                  T.C. Summary Opinion 2003-25



                     UNITED STATES TAX COURT



        ROBERT J. HARTZ & SHARI L. HARTZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                 ROBERT J. HARTZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2730-01S, 2731-01S.     Filed March 24, 2003.



     Georg Jensen, for petitioners.

     Robert A. Varra, for respondent.



     DINAN, Special Trial Judge:   These consolidated cases were

heard pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petitions were filed.    The

decisions to be entered are not reviewable by any other court,

and this opinion should not be cited as authority.   Unless

otherwise indicated, subsequent section references are to the
                                   - 2 -

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined the following deficiencies in

petitioners’ Federal income taxes, addition to tax, and penalty,

for the respective taxable years:

                                      Sec. 6651(a)(1)   Sec. 6662(a)
     Docket No.   Year   Deficiency   Addition to tax     Penalty

     2731-01S     1995    $2,259           $508             -0-
     2730-01S     1996    24,448            -0-          $4,890
     2730-01S     1997     4,080            -0-             -0-

Unless otherwise indicated, references to petitioner with respect

to any taxable year, and any references to petitioners with

respect to 1995, are references solely to petitioner Robert J.

Hartz.

     The issues for decision are:       (1) Whether petitioners

received unreported income in 1995 and 1996; (2) whether

petitioners are entitled to certain disallowed business expense

deductions in each year in issue, and to an additional deduction

for interest expense in 1995; (3) whether petitioners are

entitled to deduct a loss on the disposition of purported

business property in 1997; (4) whether petitioner is liable for

the section 6651(a)(1) addition to tax for failure to file timely

his Federal income tax return in 1995; and (5) whether
                                - 3 -

petitioners are liable for the section 6662(a) accuracy-related

penalty for 1996.1

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Hillsdale, Wyoming, on the date the petitions were filed in these

cases.

     During the years in issue, petitioner was engaged in the

business of installing bleachers as a sole proprietor.

Petitioner filed an individual Federal income tax return for

taxable year 1995.    Petitioners were married in 1996 and filed

joint Federal income tax returns in 1996 and 1997.

Unreported Income

     With respect to petitioner’s sole proprietorship,

petitioners reported business gross income of $140,559 in 1995

and $189,159 in 1996.    Respondent determined that there was

unreported business income of $13,153 in 1995 and $38,641 in

1996.    The notices of deficiency include no details concerning

the source of the unreported business income.    Respondent also


     1
      Petitioners generally do not dispute, and we do not
address, those adjustments by respondent which favor petitioners.
Although the parties addressed at trial the meal and
entertainment expense deductions, the adjustments with respect
thereto are in petitioners’ favor and need not be addressed here.
Adjustments to self-employment income taxes and deductions
therefor in each year in issue, and to the earned income credit
in 1996, are computational and will be resolved by the Court’s
holding on the issues in these cases.
                                 - 4 -

determined that petitioner Shari L. Hartz received unreported

wage income of $13,595 in 1996.

     Gross income generally includes all income from whatever

source derived, including compensation for services and gross

income derived from business.    Sec. 61(a)(1) and (2).

     In his trial memorandum, respondent argues as follows with

respect to the unreported income:

          Gross receipts of $140,559 were reported for the year
     1995 for Hartz Bleachers. Forms 1099-MISC totaling $153,712
     were issued to Hartz Bleachers for the year 1995.
     Respondent determined that the amount reported on the Forms
     1099-MISC accurately reflected gross income for Hartz
     Bleachers for * * * 1995.

          Gross receipts of [$189,159] were reported for the year
     1996 for Hartz Bleachers. Forms 1099-MISC totaling $187,809
     were issued to Hartz Bleachers for the year 1996. Books
     kept for Hartz Bleachers reported receipts of $227,800.
     Bank deposits into accounts held by petitioners and Hartz
     Bleachers for the year 1996 totaled $239,234. Respondent
     determined that the correct amount of income was [$227,800],
     as shown on petitioners’ books and records.

                     *   *   *     *     *   *   *

           For the year 1996, [$13,595] of the amount allowed by
     respondent as a deduction for compensation [see discussion
     infra] was for amounts Hartz Bleachers paid to petitioner
     Shari L. Hartz. Respondent also determined that this amount
     should be reported as income by Shari L. Hartz for * * *
     1996.

No party presented reliable evidence concerning the correct

amount of wage and business income in 1995 and 1996.      Although

petitioner testified briefly concerning the business income, the

extent of his testimony was that he relied upon the Forms 1099 in

calculating the total amount of income in each year.      The Forms
                               - 5 -

1099 were not introduced into evidence by petitioners or

respondent, but the amounts reflected on these forms for 1995

were stipulated by the parties.

     Because petitioners have not introduced any credible

evidence regarding the amount of unreported income determined by

respondent, petitioners ultimately bear the burden of proof with

respect to this issue.   Sec. 7491(a)(1);2 Rule 142(a); Ruidoso

Racing Association, Inc. v. Commissioner, 476 F.2d 502, 507-508

(10th Cir. 1973), affg. in part and remanding in part T.C. Memo.

1971-194 (“With regard to unreported income, the taxpayer must

prove that the determination is arbitrary or erroneous, and if it

does so the Commissioner must satisfy the court as to the

existence and amount of unreported income.”).    The nature of the

business activity giving rise to respondent’s determination of

unreported income is not in dispute:   Both the unreported

business income and the unreported wage income are connected to

petitioner’s undisputed sole proprietorship.    Petitioners have

presented no evidence refuting respondent’s determination or

otherwise tending to show it to be arbitrary or erroneous.    We

find that petitioners have failed to meet their burden and,




     2
      Respondent asserts that the “audit in this case began on
April 3, 1998, so the provisions of I.R.C. sec. 7491 do not
apply.” Because sec. 7491 does not alter the outcome, however,
we need not decide whether its provisions are inapplicable in one
or both of these cases.
                                           - 6 -

subject to a concession by respondent,3 sustain respondent’s

determination with respect to the 1995 and 1996 unreported

income.

Business Expense Deductions

      With respect to petitioner’s sole proprietorship,

petitioners claimed the following deductions and respondent

disallowed the respective portions thereof:
                             1995                  1996                 1997
                       Claimed Disallowed    Claimed Disallowed   Claimed Disallowed

Travel                  $6,591      $959     $26,811    $2,420
Legal fees                                     5,675     5,765    $21,240   $21,240
Depreciation                                  16,604     2,420     23,420     2,256
Car and truck            6,116     3,054      17,615     6,627     24,267     4,853
Rent                                           4,569     2,188
Contract labor/wages                          75,662    11,266

      While a taxpayer generally may deduct expenses incurred in

conducting a trade or business, a taxpayer may not deduct

personal, family, or living expenses.                  Secs. 162(a), 262(a).

Moreover, a taxpayer generally must keep records sufficient to

establish the amounts of the items reported on his Federal income

tax return.     Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.

In the event that a taxpayer establishes that a deductible

expense has been paid but is unable to substantiate the precise

amount, we generally may estimate the amount of the deductible

expense bearing heavily against the taxpayer whose inexactitude

in substantiating the amount of the expense is of his own making.



      3
      Respondent concedes in the parties’ stipulation that the
correct amount of business gross income in 1995 is $152,012. We
accordingly find that petitioner had unreported business income
of $11,453 in that year.
                                 - 7 -

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

cannot estimate a deductible expense, however, unless the

taxpayer presents evidence sufficient to provide some basis upon

which an estimate may be made.     Vanicek v. Commissioner, 85 T.C.

731, 743 (1985).   Furthermore, section 274(d) supersedes the

Cohan doctrine and prohibits estimating certain expenses.

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d

201 (2d Cir. 1969).   That section provides that, unless the

taxpayer complies with certain strict substantiation rules, no

deduction is allowable (1) for travel expenses, (2) for

entertainment expenses, (3) for expenses for gifts, or (4) with

respect to listed property.   Listed property includes passenger

automobiles and other property used as a means of transportation.

Sec. 280F(d)(4).   To meet the strict substantiation requirements,

the taxpayer must substantiate the amount, time, place, and

business purpose of the expenses.    Sec. 274(d); sec. 1.274-5T,

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

     With respect to the travel expenses, petitioners provided a

summary document prepared in 1996 or 1997 listing various

destinations and lengths of stay during 1995.    This document was

not prepared contemporaneously with the travel and does not meet

the section 274(d) requirement that business purpose be

documented.

     With respect to the legal fees, petitioners provided a

summary document from the office of petitioners’ counsel
                                - 8 -

reflecting payments by petitioners of $1,500 during 1996.    The

parties stipulated that in 1996 petitioners paid their counsel

$2,175 and paid various other legal expenses of $822.   However,

there is little evidence that these expenses were related to

petitioner’s business.    To the contrary, the office records and

petitioner’s testimony indicate that the legal work was primarily

related to the matter involving the Winnebago, discussed infra,

and was therefore personal in nature and nondeductible under

section 262(a).    Petitioner testified that a portion of the legal

expenses was incurred for obtaining advice on whether filing for

bankruptcy was necessary in order to continue his business

activity.    Certain bankruptcy-related legal expenses incurred in

connection with a business activity may be deductible as business

expenses.    See, e.g., Tarakci v. Commissioner, T.C. Memo. 2000-

358.    However, petitioners have not shown that any amount of the

legal expenses they incurred was connected with petitioner’s

business.    Although a record for a $75 billing refers to a matter

involving “ch 13”, presumably a reference to a chapter 13

bankruptcy proceeding, this amount was also billed as legal work

for the personal Winnebago lawsuit; nothing indicates that there

was any connection to petitioner’s sole proprietorship.

       With respect to depreciation, the only evidence presented by

petitioners was a copy of the supporting schedule which had been
                               - 9 -

attached to the 1997 return and which summarized the various

items claimed thereon as section 179 expenses and depreciation.

These items were a 1994 Dodge truck, 1992 Dodge truck, van, file

cabinet, computer cabinet, fax machine, van engine, and cargo

trailer, and tools.   No supporting documentation was provided

showing when these items were purchased, what their cost or other

basis was, or how the items were used in petitioner’s business.

At trial, petitioner failed to provide any testimony regarding

these or other substantiating details.

     With respect to the car and truck expenses, petitioner

testified that the vehicles for which he claimed the deductions

were used solely for business purposes, and that he had other

vehicles which he used for personal purposes.   He also partially

relied upon the same reconstructed travel summary discussed

supra.   However, petitioner provided no substantiation of the

amounts, times, places, and business purposes of the car and

truck expenses as required by section 274(d), such as a

contemporaneous mileage log.

     At trial, petitioners did not address specifically, and did

not provide substantiation for, the disallowed rent expense

deduction for 1996.

     Petitioners briefly addressed the adjustments made to the

contract labor expense deductions in each year in issue.   A
                               - 10 -

dispute exists between the parties concerning whether the expense

is properly characterized as contract labor expense or wage

expense subject to employment taxes.      Although petitioners raised

this as an issue in their petitions to this Court, the parties

stipulated that respondent had not issued a notice of

determination concerning this issue and that it is not currently

before this Court.   See sec. 7436.     As such, only the amounts

paid to the individuals in 1996--not the characterization of the

payments--is at issue.   The amount of the payments was not

addressed at trial, however, and nothing was produced to

substantiate any such payments in excess of what respondent

determined had been made.

     Petitioners have failed to substantiate any of the above

alleged expenses as business expenses deductible under section

162(a).   Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.     We

therefore sustain respondent’s disallowance of the deductions

therefor.

     Finally, petitioner argues that he is entitled to an

additional deduction which he claimed on an amended return form

which he filed for 1995.    Petitioner intended to use an amended

return to make a variety of changes to amounts of income and

deductions reported on the original 1995 return.      These changes,

resulting in a reduction of petitioner’s reported adjusted gross

income from $80,867 to $11,582, were not accepted by respondent
                                - 11 -

and are not reflected in the notice of deficiency.     The only item

appearing on the amended return form which petitioner chose to

pursue at trial was a claim for an additional deduction for

business interest expense of $1,487.     Petitioner testified that

the expense was incurred in connection with vehicles used for

business purposes.     Petitioner, however, provided no reliable

substantiation that he incurred this expense in this amount or

that the expense had a business purpose.     Consequently,

petitioner is not entitled to an additional business expense

deduction for 1995.     Sec. 6001; sec. 1.6001-1(a), (e), Income Tax

Regs.

Loss on Disposition of Business Property

        On October 10, 1995, petitioner and Jeanie L. Melson (Ms.

Melson) jointly entered into an installment contract to purchase

a 1995 Winnebago.     The contract indicated that the Winnebago was

to be used primarily for personal, family, or household use.       The

purchase price of the Winnebago was $65,613.     After applying a

downpayment and incurring various costs and fees, the total

principal amount financed under the contract was $62,848.

Approximately 10 to 15 days after its purchase, Ms. Melson took

the Winnebago from petitioner’s possession.     The bank which

financed the purchase of the Winnebago sued petitioner for

amounts due with respect thereto in 1996 and repossessed the

vehicle from Ms. Melson in 1997.     Petitioners claimed a deduction
                                - 12 -

in 1997 for a loss of $5,245 on the disposition of the Winnebago.

Respondent disallowed this deduction in full.

     Taxpayers generally are entitled to deduct from gross income

certain losses sustained during the taxable year.    Sec. 165(a).

However, individual taxpayers may not deduct a loss unless the

loss was incurred in a trade or business or another activity

entered into for profit, or the loss arose from a casualty or

from theft.   Sec. 165(c).

     Petitioner testified that he purchased the Winnebago solely

for business purposes.   Petitioner also testified that, in the 10

to 15 days in which he had access to the vehicle, he used it for

one business trip and had transferred all of his business files

into a filing cabinet located in it, causing him to lose the

files when the Winnebago was taken by its co-owner.    We do not

accept petitioner’s testimony that the Winnebago was to be used

solely for business purposes.    The contract indicated that the

Winnebago was for personal use and the Winnebago was financed

jointly with Ms. Melson, who subsequently took possession of it

solely for her own purposes.    Furthermore, petitioner did not

indicate how the Winnebago would have been used in his business.

We find that the use of this vehicle was personal in nature and

not connected with petitioner’s business.    Thus, any losses

related thereto are not deductible as a business loss.    Sec.

165(c)(1).    Petitioners have not argued that any loss relating to
                              - 13 -

the Winnebago was the result of theft, so we need not address any

issues of amount or timing.   See sec. 165(c)(3), (e), (h).

Section 6651(a)(1) Addition to Tax

     Petitioner’s individual Federal income tax return for

taxable year 1995 was dated September 12, 1997, postmarked

September 13, 1997, and received by the Internal Revenue Service

on September 19, 1997.   The return showed a tax liability of

$28,240 and stated that no payments had been made to satisfy that

liability.   Respondent determined that petitioner is liable for

an addition to tax under section 6651(a)(1) for 1995 for failure

to file a return by the prescribed date.

     Section 6651(a)(1) imposes an addition to tax equal to 5

percent of the amount required to be shown as tax on a return for

each month or fraction thereof past the prescribed due date in

which the return is not filed, not to exceed a total of 25

percent.   Generally, the amount of the addition to tax under

section 6651(a)(1) is reduced by the amount of any addition to

tax imposed under section 6651(a)(2) (which relates to failure to

pay the tax shown on a return by the prescribed date) with

respect to each month in which both are otherwise applicable.

Sec. 6651(c)(1).

     A taxpayer may avoid the addition to tax under section

6651(a)(1) if he establishes that the failure to file is due to

reasonable cause and not due to willful neglect.   “Reasonable
                               - 14 -

cause” requires the taxpayer to demonstrate that he exercised

ordinary business care and prudence and was nonetheless unable to

file a return within the prescribed time.    United States v.

Boyle, 469 U.S. 241, 246 (1985).    “Willful neglect” means a

conscious, intentional failure or reckless indifference.       Id. at

245.

       Although respondent bears the burden of production with

respect to this addition to tax, petitioner ultimately bears the

burden of proof.    Sec. 7491(c); Rule 142(a).   It is clear that

petitioner did not file a return for taxable year 1995 until

September 1997.    Petitioner did not attempt to explain the

failure to file and provided no indication that he had reasonable

cause therefor.    We sustain respondent’s determination that

petitioner is liable for the addition to tax under section

6651(a)(1).4




Section 6662(a) Accuracy-Related Penalty

       Respondent determined that petitioners are liable for an

accuracy-related penalty under section 6662(a) for 1996 with


       4
      Respondent applied a 22.5 percent rate to the total amount
of tax required to be shown on petitioner’s return, $30,499, and
offset the resulting amount by a previously assessed sec.
6651(a)(1) addition to tax of $6,354. See sec. 6665(b).
Respondent presumably had previously assessed a sec. 6651(a)(2)
addition to tax as well. See id.; sec. 6651(c)(1).
                                 - 15 -

respect to the underpayment resulting from the total amount of

the deficiency in that year.

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

one of which is any substantial understatement of income tax.

Sec. 6662(b)(2).   A substantial understatement of income tax

exists if the amount of the understatement exceeds the greater of

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

return.    Sec. 6662(d)(1)(A).   Generally, the amount of an

understatement is reduced by the portion of the understatement

which is attributable to either (1) the tax treatment of any item

for which there is or was substantial authority, or (2) any item

with respect to which (a) the relevant facts were adequately

disclosed on the return or on a statement attached to the return,

and (b) the taxpayer had a reasonable basis for the tax treatment

thereof.   Sec. 6662(d)(2)(B).

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion.   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.    The most
                              - 16 -

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year.     Id.

     Petitioners made a substantial understatement of tax on

their 1996 return.   They have failed to produce books and records

or to otherwise show the method used to arrive at the amounts of

the deductions and income which were reported.    Based on the

record before us, we find petitioners have not established that

they had substantial authority or a reasonable basis for the

items in question.   Nor have they established that there was

reasonable cause for the underpayment or that they acted in good

faith with respect to the underpayment.    Consequently, we sustain

respondent’s determination that petitioners are liable for the

section 6662(a) accuracy-related penalty for 1996.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                      Decisions will be entered

                                 for respondent in docket No.

                                 2730-01S and under Rule 155 in

                                 docket No. 2731-01S.
