                       T.C. Memo. 2003-267



                     UNITED STATES TAX COURT



              DAVID M. PRIESTLY, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13537-99L.             Filed September 11, 2003.



     David M. Priestly, Jr., pro se.

     Irene Scott Carroll, for respondent.


                       MEMORANDUM OPINION


     CARLUZZO, Special Trial Judge:    On July 6, 1999, respondent

issued to petitioner a Notice of Determination Concerning

Collection Action(s) Under Section 63201 and/or 6330 for unpaid


     1
       Section references are to the Internal Revenue Code of
1986, as amended and in effect at the time the petition was
filed. Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 2 -

1988 Federal income tax and related liabilities of $17,801.2      In

response to that notice, petitioner timely petitioned this Court

for review of respondent’s determination to proceed with

collection.   Our jurisdiction in this case is established by

section 6330(d).

                              Background

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

so found.   At the time the petition was filed, petitioner was a

resident of California.

     Petitioner’s untimely 1988 Federal income tax return was

filed on January 13, 1991.    On the return, petitioner’s address

is shown as 24143 Palomino Dr., Diamond Bar, California (the

Diamond Bar address).    Petitioner reported wages of $42,926 from

his employment as an engineer with General Dynamics Corp.    There

were no Federal income tax withholdings on petitioner’s wages

from General Dynamics Corp.    There are two Schedules C, Profit or

Loss From Business, included with petitioner’s return.    One is

for a business described as a “tax preparation/consulting”

service; the other is for a business described as a “property

management” service.    Approximately $5,100 of gross income is

reported and approximately $21,000 of expenses are deducted on


     2
       Other liabilities were referenced in the notice, but this
Court has no jurisdiction over respondent’s determination with
respect to those liabilities. See the Jan. 10, 2000, Order
granting respondent’s Motion to Dismiss for Lack of Jurisdiction
and to Strike as to the 1990 Tax Return Preparer Penalty.
                               - 3 -

each Schedule C.   Together with the wage income referred to above

and $30 in dividend income, the losses reported on the Schedules

C are taken into account in the adjusted gross income of $11,037

reported on petitioner’s return.

     A personal exemption deduction, two dependency exemption

deductions, and the standard deduction applicable to a head of

household are subtracted from the adjusted gross income and

result in reported taxable income of $787.   Applying the section

1 income tax rate applicable to a head of household, petitioner

reported an income tax liability of $118, which was reduced to

zero by a claimed credit for child and dependent care expenses.

A $754 earned income credit was claimed, which gave rise to a

refund in the same amount.

     Petitioner was married as of the close of 1988.   His spouse,

Debra A. Priestly, was employed as a registered nurse during

that year.   Her untimely 1988 Federal income tax return, which

was prepared by petitioner, was filed in late September 1989.

The return shows the Diamond Bar address as her home address.

The income reported on the return includes wages of $26,379,

interest of $99, and dividends of $303.   Included with her

return is a Schedule C for a business described as a “property

management” service.   With one minor exception, the income and

deductions reported on this Schedule C are identical to the items

reported on the “property management” Schedule C included with
                               - 4 -

petitioner’s return.   The $10,537 adjusted gross income reported

on her return takes into account the above items of income and

the loss reported on the Schedule C.

     A personal exemption deduction, a dependency exemption

deduction for an individual not listed on the return, and the

standard deduction applicable to a head of household are

subtracted from the adjusted gross income and result in reported

taxable income of $2,237.   Applying the section 1 income tax rate

applicable to a head of household, petitioner’s spouse reported

an income tax liability of $336, which was reduced to zero by a

claimed credit for child and dependent care expenses.   The $1,344

refund claimed on the return consists of an $804 earned income

credit, plus $540 of Federal income tax withholdings.

     Petitioner’s 1988 Federal income tax return was examined.

As a result, respondent issued a notice of deficiency in which a

deficiency of $8,118 in petitioner’s 1988 Federal income tax was

determined.   It appears that the deficiency results from the

disallowances of the earned income credit and the deductions

claimed on the Schedules C.   The details of the examination and

deficiency determination cannot be determined with precision

because respondent’s administrative file has been destroyed.3


     3
       According to respondent, the file was destroyed “in the
ordinary course of business”. We interpret this to mean that the
destruction of the file was consistent with respondent’s record
retention requirements. In any event, petitioner does not claim
that the file was destroyed for other reasons.
                                - 5 -

     Petitioner describes the examination of his 1988 return as

“uncontested”.   He did not petition this Court in response to the

above-mentioned notice of deficiency, and the deficiency,

additions to tax, and interest were assessed on November 16,

1992.

     Some time in the middle of 1993, a criminal tax

investigation against petitioner was initiated.    He was charged

and convicted of aiding and abetting the filing of false Federal

income tax returns.    The criminal activity that resulted in

petitioner’s conviction involved the preparation of fraudulent

Schedules C for his clients.    His sentence included a prison

term, and he was incarcerated from March 10, 1999, until August

1, 2001.   In the course of the criminal investigation,

petitioner’s residence was searched pursuant to a search warrant

issued in April 1994.    Some or all of the items seized during the

search have not been returned to petitioner.

     On January 21, 1999, respondent mailed to petitioner a final

notice of intent to levy with respect to his outstanding 1988

Federal income tax liability.    On February 22, 1999, respondent

received from petitioner a Form 12153, Request for a Collection

Due Process Hearing.    The form is signed by petitioner and the

Diamond Bar address is shown as petitioner’s address on the form

itself, as well as on the envelope in which the form was mailed

to respondent.   In the area of the form where the taxpayer is
                                 - 6 -

prompted to explain his or her disagreement with respondent’s

proposed collection activity, petitioner wrote:

     I do not owe the amount shown. I do have receipts to
     substantiate my deductions. They are with the IRS
     downtown Los Angeles branch. I need time to retrieve
     them. Ms. Snoody [sic] (rev agt) is aware of this.
     * * * I did not have the opportunity to dispute tax.

     In response to petitioner’s request for a hearing, in a

letter dated April 15, 1999, addressed to petitioner at the

Diamond Bar address, an Appeals officer, who was unaware that

petitioner was incarcerated at the time, scheduled a hearing for

May 20, 1999.   Petitioner apparently contacted the Appeals

officer by telephone and requested that the hearing be

rescheduled for another date.    Petitioner did not notify the

Appeals officer that he was incarcerated; the Appeals officer was

aware that petitioner had been convicted of criminal tax offenses

but believed that petitioner’s incarceration had been deferred

pending appeal of his criminal conviction.    The hearing was

rescheduled for June 17, 1999.    Petitioner failed to attend the

June hearing because he was incarcerated.

     In a Notice of Determination Concerning Collection Action(s)

Under Section 6320 and/or 6330, dated July 6, 1999, addressed to

petitioner at the Diamond Bar address, respondent determined to

proceed with the proposed collection activity because:    (1) “All
                              - 7 -

statutory requirements have been met”; (2) petitioner’s

“allegations that the tax is not owed are unsubstantiated”; and

(3) “the proposed collection methods are not too intrusive”.    In

the notice, respondent also notes that petitioner “raised the

issue” of the amount or the existence of his 1988 Federal income

tax liability, but that he failed to present “anything to change

the amount of tax assessed”, and further, that petitioner offered

“no other alternatives to enforced collection”.

                         Discussion

     Petitioner’s incarceration prevented him from attending

either of the scheduled hearings with the Appeals officer.     We

could remand the case to respondent’s Appeals Office to allow for

an administrative hearing, see, e.g., Tatum v. Commissioner, T.C.

Memo. 2003-115; Nestor v. Commissioner, T.C. Memo. 2002-251;

however, under the circumstances we elect not to do so.

Petitioner makes no claim that the Appeals officer failed to

obtain verification that the requirements of any applicable law

or administrative procedure have been met.   See 6330(c)(1).

Furthermore, petitioner does not raise a spousal defense,

challenge the appropriateness of the proposed collection action,

or offer any collection alternatives.   See sec. 6330(c)(2)(A).

Instead, petitioner’s challenge to respondent’s determination

raises issues exclusively related to the existence or amount of
                                - 8 -

his 1988 Federal income tax liability.    See sec. 6330(c)(2)(B).4

Because we review de novo respondent’s determination with respect

to the existence or amount of petitioner’s 1988 Federal income

tax liability, see Sego v. Commissioner, 114 T.C. 604, 610

(2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000), it is

appropriate to consider and resolve those issues at this time in

this proceeding.    Remanding the case to respondent’s Appeals

Office would, more likely than not, needlessly delay the

collection of petitioner’s 1988 Federal income tax liability

(plus related additions to tax and interest), which, if the

proper amount has been assessed, is already long overdue.    See

Lunsford v. Commissioner, 117 T.C. 183, 189 (2001); Thomas v.

Commissioner, T.C. Memo. 2003-231; Moore v. Commissioner, T.C.

Memo. 2003-1.




     4
         Sec. 6330(c)(2)(B) states:

          (B) Underlying liability.--The person may also
     raise at the hearing challenges to the existence or
     amount of the underlying tax liability for any tax
     period if the person did not receive any statutory
     notice of deficiency for such tax liability or did not
     otherwise have an opportunity to dispute such tax
     liability.

     Petitioner claims that he never received a notice of
deficiency for 1988. Respondent’s records indicate that one was
sent, but because respondent’s administrative file has been
destroyed, respondent cannot refute petitioner’s contention and
concedes that petitioner may challenge the existence or the
amount of his 1988 Federal income tax liability in this
proceeding.
                                    - 9 -

       After careful consideration of the evidence presented in

this proceeding, we find that petitioner has failed to establish

that there should be any adjustment to or reduction in the

assessments made with respect to his 1988 Federal income tax

liability.       Our reasons for this finding are summarized below.

       The disputed liabilities in this case result from

respondent’s deficiency determination made more than 10 years

ago.       The Commissioner’s determination of a deficiency is

presumptively correct, and the taxpayer bears the burden of proof

to establish that a deficiency determination is erroneous.          Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).5          As we

have observed in countless opinions, deductions are a matter of

legislative grace.       New Colonial Ice Co. v. Commissioner, 292

U.S. 435, 440 (1934).       A taxpayer claiming a deduction on a

Federal income tax return must demonstrate that the deduction is

allowable pursuant to some statutory provision and must further

substantiate that the expense to which the deduction relates has

been paid or incurred.       Id.   A taxpayer’s obligation to

substantiate a claimed deduction is not eliminated merely because

the taxpayer’s records have been lost, stolen, destroyed, or

otherwise made unavailable to the taxpayer.        Malinowski v.

Commissioner, 71 T.C. 1120, 1124-1125 (1979); Villarreal v.

Commissioner, T.C. Memo. 1998-420 (“A taxpayer’s inability to


       5
           Sec. 7491 is not applicable to this proceeding.
                               - 10 -

produce records does not relieve the taxpayer of the burden of

proof.”).   Certain expenses, e.g., interest, real estate taxes,

items paid by check or credit card, etc., can be substantiated by

records maintained by third parties.    If the taxpayer’s own

records are not available, we expect the taxpayer to make some

attempt to obtain substantiating records from third parties in

those situations where it is reasonable to expect that third

party records exist.   Cf. Gizzi v. Commissioner, 65 T.C. 342, 345

(1975); Cook v. Commissioner, T.C. Memo. 1991-590.

     Petitioner admits that he has few, if any, records that

substantiate the deductions claimed on the Schedules C.

According to petitioner, most, if not all, of the records that

would substantiate the deductions here in dispute were seized in

the search of his residence.   We note that the search of

petitioner’s residence occurred after petitioner’s 1988 return

had been examined and the resulting deficiency, additions to tax,

and interest had been assessed.   Petitioner describes the

examination as “uncontested” and does not claim that

substantiating records were produced for respondent’s agent

during the course of that examination.    Furthermore, to the

extent that substantiating records exist and were in his

possession at the time of the examination, he does not explain

why those records were not provided to respondent’s examining

agent.
                              - 11 -

     Instead of attempting to substantiate the disallowed

deductions through third-party or duplicate records (e.g.,

statements from banks, credit card companies, local property tax

records, etc.), petitioner produced various documents that he

claims remained in his possession after the search.   These

documents include an unsigned blank check and deposit slip from a

“business account”, illegible copies of credit card receipts,

automobile repair bills, several bank statements for a joint

checking account, a notice advising petitioner and his spouse

that their automobile insurance had expired and another notice

indicating that the insurance had been reinstated, a notice that

petitioner’s real estate taxes for 1991 and 1992 were delinquent,

a bill for a newspaper classified advertisement, a deed, a copy

of a check made payable to Fleet Funding Assumption Department

which appears not to have been negotiated, copies of mortgage

statements, and copies of utility bills.   When describing these

documents at trial, petitioner acknowledged that some of them had

nothing to do with deductions claimed on his 1988 return.     Only

some of the documents introduced into evidence by petitioner

relate to 1988.   According to petitioner, these documents were

not seized along with his other records for that year because the

agents conducting the search “missed” them.   Furthermore, to the

extent a document seems to relate to a deduction claimed by

petitioner, it is equally plausible that the document relates to
                                - 12 -

a deduction claimed on the Schedule C included with his spouse’s

return.

     We reject petitioner’s testimony that he at one time had

substantiating documents for the deductions claimed on the

Schedules C included with his 1988 Federal income tax return, but

that those documents were seized in the search of his residence.

Petitioner has otherwise failed to produce in this proceeding

sufficient substantiation for any of the deductions claimed on

the Schedules C, and he has not given us a basis upon which we

can reasonably estimate the amount of the expenses to which the

deductions relate.    See Norgaard v. Commissioner, 939 F.2d 874,

877 (9th Cir. 1991); Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957); Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

     Petitioner has failed to establish that respondent’s

determination of a deficiency in his 1988 Federal income tax was

in any way erroneous.     Respondent’s Appeals officer has verified

that the assessments made as a result of that determination are

otherwise valid.     Respondent’s determination to proceed with

collection is therefore sustained.

     To reflect the foregoing,

                                           Decision will be

                                      entered for respondent.
