                         T.C. Memo. 2010-251



                     UNITED STATES TAX COURT



            VICTOR AND DELLA JENKINS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21092-08.              Filed November 17, 2010.



     Victor and Della Jenkins, pro se.

     Matthew D. Carlson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:    The petitioners, Victor and Della Jenkins

(the “Jenkinses”), filed a joint tax return for the year 2006.

Respondent, whom we will refer to as the IRS, issued a deficiency

notice determining a deficiency of $98,479, and a section 6662(a)

penalty of $19,695.80.   The Jenkinses filed a petition with the

Tax Court seeking a redetermination.   The IRS now concedes the
                               - 2 -

correctness of charitable-contribution and home-mortgage

deductions that the Jenkinses claimed on their return.    After

taking into account these two concessions, the remaining issues

for us to decide include:   (1) the amount of the deduction to

which the Jenkinses are entitled for payments to a loan processor

(we find the amount is $156,970.89), (2) whether the Jenkinses

are entitled to deduct $16,418 in other business expenses (we

find they are not), and (3) whether the Jenkinses are liable for

the accuracy-related penalty under section 6662(a) (we find that

they are).   All of the other unresolved issues involve matters

that should be resolved in the Rule 155 computations.    These

computational issues are:   (1) whether the self-employment tax

should be increased to $17,603, (2) whether the self-employment

tax deduction should be increased to $8,802, and (3) whether the

Jenkinses are entitled to itemized deductions as opposed to the

standard deduction.

                         FINDINGS OF FACT

     During 2006 Victor Jenkins (“Jenkins”) worked as a

registered nurse for a company called Nursefinders, Inc.    In 2006

Jenkins received $41,929 in wages from Nursefinders, Inc.    The

tax treatment of these wages is not in dispute.   Jenkins also

worked as a loan officer during 2006.

     In his capacity as a loan officer Jenkins worked with two

mortgage brokers:   American Dream Homes, and Living American
                                - 3 -

Dreams, Inc.1   The two brokers compensated Jenkins by writing him

commission checks.2   We refer to these commission checks as

“broker checks”.

     Jenkins worked with a loan processor named Therriman

Edwards.3   Jenkins and Edwards had an arrangement whereby

the two men split the amount of each broker check that Jenkins

received.   Edwards was the key man in bringing in the business.

Therefore, Edwards received the larger percentage of the net

profit attributable to the broker checks.   The primary reason

that Jenkins received any share at all was that he held a

California real-estate license.    This permitted Jenkins to work

as a loan officer.    Edwards did not have a real-estate license.

     Jenkins testified that his own share of a broker check was

equal to 10 percent of the difference between the broker check

and Edwards’ out-of-pocket costs.   Jenkins testified that

Edwards’ share of the broker check was equal to (1) Edwards’ out-

of-pocket costs plus (2) 90 percent of the difference between the

broker check and Edwards’ costs.    As we explain later, we do not



     1
      A mortgage broker hires a loan officer with respect to each
loan transaction.
     2
      A mortgage lender works with various mortgage brokers and
compensates these mortgage brokers with commission payments. In
2006 a typical commission payment to a mortgage broker was 2 to 3
percent of the loan amount. The amounts of the checks that the
two brokers wrote to Jenkins were 90 percent of the amounts that
the brokers received from mortgage lenders.
     3
      A loan officer works with a loan processor.
                                - 4 -

think that the amounts paid to Edwards were determined by this

formula.

     Jenkins used a bank account at Washington Mutual for both

his loan officer business and his personal business.    The bank

statements for this account and copies of checks drawn on this

account provide some information about the amounts of the

payments that Jenkins made to Edwards.

     Jenkins received an information return, a Form 1099-MISC,

Miscellaneous Income, from American Dream Homes showing that

American Dream Homes paid him $94,081.45 in 2006.    He received

another information return from Living American Dreams, Inc.

showing that Living American Dreams, Inc., paid him $124,571.79

in 2006.   The total of those two numbers is $218,653.24.

     Jenkins provided Edwards a Form 1099-MISC for the tax year

2006 showing $196,787.92 in the box for “Nonemployee

compensation”.   Jenkins arrived at $196,787.92 by multiplying 90

percent by the $218,653.24 that the two brokers reported that

they had paid him.

     The Jenkinses filed a Form 1040, U.S. Individual Income Tax

Return, for 2006.    They attached a Schedule C, Profit or Loss Frm

Business, for a business that they described as the “Mortgage

Lender” business.4   On the Schedule C the Jenkinses reported



     4
      The “Mortgage Lender” label was erroneous.    Jenkins did not
act as a mortgage lender but as a loan officer.
                               - 5 -

gross receipts of $221,131 and gross income of $221,131.       They

reported total expenses of $213,206, of which $196,788 was

“Wages”.   As Jenkins would explain to the Court, this $196,788

represented the payments he made to Edwards.     Besides the

$196,788, the remainder of the Schedule C expenses was $16,418.

This $16,418 in expenses was described on the return only in

broad categories and their corresponding amounts.     The names of

the categories and the amounts are listed later in our opinion.

The trial record does not reveal any other information about

these amounts.   The net profit from the business was reported as

$7,925, which is $221,131 minus $213,206.     The IRS does not

contest the accuracy of the $221,131 that the Jenkinses reported

as gross income and gross receipts from the business.

     Edwards filed a 2006 income-tax return with the IRS.       He

reported that he earned $96,788 in gross receipts.     Suspiciously,

this number is precisely $100,000 less than the $196,788 that

Jenkins claimed as a deduction for “Wages”.

     The IRS sent a deficiency notice to the Jenkinses

determining a deficiency of $98,479 and a section 6662(a) penalty

of $19,695.80.   One of the adjustments in the deficiency notice

was the reduction of the $213,206 that the Jenkinses had claimed

for Schedule C deductions to zero.     The deficiency notice

explained that “the record keeping requirements under Internal

Revenue Code Section 6001 have not been met, and you have not
                                - 6 -

complied with our request for substantiation of your Schedule C”.

The IRS now concedes that Jenkins paid Edwards commissions of

$69,325 during tax year 2006 and that Jenkins is entitled to a

business deduction of that amount.      At the time the Jenkinses

filed their petition, they resided in California.

                               OPINION

1.   Amount of Deduction for Jenkins’ Payments to Edwards

     a.   The Nine Payments Documented by Copies of Jenkins’
          Personal Checks to Edwards and Corresponding Entries on
          Bank Statements

     The trial record contains copies of nine checks Jenkins

wrote to Edwards.   These checks were drawn on Jenkins’ Washington

Mutual bank account.   For each check, the bank statements

reflect, under the heading “Checks Paid”, the check number, the

check amount, and the payment date.      Each of these items is

consistent with the information on the copies of the checks.

Other entries on the bank statement show that a “Customer

Deposit” was made on the same date (or almost the same date) as

the payment date of each check.   The amount of each “Customer

Deposit” entry is somewhat greater than the amount of the

corresponding check.

     For example, check No. 1012, dated March 2, 2006, is made

out from Jenkins to Edwards.   The amount on the check is $10,000.

The bank statement contains a corresponding entry, under the

heading of “Checks Paid”, for check No. “1012”, a date of March
                              - 7 -

3, 2006, and an amount of $10,000.    The bank statement contains

an entry on March 2, 2006 for a “Customer Deposit” of $11,920.50.

     Including the example described above, there were nine

transactions in which the documentation is similar.   They are

summarized as follows:
                                    - 8 -

  Nine Payments to Edwards Evidenced by Checks to Edwards and Simultaneous
                  Large Deposits to Jenkins’ Bank Account
 Date and Amount   Information on   Bank Statement    Amount of Payment to
  of “Customer     Check to         Entry for Same   Edwards (as claimed by
 Deposit” Entry    Edwards               Check       Jenkins - identical to
     on Bank                                         amounts conceded to be
    Statement                                            correct by IRS)


                    Check #1012      Check #1012
    3/2/06            3/2/06           3/3/06
    $11,920.50        $10,000          $10,000              $10,000
                    Check #1034      Check #1034
    7/25/06           7/25/06          7/25/06
    $9,791            $8,191           $8,191                 8,191
                    Check #1032      Check #1032
    7/31/06           7/31/06          7/31/06
    $13,914           $12,942          $12,942               12,942
                    Check #1033      Check #1033
    8/1/06            8/1/06           8/1/06
    $9,396            $8,600           $8,600                 8,600
                    Check #1037      Check #1037
    8/16/06           8/16/06          8/16/06
    $5,189.40         $4,929           $4,929                 4,929
                    Check #1036      Check #1036
    8/30/06           8/30/06          8/30/06
    $2,250            $2,125           $2,125                 2,125
                    Check #1038      Check #1038
    9/1/06            9/1/06           9/1/06
    $10,168.56        $9,380           $9,380                 9,380
                    Check #1047      Check #1047
    10/18/06         10/17/06         10/18/06
    $8,758.63         $8,075           $8,075                 8,075
                    Check #1046      Check #1046
    11/9/06           11/8/06          11/9/06
    $5,533.20         $5,083           $5,083                 5,083


      Total                                                  69,325



The IRS has conceded that Jenkins is entitled to deduct $69,325

for his payments to Edwards.        This is the total amount of these

nine checks.
                                 - 9 -

     b.      Seven Payments to Edwards Documented by Entries for
             Large Deposits to and Large Withdrawals from Jenkins’
             Account

     There are seven instances in which Jenkins’ bank statement

has an entry for a “Customer Deposit” and, on the same date, a

withdrawal.     The amount of each withdrawal is a relatively large

fraction of the amount of the corresponding “Customer Deposit”.

For example, the Washington Mutual bank statement shows that on

April 12, 2006, there was a “Customer Deposit” of $12,797.44.     It

also shows that on 4/12/06, there was a “Transfer Withdrawal” of

$11,517.44.

     Jenkins testified that the $12,797.44 deposit entry

reflected that he had deposited a broker check in that amount.

He testified that the entry for a “Transfer Withdrawal” of

$11,517.44 reflected that he transferred that amount from his

bank account at Washington Mutual to Edwards’ account at the same

bank.     The IRS argues that the documentary evidence is inadequate

to support the proposition that Jenkins made a payment of

$11,517.44 to Edwards.    We find, however, that the bank

statement, combined with Jenkins’ testimony, is sufficient to

demonstrate that Jenkins paid Edwards the $11,517.44 recorded on

the bank statement.    We make a similar conclusion for six other
                                   - 10 -

payments for which there is similar documentary and testimonial

evidence.     All seven payments can be summarized thus:

 Seven Payments to Edwards Evidenced by Entries for Large Deposits and Large
                                 Withdrawals
   Date and Amount of         Date and Amount of       Amount Paid to Edwards
“Customer Deposit” Entry   “Transfer Withdrawal” or   (as claimed by Jenkins -
    on Bank Statement        “Customer Withdrawal”      identical to amounts
                            Entry on Bank Statement   determined by the Court)
          4/12/06            4/12/06 (Transfer
          $12,797.44         withdrawal)                    $11,517.44
                               $11,517.44
          4/21/06            4/21/06 (Transfer
          $12,011.57           withdrawal)                   11,281.00
                               $11,281
          4/25/06            4/25/06 (Customer
          $10,099.13           withdrawal)                    9,144.00
                               $9,144
          6/2/06             6/2/06 (Customer
          $14,536.04           withdrawal)                   13,947.69
                               $13,947.69
          6/2/06             6/2/06 (Customer
          $7,906.50            withdrawal)                    7,645.50
                               $7,645.50
          6/27/06            6/27/06 (Customer
          $10,636.86           withdrawal)                    9,483.00
                               $9,483
          10/3/06            10/3/06 (Transfer
          $9,756.40            withdrawal)                    9,088.00
                               $9,088
            Total                                            72,106.63

     c.     Three Payments From Jenkins to Edwards Documented by an
            Entry in the Bank Statement Showing That Jenkins
            Deposited a Small Amount

     There are three transactions for which the sole written

evidence of a payment from Jenkins to Edwards is entries on

Jenkins’ Washington Mutual bank statement showing that there were

three relatively small customer deposits made to Jenkins’ bank

account.    For example, the bank statement reflects that a
                               - 11 -

“Customer Deposit” of $1,137 was made on March 17, 2006.    On the

basis of this $1,137 entry, Jenkins testified that he must have

received a check from the broker for $11,370; i.e., $1,137

divided by 10 percent.    Jenkins cashed the broker check rather

than depositing it, which explains why there is no bank statement

entry corresponding to the amount of the broker check.    Of the

$11,370 that he estimated was the proceeds from the cashing of

the broker check, Jenkins said that he gave Edwards 90 percent;

i.e., $10,233.    He said that he deposited to his own bank account

the remaining 10 percent; i.e., $1,137.    Jenkins gave similar

testimony with respect to two other transactions for which the

written documentation is comparable to this one.    He estimated

that for all three transactions, his total payments to Edwards

were $26,894.88.

     We believe that the entry for a deposit of $1,137 to the

Washington Mutual bank account reflected Jenkins’ share of a

broker check.    We also believe that around the time of this

deposit, Jenkins paid Edwards for Edwards’ share of the broker

check.    However, we come to a different conclusion from Jenkins’

regarding how much Jenkins paid Edwards.    The method used by

Jenkins is unacceptable.    If one attempts to apply this method to

other payments to Edwards for which there is documentary evidence

as to the actual amount, the method fails to predict the actual

amount.   For example, as we have found, Jenkins received a broker
                               - 12 -

check of $11,920.50 and paid Edwards $10,000 from that check.

Yet the method Jenkins used would have predicted that Edwards’

share would be $10,728.45 ($11,920.50 times 90 percent).     To take

another example, we found that Jenkins received a broker check of

$9,791 and paid Edwards $8,191.   Yet the method Jenkins used

would have predicted $8,812.   We therefore find the method

unreliable.5

     If a taxpayer is entitled to a deduction, but it is not

possible to determine the exact amount of the deduction, the Tax

Court may estimate the amount.    Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930).   In making this estimate, the Court

may resolve uncertainties against the taxpayer, because it is the

taxpayer’s fault that there is not enough information to

accurately calculate the deduction.     Id.   For the reasons set

forth below, we have decided to determine the amount of each of


     5
      In determining the amounts of the three payments to
Edwards, we did not rely on Jenkins’ testimony that Edwards’
share of each broker check was equal to Edwards’ costs plus 90
percent of the difference between the broker check and his costs.
This amount is mathematically equivalent to 90 percent of the
broker check, plus 10 percent of his costs. (Suppose that b is
the amount of the broker check, c is Edwards’ out-of-pocket
costs, and e is Edwards’ share of the broker check. Jenkins
testified that: e = c + .9(b-c). This is algebraically
equivalent to: e = .9b + .1c.) But if we apply this formula to
the $11,920.50 broker check, the formula would predict that
Edwards would receive 90 percent of the broker check (i.e.
$10,728.45) plus costs. But in fact Edwards actually received
only $10,000. Therefore, the formula is incorrect. And, even if
the formula was correct, we would not have enough information to
use the formula. One of the terms of the formula is Edwards’
costs. We do not know this amount.
                                - 13 -

the three payments to Edwards by multiplying the amount of each

corresponding deposit by 5.2.

     The derivation of the 5.2:1 ratio is as follows.   For each

of the 16 transactions for which we have already determined the

amount that Jenkins paid Edwards, we calculated the ratio between

Jenkins’ share of the broker check and Edwards’ share of the

broker check.   The transactions for which the ratio was the

highest were (1) the $11,920.50 broker check deposited on March

2, 2006, of which Edwards’ share, $10,000, bears approximately a

5.2 ratio to Jenkins’ share, $1,920.50, and (2) the $9,791 broker

check deposited on July 25, 2006, of which Edwards’ share,

$8,191, bears approximately a 5.1 ratio to Jenkins’ share,

$1,600.

     Using this 5.2 ratio, we find that:   (1) the $1,137 deposit

Jenkins made on March 17, 2006, corresponded to a $5,912.40

payment to Edwards, (2) the $793.27 deposit Jenkins made on March

17, 2006, corresponded to a $4,125 payment to Edwards, and (3)

the $1,058.05 deposit Jenkins made on March 30, 2006,

corresponded to a $5,501.86 payment to Edwards.   The total of

these three payments is $15,539.26.

     The IRS’s position is that we should be making no estimate

at all and that the deduction for these three transactions should

be zero.   It points out there is no written evidence proving that

the three deposits actually represented Jenkins’ shares of the
                                      - 14 -

broker checks and no written evidence that Jenkins made a

corresponding payment to Edwards for Edwards’ share.               But, as we

noted above, we believe Jenkins’ testimony that the deposits to

his account did correspond to broker checks and that he made

corresponding payments to Edwards.             We have estimated the

payments to Edwards in these three transactions.

     The three transactions discussed in this section can be

summarized as follows:

 Three Payments to Edwards Evidenced In Writing by Small “Customer Deposit”
                                   Entries
 Date and Amount of
 “Customer Deposit”    Amount of Broker    Amount of Payment       Amount of
    Entry on Bank         Check (per        to Edwards (per       Payment to
      Statement            Jenkins)            Jenkins)          Edwards (Per
                                                                    Court)


    3/17/06            $11,370            $10,233 (90% of      $5,912.40
    $1,137             ($1,137/10%)       $11,370)             ($1,137*5.2)


    3/17/06            $7,932.70          $7,139.43 (90% of    $4,125.00
    $793.27            ($793.27/10%)      $7,932.70)           ($793.27*5.2)


    3/30/06            $10,580.50         $9,522.45            $5,501.86
    $1,058.05          ($1,058.05/ 10%)   ($10,580.50)         ($1,058.05*5.2)



    Total Deposits =                      Total=               Total=
    $2,988.32                             $26,894.88           $15,539.26
                              - 15 -

      d.   Conclusion

      Of the three categories of payments described above, we have

determined that Jenkins is entitled to a deduction of $156,970.89

($69,325 + $72,106.63 + $15,539.26).   This figure is less than

the $168,326.51 amount claimed by Jenkins.6     It is greater than

the corresponding amount urged by the IRS, $69,345.     We are not

persuaded that Jenkins made any payments to Edwards other than

the 19 discussed in this opinion.

2.    Remaining Schedule C Expenses

      Of the $213,206 in expenses claimed as deductions on the

Schedule C, $196,788 was labeled “Wages”.     The rest of the

expenses, amounting to $16,418, were described on the tax return

as:

      Car and truck expense                                     $2,546
      Insurance (other than health)                                 81
      Rent or lease (other business property)                      500
      Supplies                                                     130
      Taxes and licenses                                            76
      Utilities                                                    286
      Business credit card                                      10,450
      Car rental                                                   127
      Seminar airfare                                            1,134
      Hotel                                                        337
      Ink cartilages (sic)                                         160
      Business cards                                               100
      Real estate book                                             491
        Total                                                   16,418




      6
      Jenkins did not argue that his payments to Edwards were
equal to $196,787.92, the amount that Jenkins deducted on his
return for these payments.
                              - 16 -

Even though he claimed the $16,418 in expenses on his Schedule C,

Jenkins did not introduce any evidence to prove that he was

entitled to deduct it.7   We sustain the IRS’s determination in

its deficiency notice that the remaining Schedule C deductions

should be disallowed.

3.   The Section 6662(a) Penalty

     The IRS bears the burden of producing evidence that the

Jenkinses are liable for the section 6662(a) penalty.   See sec.

7491(c).   The Jenkinses were negligent within the meaning of

section 6662(c).   Their recordkeeping was extremely poor.   The

IRS has carried its burden of producing evidence.   The portion of

the underpayment attributable to the Schedule C deductions that

the Jenkinses erroneously claimed was due to negligence.

     The disallowed Schedule C deductions also resulted in an

“understatement” of income tax within the meaning of section

6662(d)(2).   Whether there is a “substantial understatement” of

income tax within the meaning of section 6662(d)(1)(A) is a

mathematical matter to be resolved after the parties have

completed Rule 155 computations.


     7
      Instead, Jenkins introduced into evidence a list of
expenses that he says he could have deducted but did not. The
purpose of the exhibit was to show the Court that his handling of
his tax return showed indifference rather than any sort of
fraudulent intent. He did not ask the Court to incorporate the
new deductions on the exhibit into its determination of his tax
liability. In any event, that spartan list of additional
deductions would not have proven he was entitled to the
additional deductions.
                              - 17 -

     The Jenkinses have the burden of proving that they are not

liable for the penalty because of reasonable cause, substantial

authority, or a similar provision.     See Higbee v. Commissioner,

116 T.C. 438, 447 (2001).   They have not satisfied their burden

of proof.


                                           Decision will be entered

                                     under Rule 155.
