                           T.C. Memo. 1997-3



                     UNITED STATES TAX COURT



                    JOEL BAKER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 22599-94, 4270-95.            Filed January 2, 1997.



     Joel Baker, pro se.

     James Thurston and Elizabeth Groenwegen, for respondent.



                       MEMORANDUM OPINION



     PANUTHOS, Chief Special Trial Judge:      These consolidated

cases were heard pursuant to the provisions of section

7443A(b)(3) and Rules 180, 181, and 182.1      Respondent determined



     1
        All section references are to the Internal Revenue Code
as amended, unless otherwise indicated. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                                     - 2 -

the following deficiencies in, addition to, and accuracy-related

penalties on petitioner's Federal income tax:

                            Addition to Tax   Accuracy-Related Penalty
Year        Deficiency      Sec. 6651(a)(1)         Sec. 6662(a)
1
 1990              $2,437             ---                   $487
 1991               2,951            $414                    590
        1
        For 1990, the deficiency and penalty determined in the
notice of deficiency were $2,130 and $426, respectively. The
increased deficiency and penalty were claimed in respondent's
amended answer that asserts that petitioner is not entitled to a
dependency exemption for his daughter.

        After concessions,2 the issues remaining for decision are:

(1) Whether petitioner is entitled to a dependency exemption for

his daughter in 1990 and his mother in 1991; (2) whether

petitioner is entitled to head-of-household filing status for

1991; (3) whether the claimed bad debt deduction in the amount of

$5,200 for 1990 should be treated as a business bad debt or a

nonbusiness bad debt; (4) whether petitioner is entitled to a

$9,100 theft loss deduction for 1991; (5) whether petitioner is

entitled to a $2,500 deduction for unreimbursed employee business

expenses incurred in 1991; (6) whether petitioner is liable for


        2
        With respect to 1990, petitioner has conceded that he is
not entitled to a deduction in the amount of $12,000 for amounts
withheld from his wages. For 1991, petitioner has conceded: (1)
He is not entitled to a deduction for medical expenses claimed on
Schedule A; (2) he may not claim his daughter, Jacqueline, as a
dependent; (3) with respect to a claimed deduction for property
taxes in the amount of $1,759, he is not entitled to a deduction
of $845 (respondent concedes that petitioner is entitled to a
deduction of $914); (4) with respect to a claimed deduction for
unreimbursed employee business expenses in the amount of $3,200,
he is not entitled to a deduction of $700; and (5) he is not
entitled to claim a deduction for a casualty loss in the amount
of $650.
                               - 3 -

an addition to tax under section 6651(a) for failure to file a

timely return in 1991; and (7) whether petitioner is liable for

negligence penalties under section 6662(a) for the years 1990 and

1991.

     For the purposes of convenience, we have combined the

findings of fact and discussion of pertinent legal issues.      Some

of the facts have been stipulated, and they are so found.      The

stipulation of facts and attached exhibits are incorporated

herein by this reference.   At the time of filing the petitions,

petitioner resided in Berkeley, California.

     We begin by noting that respondent's determinations are

presumed correct, and petitioner bears the burden of proving that

those determinations are erroneous.    Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).   Moreover, deductions are a

matter of legislative grace, and petitioner bears the burden of

proving that he is entitled to any deductions claimed.    INDOPCO,

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

Dependency Exemptions in 1990 and 1991

     Petitioner is single, having been divorced from his former

wife in 1972, and his daughter, Jacqueline, resided with him in

1990.   Jacqueline was born on April 10, 1966.   Petitioner's

mother, Laverne Baker (Ms. Baker), resided with petitioner from

January 1 to September 1, 1991.   Ms. Baker, 80 years old during

that year, was blind and suffered from Alzheimer's disease.       Ms.
                                 - 4 -

Baker received a total of $600 per month from the Federal

Government and the State of California.

     Section 151(c) allows an annual exemption amount for each

dependent whose gross income for the taxable year is less than

the exemption amount, or who is a child of the taxpayer and is a

student who has not attained the age of 24 at the close of such

calendar year.   Sec. 151(c)(1)(A), (B)(ii).   Dependents are

generally defined as individuals who receive over half of their

support from a taxpayer in the calendar year in which that

taxpayer's taxable year begins.    Sec. 152(a).   Individuals listed

under this general definition include both mothers and daughters.

Sec. 152(a)(1), (4).   To determine whether a taxpayer has

furnished over half of an individual's support, there must be

included the cost of food, shelter, clothing, medical and dental

care, education, and the like.    Sec. 1.152-1(a)(2)(i), Income Tax

Regs.   Support also includes any amount which that individual has

contributed for his or her own support, including amounts

ordinarily excludable from gross income, in whole or part, such

as Social Security benefits.   Sec. 1.152-1(a)(2)(ii), Income Tax

Regs.

     With respect to petitioner's claim that his daughter,

Jacqueline, was his dependent in 1990, the record indicates that

she earned $11,555 in wage income, an amount which exceeded the

exemption amount for that year.    Furthermore, although Jacqueline

was a student, she reached age 24 during that year.
                                 - 5 -

Consequently, petitioner is not entitled to claim his daughter as

a dependent for 1990.3

         With respect to petitioner's claim that he is entitled to a

dependency exemption for his mother in 1991, petitioner must

establish that he provided over half of her support for the year.

Petitioner presented no documentary evidence and only vague oral

testimony on this issue.    Furthermore, the record indicates that

Ms. Baker received Federal and State Government support, and

resided with petitioner's sister for 4 months during the year.

Petitioner has not met his burden of proving that he provided

more than half of the support for his mother.    Therefore, we

sustain respondent on this issue.

Filing Status in 19914

     We now address the question of whether petitioner is

entitled to head-of-household filing status for 1991.    Based upon


     3
        Respondent first raised this issue in an amended answer.
As such, respondent bears the burden of proof on this issue.
Rule 142(a). Nevertheless, the facts in the record are clear
that petitioner is not entitled to the dependency exemption.
Accordingly, the burden of proof does not play a role with
respect to this issue.
     4
        Petitioner claimed head-of-household filing status on his
1991 return. In the notice of deficiency, respondent determined
that petitioner, because he improperly claimed his daughter as a
dependent, was not entitled to head-of-household filing status.
Petitioner appears to have conceded both the dependency and
filing status issues in his pretrial memorandum, and neither
party mentioned the issue during trial. Under sec.
2(b)(1)(A)(i), however, the issue of whether a parent may claim
an unmarried son or daughter as a dependent is not determinative
of whether that parent is entitled to head-of-household filing
status. Given that petitioner is pro se, we do not accept his
apparent concession, which was based upon respondent's erroneous
legal analysis.
                                 - 6 -

evidence in the record, including a copy of his daughter's 1991

Federal income tax return, we find that petitioner's daughter was

unmarried and resided with petitioner for more than one-half of

the year.    Under section 2(b)(1)(A), an unmarried individual may

file a return as "head of household" if that individual maintains

a household which constitutes for more than one-half of such

taxable year the principal place of abode of an unmarried son or

daughter of the taxpayer.     Therefore, petitioner is entitled to

head-of-household filing status for 1991.

Bad Debt Deduction in 1990

     On several occasions from 1981 to 1991, petitioner loaned

money to individuals, receiving interest-bearing notes in return.

On January 19, 1990, petitioner loaned $5,296.70 to James C.

Murphy, who died one month later without making any payments on

the loan.    Petitioner never collected on this debt, and claimed a

bad debt deduction in the amount of $5,200 on his 1990 return.

     Section 166(a) generally allows a deduction for any debt

that becomes worthless during the taxable year.     Bad debts may be

characterized as either business bad debts or nonbusiness bad

debts.    Sec. 166(d).   Section 166(d)(1)(B) provides that

nonbusiness bad debts are deductible as short-term capital

losses.

     While petitioner claimed the $5,200 deduction as a business

bad debt loss, respondent characterized the loss as a nonbusiness

bad debt, thereby limiting petitioner's deduction to $3,000 for
                                  - 7 -

the year.   Sec. 1211(b)(1).   Respondent concedes the validity and

the amount of the loan, as well as its worthlessness as a bad

debt.   The issue to be decided, therefore, is whether petitioner

is entitled to claim the bad debt as a business bad debt.

     Bad debts are properly characterized as business bad debts

if they are incurred in connection with a trade or business of

the taxpayer.   Sec. 166(d)(2).    Petitioner argues that he was in

the trade or business of lending money.       During the year in

issue, petitioner worked as a school counselor and reported wages

from that activity.   Petitioner's 1990 income tax return does not

reflect any other activity which would lead us to the conclusion

that he was in the trade or business of lending money.       Based

upon the record before us, we find that petitioner has failed to

present sufficient evidence to establish that he is entitled to a

deduction for a business bad debt.        Deely v. Commissioner, 73

T.C. 1081, 1096 (1980).   Therefore, we sustain respondent's

determination that the loss in question constituted a nonbusiness

bad debt.

Theft Loss in 1991

     Petitioner was divorced in 1972, and fell into arrears on

child support payments to his former wife.       By September 21,

1987, however, petitioner had paid all amounts in arrearage.

Nevertheless, on January 29, 1988, petitioner's former wife

obtained an ex parte order to withhold a portion of petitioner's

wages at a rate of $500 per month until purported child support
                                 - 8 -

arrearages of $13,780 were paid.     Petitioner commenced legal

proceedings to contest the wage assignment.       On April 4, 1990,

petitioner obtained a judicial order declaring the wage

assignment void, and requiring his former wife to return $7,180

which had been paid pursuant to the original order.       Petitioner

made attempts to find his former wife, but never filed suit

seeking to collect the amounts she owed him.       On Schedule A of

his amended return for 1991, petitioner deducted $9,100 as a

theft loss attributable to amounts withheld from his paycheck

"for child support * * * not owing".5

         Individual taxpayers may deduct certain losses, including

theft losses, sustained during the taxable year and not

compensated by insurance or otherwise.     Sec. 165(a), (c)(3).    A

taxpayer may deduct a theft loss in the year in which the loss is

discovered, to the extent that the loss exceeds 10 percent of

adjusted gross income.     Sec. 165(e), (h)(2).    The existence of a

theft depends upon the law of the State where the purported theft

occurred.     Paine v. Commissioner, 63 T.C. 736, 740 (1975), affd.

without published opinion 523 F.2d 1053 (5th Cir. 1975).

California provides that a person commits theft when he or she

"knowingly and designedly, by any false or fraudulent

representation or pretense, defraud[s] any other person of

money".     Cal. Penal Code sec. 484(a) (West 1988).



     5
        Petitioner maintains that a total of $9,100 was withheld
from his wages before payments finally ceased.
                                - 9 -

     To meet his burden of proof on this issue, petitioner must

establish that a theft occurred; i.e., that his former wife

possessed felonious intent when she obtained the judicial order

for the wage assignment.    Bellis v. Commissioner, 540 F.2d 448,

449 (9th Cir. 1976), affg. 61 T.C. 354 (1973).    In this regard,

respondent contends that because petitioner was not present when

his former wife obtained the wage assignment order, and has

presented no other evidence regarding his former wife's intent at

that time, petitioner has not shown that the order was procured

with fraudulent intent.    Based upon the record before us, we find

that petitioner has failed to prove that his former wife

committed a theft under California law when obtaining the wage

assignment order.   We, therefore, sustain respondent on this

issue.

Unreimbursed Employee Business Expenses in 1991

     During the years in issue, petitioner was employed as a

counselor in the Oakland Unified School District.   One of

petitioner's responsibilities as a counselor was to organize and

raise funds for various events, including a school picnic for

Bret Harte Junior High School, held on May 31, 1991.   Petitioner

was responsible for finding a caterer for the picnic and entered

into an agreement, approved by the school administration, with

Avalon Catering (Avalon).   Funds could not be paid to the caterer

until petitioner, the class secretary, and the school principal

each signed a form authorizing disbursement of the funds.
                              - 10 -

According to petitioner, 1 or 2 days prior to the date of the

picnic, he was advised that Avalon would not perform according to

the agreement.6   Petitioner then entered into a new contract with

A & S Catering (A & S).   Petitioner was informed by the principal

of the school that she would not authorize the disbursement of

funds to A & S.   Petitioner then paid $2,500 to A & S out of his

own funds, and deducted the amount as an unreimbursed employee

business expense on Schedule A of his income tax return.

     With respect to the $2,500 paid by petitioner to A & S, we

note that section 162(a) allows a deduction for all ordinary and

necessary expenses incurred in carrying on a trade or business.

Generally, the performance of services as an employee constitutes

a trade or business.   Primuth v. Commissioner, 54 T.C. 374, 377

(1970).   In this regard, petitioner maintains that he may deduct

the $2,500 as an ordinary and necessary expense.   The record,

however, indicates that petitioner was aware that the school's

principal disapproved of the expenditure before petitioner

incurred the expense in question.   We are not persuaded that this

expense, incurred with the knowledge that it would not be

approved by his superiors, was ordinary and necessary to




     6
        Documents in this record are inconsistent with
petitioner's testimony. Said documents could lead us to the
conclusion that petitioner unilaterally terminated the contract
with Avalon. We need not, and do not, decide for purposes of
this opinion whether petitioner was at fault or exactly what role
petitioner played in the failure of Avalon to perform the
catering services.
                                - 11 -

petitioner's employment.    Therefore, we sustain respondent on

this issue.

Addition to Tax for Failure To Timely File Under Section 6651(a)

     Respondent determined that petitioner was liable for an

addition to tax for failure to timely file a tax return for 1991.

Generally, taxpayers failing to submit a timely return are

subject to this addition to tax, unless they establish that the

failure resulted from "reasonable cause" and not from "willful

neglect".     United States v. Boyle, 469 U.S. 241, 245-246 (1985).

Petitioner filed his return for the 1991 tax year on December 28,

1993, but noted at trial that he was preoccupied with other

matters at the time his return was due.    The fact that a taxpayer

is busy during the time that his or her return is due does not,

by itself, establish reasonable cause for failing to timely file

a return.     Dustin v. Commissioner, 467 F.2d 47, 50 (9th Cir.

1972), affg. 53 T.C. 491 (1969).    Therefore, we sustain

respondent on this issue.

Accuracy-Related Penalty Under Section 6662(a)

     For 1990 and 1991, respondent determined that petitioner is

liable for the accuracy-related penalty provided under section

6662(a).    The accuracy-related penalty is equal to 20 percent of

any portion of an underpayment attributable to a taxpayer's

negligence or disregard of rules or regulations.    Sec. 6662(a)

and (b)(1).    The term "negligence" includes any failure to do

what a reasonable and ordinarily prudent person would do under
                               - 12 -

the same circumstances.   Neely v. Commissioner, 85 T.C. 934, 947

(1985).   The penalty does not apply to any portion of an

underpayment for which there was reasonable cause and with

respect to which the taxpayer acted in good faith.    Sec. 6664(c).

Generally, respondent's determination imposing the accuracy-

related penalty is presumed correct, and taxpayers bear the

burden of proving that they are not liable for the accuracy-

related penalty imposed by section 6662(a).    Rule 142(a);

Tweeddale v. Commissioner, 92 T.C. 501, 505 (1989).      Respondent,

however, bears the burden of proving petitioner's liability for

an accuracy-related penalty with regard to petitioner's claim

that his daughter was his dependent in 1990.    See supra note 3.

     With respect to 1990, we find that petitioner did not have a

reasonable basis either for claiming his daughter as a dependent,

or for characterizing his worthless note as a business bad debt.

With respect to 1991, we conclude that petitioner did not have a

reasonable basis for claiming a deduction for theft losses

relating to amounts withheld from his wages by his former wife.

Furthermore, petitioner offered no evidence to suggest that he

had a reasonable basis for any of the conceded items which

resulted in an underpayment.   Accordingly, we sustain

respondent's determination to this extent.    However, we find that

petitioner made reasonable attempts to comply with statutory

requirements when claiming his mother as a dependent in 1991.

Moreover, we find that petitioner had a reasonable belief that
                             - 13 -

expenses paid to A & S were sufficiently related to his

employment to warrant a deduction.    Therefore, we conclude that

the accuracy-related penalty is not applicable to the portion of

the underpayment attributable to this adjustment.

     To reflect the foregoing,

                                          Decisions will be entered

                                     under Rule 155.
