                        T.C. Memo. 2001-320



                      UNITED STATES TAX COURT



                  JAMES TRIPLETT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19527-97.           Filed December 27, 2001.



     James Triplett, pro se.

     Richard J. Hassebrock, for respondent.


                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was heard by Special Trial Judge

Lewis R. Carluzzo pursuant to section 7443A(b)(4) of the Internal

Revenue Code of 1986, as amended, in effect at the time the

petition was filed in this case, and Rules 180, 181, and 183 of

the Tax Court Rules of Practice and Procedure.   Unless otherwise

indicated, subsequent section references are to the Internal
                                - 2 -

Revenue Code, as amended, in effect for 1993.    The Court agrees

with and adopts the opinion of the Special Trial Judge, which is

set forth below.

                  OPINION OF THE SPECIAL TRIAL JUDGE

     CARLUZZO, Special Trial Judge:     Respondent determined a

deficiency of $8,922 in petitioner’s 1993 Federal income tax and

a section 6662 penalty of $1,784.

     The issues for decision are:    (1) Whether petitioner is

entitled to any of the deductions claimed on a Schedule C, Profit

or Loss From Business, included with his 1993 Federal income tax

return; (2) whether petitioner is entitled to a credit for what

is identified as a “carry forward loss” on his 1993 return; (3)

whether petitioner is entitled to exclude from income or defer

the gain realized from the sale of his residence; and (4) whether

any underpayment of tax required to be shown on petitioner’s 1993

return is due to negligence.

                              Background

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

At the time that the petition was filed, petitioner resided in

Columbus, Ohio.

     In 1992, petitioner was convicted of filing a false 1984

Federal income tax return.    As a result, among other sanctions,

he was ordered to “pay a fine to the United States in the amount

of ten thousand ($10,000) dollars”.     As best as can be determined
                                 - 3 -

from the record, the $10,000 fine was paid by petitioner during

1993.

     On June 30, 1993, petitioner sold a condominium located at

2793 Chateau Circle, Columbus, Ohio (the condominium), that he

used as his residence for an unspecified period.1    Thereafter, he

moved into an apartment in an 18 unit apartment building located

at 104 W. Main Street, Columbus, Ohio (the apartment building)

that he owned.2    Some or all of the other apartments in the

apartment building were rented out, or held for rent by

petitioner during 1993.

        Petitioner prepared his 1993 Federal income tax return.

Included with that return are: (1) A Schedule E, Supplemental

Income and Loss; (2) a Schedule C, Profit or Loss From Business;

and (3) a Form 2119, Sale of Your Home.

        The income and deductions attributable to the apartment

building are reported on the Schedule E as follows:




     1
        Petitioner’s 1988 Federal income tax return, dated
October 15, 1989, lists 85 East Gay St., Suite 804, Columbus,
Ohio, as his then present home address. His 1989 Federal income
tax return, dated July 31, 1990, indicates that as of that date
his home address was the address of the condominium.
     2
        A review of petitioner’s Federal income tax returns
indicates that he has owned the apartment building since at least
1987. A Schedule E, Supplemental Income Schedule, included with
petitioner’s 1987 Federal income tax return, lists the apartment
building as rental property.
                                 - 4 -

          Rents Received:                   $39,814

          Expenses:
            Advertising                          2,355
            Repairs                              2,921
            Utilities                            5,316
          Income                                29,222
     On the Schedule C, petitioner described his “Principal

business or profession” as “104 West Main St.”, which is the

address of the apartment building.       He made no entry on the line

designated “Business address”.    There is no income reported on

the Schedule C, but the following deductions are claimed:3

          Advertising                       $       90.00
          Car and truck                            900.15
          Employee benefit programs                143.79
          Mortgage interest                      1,426.48
          Other interest                         4,560.00
          Legal and professional
            services                            29,126.79
          Repairs and maintenance                2,848.74
          Taxes and licenses                     1,690.00
          Travel, meals and
            entertainment                          373.88

          Total expenses/net loss           41,159.83

Included in the deduction for legal and professional services is

the $10,000 fine imposed as a result of petitioner’s conviction

for filing a false 1984 Federal income tax return.

     The sale of the condominium is reported on the Form 2119.

According to that form, petitioner realized a $17,500 gain on

the sale, which gain is included as long term capital gain in the



     3
        According to the form, petitioner reported Schedule C
items in accordance with the cash method of accounting.
                                - 5 -

income reported on his 1993 return.     Petitioner made no entries

on Part III of the form (One-Time Exclusion of Gain for People

Age 55 or Older).   Nor did he make any entries on Part IV of the

form (Adjusted Sales Price, Taxable Gain, and Adjusted Basis of

New Home) relevant to whether the gain from the sale of the

condominium must be deferred.    In a Form 1040X, Amended U.S.

Individual Income Tax Return, received by respondent on April 15,

1997, petitioner reduced the adjusted gross income reported on

his 1993 return by $17,500.4    According to the explanation

contained in the amended return, the reduction results from

petitioner’s “option to change reporting capital gain on house”.

     Petitioner also claimed what is described as a “carry

forward loss” credit of $138,555.16 on his 1993 return.    The

details supporting the computation of this item are not included

on the return.

     The notice of deficiency upon which this case is based

contains adjustments to petitioner’s income as reported on his

original return, although the notice addresses items reported on




     4
        Petitioner first filed a Form 1040X for 1993 on June 10,
1996. In that amended return he eliminated the $10,000 deduction
for the fine claimed on his original return. He again claimed
entitlement to the deduction in the amended return filed April
15, 1997. Apparently, neither amended return was processed by
respondent.
                               - 6 -

amended returns.5   In the notice of deficiency, respondent:

(1) Disallowed all of the deductions claimed on the Schedule C

because petitioner failed to establish “that any amount was paid

for the designated purpose or that the expenditure, if paid,

constitutes an ordinary and necessary business expense”; (2)

disallowed the “carry forward loss” credit because “there is no

provision in the Internal Revenue Code for such a credit” and

because petitioner “did not sustain a net operating loss * * * in

any taxable year prior to 1993”; and (3) determined that the

entire understatement of tax required to be shown on petitioner’s

1993 return is due to negligence and imposed a section 6662

accuracy-related penalty.

                             Discussion

1.   Schedule C Deductions

     Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

a trade or business.   In the case of a taxpayer who uses the cash

method of accounting, entitlement to a section 162(a) deduction

presupposes that the taxpayer can substantiate by sufficient

records that the underlying expense has been paid.   Sec. 6001;

sec. 1.6001-1(a), (e), Income Tax Regs.; see also sec. 446; sec.



     5
        E.g., according to the notice of deficiency, the gain
realized from the sale of the condominium is includable in
petitioner’s 1993 income because he has “not established the
requirements of section 121 or section 1034 * * * have been met”.
                                - 7 -

1.446-1, Income Tax Regs.

     According to the explanation contained in the notice of

deficiency, all of the deductions claimed on the Schedule C were

disallowed for lack of substantiation.      It appears that

respondent now agrees, or at least does not dispute, that during

1993 petitioner paid the $10,000 fine imposed in connection with

his 1984 criminal tax conviction.6      Nevertheless, petitioner is

not entitled to a deduction for the payment of the fine because

“no deduction shall be allowed * * * for any fine or similar

penalty paid to a government for the violation of any law.”      Sec.

162(f).

     With respect to the other deductions claimed on the Schedule

C, we agree with respondent that petitioner has failed to provide

adequate substantiation that the underlying expenses have been

paid.    At trial, petitioner presented a manila folder filled with

bundles of records from 1993.   The bundles include assorted

photocopies of invoices, bills, statements, and receipts.      There

is no spreadsheet or other document that explains how these

records correspond to the specific deductions claimed on the

Schedule C, and petitioner was unable to provide such an

explanation at trial.   Many of the invoices, bills, statements,



     6
        According to petitioner, the $10,000 payment he made to
the Government was not a “fine”, but reimbursement to the United
States for the litigation costs incurred in connection with his
criminal tax conviction.
                               - 8 -

and receipts that petitioner could explain relate to expenses

paid or incurred in connection with his rental real estate

activities, which expenses appear to have been deducted on the

Schedule E.   Furthermore, certain invoices, bills, statements,

and receipts seem to involve personal, nondeductible expenses.

See sec. 262(a).

     We see no connection between the Schedule C deductions here

in dispute and the records offered by petitioner to substantiate

those deductions.   Furthermore, we find nothing in those records

that supports petitioner’s suggestion at trial that he is

entitled to deductions not claimed on his return.   Respondent’s

disallowance of all of the deductions claimed on the Schedule C

is sustained.

2.   “Carry Forward Loss” Credit/Net Operating Loss

     Petitioner claimed a $138,555.16 credit for a “carry forward

loss”.   At trial, petitioner attempted to explain how he computed

this amount, but we are unable to follow his explanation.7   Our


     7
        On brief petitioner acknowledged, properly so, that his
prior reliance on sec. 39 as support for the credit was
misplaced.
     Sec. 172 allows a deduction for a net operating loss (NOL),
which may be carried back to years preceding the year of the loss
and carried over to years following the year of the loss. Sec.
172(b). The item here in dispute is described as a “carry
forward loss credit”. If petitioner intended, albeit inartfully,
to deduct an NOL carryover, the deduction would have to be denied
because he failed to establish that: (1) He sustained an NOL
prior to 1993; and (2) any portion of the NOL was available to
carry over into 1993. The copies of petitioner’s Federal income
                                                   (continued...)
                                 - 9 -

failure to grasp the factual basis for the computation, however,

does not deter us from ruling on petitioner’s entitlement to the

credit.     Simply put, there is no provision in the Internal

Revenue Code that allows such a credit.     Respondent’s

disallowance of the “carry forward loss” credit is sustained.

3.   Gain From the Sale of the Condominium

     In 1993, petitioner apparently realized a $17,500 gain on

the sale of the condominium.     He included that gain in the income

he reported on his 1993 return but now argues that he should not

have done so.

         In general, a taxpayer is required to include in income for

the year of sale any gain realized on the sale of property.

Secs. 61, 1001.     For 1993, section 1218 permitted certain

taxpayers (55 years old and older) to exclude from gross income

up to $125,000 of gain from the sale of property which they had

owned and used as their principal residence for 3 or more of the




     7
      (...continued)
tax returns for prior years and a Form 1045, Application for
Tentative Refund, for 1991, without more, are not sufficient to
establish either point. Wilkinson v. Commissioner, 71 T.C. 633,
639 (1979).
     8
        Sec. 121 was amended by sec. 312(a) of the Taxpayer
Relief Act of 1997 (TRA 1997), Pub. L. 105-34, 111 Stat. 836,
effective for sales after May 6, 1997.
                               - 10 -

5 years immediately before the sale.    For 1993, section 10349

required a taxpayer, in certain circumstances, to defer

recognition of gain realized on the sale of the taxpayer's old

principal residence if a new residence is purchased and used by

the taxpayer as a new principal residence within the period

beginning 2 years before the date of the sale and ending 2 years

after the date.

     There is insufficient information in the record that would

allow for the application of section 121 to the sale of the

condominium.    It cannot be determined whether petitioner used the

condominium as his principal residence for the requisite period

or whether he met the age requirement.    Likewise, there is

insufficient information in the record that would allow for the

application of section 1034 to the sale of the condominium.       It

cannot be determined whether petitioner purchased and used as his

residence a new principal residence within the period beginning 2

years before the date of the sale and ending 2 years after the

date.    Because we cannot find that the requirements of either

section 121 or section 1034 have been met, the gain petitioner

realized from the sale of the condominium is includable in his

1993 income, and we so hold.



     9
        Sec. 1034 was repealed by TRA 1997 sec. 312(b), 111 Stat.
839, generally effective for sales and exchanges of principal
residences after May 6, 1997. The sec. 1034 rollover provision
was replaced by an expanded and revised sec. 121.
                               - 11 -

4.   Negligence Penalty

     Section 6662(a) imposes an accuracy-related penalty of 20

percent on any portion of an underpayment of tax that is

attributable to negligence or disregard of rules or regulations.

Section 6662(c) defines “negligence” to include any failure to

make a reasonable attempt to comply with the Internal Revenue

Code or to exercise ordinary and reasonable care in the

preparation of a tax return.    “Negligence” also includes any

failure by the taxpayer to keep adequate books and records or to

substantiate items properly.    Sec. 1.6662-3(b)(1), Income Tax

Regs.   Section 6662(c) also defines “disregard” to include any

careless, reckless, or intentional disregard of rules or

regulations.   The negligence penalty does not apply to any

portion of an underpayment if it is shown that there was

reasonable cause for such portion and the taxpayer acted in good

faith with respect thereto.    Sec. 6664(c)(1).

     Contrary to section 162(f), which specifically provides that

fines are not deductible, petitioner claimed a deduction for the

$10,000 fine he paid to the United States in connection with his

criminal tax prosecution.   Other deductions claimed on the

Schedule C could not be substantiated, some of which appear to

relate to personal expenses.    We see no factual basis and there

is certainly no legal basis for the substantial “carry forward

loss” credit claimed on petitioner’s 1993 return.    Petitioner’s
                               - 12 -

explanations with respect to these items were vague and at times

nonsensical.

     Petitioner failed to establish that the errors made on his

1993 Federal income tax return were due to reasonable cause.

Consequently, respondent’s determination that petitioner is

liable for the negligence penalty for 1993 is sustained.

     Based on the foregoing,



                                              Decision will be

                                        entered for respondent.
