                         T.C. Memo. 2008-5



                     UNITED STATES TAX COURT



      CURTIS G. LOCKETT AND EDNA L. LOCKETT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10374-05.             Filed January 14, 2008.



     Curtis G. Lockett and Edna Lockett, pro sese.

     William J. Gregg, for respondent.



                        MEMORANDUM OPINION


     THORNTON, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax of $3,049, $32,675, and $2,581

for taxable years 2001, 2002, and 2003, respectively.   The issue

for decision is whether respondent correctly determined the

amounts of petitioners’ deductions for these years.   Unless

otherwise indicated, all Rule references are to the Tax Court
                                    - 2 -

Rules of Practice and Procedure, and all section references are

to the Internal Revenue Code in effect for the years in issue.

                              Background

     When they petitioned the Court, petitioners resided in

Florida.

     Petitioners filed joint Federal income tax returns for the

years at issue.   In the notice of deficiency, respondent

disallowed the following amounts of deductions that petitioners

claimed on their returns:1

                             2001             2002          2003

Itemized deductions      $480,776             $12,419      $26,015
Business expenses          61,632           1,065,543       64,931
Theft/destruction of       36,000           1,500,000         --
  property losses
Moving expenses                -–             41,952            --

     Petitioners timely petitioned this Court.       At the time of

trial, the parties had entered into no stipulations, contrary to

Rule 91(a) and the Court’s standing pretrial order.       Petitioners

also failed to comply with the Court’s order, dated May 8, 2006,

granting respondent’s motions to compel production of documents

and to compel responses to interrogatories.      The case was


     1
       In the notice of deficiency, respondent also determined
that petitioners had unreported dividend income of $113 and $248
for 2001 and 2003, respectively, and unreported interest income
of $16 for 2002. Respondent also determined that petitioners
owed $30 additional tax for the early distribution of retirement
income pursuant to sec. 72(t). Petitioners have not assigned
error to these determinations either in their pleadings or at
trial. Consequently, we sustain respondent’s determinations as
to these items.
                                 - 3 -

submitted on the basis of a sparse record consisting of

petitioner husband’s testimony and limited documentary evidence.

                             Discussion

A.   In General

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

to prove that the determinations are in error.      Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).2      Deductions are a

matter of legislative grace, and a taxpayer must prove

entitlement to claimed deductions.       Rule 142(a)(1); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).      The taxpayer must keep

sufficient records to substantiate any deductions claimed.      Sec.

6001.    In the event that a taxpayer establishes a deductible

expense but is unable to substantiate the precise amount, the

Court may approximate the deductible amount, but only if the

taxpayer presents sufficient evidence to establish a rational

basis for making the estimate.     Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930).

B.   Casualty and Theft Losses

     Petitioners challenge respondent’s disallowance of various

deductions they have claimed for casualty and theft losses.


     2
       Petitioners have not alleged and the record does not
support a conclusion that the burden of proof is shifted to
respondent pursuant to sec. 7491(a).
                                - 4 -

Section 165(a) allows as a deduction “any loss sustained during

the taxable year and not compensated for by insurance or

otherwise.”    For individuals, the deduction is available only

for:    (1) Losses incurred in a trade or business; (2) losses

incurred in transactions entered into for profit; or (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.”        Sec.

165(c).

       The amount of a casualty or theft loss is generally limited

to the lesser of the property’s reduction in fair market value or

the property’s adjusted tax basis.      Secs. 1.165-7(b)(1) and

1.165-8(c), Income Tax Regs.    Petitioners bear the burden of

proving both the occurrence of a casualty or theft within the

meaning of section 165 and the amount of the loss.      See Rule

142(a); Elliott v. Commissioner, 40 T.C. 304, 311 (1963).

       A casualty loss deduction under section 165(a) is allowed

only for the taxable year in which the loss was sustained.        Sec.

1.165-7(a)(1), Income Tax Regs.    If the taxpayer has a reasonable

prospect for recovering the loss (for example, through insurance

or a lawsuit), no portion of the loss is treated as being

sustained until it can be ascertained with reasonable certainty

that the taxpayer will not receive reimbursement.      Sec. 1.165-

1(d)(2), Income Tax Regs.    A taxpayer has a reasonable prospect
                               - 5 -

for recovery if there is a bona fide claim for recoupment and a

substantial possibility that the claim will be decided in the

taxpayer’s favor.   Ramsay Scarlett & Co. v. Commissioner, 61 T.C.

795, 811 (1974), affd. 521 F.2d 786 (4th Cir. 1975).

     1.   Claimed Destruction of Home and Illegal Foreclosure

     Petitioners assign error to respondent’s disallowance of

$467,900 of casualty and theft losses that were included among

the $480,776 total itemized deductions that petitioners claimed

on their 2001 Federal income tax return.3   Petitioners contend

that the disputed $467,900 of casualty and theft losses arose, in

undifferentiated fashion, from the burning of their house in 1994

and from an illegal foreclosure action in 2001, apparently with

respect to the property where the destroyed house formerly stood.

Petitioners contend that although their house was destroyed in

1994, they claimed the casualty loss in 2001 because it was then

that litigation against an insurance company to recover the value

of the home proved unsuccessful.

     The record is far from clear about the circumstances of the

alleged destruction of petitioners’ house and the litigation to



     3
       Petitioners have not otherwise assigned error to
respondent’s disallowance of the itemized deductions that they
claimed for 2001, 2002, and 2003, other than the $467,900 of
casualty and theft losses claimed on their 2001 Federal income
tax return. We deem petitioners to have conceded respondent’s
determinations with respect to all of their itemized deductions
other than the $467,900 item. In any event, petitioners have
failed to substantiate any of these itemized deductions.
                              - 6 -

recover the value of the house.   Even if we were to assume,

however, for purposes of argument, that 2001 was the proper year

for petitioners to claim a deduction for the alleged destruction

of their house in 1994, petitioners have failed to prove the fair

market value of the house or to produce evidence that would allow

us to reasonably estimate its value.4   Furthermore, petitioners

have failed to prove their adjusted basis in the house, thereby



     4
       Petitioners’ explanations as to their lack of supporting
documentation are unconvincing and unsatisfactory. At trial, in
response to an inquiry as to whether he had evidence as to the
amount of unreimbursed loss, petitioner husband stated
incongruously: “Yes, sir. I don’t have that. I don’t know if I
have it or not.” Petitioner husband testified that at least some
of the relevant documents were in a trailer that “was stolen by
two people who worked for the government.” Petitioner husband
initially testified that petitioners “didn’t have the money to
get the trailer back.” Subsequently, petitioner husband
testified, inconsistently: “even after we got the trailer, we
didn’t have, we couldn’t move it. We had no way to move the
trailer from off the person’s property to where we could go
through it.” Petitioner husband also testified that although
petitioners had additional records in a “storage facility” with
“files all the way to the door”, they were unable to open the
door of the storage facility to go through the files.

     Petitioner husband attempted to establish the value of the
house by testifying that certain bids, ranging from $200,000 to
$245,000, were received to replace the house. The only
documentary evidence offered in support of this testimony,
however, was a brief prepared by petitioners in connection with
an Alabama State court proceeding in 2002. Petitioners otherwise
submitted no documentary evidence to show that such bids were
ever received or that any appraisal was ever made. Petitioner
husband’s self-serving statements in this proceeding and
petitioners’ statements in briefs purportedly filed in other
court proceedings are insufficient to establish the property’s
reduction in fair market value. See Ganas v. Commissioner, T.C.
Memo. 1990-143, affd. without published opinion 943 F.2d 1317
(11th Cir. 1991); Marcus v. Commissioner, T.C. Memo. 1988-3.
                               - 7 -

precluding the allowance of any casualty loss deduction with

respect to their house.   See Zmuda v. Commissioner, 79 T.C. 714,

727-728 (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).5

     Petitioners contend that additional losses of an

indeterminate amount arose from an illegal foreclosure action in

2001, which they characterize as a theft.    This Court has

previously questioned whether an illegal foreclosure action is a

theft for purposes of section 165(c).    See Johnson v.

Commissioner, T.C. Memo. 2001-97.     We need not decide this issue,

however, because petitioners have failed to show that the alleged

foreclosure action was illegal and have also failed to

substantiate the amount of the alleged losses.    Accordingly, we

sustain respondent’s determination.

     2. Claimed Loss of Computer Equipment

     On their 2001 Federal income tax return, petitioners claimed

negative $36,000 as “Other gains or (losses).”    On their 2002

Federal income tax return, petitioners claimed negative $1.5

million as “Other income.”   Petitioners claim that these amounts

represent losses arising from the theft and destruction of a



     5
       Petitioner husband testified, without reference to any
supporting evidence, that petitioners paid $115,000 for the
property. Petitioners otherwise have offered no evidence to
establish the adjusted basis of their house.
                                 - 8 -

computer system and possibly other personal property.   Respondent

disallowed these claimed losses for lack of substantiation.6

     At trial, petitioner husband produced photographs showing

personal computer equipment and other items of personal property

piled into the back of a pickup truck and lying along a roadside.

Petitioner husband contends that “the government came in with no

legal basis and just took everything and put it out on the side

of the road” because he had refused to turn over research that

the Government wanted.   Petitioner husband’s contention, as best

we understand it, is that his personal computer was worth $1.5

million because of the value of technology that he had created

and installed on the computer.

     Petitioners have failed to prove that a theft occurred.

Moreover, petitioners have neither established the fair market

value of the property alleged to have been stolen nor provided

sufficient evidence to allow the Court to estimate any of the

property’s value.7   See sec. 1.165-8(c), Income Tax Regs.


     6
       In the notice of deficiency, in showing his income tax
examination changes, respondent listed the disallowance of these
losses under “Adjustments to Income” as “Other Income”. The
accompanying explanation noted that these adjustments were in
disallowance of petitioners’ claimed losses of these amounts. In
their petition, petitioners attempt to recharacterize
respondent’s disallowance of these claimed losses as erroneous
determinations of unreported income and assign error on that
basis. Petitioners’ contentions are without merit.
     7
       Petitioners allege that a third party was prepared to pay
$1.5 million for this equipment, presumably before its alleged
                                                   (continued...)
                               - 9 -

Furthermore, petitioners have not established their adjusted

basis in the property that they allege was stolen.   See id.    We

sustain respondent’s disallowance of petitioners’ claimed $36,000

theft loss for 2001 and their claimed $1.5 million theft loss for

2002.

C.   Moving Expenses

     On their 2002 Federal income tax return, petitioners claimed

a $41,952 deduction for moving expenses.   Petitioners argue that

they are entitled to the deduction because in 2002 they moved

from Mobile, Alabama, to Florida.

     Generally, a taxpayer may deduct moving expenses paid or

incurred during a year in connection with beginning qualifying

work at a new location.   Sec. 217(a).   Petitioners have failed to

substantiate the claimed moving expenses or to show that the

requirements of section 217(a) have been met.

D.   Business Expenses

     Respondent disallowed petitioners’ claimed business expenses

for all 3 years:   $61,632 in 2001; $1,065,543 in 2002; and

$64,931 in 2003.   At trial, petitioner husband contended that $1

million of the claimed business losses in 2002 was due to “bad




     7
      (...continued)
destruction. Petitioners have not, however, identified this
third party and have produced no other evidence of such an offer.
                             - 10 -

debts” but provided no supporting evidence.    Petitioners have

failed to substantiate these claimed business expense deductions.

E.   Conclusion

     Petitioners have failed to meet their burden to prove that

respondent’s determinations were in error.

     In the light of the foregoing,


                                           An appropriate order and

                                      decision will be entered.
