                         T.C. Memo. 2010-114



                     UNITED STATES TAX COURT



                SANDRA LEE BENNETT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5956-08.                Filed May 25, 2010.



     Sandra Lee Bennett, pro se.

     Blaine Holiday, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GUSTAFSON, Judge:     In December 2007 the Internal Revenue

Service (IRS) issued to petitioner Sandra Lee Bennett a statutory

notice of deficiency pursuant to section 6212,1 showing the IRS’s



     1
      Unless otherwise indicated, all citations of sections refer
to the Internal Revenue Code of 1986 (Code; 26 U.S.C.), as
amended, and all citations of Rules refer to the Tax Court Rules
of Practice and Procedure.
                               - 2 -

determination of a deficiency of $31,979 in income tax for 2005

and an accompanying accuracy-related penalty of $6,935.80 under

section 6662(a).   The issues for decision2 are (1) whether

Ms. Bennett is entitled to deductions that she claimed for 2005

on her Form 1040, U.S. Individual Income Tax Return--i.e.,

(a) $6,956.25 that she claimed on Schedule A, Itemized

Deductions; (b) $96,325.65 that she claimed as business expenses

on Schedule C, Profit or Loss From Business; and (c) $29,137.13

that she claimed as rental activity expenses on Schedule E,

Supplemental Income and Loss; and (2) whether Ms. Bennett is

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

On the facts proved at trial, we hold (1) that Ms. Bennett is

entitled to deduct $22,964.25 on Schedule A, $2,321.63 on

Schedule C, and $0 on Schedule E, and (2) that Ms. Bennett’s

deficiency constitutes a “substantial understatement of income

tax” incurring the accuracy-related penalty.

                         FINDINGS OF FACT

     Trial of this case was held in St. Paul, Minnesota, on

September 16, 2009.   The stipulation of facts filed that day and

the attached exhibits are incorporated herein by this reference.




     2
      The parties agree that Ms. Bennett’s self-employment tax
and her deduction of half that tax from adjusted gross income are
computational issues that depend on our resolution of the other
issues in this case.
                               - 3 -

At the time she filed her petition, Ms. Bennett resided in

Minnesota.

Personal expenses

     In 2005 Ms. Bennett owned a house with a mortgage.    In that

year she paid a total of $17,048.80 in interest on that mortgage,

and she paid real estate taxes of $3,140 on that house.3   In 2005

Ms. Bennett also paid medical expenses of $2,710, and she made

charitable contributions totaling $1,045.

Real estate sales activity

     In 2005 Ms. Bennett was a real estate sales agent, and on

her return she reported gross receipts of $94,931.02.

Ms. Bennett was a 5-percent partner in Real Estate and Mortgage

Consultants (REMC),4 a firm of which her daughter and son-in-law

owned 40 percent.   REMC had eleven partners and employed about

50 agents.   Ms. Bennett used the REMC premises for some purposes,

but on her return she gave her residence address as her business

address.   The record does not show what if any portion of her

home she used as an office for her real estate business.


     3
      Ms. Bennett claimed itemized deductions for tax and
interest on Schedule A in smaller amounts because she claimed
deductions on Schedules C and E for some of the tax and interest
on her house. Because we disallow those deductions on
Schedules C and E, we allow them in full on Schedule A.
     4
      On Schedule E to her 2005 return, Ms. Bennett reported a
non-passive loss of $5,172 from REMC, which she in turn carried
over to line 17 of her Form 1040. The notice of deficiency did
not make any adjustment to this loss from REMC, and we therefore
do not disallow it.
                               - 4 -

     REMC paid some expenses for the agents who worked through

the firm, and the firm’s practice was to recoup those expenses

from commissions that the agents earned.   “QuickReports” records

printed out by REMC showed that it had paid various expenses on

Ms. Bennett’s behalf but did not show that her expenses had ever

been recouped by REMC from her commissions.   There is no evidence

that Ms. Bennett kept books or records of her real estate

business, apart from her canceled checks, bank and credit card

statements, and receipts that she kept in varying states of

illegibility and disarray.

     In September 2004 Ms. Bennett joined with another individual

in acquiring property in White Bear Lake, Minnesota.   She did not

offer evidence of what she paid in 2004 for her share in the

property nor of what expenses she bore in 2005.   Although she

alleges that this property bears some relation to her real estate

sales business, the record does not show any such relation, and

we find that there is no such relation.

     In 2005 Ms. Bennett and some of her relatives and other

acquaintances traveled to Arizona, and she spent money there to

improve a house that she owned.   However, Ms. Bennett was not

licensed to sell real estate in Arizona, and did not make any

sales in Arizona.   The record includes no evidence of any

attempts to sell real estate in Arizona.   We find that
                                - 5 -

Ms. Bennett’s Arizona-related activities in 2005 did not relate

to her real estate sales business.

     On the Schedule C to her 2005 return, Ms. Bennett reported

business expenses totaling $96,325.65.    We find that she

substantiated that she actually paid business expenses totaling

$2,321.63.

Rental activity

     Ms. Bennett claims that in 2005 she rented out an apartment

in her residence.    However, the evidence in the record does not

substantiate that claim.    Ms. Bennett owns a house in Arizona,

and she claims that she rented it out for three months of 2005.

However, the evidence in the record does not substantiate that

claim.    We find that Ms. Bennett did not prove that she rented

out these properties in 2005.

Return, notice of deficiency, and petition

     To prepare her return for 2005, Ms. Bennett hired Robert

Wicker.    Mr. Wicker has been convicted of the crime of aiding and

abetting multiple clients in fraudulently preparing their tax

returns for multiple years and for fraudulent preparation of his

personal tax returns for multiple years.    Ms. Bennett provided

Mr. Wicker with receipts and various information and relied on

him to prepare her return.    Mr. Wicker composed a mileage log

that he used for computing her car and truck expense, and he

composed a meal log that he used for computing her deductible
                                - 6 -

meals and entertainment.    Ms. Bennett signed her 2005 return in

July 2006 and submitted it to the IRS thereafter.

     In December 2007 the IRS issued to Ms. Bennett a notice of

deficiency, which disallowed all of her deductions on

Schedules A, C, and E.    Ms. Bennett timely filed her petition.

The case was originally scheduled to be tried in February 2009;

but when the case was called from the calendar, the Court

continued the case to permit it to be better prepared for trial,

and the case was tried seven months later in September 2009.

                               OPINION

I.   Burden of proof and substantiation

     At issue is Ms. Bennett’s entitlement to deductions.

Deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving that she is entitled to any deduction

she claims.   Rule 142(a); see also Deputy v. du Pont, 308 U.S.

488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).   (Ms. Bennett makes no argument that the burden

should shift under section 7491(a), and the record shows no basis

for such a contention.)    When this case was originally called for

trial on February 9, 2009, the Court observed that the evidence

for the case was not in order, stated to Ms. Bennett that she

bears the burden of proof, and then continued the case so that

Ms. Bennett could be ready for trial.    We are confident that she

had every opportunity to prepare to meet her burden of proof.
                               - 7 -

     A taxpayer’s burden of proof should be understood in the

context of what the Code requires for record-keeping and

substantiation.   Section 6001 requires that--

          Every person liable for any tax imposed by this
     title, or for the collection thereof, shall keep such
     records, render such statements, make such returns, and
     comply with such rules and regulations as the Secretary
     may from time to time prescribe. * * *

The regulations implementing that statute include 26 C.F.R.

section 1.6001-1(a), Income Tax Regs.,5 which provides that “any

person subject to tax” (such as Ms. Bennett) is required to

     keep such permanent books of account or records * * *
     as are sufficient to establish the amount of gross
     income, deductions, credits, or other matters required
     to be shown by such person in any return of such
     tax * * *.

Ms. Bennett, however, offered into evidence no “permanent books

of account” for her businesses (nor did she testify that she even

kept books of account).

     The Code’s substantiation rules are subject to some

flexibility.   When a taxpayer adequately establishes that she

paid or incurred a deductible expense but does not establish the

precise amount, the Court may in some instances estimate the


     5
      See also 26 C.F.R. sec. 1.446-1(a)(4), Income Tax Regs.
(“Each taxpayer is required to make a return of his taxable
income for each taxable year and must maintain such accounting
records as will enable him to file a correct return. See section
6001 and the regulations thereunder. Accounting records include
the taxpayer’s regular books of account and such other records
and data as may be necessary to support the entries on his books
of account and on his return, as for example, a reconciliation of
any differences between such books and his return”).
                               - 8 -

allowable deduction, bearing heavily against the taxpayer whose

inexactitude is of her own making.     Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).    There must, however, be

sufficient evidence in the record to provide a basis upon which

an estimate may be made and to permit the Court to conclude that

a deductible expense, rather than a non-deductible personal

expense, was incurred in at least the amount allowed.     Vanicek v.

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

     However, certain business expenses described in section

274(d) are subject to strict substantiation rules that supersede

the Cohan doctrine.   Sanford v. Commissioner, 50 T.C. 823, 827-

828 (1968), affd. 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

Section 274(d) applies to:   (1) any traveling expense, including

meals and lodging while away from home; (2) entertainment,

amusement, and recreational expenses; (3) any expense for gifts;

and (4) the use of “listed property”, as defined in section

280F(d)(4), including passenger automobiles.    Some of

Ms. Bennett’s expenses are in these categories.    To deduct such

expenses, the taxpayer must substantiate by adequate records or

sufficient evidence to corroborate the taxpayer’s own testimony:

(1) the amount of the expenditure or use, which includes mileage

in the case of automobiles; (2) the time and place of the travel,

entertainment, or use; (3) its business purpose; and in the case
                               - 9 -

of entertainment, (4) the business relationship to the taxpayer

of each expenditure or use.   Sec. 274(d) (flush language).

      The documents Ms. Bennett did keep were largely

insufficient--even under the Cohan rule, and all the more under

section 274(d), where it applies--to substantiate most of the

deductions she claims.

II.   Itemized deductions on Schedule A

      A.   Medical expenses

      On her Schedule A Ms. Bennett claimed deductions for medical

expenses of $2,628.53.   Respondent concedes that she incurred

$1,168.70 of such expenses--a total of amounts that are

substantiated by documents that reflect the medical provider, the

date of treatment, the date of payment, the amount covered by

insurance, and Ms. Bennett as the patient.   We find that

Ms. Bennett also substantiated deductible medical expenses by

means of 13 checks payable to her doctors, totaling $472.25, and

three premium payments to her health insurer totaling $1,069.50.

Other amounts reflected on EOBs (explanations of benefits) from

her insurer do not show evidence of payment by Ms. Bennett.   Her

deductible medical expenses therefore total $2,710.45.    (The tax

benefit of this deduction will depend on the extent to which it

exceeds 7.5 percent of her adjusted gross income.   See

sec. 213(a).)
                              - 10 -

     B.   Taxes

     On her Schedule A Ms. Bennett claimed deductions for taxes

totaling $1,561.60.   Of this total, $23 is designated as for

“Auto Tabs”, which she has evidently abandoned.    The remainder is

a portion of the $3,140 in real estate taxes that she paid on her

residence, which is substantiated by an “Annual Tax and Interest

Statement” issued to her by her mortgage lender.   She claims the

remainder as deductions on the Schedule C for her real estate

business and on the Schedule E for her rental activity.   Because

we deny the deductions on Schedules C and E, we allow Ms. Bennett

the entire $3,140 as an itemized deduction for real estate taxes

on Schedule A.

     C.   Interest

     On Schedule A Ms. Bennett claimed deductions for home

mortgage interest totaling $1,000.97.   This is a portion of the

$17,048.80 in interest that she paid on her residence, which is

substantiated by the “Annual Tax and Interest Statement” issued

to her by her mortgage lender.   She claims the remainder as

deductions on the Schedule C for her real estate business and on

the Schedule E for her rental activity.   Because we deny the

deductions on Schedules C and E, we allow Ms. Bennett the entire

$17,048.80 as an itemized deduction for interest on Schedule A.
                             - 11 -

     D.   Charitable contributions

     On Schedule A Ms. Bennett claimed deductions for charitable

contributions totaling $1,765.15.    We find that she made

deductible contributions to three donees totaling $656 and that

she made deductible contributions to a fourth donee totaling

$980.7

     The amounts of itemized personal deductions that we allow

compare as follows to what Ms. Bennett claimed on Schedule A to

her return:

                                     Deductions on   Deductions
                                       Schedule A      allowed

     Medical expenses                 $2,628.53       $2,710.45
     Taxes                             1,561.60        3,140.00
     Interest                          1,000.97       17,048.80
     Contributions                     1,765.15        1,045.00
       Total                           6,956.25       23,944.25




     6
      A $65 deduction is substantiated by her checks Nos. 8108,
8218, and 8219 (as to which three checks respondent concedes a
deduction), and No. 8419 (as to which respondent does not concede
a deduction).
     7
      After trial respondent conceded a charitable contribution
deduction for a greater amount--$1,030--evidenced by 20 checks
payable to “His Present Glory” and a receipt in that amount from
“3rd Day Ministries”. However, one of the checks in her listing
(check No. 8403) is included as part of her substantiation for
“cleaning and maintenance” expense. It is a check for $50
payable to “His Present Glory”, and on the “For” line at the
bottom left-hand corner of the check is written “apt. cleaning”.
We therefore reduce the deduction by this amount, but we
otherwise somewhat reluctantly accept respondent’s concession.
                                - 12 -

III. Business expense deductions on Schedule C

     Ms. Bennett was a real estate agent and did evidently

conclude real estate transactions in 2005 that apparently

generated commissions of $94,931.02 that she reported as gross

receipts on Schedule C.    It is entirely plausible that she

incurred deductible expenses in the course of that activity.

However, the Court cannot accept Ms. Bennett’s unsubstantiated

and unexplained allegations of the amounts of those expenses but

rather can allow deductions only for the expenses that have been

substantiated.

     A.   General shortcomings of Ms. Bennett’s Schedule C
          substantiation

          1.      REMC QuickReports

     Some of Ms. Bennett’s purported substantiation consists of

statements from REMC.    REMC kept separate accounts for the

several dozen agents who worked for it, paid various expenses,

deducted those expenses from commissions earned by each agent,

and then provided the agent with financial information, including

an “Agent Account QuickReport” for expenses incurred on the

agent’s behalf.    Ms. Bennett relied solely on REMC QuickReports

for substantiation of her advertising expenses, referral fees,

and legal fees; and she relied in part on the REMC QuickReports

for substantiation of her insurance and her office expenses.

However, the QuickReports printouts explicitly acknowledge in a

footer on each page:    “This is a print out of only the expenses
                               - 13 -

for the year.    It does not show any payments or credits made to

your account.    This is just a guide for you to use while doing

your taxes.”    (Emphasis added.)   Thus, the REMC QuickReports do

not purport to show that Ms. Bennett actually paid the expenses;

they show only that REMC incurred the expenses and made

corresponding entries on Ms. Bennett’s internal account.

Moreover, Ms. Bennett did not produce records to show that REMC

calculated Ms. Bennett’s commissions for its own internal

reporting purposes on a gross basis before any reduction for the

charges incurred on Ms. Bennett’s behalf, or whether instead REMC

reported only commissions due to Ms. Bennett after her expenses

advanced by the firm had been recouped from commissions due her.

More important, Ms. Bennett did not show whether, as “Gross

receipts” on Schedule C, she reported gross commissions or

instead reported net commissions paid to her after reduction for

her charges.    If the latter, then allowing deductions on the

basis of REMC’s tallies of expenses on QuickReports would allow

Ms. Bennett a double deduction for expenses that she paid.

Therefore, the REMC QuickReports do not substantiate

Ms. Bennett’s entitlement to deductions for payment of expenses.

          2.     Ms. Bennett’s return preparer

     Ms. Bennett relies on the testimony of her return preparer

Mr. Wicker for various matters.     However, Mr. Wicker has been

convicted of tax crimes, and we did not find his testimony
                               - 14 -

credible; and to the extent Ms. Bennett relies on his testimony

for any aspect of her proof, her proof fails to be convincing.

          3.   Payments to Ms. Bennett’s son

     Some Schedule C deductions at issue involve payments for the

benefit of Ms. Bennett’s adult son.     During the years at issue he

was a drug addict, and he sometimes came to her with requests for

money with which to pay his child support and other expenses

(including dental expenses).   Ms. Bennett declined to give him

money but instead paid these expenses directly.    The record in

this case includes checks payable to Minnesota Child Support; but

although Ms. Bennett testified that she paid $7,900 toward his

dental expenses, the record does not seem to include

documentation for those dental payments.    Ms. Bennett claims that

she made these payments on his behalf in return for work that her

son performed for the business (an assertion for which her son

gave corroborating testimony),8 and she therefore claimed

deductions for the payments as “commissions” expenses and as

“vehicle, equipment and rental”.   However, Ms. Bennett provided


     8
      Ms. Bennett’s son testified: “I would constantly be mowing
grass at one of her open houses, or shoveling sidewalks, or
delivering fliers, or numerous things, non-stop”. We find his
testimony generally credible, but taking into account all the
evidence we have no confidence that he performed business-related
tasks in 2005 or that Ms. Bennett made payments in 2005 for
business-related tasks. He assented to Ms. Bennett’s leading
question suggesting that his work and her payments occurred in
2005 (“this is kind of long ago, so I’m trying to remember what
everything was. Q It was in 2005. A Right”); but we do not
find that the testimony established the point.
                               - 15 -

no documentary evidence to show the amount or type of work her

son performed, the date on which he performed it, or its

connection with her real estate business.   Her son testified that

she did not issue to him any Forms 1099 reporting the amounts she

had paid him.9   The record includes no evidence as to whether he

reported these amounts as taxable income.   We hold that payments

on behalf of Ms. Bennett’s son have not been substantiated as

ordinary and necessary expenses of her real estate business.

           4.    Arizona real estate sales activity

     Some Schedule C deductions at issue consist of or include

alleged expenditures in connection with real estate sales in

Arizona.   However, Ms. Bennett was not licensed to sell real

estate in Arizona in 2005 (and does not allege that she ever

acquired such a license), and she had no sales in Arizona in 2005

(and does not allege that she has ever had a sale in Arizona).

Rather, she professes that it was her intention someday to sell

real estate in Arizona.   Apart from her own subjective,

unrealized intention to someday sell real estate in Arizona, she

offered no evidence inconsistent with vacationing in Arizona,

establishing a vacation home for herself in Arizona, or preparing



     9
      We disregard Ms. Bennett’s statement in her brief that
“Petitioner has filed a Form 1099 Miscellaneous Income with the
Internal Revenue Service, disclosing the payment of $7,900 to her
son, Craig A. Bennett.” The statement has no support in the
trial record, and it appears she may be describing a filing that
she made after trial.
                              - 16 -

to retire in Arizona.   We hold that she has not carried her

burden to prove that she undertook activity in Arizona with a

view toward making a profit by selling real estate there.

     Her Arizona deductions are also problematic in that many of

them appear to constitute, at best, capital expenditures.   On

brief she argues that much of her travel expense was to pay

workers (i.e., her own relatives) to “work on her real property”

and that she incurred $7,661.26 in Arizona-related supplies

expenses “to bring the Arizona house up to code”.   The receipts

indicate that the work included installing hardwood flooring and

a skylight.   The quantum of these supplies expenses suggests that

they are unlikely to have been ordinary and necessary expenses of

an ongoing business but are more likely the capital expenses of a

renovation--providing significant improvement and future benefit

to the property.   Section 162(a) allows a deduction for “ordinary

and necessary” business expenses, and section 263(a) disallows

any deduction for “permanent improvements or betterments made to

increase the value of any property or estate.”   The regulations

under section 162 elaborate on this distinction, discussing

“repairs” as follows:

     The cost of incidental repairs which neither materially
     add to the value of the property nor appreciably
     prolong its life, but keep it in an ordinarily
     efficient operating condition, may be deducted as an
     expense * * *. Repairs in the nature of replacements,
     to the extent that they arrest deterioration and
     appreciably prolong the life of the property, shall
     either be capitalized and depreciated in accordance
                                  - 17 -

     with section 167 or charged against the depreciation
     reserve if such an account is kept. [26 C.F.R.
     sec. 1.162-4, Income Tax Regs.]

The regulations under section 263(a) are in harmony with that

provision:

     In general, * * * [non-deductible capital expenditures]
     include amounts paid or incurred (1) to add to the
     value, or substantially prolong the useful life, of
     property owned by the taxpayer, such as plant or
     equipment, or (2) to adapt property to a new or
     different use. Amounts paid or incurred for incidental
     repairs and maintenance of property are not capital
     expenditures within the meaning of subparagraphs (1)
     and (2) of this paragraph. * * * [26 C.F.R.
     sec. 1.263(a)-1(b), Income Tax Regs.]

Ms. Bennett did not show that her expenditures were for

deductible “incidental repairs” rather than a substantial capital

renovation.       See Subt v. Commissioner, T.C. Memo. 1991-429.     The

extensive nature of her work on the Arizona property suggests

that she was conducting a substantial renovation.

     Any Arizona-related Schedule C expenses will be disallowed.

             5.     White Bear Lake property

     Some Schedule C deductions at issue consist of alleged

expenditures in connection with property in White Bear Lake,

Minnesota.     Ms. Bennett’s name appears along with the name of

Brent Willenbring on the September 2004 Settlement Statement

(HUD-1), but only Mr. Willenbring’s name appears on the documents

that Ms. Bennett proffers to substantiate payment of deductible

expenses, such as mortgage interest.       A “taxpayer * * * [may]

deduct only his own interest payments and not interest paid on
                              - 18 -

behalf of another person or entity.”     S. Pac. Transp. Co. v.

Commissioner, 75 T.C. 497, 565 (1980).    Ms. Bennett introduced no

canceled checks, receipts, bank statements, or other

documentation to show that she actually paid any of the expenses

for this property;10 and in the absence of any documentation or

any corroboration of Ms. Bennett’s share in the property, we hold

that she has not carried her burden to prove that she has made

any deductible expenditures in connection with this property.

     B.   Additional shortcomings of Ms. Bennett’s proof
          regarding particular Schedule C expenses

          1.    Car and truck expenses

     As is stated above, section 274(d) imposes stringent

substantiation requirements for claimed deductions relating to

the use of “listed property”, which is defined under section

280F(d)(4)(A)(i) to include passenger automobiles.    Under this

provision, any deduction claimed with respect to the use of a

passenger automobile will be disallowed unless the taxpayer

substantiates specified elements of the use by adequate records

or by sufficient evidence corroborating the taxpayer’s own

statement.   See sec. 274(d); sec. 1.274-5T(c)(1), Temporary



     10
      Marks that she has made on the Form 1098, Mortgage
Interest Statement, for her residence may suggest that she
attributes some of the interest on her home mortgage to this
White Bear Lake property. However, no testimonial or documentary
evidence establishes any such connection, and we therefore treat
the entire $17,048.80 reported on Form 1098 as home mortgage
interest deductible on Schedule A.
                                - 19 -

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).    The

elements that must be substantiated to deduct the business use of

an automobile are:   (i) the amount of the expenditure; (ii) the

mileage for each business use of the automobile and the total

mileage for all uses of the automobile during the taxable period;

(iii) the date of the business use; and (iv) the business purpose

of the use of the automobile.    See sec. 1.274-5T(b)(6), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     Ms. Bennett’s proof falls far short of this standard.     She

offered into evidence a mileage log purporting to substantiate

21,129 miles traveled for her real estate business (as compared

to 30,186 claimed on her return).    But neither that number nor

any other has been substantiated.    Her mileage log was prepared

by Mr. Wicker.   Her brief states that she “was forced to recreate

her mileage log based on her date book”; but at trial she did not

offer the date book nor present any testimony about an original

log or any recreation of it.    We find that she did not prove the

miles that she drove for her real estate activity.

          2.     Commissions and fees

     On Schedule C Ms. Bennett deducted $11,878.33 in

“Commissions and fees”.   In her brief she claims a lesser

amount--$8,701.15--but her proof consists of:    (a) an REMC

QuickReport entry for $573.75 (but see part III.A.1 above);

(b) child support checks for her son (but see part III.A.3
                                    - 20 -

above); (c) a voided check for $200; and (d) unexplained checks

to or for the benefit of individuals about whom no testimony or

written evidence was given at trial.         Ms. Bennett has not

substantiated deductible payments for “commissions and fees” in

any amount.

                3.   Depreciation

        On Schedule C Ms. Bennett deducted $5,531.11 in

“Depreciation”.        Her substantiation for that deduction is a

depreciation schedule and five checks dated 2005.         The

depreciation schedule lists nineteen items, at least ten of which

appear to be personal items (china, two pizza ovens, gas grill,

lawn edger, landscape equipment, tools, bike, TV, dishwasher),

five of which might be personal or business-related (two

computers, calculator, furniture, carpet), and one of which is

unclear in its meaning (“2003 76 102 & 103”).         Three of the 2005

checks bear no evident relation to any of the assets allegedly

placed in service in 2005,11 and no checks or other documents

show Ms. Bennett’s basis in any of the assets purchased before

2005.        No testimony was given about any of the assets at trial.




        11
      Two of the checks relate to a golf cart, and Ms. Bennett’s
brief refers to a golf cart supposedly on the depreciation
schedule; but there does not in fact appear to be any entry for a
golf cart on that schedule. Receipts that mention golf carts
also appear in support of her “Repairs” expense for the Arizona
property.
                                 - 21 -

Ms. Bennett has not substantiated her entitlement to any

depreciation deductions.

          4.     Insurance

     On Schedule C Ms. Bennett deducted $743.85 for “Insurance”.

This allegedly consists of:     (a) hazard insurance on Arizona

property, which we disallow for the reasons explained above in

part III.A.4, and (b) errors and omissions insurance documented

solely by an REMC QuickReport print-out, which we disallow for

the reasons explained above in part III.A.1.     That is, all of the

insurance expense is disallowed.

          5.     Interest

     On Schedule C Ms. Bennett deducted $28,822.27 for

“Interest”.    This allegedly consists of:   (a) a portion of the

interest on a mortgage loan for the Arizona property, which we

disallow for the reasons explained above in part III.A.4;

(b) mortgage interest and late-payment charges on the White Bear

Lake property, which we disallow for the reasons explained above

in part III.A.5; and (c) mortgage interest on Ms. Bennett’s

residence, which we allowed in full as a Schedule A itemized

deduction and therefore disallow on Schedule C.

          6.     Legal and professional expenses

     On Schedule C Ms. Bennett deducted $1,460 for “Legal and

professional services”.      However, her substantiation consists of

an REMC QuickReports print-out, which we disallow for the reasons
                                  - 22 -

explained above in part III.A.1, and a photocopy of a check for

$1,100 payable to her return preparer.     Only the front side of

the check appears in the record, and the check is dated

“08-15-04”, whereas the year in issue is 2005.     We hold that

Ms. Bennett has not carried her burden to prove deductible legal

and professional fees incurred in 2005.

            7.   Office expense

     On Schedule C Ms. Bennett deducted $1,014.82 in “Office

expense”.    Her substantiation includes REMC QuickReports print-

outs and some illegible receipts that do not prove deductible

expenditures; but we hold that she has proved, by legible checks

and credit card statements, deductible postage expenses totaling

$119.90.

            8.   Rental expenses

     On Schedule C Ms. Bennett deducted $10,673.74 in rental

expenses, and she contends that at trial she substantiated

$8,174.80.    She argues that of that total, $7,900 allegedly

consists of her payment of rental car expenses for her son.       The

record includes no evidence of any payment of $7,900 to anyone,

and any such payments made for the benefit of Ms. Bennett’s son

are not deductible, for the reasons we explained above in

part III.A.3.    The remainder of Ms. Bennett’s evidence is

difficult to read but may show payments of $32.80 and $242 to

“Ruddy’s Rental, Inc.” for landscaping equipment and $170 for
                             - 23 -

“winterizing boat storage”; but because she offered no evidence

to relate these expenditures to her business of real estate

sales, we hold that she is not entitled to any deduction for

rental expenses.

          9.    Repairs

     On Schedule C Ms. Bennett deducted $184.70 for repairs.     At

trial she offered evidence of a check for $1,000 payable to an

individual with the notation “Contract I.G. Heights”.    She

offered no testimony either explaining who the payee was or

describing any repair work performed.   We therefore hold that

this check does not substantiate any deductible expense.

However, we find that documents she mistakenly included as part

of her attempted proof of depreciation expenses do show a

business-related computer repair expense of $169.

          10.   Supplies

     On Schedule C Ms. Bennett deducted $2,038.62 for supplies.

She offered into evidence checks and receipts totaling $1,993.32,

but she offered no testimony about them.   Some are illegible;

some explicitly pertain to a Fourth of July party (about which

she gave no testimony); some are unexplained checks to

individuals; some may be capital costs of the Arizona renovation

(see supra part III.A.4); and most show purchases at Wal-Mart,

Target, Home Depot, Sam’s Club, Dollar Store, Party Town, and

Goodwill--stores from which one might make deductible business
                                  - 24 -

purchases but from which one might also make non-deductible

personal purchases.       We hold that these documents do not carry

Ms. Bennet’s burden to prove deductions for supplies.       However,

Ms. Bennett’s documentation for supplies also includes checks to

the board of realtors (for $49.73) and a key box servicing

company (for $44.73), which justify a deduction totaling $94.46.

          11.     Taxes

     On Schedule C Ms. Bennett deducted $11,516.84 in real estate

taxes allegedly paid on the White Bear Lake property and the

Arizona property, for which her substantiation is Forms 1098

bearing amounts of taxes that she apportions in part to

Schedule C.     However, as we noted above in part III.A.5, the

Form 1098 for the White Bear Lake property does not bear her name

(and is not accompanied by any evidence of her bearing the

expense); as we noted above in part III.A.4, the Arizona property

has no demonstrated business connection.       Ms. Bennett has not

proved a Schedule C deduction for taxes.

          12.     Travel, meals, and entertainment

     On Schedule C Ms. Bennett deducted $1,089.20 in travel

expenses; and at trial she offered credit card statements that

she argues show $2,470.10 in payments to travel agents for

business-related travel.       A taxpayer may not deduct travel

expenses (including meals and lodging while away from home)

unless she substantiates by adequate records or sufficient
                              - 25 -

evidence corroborating her own statements:   (A) the amount of the

expense, (B) the time and place of the travel; and (C) the

business purpose of the travel.   Sec. 274(d).   Under the

regulations, to meet the section 274(d) “adequate records”

requirement, a taxpayer “shall maintain an account book, diary,

log, statement of expense, trip sheets, or similar record * * *

and documentary evidence * * * which, in combination, are

sufficient to establish each element of an expenditure.”      26

C.F.R. sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50

Fed. Reg. 46017 (Nov. 6, 1985).   The elements she must prove for

each travel expense are the amount, time, place, and business

purpose of the travel.   26 C.F.R. sec. 1.274-5T(b)(2), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).    The

destinations evident on the statements are Cozumel (Mexico),

Minneapolis, Treasure Island Resort in Wisconsin, and Florida

(which Ms. Bennett’s post-trial brief indicates refers to Miami,

Florida).   At trial she offered no business justification for any

travel other than to Arizona, and the evidence submitted reveals

no business purpose for those trips.   (We disregard the

unsupported explanations given for the first time in her post-

trial brief.)   Arizona-related expenses are not deductible for

the reasons we explain above in part III.A.4.    We hold that

Ms. Bennett has not substantiated deductible travel expenses.
                              - 26 -

     On Schedule C Ms. Bennett deducted $937.36 in meals and

entertainment expenses.   Meals and entertainment expenses claimed

as deductions under section 162 are, with limited exceptions,

subject to the substantiation requirements of section 274(d).

26 C.F.R. section 1.274-5T(c)(1), Temporary Income Tax Regs.,

supra, requires a taxpayer to substantiate each element of an

expenditure by adequate records or by sufficient evidence

corroborating his own statements.   At trial Ms. Bennett offered

checks, receipts, and credit card statements that she argues show

$2,085.54 in payments for business related meals and

entertainment.   Some (but not all) of the checks and charges do

bear the names of restaurants, but none of them reflects that the

meal was business-related.   Included among her receipts is a

log--about which she offered no testimony at trial--that purports

to total $1,879.12 of meal expenses.   The log was apparently

written by Mr. Wicker, but the record includes no information

about what sources he used to compile the information.   Some but

not all of the entries include the name of an individual

(presumably, the alleged guest for the meal), and a few include a

phrase about a meeting.   However, in the absence of explanatory

and corroborating testimony, we find the log to be unreliable,

and we hold that Ms. Bennett did not prove any amount of

deductible expense for meals and entertainment.
                              - 27 -

          13.   Utilities

     On Schedule C Ms. Bennett deducted $1,459.45 for

“Utilities”, and at trial she offered bank statements and

canceled checks showing payments for telephone use.     It is to be

expected that a real estate agent would incur business expense

for telephone service.   However, Ms. Bennett gave no testimony to

explain her substantiating documents, and they are confusing.

They appear to show monthly payments to Qwest throughout all of

2005 (totaling $1,272.04), four payments to Cingular (in April,

May, November, and December), five payments to AT&T wireless (in

January, February, May, August, and November), and one payment to

“Lisa Wireless” (in March).   Ms. Bennett did not explain how she

could have incurred charges to all those companies, nor how we

can distinguish between deductible payments for business phone

use and non-deductible payments for personal phone use.

Consequently, we allow no deduction for payments to any of the

companies other than Qwest, the only company to which she made

regular payments for the entire year.     Most of the Qwest checks

show that they pay for two different telephone numbers, with the

monthly charges to one of the numbers consistently equaling about

$56 (i.e., about $672 per year), and the charges to the other

number as somewhat less than that.     Section 262(b) prohibits a

taxpayer’s deducting the cost of basic local telephone service

for the first telephone line provided to her residence, because
                                   - 28 -

that expenditure is a personal expense.       Ms. Bennett has not

shown that she had a home telephone number in addition to the two

Quest numbers she claimed on Schedule C.       In view of

Ms. Bennett’s having the burden of proof, we conclude that she

has shown no more than that she incurred deductible business

phone expense of $600.04 (i.e., the $1,272.04 paid to Qwest minus

$672 as the presumed charge for a personal phone number).

            14.   Other expenses

     On Schedule C Ms. Bennett deducted $1,926.83 as “Other

expenses”, broken down into customer costs, periodicals,

security, education, MLS dues, and client carpet cleaning.       At

trial she gave no testimony about these expenses, and we do not

use her statements in her brief to make up what is lacking in her

evidence.    Her $208 periodicals expense is for her subscription

to the local newspaper--a personal expense, absent proof of a

business purpose.    Her $35 security expense is unexplained.       Her

education expense, substantiated by a $79 check to an individual

marked “Cont. Ed”, may pertain to a business education expense,

but without more explanatory evidence we cannot say that she

proved it is deductible.    Multiple Listing Dues of $326 is a

plausible expense for a real estate agent, but her only proof is

an REMC QuickReports print-out that is inadequate for the reasons

we explain above in part III.A.1.       We find, however, that her

evidence does include credible and self-explanatory evidence
                              - 29 -

showing a client carpet cleaning expense of $160.73 and other

customer costs of $1,177.50 (for home inspections, dead bolt

repair, cleaning, and appraisals).     Her allowable “Other

expenses” therefore total $1,338.23.

      The expenses that Ms. Bennett substantiated, as compared to

the deductions she claimed on Schedule C, are as follows:

                               Expenses reported        Expenses
                                 on Schedule C       substantiated

Advertising                            $3,958.84          -0-
Car and truck expense                  13,030.29          -0-
Commissions and fees                   11,878.33          -0-
Depreciation                            5,531.11          -0-
Insurance                                 743.85          -0-
Interest                               28,822.27          -0-
Legal and professional                  1,460.00          -0-
Office expense                          1,014.82         $119.90
Rent: Vehicles                         10,588.74          -0-
Rent: Other                                85.00          -0-
Repairs and maintenance                   184.70          169.00
Supplies                                2,038.62           94.46
Taxes and licenses                     11,516.84          -0-
Travel                                  1,089.20          -0-
Meals and entertainment                   937.36          -0-
Utilities                               1,459.45          600.04
Other expenses                          1,986.23        1,338.23
  Total                                96,325.65        2,321.63


IV.   Rental expenses on Schedule E

      On Schedule E Ms. Bennett reported the rental of two

properties--the Arizona property and an alleged apartment in her

principal residence.   Although she reported rental receipts of
                                - 30 -

$4,500 for the apartment and $6,000 for the Arizona property,12

she claimed deductions in amounts that greatly exceeded the

reported rental receipts, and she therefore reported losses of

$6,944.73 on the apartment and $11,692.40 on the Arizona

property, totaling $18,637, which she in turn included (as a

loss) on line 17 of Form 1040.

     Ms. Bennett did not offer into evidence any lease or other

documentary information showing that the properties had in fact

been rented out in 2005.    She could not recall the name of the

2005 tenant in the apartment.    She claims that the apartment

constitutes 51 percent of the house in which she resides, and she

therefore claims as deductions 51 percent of various household

expenses (utilities, cleaning, supplies); but she presented no

floor plan of the house showing a 51/49 allocation, and she gave

no testimony about how she arrived at the allocation.    Her return

preparer testified summarily that he had measured the property

himself and found those percentages, but we did not find his

testimony to be credible.    Her deductions for the apartment on



     12
      Ms. Bennett did not contend in the alternative that, if
her deductions were disallowed, then her income ought to be
reduced by the amount of the rental receipts reported. Although
we find that she failed to prove that she rented out the
properties as she alleged, we do not find that she did not
receive the income that she reported on Schedule E. Ms. Bennett
did not make any showing about the nature of those receipts, the
identities of the payors, the accounts into which she deposited
them and thus did not assert or prove any theory under which her
income should be reduced.
                              - 31 -

Schedule E included mortgage interest and real estate tax, and we

disallow those as Schedule E expenses; but, as we have said, we

allow them in full on Schedule A as itemized deductions.

     As we noted above (in part III.A.4), Ms. Bennett’s brief

states that the Arizona property was not up to code, and her

substantial repair expenses ($1,409.41) and supplies expenses

($9,234.58) claimed for the Arizona property on Schedule E

indicate that she was undertaking a capital renovation of the

property in 2005 rather than incurring “ordinary and necessary

expenses”.   Furthermore, the fact that the work was needed in

order to bring the building up to code makes it unlikely that she

had a tenant before those improvements had been completed.

     Even if Ms. Bennett had proved that the properties were

actually rented out in 2005, she would need also to substantiate

the specific expenses (and show that they were not capital

improvements).   We will not analyze in detail her evidence for

each category of expense, but we note that her proof for most of

these items includes illegible and unexplained documents that

sometimes raise more questions than they answer (e.g., a receipt

from a veterinarian for treatment of her dog “Benji”).   We hold

that Ms. Bennett has not substantiated any rental activity

deductions claimed on Schedule E.
                               - 32 -

V.   Section 6662(a) accuracy-related penalty

     The IRS determined that Ms. Bennett is liable for the

accuracy-related penalty of section 6662(a) because her

underpayment was a “substantial understatement of income tax”

under section 6662(b)(2).13   By definition, an understatement of

income tax is substantial if it exceeds the greater of $5,000 or

10 percent of the tax required to be shown on the return.    Sec.

6662(d)(1)(A).   Pursuant to section 7491(c), the Commissioner

bears the burden of producing sufficient evidence showing the

imposition of the penalty is appropriate in a given case.     Higbee

v. Commissioner, 116 T.C. 438, 446 (2001).   Once the Commissioner

meets this burden, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect.

Rule 142(a); Higbee v. Commissioner, supra at 447.

     The parties will be instructed to recompute Ms. Bennett’s

liability in accordance with this decision, but for purposes of

section 6662(a) we can make a rough calculation of only one

component of that liability--the Social Security portion of self-


     13
      The notice of deficiency also supports the accuracy-
related penalty on two alternate grounds: Under
section 6662(b)(1), the accuracy-related penalty is also imposed
where an underpayment is attributable to the taxpayer’s
negligence or disregard of rules or regulations; and under
section 6662(b)(3) the penalty is imposed where there is a
“substantial valuation misstatement”. However, as we show below,
respondent has demonstrated that Ms. Bennett substantially
understated her income tax for 2005 for purposes of
section 6662(b)(2). Thus, we need not consider whether
Ms. Bennett might also be liable under section 6662(b)(1) or (3).
                                - 33 -

employment tax--that shows that her understatement is

substantial.   Since Ms. Bennett reported a tax liability of zero,

any liability computed will be an understatement and will be not

just 10 percent but rather 100 percent of the liability required

to be shown on the return.   Therefore, the question to be

answered is whether the liability will also be greater than

$5,000, and it is easy to see that it will:

     Ms. Bennett’s Schedule C reported gross receipts of

$94,931.02, and when the deductions of $2,321.63 that we allow

are subtracted therefrom, her self-employment income equals

$92,609.39.    Section 1401(a) imposes a tax of 12.4 percent on the

first $90,000 of that self-employment income and yields a

liability of $11,160--i.e., greater than $5,000.   Her income tax

and the hospital insurance component of self-employment tax will

only increase that liability.    Respondent has therefore carried

the burden of production imposed by section 7491(c).

     Ms. Bennett states that she “leaves it to the discretion of

the Court whether to apply the Accuracy Penalty in this matter.”

However, where an understatement of income tax is substantial,

the accuracy-related penalty is not discretionary but mandatory;

the statute provides that it “shall be added”.   Sec. 6662(a).
                             - 34 -

Ms. Bennett bears the burden of proving any defenses,14 see

Higbee v. Commissioner, supra at 446, but she asserted none.   We

therefore sustain the accuracy-related penalty.

     To reflect the foregoing,


                                     Decision will be entered under

                                 Rule 155.




     14
      A taxpayer who is otherwise liable for the accuracy-
related penalty may avoid the liability if she successfully
invokes one of three other provisions: Section 6662(d)(2)(B)
provides that an understatement may be reduced, first, where the
taxpayer had substantial authority for her treatment of any item
giving rise to the understatement or, second, where the relevant
facts affecting the item’s treatment are adequately disclosed and
the taxpayer had a reasonable basis for her treatment of that
item. Third, section 6664(c)(1) provides that if the taxpayer
shows that there was reasonable cause for a portion of an
underpayment and that she acted in good faith with respect to
such portion, no accuracy-related penalty shall be imposed with
respect to that portion. The record suggests no basis for any of
these defenses.
