                   T.C. Summary Opinion 2007-152



                      UNITED STATES TAX COURT



        WILLIE D. AND GABRIELA IRENE OUTLAW, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8484-05S.             Filed August 30, 2007.



     Willie D. and Gabriela Irene Outlaw, pro sese.

     Frederick J. Lockhart, Jr., for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

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

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

and this opinion shall not be treated as precedent for any other

case.   Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue, and
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all Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined deficiencies in petitioners’ Federal

income tax of $2,542 for 2001, $3,672 for 2002, and $2,032 for

2003.   Petitioners concede that they are entitled to mortgage

interest expense deductions of $9,384.63 for 2001 and $9,254.42

for 2002 and a real estate tax deduction of $945.12 for 2002.

The issues remaining for decision are whether petitioners:    (1)

Failed to report gross income for 2001, 2002, and 2003; and (2)

are entitled to deduct meals and entertainment expenses for 2003.

                            Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   At the time the

petition was filed, petitioner resided in Colorado Springs,

Colorado.

     For the years under consideration, Willie D. Outlaw

(petitioner) was an employee of the U.S. Postal Service.   He also

conducted a landscaping business.   Petitioners filed joint Forms

1040, U.S. Individual Income Tax Return, for 2001, 2002, and

2003.   On Schedule A, Itemized Deductions, petitioners deducted

$11,507 in home mortgage interest for 2001.   For 2002,

petitioners deducted $18,562 in home mortgage interest and real

estate taxes of $1,849.

     On Schedules C, Profit or Loss From Business, petitioners
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reported a net loss of $14,719 for 2001, $12,041 for 2002, and

$13,796 for 2003.   The net losses included expenses claimed for

the business use of their home, $455 for 2002 and $398 for 2003.

Petitioners’ net loss from business in 2003 included a deduction

of $150 for meals and entertainment expenses.

     Respondent initially chose petitioners’ 2001 and 2002 tax

returns for examination.   The examination was later extended to

include the 2003 return.   Petitioners failed to provide to the

examiner any books or records for the business save for

reconstructed mileage for 2001 and 2002.   Petitioners produced

copies of Forms 1098, Mortgage Interest Statement, for 2001

showing mortgage interest of $9,384.63, and for 2002 showing

mortgage interest of $9,254.42 and real estate taxes of $945.12.

Respondent adjusted petitioners’ mortgage interest expenses for

2001 and 2002 and their real estate tax deduction for 2002 to

comport with the amounts reported on the Forms 1098.   Respondent

also increased petitioners’ Schedule C income to “equal” the

total amount of expense deductions,1 but for 2003 respondent

disallowed the deduction for meals and entertainment expenses.

                            Discussion

     Generally, the Commissioner’s deficiency determinations are


     1
      Respondent’s adjustments increased petitioners’ income for
2002 and 2003 to equal their claimed business deductions except
for office-in-home expenses, in effect allowing an “excess”
deduction for office-in-home expenses as claimed by petitioners.
There was no deduction for office-in-home expenses in 2001.
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presumed correct, and taxpayers have the burden of proving that

the determinations are incorrect.   Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).   Under certain

circumstances, however, section 7491(a) may shift the burden to

the Commissioner with respect to a factual issue affecting

liability for tax.   Petitioners did not present evidence or

argument that they satisfied the requirements of section 7491(a).

Therefore, the burden of proof does not shift to respondent.

     Taxpayers are required to maintain records that are

sufficient to enable the Commissioner to determine the correct

tax liability.   See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

When a taxpayer fails to keep records, or the records of income

are inadequate, the Commissioner may calculate the taxpayer’s

income in any manner that clearly reflects the income.   Sec.

446(b); Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965).     The

Commissioner’s method of reconstructing a taxpayer’s income need

only be reasonable in the light of all the surrounding

circumstances.   Schroeder v. Commissioner, 40 T.C. 30, 33 (1963).

     Petitioner testified that he had no records of the business

because one of his sons moved back into the family home and

“threw cardboard boxes and everything out and the receipts [sic]

that I had my taxes in, and I stated that to the Internal Revenue

examiner”.   The examiner testified that during the examination

petitioner described his landscaping business as a cash business
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and that petitioner stated that he paid his business expenses out

of the receipts from his business.       Further, the examiner

testified that during the examination petitioner said he did not

have any cash hoard at the beginning of the period under

examination.   During his testimony, petitioner failed to deny the

substance of or contradict the testimony of the examiner.

Petitioner, in fact, testified that he paid his son’s salary, a

major expenditure,2 out of what his customers paid him.

     The Court finds respondent’s method of reconstructing

petitioners’ income to be reasonable in the light of all the

surrounding circumstances. The Court finds that petitioner paid

his expenses from the proceeds of his business.       Since the

business expenses were paid from business proceeds, the Court

concludes that the business income must logically have at least

equaled the business expenses.

     Petitioners did not provide any substantiation for the $150

deducted for meal and entertainment expenses for 2003 and




     2
      The amounts claimed for 2001 and 2002 on Schedules C, line
37, as “Cost of labor” greatly exceed reported gross receipts in
either year. There is no cost of labor claimed for 2003.
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therefore have failed to meet the strict substantiation

requirements of section 274(a) and (d) that would allow a

deduction.

     To reflect the foregoing,



                                              Decision will be

                                         entered for respondent.
