                  T.C. Memo. 2009-279



                UNITED STATES TAX COURT



            THOMAS H. CARVER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3663-07.                Filed December 1, 2009.



     R determined deficiencies and additions to tax pursuant
to sec. 6651(a)(1) and (2), I.R.C.

     Held: P is liable for the deficiencies and the
additions to tax.



Thomas H. Carver, pro se.

Michael K. Park, for respondent.
                                - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of alleged income tax deficiencies and

additions to tax that respondent determined for petitioner’s 2001

and 2003 tax years.   After concessions by petitioner,1 the issues

for decision are:

     (1) Whether petitioner is entitled to business expense

deductions for 2001 and 2003;

     (2) whether petitioner is entitled to net operating loss

(NOL) carryforward or carryback deductions for 2001 and 2003;

     (3) whether petitioner is liable for additions to tax under

section 6651(a)(1)2 for 2001 and 2003; and

     (4) whether petitioner is liable for additions to tax under

section 6651(a)(2) for 2001 and 2003.

                         FINDINGS OF FACT

     Petitioner is an elderly individual who needed a caregiver’s

assistance and a wheelchair to pursue this Court case.   He

resided in California when he filed his Tax Court petition.   He



     1
      Petitioner conceded that he received $15,188 and $15,841 of
income in 2001 and 2003, respectively. Those amounts included
income from the sale of stocks and bonds, dividend income,
interest income, and pension/retirement distributions.
     2
      All section references are to the Internal Revenue Code of
1986, as amended and in effect for the tax years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

did not file Federal income tax returns for his 2001 and 2003 tax

years.    Accordingly, respondent prepared section 6020(b)

substitutes for individual Federal income tax returns for those

years on July 31, 2006, and issued notices of deficiency on

November 6, 2006, for both years.    Petitioner filed a timely

petition with this Court on February 13, 2007, and an amended

petition on April 13, 2007.    A trial was held on October 24,

2008, in Los Angeles, California.    Respondent filed a brief on

January 8, 2009.    Petitioner, who was a licensed attorney in

California from 1947 until he was disbarred in 1993,3 was given

the opportunity to file a brief but, as of the date of this

opinion, has not done so.

                                OPINION

I.   Whether Petitioner Is Entitled to Business Expense Deductions

      Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed.    Sec. 6001;

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec.

1.6001-1(a), Income Tax Regs.     Generally, the Court may allow the

deduction of a claimed expense even where the taxpayer is unable

to fully substantiate it, provided the Court has an evidentiary

basis for doing so.    Cohan v. Commissioner, 39 F.2d 540, 543-544



      3
      The Court will take judicial notice of the public records
of the California Supreme Court and the State Bar of California.
                                  - 4 -

(2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).   But see sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985).     In these instances, the Court is

permitted to approximate the allowable expense, bearing heavily

against the taxpayer whose inexactitude is of his or her own

making.     Cohan v. Commissioner, supra at 544.

     Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.       A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry and

is necessary if it is appropriate and helpful for the development

of the business.     Commissioner v. Heininger, 320 U.S. 467, 471

(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).       In

contrast, “personal, living, or family expenses” are generally

nondeductible.     Sec. 262(a).

     Certain business expenses described in section 274(d) are

subject to strict substantiation rules that supersede the Cohan

doctrine.    Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., supra.        Section 274(d) applies to:

(1) Any traveling expense, including meals and lodging away from

home; (2) entertainment, amusement, or recreational expenses; (3)

any expense for gifts; or (4) the use of “listed property”, as
                                - 5 -

defined in section 280F(d)(4), including passenger automobiles.

To deduct expenses to which section 274(d) applies, the taxpayer

must substantiate by adequate records or sufficient evidence to

corroborate the taxpayer’s own testimony:   (1) The amount of the

expenditure or use, which includes mileage in the case of

automobiles; (2) the time and place of the travel, entertainment,

or use; (3) its business purpose; and (4) the business

relationship to the taxpayer of the persons entertained or each

expenditure or use.   Sec. 274(d) (flush language).

     Petitioner did not file a return for 2001 or 2003, and

respondent’s section 6020(b) returns make no mention of any

business income, expenses, or losses.   Petitioner now claims,

however, that he sustained business losses during 2001 and 2003.

At trial he introduced a vast, unorganized collection of checks

(front side only), statements, and receipts to substantiate

unspecified amounts of business expenses for those years.   A

number of these were for tax years not at issue, particularly

2002.

     Respondent does not dispute that petitioner operated several

businesses, including a legal practice4 and an investment company

in 2001 and 2003 and a business called Color Coordinators in

2001.    Respondent does not even appear to dispute that petitioner

has deductible business expenses.   Instead, respondent argues


     4
      Given petitioner’s disbarment in 1993, that legal practice
must have been as a scrivener and not as an attorney.
                               - 6 -

that petitioner failed to prove the amounts of his business’s

gross receipts, thereby making it impossible--“regardless of the

fact that petitioner has deductible business expenses”--to

establish that petitioner had business losses that he could use

to offset his income from other sources.

     Respondent’s argument is flawed.     Section 162 allows a

deduction for ordinary and necessary business expenses regardless

of whether the business in question has income or losses.     See

sec. 1.162-1(a), Income Tax Regs. (“The full amount of the

allowable deduction for ordinary and necessary expenses in

carrying on a business is deductible, even though such expenses

exceed the gross income derived during the taxable year from such

business.”).   Simply said, petitioner is entitled to deduct any

substantiated ordinary and necessary business expenses paid

during the tax years at issue with respect to a going business

engaged in for profit and not disallowed by section 162(c) or

required to be capitalized.   Sec. 162.    Whether his businesses

had income or losses is irrelevant.5


     5
      A taxpayer’s history of income or loss related to an
activity is, of course, not always irrelevant. Such history, for
example, is an important consideration in determining whether the
activity is engaged in for profit and thus whether it constitutes
a trade or business within the meaning of sec. 162. See Helmick
v. Commissioner, T.C. Memo. 2009-220; sec. 1.183-2(b)(6), Income
Tax Regs. Respondent, however, has not argued that petitioner’s
businesses were not yet started or were not engaged in for
profit. In fact, respondent cites petitioner’s testimony that
Color Coordinators earned a profit in 2001. Paradoxically, we
note that respondent--even after petitioner revealed the
                                                   (continued...)
                               - 7 -

     We turn therefore to whether petitioner has substantiated

any business expenses for 2001 and 2003.   Petitioner has

submitted evidence pertaining to a wide variety of expenses.    It

is not clear from the evidence or petitioner’s testimony what the

expenses are for and/or how they relate to petitioner’s

businesses.   What is clear, however, is that most of the expenses

appear to be personal and thus nondeductible under section 162.

     For example, petitioner is not permitted to deduct his

traffic tickets, dentist’s fees, or mint proof coin purchase.    In

addition, he cannot deduct rent payments for the apartment he

lived in because, among other things, petitioner also maintained

and worked at an external office.   See sec. 280A(a), (c).

Further, many of petitioner’s expenses, such as vehicle expenses

or expenses for meals and club dues, are either nondeductible

under section 274(a) or are subject to the strict substantiation

requirements of section 274(d), which petitioner has not

satisfied.

     Other receipts or checks relate to airplane travel, public

storage, Pacific Bell, FAA & CC luncheon buffet and dues,

American Judicature Society annual dues, postage, Air Force


     5
      (...continued)
existence of his businesses and admitted that he earned a profit
with respect to one of them--has not alleged that there was any
unreported income or asserted an increased deficiency with
respect to any income related to Color Coordinators in 2001 or
related to petitioner’s other businesses in 2001 or 2003.
                                 - 8 -

Association membership dues, utility payments, American Foreign

Service Association dues, etc.    However, the relationship to

petitioner’s businesses has not been explained.    Petitioner has

therefore not met his burden of substantiation.

     Petitioner did introduce evidence in the form of checks and

bank statements reflecting that he paid a total of $3,396 in rent

for office space in July, August, September, and December 2001.6

The evidence also shows that he paid a total of $375 for parking

space at the office in June, July, August, September, and

December 2001.7   Respondent does not dispute that petitioner

operated several businesses in 2001 or that he maintained an

     6
      Petitioner also introduced--without any explicit testimony
or explanation--a statement from his landlord that appears to
indicate that petitioner prepaid $744 of rent for the office
space on June 23, 2000. The payment was applied to petitioner’s
rent payment for June 1, 2001. Prepaid rent applicable to future
tax years is generally deducted either ratably over the period of
the lease (or the rental period to which it applies) or, if
certain requirements are met, in the year it was paid. Howe v.
Commissioner, T.C. Memo. 2000-291. Petitioner has not made any
argument as to why this prepaid rent expense should be deductible
in 2001, and the evidence introduced at trial does little to
clarify the matter. We have no information about the period of
the lease (or the period to which the prepayment applies). We
are left to speculate whether the prepayment was a security
deposit being applied to petitioner’s June 1, 2001, rent payment.
And we must even question whether petitioner already deducted the
prepayment in 2000, assuming he even filed a return for that
year. Because of these gaps in the record, petitioner has
ultimately failed to properly substantiate the deductibility in
2001 of this prepaid rent expense.
     7
      It seems probable that petitioner also rented his office in
June and November 2001 and may have rented it for the entire 2001
tax year, but if so, he has not met his burden of proof as to the
additional rent payments or their amounts.
                               - 9 -

office where he conducted business activities.     Consequently,

petitioner’s expenses for office space and parking are ordinary

and necessary business expenses, and petitioner has substantiated

those expenses.8   See sec. 162(a)(3); Davis v. Commissioner, T.C.

Memo. 2006-272; Whitaker v. Commissioner, T.C. Memo. 1988-418.

We will therefore allow petitioner to deduct $3,771 in office

rent and parking expenses for 2001.

      With respect to petitioner’s remaining expenses, we conclude

that he has failed to explain how they relate to his businesses

and further that petitioner’s own self-serving testimony is

insufficient to establish the required relationship under the

facts of this case.

II.   NOL Carryforward and Carryback Deductions

      Petitioner testified that “from approximately 1993 to 2008,

my net operating losses from business operations exceeded my

gross receipts.”   To the extent he is claiming that he can deduct

NOL carryforwards and carrybacks for 2001 and 2003, we disagree.

To carry forward or carry back NOLs, a taxpayer must prove the

amount of the NOL carryforward or carryback.      Hawks v.

Commissioner, T.C. Memo. 2005-155; see Jones v. Commissioner, 25

T.C. 1100, 1104 (1956), revd. and remanded on other grounds 259

      8
      Although parking expenses may be personal commuting
expenses, respondent, in footnote 3 of his brief, concedes that
petitioner made payments for rent and parking that “satisfy [sec.
162] as office rental expenses for petitioner’s investment
company”.
                                - 10 -

F.2d 300 (5th Cir. 1958).     Petitioner did not introduce any

evidence regarding his NOL carryforwards or carrybacks.

Accordingly, petitioner is not entitled to NOL carryforward or

carryback deductions for his 2001 and 2003 tax years.

III.   Additions to Tax

       Respondent determined that petitioner is liable for

additions to tax under section 6651(a)(1) and (2).      Pursuant to

section 7491(c), respondent has the burden of production with

respect to these additions to tax and is therefore required to

“come forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.”      See Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).     However, “once the

Commissioner meets his burden of production, the taxpayer must

come forward with evidence sufficient to persuade a Court that

the Commissioner’s determination is incorrect.”       Id. at 447.

       A.   Section 6651(a)(1) Addition to Tax

       Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return unless the taxpayer proves that such failure

is due to reasonable cause and not willful neglect.      See United

States v. Boyle, 469 U.S. 241, 245 (1985).       Petitioner concedes

that he did not file Federal income tax returns for his 2001 and

2003 tax years.     He has not argued, or introduced any evidence

suggesting, that his failures to file were due to reasonable

cause and not willful neglect.     Accordingly, we sustain
                                - 11 -

respondent’s imposition of the additions to tax under section

6651(a)(1).

       B.   Section 6651(a)(2) Addition to Tax

       Section 6651(a)(2) imposes an addition to tax for failure to

timely pay the amount of tax shown on a return.

            The Commissioner’s burden of production with
       respect to the section 6651(a)(2) addition to tax
       requires that the Commissioner introduce evidence that
       a return showing the taxpayer’s tax liability was filed
       for the year in question. In a case such as this where
       the taxpayer did not file a return, the Commissioner
       must introduce evidence that an SFR [substitute for
       return] satisfying the requirements of section 6020(b)
       was made. See Cabirac v. Commissioner, * * * [120 T.C.
       163 (2003)]. * * *

Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), affd. 521

F.3d 1289 (10th Cir. 2008).     The section 6651(a)(2) addition to

tax is not imposed if the taxpayer proves that the failure to pay

is due to reasonable cause and not willful neglect.

       Under section 6651(g)(2), a return prepared by the Secretary

pursuant to section 6020(b) is treated as a return filed by the

taxpayer for the purpose of determining the amount of an addition

to tax under section 6651(a)(2).     To constitute a section 6020(b)

return, “the return must be subscribed, it must contain

sufficient information from which to compute the taxpayer’s tax

liability, and the return form and any attachments must purport

to be a ‘return’.”     Spurlock v. Commissioner, T.C. Memo. 2003-

124.
                              - 12 -

     Petitioner concedes that respondent prepared section 6020(b)

returns for his 2001 and 2003 tax years.    Those returns were

entered into evidence as joint exhibits.    Because petitioner did

not fully pay the tax liabilities as shown on the section 6020(b)

returns, respondent has met the burden of production with respect

to the section 6651(a)(2) additions to tax.    Further, petitioner

has not argued, or introduced any evidence suggesting, that his

failures to pay are due to reasonable cause and not willful

neglect.   We therefore sustain respondent’s imposition of the

addition to tax under section 6651(a)(2).

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.    To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.
