                       T.C. Memo. 2000-230



                     UNITED STATES TAX COURT



   JAMES M. NITSCHKE AND PATRICIA S. NITSCHKE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7586-99.                     Filed August 1, 2000.



     James M. and Patricia S. Nitschke, pro sese.

     Marty J. Dama, for respondent.



                       MEMORANDUM OPINION

     DINAN, Special Trial Judge:    Respondent determined a

deficiency in petitioners’ Federal income tax in the amount of

$1,508 for the taxable year 1995.   Unless otherwise indicated,

section references are to the Internal Revenue Code in effect for

the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.
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     The issue for decision is whether petitioners are entitled

to deduct certain business expenses in excess of those allowed by

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

found.    The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Fort Worth, Texas, on the date the petition was filed in this

case.

     Petitioners received wage and business income from several

sources during 1995.    Petitioner wife (Ms. Nitschke) worked as a

legal secretary for the law office of Haynes and Boone L.L.P.,

earning wages in the amount of $18,969.    She also earned wages

from Shannon Gracey Ratliff and Miller DTD in the amount of $270.

Petitioner husband (Mr. Nitschke) worked for Duro-Test

Corporation, earning taxable wages in the amount of $32,933.84.

In addition, petitioners conducted three business activities for

which they filed Schedules C with their 1995 joint Federal income

tax return.    The first was petitioners’ Melaleuca sales and

marketing business with a claimed loss of $13,342.    The second

was Mr. Nitschke’s business as a musician with a claimed loss of

$3,994.    The third was Ms. Nitschke’s business as a freelance

legal secretary with a reported profit of $4,741.

     In the statutory notice of deficiency mailed January 21,

1999, respondent made the following adjustments to the respective

deductions claimed by petitioners:
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                                Claimed   Adjustment       Allowed

     Melaleuca Business
          Office expenses       $3,232     ($3,232)            $0
          Supplies                 885         585          1,470
          Meals/Entertainment    1,638      (1,151)           487
          Travel expenses        2,835      (1,681)         1,154
          Other expenses         7,424      (2,794)         4,630
     Musician Business
          Advertising              257           4            261
          Car/Truck expenses     2,132      (1,548)           584
     Itemized Deductions
          Miscellaneous          8,915          (197)1      8,718

The notice of deficiency stated that the various business

expenses were disallowed because it had not been established that

each amount “was for an ordinary and necessary business expense,

or was expended for the purpose designated.”

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

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Personal, living, and family

expenses, however, generally are not allowed as deductions.         See

sec. 262.

     A taxpayer is required to maintain records sufficient to

establish the amount of his income and deductions.       See sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.     In the event that

a taxpayer establishes that a deductible expense has been paid

but is unable to substantiate the precise amount, we generally

may estimate the amount of the deductible expense, bearing



     1
      This adjustment was computational and is not disputed by
petitioners.
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heavily against the taxpayer whose inexactitude in substantiating

the amounts of the expenses is of his own making.    See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).    We may

estimate deductible expenses only where the taxpayer presents

evidence sufficient to provide some basis upon which estimates

may be made.   See Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).   Section 274(d) supersedes this general rule allowing

estimates, however, and provides that--unless the taxpayer

substantiates certain elements--no deduction shall be allowed

with respect to:   (1) Traveling expenses under section 162,

including meals and lodging while away from home; (2) any item

with respect to an activity of a type considered to be

entertainment, amusement, or recreation; or (3) the use of any

listed property, as defined in section 280F(d)(4) to include

passenger automobiles, computers and peripheral equipment, and

cellular telephones.   For an expense described in any of the

above categories, 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 based on the

appropriate measure; (2) the time and place of the expenditure or

use; (3) the business purpose of the expenditure or use; and (4)

in the case of entertainment, the business relationship to the

taxpayer of each person entertained.   See sec. 274(d); sec.
                               - 5 -

1.274-5T(b), Temporary Income Tax Regs., 50 Fed. Reg. 46006 (Nov.

6, 1985).

     Petitioners argue that sections 162 and 274(d) should not be

applied in this case because respondent did not raise these

issues during the audit of their return.   Petitioners further

assert that the “substantiation issue” was not raised by

respondent until presented at trial.   Subject to exceptions

inapplicable to this case, this Court does not look behind the

statutory notice of deficiency:   A trial before this Court is a

proceeding de novo, and our determination as to a taxpayer's tax

liability is based upon the merits of the case.   See Greenberg’s

Express, Inc. v. Commissioner, 62 T.C. 324, 327-328 (1974).

Furthermore, the notice of deficiency in this case specifically

stated that the various business expenses were disallowed because

it had not been established that each amount “was for an ordinary

and necessary business expense, or was expended for the purpose

designated.”   This statement raises issues under both section

162(a)--whether the expenses were ordinary and necessary--and

section 274(d)--whether the expenses were properly substantiated,

i.e., whether petitioners established that the amounts were

expended for the purpose designated.

     Petitioners also argue that the burden of proof in this case

should be shifted to respondent because petitioners presented

credible evidence with respect to factual issues.   Although
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petitioners cite no authority with regard to this argument, we

assume they are referring to the recently enacted section 7491.

However, section 7491 only applies to court proceedings arising

in connection with examinations commencing after July 22, 1998.

See Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.    There is

nothing in the record which establishes that the examination in

this case commenced after July 22, 1998.     We therefore find that

section 7491 does not operate to shift the burden of proof in

this case.   Accordingly, the burden of proof is upon petitioner

to show respondent’s determinations to be in error.    See Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     The first deductions at issue in this case relate to the

office expenses claimed in connection with petitioners’ Melaleuca

business.    At trial, petitioners presented receipts and copies of

checks totaling $400 for office expenses.    Petitioners claimed

$3,232 in office expenses on their return.    The receipts were for

a computer printer and a cellular phone; because these are listed

property, see sec. 280F(d)(4)(iv), (v), these expenses are

subject to the provisions of section 274(d).    In order to

substantiate the amount of expenses for listed property, a

taxpayer must establish the amount of business use and the amount

of total use for such property.   See sec. 1.274-5T(b)(6)(i)(B),

Temporary Income Tax Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).
                                - 7 -

Petitioners have failed to do this, and we therefore find that

they have not adequately substantiated these expenses and are not

entitled to these deductions.   The copies of checks, in the total

amount of $140, were for the purchase of an armoire used to store

Melaleuca supplies and products.    The copies of these checks

which were entered into evidence are not clear, but nothing

appears on them which indicates they were presented for payment.

We nevertheless accept petitioners’ testimony with regard to this

expense, and therefore hold that they are entitled to an

additional deduction in the amount of $140.

     The next deductions at issue relate to the Melaleuca meals

and entertainment expenses.   Petitioners presented 67 copied

pages of receipts and checks which contained sporadic notations,

for the most part providing only partial details, such as “Mela

mtg” or a person’s name.   This substantiation does not meet the

requirements of section 274(d).    Furthermore, we find the

receipts are not credible evidence.     For example, one receipt was

copied twice, and the copies each had separate notations stating

meetings had occurred with two different persons.    The notations

were nearly all made not on the receipt itself, but on the copy

of the receipt.   Ms. Nitschke indicated in her testimony

concerning other receipts presented as evidence that the

notations were probably made at the end of the year.    Even

accepting this testimony, and not concluding that petitioners
                                - 8 -

made the notations in anticipation of trial, we find it unlikely

that petitioners could have accurately remembered the business

purpose and persons with whom they dined for these numerous

expenses--which included items such as fast food meals--for up to

a year beyond the date of the expense.      Petitioners also

presented a summary of these meal and entertainment expenses,

listing amount, business purpose, time, location, and business

contact.    The amount of expenses contained in the summary,

$2,352.73, does not match the amount of expenses claimed on the

return, $3,277.    We do not accept this summary as substantiation

for the same reasons we do not accept the underlying receipts as

substantiation.    We therefore uphold respondent’s determinations

with respect to these deductions.

     The next deductions at issue relate to the Melaleuca travel

expenses.    Petitioners presented receipts with a cover sheet

stating that travel expenses for 1995 totaled $4,467.

Petitioners claimed $2,835 of travel expenses on their return.

We find that this substantiation presented by petitioners also

does not meet the strict substantiation requirements of section

274(d) because the amount, time, place, and business purpose of

the expenses were not established.      We therefore uphold

respondent’s determinations with respect to these deductions.

     The next deductions at issue relate to the Melaleuca “other

expenses.”    Petitioners presented 115 copied pages of receipts
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and other documents with a cover sheet stating that these

expenses totaled $10,247.   Petitioners claimed $7,424 of expenses

on their return.   The amounts claimed on their return and the

amounts petitioners asserted were substantiated at trial are as

follow:

                                        Claimed        Argued
                                       on Return      at Trial

     Postage                             $1,108        $1,104
     Copies/faxes                           850           655
     Training meeting                       105           105
     Convention fees                        210           220
     Convention merchandise                 464           907
     Business reports                        90           169
     Parking                                 82            82
     Tolls/Food for home meetings           662           736
     Bus charter to meeting                 240           240
     Tapes/Magazines/Books                1,691         2,160
     Sales aides                          1,042         2,830
     Giveaways                              880         1,039
                                          7,424        10,247

We may estimate the amount of a deductible expense, but there

must be sufficient evidence in the record to permit the Court to

conclude that a deductible expense was incurred for the stated

purpose and at least in the amount estimated.      See Williams v.

United States, 245 F.2d 559, 560 (5th Cir. 1957) (citing Cohan v.

Commissioner, supra).   Many of the expenses in this category

appear likely to have been personal in nature, and petitioners

were unable to provide details regarding many of them.     Thus,

petitioners have presented this Court with a number of receipts,

but have failed to give the Court any reasonable method to

determine which receipts were business, personal, or a
                               - 10 -

combination of both, and which of the business expenses were

ordinary, necessary, and otherwise properly deductible under

section 162.   Furthermore, a portion of the receipts in this

category are not credible evidence.     For example, one receipt for

food was marked as having been incurred for a meeting that

occurred a day earlier, while another receipt for snack food was

marked as having been incurred for a meeting 3 months later.

Petitioner testified that these notations were made at the end of

the year, well after the expenses were incurred.    Because the

evidence presented by petitioners is not fully credible, and

because petitioners have failed to provide a sufficient basis to

enable us to conclude that they are entitled to a deduction in

excess of the $4,630 deduction allowed by respondent in the

notice of deficiency, we uphold respondent’s determinations with

respect to these deductions.

     The final deductions at issue in this case relate to the car

and truck expenses incurred in connection with Mr. Nitschke’s

musician business.   Petitioners presented evidence purporting to

reflect 9,192 miles and, using $.30 per mile, $2,758 in expenses.

Petitioners claimed $2,132 in car and truck expenses on their

return.   Because passenger automobiles and any other property

used as a means of transportation are listed property, see sec.

280F(d)(4)(i), (ii), these expenses are subject to the provisions

of section 274(d).   Petitioners presented a purported mileage log
                               - 11 -

and summary to substantiate the mileage.    We find that this

evidence is not credible.    Mr. Nitschke testified that he kept a

daily log in his vehicle, and that he would then on a daily basis

report the amount of mileage he incurred to his wife, who would

record this information in another log (the log presented as

evidence).    We do not believe that petitioners would use this

method of recording mileage on a daily basis.      Furthermore, the

mileage reflected in the log are often round numbers, and Mr.

Nitschke testified that he thought the mileage amounts were

“conservative numbers”.   Both of these facts suggest that

petitioners’ purported log was in fact based upon estimates, and

was not created in the alleged manner.    Because petitioners have

not presented credible substantiation for the mileage expense, we

uphold respondent’s determinations with respect to these

deductions.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
