                        T.C. Memo. 1996-47



                      UNITED STATES TAX COURT



  EMMETT I. AND SHIRLEY SINDIK, Petitioners v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket No. 11487-94.              Filed February 12, 1996.



     Emmett I. and Shirley Sindik, pro se.

     Lisa M. Bernardini, for respondent.



                        MEMORANDUM OPINION



     WRIGHT, Judge:   Respondent determined deficiencies,

additions, and penalties with respect to petitioners’ Federal

income tax for taxable years 1988, 1989, and 1990, as follows:
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                             Additions to Tax and Penalties
                            Sec.           Sec.      Sec.
Year         Deficiency     6653(a)(1)     6661(a)   6662(a)

1988          $9,864          $493         $2,020      -0-
1989          13,603           -0-           -0-     $2,603
1990          29,476           -0-           -0-      5,895

       After concessions by the parties, which will be given effect

in the Rule 1551 computation, the issues for decision are:

       (1)   Whether petitioners understated gross receipts for

taxable years 1988, 1989, and 1990 in the amounts of $27,678,

$27,016, and $39,219, respectively, as determined by respondent.

We hold that they did.

       (2)   Whether petitioners overstated business expense

deductions for the taxable years at issue as determined by

respondent.     We hold that they did.

       (3)   Whether petitioners had unreported capital gain for

taxable year 1990 in the amount of $38,700 as determined by

respondent.     We hold that they did.

       (4)   Whether petitioners are liable for an addition to tax

for negligence under section 6653(a)(1) for taxable year 1988 and

accuracy-related penalties for negligence under section 6662(a)

for taxable years 1989 and 1990.     We hold that they are.




       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

       (5)   Whether petitioners are liable for an addition to tax

under section 6661(a) for a substantial understatement of tax for

taxable year 1988.    We hold that they are.

Background

       Petitioners resided in New Orleans, Louisiana, at the time

the petition was filed.    Petitioners timely filed their joint

Federal income tax returns for the years at issue.     References to

petitioner in the singular are to Emmett I. Sindik.

       Petitioner is the sole proprietor of an import-export

business.    Petitioner has been in the business for more than 25

years acting as the middleman between U.S. and foreign importers

and exporters handling U.S. Customs duties, ocean freight fees,

and trucking fees.    Petitioner essentially completes the

paperwork involved and charges a fee to his clients for this

service; he has no monetary interest in the cargo other than his

fee.    Petitioner’s clients write checks payable to petitioner as

a customs broker for customs duties and various other fees.

Petitioner deposits these checks into his bank account and

subsequently issues checks to the appropriate agencies.      Mrs.

Sindik did not participate in petitioner’s business or in the

preparation of their returns.

       Petitioner failed to maintain complete and accurate records

of his income-producing activities and failed to produce complete

and accurate records to respondent in connection with the
                               - 4 -

examination of his income tax returns for the taxable years at

issue.

     Respondent, using the bank deposits method, determined that

petitioners had understated gross receipts and overstated various

business expense deductions for the years at issue.   Respondent

further determined that petitioners had unreported capital gain

in the amount of $38,700 from the sale of stock in 1990.

     Petitioners did not stipulate any facts prior to trial,

provided no documentary evidence other than their returns for the

taxable years at issue, and called no witnesses other than Mr.

Sindik, who did testify on behalf of himself and Mrs. Sindik.

Petitioner testified that he knows exactly the amount of money he

makes on every business transaction, but when asked by the Court

if he had any books reflecting these amounts, petitioner stated:

“I don’t keep books”.

Gross Receipts

     The first issue for our decision is whether petitioners

understated gross receipts from Mr. Sindik’s business for taxable

years 1988, 1989, and 1990, in the amounts determined by

respondent.   Respondent claims that petitioner failed to keep

adequate records and as a result respondent reconstructed

petitioners’ income for the years at issue using the bank

deposits method.

     It is well established that where a taxpayer fails to

maintain adequate records, the Commissioner may prove the
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existence and amount of unreported income by any method that will

clearly reflect the taxpayer’s income.      Sec. 446(b); Holland v.

United States, 348 U.S. 121, 130-132 (1954); Harper v.

Commissioner, 54 T.C. 1121 (1970).       The premise underlying this

method of income reconstruction is, absent some explanation, that

a taxpayer’s bank deposits represent taxable income.      The total

of all deposits is determined by the Commissioner to arrive at

the taxpayer’s income.   Adjustments are then made to eliminate

deposits that reflect nonincome items such as gifts, loans,

transfers between bank accounts, and redeposits.

     Petitioners bear the burden of proving that respondent’s

determinations, including unreported income, are incorrect.      Rule

142(a); Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978).

Petitioners provided no sufficient evidence indicating that the

excess deposits into their bank account during the years at issue

were attributable to nontaxable sources.

     Petitioners argue that respondent’s use of the bank deposits

method does not accurately reflect the amount of unreported

income for the years at issue.    Without more than petitioner’s

testimony that he believes respondent’s determinations to be

incorrect, however, we have no way of making any adjustments to

respondent’s calculations.

     Accordingly, we find that petitioners have failed to meet

their burden of proof, and respondent’s determination with
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respect to petitioners’ unreported gross receipts for the years

at issue is sustained.

Business Expense Deductions

     The second issue for our decision is whether petitioners

overstated the amount of their business expense deductions for

the taxable years at issue.    Deductions are a matter of

legislative grace, and petitioners bear the burden of proving

their entitlement to any deduction claimed on their returns.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).      A

taxpayer is required to maintain records sufficient to establish

the amount of his or her income and deductions.    Sec. 6001.

Under certain circumstances, in which a taxpayer establishes his

or her entitlement to a deduction, but does not establish the

amount of the deduction, we are permitted to estimate the amount

allowable.   Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

There must be, however, sufficient evidence in the record to

permit us to conclude that a deductible expense was incurred in

at least the amount allowed.    Williams v. United States, 245 F.2d

559, 560 (5th Cir. 1957).   In estimating the amount allowable, we

may bear heavily against the taxpayer whose inexactitude is of

his or her own making.   Cohan v. Commissioner, supra at 544.

     Based upon the record before us in the instant case, we find

that petitioners have failed to meet their burden of proving

entitlement to business expense deductions for the years at issue

in excess of the amounts allowed by respondent.    Petitioners have
                               - 7 -

provided no sufficient evidence to enable us to estimate the

amount of any business expense in excess of the amounts allowed

by respondent.   Accordingly, respondent is sustained on this

issue.

Capital Gain

     Respondent determined that petitioners failed to report a

capital gain on the sale of stock in the amount of $38,700 for

taxable year 1990.   Petitioners presented no evidence with

respect to this issue.   Accordingly, we find that petitioners

have failed to meet their burden of proving that respondent’s

determination is incorrect, and respondent’s determination is

therefore sustained.

Negligence

     The next issue for our decision is whether petitioners are

liable for an addition to tax for negligence under section

6653(a)(1) for taxable year 1988 and for an accuracy-related

penalty for negligence under section 6662(a) for taxable years

1989 and 1990.

     For taxable year 1988, section 6653(a)(1) imposes an

addition to tax equal to 5 percent of the underpayment if any

part of the underpayment is attributable to negligence or

intentional disregard of rules or regulations.   With respect to

taxable years 1989 and 1990, section 6662(a) imposes an accuracy-

related penalty equal to 20 percent of the portion of the
                                - 8 -

underpayment attributable to negligence or disregard of rules or

regulations.

     Negligence is defined as a lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.    Neely v. Commissioner, 85 T.C. 934, 947

(1985).    Negligence includes any failure to make a reasonable

attempt to comply with the law.    Secs. 6653(a)(3), 6662(c).

Respondent’s determination that petitioners’ underpayment was due

to negligence is presumptively correct and must stand unless

petitioners can establish that they were not negligent.     Hall v.

Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo.

1982-337.

     In the instant case, petitioner admitted that he did not

keep records with respect to his business activities.    As stated

earlier, a taxpayer is required to maintain records sufficient to

establish the amount of his or her income and deductions.    We

find that in keeping no records of his business activities,

petitioner failed to make any reasonable attempt to comply with

the law.    We find further that the underpayment of tax for the

years at issue is due to petitioner’s failure to do what a

reasonable and ordinarily prudent person would do under like

circumstances.

     Petitioners presented no sufficient evidence to rebut

respondent’s determination that the underpayment of tax for the
                                - 9 -

years at issue was due to negligence.   Accordingly, respondent’s

determination is sustained on this issue.

Substantial Understatement

     Respondent determined that petitioners are liable for an

addition to tax for a substantial understatement of income tax

under section 6661 for taxable year 1988.   The amount of the

section 6661 addition to tax for additions assessed after October

21, 1986, is equal to 25 percent of the amount of any

underpayment attributable to the substantial understatement.

Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec.

8002, 100 Stat. 1951; Pallottini v. Commissioner, 90 T.C. 498,

501-503 (1988).

     A “substantial understatement” occurs when an understatement

exceeds the greater of $5,000 or 10 percent of the amount of tax

required to be shown on a return.   Sec. 6661(b)(1)(A).   An

“understatement” means the excess of the amount of the tax

required to be shown on a return over the amount of tax imposed

which is shown on the return.   Sec. 6661(b)(2)(A).

     Section 6661(b)(2)(B) provides for the reduction of an

understatement by that portion of the understatement which is

attributable to either:   (1) The tax treatment of any item by the

taxpayer if there is or was substantial authority for such

treatment; or (2) any item with respect to which the relevant

facts affecting the item’s tax treatment are adequately disclosed

in the return or in a statement attached to the return.
                             - 10 -

     Petitioners presented no evidence that there was substantial

authority for the treatment of any item or that any item was

adequately disclosed on their returns for the years at issue.

Accordingly, respondent is sustained on this issue.

     To reflect the foregoing,

                                        Decision will be

                                   entered under Rule 155.
