                        T.C. Memo. 2008-40



                       UNITED STATES TAX COURT



         DONALD P. AND MARGIE C. OSBORNE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4838-05.                Filed February 26, 2008.



     Donald P. and Margie C. Osborne, pro sese.

     Joan E. Steele, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    After concessions, the issues for decision

are whether:   (1) Petitioners are entitled to depreciation,

insurance, interest, supplies, tax and licenses, travel, and

other expense deductions relating to 2001 and 2002; (2)

petitioners properly calculated cost of goods sold relating to
                                - 2 -

2001 and 2002; (3) petitioners failed to report gross income

relating to 2001 and 2002; and (4) petitioners are liable for

section 6662(a)1 accuracy-related penalties.

                          FINDINGS OF FACT

     Petitioner Donald Osborne (Mr. Osborne) was a self-employed

truck driver.    In addition, he maintained a business, Don Osborne

Enterprises, which rented trailers and bought and sold over-the-

road trucks and trailers.   On his Schedules C, Profit or Loss

from Business, relating to 2001 and 2002, Mr. Osborne combined

income and expenses relating to these activities and claimed

expense deductions for depreciation, insurance, interest,

supplies, tax and licenses, travel, and other expenses.

     In 2004, petitioners’ 2001 and 2002 returns were selected

for audit, and respondent’s Revenue Agent Mary Miller began an

examination of the items on the returns.     To substantiate their

expense deductions, petitioners submitted canceled checks, credit

card statements, insurance records, and other documentation.

Petitioners were given credit for the expenses that were properly

substantiated.   Using canceled checks and vehicle title

information for Mr. Osborne’s business, Ms. Miller made

adjustments to the inventory, cost of goods sold, and depreciable


     1
         Unless otherwise indicated, all section references are
to the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                              - 3 -

assets relating to 2001 and 2002.    In addition, Ms. Miller used a

bank deposits analysis to determine petitioners’ unreported

income.

     On December 6, 2004, respondent issued petitioners a notice

of deficiency relating to 2001 and 2002.    In the notice of

deficiency, respondent determined that petitioners were not

entitled to portions of the deductions claimed on their returns,

had failed to report gross receipts income, had improperly

calculated cost of goods sold, and were liable for section

6662(a) accuracy-related penalties.

     On March 11, 2005, petitioners, while residing in Colorado,

filed their petition with the Court.

                             OPINION

     Petitioners contend that they are entitled to the Schedule C

deductions relating to 2001 and 2002 for Don Osborne Enterprises.

Section 162(a) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    Petitioners must maintain

sufficient records to substantiate the deductions.    See sec.

6001; sec. 1.6001-1(a), Income Tax Regs.

     At trial, petitioners produced canceled checks, credit card

statements, insurance records, and other documentary evidence

that respondent had previously taken into account in the
                                - 4 -

determinations.2   There is no credible evidence to substantiate

deductions (i.e., those relating to depreciation, insurance,

interest, supplies, tax and licenses, travel, and other expenses)

beyond those that respondent allowed in the notice of deficiency.

In addition, we sustain respondent’s determinations relating to

cost of goods sold.   During the trial, pursuant to a stipulated

agreement, the parties reduced the amount of unreported gross

income in dispute.

     To determine petitioners’ unreported income, respondent

conducted a bank deposits analysis.     Bank deposits are prima

facie evidence of income, Tokarski v. Commissioner, 87 T.C. 74,

77 (1986), and under the bank deposits method, all money

deposited into a taxpayer’s bank account during a given period is

assumed to be taxable income, DiLeo v. Commissioner, 96 T.C. 858,

868 (1991), affd. 959 F.2d 16 (2d Cir. 1992).     Respondent’s

determinations are presumed to be correct, and petitioners bear

the burden of proving that respondent’s bank deposits analysis is

erroneous.    See Rule 142(a); Parks v. Commissioner, 94 T.C. 654,

658 (1990).   Petitioners did not submit sufficient evidence to


     2
        Pursuant to sec. 7491(a), petitioners have the burden of
proof unless they introduce credible evidence relating to the
issue that would shift the burden to respondent. See Rule
142(a). Our conclusions, however, are based on a preponderance
of the evidence, and thus the allocation of the burden of proof
is immaterial. See Martin Ice Cream Co. v. Commissioner, 110
T.C. 189, 210 n.16 (1998).
                                 - 5 -

rebut respondent’s determinations, and the determinations are, as

adjusted by the parties’ stipulation, therefore, sustained.

     With respect to 2001 and 2002, respondent determined that

petitioners were liable for accuracy-related penalties pursuant

to section 6662(a).   The penalty applies to any portion of

petitioners’ underpayment that is attributable to negligence or

disregard of rules or regulations.       See sec. 6662(b)(1).

Respondent bears and has met the burden of production relating to

the section 6662(a) accuracy-related penalties and has

established that petitioners were negligent in the filing of

their 2001 and 2002 returns.   See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).       Petitioners failed to

report income, maintain adequate business records, or exercise

due care in reporting their income and expenses.       Accordingly, we

sustain respondent’s determinations.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
