                  T.C. Summary Opinion 2001-142



                     UNITED STATES TAX COURT



       MARVIN J. LEWIS AND BRENDA J. LEWIS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1321-00S.           Filed September 14, 2001.



     Marvin J. Lewis and Brenda J. Lewis, pro sese.

     Frank N. Panza and Sherri Wilder, for respondent.




     PAJAK, 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 of $28,708 and an

addition to tax under section 6651(a)(1) of $6,567 for the

taxable year 1993.

     Some of the facts in this case have been stipulated and are

so found.   Petitioners resided in Fontana, California, at the

time they filed their petition.

     On the 1993 Federal income tax return, filed March 15, 1996,

petitioner Marvin J. Lewis (petitioner) listed his occupation as

“Ins. Agency [sic]”.   Petitioner is in the insurance business and

sells life insurance, retirement group benefits, voluntary

benefits, and automobile and homeowner’s insurance.   Petitioner

then lived in Moreno Valley, Riverside County, and drove to Los

Angeles and surrounding areas three to four times per week.

During 1993, he traveled about 7 months.   At one time petitioner

had a log of his travels but lost it moving from one office to

another.

     On their 1993 return, petitioners deducted $7,000 for car

and truck expenses on petitioners’ Schedule C, Profit or Loss

From Business.   Petitioner claimed that he drove 25,000 miles for

business.   On the same Schedule C, petitioners deducted $7,500

for rent expense for business property.    On a Form 4797, Sales of

Business Property, petitioners reported $145,000 as the gross

sales price of a house at 5317 Mullen Avenue, Los Angeles,
                                - 3 -


California, (Mullen Avenue), reported a basis of $146,457, and

claimed a net loss of $1,457.

     Respondent disallowed $4,000 of the automobile expense,

disallowed $3,675 of the rent expense, and determined that

petitioners had a capital gain of $105,427 on the sale of the

Mullen Avenue property.

     Deductions are strictly a matter of legislative grace.

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

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

Taxpayers must substantiate claimed deductions.      Hradesky v.

Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).   Section 7491(a) does not change the burden

of proof where taxpayers have failed to substantiate their

deductions.   Higbee v. Commissioner, 116 T.C. 438 (2001).

Moreover, taxpayers must keep sufficient records to establish the

amounts of the deductions.   Meneguzzo v. Commissioner, 43 T.C.

824, 831 (1965); sec. 1.6001-1(a), Income Tax Regs.     Generally,

except as otherwise provided by section 274(d), when evidence

shows that a taxpayer incurred a deductible expense, but the

exact amount cannot be determined, the Court may approximate the

amount, bearing heavily if it chooses against the taxpayer whose

inexactitude is of his own making.      Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).    The Court, however, must have
                                - 4 -


some basis upon which an estimate can be made.    Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).

     Section 274(d) imposes stringent substantiation requirements

for the deduction of travel and automobile expenses.    Taxpayers

must substantiate by adequate records certain items in order to

claim deductions, such as the amount and place of each separate

expenditure, the property’s business and total usage, the date of

the expenditure or use, and the business purpose for an

expenditure or use.   Sec. 274(d); sec. 1.274-5T(b), Temporary

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

substantiate a deduction by means of adequate records, a taxpayer

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

trip sheets, and/or other documentary evidence, which, in

combination, are sufficient to establish each element of

expenditure or use.   Sec. 1.274-5T(c)(2)(i), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).    Travel and car and

truck expenses cannot be estimated under Cohan.    Sanford v.

Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412

F.2d 201 (2d Cir. 1969).

     Respondent allowed petitioner $3,000 for automobile expenses

based on his comments to the auditing agent which were similar to

those he made in court.    Petitioner did not have a log or any

other documentary evidence which meet the strict requirements of

section 274(d).   Petitioner’s statement that he lost the log
                               - 5 -


moving from office to office fails to show that this was a loss

beyond his control as contemplated by section 1.274-5(c)(5),

Income Tax Regs.   Silver v. Commissioner, T.C. Memo. 1972-102.

Nor has petitioner reasonably reconstructed his expenditures

under the regulations.   Gizzi v. Commissioner, 65 T.C. 342, 345-6

(1975).   Accordingly, we must sustain respondent’s determination

on this issue.

     As to the rent deduction issue, respondent allowed $3,825

and disallowed $3,675 of the amount claimed as a deduction.    When

we reached this issue at trial, we asked petitioner whether he

could provide any evidence to establish that he was entitled to

an additional amount over and above what respondent allowed.     The

response by petitioner was “No, I have nothing else to submit.”

We deem this issue conceded by petitioners and sustain

respondent’s determination as to rental expenses.

     With respect to determinations of gain or loss, section

1001(a) provides that the gain from the sale or other disposition

of property shall be the excess of the amount realized therefrom

over the adjusted basis provided in section 1011 for determining

gain, and the loss shall be the excess of the adjusted basis

provided in such section for determining loss over the amount

realized.   Sections 1011 and 1012 provide, insofar as relevant in

this case, that the adjusted basis of the property shall be its

cost.   Section 1016 provides that proper adjustments shall be
                              - 6 -


made to the basis of property for items such as capital

expenditures and depreciation allowed or allowable.    Section 1245

relates to gains from disposition of certain properties and

provides for a depreciation adjustment.

     Respondent in the notice of deficiency determined that

petitioners had a capital gain of $103,970 resulting in an

adjustment of $105,427 ($103,970 + $1,457 reported loss) from the

sale of an asset “as shown in the accompanying computation”.    No

such computation was attached to the notice of deficiency in the

record.

     The parties stipulated that petitioner advised the revenue

agent that the price of the Mullen Avenue property was $21,500,

and that in calculating the gain upon which the additional tax

was based, respondent used a sales price of $145,000, with

$46,000 of capital expenditures made, and depreciation incurred

during the years 1988 through 1992 of $26,470.    Petitioners do

not agree with respondent’s determination.

     Respondent in the trial memorandum explained that respondent

had calculated petitioners’ basis in the property at the time of

its sale in 1993 to be $41,030.   The property’s original purchase

price according to petitioner was $21,500.    Respondent added to

that amount $46,000, representing assumed capital expenditures of

$2,000 per year for the 23 years petitioners owned the property.

The $21,500 plus $46,000 totaled $67,500.    Respondent then
                                 - 7 -


reduced the $67,500 by depreciation allowed or allowable of

$26,470, resulting in a basis of $41,030.    Respondent subtracted

the $41,030 basis from $145,000, the amount petitioners reported

as the sales price of the property on their 1993 Federal income

tax return.   This resulted in the gain of $103,970 and an

adjustment of $1,457 (reported loss) for a total adjustment of

$105,427.

     A 1989 Schedule E, Supplemental Income and Loss, from

petitioners’ 1989 return, showed depreciation for that year was

$5,707.   An Internal Revenue Service transcript of petitioners’

1992 Federal income tax return shows petitioners claimed $4,882

of depreciation for that year.    Respondent averaged these two

figures ($5,294.50) and multiplied the result by the 5 years of

rental to approximate the depreciation allowed or allowable

($26,472.50 rounded by $2.50 equals $26,470, the amount

respondent calculated was depreciation allowed).

     Petitioners purchased the house at Mullen Avenue as a

personal residence in April 1970 for $21,500.    Petitioners sold

the house for $145,000 in April 1993.    On the Form 4797, Sales of

Business Property, petitioners reported a basis of $146,457, and

a loss of $1,457.   Petitioners did not attach a calculation of

their basis to the Form 4797.

     Petitioners did not have a schedule of the depreciation

allowed or allowable to them over the rental period.    They did
                               - 8 -


not even have copies of their income tax returns showing

depreciation.   Petitioners did not have proof of purchase of the

Mullen Avenue property nor of any subsequent capital

improvements.   Petitioners had a schedule prepared by their tax

return preparer which showed purported capital improvements of

$130,550.   The listed items on that schedule totaled $65,275 and

the return preparer apparently doubled that amount to $130,550.

Petitioner admitted the error at trial.   The schedule is also

suspect because it contains items not capital in nature.    It is

further suspect in that most items are rounded to the nearest one

hundred dollar amount.   This schedule does not persuade us to

adjust respondent’s generous computation of capital improvements.

Nor have petitioners shown error in the computation of

depreciation which respondent had to undertake because of the

failure of petitioners to provide records.   Respondent’s

determination on the capital gains issue is sustained, except as

set forth below.

     Respondent did not have petitioners’ Escrow Closing

Statement for the sale of the Mullen Avenue property when

respondent made the computation in the notice of deficiency.

This Court has stated that it has always been recognized that all

expenses of sale enter into the computation that results in the

determination of a gain.   Chapin v. Commissioner, 12 T.C. 235,

238 (1949), affd. 180 F.2d 140 (8th Cir. 1950).   The Escrow
                                - 9 -


Closing Statement lists $9,717 of selling expenses which are to

be deducted from the $103,970 figure to reach a net capital gain

of $94,253.    Thus, the capital gain adjustment is $95,710

($94,253 + $1,457).    This can be reflected in the Rule 155

computation.

     Under section 7491(c), respondent has the burden of

production in any court proceeding with respect to the liability

of any individual for any penalty or addition to tax.    Section

6651(a)(1) imposes an addition to tax for failure to file a

return on time.    The addition equals 5 percent for each month

that the return is late, not to exceed 25 percent.    The addition

to tax under section 6651(a)(1) is imposed unless the taxpayer

establishes that the failure was due to reasonable cause and not

willful neglect.    “Reasonable cause” requires a taxpayer to

demonstrate that he or she exercised ordinary business care and

prudence.   United States v. Boyle, 469 U.S. 241, 246 (1985).

Willful neglect is defined as a “conscious, intentional failure

or reckless indifference.”    Id. at 245.

     Petitioners’ return was untimely filed on March 15, 1996,

and bore a signature date of April 6, 1996.    The return was due

on April 15, 1994.    At trial, petitioner admitted the 1993 return

was filed in 1996.    Petitioner claimed that he had financial

difficulties to the point of filing a bankruptcy proceeding.

Petitioner’s unfortunate personal and financial circumstances do
                               - 10 -


not constitute reasonable cause for failure to timely file a tax

return.   Lerma v. Commissioner, T.C. Memo. 1995-586.     Petitioner

also claimed that he had a drinking problem as an excuse for his

failure to timely file.    A letter from Kaiser Permanente, which

verified petitioner’s attendance at a chemical dependency

recovery program, shows he attended from October 7 through

December 11, 1996.   Petitioners’ return was due on April 15,

1994, and was filed on March 15, 1996, long before such

attendance.   In any event, this Court has held that an addition

to tax under section 6651(a) is due if a taxpayer’s only

explanation is lack of attention to business affairs resulting

from excessive drinking.    Myers v. Commissioner, T.C. Memo.

1980-437; see Gardner v. Commissioner, T.C. Memo. 1982-542.      We

find that petitioners did not show reasonable cause why the

return was not timely filed.   A comparison of both the signature

date and the filing date leads to the conclusion that the late

filing was due to willful neglect.      We conclude that petitioners

are liable for an addition to tax under section 6651(a)(1) for

failure to timely file their 1993 return.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                            Decision will be entered

                                     under Rule 155.
