                          T.C. Memo. 2006-62



                        UNITED STATES TAX COURT



                 DAVID E. CHRISTENSEN, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket Nos. 13710-04, 13711-04.      Filed March 30, 2006.



       David E. Christensen, pro se.

       Ron S. Chun, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


       HAINES, Judge: Respondent determined deficiencies in

petitioner’s Federal income tax as follows:

Year at issue       Deficiency   Sec. 6651(a)(1)    Sec. 6662

1997                 $19,104           $4,050          N/A
1998                  10,666            2,658        $2,133
1999                   9,260            2,243         1,852
2000                   9,053            2,247         1,810
2001                   7,247            1,812         1,449
                                - 2 -

     The issues to be decided are:      (1) Whether petitioner failed

to report $78,491 in 1997 as income for Federal income tax

purposes; (2) whether petitioner failed to substantiate his

claimed Schedule C, Profit or Loss From Business, expenses for

1998, 1999, 2000, and 2001; (3) whether petitioner is liable for

additions to tax under section 6651(a)(1) for all years at issue;

and (4) whether petitioner is liable for accuracy-related

penalties under section 6662 for 1998, 1999, 2000, and 2001.1

                          FINDINGS OF FACT

     Petitioner resided in Glendora, California, at the time the

petitions were filed.

     During the years at issue, petitioner was employed by

various companies as a systems engineer.     The work he performed

as a systems engineer was done out of his home.     In addition, he

started his own company in 1998 called Connect4Less.     In this

capacity, he repaired computers, programmed computers, and

developed Web sites for individuals.     Petitioner also operated

Connect4Less out of his home.

     Petitioner did not file a Federal income tax return for

1997.    He did not make estimated tax payments for 1997.

Petitioner did not file his 1998, 1999, 2000, and 2001 Federal



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. Amounts are rounded to the nearest dollar.
                               - 3 -

income tax returns until October 28, 2002.   On February 2, 2003,

respondent prepared a substitute for return for 1997.   On July

12, 2004, respondent issued notices of deficiency to petitioner

for the years at issue.

     Respondent determined petitioner received taxable income in

1997 based upon the Internal Revenue Service administrative

record of petitioner’s 1997 third-party payor information

(Administrative Record).   Based upon the Administrative Record,

petitioner received:   (1) W-2, Wage and Tax Statement, income of

$69,990, consisting of (a) $22,438 from Auspex Systems, Inc.; (b)

$33,269 from Microcadam, Inc.; and (c) $14,283 from NPC Admin.

Services DCP (NPC); (2) 1099-INT, Interest Income, income of

$120, consisting of (a) $13 from Capital One FSB; (b) $18 from

Glendale Federal Bank; and (c) $71 from Pasadena Federal Credit

Union; and (3) 1099-R, Distributions from Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc., income of $8,399 from the Public Employees’ Retirement

System, for the State of California.

     Respondent disallowed petitioner’s Schedule C expenses of

$46,669, $44,451, $44,063, and $39,135 for 1998, 1999, 2000, and

2001, respectively, for lack of substantiation.   The disallowance

of Schedule C expenses caused petitioner’s adjusted gross income

to increase.   As a result, petitioner’s Schedule A, Itemized

Deductions, deductions were reduced by $873, $864, and $764 in
                                - 4 -

1999, 2000, and 2001, respectively.      On August 2, 2004,

petitioner timely filed petitions contesting the deficiencies for

the years at issue.

     Petitioner did not cooperate with respondent in preparing

for trial.   He did not identify or exchange any documents,

identify witnesses, or file a pretrial memorandum as required by

the standing pretrial order.   Respondent complied with these

requirements.

     On March 14, 2005, the cases were consolidated for trial.

Trial was held on this matter on March 16, 2005.      The parties

submitted their stipulation of facts at the beginning of trial.

                               OPINION

     Petitioner asserts he is not liable for respondent’s

deficiency determinations, penalties, and additions to tax

because:   (1) He did not receive taxable income of $78,491 in

1997; (2) he properly substantiated his Schedule C expenses for

1998, 1999, 2000, and 2001; (3) he is not liable for additions to

tax under section 6651(a)(1) for all years at issue; and (4) he

is not liable for accuracy-related penalties under section 6662

for 1998, 1999, 2000, and 2001.

     Generally the taxpayer bears the burden of proving the

Commissioner’s determinations are erroneous.      Rule 142(a).

However, the burden of proof may shift to the Commissioner under

section 7491(a) if the taxpayer has produced credible evidence
                                - 5 -

relating to the tax liability at issue, has met his

substantiation requirements, maintained records, and cooperated

with the Secretary’s reasonable requests for documents,

witnesses, and meetings.2

     In this case, petitioner bears the burden of proof because

he did not: (1) substantiate his expenses; (2) maintain the

required records; and (3) cooperate with respondent’s requests.

Sec. 7491(a); see Higbee v. Commissioner, 116 T.C. 438, 440-441

(2001).

A.   1997

     1.     Section 6201(d)

     If a taxpayer asserts a reasonable dispute with respect to

any item of income reported on a third-party information return

and the taxpayer has fully cooperated with the Secretary, the

Secretary has the burden of producing reasonable and probative

information concerning that deficiency in addition to the

information return.    Sec. 6201(d).    In this case, petitioner did

not fully cooperate with respondent.     Therefore, the Court

concludes respondent does not have the burden of production under

section 6201(d) for the 1997 tax year.




     2
       Sec. 7491 applies to all years at issue because the
examination of petitioner’s returns for all years at issue began
after July 22, 1998, the effective date of sec. 7491.
                                 - 6 -

     2.   Determination in Unreported Income Cases

     The Court of Appeals for the Ninth Circuit has determined

that in order for the presumption of correctness to attach to a

deficiency determination in unreported income cases, the

Commissioner must establish “some evidentiary foundation”

connecting the taxpayer to the income-producing activity,

Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.

1979), revg. 67 T.C. 672 (1977), or demonstrate the taxpayer

received unreported income, Edwards v. Commissioner, 680 F.2d

1268, 1270 (9th Cir. 1982).   Once there is evidence of actual

receipt of income by the taxpayer, the taxpayer has the burden of

proving that all or part of the income is not taxable.     Tokarski

v. Commissioner, 87 T.C. 74, 76-77 (1986).

     A deficiency determination which is not supported by some

evidentiary foundation is arbitrary and erroneous.    Weimerskirch

v. Commissioner, supra at 362.    In these circumstances, the

Commissioner has the burden of coming forward with evidence

establishing the existence and amount of a deficiency.     Jackson

v. Commissioner, 73 T.C. 394, 401 (1979).

     In this case, there is sufficient evidence linking

petitioner to all the 1997 income-producing activities except the

amounts reported by NPC.   With respect to the Administrative

Record, petitioner testified:    (1) He was employed by Auspex

Systems, Inc., and   Microcadam, Inc, in 1997; (2) he had a
                                - 7 -

mortgage with Glendale Federal Bank and had accounts with Capital

One and Pasadena Federal Credit Union; and (3) he received income

from the Public Employees’ Retirement System, for the State of

California.    Thus, there is sufficient evidence linking

petitioner to $64,208.

     However, even though the Administrative Record indicated

petitioner received $14,283 from NPC in 1997, petitioner

testified he was not employed by, nor did he receive income from,

NPC in 1997.    At trial, respondent was unable to provide the

Court a Form W-2 statement from NPC or any other evidence linking

petitioner to receipt of income from NPC.    Respondent informed

the Court he attempted to issue a subpoena to NPC; however, he

was unable to find its location.

     The Court finds respondent’s administrative record of NPC’s

third-party information, without more, is an insufficient

evidentiary foundation, because petitioner disputes receipt of

such income.    Therefore, this Court concludes respondent

presented evidence linking petitioner to only $64,208 of

unreported income in 1997, not the alleged $78,491.

     Finally, petitioner provided no evidence to dispute

respondent’s determination of petitioner’s receipt of income for

1997 as reduced by the Court.    Therefore, the Court finds

petitioner received taxable income of $64,208 in 1997.
                                - 8 -

B.   1998-2001

     Petitioner argues his business expenses for 1998, 1999,

2000, and 2001 were properly substantiated solely by his

testimony.    The Court disagrees.

     Under section 162(a), a taxpayer may deduct ordinary and

necessary business expenses incurred or paid during the taxable

year.   However, deductions are a matter of legislative grace, and

the taxpayer must clearly demonstrate entitlement to the claimed

deductions.    INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).   The taxpayer must keep records sufficient to establish

the amount of his deductions.    Secs. 162(a), 6001; sec.

1.6001-1(a), Income Tax Regs.    The taxpayer bears the burden of

substantiation.    Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     Petitioner testified all substantiating documents were

either destroyed in “hard disk crashes” or lost while moving.

When a taxpayer’s records have been destroyed or lost due to

circumstances beyond the taxpayer’s control, such as fire, flood,

earthquake, or other casualty, the taxpayer has a right to

substantiate the deductions by a reasonable reconstruction of the

expenditures or uses.    Sec. 1.274-5T(c)(5), Temporary Income Tax

Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).    If documentation is

unavailable, the Court may, although it is not required to do so,

accept the taxpayer’s testimony to substantiate the deduction.
                                 - 9 -

See Boyd v. Commissioner, 122 T.C. 305, 320 (2004); Watson v.

Commissioner, T.C. Memo. 1988-29.

     During petitioner’s testimony, he contradicted himself,

admitted to errors in the Schedules C relative to expenses, and

in some instances could not recall what the claimed expenses

were.    Further, petitioner did not make a good faith effort to

reconstruct his expenses, provide documentation, or provide

corroborating evidence to bolster the credibility of his

testimony.    See Tokarski v. Commissioner, supra at 77; Smith v.

Commissioner, T.C. Memo. 1998-33.    Therefore, the Court finds

petitioner’s testimony was insufficient to substantiate his

deductions.     Boyd v. Commissioner, supra; Watson v. Commissioner,

supra.

     Finally, petitioner failed to reconstruct his records,

submit any documentation, or otherwise provide sufficient

evidentiary basis for the Court to estimate his expenses under

the Cohan rule.    See Cohan v. Commissioner, 39 F.2d 540, 543-544

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

(1985).

     Therefore, the Court sustains respondent’s determination

disallowing petitioner’s Schedule C expenses of $46,669, $44,451,

$44,063, and $39,135 for 1998, 1999, 2000, and 2001,

respectively.    As a result of the above, the Court sustains
                                 - 10 -

respondent’s determination disallowing Schedule A deductions of

$873, $864, and $765, in 1999, 2000, and 2001, respectively.

C.   Penalties and Additions to Tax

     1.     Section 6651(a)(1)

     Pursuant to section 7491(c), respondent has the burden of

production with respect to any penalty, addition to tax, or

additional amounts.    The burden of production only requires

respondent to come forward with sufficient evidence indicating it

is appropriate to impose additions to tax.      Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).     In this case, respondent

has carried the requisite burden of production with respect to

the additions to tax under section 6651(a)(1).

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

file a required return on or before the prescribed filing date,

unless it is shown that such failure is due to reasonable cause

and not due to willful neglect.      A showing of reasonable cause

requires the taxpayer to demonstrate he exercised ordinary

business care and prudence and nevertheless was unable to file

the return by the due date.      Sec. 301.6651-1(c), Proced. & Admin.

Regs.

     Petitioner did not file a return for 1997, and he did not

timely file his 1998, 1999, 2000, and 2001 tax returns.

Petitioner did not offer a legitimate explanation for these

failures.    Thus, petitioner is liable for additions to tax for
                                  - 11 -

failure to timely file under section 6651(a)(1) in 1997, 1998,

1999, 2000, and 2001, in amounts to be determined under Rule 155

calculations.

       2.   Section 6662

       Section 6662 imposes an accuracy-related penalty upon any

underpayment of tax resulting from a substantial understatement

of income tax.     The penalty is equal to 20 percent of any

underpayment that constitutes a substantial understatement of

income tax.     Sec. 6662(a).   The term “substantial understatement”

is defined as the greater of:      (1) 10 percent of the tax required

to be shown on the return for the taxable year, or (2) $5,000.

Sec. 6662(d).     Petitioner reported tax on his income tax returns

and respondent determined deficiencies based upon corrected tax

resulting in understatements of the following amounts:

Tax year          Tax on return        Corrected tax   Understatement

1998                   $979                 $11,645        $10,666
1999                     96                   9,356          9,260
2000                    156                   9,209          9,053
2001                     -0-                  7,323          7,247

       In this case, the amount of the understatement for each of

the years 1998, 1999, 2000, and 2001 is more than 10 percent of

the tax required to be shown and greater than $5,000.      Thus,

petitioner substantially understated his income tax for 1998,

1999, 2000, and 2001.      Thus, respondent has met the burden of

production, and petitioner, having failed to show reasonable

cause, substantial authority, or other basis for reducing the
                             - 12 -

understatement, is liable for the section 6662 penalty for 1998,

1999, 2000, and 2001.

     The Court, in reaching its holding, has considered all

arguments made and concludes that any arguments not mentioned

above are moot, irrelevant, or without merit.

     To reflect the foregoing,

                                      Decisions will be entered

                                 under Rule 155.
