                  T.C. Summary Opinion 2001-122



                     UNITED STATES TAX COURT



                JOSEPH C. MINNEMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13558-99S.                   Filed August 7, 2001.


     Joseph C. Minneman, pro se.

     Michael F. O’Donnell, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to



     1
       Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1989,
the only taxable year remaining in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure. All
amounts are rounded to the nearest dollar.
                              - 2 -

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

should not be cited as authority.

     Respondent determined deficiencies in petitioner's Federal

income taxes and penalties for fraud under section 6663 for the

taxable years 1989, 1990, and 1991.

     After concessions by respondent,2 the issue for decision is

whether petitioner overpaid his income tax for 1989.     The

resolution of this issue turns on whether petitioner sustained a

business loss or a personal casualty loss in an amount greater

than that conceded by respondent.     We hold that petitioner did

not; accordingly, we also hold that petitioner did not overpay

his income tax for 1989.

                           Background

     Some of the facts have been stipulated, and they are so

found.




     2
       Prior to trial, respondent conceded the fraud penalty for
each of the years in issue. As a consequence, respondent also
conceded the deficiency in income tax for each of those years.
See generally sec. 6501 relating to periods of limitations on
assessment and collection.
     Insofar as petitioner’s overpayment claim for 1989 is
concerned, respondent concedes that petitioner is entitled to a
deduction for a casualty loss for that year of $55 (after taking
into account the $100 limitation of sec. 165(h)(1) and the 10-
percent limitation of sec. 165(h)(2)(A)). However, respondent
does not concede that petitioner overpaid his income tax for 1989
because allowance of the $55 deduction has no tax effect,
petitioner having claimed the standard deduction for that year.
                                - 3 -

      At the time that the petition was filed, petitioner was in

the custody of the U.S. Bureau of Prisons and was incarcerated in

Illinois, the State in which he resided immediately prior to his

incarceration.

A.   Petitioner’s Education and Occupation

     Petitioner graduated from college with a degree in

accounting.   Thereafter, from 1967 to 1970, petitioner attended

law school.   After earning his degree, petitioner was admitted to

the Illinois State bar and entered the private practice of law.

     During 1989, 1990, and 1991, the taxable years in issue,

petitioner was self-employed as an attorney and maintained a law

office in Peoria, Illinois.    Petitioner’s practice included

litigation.

B.   Petitioner’s 1989 Income Tax Return

     Petitioner filed Form 1040, U.S. Individual Income Tax

Return, for 1989, listing his occupation as “lawyer”.     Petitioner

attached to his return Schedule C, Profit or Loss From Business,

and reported thereon income and expenses from his law practice.

None of the deductions claimed on Schedule C included any

deduction for the loss of, or damage to, business property.

     On page 2 of his Form 1040, petitioner claimed the standard

deduction.    Nevertheless, petitioner attached Schedule A,

Itemized Deductions, to his return.     On Schedule A, petitioner

claimed deductions for State and local income taxes and
                                - 4 -

charitable contributions but in a total amount considerably less

than the standard deduction.    On the line for “Casualty and Theft

Losses”, petitioner wrote “-0-”.

C.    Petitioner’s Amended Return for 1989

      In February 1991, petitioner filed Form 1040X, Amended U.S.

Individual Income Tax Return, for 1989 (the amended return).     On

the amended return, petitioner claimed a refund of $2,958 based

on:   (1) An alleged casualty or theft loss of personal-use

property in the amount of $6,675 (before application of section

165(h)(1) or (2)(A)); and (2) an alleged casualty or theft loss

of business-use property in the amount of $15,156.   By way of

explanation, petitioner included the following statement on his

amended return:

      Taxpayer suffered uninsured theft and water damage
      casualty losses on personal property and business
      personal property that taxpayer was holding in storage
      due to lack of residential space and office space.
      Apparently landlord, his agents or previous tenants
      used a key to obtain entry and remove items and either
      landlord, his agents or tenants from the building the
      storage area was attached to used the roof for purposes
      not intended causing the roof to leak which caused
      heavy damage to taxpayer’s property stored in such
      building and landlord’s insurer would not pay for the
      losses.

      To support his claim, petitioner attached Form 4684,

Casualties and Thefts, to his amended return.   Form 4684 reveals

that petitioner computed the claimed losses in the following

manner:
                                       - 5 -

     Section A:    Personal Use Property           Date of Purchase
       Property   A: Clothes washer                      1981
       Property   B: Lawnmower                           1984
       Property   C: Books, notes, and awards1        1964-1970
       Property   D: Lawnseeder                          1982


                                                     Properties
                                           A       B       C           D
      Cost or other basis                 $330    $240   $7,150       $90
      Insurance or other reimbursement     -0-     -0-      -0-        -0-
      FMV before casualty/theft            300     100    6,700        75
      FMV after casualty/theft             -0-     -0-      500        -0-
      Casualty or theft loss               300     100    6,200        75

      Total:   $6,675 (but reported by petitioner as $6,625)




     Section B:   Business Use Property           Date of Purchase
       Property   A: Law Library                         1974
       Property   B: Office Furniture                    1983
       Property   C: Office Equipment                  1974-1985
       Property   D: Professional Research2           1974-present


                                                    Properties
                                          A         B       C         D
      Cost or other basis              $1,403    $4,276 $1,040     $12,670
      Insurance or other reimbursement    -0-       -0-     -0-        -0-
      FMV before casualty/theft        10,000     1,500   2,000     20,000
      FMV after casualty/theft          1,000       200     350        -0-
      Casualty or theft loss            1,403     4,276   1,040     12,670

      Total:   $19,389 (but reported by petitioner as $15,156, a discrepancy
                unexplained in the record)
            1
              The category of “books, notes” represents petitioner’s
       classroom notes and law books (case books, horn books, and
       Gilbert’s outlines) from law school, which he attended from 1967
       to 1970. The category of “awards” represent plaques and trophies
       “and things like that” that petitioner received in the mid-1960s
       in recognition of his service as a local school board member.
            2
              The category of “professional research” represents client
       files and includes petitioner's work product.

       Respondent’s disposition of petitioner’s claim for refund is

discussed infra in subdivision E of our findings of fact.

D.    Petitioner’s Indictment and Conviction

       In March 1996, petitioner was indicted under 18 U.S.C. sec.
                                - 6 -

371 for conspiracy to defraud the United States by impeding the

collection of income tax by the Internal Revenue Service (IRS).

In June 1997, following a jury trial, petitioner was found

guilty, and judgment was entered by the U.S. District Court for

the Central District of Illinois.     Petitioner was sentenced to 30

months’ imprisonment and 3 years of supervised release and

ordered to pay $25,000 in restitution to the IRS.

      Petitioner appealed his conviction, but it was affirmed by

the Court of Appeals.   United States v. Minneman, 143 F.3d 274

(7th Cir. 1998).   Petitioner’s subsequent motion to vacate his

sentence pursuant to 28 U.S.C. sec. 2255 was denied by the

District Court in August 1998, and the Court of Appeals declined

to issue a certificate of appealability.    Appeals filed by

petitioner from other adverse orders of the District Court were

equally unsuccessful on appeal.     United States v. Minneman, 87

AFTR 2d 2001-1920 (7th Cir. 2001).3

E.   The Notice of Deficiency

      In May 1999, after the completion of an examination that had

commenced several years earlier, respondent issued a notice of

deficiency to petitioner.   In the notice, respondent determined

deficiencies in petitioner’s Federal income taxes for 1989, 1990,



      3
        At the time of trial, April 2001, petitioner had been
disbarred from the practice of law. Whether petitioner was
disbarred because of his felony conviction for conspiracy or for
some other reason(s) is not disclosed in the record.
                               - 7 -

and 1991, as well as fraud penalties under section 6663 for those

same 3 years.

     In the notice of deficiency, respondent also allowed in part

and disallowed in part petitioner’s claim for refund for 1989

(made pursuant to petitioner’s amended return for that year).

Thus, respondent allowed petitioner a deduction for a casualty

loss for 1989 in the amount of $55 (after taking into account the

$100 limitation of section 165(h)(1) and the 10-percent

limitation of section 165(h)(2)(A)).     In computing the deficiency

for 1989, respondent did not take this deduction into account

because the deduction, together with petitioner’s other itemized

deductions, was less than the standard deduction to which

petitioner was otherwise entitled.     See sec. 63(c).

F.   Petitioner’s Testimony at Trial

     At trial, petitioner testified that he was divorced in 1989;

that after his divorce he relocated to another residence and

another law office; that he rented a private garage in order to

store excess belongings; and that he subsequently discovered that

some of his belongings (namely, a washing machine, a lawnmower,

and a lawnseeder) had been removed from the garage and that his

remaining belongings (namely, books, notes and awards, law

library, office furniture and equipment, and “professional

research”) had sustained water damage.     In addition, petitioner

testified that he filed a police report; that he commenced an
                               - 8 -

action against the owner of the garage but recovered nothing; and

that no part of his loss was covered by insurance or was

otherwise reimbursable.

                            Discussion

     We begin with two fundamental principles that serve to guide

the decisional process.

     First, deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he or she is entitled

to any deduction claimed.   Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Deputy v. duPont, 308 U.S.

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

440 (1934); Welch v. Helvering, 290 U.S. 111, 115 (1933); cf.

sec. 7491(a) (applicable generally to court proceedings arising

in connection with examinations commencing after July 22, 1998).

     Second, the fact that a taxpayer reports a deduction on the

taxpayer’s income tax return is not sufficient to substantiate

the deduction claimed on the return.     Wilkinson v. Commissioner,

71 T.C. 633, 639 (1979); Roberts v. Commissioner, 62 T.C. 834,

837 (1974).   A tax return is merely a statement of the taxpayer’s

claim; the return is not presumed to be correct.    Wilkinson v.

Commissioner, supra at 639; Roberts v. Commissioner, supra at

837; see also Seaboard Commercial Corp. v. Commissioner, 28 T.C.

1034, 1051 (1957) (a taxpayer's income tax return is a

self-serving declaration that may not be accepted as proof for
                               - 9 -

the deduction or exclusion claimed by the taxpayer); Halle v.

Commissioner, 7 T.C. 245 (1946) (a taxpayer’s return is not self-

proving as to the truth of its contents), affd. 175 F.2d 500 (2d

Cir. 1949).

     We turn now to the substantive law that controls our

disposition of the disputed issue.

     As a general rule, section 165(a) allows as a deduction any

loss sustained during the taxable year and not compensated for by

insurance or otherwise.   However, in the case of an individual,

section 165(c) limits the deduction to:   (1) Losses incurred in a

trade or business; (2) losses incurred in any transaction entered

into for profit, even though not connected with a trade or

business; and (3) losses of property not connected with a trade

or business or with a transaction entered into for profit, if

such losses arise from fire, storm, shipwreck, or other casualty,

or from theft.

     The amount of a casualty loss is generally the lesser of the

taxpayer’s adjusted basis in the property or the diminution in

the fair market value of the property caused by the casualty.

Sec. 1.165-7(b)(1), Income Tax Regs.; see Helvering v. Owens, 305

U.S. 468, 471 (1939); Lamphere v. Commissioner, 70 T.C. 391, 395

(1978).   The amount of a theft loss is determined similarly,

except that the fair market value of the property immediately

after the theft is considered to be zero.   Sec. 1.165-8(c),
                             - 10 -

Income Tax Regs.

     In the case of a loss described in section 165(c)(3), the

loss is allowed only to the extent that the amount of the loss

arising from each casualty, or from each theft, exceeds $100, and

then only to the extent that the aggregate amount of such losses

exceeds 10 percent of the taxpayer’s adjusted gross income.    Sec.

165(h)(1), (2)(A).

     In determining the amount of loss deductible under section

165, the taxpayer’s adjusted basis in the property is the amount

of the adjusted basis prescribed in section 1.1011-1, Income Tax

Regs., for determining the loss from the sale or other

disposition of the property involved.   Sec. 1.165-7(b)(1)(ii),

Income Tax Regs.; see sec. 1.165-1(c)(1), Income Tax Regs.    Under

section 1.1011-1, Income Tax Regs., adjusted basis is the cost or

other basis of property under section 1012, adjusted to reflect

allowable deductions for depreciation under section 1016.

     Also in determining the amount of loss deductible under

section 165, “fair market value” means “the price at which the

property would change hands between a willing buyer and a willing

seller, neither being under any compulsion to buy or sell and

both having reasonable knowledge of relevant facts.”   Sec.

1.170A-1(c)(2), Income Tax Regs.; sec. 20.2031-1(b), Estate Tax

Regs.; see Gay v. Commissioner, T.C. Memo. 1980-19; Black v.

Commissioner, T.C. Memo. 1977-337.    The fair market value of the
                               - 11 -

property immediately before the casualty and the fair market

value of the property immediately after the casualty must

generally be ascertained by competent appraisal.   Sec. 1.165-

7(a)(2)(i), Income Tax Regs.

     At trial, petitioner boasted that “I’ve kept very detailed

records.”   Nevertheless, petitioner, a former practicing attorney

with litigation experience and a degree in accounting, failed to

introduce one shred of documentary evidence regarding his

adjusted basis in any of the items of property involved.

Similarly, petitioner failed to introduce one shred of

documentary evidence regarding the fair market value of any of

those items.   It is well established that if a taxpayer fails to

prove the taxpayer’s adjusted basis in the property involved, no

casualty loss is allowable.    Zmuda v. Commissioner, 79 T.C. 714,

727 (1982), affd. 731 F.2d 1417 (9th Cir. 1984); Millsap v.

Commissioner, 46 T.C. 751, 760 (1966), affd. 387 F.2d 420 (8th

Cir. 1968); see sec. 1.6001-1(a), Income Tax Regs. (requiring

taxpayers to maintain records sufficient to permit verification

of losses).

     On brief, petitioner asks that we apply the approach used in

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

approximate the amount of his alleged losses.   Although we have

occasionally followed that approach in other cases when it has

been appropriate to do so, e.g., Daniel v. Commissioner, T.C.
                              - 12 -

Memo. 1997-328, this is not such a case.

     We have consistently held that we will not apply the Cohan

approach unless the taxpayer presents evidence sufficient to

provide some rational basis on which an estimate may be made.

See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).      Without

such evidence, any allowance would amount to unguided largesse.

See Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957);

see also Millsap v. Commissioner, supra.4

     In the present case, petitioner offered no evidence

whatsoever that would provide a rational basis on which an

estimate might be made.   In this regard, we note that petitioner

offered nothing other than his own testimony.   However,

petitioner’s testimony was invariably conclusory, frequently

improbable, and occasionally fantastical.   See Lovell & Hart,

Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972) (the Tax

Court is not required to accept a taxpayer’s testimony if it is

improbable, unreasonable, or questionable), affg. T.C. Memo.



     4
        The following passage from Millsap v. Commissioner, 46
T.C. 751, 760 (1966), affd. 387 F.2d 420 (8th Cir. 1968), is
particularly apt:

     There have been cases where a failure of proof on the
     issue of basis has been overlooked to permit the
     allowance of a small casualty loss deduction where it
     could reasonably be inferred from other facts of record
     that the allowed amount did not exceed basis, but this
     is not such a case. We do not feel that application of
     the Cohan rule is appropriate here on the question of
     basis. [Fn. ref. omitted.]
                                 - 13 -

1970-335; MacGuire v. Commissioner, 450 F.2d 1239, 1244 (5th Cir.

1971) (same), affg. T.C. Memo. 1970-89; Niedringhaus v.

Commissioner, 99 T.C. 202, 212 (1992) (“The Court is not required

to accept petitioner’s self-serving testimony.”); Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986) (“we are not required to

accept the self-serving testimony of petitioner * * * as

gospel”).     Thus, by way of example, we regard as a flight of

fancy petitioner’s assertion that his personal notes and books

from law school, which he attended from 1967 to 1970, together

with some plaques and trophies “and things like that” from his

days as a member of a local school board in the mid-1960s, had an

adjusted basis of $7,150 and a fair market value of $6,200 in

1989.5


         5
        The following colloquy between the Court and petitioner
is particularly revealing:

              THE COURT: So a law student going to law school,
         let’s say, in 1989 or 1990 –- do you think they would
         be willing to pay $5,000 for these 20-year-old books in
         lieu of buying current books at the law school?

              PETITIONER: Well, now, I don’t want to be
         facetious, Your Honor. I do know –-

              THE COURT: You’re having trouble keeping a
         straight face, so I think you’ve kind of given us an
         answer.

              PETITIONER: No, I’m not laughing about that. I
         was thinking of something that occurred when I was
         going to law school. It was when we freshmen came in,
         there was always a sophomore or senior who was always
         willing to sell us a book that we –- wasn’t being used,
                                                       (continued...)
                                  - 14 -

     In addition, the record does not demonstrate that any water

damage that petitioner’s personal-use property might have

sustained was caused by a casualty within the meaning of section

165(c)(3).     Thus, on cross-examination, petitioner conceded that

his property was not damaged by flood; rather, petitioner

asserted that the rented garage was not “in proper repair” and

that the roof leaked.      However, the law is clear that progressive

deterioration of property through a steadily operating cause does

not give rise to a casualty loss.      See United States v.

Lattimore, 353 F.2d 379, 381 (9th Cir. 1965); see also Fay v.

Helvering, 120 F.2d 253 (2d Cir. 1941); Maher v. Commissioner, 76

T.C. 593, 599-600 (1981), affd. 680 F.2d 91 (11th Cir. 1982);


     5
     (...continued)
     you know.

              THE COURT:   That was maybe one year or two years
         out of date.

              PETITIONER: But they was [sic] trying to, you
         know, pull a, you know, a fast one on incoming
         freshmen, which is neither here nor there, I’m sure.

     Equally revealing is petitioner’s assertion that his 20-
year-old tax code had value because “the Tax Code hadn’t been
amended until –- what -– 1988? It was not out of date.” Yet
this testimony blithely ignores such major tax acts as the
Employee Retirement Income Security Act of 1974, Pub. L. 93-406,
88 Stat. 829; the Tax Reform Act of 1976, Pub. L. 94-455, 90
Stat. 1520; the Revenue Act of 1978, Pub. L. 95-600, 92 Stat.
2763; the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95
Stat. 172; the Tax Equity and Fiscal Responsibility Act of 1982,
Pub. L. 97-248, 96 Stat. 324; the Deficit Reduction Act of 1984,
Pub. L. 98-369, 98 Stat. 494; the Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2085; and the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342.
                               - 15 -

Whiting v. Commissioner, T.C. Memo. 1975-38.

     Moreover, we do not comprehend how petitioner could have had

an adjusted basis of $12,670 in “professional research”.   Any

costs that petitioner had incurred in producing such “research”

would have been expensed on a Schedule C and/or billed to his

clients.

     Finally, we are not convinced that any of petitioner’s

property was either stolen or damaged by water.   See Diaz v.

Commissioner, 58 T.C. 560, 564 (1972) (distilling truth from the

testimony of witnesses, whose demeanor we observe and whose

credibility we evaluate, is “the daily grist of judicial life”);

Kropp v. Commissioner, T.C. Memo. 2000-148 (“As a trier of fact,

it is our duty to listen to the testimony, observe the demeanor

of the witnesses, weigh the evidence, and determine what we

believe.”).   Significantly, petitioner failed to introduce a copy

of the police report that he allegedly filed; likewise,

petitioner failed to introduce a copy of the civil complaint that

he allegedly filed against the owner of the garage.    Documents

such as these should have been readily obtainable; indeed,

petitioner implied that they were in his possession.

Petitioner’s failure to introduce them justifies a negative

inference.    See Recklitis v. Commissioner, 91 T.C. 874, 890

(1988); Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd.

392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v.
                                - 16 -

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).

     In view of the foregoing, we hold that petitioner is not

entitled to a loss deduction under section 165 in any amount

greater than that conceded by respondent.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect our disposition of the disputed issue, as well as

respondent’s concessions,



                                      Decision will be entered for

                            respondent as to the overpayment in

                            income tax for 1989 and for

                            petitioner as to the deficiencies

                            in income taxes and penalties under

                            section 6663.
