                  T.C. Summary Opinion 2001-133



                     UNITED STATES TAX COURT



              STEPHEN J. COTTA, SR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16488-99S.            Filed September 4, 2001.



     Stephen J. Cotta, Sr., pro se.

     Andrew J. Wyman, for respondent.



     DINAN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.     The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.     Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue.
                                 - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax of $1,695 for the taxable year 1996.

     The issue for decision is whether petitioner is entitled to

deductions for business expenses and to the subtraction from

gross receipts for an amount of cost of goods sold.

     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.      Petitioner resided in San

Jose, California, on the date the petition was filed in this

case.

     During 1996, petitioner earned $55,201 in wages from Applied

Materials, Inc. and Philips Semiconductors, Inc.          He also

received $17,727 in pension and annuity income, primarily from

military retirement benefits.

     Petitioner filed a Schedule C, Profit or Loss from Business,

with his 1996 Federal income tax return.          This schedule listed

petitioner as the proprietor of a housekeeping business named

“Beverly’s Housekeeping”.     The following amounts were reported on

the schedule:

          Gross receipts                              $ -0-
          Cost of goods sold                           (750)
          Expense deductions
             Advertising                 $6,000
             Insurance                      775
             Office expense               1,045
             Supplies                       350
             Meals and entertainment        437
             Wages                          750
             Total                                    (9,357)
          Net loss                                   (10,107)
                                 - 3 -

In the statutory notice of deficiency, respondent disallowed in

full the cost of goods sold and the business expense deductions

because petitioner did not establish that each was “paid or

incurred during the taxable year and that the expense was

ordinary and necessary” to his business.1

     Expenses which are ordinary and necessary in carrying on a

trade or business generally may be deducted in the year in which

they are paid.    Sec. 162(a).   The cost of goods sold is

subtracted from gross receipts in determining a taxpayer’s gross

income.    Sullenger v. Commissioner, 11 T.C. 1076 (1948).

     A taxpayer generally must keep records sufficient to

establish the amounts of the items reported on his Federal income

tax return.    See sec. 6001; sec. 1.6001-1(a), (e), Income Tax

Regs.    However, 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 heavily against the taxpayer whose

inexactitude in substantiating the amount of the expense is of

his own making.    See 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



     1
      The other adjustments made in the notice of deficiency were
to the itemized deductions; these adjustments are computational
and will be resolved by the Court’s holding on the issue in this
case.
                                - 4 -

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

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

     Section 274(d) supersedes the Cohan doctrine.     See Sanford

v. Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d 201 (2d

Cir. 1969).   As relevant here, section 274(d) provides that,

unless the taxpayer complies with certain strict substantiation

rules, no deduction is allowable for meals and entertainment

expenses or with respect to listed property.    Listed property

generally includes computers.    Sec. 280F(d)(4).   To meet the

strict substantiation requirements, the taxpayer must

substantiate the amount, time, place, and business purpose of the

expenses.   See sec. 274(d); sec. 1.274-5T, Temporary Income Tax

Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).

     We are not convinced that petitioner had a trade or business

within the meaning of section 162(a).    Petitioner’s testimony

concerning the alleged business activity can be summarized as

follows.    The business was started in May 1996 and lasted until

December 1996.   Beverly Castillo, a personal friend of

petitioner’s, performed the housekeeping services, while

petitioner did marketing and business development.     The business

started with six clients; Ms. Castillo already had been

performing housekeeping services for four of these clients before

petitioner became involved in the business.    According to an

agreement, Ms. Castillo was to take all revenue from the first 10
                                 - 5 -

clients, and any further revenue would be divided equally.    The

business had no office, but petitioner rented a mailbox in

Modesto, California, for its use.    Clients would pay between $50

and $100 for the housekeeping services with the exception of one

client who was a cosmetic surgeon and who rendered payment in the

form of breast implant surgery.    The cost of goods sold claimed

on petitioner’s return in the amount of $750 was the cost of Ms.

Castillo’s housecleaning services rendered to clean petitioner’s

personal residence “to foster motivation and enthusiasm in Ms.

Castillo.”   This same expenditure was also claimed as a deduction

for wage expense.    The advertising expense of $6,000 consists

partly of advertising at a bar/restaurant during “Friday night

get-togethers with the local crowd” in which petitioner would

find out who needed housekeepers.    The remainder is non-

advertising expense which was categorized improperly.    Petitioner

also purchased insurance and cleaning supplies for the business,

as well as a computer that was used over half the time for

business purposes.    Finally, petitioner purchased meals while

traveling to look for clients.    The business was terminated when

Ms. Castillo’s boyfriend asked her to terminate her business

relationship with petitioner in order to foster their own

personal relationship.

     We find that, at most, petitioner was in the process of

starting a business which never materialized.    However, assuming
                                 - 6 -

arguendo that he did in fact have a trade or business, we hold

that he is not entitled to the claimed deductions (or to the cost

of goods sold) because they have not been substantiated.       See

secs. 274(d), 6001.   Petitioner claimed that flooding destroyed

his records, but provided neither corroboration of this assertion

nor any reconstructed records.    Furthermore, petitioner’s

testimony--the only evidence he provided--was vague concerning

specific items and did not provide a sufficient basis upon which

we could estimate any amounts.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                 for respondent.
