                       T.C. Memo. 2008-235



                     UNITED STATES TAX COURT



              EDWARD NORMAN FADELEY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15933-05.             Filed October 22, 2008.



     Edward Norman Fadeley, pro se.

     Aimee R. Lobo-Berg, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies and

additions to tax with respect to petitioner’s Federal income

taxes as follows:
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                                       Additions to Tax
                                  Sec.         Sec.        Sec.
                Deficiency     6651(a)(1)   6651(a)(2)     6654

     2000         $33,852        $5,658         $6,035    $1,290
     2002          34,798         6,038          3,220       868


     At issue is petitioner’s claim to additional deductions

for business and personal expenses beyond those allowed by

respondent.

     All section references are to the Internal Revenue Code

applicable to the years in issue, and all rule references are to

the Tax Court Rules of Practice and Procedure.


                             FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Since 1957, petitioner has been a licensed attorney in

Oregon.     From approximately 1964 to 1989 petitioner was an elected

member of the Oregon State Legislature.     In 1989 petitioner was

elected as a justice on the Oregon Supreme Court.

     In the mid-to-late 1990s, disciplinary questions were

raised as to petitioner’s ability to continue performing judicial

duties.     In 1998, when petitioner was 68 years of age the

disciplinary matter was settled.     Under the settlement, petitioner

agreed to retire as a justice of the Oregon Supreme

Court but to retain his right to a judicial retirement pension.

     In 2000 and in 2002 petitioner received total pension

income of $81,981 and $85,302, respectively, from petitioner’s
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judicial retirement and from a pension relating to his

25 years in the Oregon Legislature.

     In 2001 petitioner sold a parcel of real estate in Salem,

Oregon, and petitioner used proceeds from the sale to pay to an

Oregon law firm $100,000 in legal fees relating to the above

disciplinary matter.

     Since his retirement in 1998, petitioner has performed

a limited amount of legal work for a few clients out of his home.

     Petitioner and his wife’s home is located on an 80-acre farm

in the Willamette Valley in Oregon.     On their farm petitioner

and his wife have a barn and raise a number of animals.

     Typically, petitioner and his wife work on the farm a total

of 10 to 20 hours a week.   Meat harvested from animals raised on

the farm is kept on the farm and is eaten by petitioner and his

wife and their guests.   None of the meat is sold.

     Petitioner and his wife maintain no separate books and

records relating to their farm activity.     Bills, receipts, and

payments relating to the farm are intermingled with petitioner and

his wife’s personal expenses.

     For the 5 years for which evidence was offered,

petitioner and his wife realized no profit from their farming

activity, and the evidence does not establish what gross income,

if any, was realized.

     During 2000 and 2002 petitioner’s wife worked part time as

an employee of Landmark Education Corporation (LEC) and
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she was not otherwise engaged in a trade or business.     As part of

her employment with LEC, petitioner’s wife could have requested

and received reimbursement from LEC for all employee-related

expenses she incurred.

     In 2000 and 2002 petitioner and his wife received the

following types and amounts of income and retirement benefits:


          Year           Type                   Amount

          2000      Pension                     $81,981
                    Social Security              18,102
                    Other income                  2,750
                    Interest Income                 106


          2002      Pension                     $85,302
                    Social Security              19,248
                    Other income                  2,750
                    Interest Income                  76


     In 2000 and 2002 Federal income taxes of $8,706 and $7,963,

respectively, were withheld from petitioner’s    pension income.

     As of the spring of 2005, petitioner and his wife had not

filed their 2000 and 2002 Federal income tax returns.     On audit,

respondent prepared substitute 2000 and 2002 Federal income tax

returns for petitioner, and respondent determined the above

deficiencies in petitioner’s Federal income taxes.    On May 27,

2005, respondent mailed to petitioner notices of the above

deficiencies and additions to tax.

     In 2006, after petitioner filed the petition and after

respondent filed a motion to dismiss for lack of prosecution, the
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Court continued this case and asked petitioner to file his 2000

and 2002 joint Federal income tax returns.

     On July 25, 2006, petitioner and his wife late filed with

respondent their 2000 and 2002 joint Federal income tax returns.

Petitioner himself prepared the returns.    Thereon, petitioner

reported the pension income received in each year, and petitioner

and his wife each attached a Schedule C, Profit or Loss From

Business, and a Schedule F, Profit or Loss From Farming, on each

of which a loss was reported.   Petitioner’s Schedules C related to

petitioner’s part-time law practice.    Petitioner’s wife’s

Schedules C related to her employment with LEC.    The Schedules F

related to petitioner and his wife’s farming activity.

     Also attached to petitioner and his wife’s 2000 and 2002

late-filed joint Federal income tax returns was a Form 8829,

Expenses for Business Use of Your Home, on which petitioner and

his wife claimed that 70 percent of their home was used for

petitioner’s legal work and 50 percent of their home expenses were

deductible expenses of a home office.

     On Schedules A, Itemized Deductions, the following

miscellaneous deductions were claimed:    (1) $11,400 on the 2000

return as a loss carryback; and (2) $11,000 on the 2002 return as

a loss carryforward relating to the $100,000 in legal fees

petitioner paid in 2001 in connection with the settlement of the

dispute over petitioner’s status as a justice on the Oregon

Supreme Court.
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     On their late-filed 2000 and 2002 Federal income tax returns,

petitioner and his wife claimed credits for the approximately

$8,000 that had been withheld during each year as Federal income

taxes from petitioner’s pensions, no taxes due, and overpayments

of Federal income taxes.

     Before trial in September of 2007, respondent reviewed

petitioner and his wife’s late-filed 2000 and 2002 Federal income

tax returns and allowed some of the items and disallowed others.

Specifically, respondent disallowed many of the claimed Schedule A

itemized deductions and Schedule C business expenses, all of the

home office and farm expenses claimed, and all of petitioner’s

wife’s claimed business expenses.   Respondent disallowed most of

the claimed expenses due to inadequate substantiation and due to

respondent’s determination that petitioner’s wife’s claimed

business and farm expenses did not qualify as ordinary and

necessary expenses of a trade or business.    At trial, the unagreed

items claimed on petitioner’s late-filed 2000 and 2002 Federal

income tax returns were tried by consent.    Rule 41(b)(1).

     After trial, respondent acknowledged that 13.25 percent of

petitioner’s home qualifies as a home office and that expenses

properly allocated thereto are deductible under section 179.

     Respondent disallowed the $11,400 and the $11,000 in claimed

carryback and carryforward losses relating to the legal fees

petitioner incurred in 2001.
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     The schedule below reflects by category for each year the

total amounts of petitioner’s claimed expenses, the amounts

respondent allowed, and the amounts still in dispute:


                               2000

     Expense          Amount   Amount Allowed        Still
     Category        Claimed   by respondent       in dispute

     Business        $33,546      $16,968           $ 6,272
     Home Office      11,630        5,358             6,272
     Itemized         52,042       40,594            11,400
     Farm              8,902        -0-               8,902


                               2002

     Expense          Amount   Amount Allowed        Still
     Category        Claimed   by respondent       in dispute

     Business        $46,193      $19,519           $25,674
     Home Office      16,709        5,372            11,337
     Itemized         50,112       39,112            11,000
     Farm             10,333         -0-             10,333


                               OPINION

     Generally, as to the allowance of deductions taxpayers bear

the burden of proof, and the Commissioner’s determinations are

entitled to a presumption of correctness.   Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v. United

States, 70 F.3d 548, 550 (9th Cir. 1995).

     Petitioner and his wife late filed their Federal income tax

returns.   During respondent’s audit and during pretrial,

petitioner did not cooperate with respondent’s representatives,

and petitioner did not participate in good faith in the Court’s
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pretrial stipulation process.    Further, with regard to the

expenses still in dispute, petitioner has not submitted credible

evidence.

       The burden of proof on the disputed expenses (and on the

additions to tax) is on petitioner.     Sec. 7491(a); Rule 142(a).

       The $6,272 and the $25,674 in business expenses for 2000 and

2002 still in dispute have not been adequately substantiated by

petitioner, and petitioner has not established that the disputed

expenses constitute ordinary and necessary business expenses

deductible under section 162.

       On brief, petitioner states that “Taxpayer spent all the

money claimed in the amount of every deduction for the purpose

that was claimed.”    Petitioner’s records in evidence and the

credible trial testimony, however, do not adequately establish the

nature and/or purpose of the items in dispute--particularly

whether the items were incurred in connection with a trade or

business.

       Section 262 denies a deduction for personal, living, or

family expenses.    Section 274(d) requires taxpayers to maintain

substantiating evidence with regard to travel, meal, and

entertainment expenses.    Beale v. Commissioner, T.C. Memo. 2000-

158.

       Petitioner has failed to substantiate that any of the claimed

expenses still in dispute qualify as deductible business expenses.
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Also the law is clear that expenses for which petitioner’s wife

could have received reimbursement from an employer are not

deductible.   Lucas v. Commissioner, 79 T.C. 1 (1982).

     With respect to the claimed home office expenses in dispute,

section 280A generally prohibits deductions relating to a

taxpayer’s personal residence.    Section 280A(c)(1) provides an

exception and allows a deduction for appropriate home office

expenses where a taxpayer establishes that a portion of the

taxpayer’s home is used exclusively on a regular basis as:    (1)

The taxpayer’s principal place of business or (2) a place of

business which is used by the taxpayer in meeting with clients in

the normal course of business.    The deduction cannot exceed the

gross income derived from the business use of the residence over

the sum of certain deductions allocable to such income. Sec.

280A(c)(5); Tobin v. Commissioner, T.C. Memo. 1999-328; Cunningham

v. Commissioner, T.C. Memo. 1996-141, affd. without

published opinion 110 F.3d 59 (4th Cir. 1997).

     In order for a taxpayer to establish use of a personal

residence on a “regular” basis, the business use must be more than

occasional and incidental.   Irwin v. Commissioner, T.C. Memo.

1996-490, affd. without published opinion 131 F.3d 146 (9th Cir.

1997); Hefti v. Commissioner, T.C. Memo. 1993-128.    The use of a

portion of a residence both for personal purposes and for the

carrying on of a trade or business does not meet the exclusive use
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test. See Sengpiehl v. Commissioner, T.C. Memo. 1998-23; Hefti v.

Commissioner, supra.

        The trial evidence is particularly vague as to petitioner’s

use of his home in his part-time legal work.1    Respondent is

generous in agreeing to treat 13.25 percent of petitioner’s home

as a home office.    On the facts before us we have no basis for

using a higher percentage, and we disallow any claimed home office

expenses in excess of the amount reflected by this percentage.

     With regard to the miscellaneous itemized deductions claimed

on petitioner’s 2000 and 2002 tax returns that are still in

dispute ($11,400 for 2000 and $11,000 for 2002), at trial

petitioner testified that the $11,400 claimed for 2000 actually

was incurred in 2001 and represented a claimed loss carryback to

2000.     The $11,000 claimed for 2002 also was acknowledged to have

been incurred in 2001 and represents a claimed loss carryforward

to 2002.     There is only a limited legal basis for loss carryovers

of miscellaneous itemized deductions, and petitioner’s entitlement

thereto in this case has not been established.    See sec.

172(d)(4).

     The claimed Schedule F farm expenses still in dispute involve

$8,902 for 2000 and $10,333 for 2002.     No income was earned from

petitioner and his wife’s farm activity, and the facts before us




    1
        Petitioner stated that he “lives in his workspace.”
                               - 11 -

do not establish that the farm activity constituted a trade or

business activity.

     Petitioner alleges that a number of misfortunes on the farm

hampered efforts to earn a profit.   Petitioner claims that one of

the horses fell into a ditch and died and that cougars and an

English bulldog killed some of the sheep and three pygmy angora

goats.   Petitioner notes that Douglas fir trees grow on the

property, and petitioner argues that the long growing cycle for

Douglas fir and the resulting delayed tree harvest, explain the

lack of farming profits, not a lack of profit motive.   On the

evidence before us, we reject petitioner’s claimed additional farm

expenses.

     Although not clear from the parties’ briefs, claimed medical

expenses of $7,203 and a claimed horse casualty expense of $1,800

may also be in dispute.   Neither item is supported by credible

evidence, and they are disallowed.

     On the disputed additions to tax, the evidence satisfies

respondent's burden of production.

     For the reasons stated, we sustain respondent’s disallowance

of each of the claimed expenses still in dispute, and we sustain

the imposition against petitioner of each of the additions to tax.


                                         Decision will be entered

                                     under Rule 155.
