                        T.C. Memo. 1997-418



                      UNITED STATES TAX COURT



              EDGAR AND DORIS BROWN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25831-95.               Filed September 22, 1997.




     Edgar Brown and Doris Brown, pro sese.

     Charles Pillitteri, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     WELLS, Judge:   Respondent determined a deficiency of $41,875

in petitioners' 1991 Federal income tax and an accuracy-related

penalty pursuant to section 6662 in the amount of $8,375.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and
                               - 2 -

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions,1 the issues to be decided involve the

substantiation of certain Schedule C business expense deductions

and Schedule A itemized deductions claimed by petitioners on

their 1991 joint Federal income tax return.2

                         FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.

     At the time they filed their petition in the instant case,

petitioners Edgar Brown (Mr. Brown) and Doris Brown (Mrs. Brown)

resided in Lucedale, Mississippi.   Petitioners filed a joint U.S.

Individual Income Tax Return (Form 1040) for the year in issue.




1
     In the notice of deficiency, respondent determined that
petitioners had unreported income from Hercules, Inc., in the
amount of $21,429. Subsequently, the parties conceded that
petitioners have unreported income in the amount of $18,229.
     Additionally, in the notice of deficiency, respondent
disallowed certain Schedule C business expenses of petitioners.
Subsequently, respondent conceded that petitioners are entitled
to business expense deductions in the amount of $10,949 for
insurance and in the amount of $543 for taxes.
2
     On their 1991 return, petitioners claimed exemptions in the
amount of $10,750 and reported self-employment taxes in the
amount of $5,494. On the basis of adjustments in the notice of
deficiency, respondent reduced petitioners' exemption deduction
by $2,580 and increased petitioners' self-employment taxes by
$4,753. We sustain those computational adjustments to the extent
that they result from the Rule 155 computations that we order
below.
                                - 3 -

     During the year in issue, Mr. Brown operated a tree stumping

business, in which he removed tree stumps from the ground in

Mississippi and transported them to Brunswick, Georgia, to be

processed by Hercules, Inc. (Hercules), which paid him for the

stump wood that he delivered.   In his business, Mr. Brown used at

least three Caterpillar tractors, two loaders, two trucks with

trailers, and two pickup trucks.   Mrs. Brown maintained

petitioners' books and records, including those pertaining to Mr.

Brown's tree stumping business, and stored the records in

petitioners' house.

     Mr. Brown maintained a shop in Fruitdale, Alabama, where he

repaired his tree stumping equipment.   For more difficult repair

jobs, Mr. Brown sent his equipment to a garage in Richland.

     Mr. Brown also served as pastor to a small church in

Mississippi.   In his ministry, Mr. Brown, inter alia,

evangelized, visited people in hospitals, and attended wakes.

     During September 1994, Willie Sue Daniels, a tax auditor

with respondent, met with Mrs. Brown to examine petitioners' 1991

return.   At the meeting, Mrs. Brown produced substantiation for

certain deductions that petitioners had claimed on their return.

In order to complete the audit, Ms. Daniels scheduled a second

meeting, which Mrs. Brown missed because she was out of town

attending a funeral.   On or around September 28, 1994, respondent

issued petitioners an initial report stating that their 1991
                               - 4 -

examination was closed and that they owed approximately $99,783

in taxes, penalties, and interest.

     On January 10, 1995, petitioners' house was gutted by fire,

which destroyed all of petitioners' books and records.   After the

fire, respondent scheduled several meetings with petitioners to

review the status of their case.   Petitioners produced some

additional substantiation of their deductions.

     Subsequently, respondent issued a notice of deficiency in

which respondent determined, inter alia, that petitioners were

not entitled to certain Schedule C or Schedule A deductions

beyond the amounts for which they provided substantiation during

the course of their examination.   Accordingly, respondent

increased petitioners' income by the amount of the disallowed

deductions.   Additionally, respondent disallowed certain

deductions as automatic adjustments resulting from the increase

in petitioners' income.

                              OPINION

     The issue to be decided in the instant case is whether

petitioners have substantiated certain Schedule C business

expense deductions and Schedule A itemized deductions that they

claimed on their 1991 joint Federal income tax return.

Deductions are a matter of legislative grace, and petitioners

bear the burden of proving that they are entitled to the

deductions claimed.   Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
                               - 5 -

U.S. 435 (1934).   Taxpayers are required to maintain records that

are sufficient to enable the Commissioner to determine their

correct tax liability.   See sec. 6001; Meneguzzo v. Commissioner,

43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.

Moreover, a taxpayer who claims a deduction bears the burden of

substantiating the amount and purpose of the item claimed.

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

540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.

     Under certain circumstances, however, if a taxpayer

establishes the entitlement to a deduction but does not establish

the amount of the deduction, we may estimate the amount

allowable, Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930), if the taxpayer provides some rational basis upon which an

estimate may be made, Vanicek v. Commissioner, 85 T.C. 731, 743

(1985).   In estimating the amount allowable, we bear heavily upon

the taxpayers, whose inexactitude is of their own making.    Cohan

v. Commissioner, supra at 543-544.

     Respondent contends that petitioners are not entitled to any

deductions beyond the amounts allowed in the notice of deficiency

and in the stipulations.   Petitioners, however, contend that they

are entitled to all of the deductions that they claimed on their

return.   As all of their records were destroyed by fire,

petitioners seek to establish their entitlement to the disallowed

deductions through their testimony only.
                               - 6 -

     We first examine the disallowed Schedule C deductions in

issue.   On their 1991 return, petitioners claimed Schedule C

expenses related to Mr. Brown's tree stumping business in the

amount of $194,059.   After concessions,3 respondent disallowed

$84,021 of those business expenses on the grounds that

petitioners failed to substantiate that the amounts were paid and

were for business purposes.   At trial, petitioners testified that

they incurred certain expenses, as discussed infra.     We are

satisfied by the testimony of petitioners that, in carrying out

his tree stumping business, Mr. Brown incurred expenses beyond

those allowed by respondent in the notice of deficiency.    Because

petitioners have not established the precise amount of the

deductions, however, we shall make a reasonable approximation of

the amounts allowable, "bearing heavily" upon petitioners as

permitted by Cohan v. Commissioner, supra at 543.

     Petitioners claimed interest expenses in the amount of

$9,390, which respondent allowed to the extent of $1,392.

Accordingly, the amount remaining in issue is $7,998.    At trial,

petitioners provided neither documentary evidence nor testimony

to substantiate the additional $7,998 in interest expenses that

they claimed.   Moreover, they failed to offer any reconstruction

of the amounts through third party records.   Consequently, as

there is no rational basis to approximate those expenses, we


3
     See supra note 1.
                               - 7 -

conclude that petitioners have not met their burden of

substantiating the deduction for an additional $7,998 in interest

expenses.   Rule 142(a).

     Petitioners claimed car and truck expenses in the amount of

$56,542, which respondent allowed to the extent of $49,989,

insurance expenses on vehicles in the amount of $18,410, which

respondent allowed to the extent of $16,873, and tax and license

expenses in the amount of $4,605, which respondent allowed to the

extent of $543.   At trial, however, petitioners failed to offer

adequate evidence to meet the strict substantiation requirements

of section 274(d)(4) or otherwise show that the requirements of

section 274(d)(4) do not apply to such expenses.   Accordingly, we

conclude that petitioners have failed to establish allowable car

and truck expenses, insurance expenses, and tax and license

expenses beyond those allowed by respondent.

     Petitioners claimed office expenses in the amount of $706,

which respondent disallowed in full.   Mrs. Brown testified that

she ran the office for Mr. Brown's tree stumping business and

that she spent $706 for stamps, envelopes, tape, staples, paper,

pens, and folders.   We are satisfied by the record in the instant

case that petitioners incurred $706 in office expenses.

     Petitioners claimed repair expenses in the amount of

$56,665, which respondent disallowed in full.4   Mrs. Brown

4
     The parties' stipulations categorized petitioners' tire
                                                   (continued...)
                               - 8 -

testified that Mr. Brown purchased truck parts, tractor parts,

track, welding materials, acetylene, oxygen, welding rods,

wrenches, rollers, engines, hydraulic systems, and a set of

rails.   Mr. Brown testified that a set of rails (treads for the

tractor) costs approximately $5,000-7,000 but failed to provide

the cost of any of the other parts that he purchased.   Mr. Brown

testified that he did some repair work on his own in the

Fruitdale shop.   Additionally, he testified that he took more

difficult repair jobs to a garage in Richland.   On the basis of

the record in the instant case, we approximate petitioners'

repair expense to be $40,000 during 1991.

     Petitioners claimed travel expenses in the amount of $3,417,

which respondent disallowed in full.   Mrs. Brown testified that

Mr. Brown incurred travel expenses when he performed work out of

town and when he traveled to Florida to purchase parts.

Petitioners, however, did not produce adequate records or

sufficient evidence substantiating their travel expenses as

required by section 274(d).   Accordingly, we sustain respondent's

disallowance in full of petitioners' claimed travel expenses.




4
 (...continued)
expense as a car and truck expense. At trial, however,
petitioners argued that their repair expenses consisted of
$41,058 for parts and $15,067 for tires. As we have addressed
petitioners' tire expense in the car and truck category, the
amount in issue in the repair expense category is limited to
$41,058 for parts.
                               - 9 -

     Petitioners claimed utilities expenses in the amount of

$2,937, which respondent disallowed in full.   Mrs. Brown

testified that Mr. Brown used the telephone in petitioners' home

to arrange work projects and to receive calls regarding potential

jobs.   Additionally, Mrs. Brown testified that petitioners paid

for water, telephone, and electricity at the Fruitdale shop.    On

the basis of the record in the instant case, we are persuaded

that petitioners incurred allowable business expenses (i.e.,

expenses other than the personal expense of the first telephone

line provided to petitioners' residence, see sec. 262(b)) to some

extent for such items.   Accordingly, we approximate petitioners'

utility expenses to be $1,500 during 1991.

     Petitioners claimed bank charge expenses in the amount of

$146, which respondent disallowed in full.   At trial, petitioners

provided no evidence or testimony to substantiate the amount or

the purpose of the bank charge expense deduction that they

claimed.   Consequently, as there is no rational basis to

approximate such expenses, we conclude that petitioners have not

met their burden of substantiating them.   Rule 142(a).   In sum,

as to petitioners' Schedule C business expenses, we conclude that

petitioners have substantiated expenses in the amount of

$158,038.52.

     We turn to examine the Schedule A deductions in issue.    On

their 1991 return, petitioners claimed Schedule A itemized

deductions in the amount of $29,305.   In the notice of
                              - 10 -

deficiency, respondent listed three adjustments to petitioners'

itemized deductions, disallowing $13,847 of those deductions.    As

to petitioners' deduction for charitable contributions in the

amount of $18,496, respondent concluded that petitioners had not

established that they donated any amount greater than $16,536 to

qualifying organizations during the tax year and, therefore,

reduced petitioners' deduction by $1,960.   At trial, petitioners

provided no evidence or testimony substantiating the additional

$1,960 in charitable contributions.    Consequently, as there is no

rational basis to approximate those contributions, we conclude

that petitioners have not met their burden of substantiating

them.

     As to petitioners' line 21 deduction for "Job Expenses and

Most Other Miscellaneous Deductions" in the amount of $10,810,

respondent conceded that petitioners were entitled to deduct $161

for other miscellaneous itemized deductions (line 20 deduction).

Respondent, however, concluded that petitioners had not

established that they paid any amount greater than $560 for the

unreimbursed employee expenses related to Mr. Brown's job as a

minister (line 19 deduction) and, accordingly, disallowed $10,089

of those expenses.   On the basis of the increase in petitioners'

gross income resulting from all of the adjustments in the notice

of deficiency, however, respondent determined that the allowable

miscellaneous expenses in the amount of $721 were less than 2
                              - 11 -

percent of petitioners' adjusted gross income, and, therefore,

that petitioners' miscellaneous itemized deduction was zero.

     At trial, Mrs. Brown testified that Mr. Brown paid all

expenses related to his job as pastor for a small church.     Mrs.

Brown testified that Mr. Brown paid for all expenses during his

visits and trips to hospitals and wakes, including mileage,

travel, and entertainment.   Additionally, Mrs. Brown testified

that, in his ministry, Mr. Brown purchased books, flowers, and

gifts and incurred office expenses.    We are satisfied by the

testimony of Mrs. Brown in the instant case that petitioners

incurred some amount of expenses in carrying out Mr. Brown's

ministry.   Accordingly, we approximate that petitioners incurred

allowable expenses (i.e., expenses other than travel expenses,

which are disallowed pursuant to section 274(d) on the grounds of

lack of adequate records or sufficient evidence) in the amount of

$6,000 pursuant to Mr. Brown's ministry.   Accordingly, we hold

that petitioners are entitled to deduct $6,721 in "Job Expenses

and Most Other Miscellaneous Deductions" (line 21 deduction),

subject to the 2-percent limitation based on petitioners'

adjusted gross income resulting from the Rule 155 computations

that we order below.

     Finally, on the basis of the increase in petitioners' gross

income resulting from all of the adjustments in the notice of

deficiency, respondent determined that petitioners' adjusted

gross income exceeded $100,000 and, therefore, reduced
                                - 12 -

petitioners' itemized deductions by $2,357.     We sustain

respondent's determination to the extent that it applies to the

Rule 155 computations that we order below.

     The final issue to be decided is whether petitioners are

liable for a penalty pursuant to section 6662.     Section 6662(a)

imposes a 20-percent penalty on the portion of an underpayment of

tax that is attributable to, inter alia, (1) negligence or

disregard of rules or regulations or (2) any substantial

understatement of income tax.    The term "negligence" includes any

failure to make a reasonable attempt to comply with the

provisions of the Code, including failure to exercise due care,

failure to do what a reasonable person would do under the

circumstances, or failure to keep adequate books and records or

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

Regs.   The term "disregard" includes any careless, reckless, or

intentional disregard of the Code or of the temporary and final

regulations issued pursuant to the Code.   Sec. 6662(c); sec.

1.6662-3(b)(2), Income Tax Regs.    A substantial understatement of

tax is defined as the amount which exceeds the greater of 10

percent of the tax required to be shown on the return for the

taxable year or $5,000.   Sec. 6662(d)(1)(A).

     The accuracy-related penalty does not apply to any portion

of an underpayment with respect to which it is shown that there

was a reasonable cause and that the taxpayer acted in good faith.

Sec. 6664(c)(1).   The decision as to whether the taxpayer acted
                               - 13 -

with reasonable cause and in good faith depends upon all

pertinent facts and circumstances.      Sec. 1.6664-4(b)(1), Income

Tax Regs.   The most important factor is the extent of the

taxpayer's efforts to assess the proper tax liability.      Id.

Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge, and education

of the taxpayer.   Id.   Petitioners must establish error in

respondent's determination that they are liable for the penalty

provided by section 6662(a).   Rule 142(a); Estate of Monroe v.

Commissioner, 104 T.C. 352, 366 (1995).

     On the basis of the record in the instant case, we conclude

that petitioners had reasonable cause and acted in good faith.

We are satisfied by the record in the instant case that

petitioners had substantiation for most if not all of their

deductions they filed their return.     Mr. Brown testified that he

gave all receipts relating to his tree stumping business to Mrs.

Brown, who stored the books and records of the business in their

home.   Additionally, petitioners testified that, at Mrs. Brown's

first meeting with Ms. Daniels, petitioners had substantiation

for all of the deductions that they claimed on their return.      We

note that petitioners' testimony was uncontroverted by

respondent.   At trial, respondent asked Ms. Daniels whether,

during the first meeting with Mrs. Brown, she looked at all of

the documents that Mrs. Brown presented at that time.     Ms.
                              - 14 -

Daniels testified that, if she had not had the time to view all

of petitioners' documents at the first meeting, she "would have

asked for them on the document request to be presented at the

second appointment."   When asked if she submitted a document

request after the first meeting, Ms. Daniels said, "Yes."

     In the instant case, except as to the unreported income

conceded by petitioners, see supra note 1, petitioners'

underpayment resulted from their failure to substantiate at trial

the deductions that they claimed on their return.    Petitioners'

inability to produce any documentation at trial resulted from the

loss of their records in the house fire.    We are satisfied,

however, that petitioners possessed substantiation for most if

not all of their deductions when they filed their return.

Consequently, we conclude that petitioners had reasonable cause

and acted in good faith as to the underpayment resulting from the

deductions in issue.   Accordingly, we hold that petitioners are

not liable for the penalty pursuant to section 6662(a) on the

understatement resulting from the disputed deductions and that

petitioners are liable for the penalty on the underpayment

resulting from the unreported income conceded by petitioner.



     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.
