                    T.C. Summary Opinion 2007-210



                       UNITED STATES TAX COURT



                LISA J. TOMLINSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 16445-05S, 6086-06S.    Filed December 17, 2007.



     Lisa J. Tomlinson, pro se.

     Margaret Burow, for respondent.


     RUWE, Judge:   These cases were heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect when the petition was filed.2    Pursuant to section


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       Respondent issued separate notices of deficiency for 2002
and 2003, respectively. Petitioner filed a separate petition for
                                                   (continued...)
                              - 2 -

7463(b), the decisions to be entered are not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined deficiencies in petitioner’s 2002 and

2003 Federal income taxes of $16,928 and $5,189, respectively,

and an addition to tax for failure to file timely a tax return

under section 6651(a)(1) of $774 for 2003.   After concessions by

respondent,3 the issues remaining for decision are:   (1) Whether

petitioner is entitled to deduct medical expenses of $6,966.21

claimed on her Schedule A, Itemized Deductions, for 2003; (2)

whether petitioner is entitled to deduct business expenses of

$77,267 and $32,018 claimed on her Schedules C, Profit or Loss

From Business, for 2002 and 2003, respectively; and (3) whether

petitioner is liable for an addition to tax under section

6651(a)(1) for failure to file timely a return for 2003.




     2
      (...continued)
each year. Due to the similarity of the issues, the Court
granted respondent’s motion to consolidate for trial, briefing
and opinion on Dec. 6, 2006.
     3
       Respondent concedes that petitioner is entitled to deduct
Schedule A, Itemized Deductions, of $30,477 for home mortgage
interest paid during 2002, $6,149 for charitable contributions
made in 2002, and $17,264 for a casualty loss for property in
2003. Respondent also concedes that petitioner has substantiated
$6,929.79 of the $13,896 in medical expenses claimed on her 2003
return.
                               - 3 -

                            Background

     Some of the facts have been stipulated and are so found.

The stipulations of facts, supplemental stipulation of facts, and

the attached exhibits are incorporated by this reference.   When

the petitions were filed, petitioner resided in Oakland,

California.

     For approximately the first 7 months of 2002, petitioner was

employed full time with Versata, Inc., as the vice president of

human resources.   Petitioner subsequently received disability

income as a result of a health condition that prevented her from

working.

     On May 2, 2004, petitioner untimely filed a 2002 income tax

return on which she reported income from wages, salaries, tips,

etc. of $88,540,4 interest income of $1,134, a taxable refund of

State and local income tax of $6,242, and a Schedule C business

loss of $77,267.   On June 17, 2005, respondent issued to

petitioner a notice of deficiency for 2002.

     On January 3, 2005, petitioner untimely filed a 2003 income

tax return on which she reported income from wages, salaries,

tips, etc., of $90,250,5 interest income of $779, dividends of



     4
       The Forms W-2, Wage and Tax Statement, attached to
petitioner’s 2002 return show that she received $51,040.34 from
Versata, Inc., and $37,500 from CNA Group Life Assurance Co.
     5
       The Form W-2 attached to petitioner’s 2003 return shows
that she received $90,250 from CNA Group Life Assurance Co.
                                - 4 -

$16, and a Schedule C business loss of $32,018.    On January 13,

2006, respondent issued to petitioner a notice of deficiency for

2003.

                            Discussion

Schedule A Medical Expenses

     Expenses paid during the taxable year, not compensated for

by insurance or otherwise, for medical care of the taxpayer, her

spouse, or a dependent shall be allowed as a deduction to the

extent that such expenses exceed 7.5 percent of adjusted gross

income.   Sec. 213(a).   The term “medical care” includes amounts

paid for insurance covering medical care.    Sec. 213(d)(1)(D).

     On her 2003 return, petitioner claimed itemized deductions

for medical expenses.    Petitioner failed to substantiate the

$6,966.21 in medical expenses that remain in dispute.    In an

attempt to substantiate the disputed medical expenses, petitioner

produced evidence of payments made to National Finance Center.

The purpose of these payments is not clear.    Copies of several of

the canceled checks and cashier’s checks that document these

payments contain writing that was scratched out.    Petitioner

testified that the scratched out writing was her Social Security

number.   However, the writing that was scratched out on the

cashier’s checks visibly indicates the checks were made out for

Jon Tomlinson, who is petitioner’s brother.    Jon Tomlinson was

not petitioner’s dependent for tax purposes.    Respondent’s
                                 - 5 -

disallowance of the disputed remaining medical expenses is

sustained.

Schedule C Expenses

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to any

deductions claimed.    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).    Taxpayers are required to maintain

sufficient records to enable the Commissioner to determine their

correct tax liability.    Sec. 6001.

     Section 162 generally allows a deduction for all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business.     Such expenses

must be directly connected with or pertain to the taxpayer’s

trade or business.    Sec. 1.162-1(a), Income Tax Regs.     Whether an

expenditure satisfies the requirements of section 162 is a

question of fact.     Commissioner v. Heininger, 320 U.S. 467, 475

(1943).

     Whether a taxpayer’s activities constitute the carrying on

of a trade or business requires an examination of the particular

facts and circumstances of each case.     Commissioner v.

Groetzinger, 480 U.S. 23, 36 (1987).     Carrying on a trade or

business requires a showing of more than an initial investigation
                                - 6 -

of business potential.    Dean v. Commissioner, 56 T.C. 895, 902

(1971); Glotov v. Commissioner, T.C. Memo. 2007-147.

     Personal, living, or family expenses are not deductible.

Sec. 262.    Similarly, deductions for expenditures that are

properly categorized as capital expenditures are not allowable.

Sec. 263.    In order for petitioner to be entitled to deduct her

claimed Schedule C expenses she must satisfy the requirements of

section 162.    Additionally, certain expenses warrant the

heightened substantiation requirements of section 274(d) and the

regulations thereunder.

     Petitioner’s return for 2002 contains a Schedule C for “ASIL

Investments” on which she reported zero gross receipts and a net

loss of $77,267.    Respondent disallowed all of the claimed

deductions for expenses, which were listed on petitioner’s 2002

Schedule C as follows:

            Expenses                             Amount

     Car and truck expenses                      $1,230
     Depreciation                                 4,196
     Insurance                                    1,600
     Legal and professional services             12,115
     Office expense                              10,132
     Rent or lease of other business              4,152
       property
     Supplies                                     5,936
     Travel                                      10,706
     Meals and entertainment                      5,845
     Wages                                        1,490
     Accounting                                   1,832
     Answering service                              495
     Club membership                              3,170
     Delivery and freight                           757
     Gifts                                        1,226
                                - 7 -

     Internet services                             168
     Membership fees                               404
     Parking and tolls                           1,827
     Photography                                 2,037
     Postage                                     1,785
     Professional development                      245
     Subscriptions and publications                702
     Telephone                                   5,217
       Total                                    77,267

Petitioner claims that ASIL Investments was a real estate

investment business that she began while she worked full time at

Versata, Inc.   Petitioner testified that she took a number of

courses and looked at a variety of properties in 2002.

Petitioner testified that she made some offers on properties;

however, she provided no other evidence of these offers.    There

is no evidence that petitioner ever completed a purchase of

property.   Petitioner received no income from ASIL Investments in

2002 and abandoned the venture early in 2003.

     If any of the expenses incurred by petitioner were in

relation to a real estate investment venture, they appear to be

in the nature of investigating the business potential of creating

a real estate investment business or preparing to start such a

business.   In order to deduct expenses under section 162, the

expenses must relate to a functioning business at the time the

expenses were incurred.   Glotov v. Commissioner, supra.

     Section 195(a) provides:   “Except as otherwise provided in

this section, no deduction shall be allowed for start-up
                               - 8 -

expenditures.”   Section 195(c)(1) defines “start-up expenditure”

as:

      (1) * * * 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.[6]

      Petitioner’s activities in 2002 with relation to ASIL

Investments were, at best, start-up activities and did not amount

to an active trade or business.   Accordingly, we hold that




      6
       Sec. 195(c)(1) provides that the term “start-up
expenditure” does not include expenditures for which a deduction
would be allowable under sec. 163(a) (interest), 164 (taxes), or
174 (research and experimental expenses). See TSR, Inc. & Sub.
v. Commissioner, 96 T.C. 903 (1991) (explaining that the phrase
“research or experimental” for purposes of sec. 174 refers to
scientific or technological research); see also sec. 1.174-2(a),
Income Tax Regs. None of the expenditures listed on petitioner’s
Schedules C were allowable under these sections.
                                 - 9 -

respondent’s disallowance of petitioner’s 2002 Schedule C

deductions was proper.7

     Petitioner’s return for 2003 contains a Schedule C on which

she reported zero gross receipts and a net loss of $32,018 for

“Temps To Go”.     The Schedule C for Temps To Go is the only

Schedule C attached to the 2003 return.     Petitioner testified

that the expenses claimed on her Schedule C for 2003 were

actually expenses incurred in another business called “Gotta Get

Up Productions”.8    Petitioner claimed that she held a 100-percent

interest in Gotta Get Up Productions in 2003.

     In the notice of deficiency, respondent disallowed the

following claimed deductions for expenses listed on petitioner’s

2003 Schedule C:




     7
       We note that many of the claimed expenses were clearly
personal as opposed to business expenses. These included:
Travel expenses paid for with petitioner’s Versata, Inc., credit
card for a stay at the Oakland Marriott while her house was being
restored after experiencing water damage caused by a leaky roof;
expenses associated with a tennis club membership; expenses for
the rental of other business property for a studio that her
brother Jon Tomlinson leased in September 2002; travel expenses
for four rooms at the Dayton Marriott for petitioner’s family to
attend an event featuring petitioner’s brother Jon’s art; and
expenses for the entire cost of petitioner’s health, life,
disability, homeowner’s, and automobile insurance. Many other
claimed expenses were unsubstantiated.
     8
       Petitioner also testified that she was unsure whether any
of the expenses claimed on the 2003 Schedule C relate to Temps to
Go.
                                  - 10 -

            Expenses                                    Amount
                                                    1
     Other expenses                                  $16,055
     Meals and entertainment                            2,140
     Travel                                               460
     Legal and professional services                      459
     Car and truck expenses                               824
       Total                                           19,938
        1
          “Other expenditures” are enumerated on petitioner’s return
     as follows:
                    Expenses                       Amount

            Club memberships                        $172
            Copyright registration                 1,890
            Dues and subscriptions                   320
            Framing                                  280
            Membership fees                          175
            Parking                                  848
            Photography                              685
            Postage                                1,043
            Professional development               4,250
            Storage fees                             440
            Subscriptions and publications           199
            Telephone                              5,753
              Total                               16,055

     On brief, respondent disputes the entire $32,018 of claimed

Schedule C expenses for 2003.       Section 6214(a) provides that this

Court shall have jurisdiction to redetermine the correct amount

of the deficiency, even if the amount so redetermined is greater

than the amount determined by the Commissioner in the notice of

deficiency, if the Commissioner asserts a claim at or before the

hearing or rehearing.     Consistent with the general mandate of

section 6214(a), this Court generally will exercise its

jurisdiction over an increased deficiency only where the matter

is properly pleaded.     See Estate of Petschek v. Commissioner, 81

T.C. 260, 271-272 (1983), affd. 738 F.2d 67 (2d Cir. 1984); see

also Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).               Because
                               - 11 -

respondent failed to plead an increase in the disallowance of

petitioner’s Schedule C deductions for 2003, we consider the only

amount of Schedule C deductions in dispute to be $19,938.

     Petitioner testified that Gotta Get Up Productions is a

greeting card, stationery, and gift item business.     Petitioner

described Gotta Get Up Productions as a “family business”

involving the prospective sale of artwork created by her brother,

Jon Tomlinson.

     Petitioner testified that she took over Gotta Get Up

Productions in March or April of 2003 and that “in 2003 what I

had to do was identify our product offerings, develop prototypes,

select paper, figure out which offerings were going to be

introduced and how they were going to be introduced to the

general public”.    Petitioner added that Gotta Get Up Productions

did not open its doors until 2004.      Petitioner did not earn any

income from Gotta Get Up Productions in 2003.     When asked at

trial whether the expenses she incurred in 2003 were start-up

expenses, petitioner replied that they were “the cost of starting

a business, yes.”   Gotta Get Up Productions was not incorporated

during 2003 and had no paid employees in 2003.     Petitioner

testified that the people who assisted her received no wages

because they “hadn’t sold anything” and “didn’t have anything”

from which they could receive any money.
                                - 12 -

     Petitioner failed to provide evidence indicating that Temps

to Go existed as an active trade or business in 2003.     While

petitioner may have intended to create a greeting card business,

petitioner’s evidence indicates that her activities during 2003

were related to an attempt to start a business.     Thus, for the

same reasons that we upheld respondent’s disallowance of

petitioner’s Schedule C expenses for 2002, we sustain

respondent’s disallowance of petitioner’s 2003 Schedule C

deductions as determined in the notice of deficiency.9

Sec. 6651(a)(1) Addition to Tax

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

file a timely return.   The addition equals 5 percent of the

amount required to be shown on the return for each month or

fraction thereof that the return is late, not to exceed 25

percent.   Sec. 6651(a)(1).

     Respondent bears the burden of production with respect to

the addition to tax.    Sec. 7491(c); Higbee v. Commissioner, 116

T.C. 438, 446-447 (2001).     To meet his burden of production,

respondent must come forward with sufficient evidence indicating

it is appropriate to impose the addition to tax.     See Higbee v.

Commissioner, supra.    Once respondent meets his burden of

production, petitioner bears the burden of proving he is not


     9
       As in 2002, many of petitioner’s claimed expenses in 2003
appear to be personal in nature. Many other claimed expenses
lack the required substantiation.
                               - 13 -

liable for the addition to tax.    See id. at 447.   Petitioner’s

2003 income tax return was due on October 15, 2004, but was not

filed until January 3, 2005.   We find that respondent has met his

burden of production.

     “A failure to file a tax return on the date prescribed leads

to a mandatory penalty unless the taxpayer shows that such

failure was due to reasonable cause and not due to willful

neglect.”   McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.

1997), affg. T.C. Memo. 1995-547.    A showing of reasonable cause

requires taxpayers to demonstrate they exercised “ordinary

business care and prudence” but were nevertheless unable to file

the return within the prescribed time.    United States v. Boyle,

469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.   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.     McMahan

v. Commissioner, supra at 369.

     Petitioner contends that she had reasonable cause for filing

late, and that the late filing of her return is because of her

responsibility to care for her brother after he was released from

the hospital in December 2003.    Petitioner argues that it took

more than 5 months to secure reliable caregivers, and that her
                              - 14 -

primary focus was overseeing her brother’s caregiver needs and

starting a new business venture.

     We accept petitioner’s testimony that she became responsible

for her brother after he was released from the hospital in 2003.

However, petitioner testified that she found the time to try to

start a new greeting card venture and also found caregivers for

her brother by May 2004, 5 months before the extended due date of

the 2003 tax return and more than 7 months before it was actually

filed.10   We conclude that petitioner failed to demonstrate that

her failure to file timely a return was because of reasonable

cause and not willful neglect.   See sec. 301.6651-1(c), Proced. &

Admin. Regs.   Accordingly, petitioner is liable for the addition

to tax under section 6651(a)(1) for 2003.

     To reflect the foregoing,

                                         Decisions will be entered

                                    under Rule 155.




     10
       We note that respondent did not determine a sec. 6651
addition to tax with regard to petitioner’s late filing of her
2002 return.
