Court Opinion

ID: 2830504
Source: CourtListenerOpinion
Date Created: 2015-08-25 20:02:15.371178+00
Date Added: 2024-06-11T11:31:39.290434
License: Public Domain

PURSUANT TO INTERNAL REVENUE CODE
 SECTION 7463(b),THIS OPINION MAY NOT
  BE TREATED AS PRECEDENT FOR ANY
            OTHER CASE.
                            T.C. Summary Opinion 2015-52

                            UNITED STATES TAX COURT

                   RONALD G. EZZELL, JR., Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 12260-14S.                            Filed August 25, 2015.

      Ronald G. Ezzell, Jr., pro se.

      Andrew J. Davis, for respondent.

                                 SUMMARY OPINION

      THORNTON, Chief Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by

      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Petitioner petitioned the Court for redetermination of a $7,186 deficiency

that respondent determined in petitioner’s Federal income tax for 2010 and a

$1,437 accuracy-related penalty under section 6662(a). Following concessions,

we are left to decide two issues.2 We decide first whether petitioner may deduct

expenses for his sole proprietorship in amounts greater than respondent has

allowed. We hold he may to the extent stated. We decide second whether

petitioner is liable for the accuracy-related penalty that respondent determined.

We hold he is not.

        1
        (...continued)
Code (Code) in effect for the year in issue, Rule references are to the Tax Court
Rules of Practice and Procedure, and dollar amounts are rounded to the nearest
dollar.
        2
       In addition to the concessions which we discuss herein, respondent
conceded an adjustment in the deficiency notice relating to “Form 25551 [sic]
Income”. In addition to the two issues which we decide, the parties dispute two
computational adjustments that turn on the amount of net income from petitioner’s
sole proprietorship. The parties should readjust the computational adjustments in
accordance with this opinion.
                                         -3-

                                     Background

I.    Preliminaries

      Some facts were stipulated. The stipulations of fact and the facts drawn

from stipulated exhibits are incorporated herein, and we find those facts

accordingly. Petitioner resided in North Carolina when the petition was filed. He

timely filed a Federal income tax return for 2010 (2010 return), using the filing

status of “Single”.

II.   Repair Business

      A.     Background

      Petitioner owned a sole proprietorship that he formed in 2005 and operated

during 2010 as an automobile repair business (repair business). He devoted a lot

of his time to the repair business, which he operated out of a room (business

headquarters) in his residence. The business headquarters measured 30 feet by 40

feet at its base and had a second level which measured 12 feet by 40 feet.

      Petitioner was deployed to the Middle East on September 25, 2010, and he

did not return to the United States during the rest of 2010. While petitioner was

outside the United States, his father either used petitioner’s funds to pay some of

the repair business’ recurring expenses (e.g., insurance, utilities) or assured that
                                        -4-

those expenses were paid from petitioner’s bank account through automatic

payments.

      Petitioner used the cash method to report on his 2010 return the following

gross income, expenses, and net loss for the repair business:

            Gross income:                                 Amount
             Gross receipts                               $11,539
             Total                                         11,539

            Expenses:
             Depreciation                                  15,395
             Insurance (other than health)                  3,354
             Mortgage interest                                369
             Legal and professional services                  175
             Repairs and maintenance                        2,631
             Supplies                                       1,149
             Utilities                                      3,991
             Mileage (at standard rate)                     2,150
              Total                                        29,214

                Net loss                                  (17,675)

      B.    Depreciation

      Petitioner reported that $15,004 of the $15,395 depreciation deduction was

attributable to depreciable property that he purchased and placed in service before

2010 and that the remaining $391 was attributable to depreciable property that he

purchased and placed in service during 2010. Petitioner purchased all of the

property for which he claimed depreciation.
                                         -5-

      During respondent’s audit of the 2010 return, petitioner gave to respondent

a “Depreciation and Amortization Report” (depreciation report) to support

petitioner’s claimed depreciation deduction. The depreciation report describes the

property underlying the reported depreciation and lists for each property the date

placed in service, the cost, the business use, the depreciable basis, the depreciable

life, the depreciation method and convention, and the prior and current

depreciation claimed. The property and the corresponding relevant amounts

shown in the depreciation report are as follows:
                                    -6-

                            Date placed                 Depreciation
    Property                in service      Cost     Prior      Current

2010 shop tools               6/10/10      $2,739     -0-        $391
 Current year total                         2,739     -0-         391

Shop                           1/1/05      36,000   $13,561      2,244
Miller Matic 210 (welder)      1/1/05       1,850     1,743        107
Used Ammco brake lathe        1/20/05       2,000     1,554        178
Computer                       2/1/05       1,100     1,037         63
Tire changer                  2/10/05       2,000     1,554        178
Used pro cat brake lathe      2/10/05       3,500     2,719        312
Brake lathe table             2/10/05         450       349         40
Tire balancer                  3/5/05       1,800     1,399        160
Drill press                   3/20/05         350       272         31
Bush Hog lawnmower            4/15/05       8,200     6,371        732
Car lift                      4/15/05       2,300     1,786        206
Transmission jack              5/1/05         500       389         44
Septic tank                   11/1/05       1,200       452         75
OTC diagnostic scanner        12/1/05       4,300     4,052        248
A/C machine                    4/6/06       2,500     1,719        223
Flush machine                  5/3/06       1,800     1,238        161
Plasma cutter                 10/2/06       2,385     1,640        213
2007 shop tools                6/1/07      40,863    22,993      5,106
Shop building                11/30/08      20,861       602        535
2008 shop tools               12/1/08       8,895     2,769      1,750
Pro-cut 9.2 brake lathe       3/27/09       3,500       875        750
Robin Air 34788               4/29/09       2,900       518        681
Building shed attachment     10/23/09       1,957        24        193
General tools                 12/1/09       2,809       100        774
 Prior year total                         154,020    69,716     15,004
  Totals                                  156,759    69,716     15,395
                                         -7-

      The Bush Hog lawnmower is a large lawnmower. Petitioner used it to mow

the grass on the grounds of his repair business. He also used it to mow the grass at

other locations where he placed signs to advertise his business.

      Petitioner used the computer in his repair business. He bought the computer

in 2005 for $1,100.

      Petitioner purchased various shop “tools” for the repair business during

2007 and 2008. He capitalized the cost of the shop tools. The costs of the shop

tools that he purchased in 2007 and 2008 were $32,711 and $9,146, respectively.

      C.     Repairs and Maintenance

      The business headquarters originally had a French door on the second level,

which was accessible only by ladder. The door was not covered, and rain

throughout the years had caused the door to rot. Before 2010 petitioner replaced

the door, built a dock to gain easier access to the second level, and built a shelter

over the second level (including over the door).

      Petitioner later learned that a wall on the second level of the business

headquarters had rotted and become moldy from the water damage. He bought

various items during 2010 primarily to repair the wall and to install two toilets.

He also used some of those items to maintain (but not to construct) the shelter.
                                        -8-

The most expensive single item that petitioner purchased for these projects was

insulation, which cost $600. Most of the other items cost less than $100 each.

      D.      Utilities

      Petitioner reported on the 2010 return that he had paid $3,991 of utilities

expenses with respect to the repair business. These expenses related to payments

that petitioner made for (1) the provision of electricity to the business headquarters

and to the rest of his residence, (2) a cellular phone which he used primarily for

business, and (3) a bundled package comprising digital cable television for three

televisions, DVR service for two televisions, Internet service, and two landline

telephones.

      Petitioner had one television in the business headquarters. He used one

landline telephone primarily for business, and he maintained the second landline

telephone as a dedicated line required by the State of North Carolina. He used the

Internet to access specifications and other information particular to the vehicles he

repaired and to purchase items used in the repair business. He continued to use

the cellular phone after he went to the Middle East, primarily to check on the

status of the repair business and on the payment of the repair business’ recurring

expenses.
                                        -9-

      Petitioner paid $1,081 for electricity provided to his residence from

December 17, 2009, through December 15, 2010. He paid $1,442 during 2010 for

the cellular phone service. He paid $2,173 during 2010 for the bundled package.

      E.     Mileage

      Petitioner kept receipts for purchases related to the repair business.

Contemporaneously with his making of a purchase, he typically listed on each

receipt the corresponding number of miles that he had traveled to make the

purchase. Petitioner eventually used the receipts to generate a summary (mileage

summary) which his bookkeeper gave to respondent during the audit.

      The mileage summary was a 2010 calendar on which petitioner’s

bookkeeper generally copied onto the space for each day on which a receipt was

issued the miles written on the receipt and the name of the receipt’s issuer. In the

few cases where a receipt did not list the miles traveled, the bookkeeper “googled

the mileage” and wrote the number of obtained miles on the applicable day of the

calendar. The mileage summary includes miles that petitioner personally traveled

and miles which his father traveled while tending to petitioner’s business after

September 25, 2010. Petitioner concedes that he may not deduct mileage for any

day after September 25, 2010.
                                        - 10 -

III.   Preparation of 2010 Return

       Petitioner is relatively unsophisticated as to tax matters, and he relies upon

professionals to assist him on tax matters.

       A certified public accountant (C.P.A.) prepared the 2010 return on the basis

of the receipts and the other information that petitioner gave to the C.P.A.

Petitioner met with the C.P.A. to discuss the receipts and the other information

before the C.P.A. prepared the 2010 return, and petitioner proffered the receipts

and the other information to the C.P.A. for his consideration. The C.P.A. had

previously prepared petitioner’s Federal income tax returns for other years and

was familiar with the repair business and with its operation.

IV.    Deficiency Notice

       Respondent mailed petitioner a deficiency notice for 2010. Respondent

determined in relevant part that petitioner may not deduct any expense that he

reported as to the repair business except for the expenses for mortgage interest and

for legal and professional services. Respondent disallowed the depreciation

deduction primarily because, he determined, petitioner did not establish the cost

basis of any depreciable asset. Respondent disallowed deductions for the other

expenses because, he determined, petitioner did not establish that any of the

reported expenses were paid in the carrying on of a trade or business. Respondent
                                         - 11 -

also determined in the deficiency notice that petitioner was liable for an accuracy-

related penalty under section 6662(a).

V.    Respondent’s Concessions

      Respondent conceded before trial that petitioner is entitled to some of the

disallowed deductions. Those concessions, as well as the reported expenses and

the amounts of the reported expenses which remain in dispute, are as follows:

                                                  Reported   Conceded   In dispute

      Depreciation                                $15,395    $12,060     $3,335
      Insurance (other than health)                 3,354      3,354       -0-
      Repairs and maintenance                       2,631       -0-       2,631
      Supplies                                      1,149      1,149       -0-
      Utilities                                     3,991      1,885      2,106
      Mileage                                       2,150      1,075      1,075
       Total                                       28,670     19,523      9,147

                                      Discussion

I.    Disputed Expenses

      A.     Burden of Proof

      The Commissioner’s determinations in a deficiency notice are presumed

correct, and a taxpayer generally bears the burden of proving the determinations

wrong in order to prevail. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933). As one exception to the general rule, the burden of proof with respect

to factual issues underlying a deficiency may shift to the Commissioner to the
                                       - 12 -

extent that the taxpayer introduces credible evidence with respect to the factual

issues and meets certain other requirements. See sec. 7491(a). Where, as here, the

record allows the Court to decide a case without regard to the burden of proof, we

need not opine on which party bears the burden of proof. See, e.g., Knudsen v.

Commissioner, 131 T.C. 185, 186-189 (2008). Instead, we may decide the case on

the preponderance of the evidence. See, e.g., id. We decide this case on the

preponderance of the evidence.

      B.     Ordinary and Necessary Business Expenses

             1.    General Rule

      Section 162(a) generally lets taxpayers deduct “all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying on any

trade or business”. Under that section, a cash method taxpayer such as petitioner

may deduct an expenditure if it is: (1) an expense, (2) an ordinary expense, (3) a

necessary expense, (4) paid during the taxable year, and (5) made to carry on a

trade or business. See Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S.
345, 352-353 (1971); Lychuk v. Commissioner, 116 T.C. 374, 386 (2001).

             2.    Personal and Capital Expenses

      Section 162(a) does not let taxpayers deduct personal, living, or family

expenses. See sec. 262(a). Nor does section 162(a) let taxpayers currently deduct
                                       - 13 -

capital expenses. See sec. 263(a). Capital expenses include “[a]ny amount paid

out for new buildings or for permanent improvements or betterments made to

increase the value of any property”. See sec. 263(a)(1). Deductible expenses

include repairs made to maintain property in ordinarily efficient operating

condition. See, e.g., Ill. Merchs. Trust Co. v. Commissioner, 4 B.T.A. 103, 106

(1926);3 accord Gibson & Assocs., Inc. v. Commissioner, 136 T.C. 195, 232-233

(2011).

      The characterization of an expenditure as a deductible repair or a capital

expense is not always straightforward and generally hinges on the unique facts of

each case. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 86 (1992). Former

      3
        In the seminal case of Ill. Merchs. Trust Co. v. Commissioner, 4 B.T.A.
103, 106-107 (1926), the Board considered whether the cost of repairing rotting
support pilings in a warehouse was deductible as an ordinary expense where the
warehouse threatened to collapse if the repairs were not made. The warehouse
was on the Chicago River, and the pilings supporting the warehouse developed dry
rot when the river unexpectedly receded. See id. at 104. The taxpayer removed
the dry rot and inserted cement supports between the pilings and the floor of the
building. See id. The taxpayer removed large parts of the ground floor and shored
up and raised the partially collapsed wall. See id. The Board held that the cost of
the taxpayer’s work was deductible because it was incurred to prevent the total
loss of the building and to keep the property in its ordinary operating condition as
a warehouse. See id. at 106-107.
                                       - 14 -

section 1.162-4, Income Tax Regs.,4 illustrates the distinction between a

deductible repair and a nondeductible capital expense as follows:

      The cost of incidental repairs which neither materially add to the
      value of the property nor appreciably prolong its life, but keep it in an
      ordinarily efficient operating condition, may be deducted as an
      expense, provided the cost of acquisition or production or the gain or
      loss basis of the taxpayer’s plant, equipment, or other property, as the
      case may be, is not increased by the amount of such expenditures.
      Repairs in the nature of replacements, to the extent that they arrest
      deterioration and appreciably prolong the life of the property, shall
      either be capitalized and depreciated in accordance with section 167
      or charged against the depreciation reserve if such an account is kept.
      ***
             3.     Need To Substantiate Expenses

      Taxpayers generally bear the burden of substantiating an expense in order to

deduct it. See sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),

aff’d, 540 F.2d 821 (5th Cir. 1976). All the same, the Court may apply the

longstanding Cohan rule to estimate an expense that a taxpayer establishes is

deductible but does not otherwise substantiate the precise amount of. See Cohan

v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court may apply the

Cohan rule, however, only if the record gives the Court a basis upon which to

      4
       T.D. 9564, 2012-14 I.R.B. 614, amended by Announcement 2013-7, 2013-
3 I.R.B. 308, revised former sec. 1.162-4, Income Tax Regs., generally for taxable
years beginning after December 31, 2013.
                                         - 15 -

estimate the deductible expense. See Vanicek v. Commissioner, 85 T.C. 731,

742-743 (1985).

             4.     Vehicle Expenses

      Vehicle expenses are subject to strict substantiation rules and are excepted

from the Cohan rule. See secs. 274(d)(4), 280F(d)(4)(A)(i), (5); see also Boyd v.

Commissioner, 122 T.C. 305, 320 (2004); sec. 1.274-5T(a), Temporary Income

Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). These strict rules allow taxpayers

to substantiate vehicle expenses through adequate records that establish (1) the

amount and business purpose of the expense and (2) the time and place of the

vehicle’s use. See sec. 274(d). Adequate records are (1) an account book, a log, a

statement of expense, or a similar record and (2) documentary evidence (e.g.,

receipts, paid bills, or similar evidence), which together are sufficient to establish

each element of an expenditure. See sec. 1.274-5T(c)(2)(i), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985); see also sec. 1.274-5(c)(2)(iii),

Income Tax Regs.

      C.     Depreciation Expense

      Taxpayers may deduct depreciation for certain tangible property used in a

trade or business. See sec. 167(a); see also secs. 167(b), 168. Depreciation is

generally computed by using the cost of the depreciable property as its basis. See
                                        - 16 -

secs. 167(c), 1011(a), 1012(a). Where the Commissioner has determined that a

taxpayer failed to establish the cost of depreciable property, the taxpayer must

establish the cost of the property in order to depreciate it. See Cluck v.

Commissioner, 105 T.C. 324, 337 (1995); Reinberg v. Commissioner, 90 T.C.
116, 139 (1988).

      D.     Depreciation in Issue

      The parties dispute whether petitioner is entitled to deduct $3,335 of the

depreciation that he reported for 2010. The disputed depreciation relates to the

following property:

                Property                         Disputed depreciation

             2010 shop tools                            $291
             Computer                                     63
             Miller Matic 210 welder                     107
             Tire changer                                178
             Brake lathe table                            40
             Drill press                                 160
             Car lift                                    206
             Transmission jack                            44
             Flush machine                               161
             Plasma cutter                               213
             Bush hog lawnmower                          732
             2007 and 2008 shop tools                  1,140
              Total                                    3,335

      We start with the Bush Hog lawnmower. Respondent asserts in his pretrial

memorandum that he disallowed the depreciation deduction for that lawnmower
                                       - 17 -

because petitioner’s use of it was not ordinary and necessary to his carrying on of

the repair business. We disagree with respondent’s rationale for his disallowance

of that depreciation deduction. A depreciation deduction is not dependent on the

taxpayer’s satisfaction of the “ordinary and necessary” expense requirements of

section 162 but rests solely on the taxpayer’s use of depreciable property in a trade

or business. See Noyce v. Commissioner, 97 T.C. 670, 689-690 (1991). Because

we have found that petitioner used the Bush Hog lawnmower in the repair

business, we hold that he may deduct the depreciation that he reported on that

property.5

      We turn to the other property in dispute and, more specifically, the amounts

of petitioner’s bases in that property. We start first with the computer and with the

2007 and 2008 shop tools. We have found that petitioner paid $1,100 for the

computer and that he respectively paid $32,711 and $9,146 for the 2007 and 2008

shop tools. We conclude that petitioner’s bases in those three items are the

amounts of those corresponding payments. We hold therefore that petitioner may

      5
        Respondent does not assert that petitioner is precluded from depreciating
the Bush Hog lawnmower because he failed to establish his basis in that item. Nor
does respondent assert that petitioner’s deduction for some of the depreciation on
that item should be disallowed because it is personal. We consider those potential
assertions waived and do not consider them. See Swords Trust v. Commissioner,
142 T.C. 317, 339 n.30 (2014).
                                         - 18 -

expense those payments through depreciation deductions. As for the remaining

property, however, we agree with respondent that the record does not reveal

petitioner’s bases in any of that property. We conclude and hold that petitioner

may not deduct depreciation as to any of that remaining property.

      E.     Other Expenses in Issue

             1.     Repairs and Maintenance

      Respondent disallowed petitioner’s deduction of $2,631 in expenses for

repairs and maintenance. Respondent asserts that these expenses must be

capitalized because they relate to petitioner’s building of a shelter over the second

level in the business headquarters. We have found, however, that the expenses

related not to the building of the shelter but primarily to petitioner’s repair of the

wall that was damaged by water.6 Given the minimal amount of these expenses,

$2,631, vis-a-vis the 2005 cost of the business headquarters, $36,000, and the

2008 cost of the shelter, $20,861, we infer that the repair in 2010 did not

meaningfully increase the value or the original service life of the business

headquarters but merely kept it in ordinarily efficient operating condition. We

      6
        We note that petitioner repaired the wall in a year after the year that he
built the second level and that, for 2008, petitioner capitalized $20,861 in
expenses for “Shop building”. We infer and find that the $20,861 in expenses was
related to the building of the shelter.
                                        - 19 -

hold that petitioner may deduct the disputed repairs and maintenance expenses as

ordinary and necessary business expenses under section 162(a).

             2.     Utilities

      Petitioner claimed a $3,991 deduction for utilities expenses related to the

repair business. Respondent conceded that petitioner may deduct $1,885 of the

$3,991 as a business expense and asserts that the remaining $2,106 is a

nondeductible personal expense. Respondent computed the $1,885 by assuming

(incorrectly as he now acknowledges) that the repair shop business was terminated

when petitioner went to the Middle East. While the record does not allow the

Court to determine petitioner’s deduction for utilities expenses with any scientific

precision, we are able to determine that amount from the evidence with the

assistance of reasonable inferences which we draw from the record.

      First, as to the electricity expense, we infer that one-half of the $1,081

charge for 2010 was for electrical services supplied to the repair business.

Petitioner both worked and lived at the site of his residence; and given our finding

that petitioner devoted a lot of his time to the repair business, we consider it

reasonable on the basis of the record at hand to split the electricity expense equally

between his business and his personal pursuits. We hold that petitioner may

deduct $541 for electricity ($1,081 × 50%).
                                        - 20 -

      Second, as to the cellular phone, petitioner used that phone primarily for

business. We consider it reasonable to allow petitioner to deduct 80% of the

$1,442 charge for the cellular phone. We hold that petitioner may deduct $1,154

for cellular phone service ($1,442 × 80%).

      Third, as to the bundled package, we have found that one television, two

phone lines, and some of the Internet service were for the benefit of the repair

business. While the record does not include a breakdown of the cost for 2010 of

each of the services underlying the bundled package, there is a stipulated bill for a

bundled package provided to petitioner during 2012, which breaks down the

charges for the various services for 2012. We understand that the parties included

this bill in the record as representative of the charges for the various bundled

services during 2010, and we use the bill to determine the amount of petitioner’s

deduction for utilities expenses for 2010. The bill shows that the monthly cost for

digital cable, Internet service, and one telephone line is $115.77, that the monthly

cost of the second telephone line is $29.95, and that petitioner paid for each month

tax and various fees at a rate that we calculate as 7.86%. For 2010 we allow

petitioner to deduct for each month 80% of the $115.77 and all of the $29.95, plus

an additional amount for tax and fees. Stated differently, we hold that petitioner
                                       - 21 -

may deduct $1,586 for the bundled package (([80% × $115.77] + $29.95) × 1.0786

× 12 months).

      In sum, we compute petitioner’s deduction for utilities expenses as follows:

                   Electricity                       $541
                   Cellular phone                   1,154
                   Bundled package                  1,586
                    Total                           3,281

             3.    Mileage

      Petitioner claimed a $2,150 deduction for mileage related to the repair

business. Respondent concedes that petitioner may deduct $1,075 of the $2,150 as

a business expense and asserts that the remaining $1,075 is a nondeductible

personal expense. Respondent objects to petitioner’s mileage summary because,

respondent states, it was not prepared contemporaneously with petitioner’s travels.

      Respondent’s disallowance of part of petitioner’s reported vehicle expense

is based on respondent’s objection to petitioner’s mileage summary. The

regulations provide specifically that “[a] contemporaneous log is not required”,

sec. 1.274-5T(c)(1), Temporary Income Tax Regs., supra, and focus more

appropriately on the need to record the requisite information at or near the time of

each business use of the vehicle, see sec. 1.274-5T(c), Temporary Income Tax

Regs., supra. Petitioner met the “at or near” requirement in that he typically
                                        - 22 -

recorded on each of his receipts the business miles that he traveled with regard to

the receipt and did so contemporaneously with his travels related to the receipts.7

The receipts meet the regulatory requirements for petitioner’s vehicle expense

deduction in that they embody the requisite statements of expenses (or similar

records) by establishing the actual business miles that petitioner traveled on each

trip, the time and place of the travel, and the business purpose of the travel. The

mileage summary was not necessary to support the deduction further but was

simply a more efficient restatement of the miles and the other information listed on

the receipts.

      We conclude that petitioner may deduct his reported mileage with one

adjustment. The adjustment takes into account petitioner’s concession that he may

not deduct mileage for any day after he was deployed to the Middle East. We

ascertain from the mileage summary that petitioner claimed the standard mileage

rate with respect to 1,280 miles reported for days traveled after September 25,

2010. The standard mileage rate for 2010 is 50 cents per mile. See Rev. Proc.

2009-54, sec. 2.01, 2009-51 I.R.B. 930, 930. See generally sec. 1.274-5(j)(2),

Income Tax Regs. (stating that the Commissioner may establish a procedure for

      7
       While respondent questions the accuracy of the reported mileage, we find
nothing in the record from which to conclude that the reported mileage failed to
accurately measure petitioner’s business mileage.
                                       - 23 -

taxpayers to use mileage rates to compute vehicle expenses). We reduce by $640

(1,280 miles × .50 per mile) petitioner’s reported vehicle expense of $2,150 and

hold that petitioner may deduct $1,510 as a vehicle expense.

II.   Accuracy-Related Penalty

      Respondent determined that petitioner is liable for a 20% accuracy-related

penalty under section 6662(a) and (b)(1) and (2) on account of negligence or,

alternatively, of a substantial understatement of income tax. Respondent stated at

trial that he was still pursuing the penalty but only for negligence. Negligence

includes any failure to make a reasonable attempt to comply with the provisions of

the Code or to exercise ordinary and reasonable care in the preparation of a tax

return. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. Negligence also

includes a failure to keep adequate books and records or a failure to substantiate

items properly. See sec. 1.6662-3(b)(1), Income Tax Regs.

      The Commissioner bears the burden of production with respect to a

taxpayer’s liability for an accuracy-related penalty. See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Respondent asserts that petitioner was

negligent because he failed to keep adequate books and records and failed to

substantiate the expenses underlying his deductions. We disagree that petitioner

was negligent with respect to the 2010 return.
                                        - 24 -

      Petitioner has produced receipts for most of his reported expenses, and his

failure to present a handful of receipts to substantiate all of his expenses does not

necessarily mean that he failed to keep adequate books and records or failed to

substantiate the expenses underlying his deductions. The lion’s share of the

missing receipts related to relatively small-dollar items of depreciable property

which we have found that petitioner did in fact purchase. Moreover, petitioner’s

bookkeeper testified credibly and without contradiction that, during respondent’s

audit of the 2010 return, she saw all of the missing receipts, with the exception of

the receipt for the brick lathe table. Our holding that petitioner was not negligent

as to the 2010 return is further supported by the facts that petitioner retained a

C.P.A. to prepare the 2010 return, that petitioner and the C.P.A. met to discuss the

receipts and the other information that would eventually form the basis of the

amounts shown in the 2010 return, and that petitioner proffered those receipts and

other information to the C.P.A. for his consideration. Petitioner’s actions as to the

preparation of the 2010 return show us that he knew that he had an obligation to

file a correct Federal income tax return for 2010 and that, while he was relatively

unsophisticated as to tax matters, he was reasonably attempting to comply with the

provisions of the Code and to exercise ordinary and reasonable care in the

preparation of the 2010 return.
                                        - 25 -

       We hold that petitioner is not liable for the accuracy-related penalty that

respondent determined.

III.   Conclusion

       Petitioner may deduct the disputed expenses to the extent stated herein. In

addition, petitioner is not liable for the accuracy-related penalty that respondent

determined.

       To reflect the foregoing,

                                                            Decision will be entered

                                                     under Rule 155.