                            T.C. Memo. 1999-96



                          UNITED STATES TAX COURT



            SONY AND GWENDOLYN A. JEAN BAPTISTE, Petitioners v.
                COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 1017-97.                Filed March 29, 1999.


        Sony Jean Baptiste, pro se.

        Michelle Or, for respondent.


                            MEMORANDUM OPINION


        NAMEROFF, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1       Respondent determined a deficiency in petitioners’ 1994

Federal income tax in the amount of $5,183 and an accuracy-

related penalty under section 6662(a) in the amount of $1,037.


        1
        Unless otherwise specified, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

     The issues for decision are:2      (1) Whether petitioners

received nonemployee compensation in the amount of $14,288; (2)

whether petitioners are entitled to deduct Schedule C expenses in

the amount of $6,811; and (3) whether petitioners are liable for

the accuracy-related penalty under section 6662(a).

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.      At the time the petition

was filed, petitioners resided in Pasadena, California.

Background

     Sony Jean Baptiste (petitioner) earned his living as a truck

driver in 1994.    From January 1, 1994 to May 2, 1994, petitioner

worked for Ortega Trucking (Ortega), the owner of which is

Charles Ortega (Mr. Ortega).    Petitioner would drive one of

Ortega’s trucks to Pacific Railroad where he would pick up a

shipment.    Petitioner would then transport this shipment to

various warehouses for unloading.

     Some of the warehouses to which petitioner delivered had

their own employees help unload the trucks.      Other warehouses did

not, and petitioner would hire “lumpers” to help unload.      The

lumpers would wait in the vicinity of the warehouse for the

trucks to come in.    According to petitioner, he would negotiate a

price with the lumpers and would pay them about $60 or $65 and

sometimes $80.    If petitioner needed help unloading a double


     2
        Petitioners conceded that they received a tax refund of
$2,535 for the 1994 taxable year.
                                - 3 -

trailer, he would pay around $125.      Since petitioner was paid per

load, he hired the lumpers so he could unload quickly and then

call dispatch at Ortega to see if there were more loads to be

picked up.    Petitioner paid for the fuel for the truck, for which

he was not reimbursed.

     When hired by Ortega, petitioner was told that a portion of

petitioner’s earnings would be placed in an escrow account, and

after 2 years of employment that account would be paid to

petitioner.   Mr. Ortega also allegedly told petitioner that

income taxes would be withheld from his earnings.

     Petitioner was paid weekly, and with every paycheck

petitioner would receive a computer printout detailing the number

of “dispatches” he had, the total dispatch earnings (earnings of

both the truck and the driver), and the driver earnings.      The

printout also detailed the escrow amounts that were being

withheld from petitioner’s earnings along with other deductions

such as amounts for “company advances”.     The latter were

repayments of amounts that were lent to petitioner to cover his

lumper costs.   Escrow amounts and repayments were deducted from

the driver’s gross to determine take home pay.     If petitioner did

not have enough earnings to cover the advances, they would be

carried over to the next pay period.

     For example, for the week ending March 5, 1994, the total

dispatch earnings were $1,835, and the gross driver earnings were

$1,152.   From the driver gross of $1,152, $120 is deducted for

advances (which consists of two $60 advances), and $200 is
                                - 4 -

deducted for escrow, resulting in a net of $832 that was paid to

petitioner.   No taxes were withheld.   Petitioner provided Ortega

computer printouts for 10 weeks, and, according to the last

printout, for the week ending April 30, 1994, there was a balance

of $856 in escrow.   Most of the advance amounts were for $60 or

$80, with four for amounts of $500, $350, $250 and $120.

     Also detailed on the computer printouts are “contributions”

to a vehicle acquisition fund (VAF).    Contributions to this fund

are made weekly, but it does not appear that these contributions

came from petitioner’s gross wages.

     Petitioner was frustrated that he was not earning as much as

he had hoped working for Ortega, and he quit on May 2, 1994.

According to the last printout for the week ending April 30,

1994, petitioner had gross earnings “to date” of $8,981.

Petitioner argued with Mr. Ortega about money that was owed to

him,3 and Mr. Ortega agreed to pay him this money.   Accordingly,

subsequent to May 2, 1994, Ortega paid petitioner $1,319.

     Petitioner received a Form 1099-MISC from Ortega which

reflected that he earned $14,288.   Petitioners did not report

this income on their 1994 income tax return.   Petitioners did not

report this amount because they did not believe this to be the

correct amount they received.   In 1997, petitioners filed an


     3
        Petitioner testified that there were weeks when he was
not paid. Petitioner did not provide printouts for 7 consecutive
weeks from Mar. 12, to Apr. 23, 1994. According to the “year-to-
date earnings” reflected on the printouts for the weeks prior to
and after this period, petitioner grossed $1,429 in those 7
weeks.
                                     - 5 -

amended 1994 return which included a Schedule C for petitioner’s

truck driving.       On the Schedule C, petitioners reported gross

income of $10,300; they arrived at this amount by adding $8,981,

the gross earnings to date listed on the April 30, 1994, computer

printout, to $1,319 which petitioner received from Ortega that

May.       Petitioners claimed the following expenses:

                  Expense                     Amount
                Taxes and licenses              $650
                Travel                           350
                Wages                          1,190
                Uniforms                          27
                Fuel                             804
                Beeper                            72
                Tools                            150
                Truck rent                     1,878
                Unpaid dispatch                1,690
                  Total                        6,811

Petitioners reported a net profit of $3,489 and self-employment

tax of $493.4      Petitioners did not provide any additional

documentation to substantiate these expenses.          Both the original

and amended 1994 returns were prepared by H & R Block.

       In 1995, petitioners filed a claim against Mr. Ortega for

$5,000 in small claims court.5        Petitioners won their case, but

Mr. Ortega never paid.       Respondent attempted to serve Mr. Ortega


       4
        Because of our holding in this case, respondent’s
determination of increased self-employment tax (and the
concomitant self-employment tax deduction) will be recomputed
under Rule 155.
       5
        Subsequent to trial, petitioners filed a motion to
supplement the record primarily to submit copies of documents
relating to this court action. Respondent filed an objection
thereto. Upon review, we shall grant petitioners’ motion and
receive the additional documents. They have only been relied
upon for our finding as to dates and the amount claimed by
petitioners.
                                 - 6 -

with a subpoena, but was informed that Mr. Ortega had sold the

business and left the country.

Discussion

     Respondent contends that petitioners failed to report

$14,288 in income, while petitioners contend that they received a

lesser amount.    Petitioner acknowledges that he received income

from Ortega in 1994, but not $14,288.    Petitioner introduced

credible testimony and documents which persuade us that the

amount of income reported on Form 1099-MISC received by

respondent was incorrect.    We agree with the amount that

petitioners reported on Schedule C attached to the amended

return; i.e., $10,300 in gross receipts.    Therefore, petitioner

received $10,300 as nonemployee compensation from Ortega in 1994.

     Section 162(a) provides that there shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business.    Taxpayers must keep sufficient records to establish

deduction amounts.    See sec. 6001; Meneguzzo v. Commissioner, 43

T.C. 824, 831-832 (1965).    To be entitled to a deduction under

section 162(a), a taxpayer is required to substantiate the

deduction through the maintenance of books and records.      In the

event that a taxpayer establishes that he or she has incurred a

deductible expense but is unable to substantiate the precise

amount, we may estimate the amount of the deductible expense.

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

We cannot estimate deductible expenses, however, unless the
                                - 7 -

taxpayer presents evidence sufficient to provide some rational

basis upon which estimates may be made.    Vanicek v. Commissioner,

85 T.C. 731, 743 (1985).

     The only documentary evidence petitioner provided to

substantiate the claimed deductions were the computer printouts.

Petitioner testified that he no longer had any receipts or other

records.    Petitioner did not offer any testimony regarding taxes

and licenses, travel, uniforms, beeper, and tools.    We assume

that petitioners have conceded these issues.    Therefore, we shall

address only the expenses for wages, truck rent, fuel, and unpaid

dispatch.

     Petitioners claimed an expense for wages in the amount of

$1,190.    This expense was for the amounts that petitioner paid

the lumpers to help unload the trucks.    Petitioner would obtain

advances from Ortega for this purpose.    Repayment of these

advances would be made by deductions from petitioner’s wages.

The computer printouts from Ortega substantiate petitioner’s

claim.    We find that petitioners have substantiated the amount

that petitioner paid the lumpers and are entitled to a deduction

of $1,190.6

     Petitioners deducted $1,878 for truck rent.    Petitioner

testified that this amount is composed of the escrow balance and

the VAF.    After studying the computer printouts, we find that no


     6
        We note that according to the printouts, petitioner
received $2,410 in company advances. Some of these advances were
for large amounts and may have been for other purposes that
petitioner did not specify.
                               - 8 -

amounts were deducted from petitioner’s gross wages for the VAF.

On the other hand, as of April 30, 1994, $866 had been deducted

from petitioner’s gross income for the escrow balance.

Therefore, petitioners are entitled to a deduction of $866.

     Petitioners claimed a deduction for fuel of $804.

Petitioner testified that he had to purchase fuel for the trucks

out of his own pocket.   Ortega did not have a fuel pump on its

premises; therefore the drivers had to obtain fuel offsite.

Petitioners did not provide any documentation to support this

claimed expense deduction.   However, petitioner was a credible

witness, and we find that this was an ordinary and necessary

expense which petitioner incurred.     Therefore, petitioners are

entitled to a deduction for fuel in the amount of $500.     Cohan v.

Commissioner, supra.7

     The deduction for unpaid dispatch is the difference between

the dispatch total the company earned and the driver’s total

earnings.   This amount was never included in petitioner’s gross

income, was not paid by petitioner, and is therefore not

deductible.




     7
        Typically, expenses for fuel, if purchased in connection
with listed property under sec. 280F(d)(4)(A)(i) and (ii), must
meet the strict substantiation requirements of sec. 274(d) and
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), cannot be
applied. However, that rule does not apply for “any property
substantially all of the use of which is in a trade or business
of providing to unrelated persons services consisting of the
transportation of persons or property for compensation or hire.”
Sec. 280F(d)(4)(C).
                                - 9 -

Accuracy-Related Penalty

       In the notice of deficiency, respondent determined that

petitioners were liable for the accuracy-related penalty under

section 6662(a) “due to substantial understatement of tax”.

Section 6662(a) imposes a penalty of 20 percent of the portion of

the underpayment which is attributable to any substantial

understatement of income.    See sec. 6662(b)(2).   There is a

substantial understatement of income tax for any year if the

amount of the understatement exceeds the greater of 10 percent of

the tax required to be shown on the return or $5,000.     See sec.

6662(d)(1).    Consequently, due to our holdings on the other

issues, if the Rule 155 computation does not indicate that

petitioners’ understatement of tax exceeded the greater of 10

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

or $5,000, petitioners will not be liable for the section 6662

accuracy-related penalty due to substantial understatement of

tax.

       In the alternative, counsel for respondent raised in her

trial memorandum the issue that petitioners negligently failed to

report the income from Ortega and, therefore, are liable for the

section 6662 penalty for negligence or disregard of rules or

regulations.    Where respondent raises a new issue after the

issuance of the notice of deficiency, respondent bears the burden

of proof.    See Rule 142(a).

       Section 6662(a) imposes a penalty of 20 percent on the

portion of the underpayment which is attributable to negligence
                              - 10 -

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

Negligence is the lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.   Neely v. Commissioner, 85 T.C. 934, 947 (1985).

The term “disregard” includes any careless, reckless, or

intentional disregard.   See sec. 6662(c).

     However, section 6664(c) provides that no penalty shall be

imposed with respect to any portion of an underpayment if it is

shown that there was reasonable cause for such portion and that

the taxpayer acted in good faith with respect to such portion.

The determination of whether a taxpayer acted with reasonable

cause and in good faith is made on a case-by-case basis, taking

into account all pertinent facts and circumstances.    See sec.

1.6664-4(b)(1), Income Tax   Regs.   Thus, respondent must prove

that a portion of the underpayment is attributable to negligence

and that petitioners did not act with reasonable cause and in

good faith.

     Petitioners are not sophisticated with regard to income tax

laws and had their return prepared by H & R Block.    While

petitioners disclosed to their preparer that they had income from

Ortega and that there was a dispute about the correct amount of

income earned, petitioners knew the amount of income earned and

paid from Ortega, as well as their expenses.    Petitioner was

involved in a dispute with Ortega over the amount of his income

and had to file an ultimately unsuccessful lawsuit against Mr.

Ortega.   However, that lawsuit was resolved in 1995, but
                             - 11 -

petitioner did not file an amended 1993 income tax return until

1997, after the commencement of respondent’s audit.    We hold that

respondent has proved that petitioners were negligent and did not

act with good faith and reasonable cause with respect to the

unreported net income from Ortega.    Accordingly, petitioners are

liable for the accuracy-related penalty for negligence under

section 6662(a).

     To reflect the foregoing,

                                     Decision will be entered

                                     under Rule 155.
