                        T.C. Memo. 2003-247



                      UNITED STATES TAX COURT



                 JIMMY A. PRINCE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9120-02.                 Filed August 18, 2003.



     Jimmy A. Prince, pro se.

     Jean Song, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioner petitioned the Court to redetermine

respondent’s determinations as to petitioner’s 1997, 1998, and

1999 Federal income taxes.   Respondent determined for those

respective years that petitioner had deficiencies of $36,861,

$89,210, and $71,454 and was liable for section 6662(a)
                                - 2 -

accuracy-related penalties of $7,372, $17,842, and $14,291.1

Respondent also determined as to 1997 that petitioner was liable

for a $9,215 addition to tax under section 6651(a)(1).

     Following concessions,2 we are left to decide:

     1.    Whether the 3-year period of limitations under section

6501(a) has run on 1997.    We hold it has not.

     2.    Whether petitioner may deduct self-employment expenses

in amounts greater than those allowed by respondent.     We hold he

may not.

     3.    Whether petitioner may deduct for 1998 a $37,181 net

operating loss (NOL) carryover.    We hold he may not.

     4.    Whether petitioner may deduct dependency exemptions for

his daughter Keauna (Keauna) and his son Zik (Zik).      We hold he

may not.



     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the subject years, Rule
references are to the Tax Court Rules of Practice and Procedure,
and dollar amounts are rounded.
     2
       In addition to the concessions made explicitly, we
consider petitioner to have conceded respondent’s determination
of unreported income by virtue of the fact that petitioner did
not address this issue on brief. We hold without further comment
that petitioner underreported the 1997 and 1998 gross income of
his sole proprietorship by $5,261 and $26,631, respectively, as
determined by respondent. See Levin v. Commissioner, 87 T.C.
698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987);
Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976); see also
Remuzzi v. Commissioner, T.C. Memo. 1988-8, affd. without
published opinion 867 F.2d 609 (4th Cir. 1989).
                                 - 3 -

      5.   Whether petitioner may use the head of household filing

status.    We hold he may not.

      6.   Whether petitioner is liable for the addition to tax

determined by respondent under section 6651(a)(1).      We hold he

is.

      7.   Whether petitioner is liable for the accuracy-related

penalties determined by respondent under section 6662(a).       We

hold he is.

                          FINDINGS OF FACT

      Some facts were stipulated.   The stipulated facts and the

accompanying exhibits are incorporated herein by this reference.

We find the stipulated facts accordingly.      Petitioner resided in

Los Angeles, California, when his petition was filed.

Petitioner’s daughter is Keauna, and his son is Zik.      Petitioner

did not reside with Keauna during the subject years, and we do

not find in the record that he resided with Zik either.

      Petitioner filed with the Commissioner 1997, 1998, and 1999

Forms 1040, U.S. Individual Income Tax Return, using the filing

status of “Head of Household”.    He reported on those returns that

his dependents were Keauna and Zik.      On his 1997 and 1999

returns, petitioner reported a loss of $9,614 and income of $954,

respectively, from his sole proprietorship named Jasmak Auto

Parts (Jasmak).    On his 1998 return, petitioner reported income

of $17,609 from Jasmak and an NOL carryover of $37,181 for
                              - 4 -

purported losses from Jasmak for 1994 through 1997.    The items of

income from Jasmak were the only items of income reported on

petitioner’s 1997 through 1999 returns.   Petitioner filed his

1997 tax return with the Commissioner on March 26, 1999.

     The respective returns reported that petitioner calculated

Jasmak’s profit (loss) for 1997 through 1999 as follows:

                                 1997         1998         1999

  Gross receipts              $233,394     $407,173    $356,977
  Returns and allowances           -0-       (7,846)        -0-
  Cost of goods sold:
       Beginning inventory      72,411       56,270      81,431
       Purchases               114,367      279,762     220,877
       Ending inventory         56,270       81,431      83,236
                               130,508      254,101     219,072
  Gross profit                 102,886      144,226     137,905
  Expenses:
       Advertising               7,212        2,206       4,394
       Commissions and fees     19,460       23,562      24,348
       Insurance                 3,428        4,785       6,097
       Interest                    -0-          529         -0-
       Legal and prof. services 2,678         9,167       7,971
       Office expense              -0-          -0-       1,782
       Rent                     36,000       36,000      36,000
       Repairs and maintenance   5,152        2,446       1,686
       Supplies                  1,648        1,049         -0-
       Taxes and licenses          197        2,985       2,338
       Travel                      795          150       1,143
       Utilities                 2,750        1,200       1,200
       Bank charges                425          991         929
       Depreciation              4,565        8,058       8,058
       Dues and subscriptions       82          182         215
       Freight                   1,274           94         106
       Janitorial                  320          355       1,070
       Medical/health              -0-        1,760         -0-
       Miscellaneous expenses      110          839         272
       Postage                     301          517         674
       Salary expense           11,000       20,200      22,000
       Security                    422          433         428
       Telephone                 6,342        7,581       8,245
       Transportation            3,435        2,028       3,061
       Sales tax                 3,118          -0-       3,226
                                - 5 -

       Finance charges               727           -0-        982
       Other                         530           -0-        -0-
       Interest expense              529           -0-        726
                                 112,500       127,117    136,951
  Profit (loss)                   (9,614)       17,109        954

The “Salary expense” represented payments which Jasmak made to

petitioner for his services.    Petitioner now acknowledges that

the deduction of these payments was improper.

     In 2000, the Commissioner began auditing petitioner’s 1997

through 1999 taxable years.    As a result of this audit, the

Commissioner increased (decreased) petitioner’s reported taxable

income as follows and reflected these adjustments in the subject

notice of deficiency mailed to petitioner on February 21, 2002:

                                        1997       1998      1999

 Self-employment income:

    Unreported gross receipts       $16,338     $26,631    $24,988

 Self-employment expenses:

    Advertising                       5,952         -0-      2,610
    Commissions                      19,261      23,397     24,105
    Depreciation                      1,315       4,801      4,848
    Insurance                         3,428       4,785      6,097
    Legal                             2,410       8,240      7,174
    Purchases                        52,174     127,641    100,764
    Returns and allowances              -0-       6,760        -0-
    Salary                           11,000      20,200     22,000
    Sales tax                         3,118       2,985      3,226
    Telephone                         4,439       5,307      5,770
    Transportation                    1,767       1,040      1,530

 Other items of income:

    NOL carryover                        -0-     37,181         -0-

 AGI adjustments:
                                 - 6 -

     Insurance                           -0-       (594)         -0-
     Self-employment                  (5,549)    (6,337)      (7,166)

 Deductions and exemptions:

     Standard deduction                1,900      2,000        2,050
     Exemptions                        5,300      7,938        7,040
                                     122,853    271,975      205,036

      At trial, respondent conceded as to 1997 that he incorrectly

disallowed $49,529 of the purchases, $2,308 of the sales tax

expense, and $4,449 of the advertising expense.     Respondent also

conceded that petitioner’s 1997 gross income did not include

$11,077 of the determined unreported gross receipts and that

petitioner’s 1999 gross income did not include any of the

determined unreported gross receipts.

                                OPINION

1.   Burden of Proof

      Taxpayers generally must prove respondent’s determinations

wrong in order to prevail.     Rule 142(a)(1); Welch v. Helvering,

290 U.S. 111, 115 (1933).     As one exception to this rule, section

7491(a) places upon respondent the burden of proof with respect

to any factual issue if the taxpayer maintained adequate records,

satisfied applicable substantiation requirements, cooperated with

respondent, and introduced during the court proceeding credible

evidence on the factual issue.3     The legislative history of


      3
          The relevant language of sec. 7491 provides:


                                                         (continued...)
                                - 7 -

section 7491(a) clarifies that taxpayers must prove that they

have satisfied the adequate records, substantiation, and

cooperation requirements before that section places the burden of

proof upon the Commissioner.4   H. Conf. Rept. 105-599, at 239

(1998), 1998-3 C.B. 747, 993 (“The taxpayer has the burden of

proving that it meets each of these conditions, because they are

necessary prerequisites to establishing that the burden of proof


     3
      (...continued)

     SEC. 7491. BURDEN OF PROOF.

          (a) Burden Shifts Where Taxpayer Produces Credible
     Evidence.--

               (1) General rule.--If, in any court
          proceeding, a taxpayer introduces credible
          evidence with respect to any factual issue
          relevant to ascertaining the liability of the
          taxpayer for any tax imposed by subtitle A or
          B, the Secretary shall have the burden of
          proof with respect to such issue.

               (2) Limitations.--Paragraph (1) shall
          apply with respect to an issue only if--

                    (A) the taxpayer has complied
               with the requirements under this
               title to substantiate any item;

                    (B) the taxpayer has
               maintained all records required
               under this title and has cooperated
               with reasonable requests by the
               Secretary for witnesses,
               information, documents, meetings,
               and interviews; * * *
     4
       The text of the statute requires that the taxpayer satisfy
the remaining (credible evidence) requirement as a condition of
placing the burden of proof upon respondent.
                               - 8 -

is on the Secretary.”).   The legislative history provides further

as to the term “credible evidence”, which is not defined in the

statute, that

     Credible evidence is the quality of evidence which,
     after critical analysis, the court would find
     sufficient upon which to base a decision on the issue
     if no contrary evidence were submitted (without regard
     to the judicial presumption of IRS correctness). A
     taxpayer has not produced credible evidence for these
     purposes if the taxpayer merely makes implausible
     factual assertions, frivolous claims, or tax
     protestor-type arguments. The introduction of evidence
     will not meet this standard if the court is not
     convinced that it is worthy of belief. If after
     evidence from both sides, the court believes that the
     evidence is equally balanced, the court shall find that
     the Secretary has not sustained his burden of proof.
     [Id. at 240-241, 1998-3 C.B. at 994-995.]

     We have in previous cases involving section 7491 applied the

definition of the term “credible evidence” as discerned from the

legislative history.   E.g., Higbee v. Commissioner, 116 T.C. 438,

442-443 (2001); Forste v. Commissioner, T.C. Memo. 2003-103;

Managan v. Commissioner, T.C. Memo. 2001-192.   We do likewise

here.   We conclude that section 7491(a) does not apply here to

place the burden of proof upon respondent in that petitioner has

failed to introduce during this proceeding credible evidence on

any factual issue.   We note that section 7491(a) also is

inapplicable here in that we do not find that petitioner

maintained adequate records, satisfied applicable substantiation

requirements, or cooperated with the Commissioner.
                                - 9 -

2.   Period of Limitations

      Section 6501(a) generally gives the Commissioner 3 years

from the date on which a return is filed to assess a tax as to

that return.   Petitioner filed his 1997 tax return with the

Commissioner on March 26, 1999, and the Commissioner mailed the

subject notice of deficiency to petitioner on February 21, 2002.

We conclude that respondent’s issuance to petitioner of the

notice of deficiency for 1997 was within the 3-year period of

section 6501(a).5

3.   Self-Employment Expenses

      In addition to the general burden of proof discussed above,

petitioner must prove his entitlement to any deduction, e.g., by

maintaining sufficient records to substantiate his claimed

deductions.    New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); Lychuk v. Commissioner, 116 T.C. 374, 384 (2001); see

also sec. 6001; sec. 1.6001-1(a), Income Tax Regs.   Petitioner’s

burden requires that he introduce sufficient evidence to:

(1) Make a prima facie case establishing that respondent

committed the errors alleged in the petition and (2) overcome the

evidence favorable to respondent.   See Lobe v. Commissioner, T.C.

Memo. 2001-204; Lawler v. Commissioner, T.C. Memo. 1995-26.


      5
       Petitioner asserts on brief that he mailed his 1997 return
to the Commissioner on Apr. 20, 1998, and that the return filed
on Mar. 26, 1999, was simply a copy of that return. We find
these assertions unsupported by the credible evidence in the
record and decline to rely upon them.
                                - 10 -

      Petitioner has failed to carry his burden of proof as to

this issue.     The record does not disprove respondent’s

determination as to the self-employment expenses, as adjusted by

respondent’s concessions at trial.       We sustain that

determination, as adjusted.     Lobe v. Commissioner, T.C. Memo.

2001-204 (and cases cited therein).

4.   NOL Deduction

      Section 172 allows a taxpayer to deduct an NOL for a taxable

year.     The amount of the NOL deduction equals the sum of the NOL

carryovers plus NOL carrybacks to that year.       Sec. 172(a).

Absent an election to the contrary, an NOL for any taxable year

must first be carried back 3 years and then carried over 15

years.     Sec. 172(b)(1)(A), (2), and (3).6   Petitioner, as a

taxpayer attempting to deduct an NOL, bears the burden of

establishing both the existence of the NOL and the amount of any

NOL that may be carried over to 1998.       Rule 142(a)(1); United

States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235

(1955); Keith v. Commissioner, 115 T.C. 605, 621 (2000).          Such a

deduction is a matter of legislative grace; it is not a matter of

right.    United States v. Olympic Radio & Television, Inc., supra

at 235; Deputy v. du Pont, 308 U.S. 488, 493 (1940).


      6
       In 1997, sec. 172(b)(1)(A) was amended to generally
require a 2-year carryback and a 20-year carryover for NOLs
incurred in taxable years beginning after Aug. 5, 1997. Neither
party asserts that this amendment is applicable here, and we
conclude it is not.
                              - 11 -

      Petitioner claimed on his return that the NOL applied in

1998 arose in 1994 through 1997.   The record does not establish

that petitioner incurred an NOL in any of those years.     We

sustain respondent’s determination as to this issue.

5.   Dependency Exemptions/Filing Status

      Section 152(a) allows a taxpayer such as petitioner to treat

a son and a daughter as dependents if the taxpayer provided

during the taxable year more than half of the support of each.

See also sec. 151(a), (c) (individual taxpayer may deduct an

exemption amount for each of his or her dependents).     Support

generally includes amounts used for a dependent’s food, shelter,

clothing, medical and dental care, education, and the like.       Sec.

1.152-1(a)(2)(i), Income Tax Regs.     To meet the support test

required as to a dependent, a taxpayer must show:     (1) The total

amounts received by the dependent from all sources, (2) the

amounts actually applied for the support of the dependent, (3)

the sources which contributed to the total support costs expended

on behalf of the dependent, and (4) that the taxpayer provided

over half of the total expenditures for the dependent’s support.

Barnes v. Commissioner, T.C. Memo. 1986-585.

      Petitioner has not persuaded us that he provided more than

one-half of the support of either Keauna or Zik.     We conclude

that he is not entitled to treat either of them as his dependent.

We also conclude that petitioner may not file as head of
                                - 12 -

household.     Under section 2(b)(1)(A)(i), an individual such as

petitioner will qualify for head of household status if he

maintains as his home a household that is the principal place of

abode of a son or daughter for more than one-half of the taxable

year.     The record establishes that petitioner did not reside with

Keauna during the subject years and does not establish that Zik

resided with him either.

6.   Addition to Tax/Accuracy-Related Penalties

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

file a return on or before the specified filing date unless it is

shown that this failure is due to reasonable cause and not due to

willful neglect.     Reasonable cause may exist if a taxpayer

exercised ordinary business care and prudence and was nonetheless

unable to file the return within the date prescribed by law.

Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.     Willful neglect

means a “conscious, intentional failure or reckless

indifference.”     United States v. Boyle, 469 U.S. 241, 245 (1985).

        Section 6662(a) imposes a penalty of 20 percent on the

portion of an underpayment of tax attributable to, among other

things, a substantial understatement of tax.      Sec. 6662(b)(1) and

(2).     A substantial understatement of tax is one that exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.     Sec. 6662(d)(1)(A).   An accuracy-related

penalty does not apply to any portion of an understatement as to
                                - 13 -

which the facts and circumstances show that the taxpayer acted

with reasonable cause and in good faith.    Sec. 6664(c)(1); sec.

1.6664-4(b)(1), Income Tax Regs.

     Respondent bears the burden of production with respect to

this addition to tax and these accuracy-related penalties.      Sec.

7491(c).   In order to meet this burden, respondent must produce

sufficient evidence establishing that it is appropriate to impose

these items.     Once respondent has done so, the burden of proof is

upon petitioner.     Higbee v. Commissioner, 116 T.C. at 449.

     Respondent has satisfied his burden of production with

respect to the addition to tax in that the record establishes

that petitioner filed his 1997 tax return after its due date.

Respondent has also satisfied his burden of production with

respect to the section 6662(a) accuracy-related penalties to the

extent that the record establishes that petitioner understated

his tax for each of the subject years by the greater of 10

percent of the tax required to be shown on the return or $5,000.

With regard to both the addition to tax and the accuracy-related

penalties, petitioner must establish reasonable cause in order to

prevail.   Id.    Petitioner filed his 1997 tax return more than 11

months after the due date, and he has presented no evidence

establishing that his failure to file that return timely was due

to reasonable cause and not due to willful neglect.    Petitioner

has also failed to introduce any evidence establishing that he
                             - 14 -

acted with reasonable cause or in good faith with respect to the

items underlying the accuracy-related penalties.   We sustain

respondent’s determination as to the addition to tax and the

accuracy-related penalties (to the extent that the parties

computation(s) under Rule 155 establishes that petitioner

understated his tax for each of the subject years by the greater

of 10 percent of the tax required to be shown on the return or

$5,000).

     All arguments made by the parties and not discussed herein

have been rejected as meritless.   To reflect concessions,



                                              Decision will be

                                         entered under Rule 155.
