                  T.C. Memo. 2008-70



                UNITED STATES TAX COURT



       KELVIN AND ARLENE JACKSON, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 21526-04.              Filed March 19, 2008.



     R determined deficiencies in income tax for Ps’
2000 and 2001 taxable years, primarily on account of
disallowed business expense deductions, and determined
that Ps were liable for the sec. 6662, I.R.C.,
accuracy-related penalty for 2000.

     Held: Ps failed to substantiate their claimed
deductions and are liable for the deficiencies.

     Held, further, Ps are liable for the sec. 6662,
I.R.C., accuracy-related penalty for 2000.



Kelvin and Arlene Jackson, pro sese.

Kelli H. Todd and Gerald Brantley, for respondent.
                               - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for judicial review of a notice of deficiency, dated August 12,

2004, that determined deficiencies of $6,795 and $77 for taxable

years 2000 and 2001, and a section 6662 accuracy-related penalty

of $1,359 for taxable year 2000.1   Petitioners timely petitioned

this Court to review the notice of deficiency.   After concessions

by both parties,2 the issues for decision are:

     (1) Whether petitioners are entitled to fully or partially

deduct, in taxable year 2000, business startup expenditures that

were incurred in 1998 and 1999;3


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) of 1986, as in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
      Petitioners concede that they are not entitled to a $5,200
deduction for “Disabled Workers [sic] Impair” claimed on their
Schedule C, Profit or Loss From Business, for their 2001 taxable
year. Respondent concedes that for taxable year 2000,
petitioners are allowed to claim the following Schedule C
deductions: (1) $899.57 interest expense; (2) $217 travel
expense; (3) $1,387.44 in other expenses; (4) $1,069 depreciation
expense; and (5) $1,620 in educational expenses for University of
Texas classes. Respondent concedes that for taxable year 2001,
petitioners are allowed a $1,117 Schedule C deduction for donated
books.
     3
      The total amount of startup expenditures that petitioners
incurred in 1998 and 1999 and deducted in 2000 is unclear to the
Court. Respondent claimed that petitioners presented
approximately $12,000 in receipts dated 1998 or 1999.
Petitioners offered into evidence receipts dated 1998 or 1999
totaling approximately $9,630. The discrepancy regarding the
                                                   (continued...)
                               - 3 -

     (2) whether petitioners had cost of goods sold of $18,367.57

for taxable year 2000;

     (3) whether petitioners are entitled to expense $6,902.80 in

depreciable business assets purchased in taxable year 2000;

     (4) whether petitioners are entitled to claim Schedule C

deductions in excess of the $5,193.10 and $14,936, for 2000 and

2001, respectively, that respondent has previously allowed or

conceded;4

     (5) whether petitioners are liable for the section 6662

accuracy-related penalty for taxable year 2000;

     (6) whether to grant petitioners’ motion to impose sanctions

on respondent pursuant to Rule 104(c).

                         FINDINGS OF FACT

     Some of the facts have been stipulated by the parties.    The

stipulations, with accompanying exhibits, are incorporated herein

by this reference.   At the time the petition was filed

petitioners resided in Austin, Texas.



     3
      (...continued)
amount of petitioners’ startup expenditures is moot as the Court
concludes, infra, that petitioners are not entitled to deduct
their startup expenditures. The Court notes that petitioners
claimed $45,496.27 in Schedule C deductions for 2000 and were
unable to substantiate most of those deductions.
     4
      The Court notes that in calculating their 2001 Schedule C
expenses petitioners made an error that respondent did not
notice. See infra note 12. The $14,936 amount is based on the
Court’s calculation, correcting for the error, of the Schedule C
expenses allowed or conceded by respondent.
                               - 4 -

     Arlene Jackson (Mrs. Jackson) established her sole

proprietorship Hansie Productions Health Education & Research

(Hansie Productions) in July 1999.     On October 22, 1999,

Mrs. Jackson received a $10,000 loan from Business Invest in

Growth (BIG) to fund the startup costs of Hansie Productions.

According to the terms of the loan, $6,500 was to be used to

purchase inventory, and $3,500 was to be used as operating

capital.   On Schedule C of petitioners’ 2000 joint Form 1040,

U.S. Individual Income Tax Return, line H was checked to indicate

that Hansie Productions’ business was started during the 2000

taxable year.

     Hansie Productions provides health education and health and

arts programming, conducts health research studies, and publishes

and distributes books, pamphlets, brochures, and bookmarks.

Hansie Productions provides classes and counseling on abstinence,

drugs, and alcohol to middle schools and high schools in Texas.

Mrs. Jackson is the author of several books, including Ain’t No

Half Steppin’, Champions of Change (Biographies of Famous Black

Americans), and Howling Against the Wind.

     Petitioners’ 2000 joint Form 1040 was received by respondent

on October 16, 2001.   On Schedule C petitioners claimed a net

loss of $45,496.27 for Hansie Productions.5    Specifically,


     5
      The only Schedule C deductions that are at issue for
taxable years 2000 and 2001 are those from Hansie Productions.
                                                   (continued...)
                               - 5 -

petitioners reported $327.79 in gross sales and claimed cost of

goods sold (CGS) of $19,887.57.   Respondent allowed only $1,520

of the claimed CGS.6

     To substantiate their CGS, petitioners presented at trial an

invoice from Steck-Vaughn Co., dated April 21, 1998, for 1,000

copies of Champions of Change (Biographies of Famous Black

Americans), for a total cost of $2,359.85.   Petitioners also

presented an invoice from Winston Derek Publishers Group, Inc.,

dated February 8, 1999, for a total cost of $525.56 for 56 copies

of Howling Against the Wind.   Additionally, petitioners presented

Travelers Express Co., Inc. Drawers (Travelers Express) receipts

with a combined total of $707.7   The Travelers Express receipts,

which provided only the date and amount, contained handwritten




     5
      (...continued)
Kelvin Jackson’s (Mr. Jackson) 2000 Schedule C-EZ, Net Profit
From Business, and 2001 Schedule C deductions are not at issue.
Accordingly, all references to Schedule C deductions are to those
for Hansie Productions.

     Mr. Jackson reported on his 2000 Schedule C-EZ a net profit
of $3,348.45 from his business of “News Paper [sic] Deliverer”.
As a result, line 12 of petitioners’ 2000 joint Form 1040 lists
$42,147.82 as their net business loss.
     6
      Respondent’s notice of deficiency indicates that $18,367 of
the claimed $19,887.57 CGS was disallowed in 2000, which would
leave $1,520.57 as allowable. The Court notes that amount should
have been rounded to $1,521, not $1,520.
     7
      The Travelers Express receipts were dated Dec. 27, 1999,
and Mar. 10 and 19 and Aug. 25, 2000, bearing amounts of $57,
$200, $200, and $250, respectively.
                               - 6 -

notations on the backs of the Travelers Express receipts that

provide “Monarch Pub Ain’t No Half Steppin’”.

     Petitioners also provided UPS receipts showing that

Mrs. Jackson mailed her books to bookstores and other recipients.

The receipts provide the names, addresses, package contents, and

declared values of shipments by Mrs. Jackson, Mr. Jackson, and

Hansie Productions.8   The total declared value for all of the

books shipped was $550.

     Petitioners also presented an invoice from Bacon’s Mailing

Service for $3,858.71 dated April 23, 2001.   The invoice

indicates that petitioners purchased 511 “PRESS KITS”, which

consisted of a “5X7 PHOTO W/LABEL CAPTION AFFIXED TO BACK.   1



     8
      A UPS receipt dated Feb. 4, 2000, indicates that Mrs.
Jackson shipped books to “Amazon.com Advantage DC” in Delaware,
with a declared value of $100, and to “Barnes & Nobles Extended
Title” in New Jersey in two separate packages, each with a
declared value of zero. A UPS receipt dated Feb. 16, 2000,
indicates that Mrs. Jackson shipped books to “Nu World of Books”
in Texas, and that Mr. Jackson shipped books to Mrs. Jackson in
New Jersey and Pennsylvania; there were no declared values
provided. A UPS receipt dated Mar. 2, 2000, indicates that Mrs.
Jackson shipped books to: (1) “Lushena Books” in Illinois;
(2) “TMJ. D Lindsey Council” in North Carolina; (3) “Barnes &
Nobles” in New Jersey; and (4) “The Elliott Bay Book Co” in
Washington. The receipt lists the declared value as $100 for
each of the first 3 packages and $50 for the fourth. A UPS
receipt dated Apr. 3, 2000, indicates that Mrs. Jackson shipped
books to “Ingram Book Com” in Tennessee and “Amazon.com” in
Delaware; there were no declared values provided. A UPS receipt
dated Oct. 6, 2000, indicates that Mrs. Jackson shipped books to
“Ingram Book Company” in Tennessee; there was no declared value
provided. A UPS receipt dated Nov. 29, 2000, indicates that
Hansie Productions shipped books to “Amazon.com Advantage DC” in
Delaware, with a declared value of $100.
                                     - 7 -

PAPERBACK BOOK, 1 PAGE COVER PAGE, AND 1-3 PAGE RELEASE TO BE

COLLATED STAPLED AND INSERTED INTO A PADDED ENVELOPE MAILER”,

that totaled $1,134.42, and also 1 “SOFTWARE MEDIA CONTACT LIST”,

that totaled $2,430.21.9        The invoice indicates below the total

“PREPAID VIA VISA CREDIT CARD ENDING IN NUMBER: *6166 EXPIRATION

DATE 01/03".

     Petitioners also claimed on their Schedule C for the taxable

year 2000 supplies other than those included in CGS of $6,902.80,

which respondent disallowed.        At trial petitioners provided

invoices for, inter alia, a Dell computer, a digital camera, a

scanner, and office furniture, which substantiated $5,748.27 of

their claimed expenses.         Respondent conceded that petitioners are

entitled to a depreciation expense of $1,069 for taxable year

2000.       See supra note 1.

        Additionally, petitioners claimed total expenses of

$25,936.49 on Schedule C of their 2000 joint Form 1040, which

included “Other expenses” of $15,064.69 on line 27 of Schedule


        9
      Attached to the invoice was a fax from Bacon’s Mailing
Service to Hansie Productions, entitled “Re: Quote for Mailing”,
dated Apr. 9, 1999, that stated:

        Project Description:      Mailing to include one kit
        cover with one 5x7 photo with label caption affixed to
        the back, one paperback book, one 1-page generic cover
        page and one 3-page release to be collated and stapled
        and inserted into padded mailer. Client to provide
        letterhead for 1st pages of release and paperback
        books. Bacon’s to provide plain white for second pages
        of release, photo reproduction, kit covers, and padded
        mailers. (Emphasis omitted.)
                                - 8 -

C.10   Respondent initially disallowed all of petitioners’ claimed

“Other expenses” for 2000, but subsequently conceded $1,387.44.

See supra note 1.    Petitioners also deducted on their 2000 joint

Form 1040 expenses incurred in taxable years 1998 and 1999.    See

supra note 2.

       On their 2001 joint Form 1040, petitioners claimed a net

loss of $21,826 from Hansie Productions.11   Specifically,

petitioners reported $6,839 in gross receipts and did not claim

any CGS.    Petitioners claimed $28,665 in total expenses.12


       10
      The total expenses consisted of: (1) “Advertising” of
$3,969; (2) “Supplies” of $6,902.80; and “Other expenses” which
included (1) “Occupational Professional Organization Dues” of
$350; (2) “Travel to secure distributers; customers” of
$2,497.69; (3) “Business management consultant” of $887;
(4) “Post Office Box (64) Website (432)” of $496;
(5) Professional magazines books: Trade” of $410; (6) “Disabled
Worker Impairment Expenses Necessary for proprietor to work” of
$4,590; (7) “expense required to satisfactorily perform work” of
$3,154; and (8) “Incidental supplies consumed in tax year” of
$2,680.
       11
      Mr. Jackson reported on his Schedule C a net profit of
$1,294 from “1099 MISC INCOME”. As a result, line 12 of
petitioners’ 2001 joint Form 1040 lists $20,532 as their net
business loss.
       12
      The total expenses consisted of: (1) “Advertising” of
$2,670; (2) “Car and truck expenses” of $203; (3) “Interest” of
$934; (4) “Rent or lease” of $1,428; (5) “Meals and
entertainment” of $54; (6) “Legal and professional services” of
$75; and “Other expenses” which included (1) “DONATED BOOKS TO
LIBRARY” of $6,029; (2) “DISABLED WORKERS IMPAIR” of $5,200;
(3) “PO RENT” of $64; (4) “PROFESSIONAL ORG DUES” of $490;
(5) PROFESSIONAL TRADE MAG” of $410; and (6) “WEBSITE” of $2,900.

     The Court notes that the listed “Other expenses” total
$15,093, not $23,301 as was listed on line 27, Other Expenses, of
                                                   (continued...)
                                - 9 -

     On January 9, 2006, petitioners filed a motion for sanctions

against respondent.    A trial was held on January 10, 2006.    At

trial, petitioners presented voluminous documents that were

admitted into evidence.13   On January 24, 2006, respondent’s

response to “petitioners’” motion for sanctions against

respondent was filed with the Court.

                               OPINION

I.   Burden of Proof

     As a general rule, the Commissioner’s determination of a

deficiency is presumed correct, and the taxpayer bears the burden

of proving that the determination is improper.    See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    However, pursuant



     12
      (...continued)
Mrs. Jackson’s 2001 Schedule C. Petitioners appear to have made
a mathematical error that went undetected by respondent.
According to the Court’s calculations, Mrs. Jackson’s listed
Schedule C expenses total $20,457, not $28,665.
     13
      Many of petitioners’ documents that were admitted into
evidence were from taxable years preceding the years in issue.
Also, many documents were letters, e-mails, and questionnaires
that failed to substantiate any expenditures. Petitioners’
extensive documentation, as described on brief, included, inter
alia:

     a letter of recommendation from the past owner of the
     Emergi-Clinic which states that * * * [Mrs. Jackson]
     had successfully attended computer classes in 1983, and
     that she’d worked as a Manager and had trained staff
     members. She has a letter of appreciation from Texas
     Circuit (1988) for allowing her students to participate
     in ‘Open Mic Night.’ Petitioner has letters from
     teachers in Beaumont, and Dallas, Texas thanking her
     for the programming she’d provided their students.
                                 - 10 -

to section 7491(a), the burden of proof on factual issues that

affect the taxpayer’s tax liability may be shifted to the

Commissioner where the “taxpayer introduces credible evidence

with respect to * * * such issue.”        The burden will shift only if

the taxpayer has, inter alia, complied with substantiation

requirements pursuant to the Internal Revenue Code and

“cooperated with reasonable requests by the Secretary for

witnesses, information, documents, meetings, and interviews”.

Sec. 7491(a)(2).   In the instant case, petitioners did not argue

that the burden should shift, and they failed to comply with the

substantiation requirements.     Accordingly, the burden of proof

remains on petitioners.

II.   Deductions

      A. General Rules

      Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he is entitled to any

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

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   Taxpayers must maintain records relating to their income

and expenses and must prove their entitlement to all claimed

deductions, credits, and expenses in controversy.       See sec. 6001;

Rule 142(a); INDOPCO, Inc. v. Commissioner, supra at 84; Welch v.

Helvering, supra at 115.
                               - 11 -

       Pursuant to section 162(a), a taxpayer is entitled to deduct

all of the ordinary and necessary business expenses paid or

incurred during the taxable year in carrying on a trade or

business.    The taxpayer bears the burden of proving that the

expenses were ordinary and necessary according to section 162.

In certain circumstances, the taxpayer must meet specific

substantiation requirements in addition to section 162.    See sec.

274.

       To be “ordinary” the transaction which gives rise to the

expense must be of a common or frequent occurrence in the type of

business involved.    Deputy v. Dupont, 308 U.S. 488, 495 (1940).

To be “necessary” an expense must be “appropriate and helpful” to

the taxpayer’s business.    Welch v. Helvering, supra at 113.

Additionally, the expenditure must be “directly connected with or

pertaining to the taxpayer’s trade or business”.    Sec. 1.162-

1(a), Income Tax Regs.

       Generally, a claimed expense (other than those subjected to

heightened scrutiny under section 274) may be deductible even

where the taxpayer is unable to fully substantiate it, if there

is an evidentiary basis for doing so.    Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,

827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
                              - 12 -

(Nov. 6, 1985).   In these instances, the Court is permitted to

make as close an approximation of the allowable expense as it

can, bearing heavily against the taxpayer whose inexactitude is

of his or her own making.   Cohan v. Commissioner, supra.

     B. Substantiation Requirements of Section 274

     Section 274(d) applies to:   (1) Any traveling expense,

including meals and lodging away from home; (2) entertainment,

amusement, and recreational expenses; or (3) the use of “listed

property”, as defined in section 280F(d), including personal

computers.   To deduct such expenses, the taxpayer must

substantiate by adequate records or sufficient evidence to

corroborate the taxpayer’s own testimony:   (1) The amount of the

expenditure or use; (2) the time and place of the travel,

entertainment, amusement, or recreation; (3) its business

purpose; and in the case of entertainment, (4) the business

relationship to the taxpayer of each expenditure or use.    Sec.

274(d).

     To satisfy the adequate records requirement of section 274,

a taxpayer must maintain records and documentary evidence that in

combination are sufficient to establish each element of an

expenditure or use.   Sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).   Although a

contemporaneous log is not required, corroborative evidence to

support a taxpayer’s reconstruction “of the elements * * * of the
                                - 13 -

expenditure or use must have a high degree of probative value to

elevate such statement” to the level of credibility of a

contemporaneous record.    Sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     C. Startup Expenditures

     Pursuant to section 195(a), startup expenditures are not

generally deductible.     However, at the election of the taxpayer,

startup expenditures may be treated as deferred expenses and

amortized over at least a 60-month period beginning in the month

in which the active trade or business begins.    See sec.

195(b)(1), (c).    Section 195(c) provides in part:

     The term “startup expenditure” means any amount--

          (A) paid or incurred in connection with--

               (i) investigating the creation or acquisition
     of an active trade or business, or

                  (ii) creating an active trade or business, or

               (iii) any activity engaged in for profit and
     for the production of income before the day on which
     the active trade or business begins, in anticipation of
     such activity becoming an active trade or business, and

          (B) which, if paid or incurred in connection with
     the operation of an existing active trade or business
     (in the same field as the trade or business referred to
     in subparagraph (A)), would be allowable as a deduction
     for the taxable year in which paid or incurred.

     The taxpayer must elect to amortize his or her startup

expenditures.   Sec. 195(d).   Regulations promulgated under

section 195 provide the time and manner for making such an
                              - 14 -

election.   See sec. 1.195-1(b), Income Tax Regs.    A taxpayer

makes an election by attaching a statement (election statement)

to his or her tax return, which must be filed no later than the

date prescribed for filing the return, including extensions, for

the taxable year in which the active trade or business begins.14

Sec. 195(d); sec. 1.195-1(b), Income Tax Regs.     The election

statement must provide the following information:

     The statement shall set forth a description of the
     trade or business to which it relates with sufficient
     detail so that expenses relating to the trade or
     business can be identified properly for the taxable
     year in which the statement is filed and for all future
     taxable years to which it relates. The statement also
     shall include the number of months (not less than 60)
     over which the expenditures are to be amortized, and to
     the extent known at the time the statement is filed, a
     description of each start-up expenditure incurred
     (whether or not paid) and the month in which the active
     trade or business began (or was acquired). * * *
     [Sec. 1.195-1(c), Income Tax Regs.]

     Once effective, the election applies to all startup

expenditures related to the active trade or business and is

irrevocable.   Sec. 1.195-1(a), Income Tax Regs.    A taxpayer may

file a revised statement that includes any startup expenditures

not included in the original statement.   Sec. 1.195-1(c), Income

Tax Regs.



     14
      The election statement may be attached to, and filed with,
a tax return for a taxable year preceding the taxable year in
which the taxpayer’s trade or business becomes active. Sec.
1.195-1(b), Income Tax Regs. The election does not become
effective until the first month in which the taxpayer’s trade or
business becomes active. Id.
                                - 15 -

     A taxpayer bears the burden of proving that he or she

executed a timely election to amortize startup expenditures.       See

Krebs v. Commissioner, T.C. Memo. 1992-154; Pino v. Commissioner,

T.C. Memo. 1987-28.    Petitioners have not established that they

executed a timely election.    The record indicates that

petitioners fully deducted in taxable year 2000 the startup

expenditures incurred in 1998 and 1999 for Hansie Productions.

The record further indicates that petitioners did not provide a

description of each startup expenditure and did not amortize

their expenditures.    Respondent disallowed the entire amount of

the deduction.   The Court sustains respondent on this issue.      See

Krebs v. Commissioner, supra; Pino v. Commissioner, supra.

     D. Cost of Goods Sold

     In calculating gross income, taxpayers may offset gross

revenue with CGS.     B.C. Cook & Sons, Inc. v. Commissioner, 65

T.C. 422, 428 (1975), affd. 584 F.2d 53 (5th Cir. 1978).

Pursuant to regulations promulgated under section 162, “The cost

of goods purchased for resale, with proper adjustment for opening

and closing inventories, is deducted from gross sales in

computing gross income.”    Sec. 1.162-1(a), Income Tax Regs.; see

sec. 1.61-3, Income Tax Regs.     Taxpayers are required to take

“inventories at the beginning and end of each taxable year” in

which “the production, purchase, or sale of merchandise is an

income-producing factor.”     Sec. 1.471-1, Income Tax Regs.   There
                                - 16 -

is an exception to the inventory accounting requirements for

taxpayers with average annual gross receipts of $1 million or

less.     See Rev. Proc. 2001-10, sec. 1, 2001-1 C.B. 272, 272.     The

exception is only available for taxpayers that are not required

to use the inventories or accrual method of accounting, and for

tax years ending after December 17, 1999.15    Id. secs. 1, 8,

2002-1 C.B. 272, 275.

     If the exception is applicable, the taxpayer may choose to

treat inventory in the same manner as materials and supplies that

are not incidental pursuant to regulations promulgated under

section 162.     See sec. 1.162-3, Income Tax Regs.   Pursuant to

section 1.162-3, Income Tax Regs.:

     Taxpayers carrying materials and supplies on hand
     should include in expenses the charges for materials
     and supplies only in the amount that they are actually
     consumed and used in operation during the taxable year
     for which the return is made, provided that the costs
     of such materials and supplies have not been deducted
     in determining the net income or loss or taxable income
     for any previous year. * * *

     For a taxpayer using the exception, the inventoriable items

that are treated as materials and supplies that are not

incidental are considered consumed and used in the year in which

the taxpayer sells the merchandise or finished goods.      See Rev.


     15
      The IRS will not challenge a taxpayer’s use of the cash
method under sec. 446, or a taxpayer’s failure to account for
inventories under sec. 471, in a tax year ending before Dec. 17,
1999, if the taxpayer would satisfy the 3-tax-year-period gross
receipts test of Rev. Proc. 2001-10, sec. 5.01, 2001-1 C.B. 272,
273. Id. sec 8., 2001-1 C.B. at 275.
                              - 17 -

Proc. 2001-10, sec. 4.02, 2001-1 C.B. at 273.   For a cash method

taxpayer, the cost of such inventoriable items are deductible

only in that year, or in the taxable year in which the taxpayer

actually pays for the inventoriable items, whichever is later.

Id.

      CGS is not treated as a deduction and is not subject to the

limitations on deductions contained in sections 162 and 274.

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987).

However, any amount claimed as CGS must be substantiated, and

taxpayers are required to maintain records sufficient for this

purpose.   Sec. 6001; Nunn v. Commissioner, T.C. Memo. 2002-250;

Wright v. Commissioner, T.C. Memo. 1993-27; sec. 1.6001-1(a),

Income Tax Regs.   Where taxpayers do not have adequate records,

but where the record suggests that they clearly incurred an

offset to gross income, courts may estimate the offset based on

the evidence.   Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

      On Schedule C of petitioners’ 2000 joint Form 1040, Mrs.

Jackson reported only $327.79 of gross receipts and claimed CGS

of $19,887.57 for Hansie Productions.   Petitioners offered into

evidence substantiation for inventory, i.e. 1,000 copies of

Champions of Change and 56 copies of Howling Against the Wind,

totaling $2,885.41.   On brief, respondent conceded that Mrs.

Jackson “produced documents substantiating that she paid

$19,677.00 to purchase copies of novels that she authored.”
                               - 18 -

However, respondent allowed petitioners only a $1,520 CGS

deduction “Since all of the books purchased were not sold during

taxable year 2000”.

      Petitioners claim that “Some of this inventory was utilized

for garnering bookstores as distributors of products, and for

advertising/publicity packages to newspapers, consumer health

information organizations, television stations, and radio

stations for printed reviews.”    Petitioners presented an invoice

from Bacon’s Mailing Service that indicated that they had

purchased 511 press kits that would contain one paperback book

each when mailed or shipped.   Petitioners did not provide any

evidence that they actually mailed or shipped the press kits,

other than UPS receipts that indicated books with a declared

value of $550 had been shipped.   Petitioners have not shown that

the $550 declared value was not included in the $1,520 CGS

allowed by respondent, nor have they shown that they are entitled

to CGS in excess of that allowed by respondent.   Accordingly, the

Court sustains respondent on the CGS issue for taxable year 2000.

     E. Depreciable Assets

     A taxpayer may elect to deduct as a current expense the cost

of any section 179 property, with certain dollar limitations,

that is acquired for purchase in the active conduct of a trade or

business and placed in service during the taxable year.

Sec. 179(a), (b), (d)(1); see sec. 1.179-4(a), Income Tax Regs.
                              - 19 -

Section 179 property was, during the taxable years at issue,

tangible personal property and certain other property listed in

section 1245(a)(3).   See secs. 179(d)(1), 1245(a)(3).

     Section 179 has its own substantiation and election

requirements.   The taxpayer must maintain records reflecting how

and from whom the section 179 property was acquired and when it

was placed in service.   Sec. 1.179-5(a), Income Tax Regs.   A

section 179 election must be made on the taxpayer’s first income

tax return for the taxable year the property is placed in

service, whether or not the return is timely, or on an amended

return filed within the time prescribed by law (including

extensions) for filing the original return for such year.    Sec.

179(c)(1)(B); sec. 1.179-5(a), Income Tax Regs.   The section 179

election must specify the total section 179 expense deduction

claimed and enumerate the portion of that deduction allocable to

each specific item.   Sec. 179(c)(1); sec. 1.179-5(a)(1) and (2),

Income Tax Regs.

     The election is normally made by attaching Form 4562,

Depreciation and Amortization, to the taxpayer’s return.16   Visin

v. Commissioner, T.C. Memo. 2003-246, affd. 122 Fed. Appx. 363

(9th Cir. 2005); see 2000 Instructions for Schedule C, Profit or

Loss From Business, Specific Instructions, Part II. Expenses,



     16
      Part I of Form 4562 is entitled “Election to Expense
Certain Tangible Property (Section 179)”.
                                - 20 -

Line 13, Depreciation and Section 179 Expense Deduction; Form

4562.     A taxpayer who fails to make the election is denied the

benefits of section 179.     See Visin v. Commissioner, supra; Verma

v. Commissioner, T.C. Memo. 2001-132; Fors v. Commissioner, T.C.

Memo. 1998-158; Starr v. Commissioner, T.C. Memo. 1995-190, affd.

without published opinion 99 F.3d 1146 (9th Cir. 1996).

     Petitioners deducted $6,902.80 on Schedule C of their 2000

joint Form 1040.     They failed to individually list the property

in respect of which they claimed this deduction.     Mrs. Jackson

admitted at trial that petitioners did not attach Form 4562 to

their 2000 joint Form 1040.     Respondent disallowed the entire

deduction, but conceded that petitioners are entitled to a

depreciation expense of $1,069.17    As petitioners failed to make

the section 179 election, they are not entitled to the benefits

of section 179.    Accordingly, the Court sustains respondent on

this issue.

     F. Miscellaneous Schedule C Deductions

     On January 9, 2006, the night before trial, petitioners

presented to respondent various invoices to substantiate

additional expenses for 2001.     Petitioners presented invoices for

advertising expenses, Internet design expenses, travel expenses,

mail and post office box expenses, and trade magazine expenses.


     17
      Petitioners provided invoices for, inter alia, a Dell
computer, a digital camera, a scanner, and office furniture,
which substantiated $5,748.27 of their claimed deduction.
                                - 21 -

Respondent contends that petitioners have not shown that the

expenses were not previously allowed or that the expenses were

incurred in 2001.

     1. Advertising Expenses

     Petitioners claimed on Schedule C of their joint 2001 Form

1040 an advertising expense of $2,670, which respondent allowed.

Petitioners then presented to respondent the night before trial

several Amazon.com invoices totaling $1,929.38.18   Internal

Revenue Agent David Irving, who conducted petitioners’ audit,

testified at trial that the Amazon.com invoices substantiated a

portion of the advertising deduction claimed and allowed on

petitioners’ 2001 Schedule C.    Petitioners have not shown that

the Amazon.com invoices were not included in deductions

previously allowed.   Accordingly, the Court concludes that

petitioners are not entitled to a Schedule C deduction on their

2001 tax return for Amazon.com advertising expenses in excess of

the $2,670 advertising expense allowed by respondent.


     18
      Petitioners presented the following 11 Amazon.com invoices
that listed Hansie Productions as the vendor: (1) dated Feb. 28,
2001, in the amount of $203.97; (2) dated Mar. 31, 2001, in the
amount of $384.73; (3) dated Apr. 30, 2001, in the amount of
$217.43; (4) dated May 30, 2001, in the amount of $40.55;
(5) dated June 30, 2001, in the amount of $170.32; (6) dated July
31, 2001, in the amount of $95.34; (7) dated Aug. 31, 2001, in
the amount of $80.93; (8) dated Oct. 31, 2001, in the amount of
$40; (9) dated Nov. 30, 2001, in the amount of $82.83; (10) dated
Dec. 29, 2001, in the amount of $613.28; and (11) dated Jan. 31,
2002, which makes it irrelevant to taxable year 2001, in the
amount of $567.41. The total amount paid to Amazon.com in
taxable year 2001 was $1,929.38.
                              - 22 -

     2. Internet Design Expenses

     Petitioners presented at trial invoices for Web site design

from Nigel Gusdorf of $320 and $1,160, paid April 25 and

September 28, 2001, respectively.    On Schedule C of their 2001

joint Form 1040, petitioners claimed and respondent allowed a

deduction of $2,900 for “WEBSITE”.     Petitioners failed to show

that the $1,480 in invoices they presented was not included in

their previously allowed deduction.     Accordingly, the Court

concludes that petitioners are not entitled to an additional

Schedule C deduction on their 2001 tax return for Web site design

expenses.

     3. Travel Expenses

     As stated supra, the strict substantiation requirements of

section 274(d) apply to travel expenses.     Petitioners presented

invoices from Northwest Airlines and Doubletree Hotel in the

amounts of $221.50 and $458.84, respectively, for a trip to

Columbia, South Carolina, from November 24 to 28, 2001.

Petitioners produced at trial a document, which was previously

given to respondent, entitled “Business Use of Car Tax Year 2001”

that provided “11/24 to 11/28/01 Columbia, S.C. Conducted

Workshop at Black owned bookstore--agreement w/bookstore to carry

books.   Airline & Hotel documentation provided.”    However, Mrs.

Jackson did not produce the agreement she entered into with the

bookstore.
                              - 23 -

     Petitioners have not presented any evidence substantiating

the alleged business purpose of Mrs. Jackson’s trip, other than

their document and her uncorroborated testimony at trial, and,

therefore, have failed to meet the substantiation requirements of

section 274(d).   Furthermore, although petitioners did not claim

a deduction for travel expenses on their joint 2001 Form 1040,

respondent allowed $2,071 in travel expenses.   Petitioners have

not shown that the Northwest Airlines and Doubletree travel

expenses were not included in the expenses previously allowed by

respondent.   Accordingly, the Court concludes that petitioners

are not entitled to a deduction for travel expenses in excess of

the $2,071 previously allowed by respondent.

     4. Mail and Post Office Box Expenses

     Petitioners presented at trial an invoice from Bacon’s

Mailing Service $3,858.71 for taxable year 2001, discussed supra.

Petitioners did not claim an expense for mailing services on

their 2001 joint Form 1040.   Respondent contends that petitioners

have not shown that the invoice was paid in 2001 as the

prepayment date was not provided.   The Court agrees with

respondent.   Accordingly, the Court concludes that petitioners

are not entitled to a Schedule C deduction for mailing expenses

for taxable year 2001.

     Petitioners claimed a deduction for “PO RENT” of $64 on

Schedule C of their joint 2001 Form 1040, which respondent
                               - 24 -

allowed.    The night before trial petitioners presented an

invoice, dated 2001, for a U.S. Postal Service post office box in

the amount of $64.    Petitioners have not shown that the invoice

presented at trial was not included in the deduction previously

allowed by respondent.   Accordingly, the Court concludes that

petitioners are not entitled to a Schedule C deduction for post

office box expenses for taxable year 2001 in excess of the $64

previously allowed.

     5. Trade Magazine Expenses

     The night before trial petitioners presented to respondent

the following invoices: (1) Publishers Weekly in the amount of

$139, dated March 28, 2001; (2) “Bowker” in the amount of $314.49

for Literary Market Place, which was prepaid by a Visa credit

card and reflected a renewal date of September 12, 2001; and

(3) Ad Lib Publications in the amount of $434.95, dated January

13, 2001.    On Schedule C of their 2001 joint Form 1040,

petitioners claimed and respondent allowed deductions of $490 for

“Professional Org Dues” and $410 for “Professional Trade Mag”.

Petitioners have not shown that the invoices they presented were

not included in either of the deductions previously allowed.

Accordingly, the Court concludes that petitioners are not

entitled to a Schedule C deduction for trade magazine expenses

for taxable year 2001 in excess of the $900 previously allowed.
                                  - 25 -

III. Penalty

       A. General Rules

       The Commissioner bears the burden of production in any court

proceeding with respect to an individual’s liability for

penalties or additions to tax.      Sec. 7491(c).   To meet this

burden, the Commissioner must present “sufficient evidence

indicating that it is appropriate to impose the relevant penalty”

or addition to tax.       Higbee v. Commissioner, 116 T.C. 438, 446

(2001).    In instances where an exception to the penalty or

addition to tax is afforded upon a showing of reasonable cause,

the taxpayer bears the burden of showing such cause.          Id. at 446-

447.

       B. Section 6662 Accuracy-Related Penalty

       Pursuant to section 6662(a), a taxpayer may be liable for a

20-percent penalty on the portion of an understatement of income

tax attributable to, inter alia, negligence or disregard of rules

or regulations, or to a substantial underpayment of tax.         Sec.

6662(a) and (b)(1) and (2).      “Negligence” includes any failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue Code.      Sec. 6662(c).   The regulations

promulgated under section 6662 provide that negligence is

strongly indicated where “A taxpayer fails to make a reasonable

attempt to ascertain the correctness of a deduction, credit or

exclusion on a return which would seem to a reasonable and
                                - 26 -

prudent person to be ‘too good to be true’ under the

circumstances”.   Sec. 1.6662-3(b)(1)(ii), Income Tax Regs.    The

regulations further provide that negligence “also includes any

failure by the taxpayer to keep adequate books and records or to

substantiate items properly.”    Sec. 1.6662-3(b), Income Tax Regs.

     Negligence is defined as the “‘lack of due care or failure

to do what a reasonable and ordinarily prudent person would do

under the circumstances.’”   Neely v. Commissioner, 85 T.C. 934,

947 (1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506

(5th Cir. 1967), affg. in part and remanding in part on another

ground 43 T.C. 168 (1964) and T.C. Memo. 1964-299); see Allen v.

Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1

(1989).   Negligence is determined by testing the taxpayer’s

conduct against that of a reasonable, prudent person.     Zmuda v.

Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C.

714 (1982).

     No penalty is imposed under section 6662 if there is

reasonable cause for the underpayment of tax and the taxpayer has

acted in good faith.   Sec. 6664(c)(1).    The determination of

whether a taxpayer acted with reasonable cause and in good faith

depends upon the facts and circumstances of each particular case.

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

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable considering
                              - 27 -

the taxpayer’s experience, knowledge, and education.    Sec.

1.6664-4(b)(1), Income Tax Regs.   Generally, the most important

factor is the extent of the taxpayer’s effort to assess his or

her proper tax liability.   Stubblefield v. Commissioner, T.C.

Memo. 1996-537; sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioners are no strangers to the section 6662(a)

accuracy-related penalty.   This Court sustained respondent’s

determination that petitioners were liable for the section

6662(a) penalty for taxable year 2002 because of “their failure

to maintain and produce the required documentation to support

their deductions”.   Jackson v. Commissioner, T.C. Memo. 2005-159.

     On Schedule C of their 2000 joint Form 1040, petitioners

fully deducted startup costs incurred in 1998 and 1999 for Hansie

Productions instead of amortizing the expenditures over a period

of at least 60 months.   The instructions to Schedule C clearly

state that startup expenditures must be amortized.   See 2000

Instructions for Schedule C, Profit or Loss From Business,

General Instructions, Other Schedules and Forms You May Have to

File, and Part V Specific Instructions, Other Expenses; 2000

Instructions for Form 4562, Part VI--Amortization, Line 40.

     Additionally, petitioners fully deducted the cost of office

furniture and equipment they purchased in 2000, some of which

they admitted was for personal use, without making the

appropriate election under section 179.   The instructions to
                                - 28 -

Schedule C clearly state that Form 4562 must accompany the tax

return.     See 2000 Instructions for Schedule C, Profit or Loss

From Business, General Instructions, Other Schedules and Forms

You May Have To File, and Line 13, Depreciation and Section 179

Expense Deduction; 2000 Instructions for Form 4562, Part I–-

Election to Expense Certain Tangible Property (Section 179).

      Furthermore, petitioners claimed CGS of $19,887.57, while

reporting only $327.79 in gross receipts, which the Court

concludes “would seem to a reasonable and prudent person to be

‘too good to be true’ under the circumstances”.     See sec. 1.6662-

3(b)(1)(ii), Income Tax Regs.     Overall, for taxable year 2000,

petitioners failed to keep adequate books and records and to

substantiate items properly.     See sec. 1.6662-3(b), Income Tax

Regs.     The Court concludes that petitioners acted negligently

with regards to their 2000 joint Form 1040.     They failed to

substantiate, and ascertain the correctness of, many of their

claimed deductions.     Accordingly, the Court sustains respondent

on this issue.

IV.   Petitioners’ Motion for Sanctions

        Rule 104(c) provides that if a party fails to obey an order

of the Court involving certain discovery matters, then the Court

may make such orders as to the failure as are just.     Such orders

may include, but are not limited to, “An order striking out

pleadings or parts thereof, or staying further proceedings until
                                  - 29 -

the order is obeyed, or dismissing the case or any part thereof,

or rendering a judgment by default against the disobedient

party.”    Rule 104(c)(3).

     Petitioners, in their motion, have asked the Court to “issue

an order imposing sanctions upon Respondent for failure to adhere

to the Branerton Requirement.”      Petitioners, on brief, claim that

“Respondent should have granted Petitioners [sic] (numerous

written) requests for Discovery, as the pertinent documents were

in their possession, and not inconvenient for the Service (an

assistant or secretary) to copy and mail to the Petitioners [Tax

Court Rule 72]”.

     Petitioner’s motion further states that “After Respondent

failed to provide Petitioners copies of every document given to

the Service Petitioners then made application to the Court for a

Written Deposition [to] be taken of Tax Compliance Officer, D.L.

Irving.”    (Emphasis omitted.)     The Court denied petitioners’

applications for orders to take depositions.      Although

petitioners repeatedly argued that respondent failed to provide

them with requested documents, petitioners on brief asserted that

they were able to reconstruct “with original documentation the

majority of deductions which had been taken”.      (Emphasis

omitted.)

     Respondent complied with all of the Court’s orders, and as a

result was in compliance with Rule 104(c).      All of petitioners’
                               - 30 -

complaints regarding respondent’s alleged conduct during

discovery are related to motions by petitioners that were denied

by this Court.    Accordingly, the Court denies petitioners’ motion

for sanctions.

V.   Conclusion

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.    To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing and concessions by both parties,



                                          An appropriate order will

                                     be issued, and decision will

                                     be entered under Rule 155.
