                         T.C. Memo. 2011-300



                        UNITED STATES TAX COURT



                    ALPHA DIALLO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21796-09.               Filed December 29, 2011.



     Alpha Diallo, pro se.

     R. Jeffrey Knight, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    Respondent determined deficiencies in

petitioner’s 2005, 2006, and 2007 Federal income taxes of

$16,069, $16,602, and $7,247, respectively.       Respondent further

determined penalties pursuant to section 6662(a) of $3,214,
                                - 2 -

$3,320, and $1,449 for tax years 2005, 2006, and 2007,

respectively.1

     The issues for decision are:    (1) Whether petitioner

underreported gross receipts from his limousine driving business

as respondent has determined; (2) whether respondent properly

disallowed certain deductions with respect to this business; (3)

whether petitioner is entitled to dependency exemption deductions

for one dependent in tax years 2005 and 2006 and two dependents

in tax year 2007; (4) whether petitioner is entitled to head of

household filing status; and (5) whether petitioner is liable for

accuracy-related penalties pursuant to section 6662(a).

                           FINDINGS OF FACT

     The parties have stipulated some facts, which we incorporate

by this reference.    When he petitioned the Court, petitioner

resided in Maryland.

     During the years at issue petitioner was self-employed as a

limousine driver.     He owned no vehicle other than the one he used

in his business.     Sometimes he used this vehicle for personal

purposes.

     During the years at issue petitioner’s sister-in-law and his

niece, R.D., who was born in 2004, resided with him at his



     1
      All section references are to the Internal Revenue Code for
the years at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure. All dollar amounts have been
rounded to the nearest dollar.
                                - 3 -

residence.2   In 2006 another niece, S.D., was born, and she also

resided with petitioner at his residence.    Petitioner’s brother,

who is the father of R.D. and S.D., lived in Africa.    To assist

with the care of his children, petitioner’s brother provided

petitioner financial support and helped buy petitioner’s house.

     On his Federal income tax returns for 2005, 2006, and 2007,

petitioner claimed head of household filing status.    For 2005 and

2006, he claimed R.D. as his dependent.    For 2007 he claimed both

R.D. and S.D. as dependents.    On Schedules C, Profit or Loss From

Business, petitioner reported gross receipts from his limousine

driving business of $18,027, $21,271, and $35,611 for 2005, 2006,

and 2007, respectively.    He claimed total Schedule C business

expenses of $9,975, $12,481, and $22,944 for 2005, 2006, and

2007, respectively.

     In the notice of deficiency respondent determined that

petitioner’s proper filing status was single and that he was

entitled to no dependency exemption deductions.    Using the bank

deposits method, respondent determined that petitioner had

underreported his Schedule C gross receipts by $41,333 for 2005

and by $39,981 for 2006.    Respondent also disallowed, for lack of

substantiation, some of petitioner’s Schedule C expenses; the




     2
      The Court refers to minors by their initials.    See Rule
27(a)(3).
                                  - 4 -

disallowed deductions totaled $4,269, $6,491, and $16,655 for

2005, 2006, and 2007, respectively.

                                 OPINION

I.   Schedule C Gross Receipts

      If a taxpayer fails to keep adequate records, the

Commissioner may reconstruct the taxpayer’s income by any

reasonable method that clearly reflects income.     Sec. 446(b); see

Holland v. United States, 348 U.S. 121, 130-132 (1954).

One acceptable method is the bank deposits method.     Clayton v.

Commissioner, 102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96

T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Bevan v.

Commissioner, T.C. Memo. 1971-312, affd. 472 F.2d 1381 (6th Cir.

1973).   This method assumes that if a taxpayer is engaged in an

income-producing activity and makes deposits to bank accounts,

then those deposits, less amounts identified as nonincome items,

constitute taxable income.   See Clayton v. Commissioner, supra at

645-646.

      Respondent reconstructed petitioner’s gross income for 2005

and 2006 using the bank deposits method.     Respondent’s analysis

showed aggregate deposits into petitioner’s accounts of $59,360

for 2005 and $61,252 for 2006, all of which respondent has

included in petitioner’s gross income.     Petitioner bears the

burden of showing that these determinations are incorrect.     Rule
                              - 5 -

142(a); see DiLeo v. Commissioner, supra at 871; Bevan v.

Commissioner, supra.3

     Petitioner does not dispute making these deposits.    He

contends, however, that they include certain nontaxable amounts;

namely a $25,000 cash hoard that he allegedly brought with him

when he moved to the United States in 1994, as well as other

indeterminate sums that he claims to have accumulated from his

employment as a limousine driver from 1994 until 2004.

Petitioner alleges that before 2005 he kept all these moneys in

his house instead of a bank because he feared that if the bank

went broke he would lose everything.   But he also testified that

in 1999 he learned of Federal deposit insurance, which guarantees

the security of deposits in member banks.   In the light of this

testimony, it is difficult to understand why he would have made

these deposits in 2005 and 2006, and not before.

     Moreover, petitioner’s self-created profit and loss

statements, which are in evidence, strongly discredit his

testimony and in fact tend to support respondent’s determinations

as to his gross receipts for 2005 and 2006.4   Taking into account




     3
      Petitioner does not contend and the record does not suggest
that the burden of proof should shift to respondent pursuant to
sec. 7491(a).
     4
      Petitioner’s self-created profit and loss statements show
gross receipts of $55,746 for 2005 and $56,338 for 2006.
                                 - 6 -

a number of inconsistencies in petitioner’s testimony, we do not

find it credible or plausible.

      Petitioner has failed to establish that any of the

unexplained amounts deposited in his accounts represent

nontaxable items.   Accordingly, we sustain respondent’s

determinations as to this issue.

II.   Schedule C Deductions

      Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

a trade or business.   Taxpayers must maintain records sufficient

to establish the amount of their income and deductions.    Sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.    In general, no

deduction is permitted for personal, family, or living expenses.

Sec. 262.   If a taxpayer establishes a deductible expense but is

unable to substantiate the precise amount, the Court may

approximate the deductible amount, but only if the taxpayer

presents sufficient evidence to establish a rational basis for

making the estimate.   Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930).

      The record provides no credible evidentiary basis to support

petitioner’s claimed deductions beyond the amounts that

respondent has allowed.   Although petitioner introduced into

evidence copies of numerous receipts, they cannot be readily

correlated with the deductions he has claimed.    The receipts
                                   - 7 -

include expenditures for many personal items, such as games,

bedding, and food.       Similarly, although petitioner presented

evidence of about $1,500 in fuel expenditures, they appear to

cover both personal and business use of his automobile.5

Petitioner has failed to prove that he is entitled to Schedule C

deductions greater than those respondent has permitted.

       We sustain respondent’s determinations with respect to

petitioner’s Schedule C deductions.

III.       Dependency Exemption Deduction

       A taxpayer may claim a dependency exemption deduction with

respect to an individual who is either a “qualifying child” or a


       5
      Petitioner’s testimony in this regard, as in other regards,
was inconsistent and unreliable. He first testified that he
could not recall how many miles he drove for personal purposes.
Then he testified that he did not use the automobile for personal
purposes except to “stop for groceries”. Petitioner stated that
when he needed a car for personal reasons, he would rent a car.
This testimony is rendered less credible by petitioner’s
subsequent admission that he drove his automobile to the trial.
Ultimately, petitioner testified that he used his automobile 90
to 95 percent for business purposes but acknowledged he had no
documentation to support this allocation.

     In the event, as seems likely, that “substantially all” of
petitioner’s use of the limousine was not “in a trade or business
of providing to unrelated persons services consisting of the
transportation of persons or property for compensation or hire”,
see sec. 280F(d)(4)(C), petitioner would be subject to the strict
substantiation requirements of sec. 274(d). Petitioner, however,
has failed to show he meets the substantiation requirements of
sec. 1.6001-1(a) and (e), Income Tax Regs., or to provide any
basis for us to approximate a deduction under Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Perforce he
does not satisfy the stricter substantiation requirements of sec.
274(d).
                                 - 8 -

“qualifying relative”.   Secs. 151(c), 152(a).   To be a taxpayer’s

“qualifying child”, an individual must:    (1) Bear a qualifying

relationship to the taxpayer; (2) have the same principal place

of abode as the taxpayer for more than one-half of the taxable

year; (3) meet certain age requirements; and (4) have not

provided over one-half of his or her own support for the year.

Sec. 152(c)(1).

      There is no dispute that petitioner’s nieces, born in 2004

and 2006, each satisfy the relationship requirement and the age

requirement to be a “qualifying child”.    See sec.

152(c)(2)(B), (3)(A)(i).   We are satisfied that the nieces meet

the principal place of abode requirement because R.D. resided

with petitioner at his residence during 2005, 2006, and 2007, and

S.D. resided with petitioner at his residence following her birth

in 2006.   It appears self-evident that R.D. and S.D., one a

toddler and the other an infant, did not provide more than one-

half of their own support during any year at issue.

Consequently, petitioner is entitled to dependency exemption

deductions for his two nieces.

IV.   Head of Household Filing Status

      Section 1(b) grants a special tax rate for any individual

who qualifies as a head of household.    With exceptions not

relevant here, the statute generally defines a head of household

as an unmarried individual who maintains as his or her home a
                                   - 9 -

household which constitutes for more than one-half of the taxable

year the principal place of abode of either a qualifying child

(as defined in section 152(c)) or a dependent of the taxpayer

with respect to whom the taxpayer is allowed a deduction under

section 151.    Sec. 2(b)(1)(A).    For this purpose, an individual

is considered to maintain a household only if he or she furnishes

over one-half of the cost of maintaining the household during the

taxable year.    Sec. 2(b)(1).

     In order for the Court to determine whether the taxpayer

provided over one-half of the cost of maintaining the household,

the taxpayer must prove the total cost of maintaining the

household.   See Rosen v. Commissioner, T.C. Memo. 1994-40.

Costs of maintaining a household include “property taxes,

mortgage interest, rent, utility charges, upkeep and repairs,

property insurance, and food consumed on the premises.”       Sec.

1.2-2(d), Income Tax Regs.

     The record is inconclusive as to whether petitioner was

unmarried during the years at issue.       But even if he were

unmarried, he is not entitled to head of household status because

he has not established that he provided over one-half of the cost

of maintaining the household.      Petitioner provided inadequate

records to establish the total cost of maintaining the household

or his own contribution to the total cost.       In a document in

evidence dated May 14, 2008, and captioned “Attestation”,
                                - 10 -

petitioner’s brother attested that he worked for an international

bank in the Republic of Guinea, that he provided financial help

to petitioner whenever it was necessary, that he assisted him in

paying bills and in buying his house, and that his wife and

children stayed with petitioner at the brother’s own expense.

The record is otherwise silent as to the amount of the brother’s

contributions.   Petitioner has failed to show that he provided

over one-half of the cost of maintaining the household.    We

sustain respondent’s determination as to this issue.

V.   Section 6662(a) Penalty

      Respondent determined that for each year at issue petitioner

is liable for an accuracy-related penalty pursuant to section

6662(a) and (b)(1) and (2) for negligence or substantial

understatement of income tax.    Respondent bears the burden of

production with respect to this penalty.    See sec. 7491(c).   To

meet this burden, respondent must produce evidence establishing

that it is appropriate to impose this penalty.    Once respondent

has done so, the burden of proof is on petitioner to show that

the penalty does not apply.    See Higbee v. Commissioner, 116 T.C.

438, 449 (2001).

      Negligence includes any failure to make a reasonable attempt

to comply with the provisions of the internal revenue laws and is

the failure to exercise due care or the failure to do what a

reasonable and prudent person would do under the circumstances.
                               - 11 -

Sec. 6662(c); Neely v. Commissioner, 85 T.C. 934, 947 (1985);

sec. 1.6662-3(b)(1), Income Tax Regs.    Negligence also includes

any failure by the taxpayer to keep adequate books and records or

substantiate items properly.    Sec. 1.6662-3(b)(1), Income Tax

Regs.   Petitioner exhibited a lack of due care in failing to

report gross receipts, to keep adequate books and records, and to

properly substantiate claimed deductions.    Respondent has carried

his burden of production with respect to the section 6662(a)

penalties for negligence.

     Section 6662(a) and (b)(2) imposes a 20-percent

accuracy-related penalty on any portion of a tax underpayment

that is attributable to any substantial understatement of income

tax, defined in section 6662(d)(1)(A) as an understatement that

exceeds the greater of 10 percent of the tax required to be shown

on the return or $5,000.    The exact amounts of petitioner’s

underpayments will depend upon the Rule 155 computations, in

accordance with our findings and conclusions.    To the extent that

those computations establish, as seems likely, that petitioner

has substantial understatements of income tax, respondent has

also met his burden of production in this regard.    See Prince v.

Commissioner, T.C. Memo. 2003-247.

     The accuracy-related penalty does not apply with respect to

any portion of the underpayment for which it is shown that the

taxpayer had reasonable cause and acted in good faith.    Sec.
                              - 12 -

6664(c)(1).   Petitioner has made no attempt to explain his

failure to report gross receipts, to keep adequate books and

records, and to substantiate items properly.   We hold that for

each year at issue petitioner is liable for a section 6662(a)

penalty for negligence and, alternatively, for substantial

understatements of income tax insofar as the Rule 155

computations show substantial understatements.

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
