                   T.C. Summary Opinion 2008-26



                      UNITED STATES TAX COURT



             AUGUSTO AND MARIA NEGRET, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17497-06S.               Filed March 6, 2008.



     Augusto and Maria Negret, pro sese.

     Brian A. Pfeifer, for respondent.



     CHABOT, Judge:   This case was heard pursuant to section

7463.1   The decision to be entered is not reviewable by any other

court, and this opinion shall not be treated as a precedent for

any other case.   Sec. 7463(b).


     1
       Unless indicated otherwise, all section references are to
sections of the Internal Revenue Code of 1986 as in effect for
the year in issue, except as to sec. 7463, which is as in effect
for proceedings commenced on the date the petition in the instant
case was filed.
                                 - 2 -

       Respondent determined a deficiency of $2,596 in Federal

individual income tax against petitioners for 2003.

       After concessions by petitioners,2 the issues for decision3

are:

             (1) Whether petitioners are entitled to any

       depreciation deductions claimed on Schedule C, Profit

       or Loss From Business, and if so, then in what amount;

       and

             (2) whether petitioners are entitled to any

       vehicle insurance deduction in excess of their claimed

       (and allowed) standard mileage rates in connection with

       the Schedule C activity and, if so, then in what

       amount.

                              Background

       The stipulation and the stipulated exhibits are incorporated

herein by this reference.




       2
       Petitioners concede that: (1) Their Schedule C gross
income was $2,888, as determined in the notice of deficiency, and
not $831, as stated on their tax return, and (2) they are
entitled to an itemized deduction of $11,055 for home mortgage
interest and points, as determined in the notice of deficiency,
and not $15,288, as stated on their tax return.
       3
       The other adjustments (relating to the 2-percent floor on
certain itemized deductions, and a claimed credit for certain
retirement savings contributions) are computational only; their
resolutions depend on our determinations as to the issues for
decision.
                                   - 3 -

     When the petition in the instant case was filed, petitioners

Augusto Negret and Maria Negret (hereinafter sometimes referred

to as Maria) resided in Florida.

     During 2003 Maria operated a “Schedule C business” as an

Avon representative.       This business will hereinafter sometimes be

referred to as Maria’s Avon business.         Table 1 sets forth

pertinent information from the Schedule C relating to Maria’s

Avon business, that petitioners attached to their 2003 Form 1040,

U.S. Individual Income Tax Return, together with respondent’s

adjustments in the notice of deficiency.

                                   Table 1

                                   Amount     Respondent
         Schedule C Line Item      Claimed    Determined   Adjustment

   1.    Gross Receipts Or Sales      $831       $2,888      1
                                                               $2,057
   8.    Advertising                 1,350        1,350           -0-
         Tools                         -0-        1,770        (1,770)
   9.    Car And Truck Expenses      2,678        2,678           -0-
  13.    Depreciation               10,937          -0-        10,937
  15.    Insurance                   1,180          -0-         1,180
  18.    Office Expense                150          150           -0-
  22.    Supplies                      250          250           -0-
 24a.    Travel                        885          885           -0-
 24d.    Meals And Entertainment       352          352           -0-
  27.    Other Expenses                540          540           -0-
  28.    Total Expenses             18,322        7,975        10,347
  31.    Net Profit Or (Loss)      (17,491)    2
                                                 (5,087)     2
                                                               12,404
     1
       Petitioners concede this adjustment.
     2
       These amounts are not specifically set forth in the notice of
deficiency but are the computational results of the amounts that are set
forth.

     The Schedule C shows that Maria’s vehicle was used as

follows in 2003:      7,440 miles for business; 1,250 miles for

commuting; and 2,900 miles for “other”.          Petitioners’ claimed

$2,678 car and truck expenses were computed by multiplying 7,440
                                 - 4 -

miles of business use by the standard 2003 mileage rate of 36

cents.   The claimed $1,180 insurance expense (supra table 1) is

for the same vehicle as the claimed $2,678 car and truck

expenses.

     Table 2 shows the information on a depreciation schedule

attached to petitioners’ 2003 tax return.

                              Table 2

              Item                          Information

     Description of property             Leasehold imp.
     Date acquired                       02/03/03
     Cost or other basis                 $24,855
     Depreciable basis                   $17,398
     Accumulated depreciation            [No entry]
     Method used                         MACRS
     Life or rate                        5.0
     Depreciation for 2003               $10,937
     ADS depreciation for 2003           $3,480

     On the Form 4562 (Depreciation and Amortization) attached to

their 2003 tax return, petitioners claimed a $7,457 special

depreciation allowance and an MACRS depreciation deduction of

$3,480, for a total of $10,937.4




     4
       Sec. 168(k)(1) provides for an additional depreciation
deduction of 30 percent of the adjusted basis of qualified
property, but requires the adjusted basis to then be reduced by
this additional deduction before computing the amount otherwise
allowable as a depreciation deduction. The $7,457 claimed
special depreciation allowance is 30 percent of the claimed
$24,855 cost or other basis. See supra table 2. The $24,855
basis minus the $7,457 special depreciation leaves the $17,398
depreciable basis, see supra table 2, used to calculate the
remaining depreciation.
                                - 5 -

     Maria used a computer in connection with her Avon business.

She bought the computer in 2000 or 2001 for $800.   Before Maria

began to use the computer in connection with her Avon business,

petitioners used it for personal purposes.   During 2003, in

addition to business use, Maria used the computer for personal e-

mail and to browse the Internet for purposes not related to her

Avon business.

     Maria used a printer (original cost--$180), a scanner

(original cost--$100), and facsimile equipment (original cost--

$50) in connection with the computer she used in connection with

her Avon business.

     Maria used two desks in connection with her Avon business.

The desks were bought in 1995 for about $1,300 to $1,500 apiece.

Before Maria began to use the desks in connection with her Avon

business, petitioners used them for personal purposes.

                              Discussion

     In general, a taxpayer is entitled to deduct “all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.   Sec. 162(a).

During 2003, Maria operated a Schedule C business as an Avon

representative.   However, section 274 disallows deductions

otherwise available in many cases unless certain substantiation

requirements have been met.
                               - 6 -

      In general, the Commissioner’s determinations as to matters

of fact in the notice of deficiency are presumed to be correct,

and the taxpayers have the burden of proving otherwise.   See Rule

142(a);5 Welch v. Helvering, 290 U.S. 111, 115 (1933).

Petitioners have not contended that section 7491 applies so as to

shift the burden of proof; on the record in the instant case, if

such a contention had been made, then we would have concluded

that the requirements of section 7491(a)(2) had not been met, and

so the burden of proof would not have been shifted.

      For convenience, we consider first the vehicle insurance

issue and then the depreciation issue.

A.   Vehicle Insurance

      Section 274(d)(4) provides that no deduction shall be

allowed with respect to listed property (as defined in section

280F(d)(4)) unless certain substantiation requirements are met.

As best we can tell from the meager record, the vehicle Maria

used in her Avon business was a passenger automobile, within the

meaning of paragraphs (4)(A)(i) and (5) of section 280F(d).

      Section 1.274-5(j)(2), Income Tax Regs., authorizes the

Commissioner to “establish a method under which a taxpayer may

use mileage rates to determine the amount of the ordinary and

necessary expenses of using a vehicle for local transportation *



      5
       Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                 - 7 -

* * in lieu of substantiating the actual costs.”    Rev. Proc.

2002-61, sec. 11, 2002-2 C.B. 616, 623, provides that for 2003 a

taxpayer may deduct 36 cents per mile of business use “in lieu of

all operating and fixed costs”, which are defined as including

insurance.     Id. sec. 5.03, 2002-2 C.B. at 618.

      Petitioners claimed the 36-cent rate for the claimed 7,440

miles of business use of Maria’s vehicle, for a deduction of

$2,678.   Respondent allowed this mileage claim in full.   See

supra table 1.    This 36-cent mileage rate includes insurance and

is in lieu of a deduction for substantiated actual costs.    Having

used--and been allowed--the standard rate for 2003, petitioners

are not entitled to deduct in addition any of the listed

operating and fixed costs, including insurance.

      We hold for respondent on this issue.

B.   Depreciation

      On their 2003 tax return, petitioners claimed that they

acquired $24,855 of leasehold improvements on February 3, 2003.

They claimed that all of this property was eligible for 30-

percent special depreciation of $7,457, plus regular depreciation

of $3,480, for a total 2003 depreciation deduction of $10,937.

Petitioners’ 2003 tax return was professionally prepared.

Petitioners proceeded pro se at the trial, but their tax return

preparer was allowed to sit with them at the counsel table and to

assist them.
                               - 8 -

     We noted that the tax return showed the $24,855 but did not

show what items were covered by that amount, nor did it indicate

the costs, acquisition dates, and specific business uses of any

of these items.   When Maria took the witness stand, we urged her

to testify about the most expensive items first.   After Maria

testified about a computer, two desks, a printer, a scanner, a

fax machine, and a telephone, including testimony about these

items’ original costs, aggregating about $4,000, the following

colloquy occurred:

          THE COURT: How are you going to get to $24,800
     some odd dollars if you’re already getting to shall we
     say small potatoes items like $35 items?

          THE WITNESS:   I don’t have anything to go to
     $24,000.

          THE COURT: Are there any other big items that you
     want to tell us about.

          THE WITNESS:   No, sir.

     Petitioners did not call their tax return preparer to the

witness stand to explain any components of the $24,855 item on

the tax return that she had prepared for petitioners to file.

     From the foregoing, we conclude that there was no foundation

for the depreciation claims on petitioners’ 2003 tax return.

     Nevertheless:   (1) Respondent has conceded that Maria had a

real Schedule C business and agrees that petitioners are entitled

to deduct the net losses from that business against their other

income, see supra table 1; (2) petitioners impressed us as being
                               - 9 -

truthful (even if somewhat vague) in their sworn trial testimony,

notwithstanding our conclusion about the depreciation element on

their sworn tax return; and (3) we are satisfied that Maria used

depreciable property in her Avon business.

     We conclude that petitioners have failed to show that they

are entitled to any of their claimed 30-percent special

depreciation.   See sec. 168(k).

     We conclude that petitioners have failed to show that they

have satisfied the strict substantiation requirements of section

274 as to the property subject to that section.

     Doing the best we can on the basis of the record herein, we

make as close an approximation as we can, and bearing heavily

upon petitioners, whose inexactitude is of their own making, we

conclude that petitioners are entitled to deduct $100

depreciation in connection with Maria’s Avon business for 2003.

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

     To take account of the foregoing,6


                                       Decision will be entered

                               under Rule 155.



     6
       Respondent did not determine an accuracy-related penalty
under sec. 6662 in the notice of deficiency and did not assert a
claim for such a penalty at or before any hearing in this case,
and so we do not deal with that potential issue. See sec.
6214(a). Petitioners and their tax return preparer should
understand that they “dodged a bullet” with regard to the
depreciation claims on this tax return.
