                     T.C. Summary Opinion 2011-102



                        UNITED STATES TAX COURT



           FARROKH AND MARIANNE B. PEIMANI, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 8299-10S.               Filed August 17, 2011.



     Farrokh and Marianne B. Peimani, pro sese.

     Sarah E. Sexton, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.    Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code (Code) in effect for the year in
                                - 2 -

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     Respondent determined a deficiency of $8,277 in petitioners’

2006 Federal income tax.    The issues for decision are whether

petitioners are entitled to:    (1) A deduction for a downpayment

loss; and (2) certain deductions claimed on Schedule C, Profit or

Loss From Business.1

                             Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by reference.    Petitioners resided in

California when they filed their petition.

     Mr. Peimani (petitioner)2 was a rental and mortgage broker.

In 2004 he signed a real estate sales contract with ITC Homes,

Inc. (ITC), for the construction of a house.    On the contract

Lawyers Title Agency of Arizona, L.L.C. (Lawyers Title) is listed

as the trustee for ITC.    Paragraph 7 of the sales contract is

entitled “REMEDIES” and states the following:

     In the event that Seller materially fails to comply with any
     of the terms of this Agreement, Purchaser shall provide
     Seller with written notice of such failure. Seller shall
     have thirty (30) days from the date of receipt of the
     written notice to substantially remedy the obligation. In


     1
      Other adjustments made by respondent are computational and
will not be discussed.
     2
      Marianne Peimani signed the petition and the stipulation of
facts but did not appear at trial.
                                - 3 -

     the event the thirty (30) days passes [sic] without remedy
     of the obligation, Seller shall be in default and Purchaser
     shall have two remedies: (1) specific performance requiring
     Seller to sell the property, or (2) cancel the Agreement and
     have all monies paid under this Agreement refunded to
     Purchaser.

     Attached to the sales contract is an addendum for the

purchase of an additional house being constructed by ITC.        The

addendum references two additional contracts for two other houses

petitioner contracted with ITC to build.      All of petitioner’s

dealings with ITC and Lawyers Title were as a private investor

and not in his capacity as a mortgage broker.

     Petitioner wrote three $5,000 checks to Lawyers Title in

2004.    Petitioner wrote one $5,000 check to ITC in 2006.      The

memo lines on all four checks reference the houses petitioner

contracted with ITC to build.    The houses for which petitioner

contracted were never constructed.      Petitioner did not provide

written notice of a failure to comply with the terms of the

contract to ITC or Lawyers Title, nor did he file suit against

either entity for breach of contract or to collect any debt.

     ITC voluntarily filed for chapter 11 bankruptcy in January

2006.    ITC converted its bankruptcy proceedings to chapter 7

bankruptcy proceedings in July 2008.3     Lawyers Title is an



     3
      Generally, under ch. 11 proceedings, a business is
reorganized and continues to operate. Under ch. 7 proceedings, a
business ceases operations and is liquidated. See Fla. Dept. of
Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 37 n.2
(2008).
                               - 4 -

affiliate of LandAmerica Financial Group, Inc. (LandAmerica).

LandAmerica filed for chapter 11 bankruptcy in November 2008.

Petitioner was not listed as a creditor in any of the bankruptcy

proceedings.   Petitioners reported a $30,500 downpayment loss on

line 21, other income, on their 2006 Federal income tax return

for money petitioner paid to Lawyers Title and ITC in 2004 and

2006.4

     Petitioners reported income and expenses from petitioner’s

brokerage business on Schedule C for 2006.   Petitioners claimed a

deduction for legal and professional services expenses of $8,342.

Petitioners also claimed a deduction for “other expenses” of

$25,724.   Petitioners listed the other expenses as:   Appraisal

reports, credit reports, dues and subs, telephone and fax,

educational courses, postage, marketing, bank charges, auto

expenses, laundry and uniforms, and miscellaneous.

     Respondent mailed petitioners a notice of deficiency that

disallowed the downpayment loss in full.   Respondent also

disallowed $154 of petitioners’ claimed deduction for legal and



     4
      Petitioner’s four checks written to ITC and Lawyers Title
totaling $20,000 were entered into evidence. Petitioner also
entered into evidence checks written to a mortgage company whose
name is illegible and Carte Bella by Del Webb for $384 and
$5,000, respectively. It is not clear what relation, if any,
these checks have to petitioner’s reported downpayment loss.
Even if these checks are added to the amounts paid to ITC and
Lawyers Title, the total does not equal the claimed deduction of
$30,500. There is no explanation in the record for the
difference.
                                - 5 -

professional services expenses and $2,890 of petitioners’ claimed

deduction for other expenses.   The $2,890 of other expenses

comprises $450 for appraisal reports, $582 for telephone and fax,

and $1,858 for auto.

                            Discussion

I.   Burden of Proof

      Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.   Rule 142(a); see INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).   The burden of proof for factual matters

may be shifted to the Commissioner under section 7491(a).

Petitioners did not argue or present evidence that they satisfied

the requirements of section 7491(a).     Therefore, petitioners bear

the burden of proof with respect to the issues in the notice of

deficiency.

      Deductions and credits are a matter of legislative grace,

and the taxpayer bears the burden of proving that he or she is

entitled to any deduction or credit claimed.     Rule 142(a); Deputy

v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).     Additionally, a taxpayer

must substantiate all expenses.   Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).
                                - 6 -

II.   Petitioners’ Reported Downpayment Loss5

      Section 165(a) allows a deduction for any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.   For individuals, as relevant here, the deduction is

limited to losses incurred in a transaction entered into for

profit.   Sec. 165(c)(2).   In order for the loss to be deductible,

it must be evidenced by a closed and completed transaction, fixed

by an identifiable event, and actually sustained during the

taxable year.   Sec. 1.165-1(b), Income Tax Regs.

      Section 166 allows an individual a deduction from ordinary

income for any business debt that becomes wholly or partially

worthless during the taxable year.      Sec. 166(a), (d)(1)(A).   To

deduct a business bad debt, the taxpayer must establish, among

other requirements, that he was engaged in a trade or business

and the acquisition or worthlessness of the debt was proximately

related to the conduct of the trade or business.      United States

v. Generes, 405 U.S. 93 (1972); sec. 1.166-5(b)(2), Income Tax

Regs.

      The term “nonbusiness bad debt” is defined as a debt other

than a debt created or acquired in connection with the taxpayer’s


      5
      Petitioners’ and respondent’s arguments centered around
petitioners’ deduction as a loss under sec. 165. It is possible
that petitioners’ deduction could be allowed instead under sec.
166. The Court construes a pro se litigant’s petition broadly.
See Rule 31(d); Lukovsky v. Commissioner, T.C. Memo. 2010-117
(citing Haines v. Kerner, 404 U.S. 519, 520 (1972)). Therefore,
we will discuss the law under both Code sections.
                                - 7 -

trade or business or a loss from the worthlessness of a debt that

is incurred in the taxpayer’s trade or business.    Sec. 166(d)(2).

The loss from a nonbusiness bad debt that becomes wholly

worthless within the year is treated as a loss arising from the

sale or exchange of a capital asset held for less than 1 year and

is deductible subject to certain limitations.    Sec. 166(d)(1);

sec. 1.166-5(a)(2), Income Tax Regs.    The taxpayer must show

identifiable events to prove the worthlessness of a debt.      John

v. Commissioner, T.C. Memo. 2004-257 (citing United States v.

S.S. White Dental Manufacturing Co., 274 U.S. 398 (1927)).

     Only a bona fide debt qualifies for the bad debt deduction.

Sec. 1.166-1(c), Income Tax Regs.   A bona fide debt is one that

arises from a debtor-creditor relationship based upon a valid,

enforceable obligation to pay a fixed or determinable sum of

money.   Id.; see also Estate of Van Anda v. Commissioner, 12 T.C.

1158, 1162 (1949), affd. 192 F.2d 391 (2d Cir. 1951).    The

obligation to provide services, by itself, does not create a

debtor-creditor relationship.    Schneider v. Commissioner, T.C.

Memo. 1981-603 (citing Lewellyn v. Elec. Reduction Co., 275 U.S.

243 (1927)).

     Bad debts and losses are mutually exclusive.    Spring City

Foundry Co. v. Commissioner, 292 U.S. 182, 189 (1934).     We need

not decide whether petitioners’ reported downpayment loss is a

section 165 loss or a section 166 nonbusiness bad debt.    It falls
                                 - 8 -

outside either section because there is no identifiable event for

the deduction in 2006.   See John v. Commissioner, supra; sec.

1.165-1(b), Income Tax Regs.

     Petitioners’ argument that the deduction was proper in 2006

rests upon the assertion that both ITC and Lawyers Title were

bankrupt that year.   Although ITC filed for chapter 11 bankruptcy

in 2006, it was still in operation and did not liquidate through

bankruptcy until 2008.   Lawyers Title’s affiliate, LandAmerica,

did not file for chapter 11 bankruptcy until 2008.6   Petitioners

have not shown either that the investment became worthless by an

identifiable event in 2006 or that a closed and completed

transaction fixed by an identifiable event occurred in 2006.

Therefore, respondent’s determination to disallow petitioners’

downpayment loss is sustained.

III. Petitioners’ Claimed Schedule C Deductions

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    Section 6001 and the

regulations promulgated thereunder require taxpayers to maintain

records sufficient to permit verification of income and expenses.


     6
      The Court notes that petitioner was not listed as a
creditor in any of the bankruptcy proceedings and that he did not
initiate legal proceedings against either ITC or Lawyers Title
for breach of contract or to collect any debt. See H.D. Lee
Mercantile Co. v. Commissioner, 79 F.2d 391 (10th Cir. 1935)
(taxpayer who declines to enforce a valid claim cannot then
assert that he has sustained a loss).
                                - 9 -

     As a general rule, if the trial record provides sufficient

evidence that the taxpayer has incurred a deductible expense but

the taxpayer is unable to adequately substantiate the precise

amount of the deduction to which he is otherwise entitled, the

Court may estimate the amount of the deductible expense and allow

the deduction to that extent, bearing heavily against the

taxpayer whose inexactitude in substantiating the amount of the

expense is of his own making.    Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930).

     In order for the Court to estimate the amount of an expense,

the Court must have some basis upon which an estimate may be

made.   Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

Without such a basis, any allowance would amount to unguided

largesse.   Williams v. United States, 245 F.2d 559, 560-561 (5th

Cir. 1957).

     The Court may not estimate a taxpayer’s expenses with

respect to the items enumerated in section 274(d).    Sanford v.

Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412

F.2d 201 (2d Cir. 1969).   Section 274 requires strict

substantiation for expenses relating to any section 280F(d)(4)

listed property.   Sec. 274(d)(4).   A passenger automobile is

listed property.   Sec. 280F(d)(4)(A)(i).   Section 274(d) and the

regulations thereunder require taxpayers to substantiate

automobile expenses by adequate records or sufficient evidence
                                  - 10 -

establishing the amount of each expense, the mileage for each

business use and the total mileage for all purposes during the

taxable period, the date of the business use, and the business

purpose of the expense to corroborate the taxpayer’s own

testimony.    See sec. 1.274-5T(b)(6), Temporary Income Tax Regs.,

50 Fed. Reg. 46016 (Nov. 6, 1985).         Section 274(d) supersedes the

Cohan doctrine.     Id.    In the absence of evidence establishing the

elements of the expenditure or use, deductions must be disallowed

entirely.    Sec. 274(d); Sanford v. Commissioner, supra at 828.

     A.      Petitioners’ Legal and Professional Services Expenses,
             Appraisal Reports Expenses, and Telephone and Fax
             Expenses

     Petitioner entered into evidence canceled checks for

expenses related to legal and professional services, appraisal

reports, and his telephone and fax usage.        The canceled checks

for the legal and professional services expenses totaled $8,188,

which is the amount of legal and professional services expenses

respondent allowed.       The canceled checks for the appraisal

reports expenses totaled $1,350, which is the amount of appraisal

reports expenses respondent allowed.        The canceled checks for the

telephone and fax expenses totaled $2,845, which is less than the

amount of telephone and fax expenses respondent allowed.

Petitioners have failed to substantiate any legal and

professional services, appraisal reports, or telephone and fax

expenses in excess of those already allowed.        Therefore,
                               - 11 -

respondent’s determination to disallow $154 of petitioners’

claimed deductions for legal and professional services expenses,

$450 of appraisal reports expenses, and $582 of telephone and fax

expenses is sustained.

       B.   Petitioners’ Auto Expenses

       Petitioners also claimed a deduction for auto expenses of

$13,250 under other expenses on Schedule C.    Respondent

disallowed $1,858 of petitioners’ auto expenses.    Petitioner’s

2006 mileage log was entered into evidence.    The log is a table

and includes cells for the date of each trip, day of the week of

each trip, vehicle used for each trip, geographical destination

of each trip, mileage for each trip, and total mileage for each

day.

       An additional cell labeled “home-work-home” is included, and

the mileage listed under that title is included in petitioner’s

total mileage for each day.    Petitioners cannot include the

mileage from petitioner’s home to his office as a business

expense because that mileage is considered a nondeductible

personal commuting expense.    See Commissioner v. Flowers, 326

U.S. 465, 469-470 (1946); Curphey v. Commissioner, 73 T.C. 766,

777 (1980); sec. 1.262-1(b)(5), Income Tax Regs.
                                - 12 -

     For the other mileage listed in petitioner’s mileage log, no

business purpose is given for any of the trips.7    See Sanford v.

Commissioner, supra at 829.     Petitioners have failed to

substantiate their auto expenses beyond what respondent has

already allowed.   Therefore, respondent’s determination to

disallow $1,858 of petitioners’ claimed deduction for auto

expenses is sustained.

                              Conclusion

     Petitioners have failed to substantiate their reported

downpayment loss or any deductions for expenses claimed on

Schedule C beyond what respondent has already allowed.

     We have considered petitioners’ arguments, and, to the

extent not mentioned, we conclude the arguments to be moot,

irrelevant, or without merit.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent.




     7
      Petitioner testified that he had clients “in northern
California as well as * * * southern California” and that he had
to meet with them. Petitioner’s testimony about the business
purpose for each of his trips did not clarify that each trip was
for business.
