                       T.C. Memo. 2011-198



                     UNITED STATES TAX COURT



               MARIA ELLEEN SHERRER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15266-08.             Filed August 15, 2011.



     Maria Elleen Sherrer, pro se.

     Karen J. Lapekas, for respondent.



                       MEMORANDUM OPINION


     CARLUZZO, Special Trial Judge:   In a notice of deficiency

dated March 19, 2008, respondent determined deficiencies and

penalties with respect to petitioner’s Federal income taxes as

follows:
                              - 2 -

                                                  Penalty
         Year               Deficiency         Sec. 6662(a)

         2005                 $9,904             $1,980.80
         2006                 15,779              3,155.80

     Following concessions the issues for decision are:    (1)

Whether petitioner is entitled to trade or business expense

deductions in excess of the amounts now allowed by respondent;

(2) whether for 2006 petitioner overstated the amount shown for

returns and allowances on the Schedule C, Profit or Loss From

Business, included with her Federal income tax return for that

year; (3) whether petitioner is entitled to deductions for

interest expenses not claimed on her 2005 or 2006 Federal income

tax return; and (4) whether petitioner is liable for the section

66621 accuracy-related penalty for either of the years in issue.

                           Background

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

the time the petition was filed, petitioner resided in Florida.

     During the years in issue petitioner, who holds an

associate’s degree in accounting, owned and operated a business

that provided accounting services, including tax return

preparation services (petitioner’s accounting business).    At all



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

times relevant, petitioner’s accounting business was conducted in

a building in Miami, Florida, that petitioner purchased for

$130,000 in 1996 (the business property).     The purchase was

financed by a $70,000 loan from the sellers, Marion and Robert

Dodson (the Dodson loan) and a $47,000 loan from Allen and Jill

Greenwald (the Greenwald loan).   Both loans were secured by

mortgages on the business property.     In 1998 petitioner borrowed

$47,000 from Barnett Bank; that loan was also secured by a

mortgage on the business property.     As of the end of 2003 the

Greenwald loan was apparently repaid in full and the mortgage

securing that loan released.   In February 2004 the Dodson loan

was satisfied and presumably the mortgage securing that loan was

released.   In May 2004 petitioner borrowed $121,200 from Allied

Mortgage Investment Fund II, L.L.C. (the Allied loan).     The

Allied loan was secured with a mortgage on the business property.

During 2005 and 2006 petitioner paid interest on the loans

secured by the business property in the respective amounts of

$22,667 and $23,846.   No deductions for these amounts, or any

portions of these amounts, are claimed on petitioner’s timely

filed 2005 or 2006 Federal income tax returns.

      Petitioner’s Federal income tax return for each year in

issue includes a Schedule C showing the following income and

expenses relating to petitioner’s accounting business:
                               - 4 -

                                       2005          2006
Income:
  Gross receipts                   $43,000         $61,000
  Returns and allowances              -0-            2,500
  Gross income                      43,000          58,500

Expenses:
  Advertising                       $1,200          $1,700
  Car and truck                       -0-           11,125
  Insurance                          2,500           3,200
  Legal and professional
    services                           3,500         2,500
  Office                                -0-          4,200
  Rent or lease of other
    business property                  6,000         7,200
  Rent or lease of vehicle,
    machinery, and equipment         -0-             1,900
  Repairs and maintenance           9,045            4,500
  Supplies                          1,500             -0-
  Taxes and licenses                  525              750
  Travel                            2,610             -0-
  Meals and entertainment             783            1,850
  Utilities                         2,600             -0-
  Other                             4,800            5,200
    Total                          35,063           44,125

    Net profit                         7,937        14,375

     In the notice of deficiency respondent disallowed, for lack

of substantiation, all of the deductions claimed on the Schedules

C for each year2 and the amount claimed for returns and

allowances on petitioner’s 2006 Schedule C.    For each year

respondent also imposed a section 6662(a) accuracy-related

penalty on several grounds, including “negligence or disregard of


     2
      Petitioner’s 2005 Schedule C reported other expenses of
$4,800 comprising $1,200 and $3,600 for computer and telephone
expenses, respectively. For 2006 petitioner claimed other
expenses of $5,200 comprising computer and telephone expenses.
However, the record does not establish what portion of the
claimed other expenses is attributable to computer expenses and
what portion is attributable to telephone expenses.
                               - 5 -

rules or regulations” and “substantial understatement of income

tax”.

                            Discussion

     As we have observed in countless opinions, deductions are a

matter of legislative grace, and the taxpayer bears the burden of

proof to establish entitlement to any claimed deduction.3     Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

This burden requires the taxpayer to substantiate deductions

claimed by keeping and producing adequate records that enable the

Commissioner to determine the taxpayer’s correct tax liability.

Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.

per curiam 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965).     A taxpayer claiming a

deduction on a Federal income tax return must demonstrate that

the deduction is allowable pursuant to some statutory provision

and must further substantiate that the expense to which the

deduction relates has been paid or incurred.     See sec. 6001;

Hradesky v. Commissioner, supra at 90; sec. 1.6001-1(a), 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



     3
      Petitioner does not claim that the provisions of sec.
7491(a) are applicable, and we proceed as though they are not.
                                - 6 -

deductible expense, bearing heavily against the taxpayer whose

inexactitude in substantiating the amount of the expense is of

the taxpayer’s own making.    Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930).   We cannot estimate a deductible expense,

however, unless the taxpayer presents evidence sufficient to

provide some basis upon which an estimate may be made.    Vanicek

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

     Section 274(d) imposes strict substantiation requirements

for travel, entertainment, gift, and “listed property” expenses.

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per

curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary

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

section 274(d), the taxpayer generally must substantiate either

by adequate records or by sufficient evidence corroborating the

taxpayer’s own statement:    (1) The amount of the expense; (2) the

time and place the expense was incurred; (3) the business purpose

of the expense; and (4) in the case of an entertainment or gift

expense, the business relationship to the taxpayer of each

expense incurred.   For “listed property” expenses, the 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. 46016 (Nov. 6, 1985).
                               - 7 -

      Substantiation by adequate records requires the taxpayer to

maintain an account book, a diary, a log, a statement of expense,

trip sheets, or a similar record prepared contemporaneously with

the expenditure and documentary evidence (e.g., receipts or

bills) of certain expenditures.    Sec. 1.274-5(c)(2)(iii), Income

Tax Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50

Fed. Reg. 46017 (Nov. 6, 1985).    Substantiation by other

sufficient evidence requires the production of corroborative

evidence in support of the taxpayer’s statement specifically

detailing the required elements.    Sec. 1.274-5T(c)(3), Temporary

Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

I.   Schedule C Expenses

      Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     The determination of whether

an expenditure satisfies the requirements for deductibility under

section 162 is a question of fact.     See Commissioner v.

Heininger, 320 U.S. 467, 475 (1943).    In general, an expense is

ordinary if it is considered normal, usual, or customary in the

context of the particular business out of which it arose.    See

Deputy v. du Pont, 308 U.S. 488, 495 (1940).     In general, an

expense is necessary if it is appropriate and helpful to the

operation of the taxpayer’s trade or business.    See Commissioner

v. Tellier, 383 U.S. 687 (1966); Carbine v. Commissioner, 83 T.C.
                               - 8 -

356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985).   On the

other hand, section 262(a) generally disallows a deduction for

personal, living, or family expenses.

     The disallowed trade or business expense deductions here in

dispute can be divided into two categories:    (1) Those that are

subject to the strict substantiation requirements of section

274(d); and (2) those that are subject to the more general

substantiation requirements of section 6001.

     As relevant here, the deductions subject to the section

274(d) requirements include car and truck expenses, travel

expenses, meals and entertainment expenses, and computer

expenses.   Secs. 274(d), 280F(d)(4).   Deductions not subject to

section 274(d) include expenses for advertising; legal and

professional services; rent or lease of other business property;

rent or lease of vehicle, machinery, and equipment; repairs and

maintenance; supplies; taxes and licenses; utilities; contract

labor; and telephone.

     A.   Deductions Subject to Section 274(d)

     Petitioner failed to present any records, receipts, or other

written substantiation required by section 274(d) with respect to

deductions claimed for car and truck expenses, travel expenses,

meals and entertainment expenses, and computer expenses.

Consequently, petitioner is not entitled to deductions for those
                                - 9 -

expenses in excess of the amounts allowed by respondent for

either year in issue.

     B.    Deductions Not Subject to Section 274(d)

     In addition to her generalized and somewhat vague testimony

as to deductions in this category, petitioner presented canceled

checks, bank account statements, receipts, and invoices

purporting to substantiate various items claimed as business

expense deductions.    These records are not well organized and

have not been submitted to the Court in a fashion that allows for

easy association with the portions of deductions that remain in

dispute.    Furthermore, some of the checks are made payable to

persons whose relationships, if any, to petitioner’s accounting

business have not been fully described.    Nevertheless, we make

what sense we can with what we have to work with and summarize

our findings in the following paragraphs.

            1.   Advertising

     Petitioner claims a $1,700 deduction for advertising

expenses for 2006.4    In the notice of deficiency respondent

disallowed the deduction for lack of substantiation.    Petitioner

submitted an invoice from Game Day Advantage for $309.95 and

testified that she paid the invoice with a credit card.    Although

payments made by credit card should be easily substantiated by


     4
      In the stipulation of settled issues respondent conceded
that petitioner is entitled to a deduction for advertising
expenses of $3,386 and $1,369.99 for 2005 and 2006, respectively.
                               - 10 -

obtaining records from the credit card company, petitioner has

failed to submit a credit card receipt or statement evidencing

payment of the amount claimed.   Accordingly, except for the

amounts now conceded, respondent’s disallowances of petitioner’s

deductions for advertising expenses are sustained.

          2.    Legal and Professional Services

     Petitioner claims deductions for legal and professional

services expenses of $3,500 and $2,500 for 2005 and 2006,

respectively.   In the notice of deficiency respondent disallowed

the entire amount claimed for each year because, according to

respondent, petitioner failed to show that the legal and

professional services expenses were paid for a business purpose.

     Petitioner testified that she incurred and paid the amounts

claimed for each year to an attorney for “legal representation

for different legal issues”.   According to petitioner, in one

instance she hired an attorney to represent her in connection

with the rental of “a large piece of land with a mobile on it to

use as a second office.”   Petitioner provided no written

evidence, such as a retainer letter or representation agreement,

establishing that petitioner incurred legal expenses for a

business purpose.   Accordingly, petitioner has failed to

substantiate that these claimed legal expenses had a bona fide

business purpose or that the services were related to her

accounting business, rather than to her personally.   See sec.
                                  - 11 -

262.    Consequently, respondent’s disallowances of the deductions

for legal and professional services expenses for both years in

issue are sustained.

            3.     Rent or Lease of Other Business Property

       Petitioner claims deductions for rent or lease of other

business property expenses of $6,000 and $7,200 for 2005 and

2006, respectively.       The deductions were disallowed for lack of

substantiation.       Respondent now concedes that petitioner is

entitled to a $606 deduction for this expense for 2005.

According to petitioner, the disallowed deductions are

attributable to a lease of phone equipment for use in her

accounting business.       Other than her testimony on the point,

petitioner failed to provide any corroborative evidence of this

expense.    It would seem that amounts paid for the lease of phone

equipment would be easily substantiated by canceled checks or

statements from the leasing company.       No such evidence has been

submitted.       Consequently, except for the amount conceded by

respondent, we sustain respondent’s disallowances of the

deductions for rent or lease of other business property expenses

claimed on her 2005 and 2006 returns.

            4.     Rent or Lease of Vehicle, Machinery,
                   and Equipment

       Petitioner claims a deduction for “rent or lease of vehicle,

machinery, and equipment” expenses of $1,900 for 2006.        According

to petitioner, this expense is attributable to tool rental, but
                                - 12 -

she did not provide any further detail or any corroborating

evidence with respect to the underlying expense.    Although less

than certain, at trial it appeared that petitioner conceded this

deduction.   Nonetheless, her failure to substantiate the expense

makes any such concession, if made, of little consequence.    For

either reason, respondent’s disallowance of the deduction for

rent or lease of vehicle, machinery, and equipment expenses

claimed on her 2006 return is sustained.

          5.     Repairs and Maintenance

     Petitioner claims deductions of $9,045 and $4,500 for 2005

and 2006, respectively, for repairs and maintenance expenses.5

According to petitioner, these expenses are attributable to

“miscellaneous repairs that had to be done” to the business

property, including carpet installation, painting, installation

of a sign, and lock maintenance.    In the notice of deficiency,

respondent disallowed the deductions for lack of substantiation.

     With respect to the deduction for 2005, petitioner

submitted:     (1) A contract with Samuel Kemp regarding a storage

shed on the business property along with a canceled check to him

for $1,000; (2) a canceled check to Kertz National Alarm Co. for

$164.98; (3) a canceled check to AAA Miami Locksmith for $149.80;

(4) a receipt from JP Signs indicating that petitioner paid $815;


     5
      In the stipulation of settled issues respondent concedes
that petitioner is entitled to a deduction for repairs and
maintenance expenses of $229.88 for 2005.
                               - 13 -

and (5) a proposal from All Around Maintenance to perform

maintenance work at the business property.   Taking the above

items into account, and ignoring the proposal from All Around

Maintenance because it is nothing more than a proposal, we find

that in addition to the amount already allowed by respondent,

petitioner is entitled to a $2,129.78 deduction for repairs and

maintenance expenses for 2005.

     Because petitioner has failed to substantiate any expenses

for repairs and maintenance for 2006, respondent’s disallowance

of that deduction for that year is sustained.

            6.   Supplies

     For 2005 petitioner claimed a $1,500 deduction for supplies

expenses.    Petitioner testified that this expense is attributable

to the purchase of furniture, two desks and two chairs, and

supplies purchased at Home Depot.    Respondent disallowed the

deduction for failure to substantiate the expenses claimed.6

     For 2005 petitioner submitted receipts from Home Depot

showing items, purchased for $801.83, which, according to

petitioner, were used in connection with the maintenance of the

business property.

     Accordingly, for 2005 we find that, in addition to the

amount conceded by respondent, petitioner is entitled to an


     6
      Respondent now concedes that petitioner is entitled to
deductions for supplies expenses of $314.74 and $128.27 for 2005
and 2006, respectively.
                                - 14 -

$801.83 deduction for supplies expenses, and that for 2006,

petitioner’s deduction for supplies expenses is limited to the

amount conceded by respondent.

          7.     Taxes and Licenses

     Petitioner claims deductions for taxes and licenses expenses

of $525 and $750 for 2005 and 2006, respectively.    For 2005

respondent now concedes that petitioner is entitled to a $480.05

deduction for taxes and licenses expenses.    Petitioner offered no

evidence to support entitlement to the deduction in an amount in

excess of that allowed by respondent for 2005 and no evidence at

all with respect to 2006.    Except for the amount conceded by

respondent,    respondent’s disallowances of the deductions are

sustained.

          8.     Utilities

     Petitioner claims a deduction for utilities expenses of

$2,600 for 2005.7    In the notice of deficiency respondent

disallowed the deduction for lack of substantiation.    Petitioner

failed to substantiate any amounts in excess of the amounts

respondent now concedes but contends that the unsubstantiated

portion is attributable to late payments made in cash to the

water company.    Payments made, even if made in cash, to a utility

company should be easily substantiated by obtaining records from


     7
      In the stipulation of settled issues respondent concedes
that petitioner is entitled to a deduction for utilities expenses
of $2,156.51 and $2,383.05 for 2005 and 2006, respectively.
                                 - 15 -

the utility company.   This petitioner has failed to do.

Accordingly, we sustain respondent’s disallowance of petitioner’s

deductions for utilities expenses in excess of the amounts now

conceded by respondent.

           9.   Other Expenses

      Petitioner claims deductions for other expenses (comprising

computer and telephone fees) of $4,800 and $5,200 for 2005 and

2006, respectively.8   Petitioner failed to substantiate any

amount in excess of the amount respondent now concedes.

Accordingly, we sustain respondent’s disallowances of

petitioner’s deductions for other expenses in excess of the

amounts respondent now concedes.

II.   Returns and Allowances

      The gross income shown on the Schedule C included with

petitioner’s 2006 return takes into account “returns and

allowances” of $2,500.    According to petitioner, that amount is

attributable to refunds to clients of her accounting business

who switched from a more expensive service to a less expensive

service.   Respondent disallowed the item for failure to

substantiate the amount.   Respondent now concedes that petitioner

is entitled to reduce gross income by $375 for returns and


      8
      Respondent now concedes that petitioner is entitled to
deductions for other expenses of $3,751 and $10,847.36 for 2005
and 2006, respectively. As part of the concession for other
expenses in 2006 respondent included a $3,271 concession for
contract labor expenses.
                               - 16 -

allowances.    According to petitioner, all of the refunds were

made by check.    Petitioner did not provide canceled checks or

offer any other evidence to corroborate her claim.    Except for

the amount now conceded by respondent, respondent’s disallowance

of the amount shown for returns and allowances on the Schedule C

included with petitioner’s 2006 return is sustained.

III.   Interest Expense Deduction

       The parties dispute whether petitioner is entitled to

interest expense deductions of $22,667 and $23,846 for 2005 and

2006, respectively.    The amount for each year represents interest

paid on loans secured by the business property.    Respondent

agrees that petitioner paid the interest for each year but

contends that petitioner has not shown that the amounts paid were

for a business purpose.

       In general, section 163(h) provides that no deduction shall

be allowed for personal interest paid or accrued during the

taxable year.    As relevant here, section 163(h)(2) defines

personal interest to mean “any interest allowable as a deduction”

other than interest on trade or business indebtedness.

       As best we can determine from petitioner’s presentation, she

takes the position that because the interest was paid on loans

secured by the business property, the interest should be

deductible as interest on trade or business indebtedness.      The

use of the business property as collateral for the loans,
                               - 17 -

however, tells us nothing about how the proceeds from the two

loans were used.    Because petitioner has not shown that proceeds

of the loans were used for business purposes, the interest she

paid in 2005 or 2006 on those loans is treated as     personal

interest.    It follows that petitioner is not entitled to a

deduction for 2005 or 2006 for interest paid on the loans.       See

sec. 1.163-8T(c)(1), Temporary Income Tax Regs., 52 Fed. Reg.

25000 (July 2, 1987).

IV.    The Accuracy-Related Penalties

       Lastly, we consider whether petitioner is liable for section

6662(a) accuracy-related penalties.     For each year in issue,

respondent has determined that the penalty is applicable because,

among other reasons, the underpayment of tax required to be shown

on petitioner’s return is a substantial understatement of income

tax.

       Section 6662(a) and (b)(2) imposes a 20-percent

accuracy-related penalty on the portion of an underpayment that

is attributable to a substantial understatement of income tax.

An understatement of income tax is the excess of the amount of

income tax required to be shown on the return for the taxable

year over the amount of income tax that is shown on the

return, reduced by any rebate.    See sec. 6662(d)(2)(A).   An

understatement is substantial if it exceeds the greater of 10

percent of the tax required to be shown on the return for the
                               - 18 -

taxable year or, in the case of an individual, $5,000.     See sec.

6662(d)(1)(A).

     The Commissioner bears the burden of production with respect

to the applicability of an accuracy-related penalty determined in

a notice of deficiency.    See sec. 7491(c).   In order to meet the

burden of production under section 7491(c), the Commissioner need

only make a prima facie case that imposition of the penalty or

addition to tax is appropriate.    Higbee v. Commissioner, 116 T.C.

438, 446 (2001).    Once he has met his burden, the burden is upon

the taxpayer to prove that the accuracy-related penalty does not

apply because of reasonable cause, substantial authority, or the

like.   See secs. 6662(d)(2)(B), 6664(c); Higbee v. Commissioner,

supra at 449.    It would appear that after taking into account

respondent’s concessions and the findings of the Court, the

understatement of income tax for both 2005 and 2006 will exceed

$5,000.   Consequently, respondent has met his burden for the

imposition of an accuracy-related penalty for each year.

     An accuracy-related penalty is not imposed on any portion of

the underpayment as to which the taxpayer acted with reasonable

cause and in good faith.    Sec. 6664(c)(1).   Section 1.6664-

4(b)(1), Income Tax Regs., incorporates a facts and circumstances

test to determine whether the taxpayer acted with reasonable

cause and in good faith.    The most important factor is the extent

of the taxpayer’s effort to assess his proper tax liability.      Id.
                              - 19 -

     Petitioner has failed to explain her failure to substantiate

the disallowed Schedule C deductions.    She further failed to

demonstrate that there was reasonable cause and that she acted in

good faith with respect to the underpayment of tax, or any

portion of it, required to be shown on her return for either year

in issue.   Accordingly, respondent’s imposition of an accuracy-

related penalty for each year in issue is sustained.

     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.
