                         T.C. Memo. 2001-259



                      UNITED STATES TAX COURT



       KENNETH LEE AND MARGARET IHLENFELDT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

             KENNETH LEE IHLENFELDT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19250-96, 19251-96.           Filed October 1, 2001.



     Kenneth Lee Ihlenfeldt, pro se.

     Joanne B. Minsky, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   The docketed cases are consolidated for trial,

briefing, and opinion.   Kenneth Lee Ihlenfeldt (petitioner) and

his former wife, Margaret Ihlenfeldt (Ms. Ihlenfeldt), petitioned

the Court to redetermine respondent’s determinations as to their
                                - 2 -

1989 and 1990 Federal income taxes.     Petitioner also petitioned

the Court to redetermine respondent’s determinations as to his

1991, 1992, and 1993 Federal income taxes.

     As to the respective years 1989 and 1990, respondent

determined that petitioners were liable for deficiencies of

$2,271 and $10,471, section 6651 additions to tax of $568 and

$2,618, and section 6662 accuracy-related penalties of $454 and

$2,094.1   As to the respective years 1991, 1992, and 1993,

respondent determined that petitioner was liable for deficiencies

of $7,739, $36,363, and $2,577, section 6651 additions to tax of

$1,935, $9,091, and $644, section 6654 additions to tax of zero,

$1,586, and $108, and section 6662 accuracy-related penalties of

$1,548, zero, and zero.

     Following concessions and our dismissal of this case as to

Ms. Ihlenfeldt for failure to prosecute properly, we are left to

decide:2

     1.    Whether petitioner’s taxable income includes self-

employment income in the amounts determined by respondent.      We

hold it does.


     1
        Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, Rule
references are to the Tax Court Rules of Practice and Procedure,
and dollar amounts are rounded.
     2
       Petitioner’s posttrial brief addresses only the two issues
set forth below. We hold that petitioner has conceded all other
issues raised by the pleadings which were not conceded by
respondent.
                                - 3 -

     2.    Whether petitioner may deduct self-employment expenses

in amounts greater than allowed by respondent.      We hold he may to

the extent stated herein.

                           FINDINGS OF FACT

     Some facts have been stipulated and are so found.      The

stipulated facts and the exhibits submitted therewith are

incorporated herein by this reference.    At all relevant times,

petitioner resided in a 542-square-foot apartment in a large

building located on 6.7 acres of land at 5522 (A1A) N. Oceanside

Blvd., Palm Coast, Florida (the Oceanside Blvd. property).

Petitioner purchased the Oceanside Blvd. property (inclusive of

the apartment) in 1976 and operated on it a sole proprietorship

named “Kenneth L. Ihlenfeldt d/b/a/ Delta Marine Enterprises”

(Delta).    Delta’s primary business activity was the building,

repairing, and storing of boats.    In addition to the apartment,

the building on the Oceanside Blvd. property contained vast space

for the storage of boats and boat parts, a small business office

with a desk and a telephone, and a second office where petitioner

kept business documents.

     During 1989, petitioner purchased a second property (the

second property) in Palm Coast, Florida.      He operated on the

second property a C corporation named Seven Leagues Charter, Inc.

He began operating in 1990 another C corporation named Omega

Yachts, Inc.    Petitioner performed backhoe work and land-clearing
                                - 4 -

services during all of the relevant years in addition to the

activities which he performed through Delta and the corporations.

     Petitioner did not timely file a Federal income tax return

for any of the subject years.   He filed 1989 and 1990 Federal

income tax returns using the filing status of married filing

joint return.   He filed a 1991 and a 1992 Federal income tax

return using the filing status of married filing separate

return.3   He never filed a 1993 Federal income tax return before

the notice of deficiency for that year was issued.

     Petitioner’s 1989 through 1992 returns reported the

following taxable income:

                             1989       1990    1991        1992

     Wages                   $115      $469     $405       $242
     Interest income        1,808       -0-       50         70
     Taxable tax refund       -0-       160      -0-        -0-
     Business loss         77,997   107,052   34,181     57,432
     Gambling winnings      9,469       -0-      -0-        -0-
     Taxable income       (66,605) (106,423) (33,726)   (57,120)

His accompanying Schedules C, Profit or Loss From Business (Sole

Proprietorship), reported that the business losses were

attributed to the following items of income and expense:




     3
       None of the amounts set forth in the 1992 return are
reflected in the notice of deficiency for that year because
petitioner filed that return right before respondent issued to
him the notice of deficiency.
                                 - 5 -



                               1989        1990      1991        1992

   Gross receipts          $7,066          $344   $10,582         -0-

   Car and truck              297         -0-        -0-          -0-
   Depreciation             2,598       2,598      2,598       $2,598
   Insurance                1,476         -0-        -0-          -0-
   Mortgage interest       34,043      32,333      5,071       13,081
   Other interest             -0-         -0-     29,674          -0-
   Legal and profess.         460         -0-        356          206
   Repairs and maint.         524         -0-        -0-           60
   Taxes                    5,834       5,860      5,981        6,183
   Utilities                1,621         -0-      1,083        1,578
   NOL carryover           38,172      66,605        -0-       33,726
   Donation                    12         -0-        -0-          -0-
   Licenses                    26         -0-        -0-          -0-
   Total expenses          85,063     107,396     44,763       57,432
   Net loss                77,997     107,052     34,181       57,432

     Respondent audited petitioner for the subject years and

analyzed his bank accounts as part of the audit.       On the basis of

that analysis, respondent determined that petitioner had

unexplained deposits of $10,702, $59,068, $34,703, $93,912, and

$11,732 in the respective years, all of which respondent

characterized as self-employment income.      Respondent determined

that petitioner should have reported this income for the

respective years and reflected in the notices of deficiency a

corresponding adjustment as well as other adjustments.

Respondent’s adjustments to taxable income were as follows:

                        1989        1990      1991      1992      1993

 Self-empl. inc.   $10,702      $59,068 $34,703 $93,912 $11,732
 Self-empl. exps.1  84,740      107,395   44,407     -0-     -0-
 Self-empl. ded.       -0-       (3,889) (3,174) (4,684)    (829)
 Itemized deds.    (39,753)     (43,211) (58,781)
 Standard ded.       5,200        5,450    2,850  (3,000) (3,100)
 Personal exemp.       -0-          -0-      -0-  (1,380) (2,350)
                                  - 6 -

  Capital gain          -0-    16,471         -0-      -0-     -0-
  Interest income       -0-     2,339          53       70       5
  Wage income           -0-       -0-         -0-      241     678
  Dividend income       -0-       -0-      27,967   13,627     -0-
  NOL                   -0-    (3,038)        -0-      -0-     -0-
  Total adjustments 60,889    140,585      48,025   98,786   6,136
  AGI as filed      (75,805) (115,973)        -0-      -0-     -0-
  Tax. inc. as rev. (14,916)   24,612      48,025   98,786   6,136
       1
         Respondent disallowed all of petitioner’s reported
  expenses except for: (1) The car and truck expense of $297
  and the licenses expense of $26 reported for 1989 and (2) the
  legal and professional expense of $356 reported for 1991.

Respondent explained in the notices of deficiency that he had

disallowed the self-employment expenses on the basis of his

determination that they were not ordinary and necessary business

expenses.    Respondent explained further that petitioner could

deduct the following amounts as itemized deductions, rather than

as business expenses:

                                    1989     1990     1991

            Mortgage interest:1
            Barnett Bank          $8,698   $6,988   $5,059
            SouthTrust Bank          733      350      -0-
            Charles Williams      25,658   33,534   32,184
                                  35,089   40,872   37,243
            Taxes                  2,856      -0-      -0-
            Investment interest    1,808    2,339   22,144
                                  39,753   43,211   59,387
                 1
                   The interest paid to Barnett Bank and
            Charles Williams concerned mortgages on the
            Oceanside Blvd. property. The interest paid
            to SouthTrust Bank concerned a mortgage that
            Ms. Ihlenfeldt had on a mobile home unrelated
            to the Oceanside Blvd. property.
                                 - 7 -

Respondent has since conceded that petitioner may also deduct as

itemized deductions mortgage interest of $24,503 for 1992 and

taxes of $5,834, $5,955, and $6,141 for 1990 through 1992,

respectively.

                                OPINION

     Petitioner must prove that respondent's determinations

contained in the notices of deficiency are incorrect.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Petitioner

also must prove his entitlement to any deduction challenged by

respondent.     New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).    Deductions are strictly a matter of legislative grace,

and petitioner must present to the Court sufficient evidence to

substantiate any deduction that is allowed by the Code.    Sec.

6001; New Colonial Ice Co. v. Helvering, supra at 440.

     With these basic principles in mind, we turn to the issues

at hand.    We address those issues seriatim.

1.   Self-Employment Income

     Respondent determined through a bank deposits analysis that

petitioner had unexplained bank deposits in the amounts set forth

above.    Respondent asserts that those unexplained deposits

constitute unreported income from petitioner’s backhoe work and

land-clearing services.

     When a taxpayer such as petitioner fails to keep adequate

books and records, section 446(b) authorizes the Commissioner to
                                - 8 -

compute the taxpayer's income by any method that clearly reflects

income.    Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965).    A

bank deposits analysis has been accepted by the Courts as

satisfying this legislative mandate.      Harper v. Commissioner, 54

T.C. 1121, 1129 (1970); Pao v. Commissioner, T.C. Memo. 1984-224.

The Commissioner's determination of tax liability, when

calculated under a bank deposits analysis, is presumptively

correct and places upon the taxpayer the burden of proving the

determination wrong.    Helvering v. Taylor, 293 U.S. 507 (1935);

Kearns v. Commissioner, 979 F.2d 1176, 1178 (6th Cir. 1992),

affg. T.C. Memo. 1991-320; Traficant v. Commissioner, 884 F.2d

258, 263 (6th Cir. 1989), affg. 89 T.C. 501 (1987); Calderone v.

United States, 799 F.2d 254, 258 (6th Cir. 1986).      A bank

deposits analysis requires that all deposits in the bank be

totaled and that adjustments be made to eliminate deposits that

reflect nontaxable items such as gifts and loans.     A taxpayer's

bank deposits, absent an explanation, are considered taxable

income.    Sindik v. Commissioner, T.C. Memo. 1996-47.

     Petitioner asserts that the unexplained deposits are

nontaxable income.   According to petitioner, those deposits are

primarily the proceeds of loans which he received from financial

institutions, friends, and family.      We are unpersuaded that this

is so.    On the basis of our review of respondent’s analysis, in

the light of the record as a whole, we sustain respondent’s
                                - 9 -

determination on this issue.    Petitioner has failed to prove it

wrong.

2.   Self-Employment Expenses

     Section 162(a) lets taxpayers deduct all ordinary and

necessary expenses paid during the taxable year in carrying on a

trade or business.   Section 262(a) generally prohibits a taxpayer

from deducting personal, living, or family expenses.

     Respondent determined that petitioner was not engaged in a

trade or business on the Oceanside Blvd. property and disallowed

the business deductions which petitioner claimed for expenses

related to that property.   Respondent argues that petitioner used

the Oceanside Blvd. property only for personal purposes.

We disagree.   We have found as a fact that petitioner operated at

least Delta’s business on the Oceanside Blvd. property and that

petitioner’s personal use of the Oceanside Blvd. property was

limited solely to the apartment.   Although respondent disputes

whether petitioner actually worked on the Oceanside Blvd.

property during the subject years, the fact of the matter is that

at least Delta’s business was located on the property, and

Delta’s business generated approximately $18,000 of gross

receipts during 1989 through 1991.4     We are confident that



     4
       We also are mindful of the fact that we have just
sustained respondent’s determination that petitioner failed to
report self-employment income for the subject years totaling
$210,117.
                                - 10 -

petitioner (at least through Delta) used the Oceanside Blvd.

property during the subject years in the course of his self-

employment.   Whereas respondent invites the Court to find that

the Oceanside Blvd. property was used entirely by petitioner as

his residence, the record at hand supports a contrary finding.

We conclude that the deductions which respondent has allowed as

itemized deductions are properly characterized as business

expenses to the extent that they are attributable to petitioner’s

business use of the Oceanside Blvd. property.    We find in this

regard that 542 square feet of the 6.7 acres is attributable to

petitioner’s personal use and that the remainder constitutes

Delta’s business use.5    We allow petitioner to deduct as business

expenses 99.8 percent ((291,852 - 542)/291,852 = 99.8%)6 of the

Oceanside Blvd. property expenses that respondent concedes are

itemized deductions.     We allow petitioner to deduct the remainder

of those expenses as itemized deductions.

     As to the other expenses in dispute, i.e., depreciation,

insurance, interest (exclusive of the amounts discussed in the

immediately preceding paragraph), legal and professional

(exclusive of the $297 for 1989), repairs and maintenance, taxes


     5
       Although the building itself did not cover 6.7 acres,
petitioner’s personal use of the Oceanside Blvd. property was
limited solely to the apartment. We conclude, therefore, that
petitioner used the remainder of the building and the grounds
surrounding it in the course of his self-employment.
     6
       An acre equals 43,560 square feet. Webster’s New World
Dictionary 12 (3d coll. ed. 1988). Thus, the total square
footage of the Oceanside Blvd. property is 291,852 (6.7 x
43,560).
                               - 11 -

(exclusive of the amounts discussed in the immediately preceding

paragraph), utilities, net operating loss (exclusive of the

amount conceded by respondent), and donation, we have examined

the record and are not persuaded that petitioner is allowed to

deduct any of those amounts.    The record simply does not contain

enough credible evidence from which we could derive those

amounts.    We sustain respondent’s determination as to these

amounts.7

     All of the parties’ arguments have been considered, and we

have rejected those arguments not discussed herein as meritless.

To reflect the foregoing,

                                          Decisions will be entered

                                     under Rule 155.




     7
       We note that petitioner has failed to prove that he is
entitled to deduct any amounts for 1993.
