                     T.C. Summary Opinion 2008-68



                       UNITED STATES TAX COURT



  RONALD MICHAEL AND LORRAINE ELIZABETH SKALKO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10958-05S.                Filed June 18, 2008.


     Ronald Michael and Lorraine Elizabeth Skalko, pro se.

     Brenda Fitzgerald, for respondent.



     WELLS, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1    Pursuant to section 7463(b), the




     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all subsequent
section references are to the Internal Revenue Code as in effect
for the years in issue.
                                 - 2 -

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.

     Respondent determined deficiencies in petitioners’ income

taxes and penalties as follows:

                                                     Penalty
         Year            Deficiency                Sec. 6662(a)
         2001              $5,812                   $1,162.40

         2002               4,352                      870.40

         2003               4,176                      835.20

     The issues we must decide are:      (1) Whether petitioners are

liable for deficiencies in taxable years 2001, 2002, and 2003

where the deficiencies arose in part from deductions petitioners

claimed on Schedule C, Profit or Loss From Business; (2) whether

petitioners properly reported the gross receipts of their

businesses; (3) whether petitioners may claim a dependency

exemption deduction for their daughter for 2003; (4) whether

petitioners properly reported an early distribution from a

qualified pension or retirement plan; and (5) whether petitioners

are liable for section 6662(a) accuracy-related penalties for

negligent failure to accurately report income or for substantial

understatements of income tax.

                           Background

     Some facts have been stipulated and are so found.     The

stipulation of facts and the attached exhibits are incorporated
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herein by this reference.   At the time the petition was filed,

petitioners resided in Georgia.

     During 2001, 2002, and 2003 petitioner Ronald Skalko

(petitioner) operated two businesses as sole proprietorships.

The first business was a party equipment rental and bartending

service conducted under the name Pourmasters.   The second

business was a newspaper delivery service (Newspaper Delivery).

For part of the year Mr. Skalko also worked full time as a

seasonal employee of the Internal Revenue Service.

Car and Truck Expenses

     Petitioner did not maintain contemporaneous mileage logs for

car and truck expenses for Pourmasters and Newspaper Delivery.

Petitioner provided a noncontemporaneous log for Pourmasters and

Newspaper Delivery for 2001.   On Schedule C for Pourmasters

petitioners claimed car and truck expense deductions of $5,175

for 2001, $7,665 for 2002, and $10,800 for 2003 of which

respondent allowed in the notice of deficiency the following:

$3,695 for 2001, $5,000 for 2002, and $6,873 for 2003.   On

Schedule C for Newspaper Delivery petitioners claimed car and

truck expense deductions of $3,450 for 2001 and $8,424 for 2003,

of which respondent allowed in the notice of deficiency the

following:   $3,450 for 2001 and $3,600 for 2003.
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Depreciation Expenses

     For 2001 petitioners deducted $7,000 in depreciation

expenses for Pourmasters.     The documents petitioners provided to

respondent reported expenses of $7,297.30.     Of that amount in the

notice of deficiency, respondent disallowed $1,968.20 paid to

purchase a refrigerator during 2001 and allowed $5,311 of the

remaining depreciation expense deductions claimed.

Legal Expenses

     For 2001 petitioners deducted $3,500 in legal expenses for

Pourmasters.     In 2001 petitioners paid $3,500 to J. William

Morse, an attorney, to defend Mr. Skalko against charges of

driving under the influence of intoxicants, possessing an open

container, and failing to maintain his lane while driving.       In

the notice of deficiency respondent disallowed all of

petitioners’ claimed legal expense deductions.

Itemized Deductions for Employee Business Expenses

     For 2001 petitioners claimed deductions of $4,895 in

employee business expenses, and in the notice of deficiency

respondent allowed $3,954 of the amounts claimed.     For 2002

petitioners deducted $6,593 in employee business expenses for

Mrs. Skalko and $370 for Mr. Skalko, and of these amounts, in the

notice of deficiency respondent allowed $990 for language

training expenses and $2,964 for meal and entertainment expenses

for Mrs. Skalko.     For 2003 petitioners deducted $5,117 in
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employee business expenses for Mrs. Skalko and $240 for Mr.

Skalko, and of those amounts, in the notice of deficiency

respondent allowed $3,783 in employee business expenses for

Mrs. Skalko.

Wages

    During 2001 petitioners’ older son was a full-time student at

the University of Denver.    Also during 2001 petitioners’ younger

son was 17 years old and was a high school student.   Petitioners

claimed that they employed both of their sons in Newspaper

Delivery.    For 2001 petitioners deducted payments they claim they

paid their older son of $200 per week for 27.5 weeks, for a total

of $5,500.   Additionally for 2001, petitioners claimed deductions

for payments they claim they made to their younger son of $200

per week for 15 weeks for a total of $3,000.   Petitioner claims

that he delivered newspapers for the remaining weeks of 2001.

Petitioners failed to keep contemporaneous records of the days on

which their sons delivered newspapers as well as of any payments

made to their sons during 2001.   In the notice of deficiency

respondent disallowed all of the deductions claimed for wages

paid to petitioners’ sons.

Gross Receipts

     For 2001 petitioners’ records indicate that petitioners’

gross receipts from Pourmasters were $18,532.95; however,

petitioners reported only $15,350 of gross income.    In the notice
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of deficiency respondent adjusted petitioners’ gross receipts to

include an additional $3,182.95.

Other Expenses

     For 2001, 2002, and 2003 petitioners claimed other expense

deductions for Pourmasters.   Specifically, for 2001 petitioners

deducted $1,500 for telephone expenses, $250 in cleaning

expenses, $150 in postage expenses, and $500 in supplies.   In the

notice of deficiency respondent disallowed $124 of the cell phone

expense deduction and allowed the remaining expense deductions

claimed for 2001.

     For 2002 petitioners deducted $2,500 in telephone expenses,

$150 in cleaning expenses, $150 in postage expenses, $3,697 in

supply expenses, and $1,250 in periodical expenses.   In the

notice of deficiency respondent disallowed $1,000 of the

telephone expense deduction and $1,250 of the periodical expense

deduction and allowed the remaining expense deductions claimed

for 2002.2

     For 2003 petitioners claimed deductions of $2,400 in

telephone expenses, $150 in cleaning expenses, $150 in postage

expenses, $500 in periodical expenses, and $5,525 in supply



     2
      Although respondent intended in the notice of deficiency
that $2,250 in expense deductions claimed for taxable year 2002
should be disallowed for Pourmasters, the notice of deficiency
determined only a $1,000 adjustment. Respondent did not
subsequently move to increase the deficiency accordingly.
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expenses.   In the notice of deficiency respondent disallowed $900

of the telephone expense deduction and $500 of the periodical

expense deduction and allowed the remaining expense deductions.

Interest Expenses

     For 2001 and 2002 petitioners claimed deductions for

interest expenses charged on credit cards they used for both

personal and business expenses.   For 2001 petitioners deducted

$1,500 in interest expenses for Pourmasters.    Also, for 2002

petitioners deducted $2,500 in interest expenses for Pourmasters.

In the notice of deficiency respondent disallowed all of the

amounts deducted for those interest expenses.

Rent Expenses

      For 2001, 2002, and 2003 respondent disallowed petitioners’

claimed rent expense deductions for Pourmasters.    Petitioners

deducted amounts for rent expenses that they did not pay.    During

the audit petitioners asserted that goods were used to pay rent

invoices in lieu of monetary compensation.

Travel/Meals and Entertainment Expenses

     For Pourmasters for 2002 petitioners claimed $1,200 in

expense deductions for attending a bartending conference.    For

2002 and 2003 petitioners claimed $1,050 as meal and

entertainment expense deductions related to Mr. Skalko’s

attendance at a bartending conference.    In the notice of

deficiency respondent disallowed all of the expense deductions.
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Early Distribution

     During 2002 Mrs. Skalko received an early distribution of

$704 from a qualified pension or retirement plan.    During 2003

Mrs. Skalko received $1,207 as an early distribution from a

qualified pension or retirement plan.    In the notice of

deficiency respondent determined that the early distributions

were to be included in petitioners’ income for the respective

taxable years.

Exemptions

     During 2003 petitioners’ daughter was 26 years old and

earned $11,091 in income.   Petitioners’ daughter filed a tax

return on which she claimed a personal exemption for herself and

also claimed the earned income tax credit.    For 2003 petitioners

claimed a dependency exemption deduction for their daughter which

respondent disallowed in the notice of deficiency.

                            Discussion

     Generally, respondent’s determinations in the statutory

notice of deficiency are presumed correct.   See Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111, 115 (1933).   Deductions are a

matter of legislative grace, and petitioners bear the burden of

proving that they are entitled to the deductions claimed.   See

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).   Under certain circumstances, the burden of proof shifts
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to the Commissioner.    Sec. 7491(a)(1).   Section 7491(a) does not

shift the burden of proof to respondent because petitioners

failed to maintain records or comply with substantiation

requirements as required by section 7491(a)(2)(A) and (B).

     Where a taxpayer establishes that he incurred a business

expense but cannot prove the amount of the expense, the Court may

approximate the amount allowable, bearing heavily against the

taxpayer whose inexactitude is of his own making.     Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930) (the Cohan

rule).   To apply the Cohan rule, however, the Court must have a

reasonable basis for approximating the amount of the expense.

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).     We are not

required to accept a taxpayer’s unsubstantiated testimony that he

is entitled to a deduction.    See Tokarski v. Commissioner, 87

T.C. 74, 77 (1986); Hoang v. Commissioner, T.C. Memo. 2006-47.

     Petitioners failed to offer sufficient substantiation to

provide a reasonable basis for approximating the amounts of the

expenses.     See Vanicek v. Commissioner, supra at 742-743.

Petitioners substantiated the cost of a refrigerator, the

deduction for which respondent had disallowed; however,

petitioners failed to demonstrate that they used it in one of

their businesses.    In addition, petitioners failed to provide any

substantiation at trial that would permit the Court’s use of the

Cohan rule.    We conclude that petitioners have failed to carry
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their burden to show that they are entitled to deductions in

excess of the amounts respondent allowed in the notice of

deficiency.    Accordingly, we uphold respondent’s determinations

in the notice of deficiency for the taxable years in issue in

full.

     We next consider whether petitioners are liable for

accuracy-related penalties pursuant to section 6662(a).

Respondent determined section 6662(a) accuracy-related penalties

of $1,162.40, $870.40, and $835.20 for taxable years 2001, 2002,

and 2003.   Respondent determined that petitioners’ 2001, 2002,

and 2003 underpayments of tax were attributable to negligence or

disregard of rules and regulations, or alternatively that the

2001, 2002, and 2003 underpayments were attributable to

substantial understatements of income tax.

     Pursuant to section 6662(a) and (b), a taxpayer may be

liable for a penalty of 20 percent of the portion of an

underpayment of tax due to negligence or disregard of rules or

regulations.   The term “negligence” in section 6662(b)(1)

includes any failure to make a reasonable attempt to comply with

the Internal Revenue Code and any failure to keep adequate books

and records or to substantiate items properly.   Sec. 6662(c);

sec. 1.6662-3(b)(1), Income Tax Regs.   Negligence has also been

defined as the failure to exercise due care or the failure to do

what a reasonable person would do under the circumstances.    See
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Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348,

353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947

(1985).     The term “disregard” includes any careless, reckless, or

intentional disregard.    Sec. 6662(c).

     The Commissioner has the burden of production with respect

to accuracy-related penalties.    Sec. 7491(c).   To meet that

burden, the Commissioner must produce sufficient evidence

indicating that it is appropriate to impose the penalty.     See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).     Once the

Commissioner meets his burden of production, the taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect.    Rule 142(a); see Higbee v.

Commissioner, supra at 446-447.     The taxpayer may meet this

burden by proving that he or she acted with reasonable cause and

in good faith.    See sec. 6664(c)(1); sec. 1.6664-4(b)(1), Income

Tax Regs.

     We conclude that respondent has met his burden of production

under 7491(c).    The record shows that petitioners failed to keep

adequate books or records or to substantiate items properly for

tax years 2001, 2002, and 2003.    See sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs.    Accordingly, petitioners bear the

burden of proving that the accuracy-related penalties should not

be imposed with respect to any portion of the underpayments for
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which they acted with reasonable cause and in good faith.      See

sec. 6664(c)(1); sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioners claimed substantial deductions for which they

failed to provide credible evidence that respondent’s

determinations are incorrect.    We conclude that petitioners have

failed to meet their burden of persuasion with respect to the

accuracy-related penalties.   Thus, we conclude that petitioners

are liable for the section 6662(a) penalties for negligence

determined by respondent.

     We have considered the parties’ remaining arguments and

conclude that the arguments are either without merit or

unnecessary to reach.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
