t c memo united_states tax_court barry d and suzanne b whalley petitioners v commissioner of internal revenue respondent docket no filed date barry d whalley pro_se marion robus for respondent memorandum findings_of_fact and opinion parr judge respondent determined deficiencies in and penalties on petitioners' federal_income_tax for taxable years and as follows penalty year deficiency sec_6662 dollar_figure big_number dollar_figure big_number after concessions by the parties the issues for decision are whether pursuant to sec_162 petitioners may deduct schedule a job-related education expenses in excess of the amounts allowed by respondent for the taxable years and we hold they may to the extent set out below whether pursuant to sec_162 petitioners may claim schedule a miscellaneous_itemized_deductions for the taxable years and we hold they may to the extent set out below whether pursuant to sec_162 petitioners may deduct schedule c business_expenses in excess of the amounts allowed by respondent for the taxable years and we hold they may to the for respondent concedes that petitioners are allowed a schedule a deduction of dollar_figure for the cost of unreimbursed job- related education courses taken by mrs whalley respondent concedes that petitioners are allowed a schedule c deduction of dollar_figure for advertising expenses dollar_figure for supplies dollar_figure paid to the california association of licensed investigators and dollar_figure for the renewal of petitioner's private investigator's license respondent concedes that petitioner is not required to include in gross_income dollar_figure as a dividend petitioner concedes that he erroneously claimed a dollar_figure bad_debt deduction and a deduction for a dollar_figure parking citation for respondent concedes that petitioners are allowed a schedule a deduction of dollar_figure for the cost of unreimbursed job- related education courses taken by mrs whalley and dollar_figure for tax preparation fees respondent concedes that petitioners are allowed a schedule c deduction of dollar_figure for advertising expenses dollar_figure paid to the california association of licensed investigators and two separate dollar_figure payments made to the northern california fraud investigators association petitioner concedes that he erroneously claimed a dollar_figure bad_debt deduction all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all dollar amounts are rounded to the nearest dollar extent set out below whether the farm activity conducted by petitioners was an activity engaged in for profit for the taxable years and under sec_183 we hold it was not whether petitioners are liable for penalties for negligence or intentional disregard of rules or regulations for the taxable years and under sec_6662 we hold they are findings_of_fact a few of the facts have been stipulated and are so found the stipulated facts and the accompanying exhibits are incorporated into our findings by this reference at the time the petition in this case was filed petitioners husband and wife resided in livermore california the term petitioner refers to barry d whalley petitioners timely filed joint federal_income_tax returns form sec_1040 for and those returns reflected wages paid_by the city of hayward police department to lieutenant suzanne b whalley mrs whalley in the amounts of dollar_figure for respondent determined and we agree that for and certain computational adjustments should be made which would increase petitioners' self-employment_tax liability and self- employment_tax deduction reduce petitioners' itemized_deductions and preclude petitioners from claiming the earned_income_credit these are mathematical adjustments that the parties can make in their rule computation the pretrial order required the parties to stipulate all facts and documents to the extent possible nevertheless petitioners wasted the court's time effort and resources introducing more than exhibits into evidence many of which could and should have been stipulated and dollar_figure for for both years in issue no federal_income_tax was withheld as reflected on the forms w-2 issued for mrs whalley by the hayward police department for and petitioners claimed total itemized_deductions on schedule a of dollar_figure and dollar_figure respectively they deducted dollar_figure in and dollar_figure in for continuing education courses professional meetings and conferences for they deducted dollar_figure for union and professional dues and dollar_figure for the cost of purchasing and cleaning mrs whalley's uniforms a list of the schedule a miscellaneous deductions is attached as appendix a for and petitioners filed schedules c for a business called twin star investigations tsi the schedules c reflect gross_income of dollar_figure and expenses of dollar_figure for and gross_income of dollar_figure and expenses of dollar_figure for a list of the schedule c deductions is attached as appendix b tsi was operated solely by petitioner for approximately years from to petitioner billed clients for approximately hours in and hours in his rate for investigative work ranged from dollar_figure to dollar_figure per hour his rate for office work and travel time was dollar_figure per hour in he billed clients for mileage pincite cents per mile and also charged them for lodging meals equipment supplies photographs and fees paid petitioner's cellular telephone purportedly used in connection with his business was not listed under tsi petitioner has never reported a profit from tsi on his tax_return for and petitioners filed schedules f for an activity called twin star ranch tsr the schedules f reflect gross_income of dollar_figure and expenses of dollar_figure for and gross_income of dollar_figure and expenses of dollar_figure for a list of the schedule f deductions is attached as appendix c petitioners started their 7½-acre ranch in after petitioner retired petitioners have never reported a profit from tsr on their tax_return they did not take any farming or animal husbandry courses in college from through the time of trial however petitioner attended seminars at the university of california at davis covering a variety of animal-related topics such as breeding raising feeding and medically caring for animals in petitioners' farm consisted of a flock of to sheep some chickens and peacocks one horse and four cattle in petitioners advertised a cockatiel and a ram for sale in the local newspaper in petitioners did not advertise anything for sale from their farm in petitioners purchased two more horses none of petitioners' horses were stallions and they did not breed horses in either or in and petitioners sold only sheep and eggs they deducted dollar_figure for butchering in petitioners' farm had an unlisted phone number except for some minor items all of the schedule f expenses claimed by petitioners were incurred in connection with their horses for example in petitioners deducted over dollar_figure for the cost of veterinarian's fees and medicine tickets to the rodeo association horse magazine subscriptions and other horse- related items in petitioners deducted over dollar_figure in connection with their horses a substantial portion of which included the cost of constructing a horse training arena which petitioners' daughter used for riding practice petitioner completed the equivalent of years of college before engaging in tsi and tsr petitioner was a police officer for years in the city of oakland retiring as a sergeant in after retiring from the police force petitioner worked as a chief special investigator for world airlines where he remained for years for the years in issue petitioner owned two vans a pickup truck and a porsche issue schedule a education expenses opinion respondent determined that for and petitioners are not entitled to deduct job-related education expenses including mileage parking meals lodging and other miscellaneous expenditures claimed by mrs whalley in excess of the amounts conceded by respondent because petitioners have failed to meet the requirements of sec_162 and sec_274 and the regulations thereunder for and respondent concedes dollar_figure and dollar_figure respectively as a general_rule the commissioner's determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 70_f3d_548 9th cir moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed rule a 292_us_435 this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_162 allows a deduction for ordinary and necessary expenses of carrying_on_a_trade_or_business education expenditures including transportation from work to class parking and travel_expenses while away from home in connection with such education are deductible business_expenses when the education maintains or improves the skills required by a taxpayer in his or her employment or if the education meets the express for respondent concedes dollar_figure representing petitioners' checks made out to california state university at hayward the copy center and the bookstore we note that the check amounts listed by respondent for total only dollar_figure and not dollar_figure based on the record we infer that respondent inadvertently failed to include a check in the amount of dollar_figure made out to csuh which would bring the total up to dollar_figure requirements of the taxpayer's employer sec_1_162-5 income_tax regs a taxpayer's general statement that his or her expenses were incurred in pursuit of a trade_or_business normally is not sufficient to establish that the expenses had a reasonably direct relationship to that trade_or_business 50_tc_177 affd per curiam 409_f2d_1359 2d cir rather a taxpayer must maintain records sufficient to permit verification of income and expenses sec_6001 sec_1_6001-1 income_tax regs that a taxpayer cannot prove the exact amount of an otherwise deductible item is not fatal because generally unless precluded by sec_274 we may estimate the amount of such an expense and allow the deduction to that extent 39_f2d_540 2d cir the estimate however must have some reasonable evidentiary basis 85_tc_731 a commuting expenses respondent determined that petitioners are not entitled to deduct expenses_incurred for approximately big_number and big_number miles6 driven during and respectively in connection with mrs whalley's job-related education the standard mileage allowances for and were and cents per mile respectively for all miles of use for business purposes revproc_90_59 1990_2_cb_644 revproc_91_67 1991_2_cb_887 there is some indication based on the documents submitted at trial that petitioners used the cents per mile flat rate for both and in determining the amount of their deduction for business mileage driven under sec_274 no deduction is allowed for travel as a form of education however travel_expenses to get to a school seminar or conference where business-related education is obtained can still be deductible sec_1_162-5 income_tax regs furthermore commuting expenses from a taxpayer's home to his or her place of study are nondeductible personal expenses zimmerman v commissioner 71_tc_367 affd without published opinion 614_f2d_1294 2d cir shelton v commissioner tcmemo_1996_444 sec_1_162-2 sec_1 b income_tax regs mrs whalley drove to class during the spring summer winter and fall she kept a daily logbook to substantiate the actual miles driven during each semester however at trial petitioner testified that mrs whalley drove back and forth from home to class rather than from work to class mrs whalley did not testify consequently we conclude that such expenses are personal commuting expenses and therefore are not deductible under sec_262 b travel_expenses while away from home for and petitioners deducted dollar_figure and dollar_figure respectively for the cost of meals_and_lodging incurred by mrs whalley while away from home at business conferences petitioners also deducted expenses for approximately big_number and big_number miles7 driven by mrs whalley during and respectively from home to professional meetings and conferences taxpayers may deduct expenses_incurred while traveling away from home if the trip is primarily to obtain education that has the requisite relation to the taxpayer's business sec_1 e income_tax regs thus travel_expenses incurred to attend a seminar or continuing education course may be deductible sec_1_162-5 income_tax regs to deduct expenses_incurred for travel meals_and_lodging while away from home on job-related education a taxpayer must satisfy the stringent substantiation requirements of sec_274 and the regulations thereunder a taxpayer must substantiate each element of an expenditure incurred for travel meals_and_lodging while away from home either by adequate_records or by sufficient evidence corroborating his or her own statement sec_1 5t c temporary income_tax regs fed reg date for travel_expenses including meals_and_lodging a taxpayer must substantiate the amount of such expense the time and place such expense was incurred and the business_purpose for which such expense was incurred sec_1_274-5t temporary income_tax regs fed reg date sec_274 specifically bars a taxpayer from claiming a as we previously indicated the standard mileage allowances for and were and cents per mile respectively revproc_90_59 1990_2_cb_644 revproc_91_67 1991_2_cb_887 deduction on the basis of any approximation or the unsupported testimony of the taxpayer sec_1_274-5t temporary income_tax regs fed reg date in mrs whalley drove miles in connection with three different business conferences she attended in california she took a management class in monterey a public service seminar in san mateo and a supervisory skills program in san jose petitioner's testimony coupled with the documentary_evidence submitted at trial establishes the time and place of the business conferences that they were attended by mrs whalley for business and that she drove miles to attend them accordingly petitioners have met the requirements of sec_162 and sec_274 and therefore may deduct the expenses_incurred in connection with such mileage for and however we sustain respondent's determination as to the balance of the big_number and big_number miles driven respectively by mrs whalley for miscellaneous meetings that she allegedly attended on behalf of the police department the mileage claimed is not supported by a logbook or diary but rather consists of a handwritten index created by petitioner moreover petitioner's testimony regarding the alleged business_purpose of such mileage traveled is uncorroborated by any testimonial or documentary_evidence from mrs whalley or her employer we note that the absence of such evidence may lead the finder of fact to infer that such evidence if presented at trial subject_to respondent's cross-examination would not have been favorable to petitioners kay v comissioner 89_tc_1063 affd 886_f2d_1237 9th cir 6_tc_1158 affd 162_f2d_513 10th cir this is true where as here the party failing to produce such evidence has the burden_of_proof wichita terminal elevator co v commissioner supra pincite in mrs whalley deducted dollar_figure for meals_and_lodging allegedly incurred for two swat training classes at san jose and fort ord and dollar_figure for meals which she contends were incurred for miscellaneous business trips respondent disallowed these deductions for lack of substantiation again mrs whalley's failure to testify coupled with the fact that petitioners did not submit any receipts or canceled checks to substantiate such expenses weighs heavily against petitioners accordingly we sustain respondent's determination except that we allow petitioners to deduct dollar_figure reflected in one receipt submitted in connection with mrs whalley's lodging at fort ord c registration fees petitioners deducted registration fees of dollar_figure and dollar_figure in and respectively for business conferences attended by mrs whalley for petitioners submitted invoices which establish that mrs whalley did indeed pay dollar_figure in registration fees for the san mateo and san jose conferences accordingly we allow petitioners to deduct this amount for petitioners deducted dollar_figure for a swat course allegedly attended by mrs whalley to substantiate this expense petitioners submitted a receipt signed by a kadie for that amount petitioner however submitted the same receipt to substantiate the cost of chairs he purportedly purchased from classic oak for use in his home_office therefore the receipt is not reliable evidence of either expense accordingly petitioners have failed to meet their burden_of_proof with respect to this item d parking expenses in and mrs whalley deducted dollar_figure and dollar_figure respectively for alleged parking costs at california state university at hayward petitioner asserts that mrs whalley was required to pay cash to park at the school meters thus she did not have any parking receipts rather to substantiate these expenses petitioners submitted daily parking permits however the language on the face of the parking permit directly conflicts with petitioner's testimony because it specifically indicates that day permits are not valid at parking meters thus the evidence fails to establish that mrs whalley paid for metered parking at school rather it indicates that she was provided with daily parking permits enabling her to park without charge issue schedule a miscellaneous_itemized_deductions a union and professional dues and uniform purchases and cleaning for mrs whalley deducted on schedule a dollar_figure for union and professional dues and dollar_figure for the cost of purchasing and cleaning her police uniforms respondent disallowed the expenses in their entirety because petitioners failed to submit any evidence to substantiate these items mrs whalley is a police lieutenant as such expenses that she incurs during the taxable_year for union and professional dues as well as the cost of purchasing and cleaning her police uniforms are treated as ordinary and necessary expenses_incurred in carrying on her business sec_162 moreover that mrs whalley cannot prove the exact amount spent on such items is not fatal because under cohan we may approximate the amount of such expenses 39_f2d_540 2d cir to do so however we must have a reasonable evidentiary basis for making such an estimate 85_tc_731 petitioner asserts that at a pretrial meeting he gave respondent records to substantiate these expenses however the records petitioner submitted to respondent were for and not for the taxable_year in issue under cohan as discussed above we may estimate petitioners' expenses if we are convinced that they were actually incurred during the taxable_year however in making such an estimate the court will closely scrutinize a taxpayer whose inexactitude is of his own making cohan v commissioner supra demauro v commissioner tcmemo_1994_460 affd without published opinion 82_f3d_404 3d cir given that mrs whalley is a police lieutenant we can reasonably infer that she incurred cleaning expenses for her uniforms and was required to pay union dues however with respect to the purported purchase of mrs whalley's police uniforms no evidence was presented to establish that the hayward police department required police officers to purchase their own uniforms petitioners' failure to submit any records to substantiate such expenses weighs heavily against them accordingly under cohan we allow petitioners to deduct dollar_figure for for the cost of dues and cleaning uniforms however we sustain respondent's determination as to the dollar_figure balance b books and motivational tapes for and mrs whalley deducted dollar_figure and dollar_figure respectively for motivational tapes cassettes and books such as the confident woman as well as magazines and newspapers such as self working woman and the valley times petitioners have failed to establish how such expenses are connected to mrs whalley's job as a police officer and not merely expenses for her own personal growth and entertainment thus we find that such amounts constitute personal expenditures and therefore are not deductible sec_1_262-1 income_tax regs issue schedule c deductions respondent determined that all of petitioner's schedule c deductions for and are disallowed because he failed to meet the requirements of sec_162 and sec_274 petitioner asserts that each of the schedule c deductions claimed for his business was an ordinary_and_necessary_expense paid_or_incurred during the taxable years in issue within the meaning of sec_162 and sec_1_162-1 income_tax regs and that each of these deductions has been sufficiently substantiated pursuant to sec_162 and sec_274 both through his oral testimony and the documentary_evidence presented at trial a taxpayer can deduct all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business see supra p an expense is ordinary if it is normal usual or customary in the taxpayer's trade_or_business 308_us_488 citing welch v helvering u s pincite an expense is necessary if it is appropriate and helpful to the development and operation of the taxpayer's business welch v helvering supra pincite in determining whether an expense is ordinary and necessary pursuant to sec_162 we generally have focused on the existence of a reasonably proximate relationship between the expense and the taxpayer's business and the primary motive or purpose for incurring the expense 36_tc_879 we now address each category of disallowed deductions independently a advertising petitioner deducted advertising expenses of dollar_figure in and dollar_figure in respondent determined that petitioner was not entitled to any deduction for advertising but later conceded that petitioner is entitled to deduct dollar_figure for and dollar_figure for which represent the costs of yellow page advertising in connection with tsi the balance of the advertising represents amounts made out on tsr checks not tsi checks for admission fees to golf tournaments that petitioner claims to have attended for networking purposes petitioner testified that he went around talked and gave out his business cards to people however to meet his burden_of_proof petitioner must offer more than a general statement that such expenses were incurred in pursuit of his business in order to sufficiently establish that the expenditures had a reasonably direct relationship to his business ferrer v commissioner t c pincite in this case the evidence presented at trial fails to establish that petitioner's activities at the golf tournament actually had any direct relationship to the production of business income as required by sec_162 the balance of the advertising deductions represents amounts paid for raffle tickets and newspaper advertisements the raffle tickets were a personal_expense sec_262 with respect to the newspaper advertisements petitioner asserts that such expenses were incurred to sell his chevrolet van purportedly used in his business petitioner however failed to provide invoices at trial to support the purpose of the checks thus we find that the balance of petitioner's and claimed advertising expenses is not deductible b depreciation insurance and other automobile-related expenses petitioner claimed depreciation of dollar_figure for based on a dollar_figure purchase contract dated date for a chevrolet van for petitioner claimed depreciation of dollar_figure based on a sales invoice from an unknown source for a ford van purchased for dollar_figure in date the purchase_price was paid in full and nothing was financed for and petitioner claimed insurance expenses of dollar_figure and dollar_figure respectively petitioner claimed percent of the insurance costs for and on his chevrolet van petitioner asserts that the insurance claimed for which was paid_by a check made out to safeco insurance co is for the ford van however the automobile policy premium indicates that the insurance coverage is for a chevrolet petitioner also claimed other automobile-related expenses in connection with his business of dollar_figure for and dollar_figure for respondent disallowed the entire amounts for depreciation insurance and other automobile-related costs for lack of substantiation under sec_274 no deduction shall be allowed with respect to listed_property within the meaning of sec_280f unless such deductions satisfy the strict substantiation requirements of sec_274 and the regulations thereunder included in the definition of listed_property under sec_280f is any passenger_automobile sec_280f to substantiate a deduction attributable to listed_property a taxpayer must maintain adequate_records or present corroborative evidence to show the amount of the expense the time and place of use of the listed_property and the business_purpose for the use sec_1_274-5t temporary income_tax regs fed reg date to substantiate a deduction by means of adequate_records a taxpayer must maintain an account book diary log statement of expense trip sheets or a similar record and documentary_evidence which in combination are sufficient to establish each element of each expenditure or use sec_1_274-5t temporary income_tax regs fed reg date to be adequate a record generally must be written each element of an expenditure or use that must be substantiated should be recorded at or near the time of that expenditure or use sec_1_274-5t temporary income_tax regs fed reg date thus under sec_274 no deduction shall be allowed for expenses_incurred for_the_use_of a passenger_automobile on the basis of any approximation or the unsupported testimony of the taxpayer see eg ellison v commissioner tcmemo_1994_437 for and petitioner claimed 100-percent business use of his chevrolet van petitioner however has not met his burden_of_proof with respect to this issue at trial petitioner submitted two invoices for mechanical work done on the van the first invoice dated date shows the odometer at big_number miles the second invoice dated date shows the odometer at big_number miles accordingly the van was driven big_number miles during approximately a 3-month period petitioner concedes that he drove the van approximately big_number miles per year which he alleges was for business for and however petitioner reported gross_income on his schedules c of only dollar_figure and dollar_figure respectively which represent less than billable hours in connection with his investigation business yet he asks us to find as fact that all big_number miles driven on his van were for business purposes given this scenario such a conclusion is inconceivable furthermore petitioner failed to establish his actual percentage of business use for the van in december of petitioner purchased a dollar_figure ford van for which he claimed depreciation under macrs of dollar_figure at trial however petitioner did not offer any evidence regarding the percentage of business use for this vehicle under cohan we generally may estimate a taxpayer's deductions 39_f2d_540 2d cir however sec_274 overrides the cohan_rule with respect to listed_property and thus specifically precludes the court from allowing a deduction for automobile expenses on the basis of any approximation or petitioner's unsupported testimony sec_1 5t a temporary income_tax regs fed reg date accordingly we sustain respondent's determination since petitioner failed to establish the percentage of business use for the two vans which is a threshold requirement that must be met in order to deduct depreciation insurance and other automobile- related expenses_incurred in connection with these vehicles c legal and professional fees for and petitioner deducted dollar_figure and dollar_figure respectively for annual credit card membership fees as a legal and professional expense respondent disallowed the expenses in full on the ground that petitioner failed to establish the percentage of business use for any of the cards in issue we note that credit card membership fees should not have been characterized as legal and professional fees this classification however does not foreclose the deductions at trial petitioner conceded that although he used the credit cards for both personal and business purposes he used them for personal purposes only in emergencies when he was caught without money petitioner also testified that he had four other personal credit cards petitioner estimated that he used the credit cards in issue approximately percent for business and percent for personal purposes he made this estimate based on the business and personal charges that appeared on the monthly credit card statements we find petitioner's estimate of 25-percent personal_use to be reasonable accordingly we allow petitioner to deduct percent of the annual membership fees incurred for and cohan v commissioner supra d home_office expenses for petitioner deducted home_office expenses of dollar_figure for a facsimile machine a facsimile stand a telephone and chairs for petitioner deducted home_office expenses of dollar_figure for chairs a desk lamp a computer desk a computer stand and a computer and peripheral equipment petitioner testified that he used the business equipment in his home_office for and petitioner also deducted utilities of dollar_figure and dollar_figure respectively representing one-third of the utilities incurred on his personal_residence which he allocated to his home_office respondent denied these expenses on the ground that the home_office did not meet the requirements of sec_280a and that petitioners failed to establish the percentage of business use for the assets sec_280a provides as a general_rule that an individual taxpayer is precluded from deducting expenses_incurred in connection with the business use of a dwelling_unit that is used by the taxpayer during the year as a residence the general disallowance rule does not prevent a taxpayer from taking any deduction that would otherwise be allowable without regard to the use of the home for business sec_280a subject_to the income limitation on deductions under sec_280a a business-use exception from the general disallowance rule is carved out where a taxpayer can meet certain statutory tests prescribed by sec_280a sec_280a permits a taxpayer to deduct expenses allocable to a home_office which is exclusively used on a regular basis for one or more of the following three purposes as the taxpayer's principal_place_of_business as the place where the taxpayer meets with customers clients or patients in the normal course of business and in the case of an unattached separate structure in connection with the taxpayer's business sec_280a 506_us_168 cao v under sec_280a deductions which are otherwise allowable without regard to any connection with a trade_or_business include the deduction for interest under sec_163 subject_to the sec_163 personal_interest restriction real_estate_taxes under sec_164 and casualty losses under sec_165 commissioner tcmemo_1994_60 affd without published opinion 78_f3d_594 9th cir as a general_rule sec_280f treats any computer_or_peripheral_equipment as listed_property sec_280f to claim expensing or depreciation for such property pursuant to sec_179 and sec_280f respectively a taxpayer must establish that business use exceed sec_50 percent sec_280f sec_1_179-1 income_tax regsdollar_figure furthermore sec_274 precludes a taxpayer from claiming a deduction for listed_property as defined in sec_280f unless the taxpayer meets the strict substantiation requirements of sec_274 and the regulations thereunder see supra p sec_280f provides an exception to the listed_property rules for any computer_or_peripheral_equipment used exclusively at a regular business establishment a home_office is treated as a regular business establishment provided the office meets the requirements of sec_280a sec_280f based on the record and the evidence petitioner has failed to establish that his use of the home_office satisfies one of the three business-use exceptions under sec_280a indeed petitioner claimed deductions for the furniture and similar office items the computer and peripheral equipment the if business use of listed_property falls to percent or less then it is subject_to the expensing and depreciation_recapture rules of sec_179 and sec_280f respectively facsimile machine and stand and electricity without specifically claiming a home_office since petitioner's home_office does not meet the requirements of sec_280a it follows that the computer and the peripheral equipment are not excepted from the sec_280f definition of listed_property therefore to depreciate such items petitioner must satisfy the strict sec_274 substantiation requirements moreover he must establish that business use for such equipment exceed sec_50 percent sec_280f based on his testimony and the evidence introduced at trial petitioner failed to establish the percentage of business use for the computer and peripheral equipment rather at trial petitioner merely asserted these are office expenses and then proceeded to name each item purchased and the amount purportedly incurred for it furthermore even if petitioner had established the business-use percentage for such items he failed to satisfy all of the stringent sec_274 substantiation requirements the facsimile machine and the stand are not subject_to the listed_property rules thus to claim depreciation under sec_167 petitioner must establish that he actually purchased and used such assets in his business during the taxable years in issue sec_162 sec_167 sec_1_162-1 sec_1_167_a_-1 income_tax regs at trial petitioner testified that he purchased a facsimile machine for use in his business however we are not convinced by petitioner's general statements and the evidence submitted at trial that he actually incurred such an expense to substantiate the purchase of the facsimile machine petitioner submitted a generic american express receipt for dollar_figure from radio shack however that receipt does not specify the item charged and petitioner simply wrote in fax machine thus petitioner has failed to establish that he actually purchased a facsimile machine accordingly we sustain respondent's determination with respect to this item however with respect to the cost of the facsimile stand we allow petitioner to deduct dollar_figure since he submitted a bill for this amount which shows a description of the item purchased furthermore we can reasonably infer that petitioner used the facsimile stand in his business 85_tc_731 with respect to the telephone chairs desk lamp computer desk and computer stand we note that congress in enacting sec_280a intended to preclude expenses otherwise considered nondeductible personal_living_and_family_expenses from being converted into deductible business_expenses merely because they have some connection to a business activity s rept pincite 1976_3_cb_49 prior to the enactment of sec_280a there was congressional concern that some taxpayers were deducting personal expenditures under the guise of business use of the home 94_tc_348 citing 707_f2d_404 9th cir accordingly under present law use of a home_office that fails to qualify under sec_280a is to be treated as personal in nature for purposes of deducting any related expenses id pincite thus since petitioner failed to prove that any portion of his residence was used exclusively for business and failed to prove what portion if any of the costs of the telephone chairs desk lamp and computer stand was connected to his business he is precluded from deducting such costs sec_262 finally under sec_280a utilities are considered an expense incurred with respect to the use of a dwelling_unit accordingly petitioner is barred from deducting one-third of the cost of utilities allocable to his home_office because he failed to establish that the office was exclusively used on a regular basis for one of the three purposes under sec_280a or that one-third would be the appropriate allocation e office expenses and supplies for and petitioner deducted dollar_figure and dollar_figure in supplies and office expenses for the cost of business checking fees film and developing photocopies blank videos and miscellaneous supplies respondent disallowed all of the expenses except for dollar_figure claimed in representing the cost of typewriter services stationery legal pads fax paper and typing pads petitioner's testimony regarding these expenses was vague general and dubious petitioner alleges that he did not bill clients of his investigation business for such charges because he was trying to build his business the invoices submitted at trial however establish that petitioner did indeed bill his clients for equipment supplies and photographs the fact that some receipts have job numbers further supports our finding that petitioner was keeping track of expenses to bill clients moreover in petitioner claimed over dollar_figure in photo expenses however in many instances petitioner deducted these expenses twice by submitting both a photo receipt and a photo envelope for the same item and then claiming them as two separate expenses for petitioner deducted dollar_figure dollar_figure per month time sec_12 months for business checking fees petitioner did not submit bank statements to substantiate this expense accordingly we sustain respondent's disallowance of deductions claimed for supplies and office expenses f travel meals and entertainment for and petitioner deducted dollar_figure and dollar_figure respectively for travel and dollar_figure and dollar_figure respectively for meals and entertainment respondent disallowed these amounts for lack of substantiation we find for respondent on this matter a taxpayer is required under sec_274 to substantiate entertainment_expenses by adequate_records to corroborate his or her own testimony as to the amount of the expense the time and place the expense was incurred the business_purpose of the expense and the business relationship to the taxpayer of each expense incurred sec_1_274-5t temporary income_tax regs fed reg date see supra pp at trial petitioner's testimony regarding his travel meal and entertainment_expenses was evasive and in many instances implausible for example in response to a question asked by this court as to whether petitioner was reimbursed for a hotel bill at the victoria inn in monterey which allegedly was incurred for surveillance purposes he evaded the question by responding i just include my hourly rate on them petitioner was then asked whether this response implied that he incurred such hotel and meal expenses for business purposes without reimbursement from his clients petitioner replied if i didn't eat the business pretty soon the clients were going to somebody else and i was getting absolutely nothing petitioner's statement is not credible moreover the evidence submitted at trial establishes that in many instances petitioner did bill his clients for meals lodging and mileage whether such expenses were reimbursed by petitioner's clients or were personal expenses they are not deductible furthermore petitioner's evidence is inconsistent for example he submitted two checks in connection with the same trip to sun valley which he allegedly made for surveillance purposes one check is a payment to a nita mott on date which he testified was paid to get a special room in the hotel at sun valley to facilitate his surveillance efforts the other check is for dollar_figure and drawn on mrs whalley's personal account this check which is dated date was supposedly payment for the sun valley trip petitioner however allegedly made that trip nearly months earlier in january of when petitioner was then asked whether he was testifying that he went to sun valley in january of and his wife paid for that in november of he responded no the actual trip was in petitioner's testimony is dubious regarding this matter the record likewise fails to substantiate the expenses claimed by petitioner for finally with respect to petitioner's alleged investigatory interviews they seem to always be connected with expensive meals for which he generally provided few names and vague explanations of business_purpose furthermore nothing in the record indicates contemporaneous record keeping accordingly petitioner has failed to meet the requirements of sec_274 and we therefore sustain respondent's determination for the taxable years in issue g business promotion expenses for and petitioner deducted dollar_figure and dollar_figure respectively for alleged business promotions paid to various individuals and associations for items such as the rotary club barbecue respondent disallowed these amounts in their entirety many of the alleged promotion expenses claimed by petitioner are actually entertainment_expenses subject_to the strict substantiation requirements of sec_274 see supra pp for and petitioner's alleged business promotions include a dollar_figure check made out to a dick howard for a statue petitioner purchased at a rotary auction which he attended petitioner alleges that this purchase was related to his business because he donated the statute back to the rotary club in tsi's name for re-auctioning which petitioner asserts created both name recognition and goodwill for tsi the other items deducted by petitioner include sponsorship fees to various rodeos tickets to a benefit golf tournament fees and similar expenses petitioners have failed to show how any of the expenses_incurred for such activities actually afforded petitioner contacts with possible clients or had any direct relationship to the production_of_income ferrer v commissioner t c pincite thus we affirm respondent's determination on this issue h computer charges for and petitioner deducted computer charges of dollar_figure and dollar_figure respectively respondent disallowed these expenses in full on this issue we find for petitioner at trial petitioner testified that these expenses which were incurred in connection with his investigation and surveillance business represented computer fees paid to on-line service providers for individual background check information including addresses social_security numbers credit information and so on the checks submitted by petitioner at trial substantiate that such expenses were incurred and they are consistent with his trial testimony based on the record we find that these amounts were ordinary and necessary expenses_incurred by petitioner in carrying on his business under sec_162 i postage for and petitioner deducted postage in the amounts of dollar_figure and dollar_figure respectively respondent completely disallowed these expenses in many instances petitioner failed to show the business_purpose for the postage expense claimed for example in petitioner purchased stamps pincite cents apiece however the record is silent as to the use of the stamps in petitioner's business in petitioner conceded that he posted the newsletter for the rotary group however petitioner has not established that this newsletter postage is a business_expense these examples are indicative of the entire record regarding this matter nevertheless it is still reasonable to infer that petitioner incurred postage costs for tsi at trial petitioner submitted bills which we know he mailed out to clients accordingly we allow petitioner to deduct dollar_figure annually for postage 39_f2d_540 2d cir j dues and subscriptions for and petitioner claimed dues and subscriptions of dollar_figure and dollar_figure respectively respondent disallowed these amounts except for dollar_figure incurred by petitioner in to renew his private investigator's license dollar_figure paid both in and to the california association of licensed investigators and two payments of dollar_figure each made in to the northern california fraud investigators association for petitioner deducted membership fees to the rotary club as well as to the office club costco and price club which are all retail stores and the alameda golf club for petitioner deducted membership fees to the rotary club the alameda county leaders council and the retired peace officers association petitioner did not explain the facts and circumstances of such expenses nor is the business_purpose of these expenses self-explanatory from any business relationship of petitioner with the expenses_incurred lattin v commissioner tcmemo_1995_233 moreover petitioner is unable to trace any of his clients directly to these contacts thus we find that these items are nondeductible personal expenses under sec_262 the balance of the and deductions are for various newspapers magazines and legal books such as investigative news and the asset protection guide petitioner provided canceled checks for these items petitioner's testimony establishes that he used these materials either as resources or to stay abreast of trends in the investigation and surveillance industry therefore petitioner may deduct dollar_figure in and dollar_figure in for the cost of these items k laundry and linen for and petitioner deducted dollar_figure and dollar_figure respectively representing the cost of cleaning petitioner's suits and shirts this is clearly a personal nondeductible living expense under sec_262 l outside services for and petitioner deducted dollar_figure and dollar_figure respectively for outside services which respondent disallowed in full petitioner testified that these were amounts paid to different informants or snitches to obtain information petitioner paid these amounts in cash he did not issue forms to the recipients nor did he provide any receipts or other documentation to support the deduction for the taxable years in issue we find for respondent on this matter m telephone for and petitioner deducted dollar_figure and dollar_figure respectively for cellular phone expenses allegedly incurred in connection with his business the cellular phone which is installed in petitioner's van is not listed under tsi petitioner did not provide any telephone bills for the amounts in issue to establish what portion if any is business related we also note that the telephone bills submitted in connection with deductions claimed for petitioner's farm activity tsr are surprisingly low less than dollar_figure per month this leads to the conclusion that petitioners were making personal calls from the so-called business phone accordingly we find for respondent since petitioner failed to meet his burden_of_proof sec_162 issue schedule f farm activity respondent determined that petitioners did not engage in their farm activity with the intent to earn a profit in accord with sec_183 respondent disallowed the losses claimed on petitioners' schedule f resulting from farm expenses of dollar_figure and dollar_figure for and respectively petitioners assert that they entered into and carried on their farm activity in good_faith and with the intent to earn a profit and therefore the losses arising from the farm activity are allowable sec_183 provides that if an activity is not engaged in for profit no deduction attributable to such activity shall a cellular phone is listed_property under sec_11 280f d a v be allowed except as otherwise provided in sec_183dollar_figure sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 the test for determining whether an individual is carrying_on_a_trade_or_business under sec_183 is whether the taxpayer's actual and honest objective in engaging in the activity is to make a profit 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs while a taxpayer's expectation of profit need not be reasonable there must be a good_faith objective of making a profit 72_tc_28 sec_1_183-2 income_tax regs to determine whether the requisite profit objective exists we examine a variety of facts 72_tc_659 sec_1_183-2 income_tax regs thus the determination of whether the requisite profit objective exists depends upon all the surrounding facts and circumstances of the sec_183 provides that deductions which would be allowable without regard to whether such activity is engaged in for profit shall be allowed sec_183 provides that deductions which would be allowable only if such activity is engaged in for profit shall be allowed but only to the extent that the gross_income derived from such activity for the taxable_year exceeds the deductions allowable by reason of paragraph case 94_tc_41 sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs provides a nonexclusive list of factors to be considered in determining whether an activity is engaged in for profit these factors include the manner in which the taxpayers carried on the activity the expertise of the taxpayers or their advisers the time and effort expended by the taxpayers in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayers in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayers and any elements indicating personal pleasure or recreation although these factors are helpful in ascertaining a taxpayer's objective in engaging in the activity no single factor nor the existence of even a majority of the factors is controlling rather the facts and circumstances of the case remain the primary test keanini v commissioner supra pincite to aid in our determination we will consider the factors in the regulation seriatim a manner of carrying on the activity conducting an activity in a businesslike manner may indicate that a taxpayer has the necessary profit objective engdahl v commissioner supra pincite for example keeping books_and_records related to an activity may be indicative of a profit objective id sec_1_183-2 income_tax regs in addition to maintaining records advertising an activity may indicate a profit objective engdahl v commissioner supra also adapting new techniques and abandoning inefficient methods may support the conclusion that the taxpayer possessed the requisite profit objective allen v commissioner supra pincite sec_1_183-2 income_tax regs here petitioners failed to conduct their farm activity in a businesslike manner they did not maintain complete and accurate books nor did they keep contemporaneous_records of receipts and expenditures arising from their farm activity in many instances they failed to provide respondent with the evidence of payment in the form of canceled checks invoices or receipts for expenses claimed or evidence of business_purpose petitioners' notations on checks as to the business_purpose of such checks were written after the fact ie at the end of the year in which the expenses were allegedly incurred in fact in many instances petitioner was not quite sure what went into some of the expenses claimed advertising an activity may be indicative of a profit_motive in however the only advertising expense incurred by petitioners was for a local newspaper ad listing a cockatiel and a ram for sale in petitioners did not advertise anything for sale from their farm furthermore petitioners' ranch had an unlisted phone number petitioners also failed to show that they intended to change their operating methods in an effort to increase profitability at trial petitioner made a vague statement about his desire to expand reduce his expenses and leave a profitable business to his heirs however he was unable to articulate any specific details regarding new techniques that he intended to adapt or inefficient methods he intended to abandon with respect to his farm activity accordingly this factor favors respondent b expertise of taxpayer or advisers the fact that a taxpayer studies the accepted business economic and scientific practices associated with the activity or consults with experts may help demonstrate a profit objective engdahl v commissioner supra pincite sec_1_183-2 income_tax regs petitioner completed the equivalent of years of college he did not take any farming or animal husbandry courses in college however from through the time of trial he attended seminars at the university of california at davis covering a variety of animal-related issues such as breeding raising feeding and medically caring for animals in addition petitioner stayed abreast of developments in the farming and breeding industry by reading industry books and publications such as track and trail and national press publication although petitioners did not seek advice regarding their farm activity this fact is not necessarily determinative of a lack of profit_motive the evidence shows that petitioners made an effort to acquire the knowledge necessary to make their farm activity profitable and we find in their favor with respect to this factor c time and effort expended in the activity a taxpayer's devotion of substantial time and effort to an activity particularly if there are no substantial personal or recreational elements associated with the activity may indicate the requisite profit objective the fact that only a limited amount of time is so devoted does not necessarily give rise to a contrary inference haladay v commissioner tcmemo_1990_45 archer v commissioner tcmemo_1987_70 sec_1_183-2 income_tax regs in this case petitioners did not establish that they devoted a substantial amount of time to their farm activity mrs whalley is a full-time police officer and student and petitioner testified that back problems prevented him from doing a substantial amount of work there is evidence that the farm activity was engaged in primarily for personal purposes the evidence shows that petitioners deducted substantial costs to train their daughter to ride and participate in equestrian activities for example petitioners built and deducted the cost of an arena for their daughter's riding practice they also claimed substantial deductions for the cost of horse show equipment costumes and material however there is no persuasive evidence establishing how all of these expenses either produced or would produce income in short petitioners' failure to devote a considerable amount of time to the farm activity combined with the fact that they derived substantial personal pleasure from it suggests that the activity was not engaged in for profit d expectation that assets may appreciate an expectation that the appreciation of assets used in an activity will produce an overall profit when netted against the losses from that activity may indicate the requisite profit objective sec_1_183-2 income_tax regs there must be a bona_fide expectation that appreciation will produce a profit at some time in the future allen v commissioner t c pincite engdahl v commissioner t c pincite n sec_1_183-2 income_tax regs on petitioners' schedules f for and they showed farm income of dollar_figure and dollar_figure respectively petitioner testified that he became interested in horses after realizing that such animals were a valuable asset having appreciation potential if properly exhibited at horse shows or used for breeding purposes in petitioner owned three horses one of which was allegedly a stallion that he bought for breeding purposes at one point during the trial petitioner noted hypothetically that you can buy a horse for dollar_figure start breeding it selling its babies for an equal amount and after you sold the first one you could recapture your loss for the initial investment this statement taken on its face seems to support petitioner's assertion that he expected his stallion to appreciate in value because it could be used for breeding purposes petitioner however never owned a stallion that could potentially appreciate in fact according to a veterinarian's soundness examination given to the animal prior to petitioner's purchase it was determined that the horse was not actually a stallion as petitioner asserts but rather a gelding petitioner also testified that he could generate capital_gain from the sale of his horses since they would appreciate from being displayed at horse shows however petitioners had no income from either selling or breeding horses accordingly we find that petitioners' horses could not be expected to significantly appreciate in value e taxpayer's success in other activities we have recognized that a taxpayer's success in other business activities may indicate a profit_motive despite a currently unprofitable activity hoyle v commissioner tcmemo_1994_592 sec_1_183-2 income_tax regs during the years in issue petitioner a retired police officer is also reporting substantial losses on his schedules c from another business activity known as tsi the losses from that activity were dollar_figure for and dollar_figure for we find that this factor does not support petitioner's position f history of income or losses from the activity a history of losses over an extended period may indicate the absence of a profit objective allen v commissioner supra pincite however although a long history of losses is an important criterion it is clear that this factor is not necessarily determinative of a lack of a profit objective e g engdahl v commissioner supra pincite deductions allowed in spite of straight years of losses in a horse-breeding operation a series of initial or startup losses does not necessarily indicate that the activity was not engaged in for profit id sec_1_183-2 income_tax regs moreover losses sustained because of unforeseen or fortuitous circumstances beyond a taxpayer's control do not indicate that the activity was not engaged in for profit engdahl v commissioner t c pincite in this case petitioners have engaged in their farm activity for approximately years during those years petitioners' farm activity never made a profit petitioners' losses were not due to unfortunate events beyond their control but resulted from their deduction of expenses which in many instances were personal in nature for example petitioner testified that in he deducted dollar_figure worth of wine that he purchased for customers who bought lamb from his ranch even though he reported schedule f income of only dollar_figure for the losses arising from such deductions were used to offset mrs whalley's significant salary from her employment as a police lieutenant based on the record and the testimony presented at trial petitioners' claim that the schedule f losses were incurred in an activity having a bona_fide profit_motive exceeds the bounds of credibility g amount of occasional profits earned if any if an activity generates only small infrequent profits and typically generates large losses the taxpayer conducting the activity may be less likely to have a profit objective 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs petitioners' farm activity has never shown a profit in fact petitioners' expenses have greatly exceeded their revenue for example for the taxable years in issue their revenues from the activity were between dollar_figure and dollar_figure respectively while their expenses were between dollar_figure and dollar_figure respectively in short this factor weighs against petitioners' assertion that they operated the farm activity with the intent to turn a profit h taxpayer's financial status substantial income from sources other than the activity may indicate that the activity is not engaged in for profit engdahl v commissioner supra pincite sec_1_183-2 income_tax regs the rationale for this rule in part is that a taxpayer with substantial income from sources unrelated to the activity can more easily afford to operate the activity as a hobby and may seek to use the losses from the activity to offset the income from other sources during the taxable years at issue mrs whalley earned wages of dollar_figure for and dollar_figure for petitioner reported a nontaxable pension of dollar_figure for and dollar_figure for moreover for both years no federal_income_tax was withheld according to the forms w-2 issued for mrs whalley by the hayward police department given the facts presented the obvious conclusion is that petitioners intended that they would reduce or eliminate their tax_liability because of their claim of alleged losses we find that petitioners' substantial income from other sources coupled with the fact that they failed to claim any withholding for the years in issue indicates a lack of profit objective i elements of personal pleasure that a taxpayer receives personal or recreational benefits from an activity may indicate that the taxpayer is not engaging in the activity for profit sec_1_183-2 income_tax regs petitioner's testimony throughout the trial consistently points to his daughter's equestrian accomplishments he indicated that his daughter rides a variety of their horses and rides in western pleasure events english riding events and trail riding events for which she has won awards the majority of the schedule f expenses for the years at issue were attributable to his daughter's training attire and participation in shows this fact coupled with the other factors enumerated above indicates that petitioners did not engage in the farm activity for profit but for personal gratification based on the foregoing and considering all the facts and circumstances we conclude that petitioners did not have an actual and honest profit objective for the years in issue issue accuracy-related_penalty respondent determined in the notice_of_deficiency that petitioners are liable for the accuracy-related_penalty imposed by sec_6662 for and and that the entire underpayment_of_tax for each such year was due to negligence sec_6662 imposes a 20-percent penalty on the portion of the underpayment attributable to any one of various factors one of which is negligence the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax_return sec_6662 sec_1_6662-3 income_tax regs negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 sec_1_6662-3 income_tax regs sec_6664 however provides that the penalty under sec_6662 shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer's position with respect to that portion and that the taxpayer acted in good_faith with respect to that portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith within the meaning of sec_6664 is made on a case-by- case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs respondent's determination of negligence is presumed to be correct and petitioners bear the burden of proving that the accuracy-related_penalty does not apply rule a welch v helvering u s pincite petitioners have not presented evidence to establish that there was reasonable_cause for their position with respect to the underpayments of tax nor that they acted in good_faith with respect to such underpayments at first glance petitioners appear to have put their records together very well however careful scrutiny of the documentary_evidence presented and petitioner's trial testimony proves this assumption wrong we found numerous instances where petitioners took multiple deductions for the same item claimed deductions for items that they were not entitled to claim and failed to establish that the expenses_incurred during and were ordinary and necessary costs of carrying_on_a_trade_or_business pursuant to sec_162 thus we find that petitioners have failed to meet their burden_of_proof with respect to the accuracy-related_penalty accordingly we sustain respondent's determination that petitioners are liable for the accuracy-related_penalty pursuant to sec_6662 rule a to reflect the foregoing decision will be entered under rule appendix a schedule a expenses total misc itemized_deductions after applying agi floor dollar_figure tax prep fee union prof dues uniforms equip continuing educ dollar_figure big_number big_number big_number schedule a expenses total misc itemized_deductions after applying agi floor big_number tax prep fee union prof dues uniforms equip continuing educ dollar_figure big_number big_number big_number appendix b schedule c expenses total expenses advertising bad_debt car expenses depreciation insurance legal and professional fees office expenses supplies travel_expenses meals and entertainment utilities business promotion expenses computer charges delivery and freight dues and subscriptions laundry and linen licenses outside services telephone expenses schedule c expenses total expenses advertising bad_debt car expenses depreciation insurance legal and professional fees office expenses supplies travel_expenses meals and entertainment utilities business promotion expenses computer charges delivery and freight dues and subscriptions laundry and linen outside services small tools telephone expenses dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number appendix c schedule f expenses total expenses dollar_figure chemicals big_number machine work big_number depreciation big_number feed fertilizer big_number freight and trucking gasoline fuel and oil interest labor equipment rental sec_959 repairs and maintenance seeds and plants big_number supplies purchased utilitie sec_912 vet fees breeding and medicine big_number telephone expenses advertising big_number replenishment dues and subscriptions schedule f expenses total expenses dollar_figure chemical sec_121 conservation expenses big_number machine work big_number depreciation big_number feed fertilizer big_number freight and trucking gasoline fuel and oil interest labor equipment rentals big_number repairs and maintenance storage and warehousing big_number supplie sec_41 taxes big_number utilities vet fees breeding and medicine big_number telephone expenses advertising business promo expenses butchering kill replenishment dues and subscriptions big_number big_number


t c summary opinion united_states tax_court daniel a aregoni petitioner v commissioner of internal revenue respondent docket no 2708-04s filed date daniel a aregoni pro_se kathleen c schlenzig for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the taxable_year the issue for decision is whether petitioner is entitled to deduct dollar_figure for job expenses and other miscellaneous deductions background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in chicago illinois on the date the petition was filed in this case petitioner was a financial consultant who was employed by merrill lynch pierce fenner smith merrill lynch during the taxable_year during the year in issue merrill lynch had a reimbursement policy which stated petitioner is entitled to be reimbursed for certain limited expenses but is also expected to expenses necessary to the job for which he would not be reimbursed such expenses ordinary in this business include travel and transportation as well as promotional incur and entertainment_expenses incurred in calling on customers of merrill lynch for the purpose of creating sales through investment discussions during taxable_year petitioner requested reimbursement for expenses of dollar_figure incurred in furtherance of his job merrill lynch reimbursed petitioner for all of the requested expenses petitioner did not request any further reimbursement from merrill lynch during taxable_year petitioner’s employment at merrill lynch was terminated in june of petitioner reported the following job expenses and other miscellaneous deductions on line of schedule a itemized_deductions of his federal_income_tax return for the taxable_year description form 2106-ez tax preparation fees brokerage account fees depreciation total amount dollar_figure big_number big_number on form 2106-ez unreimbursed employee business_expenses petitioner reported the following expenses description parking fees tolls etc travel_expenses other business_expenses meals and entertainment total amount dollar_figure big_number big_number big_number big_number on statement attached to petitioner’s return petitioner reported that the other business_expenses consisted of the following items 1one such expense reimbursed by merrill lynch appears to have been requested for reimbursement twice by petitioner and was actually reimbursed twice by merrill lynch description business telephone client gifts office supplies subscriptions total amount dollar_figure big_number big_number big_number following an examination of petitioner’s return respondent issued a notice_of_deficiency disallowing job expenses and other miscellaneous deductions of dollar_figure discussion as a general_rule the determinations of the commissioner in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving the commissioner’s determinations to be in error rule a 290_us_111 as one exception to this rule sec_7491 places upon the commissioner the burden_of_proof with respect to any factual issue relating to liability for tax if the taxpayer maintained adequate_records satisfied the substantiation requirements cooperated with the commissioner and introduced during the court_proceeding credible_evidence with respect to the factual issue we decide the issue in this case without regard to the burden_of_proof accordingly we need not decide whether the general_rule of sec_7491 is applicable in this case see 116_tc_438 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to the claimed deductions 503_us_79 292_us_435 with these well-established propositions in mind we must determine whether petitioner has satisfied his burden of proving that he is entitled to deductions for job expenses and other miscellaneous deductions in excess of the dollar_figure conceded by respondent sec_162 allows a deduction for ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business for an expense to be ordinary the transaction that gives rise to the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business welch v helvering supra pincite the performance of services as an employee constitutes a trade_or_business see sec_1_162-17 income_tax regs the employee must show the relationship between the expenditures and the employment see evans v commissioner tcmemo_1974_267 the taxpayer bears the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses as a general_rule if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to adequately substantiate the precise amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of the deductible expense bearing heavily against the taxpayer whose inexactitude in substantiating the amount of the expense is of his own making and allow the deduction to that extent 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense the court must have some basis upon which an estimate may be made 85_tc_731 without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir in the case of travel_expenses entertainment_expenses and expenses paid_or_incurred with respect to listed_property eg passenger automobiles sec_274 overrides the cohan doctrine and expenses are deductible only if the taxpayer meets the section’s stringent substantiation requirements sec_274 sec_280f 50_tc_823 affd 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date sec_274 specifically provides sec_274 substantiation required --no deduction or credit shall be allowed-- under sec_162 or sec_212 for any traveling expense including meals_and_lodging while away from home for any item with respect to an activity which is of a type generally considered to constitute entertainment amusement or recreation or with respect to a facility used in connection with such an activity for any expense for gifts or with respect to any listed_property as defined in sec_280f 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 this section contemplates that no deduction or credit shall be allowed a taxpayer on the basis of such approximations or unsupported testimony of the taxpayer sec_1_274-5t temporary income_tax regs supra in order to substantiate a deduction by means of adequate_records a taxpayer must maintain a diary log statement of expenses trip sheet or similar record and documentary_evidence which in combination are sufficient to establish each element of each expense or use sec_1_274-5t temporary income_tax regs fed reg date a contemporaneous log is not required but corroborative evidence to support a taxpayer’s record of the elements of expenditure or use must have a high degree of probative value to elevate such statement and evidence to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs fed reg date thus no deduction for expenses under sec_274 may be allowed on the basis of any approximation or the unsupported testimony of the taxpayer see eg murata v commissioner tcmemo_1996_321 golden v commissioner tcmemo_1993_602 in this case petitioner has attempted to substantiate his expenditures through secondary and incomplete documentation in particular petitioner offered credit card statements and a reconstructed summary of his expenditures respondent reviewed petitioner’s documents and after performing a perfunctory analysis contends that most of the expenditures were for transportation and entertainment respondent further contends that the submitted documents do not meet the more stringent requirements of sec_274 petitioner on the other hand contends that all of the relevant expenditures represented by these documents were incurred in connection with his financial consulting business activity at trial petitioner testified that the original documents which substantiate his claimed job expenses and other miscellaneous deductions are on his hard drive and in files at merrill lynch however petitioner has not submitted those documents in the record before this court petitioner claims that merrill lynch will not turn over the documents respondent notified petitioner of the possibility of subpoenaing the documents and continuing this case in an attempt to obtain them petitioner did not avail himself of the opportunity either to continue this case or to subpoena the alleged documents moreover petitioner testified that he could not explain as to each entertainment expenditure who he met with or what the expense was incurred for and he could not explain as to airline expenditures what was the objective of the trip or the destination as to the other claimed job expenses and miscellaneous deductions petitioner stated it’d be impossible to give the exact name and prospect for each expenditure we have taken into consideration petitioner’s testimony and incomplete records and we conclude that petitioner failed to satisfy the requirements of sec_162 and sec_274 as to any expenditures in excess of the dollar_figure respondent conceded reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


internal_revenue_service number release date index numbers ---------------- ------------------------------------------- ------------------- ------------------------ ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no -------------- telephone number ---------------------- refer reply to cc corp b04 plr-122755-13 date date legend taxpayer ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ----------------------- sub1 sub2 seller target ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------- plr-122755-13 pship trust date a date b a b c d e f g h i j k l ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ------------- ---------------------------------------------------------------------------- -------------------- --------------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---- ---- -------- ------ ------ -- ---- dear -------------- this letter is in response to your date request for rulings on the federal_income_tax consequences of a proposed transaction that has been partially completed the information submitted in that request and in later correspondence is summarized below plr-122755-13 the rulings contained in this letter are based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process summary of facts taxpayer is a corporation and the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return taxpayer indirectly owns all of the issued and outstanding common_stock of sub1 a foreign_corporation sub1 owns sub2 sub2 is a foreign_entity that is disregarded as separate from its owner for federal_income_tax purposes prior to the proposed transaction target was wholly owned by seller a third party target is an entity that was disregarded as separate from its owner for federal_income_tax purposes target owned h percent of pship a partnership for federal_income_tax purposes and trust owned the remaining i percent pship directly and indirectly through one or more disregarded entities owned all of the common_stock of multiple foreign_corporations foreign corporate subsidiaries on date a taxpayer entered into an agreement the agreement with seller and target to purchase f percent of the ownership interests in target for cash of dollar_figurea and taxpayer common_stock of b shares under the agreement taxpayer also acquired the right to purchase the remaining g percent ownership_interest in target the call option together the purchase of the f percent ownership_interest and the call option are referred to as the step one acquisition the call option is exercisable in whole but not in part during a k month period beginning l months after the closing of the step one acquisition the step one acquisition closed on date b to effect the deemed acquisition by sub1 of the f percent ownership_interest in target taxpayer contributed cash and taxpayer common_stock through the ownership chain to sub2 which paid seller for the purchase of the f percent ownership_interest pursuant to the agreement and immediately prior to the step one acquisition seller caused the trust to exchange f percent of its i percent interest in pship for a new ownership_interest in target the new ownership_interest in target acquired by the trust was part of the f percent ownership_interest in target purchased by sub2 in the step one acquisition pursuant to the agreement upon exercise of the call option seller will cause the trust to exchange its remaining j percent interest in pship for a new ownership_interest in target the ownership_interest in target acquired by the trust will be part of the g percent ownership_interest to be purchased by taxpayer upon exercise plr-122755-13 of the call option the step two acquisition together the step one acquisition and the step two acquisition are referred to as the transaction taxpayer incurred and paid legal fees of dollar_figurec and investment banking fees of dollar_figured for a total of dollar_figuree upon the closing of the step one acquisition additional banker and legal fees will be payable upon the closing of the step two acquisition representations the taxpayer makes the following representations regarding the transaction a target and pship were eligible entities within the meaning of sec_301_7701-3 prior to and at the time of the step one acquisition and will be eligible entities at the time of the step two acquisition b target has been treated as a partnership for federal_income_tax purposes since the closing of the step one acquisition c since the closing of the step one acquisition the f percent ownership_interest in target has been treated for federal_income_tax purposes as held by sub1 d after taxpayer gives notice to exercise the call option seller will cause the trust to exchange its j percent interest in pship for an ownership_interest in target such that for federal_income_tax purposes pship will become disregarded as an entity separate from its owner target and target will own all of the issued and outstanding common_stock of the foreign corporate subsidiaries e in the step two acquisition the remaining g percent ownership_interest in target will be acquired pursuant to the exercise of the call option by sub1 or by one or more disregarded entities of sub1 which will own an f percent ownership_interest in target immediately prior to the step two acquisition thus for federal_income_tax purposes immediately after the closing of the step two acquisition target will be disregarded as an entity separate from its owner sub1 and sub1 or one or more disregarded entities of sub1 will own all the issued and outstanding common_stock of the foreign corporate subsidiaries rulings based solely upon the information and representations submitted we rule as follows regarding the transaction for purposes of sec_1563 the call option is characterized as an option to acquire a g percent interest in the stock of each of the foreign corporate subsidiaries plr-122755-13 as a result of the call option taxpayer and each of the foreign corporate subsidiaries are related within the meaning of sec_267 immediately after the closing of the step one acquisition and thus the step one acquisition is a covered transaction within the meaning of sec_1_263_a_-5 with respect to each of the foreign corporate subsidiaries caveats except as specifically provided herein we express no opinion concerning the tax consequences of any aspect of any matter or item discussed or referenced in this letter moreover no opinion is expressed about the tax treatment of the transaction or of any other matter under other provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction not specifically covered by the above rulings procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling in accordance with the power_of_attorney on file with this office copies of this ruling letter are being sent to your authorized representatives sincerely _____________________________________ grid glyer assistant to the branch chief branch office of associate chief_counsel corporate


t c memo united_states tax_court george b hebert petitioner v commissioner of internal revenue respondent docket no 29220-08l filed date george b hebert pro_se daniel p ryan for respondent memorandum findings_of_fact and opinion goeke judge the issue for decision is whether respondent abused his discretion in sustaining a proposed levy action against petitioner to collect unpaid income_tax assessments for and in addition to a civil penalty for taxable_year petitioner argues that respondent abused his discretion by refusing to provide him with a face-to-face collection_due_process cdp hearing for the reasons stated herein we find respondent did not abuse his discretion findings_of_fact some of the facts are stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by reference petitioner resided in massachusetts at the time he filed his petition on date respondent issued petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing the notice the notice included an account summary outlining income_tax due of dollar_figure for dollar_figure for and dollar_figure for and a sec_6672 civil penalty of dollar_figure for the period ending in petitioner timely filed a form request for a collection_due_process or equivalent_hearing his request included a demand for verification from the secretary that the requirements of any applicable law or administrative procedure were met a request for copies of notice_and_demand regarding the assessments listed in the notice and other arguments unrelated to the substantive merits of the assessed liabilities petitioner was provided with documentation of the liabilities in question and was sent the above-referenced notice_of_intent_to_levy at trial petitioner admitted receiving the notices and demand but alleged they were not properly executed in a letter dated date respondent offered petitioner a telephone cdp hearing scheduled for date respondent’s letter stated that the issues petitioner raised in his cdp hearing request were frivolous and advised him that he would not be allowed a face-to-face hearing if he raised only frivolous issues petitioner did not subsequently provide the appeals officer with a nonfrivolous issue or submit an additional request for a face-to-face hearing on date petitioner failed to contact the appeals officer for his scheduled telephone conference respondent sent petitioner a letter dated date informing him of the impending determination and again requesting information to assist the appeals officer with his decision petitioner again failed to contact the appeals officer following respondent’s request for information on date respondent issued petitioner two notices of determination concerning collection action s under sec_6320 and or notices of determination sustaining the proposed levies for income_tax liabilities incurred during and of dollar_figure dollar_figure and dollar_figure respectively and for a sec_6672 civil penalty of dollar_figure incurred for the period ending in on date petitioner filed his petition contesting these determinations on date trial was held in boston massachusetts opinion the issues we consider arise from respondent’s determinations to proceed with levy action under sec_6330 specifically we must decide whether petitioner was granted an opportunity for a hearing within the meaning of sec_6330 whether the appeals officer verified under sec_6330 that the requirements of any applicable law or administrative procedure were met and whether he wrongfully denied petitioner copies of documents and whether respondent’s determination to proceed with the proposed collection activity was an abuse_of_discretion for the reasons stated herein we find respondent did not abuse his discretion in sustaining the proposed levy action this collection review proceeding was filed pursuant to sec_6330 sec_6330 grants the court jurisdiction to review determinations made by an appeals officer to proceed with collection via levy where the validity of the underlying tax_liability is properly at issue the court will apply a de novo standard of review 114_tc_604 however where the validity of the underlying tax_liability is not properly at issue the court will review the commissioner’s administrative determination for abuse_of_discretion id at trial petitioner stated he was not making a claim that he did not owe the tax_liabilities accordingly we review respondent’s determination for abuse_of_discretion abuse_of_discretion is proven by showing that the commissioner exercised his discretion arbitrarily capriciously or without sound basis in fact or law 112_tc_19 before the commissioner may proceed to levy on a taxpayer’s property or right to property the taxpayer must be notified in writing of the commissioner’s intent and of the taxpayer’s right to a hearing sec_6330 sec_6331 sec_6330 and provides that if a person requests a hearing that hearing shall be held before an impartial officer_or_employee of the irs office of appeals at the hearing a taxpayer may raise any relevant issue including challenges to the appropriateness of the collection action sec_6330 a taxpayer who raises only frivolous arguments is not entitled to a face-to-face cdp hearing 117_tc_183 further a face-to-face meeting is not required to satisfy the hearing requirement under sec_6330 115_tc_329 concluding that telephone communications between a taxpayer and an appeals officer over the phone constituted an appeals hearing sec_301_6330-1 q a-d6 proced admin regs generally a taxpayer’s failure to raise an issue during a cdp hearing will bar our consideration of that issue 129_tc_107 118_tc_488 however the appeals officer’s mandated verification under sec_6330 that the requirements of any applicable law or administrative procedure have been met is subject_to our review without regard to a challenge by the taxpayer at the hearing hoyle v commissioner t c slip op pincite petitioner argues he was denied a cdp hearing because he did not receive a face-to-face hearing the record indicates that respondent provided petitioner with several opportunities to raise nonfrivolous arguments as to why respondent’s levy should not be sustained petitioner was notified by letter dated date scheduling his telephone hearing that he would have a face-to-face hearing if he had any nonfrivolous issues petitioner did not respond to this offer and ultimately failed to contact the appeals officer on the scheduled date of his telephone cdp hearing petitioner chose not to reschedule his hearing respondent did not abuse his discretion in denying petitioner a face-to-face hearing because he raised only frivolous issues see lunsford v commissioner supra pincite katz v commissioner supra pincite petitioner alternatively argues that the appeals officer failed to properly verify that the requirements of any applicable law or administrative procedure were met as required by sec_6330 petitioner’s argument includes a request to view certain documents including copies of assessments and notices and demand because his copies of these documents are not legitimately signed by the secretary sec_6330 does not require that an appeals officer rely upon a particular document in order to satisfy this requirement sec_6330 119_tc_252 the forms certificates of assessments payments and other specified matters which were submitted in the record at trial are valid verification that the requirements of any applicable law or administrative procedure have been met see craig v commissioner supra pincite there is no requirement under the internal revenue laws or the regulations that the appeals officer give the taxpayer a copy of the delegation of authority from the secretary to the person who signed the verification required under sec_6330 118_tc_162 the record indicates that the appeals officer verified that the requirements of any applicable law or administrative procedure were met respondent gave petitioner documents verifying certificates of assessments payments and other specified matters for the years at issue including copies of the relevant forms petitioner decided not to discuss or otherwise review these documents at trial we find that respondent did not abuse his discretion in his determination to proceed with the levy throughout the period leading up to petitioner’s scheduled hearing petitioner was uncooperative and failed to respond to the appeals officer’s requests for information the appeals officer was prepared to discuss petitioner’s concerns over the phone and offered petitioner a face-to-face conference if he had any nonfrivolous issues the appeals officer was deliberate throughout his interactions with petitioner and verified that the requirements of any applicable law and administrative procedure were met accordingly we hold there was no abuse_of_discretion in respondent’s determination to proceed with collection of petitioner’ sec_2002 and tax_liabilities and the civil penalty for sec_6673 authorizes the court to impose a penalty not in excess of dollar_figure whenever it appears the taxpayer’s position in a proceeding is frivolous or groundless we strongly warn petitioner that he may be subject_to a sec_6673 penalty in a future case if he persists in maintaining proceedings to delay or to advance frivolous arguments to reflect the foregoing decision will be entered for respondent