Vigil v. Comm'r

T.C. Summary Opinion 2008-6
UNITED STATES TAX COURT
DAVID AND GAIL VIGIL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8658-06S. Filed January 9, 2008.
David and Gail Vigil, pro se.
Valerie L. Makarewicz, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petition was filed.
Pursuant to section 7463(b), the decision to be entered is not
reviewable by any other court, and this opinion shall not be
treated as precedent for any other case. Unless otherwise
indicated, subsequent section references are to the Internal
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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 $12,118 deficiency in petitioners’
2001 Federal income tax, a $3,029.50 addition to tax pursuant to
section 6651(a)(1) for failing to file a timely 2001 tax return,
and a $2,423.60 accuracy-related penalty pursuant to section
6662.
The issues for decision are: (1) Whether petitioners are
liable for self-employment tax on income petitioner David Vigil
(Mr. Vigil) earned as a minister in 2001; (2) whether petitioners
are entitled to certain claimed deductions on Schedule C, Profit
or Loss From Business; (3) whether petitioners are liable for the
failure-to-file addition to tax under section 6651(a)(1); and (4)
whether petitioners are liable for the accuracy-related penalty
under section 6662.
Background
The parties stipulated some of the facts, and they are so
found. We incorporate the stipulation of facts and the attached
exhibits herein by this reference. Petitioners resided in
Norwalk, California, when they filed the petition.
On January 1, 1979, the Independent Pentecostal Church
granted Mr. Vigil a license as a minister. Mr. Vigil’s primary
calling has been to minister on Indian reservations. During
1979, Mr. Vigil worked part time as a minister and also had a
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full-time job. He became a full-time minister in 1980 and
continued his full-time ministry throughout the year at issue.
In 2001, petitioner Gail Vigil (Mrs. Vigil) was a homemaker.
Since 1987, petitioners have claimed they are exempt from
self-employment taxes on income from Mr. Vigil’s work as a
minister, pursuant to section 1402(e).
In 1996, apparently during the examination of petitioners’
1994 joint tax return, Mr. Vigil wrote a letter to the Internal
Revenue Service (IRS). Mr. Vigil stated that in 1987 he had
filed a Form 4361, Application for Exemption From Self-Employment
Tax for Use by Ministers, Members of Religious Orders and
Christian Science Practitioners, and that a copy of the approved
Form 4361 had been returned to him. Mr. Vigil requested that
another copy of the approved application be sent to him and
enclosed a copy of the signed (but unapproved) Form 4361 he
contends he filed in 1987. The IRS received his request and the
enclosed copy of the unapproved Form 4361 in May 1996. The IRS
searched its document and computer files but did not find any
record that Mr. Vigil had been approved for a ministerial
exemption or any record that Mr. Vigil had filed a request for a
ministerial exemption before 1996. The IRS requested that the
Social Security Administration (SSA) search its records and
learned that the SSA did not have any record of either the
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approval or the receipt of a Form 4361 from Mr. Vigil. The IRS
notified Mr. Vigil of the results of its search on June 11, 1996.
In June 1997, respondent notified petitioners that he
proposed an adjustment to their 1994 Federal income tax resulting
from nonpayment of self-employment tax, together with a
negligence penalty. However, in July 1997, respondent sent
petitioners a letter stating that the 1994 examination resulted
in no change to the tax that petitioners reported.
Petitioners filed their joint 2001 Federal income tax return
on February 27, 2004, together with a request for an extension of
time to file their 2001 return (extending the due date from April
15, 2002, to October 15, 2002). Petitioners signed both the 2001
Form 1040, U.S. Individual Income Tax Return, and the Form 2688,
Application for Additional Extension of Time To File U.S.
Individual Income Tax Return, on February 25, 2004.
Respondent determined a $12,118 deficiency in petitioners’
2001 income tax. Upon examination, respondent disallowed the
following amounts claimed as deductions on Mr. Vigil’s Schedule
C: $3,463 for meals and entertainment expenses; $12,347 for
travel expenses; $7,862 for supplies; and $17,199 for car and
truck expenses. Respondent determined that Mr. Vigil was not
exempt from self-employment tax under section 1402(e) and that
petitioners were liable for both an addition to tax under section
6651(a)(1) for failing to file their 2001 tax return on time and
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an accuracy-related penalty under section 6662. Respondent
issued a statutory notice of deficiency to petitioners for the
2001 taxable year on February 10, 2006, and petitioners timely
petitioned this Court for redetermination of respondent’s
determinations.
Discussion
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears
the burden of proving that these determinations are in error.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Pursuant to section 7491(a), the burden of proof as to factual
matters shifts to the Commissioner under certain circumstances.
Petitioners have neither alleged that section 7491(a) applies nor
established their compliance with the requirements of section
7491(a)(2)(A) and (B) to substantiate items, maintain records,
and cooperate fully with respondent’s reasonable requests.
Petitioners therefore bear the burden of proof.
With respect to the section 6651(a)(1) addition to tax and
the section 6662 accuracy-related penalty, pursuant to section
7491(c), the Commissioner bears the burden of production. To
meet this burden, the Commissioner must produce sufficient
evidence showing that the imposition of the addition to tax and
the penalty is appropriate in a particular case. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
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Once the Commissioner meets this burden, the taxpayer must
come forward with persuasive evidence that the Commissioner’s
determination is incorrect. Rule 142(a); Higbee v. Commissioner,
supra at 447. As a defense to the addition to tax, the taxpayer
bears the burden of proof regarding reasonable cause and lack of
willful neglect. Sec. 6651(a). To the extent that the taxpayer
shows there was reasonable cause for an underpayment and that he
acted in good faith, section 6664(c)(1) prohibits the imposition
of an accuracy-related penalty.
A. Exemption From Self-Employment Tax
Section 1401 imposes a tax on an individual’s self-
employment income, based on the “net earnings from self-
employment” derived by an individual during the taxable year.
Sec. 1402(b). Net earnings from self-employment are the gross
income derived by the individual from any trade or business
carried on by that individual less the deductions attributable to
that trade or business. Sec. 1402(a). Section 1402(c)(4) and
the final sentence of section 1402(c), however, provide that the
term “trade or business” does not include “the performance of
service by a duly ordained, commissioned, or licensed minister of
a church in the exercise of his ministry” if an exemption under
section 1402(e) is in effect.
Section 1402(e) provides specific requirements for a
minister to obtain an exemption from self-employment tax. A
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minister seeking the exemption must file an application stating
that he is opposed, because of religious principles or
conscientious beliefs, to the acceptance of certain types of
public insurance, such as that provided by the Social Security
Act, attributable to his services as a minister. Sec.
1402(e)(1). This application must be filed within the specific
time limits set forth in section 1402(e)(3). Once properly
obtained, the exemption from self-employment tax is irrevocable
and remains effective for all succeeding taxable years. Sec.
1402(e)(4).
Section 1402(e)(3) provides that the application for
exemption must be filed on or before the later of the following
dates: (1) The due date of the return (including any extensions)
for the second taxable year for which the taxpayer has net
earnings from self-employment of $400 or more, any part of which
was derived from the performance of services as a minister, or
(2) the due date of the return (including any extensions) for his
second taxable year ending after 1967. Sec. 1402(e)(3); sec.
1.1402(e)-3A(a)(1), Income Tax Regs. This Court has consistently
held that the time limitations imposed by section 1402(e)(3) are
mandatory and taxpayers must strictly comply with them. Wingo v.
Commissioner, 89 T.C. 922, 930 (1987); Ballinger v. Commissioner,
78 T.C. 752, 757 (1982), affd. 728 F.2d 1287 (10th Cir. 1984);
Keaton v. Commissioner, T.C. Memo. 1993-365.
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Petitioners bear the burden of proving that because Mr.
Vigil was eligible for the exemption and his Form 4361 was timely
filed, respondent’s determination is erroneous. See Rule 142(a);
Welch v. Helvering, supra.
In response to petitioners’ assertion of exemption from
self-employment tax with respect to their 2001 tax return,
respondent’s Ministerial Exemption Unit conducted a search to
determine whether Mr. Vigil had previously filed a Form 4361 and
whether it had been approved. Upon searching the IRS files, a
supervisor of this unit found Mr. Vigil’s 1996 letter asserting
that he filed Form 4361 in 1987, requesting another copy of the
approved Form 4361, and enclosing a copy of the signed but
unapproved Form 4361. The supervisor also found the case history
sheet that was completed in 1996 when the IRS received Mr.
Vigil’s letter. The case history sheet documented the search at
both the IRS and the SSA for any Form 4361 filed by Mr. Vigil and
reflects that the IRS notified petitioners in June 1996 that
neither the IRS nor the SSA found any record of a Form 4361 for
Mr. Vigil, either approved or denied.1 The supervisor queried
1
The supervisor described the procedure for processing
ministerial exemption applications. Upon receipt, Form 4361 is
evaluated to determine whether the applicant meets the
eligibility requirements. If so, the IRS sends the taxpayer a
declaration statement to sign and return. Finally, the Form
4361, originally filed in triplicate, is approved or denied. The
IRS retains copy A for its files, sends copy B to the SSA for
retention, and returns copy C, marked approved or denied, to the
(continued...)
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the SSA again and received a certification, dated May 3, 2007,
that the SSA had no record of Mr. Vigil’s submitting a Form 4361.
Finally, she testified that the SSA retains such records for 75
years.
Mr. Vigil’s testimony regarding when he filed Form 4361 was
vague and inconsistent; he was certain it was filed in the 1980s,
but he thought it might have been a couple of years after he was
licensed. Mr. Vigil signed the Form 4361 on April 7, 1987. The
form states that Mr. Vigil was licensed in January 1979. His
testimony was confusing on this issue; he stated that he was
licensed around 1980, but could not say exactly when. He also
testified that he worked part time as a minister in 1979 and full
time starting in 1980. The Form 4361 states that the first 2
years in which he had net self-employment earnings in excess of
$400, at least some of which came from services as a minister,
were 1979 and 1980.
We find that Mr. Vigil was licensed in 1979 and that his
first 2 earning years as a minister were 1979 and 1980. We
conclude that Mr. Vigil’s Form 4361 was due on the due date of
his tax return for 1980; i.e., April 15, 1981, with extensions.
Mr. Vigil signed the Form 4361 and gave it to their certified
public accountant (C.P.A.). However, he has not demonstrated
1
(...continued)
taxpayer.
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that he submitted a Form 4361 to the IRS before his letter in May
of 1996 or that an application for exemption was ever approved.2
Because a search of IRS and SSA records by respondent for
Mr. Vigil’s Form 4361 failed to discover the original form, and
since petitioners failed to carry their burden of proving that
the form was filed, we find that petitioners did not timely file
a request for exemption as required by section 1402(e).
Petitioners claimed that their C.P.A. showed the Form 4361
to the IRS agent examining their 1994 return and that this
documentation ultimately resulted in the no-change letter from
the IRS for 1994.3 Petitioners contend that the decision by the
IRS not to change their tax for 1994 proves that the IRS accepted
Mr. Vigil’s exemption for 1994 and establishes that the
2
At times during the trial, Mr. Vigil intimated that he
submitted Form 4361 to the IRS in 1980. Such a submission would
have been timely. The copy of the only Form 4361 introduced into
evidence bears a signature date of “April 7, 198”. The last
digit of the year appears to have been cut off in copying. Mr.
Vigil’s May 1996 letter provided this copy to the IRS. In that
letter, Mr. Vigil wrote that he had filed the Form 4361 on April
7, 1987. He testified that the signature date should be April 7,
1987, but he also claimed that he might have submitted the Form
4361 much earlier in the 1980s. However, the Form 4361 in the
record bears a revision date of March 1986. Since the version of
the Form 4361 completed by Mr. Vigil did not exist before 1986,
it follows that he could not have timely submitted this form by
the due date of his 1981 return, even with extensions, as
required by sec. 1402(e)(3).
3
It is doubtful, however, that petitioners shared with the
IRS examiner the June 11, 1996, notice from the IRS stating that
both the IRS and the SSA had searched their records but neither
could find any record of Mr. Vigil’s ever filing Form 4361.
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application form was on file at that time and, by implication,
was approved. Petitioners conclude that respondent cannot now
deny the exemption.
It appears that petitioners are suggesting an estoppel
argument based on their reliance on the no-change decision in
1994. However, it is well established that each tax year stands
on its own. See Rose v. Commissioner, 55 T.C. 28, 32 (1970).
Furthermore, errors of law in prior years do not estop the
Commissioner from correcting those errors in later years. Auto.
Club of Mich. v. Commissioner, 353 U.S. 180, 183 (1957).
In view of the apparent failure of Mr. Vigil to file Form
4361 timely, acquiescence by agents of respondent in accepting
his claim of exemption in 1994 was an error of law. Such a
mistake does not prevent correction of the error as to 2001. Id.
at 184. Section 1402(e) imposes time limitations, and the
Commissioner’s agents have neither the authority nor the power to
grant an exemption not complying with the statute. Robertson v.
Commissioner, T.C. Memo. 1983-32, affd. without published opinion
742 F.2d 1446 (2d Cir. 1983).
We conclude that Mr. Vigil is not exempt because he did not
satisfy the requirements of section 1402(e)(1). Respondent’s
determination that petitioners are liable for the tax imposed by
section 1401 on Mr. Vigil’s 2001 self-employment income is
sustained.
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B. Business Expense Deductions
Respondent disallowed certain deductions petitioners claimed
on Schedule C, specifically: $3,463 for meals and entertainment
expenses; $12,347 for travel expenses; $7,862 for supplies; and
$17,199 for car and truck expenses. Respondent disallowed each
of these deductions in full but allowed the remaining $26,403
petitioners claimed as business expenses.
As a general rule, section 162(a) authorizes a deduction for
“all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business”.
Taxpayers are required to maintain records sufficient to
substantiate each claimed deduction. Sec. 6001; Hradesky v.
Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th
Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
When a taxpayer adequately establishes that he paid or
incurred a deductible expense but does not establish the precise
amount, we may in some circumstances estimate the allowable
deduction, bearing heavily against the taxpayer whose
inexactitude is of his own making. Cohan v. Commissioner, 39
F.2d 540, 544 (2d Cir. 1930). We can estimate the amount of the
deductible expense only when the taxpayer produces evidence
sufficient to establish a rational basis upon which the estimate
can be made. Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985).
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Section 274(d) supersedes the general rule of Cohan v.
Commissioner, supra, and prohibits the Court from estimating the
taxpayer’s expenses with respect to certain items. Sanford v.
Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412
F.2d 201 (2d Cir. 1969). Section 274(d) imposes strict
substantiation requirements for, inter alia, traveling expenses
(including meals) and expenses with respect to listed property.
Listed property is defined in section 280F(d)(4) to include
computers and passenger automobiles.
To obtain deductions for a listed property, travel, meal, or
entertainment expense, a taxpayer must substantiate by adequate
records or sufficient evidence to corroborate the taxpayer’s own
testimony the amount of the expense, the time and place of the
use, the business purpose of the use, and, in the case of meals
and entertainment, the business relationship to the taxpayer of
each person entertained. Sec. 274(d); sec. 1.274-5T(b),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Section 274 requires that expense be recorded at or near the time
when the expense is incurred. Sec. 1.274-5T(c)(1), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
When a taxpayer’s records have been lost or destroyed
through circumstances beyond his control, he is entitled to
substantiate a deduction by reconstruction of his expenditures
through other credible evidence. Smith v. Commissioner, T.C.
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Memo. 1998-33; see also Malinowski v. Commissioner, 71 T.C. 1120,
1125 (1979).
Petitioners did not introduce any documents and offered only
vague testimony regarding these claimed expenses. Many of the
claimed travel expenses involved Mr. Vigil’s driving in his
personal automobile to Indian reservations in various States. He
traveled with family; namely, Mrs. Vigil and one or more of their
adult children. Petitioners testified that they maintained a
list of locations where Mr. Vigil ministered and of the mileage
driven and that they used credit cards for business expenses and
kept the receipts. They further explained that, at the time the
2001 return was prepared in 2004, they provided those documents
to their C.P.A. but did not retain copies.
Petitioners’ C.P.A. at the time of the preparation of the
Form 4361 and the audit of their 1994 tax return developed a drug
problem and later died. Their C.P.A.’s wife took over the
accounting business and prepared petitioners’ 2001 return in
2004. However, petitioners testified credibly that she too has
developed a drug habit, that they have been unable to retrieve
their documents from her, and that even the sheriff was unable to
serve her with a subpoena to appear and testify at trial.
Although they tried, petitioners were also unable to retrieve
documents from their credit card companies to reconstruct or
substantiate their 2001 expenses.
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On their Schedule C, petitioners claimed a deduction for
parking fees and tolls and for the business use of their personal
automobile calculated using the standard mileage rate. In
addition to these travel expenses totaling $12,347, petitioners
also claimed car and truck expenses of $17,199. Mr. Vigil
testified that the car and truck expenses claimed represent his
purchase of tires, valves, and three transmissions for their
automobile in 2001.4 Apart from this testimony, petitioners
introduced no evidence to support the deductions claimed for
mileage, parking fees and tolls, or vehicle repair expenses.
Petitioners offered no documents or testimony with respect to the
claimed deduction for meals, other than to state that they were
responsible for their own meals when teaching and ministering and
that they charged the meals to their credit cards.5
4
Taxpayers may choose to compute vehicle expenses using
either the business standard mileage rate or their actual
operating and fixed costs, such as repairs, tires, gasoline,
insurance, depreciation, etc. Even with proper substantiation,
taxpayers may not deduct both standard mileage and actual
expenses. Nash v. Commissioner, 60 T.C. 503, 520 (1973); Rev.
Proc. 2000-48, sec. 5.03, 2000-2 C.B. 570, 571.
5
Mrs. Vigil testified that they have five children, the
youngest of whom was 20 in 2001. The children traveled with
petitioners when Mr. Vigil ministered away from home, at least
until each child married. Because we conclude that petitioners
have not adequately substantiated their claimed deduction for
meals, we need not, and do not, decide the extent to which the
added costs of feeding and traveling with his family are
legitimate business expenses for Mr. Vigil as opposed to
personal, living, and family expenses rendered not deductible by
sec. 262.
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Petitioners’ testimony with respect to the supplies expenses
was vague. Mr. Vigil testified that the supplies consisted of
computers, envelopes, paper, and stamps for preparing and sending
ministry newsletters. Mrs. Vigil’s testimony described her
purchase of video equipment and tapes for preparing, editing, and
duplicating video tapes for Mr. Vigil’s ministry. She claimed
that she bought such equipment in 2001 but also testified that
she could not remember honestly. This testimony is insufficient
to satisfy the strict substantiation requirement of section
274(d) applicable to computers as listed property, and it is
inadequate either to reconstruct petitioners’ records in support
of their $7,862 claimed deduction for supplies or to establish a
rational basis upon which the Court can estimate the amount of
the deductible expense.
We conclude that petitioners have not satisfied the strict
substantiation requirements of section 274(d) to support their
claimed deductions for car and truck expenses, travel expenses,
or meals and entertainment expenses. Nor have they reconstructed
their records or provided evidence sufficient for the Court to
estimate the amount of expenses for supplies. Accordingly,
respondent’s determination that these expenses are not allowable
is sustained.
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C. Section 6651(a)(1) Addition to Tax for Failure To File
Petitioners’ 2001 Federal income tax return was due on April
15, 2002 (October 15, 2002, if petitioners had timely filed a
request for an extension). The parties stipulated that
petitioners filed their 2001 return on February 27, 2004.
Respondent has met his burden of production to show that it is
appropriate to impose the addition to tax for petitioners’
failure timely to file their 2001 Federal income tax return.
The last sentence of section 6651(a) provides a defense to
the addition to tax for failure to file. The taxpayer must show
that the failure was “due to reasonable cause and not due to
willful neglect”.
Petitioners testified that their C.P.A. regularly requested
extensions for their tax returns and that they believed she had
successfully obtained approval for them to file late.
Petitioners relied on their C.P.A. to prepare and file their tax
returns, and they argue that their reliance was reasonable and
should suffice to avoid this addition to tax.
Taxpayers may not avoid the duty of timely filing accurate
tax returns by placing responsibility on a tax return preparer.
Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987). The
Supreme Court has provided a very clear, bright line: “It
requires no special training or effort to ascertain a deadline
and make sure that it is met. The failure to make a timely
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filing of a tax return is not excused by the taxpayer’s reliance
on an agent, and such reliance is not ‘reasonable cause’ for a
late filing under § 6651(a)(1).” United States v. Boyle, 469
U.S. 241, 252 (1985).
Respondent’s determination that petitioners are liable for
the addition to tax for failing timely to file their 2001 Federal
income tax return is sustained.
D. Section 6662 Accuracy-Related Penalty
The final issue for decision is whether petitioners are
liable for an accuracy-related penalty under section 6662(a) for
2001. Section 6662(a) imposes a penalty equal to 20 percent of
any underpayment of tax that is attributable to negligence or
disregard of rules or regulations, or a substantial
understatement of income tax. See sec. 6662(a) and (b)(1) and
(2).
An “understatement” of income tax is defined as the excess
of the tax required to be shown on the return over the tax
actually shown on the return. Sec. 6662(d)(2)(A). An
understatement is “substantial” if it exceeds the greater of 10
percent of the tax required to be shown on the return, or $5,000.
Sec. 6662(d)(1)(A).
Whether the accuracy-related penalty is applied because of
negligence or disregard of rules or regulations, or a substantial
understatement of income tax, section 6664 provides a defense if
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a taxpayer establishes that there was reasonable cause for the
underpayment and that he acted in good faith with respect to that
portion. Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.;
see also Higbee v. Commissioner, 116 T.C. 448. Although not
defined in the Code, “reasonable cause” is viewed in the
applicable regulations as the exercise of “ordinary business care
and prudence”. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.;
see United States v. Boyle, supra at 246. The determination of
whether a taxpayer acted with reasonable cause and in good faith
is made on a case-by-case basis, taking into account all the
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. Considering the taxpayer’s education, experience, and
knowledge, a reasonable misunderstanding of fact or law may
indicate reasonable cause and good faith. Higbee v.
Commissioner, supra at 449.
Generally, the most important factor is the extent of the
taxpayer’s effort to assess the proper tax liability, including
reliance on the advice of a tax return preparer. However,
reliance on a professional adviser, alone, is insufficient; the
reliance must be reasonable and the taxpayer must act in good
faith. Sec. 1.6664-4(b)(1), Income Tax Regs. Furthermore, a
substantial understatement of income tax is reduced by that
portion of the understatement attributable to the tax treatment
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of any item with respect to which the taxpayer provides adequate
disclosure. Sec. 1.6662-4(a), (e), Income Tax Regs.
The understatement of income tax resulting from the
disallowance of petitioners’ Schedule C deductions, alone, is
$5,546, which is greater than 10 percent of the tax petitioners
were required to show on their 2001 return. Therefore, we
conclude that respondent has met his burden of production for his
determination of the accuracy-related penalty based on a
substantial understatement of income tax pursuant to section
6662(d)(1)(A).
Accordingly, petitioners bear the burden of proving that the
accuracy-related penalty should not be imposed with respect to
any portion of the underpayment for which they acted with
reasonable cause and in good faith. See sec. 6664(c)(1); Higbee
v. Commissioner, supra at 446.
Some of the claimed deductions, such as those for meals for
Mr. Vigil’s family (absent proof that these expenses had a bona
fide business purpose), are likely nondeductible family living
expenses. See sec. 262; sec. 1.162-2(c), Income Tax Regs. In
addition, it should be obvious to any taxpayer exercising
ordinary business care and prudence that duplicating automobile
expenses (by deducting not only car and truck expenses based on
actual costs but also driving expenses calculated using the
standard mileage rate) is prohibited.
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Petitioners failed to prove that they acted with reasonable
cause and in good faith with respect to the disallowed business
expense deductions. We therefore sustain respondent’s
determination that petitioners are liable for the section 6662
accuracy-related penalty on the underpayment associated with the
disallowed Schedule C deductions.
With respect to the tax imposed under section 1401 on Mr.
Vigil’s self-employment income from his ministry, petitioners
relied on the advice of their C.P.A., who told them that Mr.
Vigil was exempt. This reliance was reinforced by the July 1997
letter from the IRS which closed the examination of petitioners’
1994 tax year with no change and from which petitioners logically
and reasonably deduced that their Form 4361 must have been
approved. We find that petitioners acted with reasonable cause
and in good faith in claiming the exemption in 2001.6
Accordingly, we conclude that petitioners are not liable for the
section 6662 accuracy-related penalty on the underpayment
associated with the self-employment tax.
6
The Court notes that the tax returns contained in the
record indicate that petitioners consistently entered “Exempt--
Form 4361” on the self-employment tax line of their Form 1040.
Because we find that petitioners had reasonable cause and acted
in good faith with respect to self-employment tax, we need not,
and do not, decide whether this entry constituted “adequate
disclosure” pursuant to sec. 1.6662-4(a), Income Tax Regs.
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To reflect the foregoing,
Decision will be entered
under Rule 155.