TAX COURT OPINION

Case: Victor Dannon & Barbara Dannon
Docket Number: 29245-12
Judge: Gustafson
Opinion Type: bench
Filed: 11/18/2013
Pages: 24

UNITED STATES TAX COURT WASHINGTON, DC 20217 VICTOR DANNON & BARBARA DANNON, ) Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent CLC ) ) ) Docket No. 29245-12. ) ) ) ) ) ) ) ) ) OR D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at St. Paul, Minnesota, on November 1, 2013, containing his oral findings of fact and opinion, it is 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 in the above case before Judge Gustafson at St. Paul, Minnesota, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) David Gustafson Judge Dated: Washington, D.C. November 18, 2013 SERVED Nov 19 2013 Capital Reporting Company 3 1 2 Bench Opinion by Judge David Gustafson November 1, 2013 3 Victor Dannon and Barbara Dannon 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 29245-12 The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Rule 152 of the Tax Court Rules of Practice and Procedure; and it shall not be relied on as precedent in any other case. By notice of deficiency dated September 26, 2012 (Ex. 1-J), the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of petitioners Victor and Barbara Dannon, for the year 2008, along with an accuracy-related penalty pursuant to section 6662(a). On November 5, 2012, the IRS issued a supplement to that notice, determining a deficiency and a penalty in somewhat smaller amounts. The issues for decision are whether petitioners substantiated an entitlement to charitable contribution deductions and employee business expense deductions that the IRS disallowed, and whether they are liable for the accuracy-related penalty. This case was tried in St. Paul, Minnesota, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company on October 30 and 31, 2013. Petitioners represented themselves, and Melissa J. Hedtke represented 4 respondent. On the evidence before us, we find the following facts: Mr . Dannon' s background FINDINGS OF FACT Mr. Dannon is a scientist and 1 2 3 4 5 6 7 8 mathematician. He was born in Israel and moved to 9 the U.S. at age 29. He has multiple academic degrees 10 11 12 13 14 I 15 16 17 18 19 20 21 (including a Ph. D. in applied mathematics that he received in 1984), substantial work experience in research, and substantial teaching experience at several universities. Over the years Mr. Dannon has accumulated a library of thousands of books on science, math, and related subjects (which books he keeps in his apartment, as is discussed below); and in 2008 he spent $13, 740 on such books(cid:16)042He also spent $376 on professional journals and dues. Mr. Dannon is motivated by a desire to discover the truth, and he has deliberately not pursued a money-making career. He has published 22 several articles in journals published by others, but 23 most of his writing has been published by his 24 25 charity, Gauge Corporation. Gauge Corporation 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Mr. Dannon formed Gauge Corporation in 5 1997. (Stip.17.) The purpose of Gauge Corporation (sometimes referred to as Gauge Institute) was and is to promote scientific and mathematical research and education. Gauge is not operated to make money. Gauge does not pay salary to Mr. Dannon or anyone else. In March 2000, the IRS granted Gauge' s application for recognition of tax-exempt status . 1 2 3 i 4 5 6 7 8 9 10 (Stip. 19-20; Ex. 5-J) The IRS does not dispute in 11 this case that Gauge is a charitable organization 12 13 14 15 16 17 eligible to receive deductible contributions under section 170. Mr. Dannon has deliberately operated Gauge in such a manner that it has no bank account and owns no property. Gauge's only location is the apartment where the Dannons live and where Mr . Dannon has an 18 office in which he does his research and writing. 19 Gauge's only financial support is from the Dannons. 20 21 22 23 24 When Mr. Dannon makes expenditures in connection with scientific or mathematical research or publishing, he deems those expenditures to be either contributions to Gauge (since they promote its purposes) or expenses attributable to his role as an employee of 25 Gauge. In 2008 Mr. Dannon sold some of his books for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 a total of $6,745 (Ex. 39-P) (which he did not report as income), and spent $256 to ship those books (Ex. 26-J). He says he gave the proceeds to Gauge; but since Gauge has no bank account and never holds any 5 money, it seems clear that he means he spent these 6 7 8 9 10 11 proceeds on the expenses described below. That is, the proceeds from the sale of these books do not constitute a distinct contribution to Gauge. Mr. Dannon oversees Gauge's quarterly publication of the Gauge Institute Journal of Math and Physics. The articles included in it are almost 12 all by Mr. Dannon. Copyright to the journals (and to 13 14 15 16 17 18 the articles included in it) is evidently owned by Gauge. In 2008, Mr. Dannon paid for the publication of the journal, spending $7,867 on "office supplies" (including $4,395 for a binding machine), and $256 for postage. Mr. Dannon maintains a website for Gauge on 19 which are posted scores of articles on math and 20 21 22 23 24 25 science, almost all written by Mr. Dannon. In 2008 he paid $479 for web publishing in connection with the website, as well as $527 for computer hardware and $172 for computer software. The articles published on the Gauge website include all those published in the journal and many more. Mr. Dannon 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 retains copyright to the articles published on this site (except for those also published in the journal) . Mr. Dannon has written four books, and in 2008 he paid $775 to have two of those books to be published with Gauge listed as publisher. (Ex. 29-J.) 7 Only a very few copies have sold. Mr. Dannon 8 9 retained the copyright in the books. He paid $185 in 2008 to register his claims of copyright in the four 10 books he has written. 11 12 13 14 15 16 17 18 19 20 Mr. Dannon's motive for all of these forms of publication is to disseminate the product of his scientific work so that others will benefit from it, comment on it, and critique it. Mr. Dannon drove a car in connection with his work, but he did not keep a contemporaneous log of miles driven or of parking charges incurred that would enable us reliably to determine the length or nature of his trips and their connection to his work for Gauge. 21 Distribution of the Gauge Journal 22 23 24 25 In 2008 Mr. Dannon printed and bound 105 copies of each quarterly edition of the Gauge Journal, which he then mostly donated to libraries and universities. The donations were made in the name of the Gauge 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Institute and were sometimes acknowledged by a letter 8 from the recipient institution, many of them requesting continued donations. (Ex. 43-P.) From this we infer that the journals were not discarded but had substantial scientific value (which we need not quantify in this suit). The parties do dispute the "fair market value" of the donated journals. The inside front cover of the journal states that an annual library subscription is $200, that the library cost of a single copy is $70, and that an individual(pa9 half those rates (i.e., $100 for an annual subscription and $35 for an individual copy). However, the journal was never sold at any of these rates but was only given away. Consequently, there is no evidence that these nominal rates correspond to fair market value. The evidence in this case does not support any quantification of the fair market value of the journal. The Dannons' apartment In 2008 the Dannons leased an apartment where they lived and where Mr. Dannon did his research and writing. From Mr. Dannon's diagram, his testimony, and the testimony of Mrs. Dannon, we compute that roughly 25% of the apartment was used 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com .I Capital Reporting Company 9 exclusively as Mr. Dannon's workspace and the remaining 75% was used as personal living space and to house Mr. Dannon's library. To maintain the apartment they paid $22,000 for rent, $3,031 for electricity, $615 for water and trash, totaling $25,646. In addition, the Dannons paid $728 in 2008 for renter's insurance that insured not the apartment (which of course they rented and did not own) but rather insured the personal property in the apartment (chiefly books), all of which was owned by the Dannons, not by Gauge. They also paid $2,675 to rent a self-storage unit in 2008; but since Gauge owned no property to store, the unit must have held only the Dannons' property. The Dannons also paid $445 in 2008 for land-line telephone service in their apartment, plus $47 for a special phone jack, totaling $492; and they paid $513 for Internet access. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Goodwill donations 21 22 23 24 From time to time in 2008, the Dannons contributed unidentified or tersely identified household items to Goodwill Industries. They also contributed to the local public library used 25 magazines (Newsweek, Forbes, The Economist, Men's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 Health, etc.). The Dannons presented documents from 2 Goodwill and the library substantiating the fact of 3 4 5 these contributions, but our record does not substantiate a credible fair market value for the items contributed. 6 Professional Conferences 7 In 2008 Mr. Dannon traveled to Fort 8 Collins, Colorado, to attend the Western Number 9 Theory Conference, at which he presented orally and 10 11 12 13 distributed a scholarly paper. He spent $1,545 on the trip (including $593 to purchase a GPS device and $162 to purchase a cell phone). There is no evidence that in making the presentation he was identified 14 with Gauge, and the only mention of Gauge in the 15 16 17 18 19 paper is its name as the publisher of one of his books in a citation in the end references. He also spent $58 to attend a professional conference in San Diego; but again the connection to Gauge is not apparent. 20 Mrs. Dannon 21 22 23 24 25 Mrs. Dannon is a pharmacist and worked for the U.S. Navy in 2008. The professional expenses she incurred in that connection were a $115 licensing expense, $124 in continuing education expense, $10 for an immunization, and $199 for an eye exam- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 totaling $448. (She did not substantiate expenses for dues to a union related to pharmacology, nor uniform expenses, nor office expenses.) Tel Aviv trip and rental Mr. Dannon visited Israel in 2008, where he had friends and where his brother and sister still lived. Mr. Dannon and his siblings co-owned a rental apartment in Tel Aviv, which his sister managed. In 2008 Mr. Dannon spent $415 on gifts to his sister in return for her rental management. The Dannons reported income and expenses for that apartment on Schedule E of their return. While he was in Israel, he opened a bank account for the rental activity. During the trip Mr. Dannon also spent some of his time visiting with friends with whom he consulted about his scientific work. However, we conclude that the trip was evidently personal, and Mr. Dannon did not persuade us that the predominant purposes of the trip were the rental business and his charitable work. Prior years In years before 2008, Mr. Dannon incurred expenses in connection with his research, writing, and publishing of the sort that he incurred in 2008. However, our record does not substantiate such pre- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 2008 expenses in any amounts. The only evidence Mr. Dannon proffered to prove those expenses was a chart attached to his 2008 return (Ex. 4-J at 016) that purports to show charitable contribution carryovers from pre-2008 years. That chart is evidence of his claim of charitable contributions but not evidence of contributions. Tax return On the Dannons' tax return (Ex. 3-J), they reported Mrs. Dannon's pharmacist income. On Schedule A they claimed three forms of charitable contribution deductions: First, as supposed cash contributions, the Dannons claimed $34,008 on their original return (Ex. 3-J at 004), and $20,291 on their amended return (Ex. 4-J at 003) (reduced to $22,164 by the time of trial; 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Stip. 34). The supposed cash contribution consisted 18 of 75% of the apartment expenses listed above, along 19 with the storage, insurance, and phone expenses. To 20 substantiate this claim, they attached to the return a statement of Gauge Corporation (Ex. 3-J at 015), prepared by Mr. Dannon himself, which asserted that the corporation had "received the amount of $34,008.23 from Victor and Barbara Dannon on 01/01/2008". The statement is mistakenly signed 21 22 23 24 25 L 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 August 2, 2008 (a date before the end of the tax year); it reports multiple payments made throughout the year as if they had been a single gift on January 1; and it asserts "receipt" of an "amount" that 5 Gauge--which has no bank account and no property-- 6 never received. The statement does not indicate 7 whether Gauge provided any goods or services to the 8 9 Dannons in consideration for the contributions. Second, as supposed contributions "Other 10 than by cash or check", the Dannons claimed $23, 605 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 on their original return (Ex. 3-J at 004), and $23,208 on their amended return (Ex. 4-J at 003) (and at trial; see Stip. 29-30). These consist of the donations to Goodwill and the library (with an alleged total value of $748) and the donations to Gauge of the copies of the Gauge Journal to be contributed to universities and libraries (with an alleged value of $22,440). They present receipts from Goodwill and the library; but they did not attach to their return nor offer at trial any Gauge statement substantiating these contributions nor any appraisal of the donated journals. Third, as a "carryover from prior year", the Dannons claimed $51,268. Also on Schedule A, the Dannons 6-LaenTs 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 1 2 3 4 5 6 14 "Unreimbursed employee business expense" in the amount of $30,115 on their original return, and $32,780 on their amended return, consisting of: Mr. Dannon's book expense and professional journals and dues; the money he spent to ship his books that he sold; the office supplies (including the binding 7 machine); postage; the web publishing, computer 8 9 hardware, and computer software; the book printing; the copyright registration fees; the costs associated 10 with the Colorado and San Diego Conferences; Mrs . 11 12 Dannon's claimed employee expenses; the gifts to Mr. Dannon' s sister; and vehicle and parking expenses . 13 Notice of deficiency and petition 14 15 16 17 18 19 20 21 22 23 24 25 After exam1n1ng petitioners' return, the IRS allowed only $23, 595 of charitable contribution deductions and disallowed the rcmulnad. The IRS allowed only $8, 784 of the employee business expenses and disallowed the æemrtTret. The IRS issued its D notice of deficiency on September 26, 2012 (Ex. 1-J) and the supplemental notice on November 5, 2012 (Ex. 2-J); and petitioners timely filed their petition in this Court on December 3, 2012. At the time they filed their petition, they resided in Minnesota. (Stip. 1. ) OPINION 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 I. Burden of proof The IRS's determination 1s presumed correct, and taxpayers generally bear the burden to prove their entitlement to any deductions they claim. Rule 142(a). Deductions are a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001;VC.F.R. sec. 1.6001-1(a). II. Charitable contributions A. Substantiation requ1rements Section 170 (a) allows as a deduction any charitable contribution made within the taxable year. Deductions for charitable contributions are allowable only if verified under the regulations prescribed by the Secretary. Sec. 170 (a) (1). 1. Basic requirement Contributions may be made in cash paid to the organization or as "unreimbursed expenditures made incident to the rendition of services" to the organization. 26 C.F.R. sec. 1.170A-1(g). In either case, to verify a charitable contribution of money, the regulations require the taxpayer to maintain one 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 of the following for each contribution: (1) a canceled check; (2) a receipt from the donee; or (3) in the absence of a check or receipt, other reliable 4 written records. A receipt or record used for this 5 6 7 8 9 10 11 12 13 14 15 16 purpose must show the name of the donee, the date of the contribution, and the amount of the contribution. 26 C.F.R. sec. 1.170A-13(a) (1). 2. Noncash contributions To verify a charitable contribution of property other than money, the regulations first require the taxpayer to maintain a receipt from the donee for each contribution showing: (1) the name of the donee; (2) the date and location of the contribution; and (3) a description of the property. 26 C.F.R. sec. 1.170A-13(b) (1). Second, for a noncash contribution in excess of $500, the taxpayer 17 must maintain written records showing the manner of 18 19 acquisition of the item, the approximate date of acquisition, and the cost or adjusted basis of the 20 property. 26 C.F.R. sec. 1.170A-13(b) (3). Third, if 21 22 23 24 the noncash contribution deduction exceeds $5,000, the taxpayer must: (1) obtain a qualified appraisal for the contributed property, (2) attach a fully completed appraisal summary (i.e., Form 8283, Noncash 25 Charitable Contributions) to the tax return on which 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 the deduction is claimed, and (3) maintain certain records pertaining to the claimed deduction. 26 C.F.R. sec. 1.170A-13(c) (2). The value of a non-cash contribution is the fair market value at the time of contribution. 26 6 C.F.R. sec. 1.170A-1(c) (1). The fair market value of 7 8 9 10 11 12 13 14 15 contributed property is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. 26 C.F.R. sec. 1.170A- 1(c) (2). 3. Donee's acknowledgement Contributions of cash or property of $250 or more must be substantiated by a contemporaneous 16 written acknowledgement from the donee. See sec. 17 18 19 20 21 22 23 24 25 170(f) (8); 26 C.F.R. sec. 1.170A-13(f) (1). A written acknowledgement is contemporaneous if it is obtained by the taxpayer on or before the earlier of the date the taxpayer the original return for the taxable year of the contribution or the due date (including extensions) for filing the original return for the year. Sec. 170(f) (8) (C); 26 C.F.R. sec. 1.170A-13(f) (3). That acknowledgement, which must be furnished by the donee, must: (1) state the amount 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 5 6 7 of cash and describe other property contributed, (2) indicate whether the donee organization provided any goods or services in consideration for the contribution, and (3) provide a description and good faith estimate of the value of any goods or services provided by the donee. Sec. 170(f) (8) (B); 26 C.F.R. sec. 1.170A-13(f) (2). These statutory requirements 8 must be applied strictly. See Durden v. 9 Commissioner, T.C. Memo. 2012-140. 10 11 12 13 14 B. The Dannons' supposed cash contributions The Dannons' deductions for supposed cash contributions must be disallowed for multiple reasons. First, the Gauge statement does not comply 15 with the regulations because it does not state 16 whether the Dannons received anything in connection 17 with the contribution. Second, to the extent the 18 19 20 21 22 23 24 25 contribution consists of a percentage of the Dannons' apartment expenses, it is, as respondent points out, a contribution of less than their entire interest in the property, 26 C.F.R. sec. 1.170A-7(a) (1), which is not deductible. Third, the Dannons' 75% allocation to Gauge treats the housing of Mr. Dannon's books as if it were an expense of Gauge, but in fact it is an expense of housing Mr. Dannon's property. Fourth, to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 the extent the contribution consists of storage and insurance expense, it likewise benefits petitioners' property, not Gauge's (of which there was none). 4 Fifth, the phone expenses are clearly personal at 5 6 7 8 9 least in part, and the Dannons made no suggestion of a plausible allocation. C. The Dannons' non-cash contributions The Dannons' deductions for non-cash contributions must likewise be disallowed for 10 multiple reasons. First, no fair market value-the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 price at which property would change hands in a real commercial transaction-was proved for any of the donated property. The newsstand or nominal prices of the donated magazines and journals simply do not establish their fair market value. Mr. Dannon insists that commercial considerations are irrelevant to Gauge's operations, and he is entitled to his opinion. But such considerations are critical to showing a fair market value, which he did not do. Second, given the large value claimed for the journals ($22,440), the Dannons were required to obtain an appraisal and attach it to their return, but did not do so. D. The claimed carryovers As Mr. Dannon rightly pointed out in a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 9 10 11 paper that we filed as his post-trial brief, 26 C.F.R. sec. 1.170A-10 (e) requires that a taxpayer claiming a charitable contribution must attach to his return a statement showing the prior contribution years and the amounts contributing to the carryover. The Dannons did attach such a statement, and Mr. Dannon argues that his statement entitles him to the deduction without further proof. This is not so. The attachment is merely a statement of the Dannons' carryover claim and does not establish the correctness of the facts stated therein. See 12 Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979). 13 14 15 16 17 18 19 20 21 22 23 24 25 Thus, the carryovers are unsubstantiated. III. Employee business expense A taxpayer may claim an unreimbursed employee business expense as a miscellaneous deduction on Schedule A, pursuant to the provision in section 162(a) that one may deduct expenses of a business, and an employee is considered to be in the business of being an employee. (In response to our question, respondent did not dispute that such employment includes even unpaid employment.) However, most of the employee expenses that the Dannons reported must be largely disallowed. A. Gifts 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 1 2 3 4 5 6 7 8 9 10 11 12 I 13 14 15 16 17 18 19 For reasons we cannot tell, the Dannons reported not on Schedule E but as employee business expense on Schedule A $415 in gifts that Mr. Dannon gave to his sister for her management of the rental. He did not prove that this amount was an employee business expense, and it is rightly disallowed as such. (The IRS made no Schedule E adjustments in the notice of deficiency, and we do not now disallow any Schedule E deductions that the IRS did not disallow. However, to the extent the Dannons mean now to claim the $415 as a Schedule E rental expense, we do not allow it.) B. Mrs. Dannon's employee expenses Of Mrs. Dannon's expenses, only $448 were substantiated, and the remained must be disallowed. C. Mr. Dannon's employee expenses The $256 that Mr. Dannon spent to ship his books that he sold (for which he says he donated or spent the proceeds for Gauge) are not deductible 20 employee business expense. They were an expense of 21 22 23 24 25 producing income (the sale proceeds) that he did not report. The amounts that Mr. Dannon spent to produce the Gauge Journal-office supplies (including the binding machine); postage; the web publishing, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the computer hardware, and computer software; and the book printing-are not deductible employee business expense. First, these amounts were expended to perform the essential core function of Gauge. As respondent rightly argued, the business of being an employee cannot be equated with the business of the employer. The employee who buys equipment or supplies to facilitate his own job (for which deduction may be allowed) is not at all like the employee who purchases at his own expense the inventory that the employer will sell or distribute. Second, this employee business expense deduction is a re-styling of the charitable contribution deduction claimed for the donation of the Gauge Journal. The costs at issue here are the expenses he bore to make that property, which he then contributed. The taxpayer cannot use section 162 to evade the substantiation requirements of section 170. The amounts that Mr. Dannon spent for copyright registration fees and for attendance at the Colorado and San Diego Conferences, although they certainly bore a subject-matter connection to the purposes of Gauge, do not show a connection to his employment at Gauge. They are therefore not deductible. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 The vehicle and parking expenses are subject to the strict substantiation requirements of section 274, with which Mr. Dannon did not comply. He maintained no contemporaneous records of his miles driven for nor the purposes of his trips. However, Mr. Dannon's book expense ($13,740) and professional journals and dues ($ 376) are ordinary and necessary expenses of his employment, and are deductible. Moreover, although the Dannons attempted to deduct a portion of their apartment expenses as a charitable contribution-incorrectly, as we have already held-the expense of a home office may be an employee business expense. See sec. 280A(c) (1) (A) (and flush language). The Dannons had the burden to prove the portion of their apartment devoted exclusively to Gauge-related activity; but because they conflate Gauge and Mr. Dannon, they failed to put on the best proof of the proper allocation. 20 Where the Court must estimate a deductible amount on 21 22 23 24 25 the basis of less-than-optimal evidence, the Court "bear[s] heavily if it chooses upon the taxpayer whose inexactitude is of his own making". Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Under that standard, we have found that 25% of the 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 24 1 2 3 4 5 6 7 8 9 apartment was used exclusively as an office for Mr. Dannon's business. As a result, of the $25,646 in apartment expenses that the Dannons incurred, 25%--or $6,412-is allocable to the home office and is deductible as an employee business expense. IV. Computation of deductible amounts In the supplemental notice of deficiency, the IRS allowed deductions of $23,595 of charitable contributions and $8,784 of employee business 10 expenses, totaling $32,379. The trial evidence 11 12 13 14 shows, and we have held, that they are instead entitled to zero charitable contribution deductions but a somewhat larger deduction for employee business expenses-i.e., Mr. Dannon's book expense ($13,740) "15 and professional journals and dues ($376), and a home 16 office deduction of $6,412, all totaling $20,528, 17 18 19 which overall is less than the total deductions of $32,379 that the IRS allowed. Since the IRS did not plead in its answer for an increased deficiency, we 20 will not reverse the allowances in the supplemental 21 22 23 24 25 notice of deficiency but will sustain its relatively generous determinations. V. Penalty Section 6662 imposes an "accuracy-related penalty" of 20 percent of the portion of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. Since we are sustaining in full the adjustment in the supplemental notice of deficiency, we can tell that the 2008 understatement is "substantial" under section 6662 (d)-i.e., it exceeds both $5,000 and 10 percent of the tax that should have been reported. We therefore need not reach the issue of negligence. Petitioners cannot successfully invoke any of the defenses that a taxpayer might assert. against an accuracy-related penalty: They had no "substantial authority" for their position (see sec. 6662(d) (2) (B)); they did not disclose on their return (see sec. 6662(d) (2) (B)) that they had 17 mischaracterized and could not substantiate their 18 19 20 21 22 23 24 25 claimed deductions; and they did not show reasonable cause and good faith for their erroneous reporting (see sec. 6664 (c) (1)). Decision will be entered for respondent. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 1:35 p.m., the above- entitled matter was concluded.) 866.488.DEPO www.CapitalReportingCompany.com