                          T.C. Memo. 2006-158



                      UNITED STATES TAX COURT



     SHERIF S. ABDELHAK a.k.a. SAMUEL A. ABEL, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 865-05.                Filed August 1, 2006.



     Sherif S. Abdelhak, pro se.

     Mark D. Eblen, for respondent.



                          MEMORANDUM OPINION


     GOEKE, Judge:   Respondent determined income tax deficiencies

against petitioner for 1998, 1999, and 2000 in the amounts of

$172,626, $31,059, and $222,655, respectively.    Respondent also

determined additions to tax under section 6651(a)(1) for 1998,

1999, and 2000 in the amounts of $30,602.25, $7,810.50, and
                                 - 2 -

$55,663.75, respectively.1    Further, respondent determined

accuracy-related penalties against petitioner under section

6662(a) in the amounts of $34,525.20 and $6,211.80 for 1998 and

1999, respectively.

       The issues for decision are:

       (1)   Whether petitioner is entitled to a $435,000 charitable

contribution deduction for tax year 1998.     We hold that he is

instead entitled to a charitable deduction of $12,713.28.

       (2)   whether petitioner is entitled to a theft loss

deduction of $2,221,668 for tax year 2000.     We hold that he is

not.

       (3)   whether petitioner, through Global Trading Group (GTG),

an S corporation of which petitioner is the sole shareholder, is

entitled to travel, meal and entertainment business expense

deductions for tax year 1999 for an amount greater than the $437

allowed by respondent.     We hold that he is not.

       (4)   whether petitioner, through GTG, may deduct travel and

meal expense deductions of $53,245 for the tax year 2000.      We

hold he may not.

       (5)   whether petitioner, through GTG, is entitled to more

than $2,850 in rent deductions for tax year 1999.     We hold that

he is not.


       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 - 3 -

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

section 6651(a)(1) for tax years 1998, 1999, and 2000.    We hold

that he is.

      (7)   whether petitioner is liable for accuracy-related

penalties under section 6662(a) for disallowed deductions.      We

hold that he is not liable for those penalties in 1998 and 1999.

                             Background

      Petitioner was a resident of Prospect, Kentucky, at the time

he filed his petition.    Petitioner was the former president and

chief executive officer (CEO) of the Allegheny Health Education &

Research Foundation (AHERF), a Pennsylvania corporation.    AHERF

terminated petitioner in June 1998 and filed chapter 11

bankruptcy proceedings 1 month later in July of that year.

A.   1998 Charitable Deduction

      In 1990, petitioner sold his home to a subsidiary of AHERF,

Jellico, Inc. (Jellico).    In 1992, petitioner signed a land

installment contract with Jellico to repurchase the home for

$1,280,000 with payment spread over 20 years.    The terms of this

contract required petitioner to pay 5 percent of the principal

($64,000) each April 30th and interest payments of 7.5 percent on

the remaining principal each October 30th.    The contract also

required petitioner to pay all taxes due on the residence.

Jellico retained title during the contract period and would

transfer title when petitioner paid the full contract price.      If
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petitioner defaulted, he could file suit to recover any principal

payments made in excess of 25 percent of the purchase price, less

any damages to Jellico.   Thus, his recovery in the event of his

default was limited to the excess of his payments over $320,000

($1,280,000 x .25 = $320,000).    The contract assured Jellico an

unencumbered title during such a suit.

      In October 1998, petitioner could not make the next interest

payment of slightly over $50,000.    Petitioner was also in default

with respect to the property taxes on the residence.   By this

time, petitioner had made $384,000 in principal payments.

Petitioner contacted Jellico and offered to donate his equity in

the residence to AHERF and vacate the premises.   Jellico accepted

the proposal, and petitioner vacated the residence.

B.   2000 Theft Loss Deduction

      On his 2000 return, petitioner claimed a theft loss

deduction in the amount of $2,221,668.   This loss related to

three pieces of property, two life insurance policies with cash

surrender values of $1,101,000 and $570,768 and a KEYSOP deferred

compensation account which petitioner valued at $550,000.

      At the time AHERF terminated petitioner, the premiums of

several life insurance policies, including the two claimed as

theft losses, were paid by AHERF.    In return for payment of the

premiums, AHERF maintained a right of corporate recovery on these

policies.   This right allowed AHERF to recover the funds paid for
                                  - 5 -

the insurance premiums in the event of the policyholder’s death

or termination.   Petitioner assigned his rights under these

policies to AHERF in return for its funding of his Key Employees

Shared Option Plan (KEYSOP) account, a pension/deferred

compensation account.      The KEYSOP account itself was recoverable

by AHERF in the event AHERF became insolvent or filed for

bankruptcy.

      At the time of his termination by AHERF, petitioner’s

KEYSOP deferred compensation account carried a balance of

$2,062,425.   Also at the time of his termination, petitioner had

a loan from PNC Bank, which was cosigned by AHERF, for

approximately $2.2 million.     After petitioner was terminated, PNC

Bank called the loan due.     AHERF issued a check, payable to PNC

Bank and petitioner jointly, for $1,506,170.97 using funds from

petitioner’s KEYSOP account to repay the loan.     One month after

petitioner’s termination, AHERF filed for bankruptcy and

reclaimed the remaining funds in petitioner’s KEYSOP account.

C.   Business Deductions

      Petitioner is the sole shareholder of GTG, an S corporation.

GTG’s business involves buying and selling raw materials

worldwide.    Petitioner’s Forms 1040, U.S. Individual Income Tax

Return, for 1999 and 2000 claimed $78,563 and $53,245,

respectively, in business expense deductions for meals, travel,

and entertainment related to GTG.     Petitioner submitted records
                               - 6 -

that demonstrated that the expenses were incurred but not that

the expenses had a business purpose.     Petitioner’s return also

showed a rent expense deduction for 1999 related to GTG; however

petitioner presented no evidence related to this expense.

D.   Penalties

      The parties stipulated that petitioner was delinquent in

filing his tax returns for 1998, 1999, and 2000.     Petitioner

filed his 1998 tax return on June 21, 2000; his 1999 tax return

on February 28, 2001; and his 2000 tax return no earlier than

April 14, 2002.

                            Discussion

I.   Burden of Proof and Production

      Deductions are a matter of legislative grace; taxpayers do

not have an inherent right to claim them.     Taxpayers

generally bear the burden of proving that they are entitled

to claimed deductions.   See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).     The taxpayer is required to

maintain records that are sufficient to enable the Commissioner

to determine his or her correct tax liability.     See sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.

      The Commissioner’s determinations set forth in a notice of

deficiency are generally presumed correct, and the taxpayer bears

the burden of proving that the determinations are in error.       Rule
                                - 7 -

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

to section 7491(a), the burden of proof as to factual issues may

shift to the Commissioner where the taxpayer complies with

substantiation requirements, maintains records, and cooperates

fully with reasonable requests for witnesses, documents, and

other information.   Petitioner has not met the requirements of

section 7491(a) because he has not met the substantiation

requirements regarding the deductions at issue.

      The Commissioner carries the burden of production under

section 7491(c) with respect to an individual’s liability for

additions to tax.    Once this burden is met, the taxpayer has the

burden of proving that delinquent filings did not stem from

willful neglect and that the taxpayer had reasonable cause for

late filing.   See United States v. Boyle, 469 U.S. 241 (1985);

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).    To prove

reasonable cause, a taxpayer must show that he or she exercised

ordinary business care and prudence but nevertheless could not

file the return when it was due.    Crocker v. Commissioner, 92

T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.

II.   Charitable Contribution

      Petitioner claimed a charitable contribution deduction of

$435,925 on his 1998 tax return as “real estate forfeiture”.

Respondent argues that petitioner has not established a valid
                                - 8 -

charitable contribution for this amount during 1998.    We agree

with respondent.    We hold petitioner may claim only $12,713.28 as

a charitable contribution deduction on his 1998 tax return.

     Petitioner may donate to AHERF as per section

170(b)(1)(A)(iii).    Section 170(c) defines a charitable deduction

as a “contribution or gift to or for the use of * * * (2) a

corporation, trust, or community chest, fund, or foundation”.

     Petitioner misunderstands the nature of the installment land

contract.   Under this contract, petitioner gained title to the

residence from Jellico only upon completion of all payments.

Therefore, petitioner did not have title at the time of the

donation.   Petitioner knew of his lack of title when he offered

the donation, as his donation offered only his equity.    Equity is

the amount of principal paid into ownership interests.     Schuneman

v. United States, 783 F.2d 694, 701 n.8 (7th Cir. 1986).

     We need not decide the complicated issue of whether

improvements to the property constituted payment.    Petitioner

merely claimed that he made improvements and then added the

claimed value of these improvements to his deduction.    However,

petitioner has offered no proof substantiating these improvements

or their value.    Having failed to establish any proof of the

claimed value, we hold petitioner is not entitled to any

deduction for improvements made to the home.
                                - 9 -

        This leaves petitioner with $384,000 in claimed equity as a

contribution deduction.    However, the land installment contract

states that in event of default, petitioner may sue to recover

principal payments only in excess of $320,000. ($1,280,000 x

.25).

       Petitioner maintains that he never defaulted on the

contract.    He contends that he made the donation before the

October interest due date, fulfilling his obligation without

default.    In a contract, however, default occurs when a party to

the agreement fails to fulfill a stated material term.       Franconia

Associates v. United States, 536 U.S. 129, 142-143 (2002).

Petitioner failed to pay the real estate taxes as required in the

contract, placing him in default.    As petitioner defaulted,

Jellico is entitled to 25 percent of the $1,280,000 purchase

price, or $320,000, per the contract.     This leaves petitioner

with $64,000 in remaining equity ($384,000 - $320,000).      Of this

sum, Jellico is entitled to deduct the final interest payment and

the unpaid property taxes as damages.    This amounts to

$51,286.72.    Therefore, petitioner’s remaining equity and actual

charitable contribution is $12,713.28 ($64,000 - $51,286.72).

III.    Theft Loss Deductions

       Section 165 grants a taxpayer a deduction of any loss

sustained during a taxable year as a result of theft.      Sec.

165(c)(3), (e).    In order to claim this deduction, a taxpayer
                               - 10 -

must prove a theft occurred.    Elliott v. Commissioner, 40 T.C.

304, 311 (1963); Davis v. Commissioner, T.C. Memo. 2005-160

(2005).   Petitioner claims a theft loss of $2,221,668 on his 2000

tax return relating to the value of employee benefits.     This

value stems from (1) a life insurance policy with Pacific Life,

(2) a life insurance policy with Equitable Life, and (3) the

funds in petitioner’s KEYSOP account.   Petitioner maintains AHERF

unlawfully converted these funds, resulting in a theft.

     We find that petitioner has failed to prove a theft of the

life insurance policies occurred.   AHERF was entitled to a right

of corporate recovery on the policies, allowing it to reclaim the

amounts paid in premiums upon the policyholder’s death or

termination.   AHERF reclaimed the insurance policy premiums only

after petitioner’s employment was terminated.   Further,

petitioner admits that he assigned to AHERF all his rights under

the insurance policies in return for KEYSOP funding.

Essentially, petitioner did not own the policies.   Accordingly,

petitioner failed to establish the theft of any value with

respect to the policies.

     Petitioner likewise may not claim a theft loss deduction for

his KEYSOP account.   At the time of his termination in June 1998,

petitioner’s account had a balance of $2,062,452.   Petitioner

also had an outstanding loan from PNC Bank cosigned by AHERF for

approximately $2.2 million.    Upon petitioner’s termination, PNC
                               - 11 -

Bank immediately demanded full payment of the loan balance.     In

response, AHERF issued a check for $1,516,170.97 from

petitioner’s KEYSOP account to repay the balance of the loan (in

addition to using funds from the cashed-out insurance policies).

AHERF’s check required signatures by both petitioner and PNC Bank

in order to be cashed.   Although it was perhaps not as petitioner

would have liked, AHERF did issue payment from his KEYSOP account

to discharge petitioner’s debt, conferring a benefit on

petitioner.   Thus, AHERF did not make a conversion of

petitioner’s funds, a requirement to claim a theft loss

deduction.    See Sperzel v. Commissioner, 52 T.C. 320, 328 (1969)

(“But the word ‘theft’ extends only to the ‘criminal

appropriation of another's property to the use of the taker.’”

quoting Edwards v. Bromburg, 232 F.2d 107, 110 (5th Cir. 1956)).

     AHERF also structured employee KEYSOP accounts so that it

had the right to reclaim any funds in the accounts in event of

bankruptcy or insolvency.   AHERF filed a petition for bankruptcy

under chapter 11 and reclaimed petitioner’s remaining KEYSOP

funds 1 month after petitioner’s termination.   Petitioner

acknowledged and stipulated he knew of AHERF’s rights to reclaim

the funds and may not therefore claim a theft loss on those

funds.   We hold that petitioner has failed to prove theft of
                                - 12 -

these funds occurred.   As such, we hold petitioner is not

entitled to any theft loss deductions from the value of his life

insurance policies or his KEYSOP account.

IV.   GTG Business Expense Deductions

      Petitioner is the sole shareholder of GTG, an S corporation

that trades in raw materials.    Petitioner claimed several

business deductions for expenses related to the payment of rent

in 1999 as well as worldwide travel, meals, and entertainment in

both 1999 and 2000.

      Section 162(a) authorizes a taxpayer to deduct ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on a trade or business.    Section 1.162-1(a),

Income Tax Regs., provides that “Business expenses deductible

from gross income include the ordinary and necessary expenditures

directly connected with or pertaining to the taxpayer's trade or

business”.   Deductions are a matter of legislative grace, and

petitioner must prove his entitlement to the deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. at 84; see also Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930) (where a

taxpayer claims a business expense but cannot fully substantiate

it, the Court may approximate the allowable amount).

      In addition, for any expenses related to travel or

entertainment, section 274(d) provides:

           SEC. 274(d). Substantiation Required.--No
      deduction or credit shall be allowed–-
                                  - 13 -

         *         *         *       *       *       *        *

     unless the taxpayer substantiates by adequate records
     or by sufficient evidence corroborating the taxpayer's
     own statement (A) the amount of such expense or other
     item, (B) the time and place of the travel,
     entertainment, amusement, recreation, or use of the
     facility or property, * * * (C) the business purpose of
     the expense or other item, * * *

     The requirements of section 274(d) are designed to ensure

taxpayers maintain records and documentation sufficient to

substantiate each expense claimed as a deduction.        See Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).       Without business

records or other proof to substantiate that those expenses were

incurred for business purposes, a taxpayer is not entitled to

such deductions.       Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

     Petitioner has presented no evidence concerning any rent

payments paid by GTG for 1999.      Thus, without any evidence to

substantiate the claimed expenses, we find that petitioner is not

entitled to any rent expense deduction in excess of the $2,850

allowed by respondent.

     With respect to the travel and entertainment expenses for

both 1999 and 2000, petitioner’s evidence consisted of financial

records in the form of copied receipts, bills, credit card

statements, and a single expense report from a GTG employee.

Petitioner did not offer any testimony as to the business purpose

of any of the expenses noted in the financial records.       For

example, while the expense report vaguely listed several costs,
                               - 14 -

it provided no details as to the purpose of these costs, other

than that they were incurred in Ghana.   Therefore, petitioner’s

documentation did not fulfill the section 274(d) requirements.

Thus, we hold that petitioner is not entitled to any GTG travel,

meal, and entertainment deductions, beyond the $474 allowed by

respondent for 1999, pursuant to section 274(d).

V.   Additions to Tax

      The parties stipulated that petitioner filed his return for

tax year 1998 on June 21, 2000, his return for tax year 1999 on

February 28, 2001, and his return for tax year 2000 no earlier

than April 14, 2002.    Section 6651(a)(1) imposes an addition to

tax for failure to file tax returns on time unless it is shown

that the failure was due to reasonable cause, and not willful

neglect.   The stipulation of the parties has met respondent’s

burden of production.   Petitioner then bears the burden to show

reasonable cause for late filing.   See Marrin v. Commissioner,

147 F.3d 147, 152 (2d Cir. 1998) (“Generally, factors that

constitute ‘reasonable cause’ include unavoidable postal delays,

death or serious illness of the taxpayer or a member of his

immediate family, or reliance on the mistaken legal opinion of a

competent tax adviser, lawyer, or accountant that it was not

necessary to file a return.”), affg. T.C. Memo. 1991-24.

      In this case, petitioner offered no testimony or other

evidence that would support his argument that a reasonable cause
                               - 15 -

existed for his late filing.   Petitioner claims constant transit

and relocations as his reasonable cause for late filing.   We are

not convinced by this argument.    Thus, with no evidence probative

of reasonable cause, we conclude that petitioner is liable under

section 6651(a)(1) for additions to tax for failure to timely

file his Federal income tax returns for 1998, 1999, and 2000.

VI.   Accuracy-Related Penalties

      Respondent also determined that petitioner is liable under

section 6662(a) for accuracy-related penalties for tax years 1998

and 1999.   Section 6662(a) imposes an accuracy-related penalty

equal to 20 percent of the underpayment to which section 6662

applies.    Section 6662 applies to the portion of an underpayment

of tax which is attributable to, among other things, negligence

or intentional disregard of rules or regulations, a substantial

understatement of income tax, or a substantial valuation

misstatement.   See sec. 6662(b)(1)-(3).   Section 6662(c) defines

“negligence” as “any careless, reckless, or intentional

disregard.”   See also Hansen v. Commissioner, 820 F.2d 1464, 1469

(9th Cir. 1987) (“Intentional disregard occurs when a taxpayer

who knows or should know of a rule or regulation chooses to

ignore the requirements.”).

      Section 6664(c)(1) provides that the accuracy-related

penalty shall not be imposed with respect to any portion of an

underpayment if it is shown that there was reasonable cause for
                              - 16 -

that portion and the taxpayer acted in good faith with respect to

that portion.   The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all pertinent facts and circumstances.

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

     In this case, the claimed charitable contribution deduction

in 1998 was aggressive and bears scrutiny, but we believe

petitioner claimed the deduction in good faith based upon his

knowledge of the facts and understanding of the law.    This is not

a valuation case where, under section 6664(c)(2), the reasonable

cause exception would not be available unless the taxpayer relied

on a qualified appraisal and made a good faith investigation of

the property’s value.   The value of the property has always been

known, $1,280,000.   Petitioner merely misunderstood his interest

in the property according to the purchase agreement with Jellico.

We find this misunderstanding to have been in good faith.

     With respect to all other 1998 and 1999 items, we find

petitioner’s claims to be reasonable given his difficult

circumstances at the time the tax returns were filed.

Petitioner, once the president and CEO of a health care

organization, had lost his job, his house, and his interest in a

deferred compensation account, and was recently divorced.     Thus,

given these difficult circumstances and petitioner’s limited

knowledge of the tax laws, we find that the claimed deductions
                             - 17 -

were made with reasonable cause and in good faith.   Accordingly,

we do not sustain the imposition of accuracy-related penalties

for the tax years 1998 and 1999.

     To reflect the foregoing,



                                        Decision will be entered

                                   under Rule 155.
