TAX COURT OPINION

Case: Reynard & Joyce M. Campbell
Docket Number: 3530-07S
Judge: Wherry
Opinion Type: summary
Filed: 07/30/2009
Pages: 26

T .C . Summary Opinion 2009-11. 9 UNITED STATES TAX COURT REYNARD AND JOYCE M . CAMPBELL, Petitioners v . COMMISSIONER OF INTERNAL REVEUE, Responden t Docket No . 3530-07S . Filed July 30, 2009 . Reynard and Joyce M . Campbell, pro $ese . Shannon Edelstone , for respondent . WHERRY, Judge : This case was heard pursuant to section 746 3 of the Internal Revenue Code in effect when the petition wa s filed .' Pursuant to section 7463(b), the decision to be entere d 'All subsequent section references are to the Internal Revenue Code of 1986, as amended and in effect for the tax year at issue . Rule references are to the Tax Court . Rules of Practice and Procedure . SERVED JUL 3 0 2009 2 - is not reviewable by any other court, and this opinion shall no t be treated as precedent for any other case . Petitioners are husband and wife . Respondent determined a $31,153 deficiency in petitioners' Federal income tax and a j ""-x$6 ;2330':-60°,accuracy-related penalty under section 6662 (a) fo r k. . . . pet-it,-Toner s i 'qwr the:issues 2005 tax year . After concessions by the parties , remaining before the Court are : (1) Whethe r f } ._ ., petitioners are entitled to additional deductions claimed o n Schedul'e';C, Profit or Loss From Business, for insurance expenses , car KKancl truck expenses, and expenses for business use of thei r homem;,2 (2) whether petitioners are entitled to additiona l k deductions claimed on Schedule E, Supplemental Income and Loss, for repairs to two multiunit dwellings used as rental propertie s and as petitioners' home (4319 and 4329 Rilea) ;3 (3) whethe r petitioners were required to capitalize certain expenditure s 2Respondent has conceded that petitioners are entitled to a $1,444 Schedule C deduction for expenses for business use of their home . The amounts remaining in dispute relating to petitioners' claimed Schedule C deductions for business use of their home are $1,718 in depreciation and a $5,154 carryover loss from 2004 . Those amounts are computational and will .be resolved in the Rule 155 computation in accordance with our decision in Campbell v . Commissioner , T .C . Summ . Op . 2008-154, which concerned Mr . Campbell's 2004 tax year . 3The two rental properties are located at 4319 and 4329 Rilea Way in Oakland, California . 3 - relating to 4319 and 4329 Rilea ; and (4) whether petitioners are liable for an accuracy-related penalty under section 6662(a) .4 Backgroun d Some of the facts have been stipul ted, and the stipulated facts and accompanying exhibits are here y incorporated b y reference into our findings . petition, petitioners resided in Calif or i Reynard Campbell is a certified pu lic accountant (C .P .A-.) , and Joyce Campbell is aPBX operator . 2005 Mr . Campbell was employed by Bay Area Rapid Transit (BART In addition, Mr . Campbell maintained his own auditing an d accounting business, with respect to which petitioners repor t d Schedule C gros s income of $22,161 and a net profit of $ ,062 on'their 2005 joint Form 1040, U .S . Individual Income Tax Re urn .6 Petitioners reported a Schedule E loss of $14,219 re ating to 4319 and 432 9 Rilea Way . ' 'In addition, respondent made a $1 , adjustment that resulted from adjustment income from self-employment . That compu be resolved in the Rule 155 computation direct in accordance with this opinion . 66 . computationa l to petitioners' net ational adjustment will hat the Court wil l 5PBX stands for "private branch ex c privately owned telephone switching syst 6Petitioners calculated that profit1by subtracting $11,09 9 in reported business expenses from $22,1 income . - 4 - On January .18, .2007, respondent issued a notice of ;1 deficiency disallowing many of petitioners' claimed Schedule C and E deductions . Petitioners filed a timely petition with this Court on February 12, 2007 . A trial was held on March 21, 2008, in San Francisco, California . Discussio n I . Burden of Proo f The Commissioner's determination of a taxpayer's liability is generally presumed correct, and the taxpayer bears the'burden of proving that the determination is improper . See Rule 142(a) ; Welch v . Helvering , .290 U .S . 111, 115 (1933) . However, pursuant to section 7491(a), the burden of proof on factual issues that affect the taxpayer's tax liability may be shifted to the Commissioner where the "taxpayer introduces credible evidence with respect to * * * such issue ." Petitioners have not established that they meet the requirements under sectio n . 7( . . . continued ) subtracting $85,895 in expenses and depreciation from $60,179 in rents received . But because of passive activity loss limitations, they were not allowed to deduct that entire loss in 2005 . Although sec . 469(i) provides an exemption to the passive activity loss rules for taxpayers who "actively participated" in a rental real estate activity that allows such taxpayers to deduct a maximum loss of $25,000 per year related to the rental real estate activity, that exemption begins to phase out for taxpayers with modified adjusted gross income (AGI) in excess of $100,000 . Sec . 469(i)(3)(A) . Petitioners' modified AGI in 2005 was $121,562 . 7491(a)(1) and (2) for such a shift . Co sequently, . the burden of 5 - proof remains on them . II . General Deduction Rule s Deductions are a :matter of legislati ve grace,' and the taxpayer must maintain adequate records to substantiate the amounts of any deductions or credits claimed . Sec . 6001 ; INDOPCO, Inc . v . Commissioner , 503' U .S . 9, 84 (1992) ; sec . 1 .6001-1(a), Income Tax Regs . Generally, the Court may allow'for t he deduction of a claimed expense even where the taxpayer s unable to full y substantiate it, provided the Court has n evidentiary basis for doing so . Cohan v . Commissioner , 39 F .2 540, 543-544 (2d Cir . 1930) ; Vanicek v . Commissioner , 85 T .C . 7 31, 742-743 (1985) . But see sec . 1 .274-5T(a), Temporary Income T x Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) . In these instances the Court is permitted to approximate the allowable expense, b e ring heavily against the taxpayer whose inexactitude is of his o r her own making . Coha n v . Commissioner , supra at 544 . III . Deductibility of Repair Expenses Rel ating to Petitioners ' Schedule E Business Section 162(a) authorizes a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business" . trade or busines s expense is ordinary for purposes of section 162 if it . .is normal or customary within a particular trade, b siness, or industry and 6 - is necessary if it is appropriate and helpful for the development of the business . Commissioner v . Heininger , 320 U .S . 467, 47 1 (1943) ; Deputy v . du Pont , 308 U .S . 488, 495 (1940) . contrast, "personal, living, or family expenses" are generally nondeductible . Sec . 262(a) . 8 Respondent concedes that petitioners have substantiated $26,857 of the $37,076 in claimed Schedule E deductions for repair expenses .9 Respondent argues that petitioners have faile d to substantiate the remaining $10,219 . The-precise source of the $10,219 remaining in dispute is not entirely clear . That amount appears to comprise in part $1,767 .60 that Mr . Campbell paid on April 24, 2005, for=wood flooring, $20 .65 paid on August 12, 2005, for a related flooring installation kit, and $450 that Mr . Campbell paid Mrs . Campbell for contract labor . The .remainde r 'Appendix A contains a summary of our conclusions as to each of the adjustments contained in the notice of deficiency . Appendix B contains a breakdown of the additional repair expenses that we are allowing petitioners to deduct . . 'More specifically, respondent concedes that petitioners have substantiated $14,494 of repair expenses but contends that $1,789 of this amount is neither deductible nor depreciable . The $1,789 comprises a wood floor and related installation k'it costing $1,767 .60 and $20 .65, respectively . Respondent would have petitioners capitalize those items and would allow depreciation, but not until 2006 or 2007--when they were placed in service . This, in respondent's view, leaves .$12,705 in deductible 2005 repair expenses . Respondent also concedes that petitioners have substantiated another $12 .,363 in repair expenses but argues that those expenses must be capitalized . Petitioners agree that $6,016 .32 of the $12,363 must be capitalized ., The parties dispute whether the remaining $6,346 .68 of the $12,363 must be capitalized or is fully deductible . We will address these issues in the next section of our opinion . - 7 - apparently relates to a multitude of purchase s by Mr . Campbell at Home Depot and various hardware , flooring, paint, and other stores . Petitioners have provided receipts and bank records reflecting most of those purchases . Regarding the $450 deduction petitioners claimed for "contract labor", Mr . Campbell _ testified that hepaid ,l,his wife $450 to help him clean petitioners ' rent 1 units . A canceled check reflects that such a payment was made on - May 23 2005 . At trial the Court apprised petitioners that it would allow the deduction if they could show that they r ported the $450 as income on their joint return . In response, Mr . Campbell asserted : " Okay, well , I don't think th t I can parse it out to that degree ." Petitioners have not sine demonstrated that the y they have failed to demonstrate that .thelpayment constituted a deductible business expense . Petitioners have not demonstrated that the $1,767 .60,wood flooring expense constitutes .a deductibl repair expense rather than a capital expenditure . . Further, at trial Mr . Campbel l admitted that the wood flooring was not laced in service until 2006 or 2007 . Because the flooring is a item that must be . claim its cost as a deductible repair expense nor depreciate i t in 200 .5 . However, . we will treat the $20 .65 floor installation 8 - kit as a tool which is separate from the wood flooring and need not be capitalized . As for the remaining disputed Schedule E deductions for repairs, petitioners have not conclusively demonstrated to which unit(s) they were attributable . Nevertheless, through thei r receipts and bank records , petitioners have established that th e u expenses were-incurred in 2005 except as to one or two small dollar items where the receipt date has faded and is no longer legible . The bank records petitioners submitted merely reflect various purchases and their amounts . They do not specify exactly what petitioners purchased or for which specific unit(s) the purchases were made . They also do not provide enough information to determine with any certainty whether those expenses would need to be capitalized . Many are, however, for small items that do not appear to be capital in nature, and respondent has provided no evidence to the contrary . At trial Mr . Campbell acknowledged that petitioners are missing receipts but asserted : "I think yo u have to consider the fact that I normally shop at these place s * * * for repair-type items, for my apartments, and I don't think in the documentation that I do have that there was any evidence that anything was personal in it . Many of those items cost $20 or less and were from retailers that sell repair and maintenance items . The numerous receipts petitioners provided are for the 9 - most part consistent with the purchase o regular-repair and maintenance items for petitioners' renta units . Respondent' s concern for additional details as to eac i expense regardless of the materiality of the amounts at issue )r the surrounding facts reflects a failure to see the forest for the trees . 10 The resul t has been a very inefficient and questio n ble use of th e Examination Division's, Appeals', and t h Court's time . Petitioners have provided documenta ion for their Schedule E repair and maintenance expenses, but it s not perfect in al l respects ." However, petitioners' Schedule E repair an d maintenance expenses are . not subject t he strict substantiatio n requirements of section 274 . Under Cohai v . Commissioner , 3 9 F .2d at 543-544, petitioners may deduct cost of their repair an d "of particular note is the refusal to allow deductions for some items while allowing deductions for other items when all items were purchased. at the same store o .the same date . Respondent apparently disallowed those deductions because petitioners had misplaced receipts even :hough petitioners had produced credit card statements reflecti g the purchases . For example, petitioners' credit card statem nt reflects that they made four purchases at Sincere Plumbing nd Hardware on Feb . 19, 2005 . Respondent disallowed deductions or three of those purchases on-the basis that petitioners ad misplaced the receipts while allowing petitioners a $1 8 .73 deduction for one of those purchases--a faucet for a kitch n sink . 11At trial petitioners provided more than 1,000 pages of receipts, bank and accounting records, and tax returns and tax documents . Petitioners' records as to tiese small dollar items show (1) that each expense was incurred and paid, (2)the date on which each expense was incurred, and (3) the place where each expense was incurred . Petitioners' records are in many respects more complete and detailed than those maintained by many individual landlords in comparable renta businesses . 10 maintenance expenses because they have provided a sufficient . evidentiary basis for doing so, which includes petitioners' uncontroverted trial testimony . .l z Because petitioners' documentation does not permit tracing each expense to a particular unit, we will treat one-eighth as attributable to petitioners' personal unit and nondeductible under section 262(a) . We will allow petitioners to deduct the remaining seven-eighths of . the amounts spent for each of the items listed. infra note 13 and appendixes A and B 'to thi s 12We will not allow all of petitioners' claimed Schedule E repair and maintenance . deductions because some of the claimed expenses are clearly nondeductible . For example, petitioners claimed a $10 .64 deduction for a Feb . 20, 2005, purchase at "Hollywood Video" and a $423 .15 deduction for an Apr . 28, 2005, purchase at "Simayof San Francisco", a jewelry store . opinion .13 However, we will require petitioners to capitalize an d - 1 1 IV . Whether Petitioners Are Required To Ca italize Certain Expenditures Relating to 4319 and 4J29 Rile a After concessions, the parties dispute whether petitioners are required to capitalize $6,347 in expenses incurred to install or replace carpeting ($2,400), ceiling fens ($502), til e ($1,458), a toilet ($38), and baseboard molding ($474) . The remaining $1,475 was for labor performed on petitioners' renta l properties . 13(1) All of the $420 .74 of expenses listed in the "Missing receipts" attachment to respondent's pretrial memorandum including the $267 .96 paid to Home Depot on Oct . 6, 2005 ; (2) $133 .60 paid to Home Depot on Feb . 19', 2005,-for a "HOMER BUCKET", "1/2 RTD SHTG", and a "TOOLBAG" ; .(3) $36 .03 paid to Home Depot in July 2005 for "CEDAR'SHIMS", "S REWS", and a'48-inch level ; (4) the $20 .65 flooring installation kit purchased on Aug . 12, 2005 ; (5) $4 .34 paid to Laurel Ace Hardware and $20 .35 paid to Foothill Hardware in Jan . 2005 ; (6) $6 .17 for pipe tape and $17 .27 paid to Home Depot, .$6 .39 and $13 .73 paid to Foothill Hardware, and $3 .24 paid to Laurel Ace Hardware in February 2005 ; (7) $20 .04 and $6 .27 paid to Foothill Ha dware in March 2005 ; (8) $1 .03 paid to Home Depot and $19 .84 and 20 .05 paid to Foothill Hardware in April 2005 ; (9) $19 .52,$28 . 8, and $85 .88 paid to Home Depot and $19 .84 and $57 .55 paid to Lowe's in July 2005 ; (10) $12 .39, $25 .21, $11 .95, and $16 .83 . aid to Home Depot, $17 .70 paid to Laurel Ace Hardware, and 3 .3 .9 paid to Foothill Hardware in August .2005 ; and (11) $7 .60, $8 .34, and $6 .10 paid to Foothill Hardware and $6 .48 paid to Home Depot in December 2005 . To the extent that any expense list d in the paragraph above is also listed in appendix B,to this opi ion, petitioners are allowed only one deduction for seven-eig the of the expense . a i 14Petitioners must use the Modified Accelerated Cost Recovery System and depreciate the proper ty over a 5-year recovery period . 12 - Petitioners argue that they were not required to capitalize those expenses because they "were for incidental repairs to their rental properties" and because "These costs neither materially added to the value of the property nor appreciably prolonged its life, but kept the properties in good operating condition . " Section 263 generally prohibits deductions for capital expenditures . Nondeductible capital expenditures include "Any amount paid out * * * for permanent improvements or betterments made to increase the value of any property" . Sec . .263(a)(1) . In contrast, deductible expenditures include those made merely to maintain property in operating condition . See Ill . Merch . Trust Co . v . Commissioner , 4 B .T .A . 103, 106 (1926) ("A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition .") . The distinction between a nondeductible capital expenditure and a deductible repair is summarized in section 1 .162-4, Income Tax Regs . : The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as an expense, provided the cost of acquisition or production or the gain or loss basis of the taxpayer's plant,'' equipment, or other property, as the case may be, is not increased by the amount of such expenditures . Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall either be capitalized and depreciated in accordance with section 167 or charged against the depreciation reserve if such an account is kept . 13 - The deductibility of repair expen s s also depends upon th e context in which the repairs are made . Courts have held tha t expenses incurred as part of a general lan of rehabilitation must be capitalized even if they would ave been deductible a s ordinary and necessary business expenses if separately incurred . See United States v . Wehrli , 400 F .2d 68 6,'689 (10th Cir . 1968) ; Norwest Corp . & Subs . v . Commissioner , 1 08'T .C . 265, 280 (1997) . Although it is a close call, petiti oners may deduct th e amounts paid for the tile, baseboard mol ding, and toilet because we are satisfied that those expenses wer e incurred to . maintai n rather than improve the rental units . For the reasons provided below, pet itioners may not-deduc t the carpeting, ceiling fan, and labor col sts . Petitioners are .required to capitalize those expenses . Concerning the carpeting , respondent correctly notes,that petition rs did not provide any evidence (aside from Mr . Campbell's self -serving testimony) "as to when the original carpet was purchase in each apartment uni t and when each unit's carpet was replaced " In any event, the cost of the original carpet should have been capitalized when it was installed, and the remaining undepre fated cost of the carpe t should have been deducted when it was re moved and scrapped . The purchase of new carpeting to replace exi sting carpeting was an improvement or replacement and not a rep air . Accordingly , petitioners are required to capitalize a d depreciate it . 14 - Mr . Campbell testified that the ceiling fans were purchased as decorative items to be . added to the rental units "in place of the lights ." By Mr . Campbell's own testimony, the ceiling fans were improvements or replacements and not repairs . Petitioners paid the $1,475 in disputed labor expenses to someone named "Alex Cuevas" . At trial Mr . Campbell was unable to remember exactly what Alex Cuevas had done for petitioners in 2005 . Mr . Campbell testified that "Alex does a lot of things for me . I could not tell you specifically what Alex does, but what Alex will do is he will walk around with me and just simply make incidental repairs for me, like fix this, fix that, you know, just making incidental repairs ." Because they have provided no other evidence as to the nature of Alex Cuevas's work on their rental properties, petitioners have not demonstrated that they are entitled to claim a current deduction rather than capitalize the cost of his labor . V . Automobile Expenses Subject to Strict Substantiation Under Section 274(d ) Certain business expenses described in section 274(d) are subject to strict substantiation rules that supersede the Cohan doctrine . Sanford v . Commissioner , 50 T .C . 823, 827-828 (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, 1985) . Section 274(d) applies to : (1) Any traveling expense, including meals and lodging away from home ; (2) entertainment, amusement, - 15 - and recreational expenses ; (3) any expe se for gifts ;' or (4) the use of "listed property", as defined in section 280F(d)(4) , including passenger automobiles . To de uct expenses to which section 274(d) applies, the taxpayer mus t substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony : (1) The amou t of the expenditure or use, which includes mileage in the case of automobiles ; (2) the time .and place of the travel', entertain ent, or use ; (3) its business purpose ; and (4) the business r elationship to the taxpayer of each expenditure or use . Se c . 274(d) (flus h language) . The parties dispute petitioners' claimed Schedule C deductions (which were based on the actu dal cost method) of $1,43 8 for automobile insurance15 and-$1,814 foif -car and truck . expenses .16 Respondent also disputes $3 , 678 of the $4,357 i n 15That amount comprises $1,269 .20 t automobile insurance company and $169 in paid the American Automobile Associatio n at Mr . Campbell paid hiss membership fees that h e "in his general ledger Mr . Campbell .automobile expenses relating to his Sche asserts that he used the Nissan Maxima 6 business, which explains the claimed $1, x 66 .480) . It is unclear how he came up business use, particularly in light of h recordkeeping . listed $2,728 .66 in ule C business . He 6 .48 percent fo r 814 deduction ($2,728 .66 with his percentage of is less-than-perfec t We also note that the parties had d petitioners were entitled to $1,961 in c deductions for depreciation and sec . 179 petitioners concede that issue . sputed whether aimed Schedule C expense . On brief, - 16 - auto and travel expenses that petitioners claimed as deductions on Schedule E . Petitioners concede that item on brief . Mr . Campbell owns four automobiles : (1) A 2004 Nissan Maxima ; (2) a 1980 Toyota pickup truck (model unknown) ; (3) a 1998 Honda Civic ; and (4) a 2002 Chevrolet Impala . Mr . Campbell testified that the Nissan Maxima is used for his Schedule C business and that the Toyota truck is used for his Schedule E business . but that "the personal automobiles are used sometimes in business ." He then apparently conceded that petitioners, : are not entitled to any deductions relating to the Honda Civic or the Chevrolet Impala .17 After the parties' concessions, all of the disputed automobile-related deductions appear to be Schedule C deductions relating to the Nissan Maxima . Mr . Campbell has presented a copy of a day planner in an attempt to satisfy the requirements of section 274(d) . He has fallen far short . The day planner entries are devoid of much vital information : they do not list which of Mr . Campbell's fou r automobiles were used, the number, of miles traveled (the,-amount of use), or the specific business purpose of those miles . Some of the entries are incomprehensible . Moreover, at trial Mr . Campbell conceded that a $750 payment and a $446 payment tha t 17Although petitioners had claimed a Schedule C deduction for automobile insurance paid on all four vehicles, at trial Mr . Campbell testified that an adjustment was warranted and that "I think that the relative percentage of the Nissan Maxima and the truck to the whole value should be allowed ." - 17 - petitioners claimed in Schedule C deductions for automobile expenses are nondeductible personal expe ses related to th e Chevrolet Impala . Petitioners have provided receipts for parking, fuel, and N repair expenses . But there is no way of telling to which of Mr . Campbell's four automobiles they relate . Regarding the parking fees, at trial Mr . Campbell testified th t although the garage at which he parked is near his place of emp oyment with BART, he needed his car (apparently the Nissan Ma ima) "to deal wit h business as it arises ." As to the Niss a Maxima, he als o testifie d I should get .to take a 100 percent I only take a 66 percent deduction consider it a commute from my home ' I'm required to come back, the firs to do when I .return from my job or emergency or whatever else, is to c apartments, : okay . .- eduction ; however, ecause * * * I o my job, buts since thing I'm required ven if there's an eck out thos e .Mr . Campbell's conclusory testimony is s rained, and we reject it .18 Petitioners have not satisfied th e strict substantiation requirements of section 274(d) .with resp ct to the Nissan Maxima . See sec . 1 .274-5T(c)(1), Temporary Incom Tax Regs ., 50 Fed . Reg . 46016 (Nov . 6, 1985) . Accordingly, we s stain respondent' s "Petitioners live in one of the fo u and rent out the other three units . Mrsl. 4329 Rilea, which also contains four un i of a block" away from 4319 Rilea and tha three minutes" to walk from 4319 Rilea t units in 4319 Rilea Campbell testified tha t s, is "about [a] quarte r it takes her "about 4329 Rilea . 18 - adjustments as to petitioners' claimed .. Schedule C deductions for insurance ($1,438)19 and for car and truck expenses ($1,814 ) VI . Section 6662 Penalt y Under'section~7491(c), respondent bears the-burden of production with respect to petitioners' liability for the section 6662(a) penalty . This means that respondent "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty ." Higbee v . Commissioner , 116 T .C . 438, 446 (2001) . Respondent has done so . Subsection (a) of section 6662 imposes an accuracy related penalty on an underpayment of tax that is equal to 20 percent of any underpayment that is attributable to alist of causes in subsection (b) . Among. the causes justifying the imposition of the penalty are (1) negligence or disregard of rules or regulations and (2) any substantial understatement of income tax . Section 6662(c) defines negligence as "any failure to make a reasonable attempt to comply with the provisions of this title" . "[D]isregard" is defined to include "any careless, reckless, or intentional disregard ." Id . Under caselaw, "'Negligence is a lack of due care or the failure to'do what a reasonable and ordinarily prudent person would do under the circumstances .'" Freytag v . Commissioner , 89 T .C . 84.9, 887 (1987) (quoting Marcello v . Commissioner , 380 F .2d 499, 506 (5th Cir . .1967) , 19That is, except as to $92 that respondent has conceded . - 19 - affg . on this issue 43T .C . 168 (1964) and T .C . Memo . 1964-299), affd . 904 F .2d 1011 (5th Cir . 1990), affd . 501 U .S . 868 (1991) . There is .a ."substantial understatement" of income tax for a n individual in any tax year-where the amount of the understatement exceeds the greater of (1) 10 percent of the tax .required to be shown on the return for the taxable-year or (2) $5,000 . Sec . 6662(d)(1)(A) . However, the amount of the understatement is reduced to the extent attributable to an item (1) for which there is or was substantial authority for the taxpayer's treatment . thereof, or (2)_ with respect to which the relevant facts were adequately disclosed on the taxpayer's return or an attached statement and there is a reasonable basis for the taxpayer's treatment of the item . See sec . 6662(d)(2)(B) . There is an exception to the secti n 6662(a) penalty when a taxpayer can demonstrate (1) reasonable ause for the underpayment and (2) that the taxpayer a ted in good faith with respect to the underpayment . Sec . 6664( ::)(1) . Regulations promulgated under section 6664(c) further provide that the determination. of reasonable cause and go d faith "is made on a case-by-case basis, taking into account ll pertinent facts and circumstances ." Sec . 1 .6664-4(b)(1), In ome Tax Regs . On brief, petitioners argue only tiat they are not liable for the penalty because their claimed de uctions were proper . - 20 - They have not even attempted to demonstrate reasonable cause an d .good faith with respect to the underpayment . Because Mr . Campbell is a C .P .A . who knew or should have known that petitioners were . claiming many deductions to which they were not entitled, petitioners were negligent in underpayin g their 2005 Federal income tax . Because they have not demonstrated reasonable cause and good faith for the underpayment, we sustain the section 6662(a) penalty .2 0 The Court has considered all of petitioner's-contentions, arguments, requests, and statements . To the extent not discussed herein, we conclude that they'are meritless, moot, or irrelevant . To reflect the foregoing and concessions made by th e parties, Decision will be entere d under Rule 155 . 20Because the underpayment is attributable to negligence, we need not determine whether after accounting for respondent's concessions and the deductions that we have allowed, petitioners substantially understated their 2005 Federal income tax liability . 21 - APPENDIX A Summary of Our Conclusions as to Each of the Adjustments in the Notice of Deficienc y Adjustment Amount of Adjustment Amount Conceded by P and/or R Additiona l Deduction Allowe d as a Result of Ou r Opinion (if any ) Schedule E : $17,117 Parties agree that Ps are entitled to $ 0 Depreciation Expense or Depletion Schedule E : All Other Renta l Expenses Claimed a $15,156 deduction . $64,519 Ps-concede $3,678 in auto and travel $8,7 60 .63 2 deductions . R concedes that P s have substantiated $26,857 of repair expenses .' The parties have settled the remaining Schedule E deductions for all other rental expenses (e .g . ., utilities and taxes) . Schedule C : $1,321 P concedes $1,047 . R concedes $274 . Meals an d Entertainmen t 'The parties dispute whether a portion of the repair expenses must be capitalized . We addressed that issue in .our opinion . 2Appendix B contains a detailed list of expenses that we are allowing petitioners to deduct to the extent of seven-eighths of the stated amounts . Petitioners must capitalize and depreciate any expense over $250 . Petitioners must use the Modified Accelerated Cost Recovery System and depreciate the property over a 5-year recovery period . - 22 - $1,438 R concedes $92 . Schedule C : Insuranc e (Other Tha n Health ) Schedule C : 1,814 /A Car and Truc k Expense s Schedule C : Depreciatio n and Sec . 17 9 Expens e Schedule C : Other Expense s Schedule C : Expenses for Business Use of Home Schedule C : All Othe r Expense s Claimed Self Employment Adjusted Gross Income Adjustment $ 0 0 $ 0 Depreciation an d carryover los s will be resolve d in Rule 15 5 computation . $1,961 P concedes all $1,961 . 2,204 arties agree that Ps are entitled t o a $1,678 deduction . $11,062 Parties agree that Ps are entitled to a $1,444 deduction . $2,361 Parties agree that Ps are entitled to $ 0 a $2,304 deduction . ($1,566) N/A Issue will b e resolved in Rul e 155 computation . - 23 - APPENDIX B Additional Deductible Schedule E Expense s Date of Purchase Seller 1/06/2005 1/13/2005 1/18/2005 1/20/2005 1/19/2005 1/21/2005 1/23/2005 1/23/2005 1/25/2005 1/27/2005 1/31/2005 2/19/2005 2/19/2005 2/19/2 .005 Kelly-Moore Home Depot Airport Appliance Airport Appliance Foothill Home Center Laurel Ace Hardware Home Depot Home Depo t Laurel Ace Hardware Foothill Hardware Amount $55 .8 3 $86 .8 8 $937 .3 2 $318 .6 4 $47 .8 7 $14 .3 0 $394 .4 4 $2 .1 4 $9 .7 9 Frigidaire Consumer Service $73 .0 3 Home Depot Home Depot Sincere Plumbing and Hardware $5 .4 0 $33 .6 0 $300 .64 2/19/2005 2/19/2005 3/13/2005 3/24/2005 4/06/2005 4/-19/2005 5/06/2005 5/10/2005 5/21/2005 5/30/2005 6/10/2005 6/11/2005 6/13/2005 6/19/2005 7/03/2005 7/07/2005 7/09/2005 - 24 - Sincere Plumbing an d Hardware - Sincere Plumbing an d Hardware Home Depot Home Depot Home Depot Home Depot Laurel Ace Hardware Sears Roebuck Home Depot Home Depot Home Depot Laurel Ace Hardware Sears Roebuck Home Depot Home Depot Laurel-Ace Hardware, Home Depot $5 0 $21 .7 4 $41 .7 2 $25 .6 0 $142 .0 8 $103 .2 3 $4 .6 4 $10 .8 6 $86 .3 4 $2 0 $16 .8 2 $16 .6 9 $32 .6 1 $183 .7 9 $950 .8 7 $6 .4 2 $146 .95 7/10/2005 7/10/2005 7/11/2005 7/16/2005 7/23/2005 7/30/2005 8/06/2005 8/09/2005 8/20/2005 9/16/2005 9/24/2005 10/03/2005 10/06/2005 10/07/2005 10/09/2005 10/22/2005 10/25/2005 10/29/2005 - 2 5 Home Depot Home Depot Home Depot -Home Depot . Home Depot Floor Dimensions Sincere Plumbing an d Hardware Foothill Home Center Home Depot Office Depot Laurel Ace Hardware Lowe 's Home Depot Home Depot Laurel Ace Hardware Laurel Ace Hardware DAL-Tile Foothill Home Center $24 .9 9 $154 .3 6 $238 .1 1 $72 .9 8 $184 .7 6 $1,429 .2 3 $739.4 8 $73 .7 0 $435 .36 $22 .2 7 $5 .5 9 $424 .3 8 $267 .9 6 $45 .2 2 $18 .3 6 $3 .8 9 $5 .7 9 $20 .65 11/20 /2005 12/03/2005 12/17/2005 12/23 /2005 12/23/2005 - 26 - Home Depot Foothill Home Center Foothill Hardware Home Depot Laurel Ace Hardware $2 6 $8 .3 4 $6 .1 0 $6 .4 8 $11 .95