                        T.C. Memo. 1998-163



                      UNITED STATES TAX COURT



                 JOHN M. SCHAEFER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 478-96, 18876-96.     Filed May 5, 1998.



     John M. Schaefer, pro se.

     Fred Green and Paul L. Dixon, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined that petitioner is

liable for deficiencies in income tax and an addition to tax and

an accuracy-related penalty as follows:
                                    2

                                                  Accuracy-related
                             Addition to tax          penalty
Year        Deficiency       Sec. 6651(a)(1)        Sec. 6662(a)

1991         $57,187             $15,064               $11,437
1992         129,170              19,577                25,834

       After concessions,1 the issues for decision are:

       1.   Whether the Court's denial of petitioner's second

motion for a continuance was proper.       We hold that it was.

       2.   Whether petitioner's documentary evidence was properly

excluded from evidence after he failed to comply with the Court's

orders and his agreement with respondent to identify in writing

and exchange that evidence with respondent.       We hold that it was.

       3.   Whether petitioner may deduct more Schedule C and

Schedule E expenses for 1991 and 1992 than respondent allowed.

We hold that he may not.

       4.   Whether petitioner may deduct investment interest

expense for 1992.      We hold that he may not.

       5.   Whether petitioner failed to report $18,795 in capital

gain for 1992.    We hold that he did.

       6.   Whether petitioner failed to report gain of $122,000

from the sale of the Brentwood Apartments in 1992.       We hold that

he failed to report gain of $118,000.




       1
       Petitioner concedes that respondent properly disallowed
$9,883 of Olga Schaefer's Schedule C business expenses for 1991,
and that he failed to report interest and dividend income of $936
for 1992.
                                   3

     7.     Whether petitioner may deduct a net operating loss from

his bankruptcy estate for 1991.    We hold that he may not.

     8.     Whether petitioner is liable for additions to tax and

accuracy-related penalties under sections 6651(a)(1) and 6662(a)

for 1991 and 1992.    We hold that he is.

     Unless otherwise indicated, section references are to the

Internal Revenue Code.    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.

A.   Petitioner

     Petitioner lived in Las Vegas, Nevada, when he filed his

petition in this case.    He is a graduate of the University of

California at Berkeley and the Georgetown University Law Center

in Washington, D.C.

B.   1981 Tenants' Suit

     Petitioner has been a property manager, investor, and

attorney at all times relevant here.       He is admitted to practice

law in California and Nevada.    Around 1981, several hundred of

his tenants sued him for building code violations and personal

injuries.    In 1986, a court not specified in the record entered a

$1,950,000 judgment against him.       Of that amount, $300,000 was

compensatory damages and the remainder was punitive damages.
                                  4

C.   Petitioner's Bankruptcy

     In 1987, petitioner filed a petition with the Bankruptcy

Court for the Southern District of California under chapter 11 of

the Bankruptcy Code.   Wilford D. Willis was appointed trustee of

petitioner's bankruptcy estate.

     In 1991, the bankruptcy trustee disbursed $1,866,170 on

behalf of petitioner's estate.    The trustee paid:   (1) $10,500 to

Maria Camacho, a tenant in one of petitioner's buildings whose

furniture had been improperly removed; (2) $670 to Lester Linn,

Jr., a court reporter whose deposition fees petitioner had

refused to pay; (3) $38,500 to Fremont Indemnity Co. (attorney's

fees awarded against petitioner for a malpractice action brought

by petitioner against the law firm Holland & Postal); (4) $77,000

to the City of Los Angeles for civil fines and interest for

housing code violations; (5) $1,650,000 in punitive damages to

Gallego; (7) $44,000 to Peterson for fees to remove liens and

clear title on 700 acres of land in San Diego county owned by

petitioner; and (8) $45,000 to Tanana for a judgment for

malicious prosecution and abuse of process.2




     2
        Gallego, Peterson, and Tanana are not otherwise
identified in the record.
                                  5

     The bankruptcy court discharged petitioner's chapter 11

bankruptcy in 1991.   The bankruptcy estate did not file a tax

return for 1991.

D.   The Estates of Petitioner's Mother and Aunt and Petitioner's
     Management of His Sons' Real Property

     Petitioner wrote wills for his mother, who died in 1987, and

his aunt, who died in 1988.   Their estates totaled about $1

million.   One-half of that amount passed to petitioner's sister.

The other one-half passed to petitioner's two sons because

petitioner did not want more assets while his bankruptcy case was

pending.

     Petitioner's two sons were around ages 15 and 16 in 1988.

Petitioner bought and managed real property in Texas and Oklahoma

with their $500,000 share of the inheritance.   He charged his

sons $2,500 to $3,500 per month to manage the property.

Petitioner reported income from trustee's fees of $33,000 for

1991 and $30,000 for 1992.

E.   Petitioner's Real Property

     In 1991 and 1992, petitioner owned rental real property for

which he claimed expenses.    He owned the Centre City Hotel in San

Diego, California, the Riviera Apartments in San Diego, a

condominium in Marina del Rey, California, the Schaefer Hotel in

Baltimore, Maryland, and the Brentwood Apartments in Baltimore.
                                   6

     Petitioner bought the Brentwood Apartments for $104,000 in

1987.     The property became part of petitioner's bankruptcy estate

when he filed his bankruptcy petition.      Petitioner reacquired the

Brentwood Apartments from his bankruptcy estate for $80,000 in

1990.     He depreciated the property at $4,000 per year for 2 years

and sold it for $190,000 in 1992.

F.   Petitioner's Income Tax Returns and the Notices of
     Deficiency

        Petitioner filed his income tax returns for 1991 on March 5,

1993, and for 1992 on October 21, 1993.

        Petitioner reported interest and dividend income of $2,943

in 1992.     He reported no gain from the sale of the Brentwood

Apartments for 1992.

        Petitioner deducted rental interest expenses on Schedule E

of his 1991 and 1992 tax returns.      Respondent determined that

petitioner's deductions should be reduced as follows:
                                   7

                                  1991

                        Amount           Amount        Amount
 Rental property       deducted          allowed     disallowed

Centre City Hotel       $71,396          $51,032       $20,364
Riviera Apts.           143,595           51,545        92,050
Schaefer Hotel           32,238           15,771        16,467
Brentwood Apts.           6,000              --          6,000
                        253,229           118,348      134,881


                                  1992

                        Amount           Amount        Amount
 Rental property       deducted          allowed     disallowed

Centre City Hotel       $52,662          $21,405       $31,257
Riviera Apts.            99,487           33,960        65,527
Schaefer Hotel           11,107             --          11,107
Marina del Rey condo      9,600             --           9,600
                        172,856           55,365       117,491

     Petitioner also deducted an additional $70,198 of

unspecified Schedule E expenses for the Centre City Hotel for

1992, based on his estimate that his expenses were about 50

percent of the monthly revenues from the hotel.     The $70,198

estimate did not include amounts petitioner deducted for real

estate taxes, interest, petty cash and miscellaneous expenses,

fire insurance, fire sprinklers, and depreciation.

     Petitioner deducted Schedule C expenses for 1991 and 1992.

Respondent determined that petitioner's deductions should be

reduced as follows:
                                  8

                                 1991

  Schedule C           Amount           Amount        Amount
  deductions          deducted          allowed     disallowed

Attorney's fees       $17,407              --         $17,407
Wife's home office        750              --             750
Other expenses         36,825           $18,412        18,413
                       54,982            18,412        36,570

                                 1992

                       Amount           Amount        Amount
                      deducted          allowed     disallowed

All expenses          $50,430              --       $50,430

     Petitioner paid $10,000 of the amount he deducted for

attorney's fees in 1991 to the Solana Beach, California, law firm

of Kolodny & Pressman in connection with his purchase of the

Riviera Apartments.

G.   Procedural History

     This case was first calendared for trial at our session in

Las Vegas, Nevada.    We sent a copy of the Court's standing

pretrial order to the parties 5 months before that session.      Our

standing pretrial order requires that any documents or materials

which a party expects to use at trial (except to impeach), but

which are not stipulated, be identified in writing and exchanged

by the parties at least 15 days before the first day of the trial

session.   The standing pretrial order also states that the Court
                                  9

may refuse to receive in evidence any document or material not

stipulated or exchanged, unless otherwise agreed by the parties

or allowed by the Court for good cause shown.

       About 2 months later, petitioner brought various business

records for 1991 and 1992 to a meeting at the Office of District

Counsel in Las Vegas.    Respondent's counsel did not fully examine

the documents at that time, but he told petitioner that he would

give him a list of documents he wanted to review.    Respondent

later sent petitioner a list of documents respondent wanted to

see.    Petitioner did not respond because, according to

petitioner, his work papers for 1991 and 1992 had become

disorganized and he was "involved in something else and time got

away" from him.

       On March 24, 1997, at the calendar call for our Las Vegas

trial session, the parties filed a joint motion to continue, to

change the place of trial to Reno, Nevada, and to calendar these

cases at this Court's May 5, 1997, trial session in Reno.    The

parties requested the continuance so that they could resolve

issues, explore the possibility of settlement, and give

petitioner an opportunity to provide substantiation to

respondent.    In an agreement between petitioner and respondent

accompanying the motion, petitioner stated that he would give
                                 10

respondent all documents that he would use at trial for 1991 by

April 3, 1997, and for 1992 by April 17, 1997.    Petitioner agreed

to provide any additional documents requested by respondent

within 7 days.    Petitioner also agreed that if he did not give

respondent the documents by the agreed dates, he would concede

all issues for which he did not provide substantiation or would

rely solely on oral testimony to substantiate.    On the basis of

the parties' pretrial agreement, we granted their motion.

Petitioner did not give any documents to respondent pursuant to

his agreement at any time before trial.

     On the second day of the Reno session, petitioner filed a

second motion to continue on the grounds that he had hired an

accountant, Robert Ruchti, to assist him in these cases, and he

could not get his records ready for trial because he had been

physically assaulted on April 3 and May 3, 1997, by a resident of

his building.    Petitioner attached to his motion to continue a

copy of the May 3, 1997, newsletter petitioner published for the

residents of his building in which he described the May 3 assault

on himself.   Petitioner attached to his motion a copy of a police

citation he received on May 4, 1997, in which he was charged with

misdemeanor battery for unlawfully spraying in the face with
                                  11

pepper spray an individual who lived in his building.     We denied

petitioner's motion.

     At trial, petitioner sought to introduce into evidence

canceled checks and receipts and a real property closing

statement that he had not exchanged as required by the Court's

standing pretrial order served on him on October 22, 1996, and as

he had agreed to do in the agreement he and respondent submitted

to the Court on March 24, 1997.    We did not admit the documents

into evidence.   Petitioner testified at trial but called no other

witnesses.

                               OPINION

A.   Petitioner's Motion To Continue

     Petitioner contends that we should have granted his second

motion to continue.    We disagree.    We granted the parties' joint

motion to continue this case from the Court's Las Vegas session

on March 24, 1997, and to calendar these cases for trial at our

session in Reno.   The purpose of that continuance was to give

petitioner more time to organize his records and to present them

to respondent.

     Petitioner has given no good reason for his total failure to

comply with his March 24 agreement with respondent.     Petitioner

contends that he did not give documents to respondent because he
                                12

was assaulted on April 3 and May 3, 1997.    Petitioner offered no

police report relating to the April 3 assault, or records showing

that he sought medical care on or soon after April 3 during the

4-1/2 weeks from April 3 to the time of trial.    Petitioner did

not tell respondent that he had been assaulted in April until the

calendar call in Reno, and he did not tell respondent that he

could not meet the deadlines for giving documents to respondent

as he had agreed to do.

     Petitioner offered no records showing that he sought medical

care on or soon after May 3.   Petitioner offered no police report

relating to an assault on May 3, other than the citation in which

he was charged with misdemeanor battery for pepper-spraying a

resident of his building on May 4, 1997.    On May 3, 1997,

immediately after one of the incidents, petitioner was able to

write and publish a newsletter for the residents of his building

in which he described the May assault.

     The only medical evidence petitioner offered was a report

dated May 23, 1997, in which Dr. Steven A. Holper stated that

petitioner complained of ankle, knee, and arm pain and a headache

resulting from two assaults in April and May 1997.    Dr. Holper

stated that petitioner appeared alert and oriented and was intact

neurologically, and that visual inspection of petitioner's skull
                                 13

revealed no evidence to suggest laceration, contusion, or

abrasion.    We are not convinced that petitioner could not

assemble his records because of the assaults.

     Petitioner also contends that we should have granted his

second motion for continuance because he hired an accountant 2

weeks before the Reno session to assist him in preparing for

trial.    Employment of an attorney shortly before trial ordinarily

is not grounds for a continuance, Rule 134; see Dorsch v.

Commissioner, T.C. Memo. 1992-384, affd. 4 F.3d 996 (7th Cir.

1993); likewise, belated hiring of an accountant ordinarily is

not grounds for a continuance, see Harris v. Commissioner, T.C.

Memo. 1992-638.

     Petitioner objects to the fact that we held the trial in

Reno.    This argument surprises us because petitioner joined in

the motion to continue this case and change the place of trial to

Reno.

     It is within our discretion to consider the prejudice to all

parties to a case and to the Court when ruling on a motion to

continue a trial.    See Morris v. Slappy, 461 U.S. 1, 11-12 (1983)

(trial court granted broad discretion on matters of continuance);

Ungar v. Sarafite, 376 U.S. 575, 589 (1964); Brooks v.
                                 14

Commissioner, 82 T.C. 413, 429-430 (1984), affd. without

published opinion 772 F.2d 910 (9th Cir. 1985).

     Petitioner has only himself to blame for his failure to be

prepared for trial in Las Vegas and his failure to assemble his

records in a timely fashion.

B.   Exclusion of Evidence

     Petitioner offered documents into evidence at trial that he

had not exchanged or identified in writing as required by our

standing pretrial order dated October 22, 1996, or provided as he

had agreed to do in the parties' March 24, 1997, joint motion to

continue.   Respondent objected to admission of the documents, and

we did not admit them into evidence.    Petitioner contends that it

is unfair to exclude the evidence.    We disagree.

     Petitioner admits that he understood that the Court required

the parties to identify the documents in writing and exchange

them before trial.   He claims that he tried to comply with the

order by bringing documents to the Las Vegas office of District

Counsel in December 1996.    Respondent's counsel did not fully

examine his documents at that time, but he asked petitioner to

provide several documents early in 1997.    Petitioner does not

claim that he tried to comply with this request.     In March 1997,

petitioner agreed to give respondent all substantiating documents
                                 15

for 1991 and 1992 by mid-April 1997, but he did not do so.

Materials not provided in compliance with our pretrial orders may

be excluded from evidence.    Moretti v. Commissioner, 77 F.3d 637,

644 (2d Cir. 1996); Kodak v. Commissioner, T.C. Memo. 1991-485,

affd. without published opinion 14 F.3d 47 (3d Cir. 1993).    For

that reason we sustained respondent's objection.

C.   Whether Petitioner Is Entitled to More Deductions Than
     Allowed by Respondent for 1991 and 1992

     Respondent's determinations in the notices of deficiency are

presumed to be correct, and petitioner bears the burden of

proving otherwise.    Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933); Rockwell v. Commissioner, 512 F.2d 882, 885 (9th

Cir. 1975), affg. T.C. Memo. 1972-133.   Deductions are a matter

of legislative grace; petitioner must prove that he is entitled

to any deductions claimed.    INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).

     Petitioner deducted more Schedules C and E business expenses

than respondent allowed for 1991 and 1992.   Respondent disallowed

some of these deductions because petitioner did not substantiate

them or show that he had a business purpose for the expenses.

     A taxpayer may deduct ordinary and necessary expenses paid

or incurred during the taxable year in carrying on a trade or
                                  16

business.   Sec. 162(a).   We may estimate the amount of the

deductible expense if a taxpayer establishes that he or she paid

a deductible expense but cannot substantiate the precise amount.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), affg.

in part and remanding in part 11 B.T.A. 713 (1928).    The taxpayer

must present evidence that provides a rational basis for our

estimate.   Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

     Petitioner offered but we did not admit copies of records

which he said would substantiate his Schedules C and E expenses

for 1991 and 1992.   Petitioner argues that his testimony

establishes that he is entitled to deduct the expenses on his

1991 and 1992 returns.     He also contends that his deductions were

reasonable and that we should not disallow them even though he

did not provide documentation.

     Petitioner did not meet his burden of proving the amount of

his rental expenses.   There is no evidence of the amount of

interest he paid or of his other expenses for 1991 and 1992.

Petitioner's testimony about his expenses was vague and general.

He did not provide enough detail in his testimony for us to

estimate the amount of his expenses for 1991 and 1992 under

Cohan.   Although petitioner gave some examples of his expenses in
                                17

1991 and 1992, we could not tell whether these were expenses for

which respondent had previously allowed deductions.

     Petitioner urges this Court to accept his tax returns as

prepared because he contends his deductions were reasonable.

However, it is not enough that petitioner asserts that his

deductions were reasonable; he must provide adequate proof.    Sec.

6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976).   Petitioner has not given us

an adequate basis to estimate his expenses under Vanicek v.

Commissioner, supra, or Cohan v. Commissioner, supra.

     Petitioner argues that he may deduct as a Schedule C or E

expense $10,000 he paid as attorney's fees to Kolodny & Pressman

in connection with his purchase of the Riviera Apartments.    We

disagree.   He must capitalize those expenses.   See INDOPCO, Inc.

v. Commissioner, supra.

     We conclude that petitioner may not deduct more in Schedules

C and E expenses than respondent allowed for 1991 and 1992.

     At trial, petitioner testified that he could not remember

why he deducted $19,865 as investment interest on Schedule A of

his 1992 return.   We sustain respondent's disallowance of

petitioner's deduction for investment interest.
                                  18

D.   Whether Petitioner Failed To Report Capital Gains in 1992

     Petitioner reported capital gains totaling $11,965 on

Schedule D of his 1992 return.    Respondent determined that

petitioner had capital gains of $30,760 for 1992.

     1.    Walden Agreement

     Petitioner testified that he had an oral agreement with

Floyd A. Walden (Walden), who he described as a retired bank

manager and a stock market expert, under which 50 percent of his

capital gain was income to and reportable by Walden.    Petitioner

did not offer any documentary evidence that he had an agreement

with Walden, or evidence that Walden reported any of his alleged

share of the gain in 1992.    Walden did not testify.   Petitioner

did not establish that any of the $30,760 of capital gain was

taxable to Walden.   We sustain respondent's determination.

     2.    Brentwood Apartments

     Petitioner bought the Brentwood Apartments around 1990 for

$80,000.   He took $4,000 of depreciation per year for 2 years.

Petitioner sold the Brentwood property in 1992 for $190,000.

Respondent determined that petitioner failed to report gain of

$122,000 [$190,000 - ($80,000 - $12,000)] (3 years of

depreciation).
                                19

     Petitioner contends that he did not receive $190,000 in

1992.   He claims (without further explanation) that he cleared

$5,000 or $419.   Petitioner offered into evidence the settlement

sheet from the closing on the Brentwood property.   We did not

admit it because petitioner did not exchange it as required by

the Court's standing pretrial order or as he had agreed to do in

the parties' joint motion to continue.   Although petitioner

testified that he received payments totaling several thousand

dollars for the Brentwood property in 1993 before he reacquired

it, he did not testify about the terms of the sale, whether the

sale was an installment sale, or the details of his reacquisition

of the Brentwood property in 1993.   Petitioner did not prove that

he did not have gain on the sale of the Brentwood property.    We

find that petitioner failed to report $118,000 of gain for 1992.

E.   Whether Petitioner Has Established the Amount of His Loss
     Arising From His Chapter 11 Bankruptcy

     Petitioner was a debtor in bankruptcy from about 1987 to

mid-1991.   In 1990 and 1991, the trustee of his bankruptcy estate

disbursed $1,866,170 to petitioner's creditors to satisfy various

judgments and claims.   Among the claims was a $1,950,000 judgment

($300,000 of compensatory damages previously paid in 1990 and
                                20

$1,650,000 of punitive damages) arising from a suit brought by

petitioner's former tenants.   Petitioner argues that, as a result

of these disbursements, the estate had a net operating loss (NOL)

that he may carry over to his 1991 and 1992 individual income tax

returns.

     Upon the termination of a bankruptcy estate, the debtor

succeeds to its tax attributes, including NOL carryovers under

section 172.   Sec. 1398(g)(1), (i).   Deductions available to the

estate are not available to the individual debtor.    Smith v.

Commissioner, T.C. Memo. 1995-406.

     Petitioner argues that the disbursements by the chapter 11

trustee generated a net operating loss for the bankruptcy estate.

Petitioner's bankruptcy estate filed no income tax return for

1991.   The record is silent as to the estate's tax history.

There is no documentary evidence that the bankruptcy estate had

an NOL for 1991.   Although petitioner testified that his

bankruptcy estate had an NOL for 1991 because it disbursed

$1,866,170 to petitioner's creditors for various claims, he did

not testify about any income the estate may have had from the

sale of property or the amount of the bankruptcy estate's NOL.

Petitioner has not established the amount of the bankruptcy
                                 21

estate's NOL for 1991 or the amount of any NOL carryover to which

he succeeded at the termination of the bankruptcy.     See Leavell

v. Commissioner, T.C. Memo. 1996-117.    We sustain respondent's

determination.

F.   Addition to Tax and Penalty

     1.   Whether Petitioner Is Liable for the Addition to Tax
          Under Section 6651(a)(1) for Failure To Timely File

     Respondent determined that petitioner is liable for

additions to tax under section 6651(a)(1) for 1991 and 1992.

     A taxpayer is liable for an addition to tax of up to 25

percent for failure to timely file Federal income tax returns

unless the taxpayer shows that the failure was due to reasonable

cause and not willful neglect.   Sec. 6651(a)(1).    Petitioner

bears the burden of proving that the failure is due to reasonable

cause and not willful neglect.     United States v. Boyle, 469 U.S.

241, 245 (1985).   To prove reasonable cause, a taxpayer must show

that he exercised ordinary business care and prudence but

nevertheless could not timely file the return.      Crocker v.

Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.
                                 22

     Petitioner filed his 1991 return on March 5, 1993, and his

1992 return on October 23, 1993.      Petitioner offered no evidence

relating to this addition to tax.     We conclude that petitioner is

liable for the addition to tax under section 6651(a)(1) for 1991

and 1992.

     2.     Whether Petitioner Is Liable for the Accuracy-Related
            Penalty Under Section 6662

     Respondent determined that petitioner is liable for the

accuracy-related penalty for negligence for 1991 and for

substantial understatement for 1992.     Sec. 6662(a), (c), (d).

     Taxpayers are liable for a penalty equal to 20 percent of

the part of the underpayment to which section 6662 applies.     Sec.

6662(a).    Section 6662 applies to an underpayment attributable to

negligence or to a substantial understatement of income tax.

Sec. 6662(b)(1) and (2).   Negligence includes a failure to try

reasonably to comply with internal revenue laws or to exercise

ordinary and reasonable care in preparing a tax return.     Sec.

6662(c).    A substantial understatement of income tax occurs when

the amount of the understatement for a taxable year exceeds the

greater of 10 percent of the tax required to be shown or $5,000.

Sec. 6662(d)(1)(A).   The accuracy-related penalty does not apply
                                 23

to any part of an underpayment if the taxpayer shows that there

was reasonable cause for that part and that the taxpayer acted in

good faith.   Sec. 6664(c)(1).

     Petitioner has not proven that the deficiency in income tax

for 1991 was not due to negligence or intentional disregard of

rules or regulations.   Petitioner did not argue that he is not

liable for the accuracy-related penalty for substantial

understatement for 1992.   We conclude that petitioner is liable

for the accuracy-related penalty under section 6662(a) for 1991

and 1992.

     To reflect the foregoing,


                                          Decisions will be entered

                                      under Rule 155.
