                        T.C. Memo. 2011-142



                      UNITED STATES TAX COURT



             LEONARD AND PEARL FEIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15166-09.                Filed June 22, 2011.



     Leonard and Pearl Fein, pro sese.

     Deborah Aloof, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies,

penalties, and additions to tax with respect to petitioners’

Federal income taxes for 2002, 2003, and 2004 as follows:
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                           Additions to Tax    Penalties
     Year     Deficiency    Sec. 6651(a)      Sec. 6662(a)

     2002     $41,465          $9,735           $8,293
     2003      42,771          10,064            8,554
     2004      54,959          13,076           10,992

     The issue for decision is whether petitioners have

substantiated claimed business and entertainment expenses under

sections 162, 274, and 6001 relating to Leonard Fein’s

(petitioner’s) accounting and photographic activities.       The trial

of this case was held on November 30 and December 1, 2010, in New

York City.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code applicable to the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.      At

the time the petition was filed, petitioners resided in New York.

     Since the late 1970s petitioner has been a certified public

accountant.   From 1993 through most of 2000, however, petitioner

did not work as an accountant.

     In 2000 and through the years in issue petitioner resumed

his accounting activity, including the preparation of tax

returns.
                               - 3 -

     During the years in issue petitioner also engaged in some

photographic activity.   The evidence does not indicate that

petitioner received any training in photography.

     Petitioner paid his children what petitioner refers to as

“per diem”, allegedly in connection with services they performed

in petitioner’s accounting activity.   These per diem payments,

however, appear to have been set at amounts that would allow the

children to benefit from the earned income tax credit, not at

amounts that reflect the value of any services the children

actually performed for petitioner, and the credible evidence does

not establish the nature and extent of any services the children

performed for petitioner.

     Petitioner paid little attention to recordkeeping and

financial aspects of his accounting and photographic activities.

Documentation petitioner maintained regarding his accounting and

photographic activities was disorganized and incomplete.

Petitioner maintained no credible records and no bank accounts

relating to these activities, and petitioner commingled funds

relating to these activities with funds pertaining to his

personal and family activities.

     During the years in issue petitioner lived in his father’s

house with between 10 to 18 other family members and individuals.

Other than petitioner, none of the persons living in this house

owned a car.   The car petitioner owned and used in his accounting
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and photographic activities was also used by petitioner and by

other persons living with petitioner for their personal use.

     In some of the office space petitioner apparently rented,

petitioner had no phone lines or Internet connections.      The eight

phones that petitioner alleges to have used in his accounting and

photographic activities were all registered in the names of

petitioner’s wife and children.

     During the years in issue petitioner had severe medical

problems--poor eyesight, stomach ailments, and eating disorders.

In 2004 petitioner traveled to Israel and while there received

medical treatment for his eye problems.

     Petitioners’ Federal income tax returns for 2002, 2003, and

2004 were filed late on February 20, March 3, and March 13, 2006,

respectively, on which returns petitioner reported the following

gross income relating to his accounting and photographic

activities:

                             Gross Income

        Year      Accounting        Photography     Total

        2002       $98,610
                   1
                                        $53,910   $152,520
        2003       100,220               63,616    163,836
        2004       124,200               74,080    198,280

          In connection with petitioners’ 2002 Federal
          1

     income tax return, petitioners and respondent dispute
     which copy of the Schedule C, Profit or Loss From
     Business, relating to petitioner’s accounting activity
     was filed. We use the figures from the Schedule C
     respondent asserts was filed.
                              - 5 -

     On each of petitioners’ Federal income tax returns for the

years in issue, petitioner attached two Schedules C, Profit or

Loss From Business, the first relating to petitioner’s accounting

activity and the second relating to his photographic activity.

     The table below summarizes for each year in issue the

expenses petitioner claimed on the Schedules C as deductible

business expenses relating to petitioner’s accounting and

photographic activities.

                    Accounting--Schedule C-1

                                           Years
    Expenses                  2002         2003         2004

Depreciation                $10,507     $12,291       $13,255
Rent                         18,000      19,600        21,600
Postage                       3,971       4,209         4,672
Telephone & Internet          4,269       4,316         4,520
Per diem                     13,250      13,960        28,200
Office                        5,316       5,762         6,572
Repairs & maintenance           369           0             0
Supplies                      1,838       1,974         2,139
Professional books              439         463           524
Tax & computer forms            512         502           624
Computer tax programs         7,669       8,034         7,226
Computer supplies             4,639           0             0
Other                           572         609         1,024
Tolls & parking               4,312       4,609         4,763
Car & truck                   7,696       8,394         8,734
Promotion & gifts             3,312       3,570         3,698
Travel                            0           0         1,760
Meals & entertainment         1,534       1,718         2,010
  Total expenses             88,205      90,011       111,321
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                    Photography--Schedule C-2

                                                  Years
    Expenses                    2002              2003             2004

Depreciation                   $7,888        $11,460         $14,136
Postage                         1,217          1,334           1,473
Telephone                       1,338          1,296           1,489
Office expense                  1,834          1,768           1,636
Repairs & maintenance             338            309             256
Supplies                        1,743          1,917           1,873
Printing & developing          14,372         15,968          20,192
Computer programs               6,597          6,219           7,618
Computer supplies               3,487          4,383           3,974
Publications                      626            734           1,160
Videotapes & discs              4,312          4,297           3,974
Research material               2,472          3,874           3,098
Car & truck                     3,626          3,917           4,024
Promotion & gifts               1,594          2,016           2,619
Travel                              0              0           2,468
Meals & entertainment             874          1,105           1,098
  Total expenses               52,318         60,597          71,088

     On the basis of the above-reported income and expenses,

petitioners reported on their 2002, 2003, and 2004 Federal income

tax returns net profit from petitioner’s accounting and

photographic activities as follows:

                             Net Profit

        Year      Accounting           Photography         Total

        2002       $10,405               $1,592           $11,997
        2003        10,209                3,019            13,228
        2004        12,879                2,992            15,871

     On audit respondent disallowed in their entirety the claimed

business expenses relating to petitioner’s accounting and

photographic activities reflected on petitioners’ untimely filed

Federal income tax returns for 2002, 2003, and 2004, determined

the tax deficiencies at issue herein, and imposed on petitioners
                               - 7 -

the section 6651(a)(1) late-filing additions to tax and the

section 6662(a) accuracy-related penalties.

     Much of the documentation petitioner offered at trial

relating to his accounting and photographic activities is

illegible, with dates, prices, and descriptions unreadable.

Testimony petitioner gave with regard to his proffered

documentation was generally vague and inadequate.    Petitioner

testified that bills for expenses relating to his accounting and

photographic activities were the responsibility of his wife--that

he never saw the bills, never paid the bills, and never checked

whether his wife had paid the bills.    Petitioner, however, did

not call his wife, his children, or others to testify at the

trial.

                              OPINION

     Respondent claims that petitioner in 2002, 2003, and 2004

was not engaged in a trade or business of accounting or

photography and alternatively that petitioner is not entitled

to the claimed expenses relating thereto for lack of proper and

adequate documentation and substantiation.    We address only

respondent’s lack of substantiation argument.

     Taxpayers have a responsibility to maintain records

sufficient to determine their correct Federal income tax

liability.   Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440
                               - 8 -

(2001).   No deduction is allowed for personal, living, or family

expenses unless expressly provided by law.     Sec. 262(a).

     Deductions are a matter of legislative grace, and the

taxpayer generally bears the burden of proving he or she is

entitled to the deductions claimed.1    Rule 142(a); New Colonial

Ice Co. v. Commissioner, 292 U.S. 435, 440 (1934).     Taxpayers

must be able to substantiate both the amount paid and the purpose

of claimed deductions.   Higbee v. Commissioner, supra at 440.

     At trial petitioner did not credibly explain how he

accounted for the income received and the expenses incurred in

his accounting and photographic activities.     Petitioner stated he

gave funds received to his wife and she did whatever she wanted

with them.

     As noted above, documentation petitioner offered to

substantiate claimed expenses relating to his accounting and

photographic activities is illegible, some of it is blank, and

much of it is not in petitioner’s name, but rather in the names

of petitioner’s wife and children.     Much of the documentation

that is legible is utterly unclear as to the purpose of the

claimed expense--whether personal, accounting, or photography--

and no further explanatory evidence is provided.



     1
      Because petitioner has not maintained and submitted
adequate records to substantiate his claimed expenses,
petitioners do not qualify for a shift in the burden of proof
under sec. 7491(a). See sec. 7491(a)(2).
                               - 9 -

     Petitioner produced no credible documentation with regard to

claimed gasoline purchases, car repairs expenses, and toll costs.

     Documentation petitioner produced in support of car and

truck expenses, gifts and promotions, meals, entertainment, and

travel does not meet the recordkeeping requirements of section

274(d).

     There is no credible evidence that petitioners’ children

worked in any meaningful way for petitioner in either his

accounting or his photographic activities that would have

justified the per diem payments petitioner paid to them.

     In support of claimed depreciation, petitioner offers a list

of assets for 2006.   This list is insufficient to establish that

petitioner purchased and placed into service the depreciable

assets and that the depreciation amounts petitioner claimed

during the years in issue were correct.

     Petitioner claims that some of the documentation relating to

his accounting and photographic activities was destroyed in a

fire or lost as a result of a computer crash.   Petitioner

submitted numerous general receipts at trial but has provided no

credible evidence that the purpose for those expenses related to

petitioner’s accounting and photographic activities, and

petitioner’s ability to produce numerous receipts calls into

question petitioner’s allegation that a fire or a computer crash

occurred that destroyed his records.
                               - 10 -

     Over the course of the 3 years in issue, petitioner claims

approximately $8,000 in meal and entertainment expenses.      The

diary petitioner offers in support of these expenses, however,

inadequately describes the business relationship between

petitioner, the named client, and any business purpose for the

expenses.   See sec. 274(d).

     Petitioner claims his 2004 trip to Israel qualifies as a

business trip in his photographic activities.    However, no

credible evidence supports that claim; rather, it appears

petitioner’s trip to Israel related to needed medical treatments.

     In summary, we sustain respondent’s disallowance of all of

the expenses claimed on the Schedules C-1 or C-2 on petitioners’

2002, 2003, and 2004 Federal income tax returns.

     Respondent has satisfied his burden of production under

section 7491(c), and petitioners have not established any

reasonable cause with regard to the late filing of petitioners’

2002, 2003, and 2004 Federal income tax returns and the

underpayments associated therewith.     See Higbee v. Commissioner,

supra at 447.   The credible evidence does not establish that

petitioner’s (or other family members’) medical problems

incapacitated petitioner from filing timely and proper Federal

income tax returns for the years in issue.    See Wright v.

Commissioner, T.C. Memo. 1998-224, affd. without published

opinion 173 F.3d 848 (2d Cir. 1999).
                             - 11 -

     We sustain respondent’s imposition of both the section 6651

late-filing additions to tax and the section 6662(a) accuracy-

related penalties.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
