                  T.C. Summary Opinion 2003-65



                     UNITED STATES TAX COURT



            FRANK AND LOU-ANN GUARNA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9524-01S.              Filed May 29, 2003.


     Frank and Lou-Ann Guarna, pro sese.

     Elaine T. Fuller, for respondent.


     GOLDBERG, 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 years at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
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     Respondent determined a deficiency of $918 and an addition

to tax of $100 pursuant to section 6651(a)(1) in petitioners’

Federal income tax for the taxable year 1997.   Respondent also

determined a deficiency in petitioners’ Federal income tax for

1998 of $586.

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

so found.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petition

was filed, petitioners lived in Sierra Madre, California.

References to petitioner in the singular are to Frank Guarna.

     In the notice of deficiency, respondent determined that

petitioners:    (1) Failed to report interest income of $45 for the

1997 tax year; (2) are liable for self-employment tax of $318 for

the 1997 tax year; (3) are liable for an addition to tax of $100

pursuant to section 6651(a)(1) for failure to file their 1997 tax

return by the prescribed due date; (4) failed to report capital

gain income of $953 for the 1998 tax year; (5) failed to report

dividend income of $43 for the 1998 tax year; and (6) failed to

report a taxable State tax refund of $563 for the 1998 tax year.

     In the stipulation of facts, petitioners conceded that the

State income tax refund of $563 is includable in income for the

1998 tax year.   Respondent conceded in the stipulation of facts

that petitioners are entitled to a $2,000 deduction in the 1998

tax year for a contribution to an individual retirement account.
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     At trial, petitioners conceded that:    (1) The unreported

interest income of $45 is includable in their gross income for

the 1997 tax year; (2) the unreported capital gain income of $953

is includable in income for the 1998 tax year; and (3) the

unreported dividend income of $43 is includable in income for the

1998 tax year.

     After the above concessions, the remaining issues for

decision are:    (1) Whether petitioners are liable for self-

employment tax for the 1997 tax year; and (2) whether petitioners

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

for the 1997 tax year.    Adjustments for the (1) self-employment

tax and the deduction therefor, (2) reduction to medical and

dental expenses pursuant to section 213(a), (3) reduction to

miscellaneous itemized deductions pursuant to section 67(a), and

(4) alternative minimum tax, if applicable, are computational and

will be resolved by the Court’s holding in this case.

     During the years at issue, petitioner worked as an actor and

model.   He has appeared in movies, stage presentations,

television shows, commercials, and print work.    Petitioner goes

by the professional name of “Frank Isles”.    Related to his acting

and modeling during 1997, petitioner received (1) combined wages

of $10,915 reported on 7 separate Forms W-2, Wage and Tax

Statement, and (2) self-employment income of $2,250 reported on

Form 1099-MISC, Miscellaneous Income.    In addition, petitioner
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received $16,511 of Form W-2 wages and tip income from working at

2 restaurants during 1997.

     On petitioners’ 1997 tax return they reported other income

of $2,250 related to self-employment income that petitioner

received from L.A. Models Inc.    In the description field of line

21, Other income, on the 1997 Form 1040 tax return, petitioners

reported that the $2,250 was income from Schedule C, Profit or

Loss From Business.   However, petitioners did not submit a

Schedule C with their 1997 tax return.

     On petitioners’ 1997 Schedule A, Itemized Deductions, they

claimed a total of $34,430 of miscellaneous itemized deductions.

Except for a tax preparation fee of $450, the $34,430 consists of

unreimbursed business expenses.    At trial, petitioners presented

a schedule individually listing each of their business expenses

for the 1997 tax year, which totaled $41,972.84.    The $41,972.84

of business expenses consists of the $34,430 deducted on Schedule

A and an additional $7,542.84 of business expense that was not

deducted on the 1997 tax return.    At trial, the Court directed

respondent to meet with petitioners and attempt to resolve the

substantiation issue related to the additional business expenses

on petitioners’ schedule.

     In respondent’s status report filed after the conclusion of

the trial while the record was still open, respondent

acknowledged that petitioners presented documents substantiating
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the $34,430 of expenses deducted on the Schedule A.   Respondent

further acknowledged that petitioners presented documentation

substantiating the additional $7,542.84 of unreimbursed business

expenses that petitioners listed on the schedule presented at

trial.

     We decide the deficiency issues in this case on the basis of

the record without regard to the burden of proof.   Accordingly,

we need not decide whether the general rule of section 7491(a)(1)

is applicable in this case.   See Higbee v. Commissioner, 116 T.C.

438 (2001).

Schedule C–Business Expense Deductions

     Petitioner testified at trial that he should have filed a

Schedule C with the 1997 tax return.   At trial, petitioner

presented a list of expenses that he asserts relate to the

production of the $2,250 of self-employment income.   The list of

expenses that petitioner claims should have been reported on

Schedule C includes the following:

          Pictures             $ 600.00
          Parking                 20.00
          Agent                  450.00
          Directories            190.00
          Computer               750.00
          Meals                  306.00
          Education            1,130.00
          Dues                   170.00
          Phone                   28.00
          Supplies                18.00
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            Ent., Publicity       824.00
            Networking            307.00
            Mileage               290.00
            Total expenses     $5,083.00

     Petitioners did not produce documentation at trial to

substantiate any of the above expense items, except for the $450

agent fee.    However, petitioners claim that the above expenses

were included in the $34,430 of business expenses deducted on

Schedule A that respondent concedes were substantiated by

petitioners.    Petitioners request that the $5,083 of business

expenses be removed as deductions from Schedule A and be reported

as Schedule C expense deductions.

     Section 162(a) allows a taxpayer to deduct ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business.      To be “ordinary” the

transaction which gives rise to the expense must be of a common

or frequent occurrence in the type of business involved.      Deputy

v. Du Pont, 308 U.S. 488, 495 (1940).      To be “necessary” an

expense must be “appropriate and helpful” to the taxpayer’s

business.    Welch v. Helvering, 290 U.S. 111, 113 (1933).

Additionally, the expenditure must be “directly connected with or

pertaining to the taxpayer’s trade or business”.      Sec. 1.162-

1(a), Income Tax Regs.

     Generally, if a claimed business expense is deductible, but

the taxpayer is unable to fully substantiate it, the Court is
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permitted to make as close an approximation as it can, bearing

heavily against the taxpayer whose inexactitude is of his or her

own making.     Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930).    The estimate must have a reasonable evidentiary basis.

Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).     However,

section 274 supersedes the Cohan doctrine, see sec. 1.274-5T(a),

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

and requires strict substantiation of expenses for travel, meals

and entertainment, and gifts, and with respect to any listed

property as defined in section 280F(d)(4).

     A taxpayer is required by section 274(d) to substantiate a

claimed expense by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement establishing the

amount, time, place, and business purpose of the expense.      Sec.

274(d).     Even if such an expense would otherwise be deductible,

the deduction may still be denied if there is insufficient

substantiation to support it.    Sec. 1.274-5T(a), Temporary Income

Tax Regs., supra.

     We find petitioner’s testimony in this matter to be

truthful.    We agree with petitioner that he has substantiated the

business expenses deducted on Schedule A and that the amounts

have been accepted by respondent.    We further agree that a

portion of the expenses should have been reported on Schedule C

instead of Schedule A.    However, we do not agree with the
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allocation petitioner used to determine the amount of Schedule C

expenses.    Therefore, we shall apply the Cohan doctrine to each

of the above expenses that petitioner asserts relate to the L.A.

Models Inc. job to decide the amount that should have been

claimed on Schedule C.

       Unless an expense was directly incurred for the L.A. Models

Inc. job, the total business expenses reported on Schedule A

should be prorated according to the amount of time spent on the

particular job.    Petitioner testified that he worked a total of

205 days in 1997.    Petitioner further testified that the L.A.

Models Inc. job lasted 4 days.    Therefore, 1.95 percent of

petitioner’s total days worked was spent on the L.A. Models Inc.

job.    Accordingly, 1.95 percent of petitioner’s total business

expenses reported on Schedule A that relate to the L.A. Models

Inc. job are proper Schedule C expenses.

       Of the above expenses that petitioner asserts relate to the

L.A. Models Inc. job, petitioner testified that the $20 for

parking, $450 for agent fee, and the $306 for meals were expenses

directly incurred during that job.       Petitioner presented

documentation at trial to substantiate that the $450 agent fee

directly related to the L.A. Models Inc. job.       Since petitioner

deducted expenses for parking on Schedule A that respondent

agrees were substantiated, we find that petitioner is entitled to

a Schedule C deduction of $20 for parking.       Petitioner did not
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deduct an amount on Schedule A for meals, nor has he

substantiated an amount therefor.    Because the Cohan doctrine is

superseded by section 274, which requires strict substantiation

for meals, petitioner is not entitled to a Schedule C deduction

for the $306 of meals.

     Petitioner alleges that $290 of mileage expense was incurred

during the L.A. Models Inc. job.    Respondent agreed that

petitioner did substantiate the total mileage deduction on

Schedule A.   However, no evidence was presented relating to

actual operating and fixed costs for this travel.    Petitioner

testified that he traveled 120 miles round trip for 4 days

working on the job, for a total of 480 miles.    Since the business

standard mileage rate for 1997 was 31.5 cents per mile,

petitioner is entitled to a Schedule C deduction of $176 for

mileage expense.   See Rev. Proc. 96-63, 1996-2 C.B. 420.

     Petitioner asserts that $750 of expense relating to a

computer should be deducted on Schedule C.    Pursuant to section

280F(d)(4), a computer is listed property.    As such, a deduction

relating to a computer requires strict substantiation under

section 274(d).    Petitioner failed to present any evidence that

the computer was used to obtain the L.A. Models Inc. job.

Further, petitioner failed to present the amount of personal

computer use to determine the business use percentage.

Petitioner’s failure to substantiate sufficiently the computer
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expense precludes him from claiming a Schedule C deduction

relating to the computer.   As respondent concedes that

petitioners have substantiated their business expenses, we do not

disturb the total amount respondent allowed as a computer

deduction on Schedule A.

     While we do not agree with the amounts determined for the

remaining expenses that petitioner alleges should be reported on

Schedule C, we find that the remaining expenses from above do

relate to the L.A. Models Inc. job.     These remaining expenses are

allocated based on 1.95 percent of the total amount claimed for

these expenses on petitioners’ original Schedule A, rounded to

the nearest dollar.   A description of the expense related to the

L.A. Models Inc. job, the total amount claimed on the original

Schedule A for that expense, and the prorated amount that is

allowed on Schedule C is as follows:

                         As Reported      Prorated
                        on Schedule A      Amount
     Pictures            $4,021.00         $78.00
     Directories            318.00           6.00
     Education            1,400.00          27.00
     Dues                   160.00           3.00
     Phone                  710.00          14.00
     Supplies               180.00           4.00
     Ent., publicity &
      networking         6,657.00           130.00
     Total expenses    $13,446.00          $262.00
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     Based on our findings above, petitioner is entitled to

Schedule C expense deductions relating to the L.A. Models Inc.

job, as follows:

          Pictures                 $78.00
          Parking                   20.00
          Agent                    450.00
          Directories                6.00
          Education                 27.00
          Dues                       3.00
          Phone                     14.00
          Supplies                   4.00
          Ent., publicity &
           networking            130.00
          Mileage                176.00
          Total expenses        $908.00

     Accordingly, respondent must subtract $908.00 of

unreimbursed business expense from petitioners’ 1997 Schedule A

to account for the expense deductions now allowed on Schedule C.

     Petitioner’s net income from self-employment relating to the

L.A. Models Inc. job is as follows:

          Self-employment income       $2,250.00
          Total expenses                  908.00
          Net income                   $1,342.00

Self-Employment Tax

     Respondent determined that petitioners are liable for $318

of self-employment tax on the $2,250 of income received from L.A.

Models Inc.   Section 1401 imposes a tax on the self-employment

income of individuals.

     Self-employment income means the net earnings from self-

employment derived by an individual.    Sec. 1402(b).   In general,
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net earnings from self-employment means the gross income derived

by an individual from any trade or business that he or she

carries on, reduced by allowable deductions attributable thereto.

Sec. 1402(a).

     Above, we determined that petitioner had allowable

deductions of $908, reducing his income from self-employment to

$1,342.   Accordingly, we hold that petitioners are liable for

self-employment tax on $1,342 of self-employment income.

Other Items

     Since petitioners substantiated to respondent an additional

$7,542.84 of business expenses for the 1997 tax year, petitioners

are entitled to this additional expense as an unreimbursed

employee expense deduction on Schedule A.

     At trial, petitioner testified that petitioners paid $414.27

of home mortgage interest that was not reported on their 1997

Schedule A.     Further, petitioners presented documentation

substantiating the additional $414.27 of mortgage interest not

deducted on their 1997 tax return.       Accordingly, petitioners are

entitled to an additional mortgage interest deduction on their

1997 Schedule A for $414.27.

Section 6651(a)(1)

     Section 6651(a)(1) provides for an addition to tax of 5

percent of the tax required to be shown on the return for each

month or fraction thereof for which there is a failure to file a
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return, up to 25 percent in the aggregate.    The addition to tax

is imposed on the net amount due, calculated by reducing the

amount required to be shown as tax on the return by any part of

the tax which is paid on or before the date prescribed for

payment of the tax.   Sec. 6651(b)(1).   The flush language of

section 6651(a) provides that in the case of a failure to file

within 60 days of the date prescribed for the filing of such

return, unless it is shown that such failure is due to reasonable

cause and not due to willful neglect, the addition to tax under

section 6651(a)(1) shall not be less than the lesser of $100 or

100 percent of the amount required to be shown as tax on such

return.   See Patronik-Holder v. Commissioner, 100 T.C. 374, 379-

381 (1993).

     Petitioners’ 1997 Federal income tax return was due on April

15, 1998.   See sec. 6072(a); sec. 1.6072-1(a), Income Tax Regs.

Petitioners filed their 1997 Federal income tax return on August

13, 1998, well over 60 days past the due date.    Respondent has

met his burden of production with respect to the addition to tax,

and petitioners bear the burden of proving the addition to tax

does not apply.   Sec. 7491(c); Higbee v. Commissioner, 116 T.C.

at 446-447.   Petitioners have not offered any evidence to show

that the delay was due to reasonable cause.    We therefore sustain

respondent’s determination that petitioners are liable for the

addition to tax under section 6651(a)(1).
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    Reviewed and adopted as the report of the Small Tax Case

Division.

                                       Decision will be entered

                                  Under Rule 155.
