Unsubstantiated Deductions Disallowed; Penalties Proper (Main, CA-9)

The Tax Court properly determined that an attorney carried out his automobile activity with the intent to make a profit. Therefore, he could deduct substantiated business expenses related to the activity. However, he could not deduct his unsubstantiated expenses.

Unsubstantiated Expenses

The taxpayer could deduct depreciation on his garage, gantry crane and welding equipment because he established their cost, useful life and previously allowed depreciation. However, the taxpayer could not deduct depreciation for his camcorder and wireless router because he failed to substantiate them. The camcorder was not used exclusively in connection with his primary business. Further, he did not use both items exclusively at his regular business establishment. Therefore, they were listed property and the taxpayer failed to keep the required records. Finally, the taxpayer established that he incurred a storage expense but failed to substantiate the remainder of the expenses at issue.

Negligence, Late-Filing Penalties

Further, the taxpayer was liable for a negligence penalty because his tax underpayment arose from the disallowed deductions. The taxpayer did not contend and did not prove reasonable cause. He was also liable for a late-filing penalty because his claim that he did not timely file his return because he was not aware of his tax liability did not constitute reasonable cause.

Unpublished opinion affirming the Tax Court 112 TCM 1, Dec. 60,642(M), TC Memo. 2016-127.

R.B. Main, CA-9

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