                     T.C. Summary Opinion 2011-23



                        UNITED STATES TAX COURT



                   ABDUL MED BANGURA, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 28777-09S.                Filed March 8, 2011.



        Abdul Med Bangura, pro se.

        R. Jeffrey Knight, for respondent.



     JACOBS, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.     Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.
                               - 2 -

     Respondent determined a deficiency of $33,626 in

petitioner’s Federal income tax, an addition to tax under section

6651(a)(1) of $3,431.60, and an accuracy-related penalty under

section 6662(a) of $6,725.60, for 2007.     After concessions, the

issues remaining for decision are:     (1) Whether petitioner is

entitled to deduct certain business expenses as reported on

Schedule C, Profit or Loss From Business; (2) whether petitioner

underreported Schedule C gross receipts by $73,036; (3) whether

petitioner is liable for an addition to tax pursuant to section

6651(a)(1); and (4) whether petitioner is liable for the section

6662(a) accuracy-related penalty.

     All section references are to the Internal Revenue Code in

effect for 2007, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.     Petitioner resided in

Maryland when the petition was filed.

     Petitioner received a master’s degree in accounting and

taxation from Southeastern University in Washington, D.C., and is

a certified public accountant (C.P.A.).     In 2007 he was licensed

in Maryland.   During 2007 petitioner was the owner and sole

proprietor of AMB CPA Services, which provided tax preparation
                                - 3 -

services for 75 to 100 clients.   Petitioner is currently pursuing

a law degree.

     Petitioner filed his 2007 Form 1040, U.S. Individual Income

Tax Return, on June 13, 2008, almost 2 months after it was due,

computing his tax using a filing status of “Married filing

separately”.1   He did not file Form 4868, Application for

Automatic Extension of Time To File U.S. Individual Income Tax

Return, and the record does not indicate that he otherwise

requested an extension of time to file his 2007 income tax

return.   On his 2007 income tax return petitioner reported net

business income of $4,885, the difference between the reported

Schedule C gross receipts of $28,500 and the claimed Schedule C

business expenses of $23,615.   The claimed business expenses

consisted of $6,800 for business supplies, $2,750 for “other

expenses”, and $14,065 for car and truck expenses.

     On Schedule A, Itemized Deductions, petitioner deducted

$37,984, consisting of $5,142 for State and local taxes paid and

$32,842 for mortgage interest paid.     In the notice of deficiency,

respondent disallowed the claimed Schedule A deductions on the




     1
      Petitioner’s wife timely filed a Form 1040 for 2007. The
return, which petitioner prepared, applied head of household
filing status, and zero taxable income was reported thereon. On
the return petitioner’s wife claimed entitlement to an earned
income credit of $1,465 and a child tax credit of $2,000.
                               - 4 -

basis of petitioner’s failure to substantiate that he incurred

and/or paid such expenditures.2

     Respondent, acting through Revenue Agent James C. Brown (the

examining agent), began an examination of petitioner’s 2007

income tax return in June 2008, as a compliance check, at the

conclusion of the audit of petitioner’s 2004, 2005, and 2006

income tax returns.   In doing so, the examining agent noticed

that the relatively small amount of income petitioner reported on

his 2007 income tax return “did not support the itemized

deductions and the Schedule C expenses as stated on the tax

return.”

     On June 19, 2008, after completing a financial status

analysis for 2007, the examining agent notified petitioner that

his 2007 income tax return was under examination.   The examining

agent set up an initial appointment to discuss petitioner’s 2007

tax return and sent an Information Document Request (IDR) to him.

The IDR requested that petitioner provide books and records for

his tax return preparation business, including documents to

substantiate his claimed business expenses.   The examining agent

wanted to discuss the IDR with petitioner at a manager’s

conference (which petitioner requested) relating to the

closing of the audit of his 2004, 2005, and 2006 tax returns.


     2
      Respondent concedes that petitioner is entitled to a
deduction of $4,956 for real estate taxes paid and a mortgage
interest deduction of $46,245, for a total of $51,201.
                                - 5 -

The manager’s conference was scheduled for July 15, 2008, but at

petitioner’s request it was rescheduled to July 18.     That

manager’s conference was canceled by petitioner.     After

petitioner canceled the manager’s conference, the examining agent

closed the audit of petitioner’s 2004, 2005, and 2006 tax

returns, leaving open for examination the 2007 tax year.

     In connection with the audit of his 2004, 2005, and 2006 tax

returns, petitioner told the examining agent that he was not

required to provide the Internal Revenue Service with any records

or documentation other than those which had been submitted with

his income tax returns.    Indeed, petitioner never provided the

examining agent with documents of any kind with respect to years

2004, 2005, and 2006 during the audit for those years.       Nor did

petitioner respond to the IDR for 2007.

     On September 2, 2008, the examining agent (1) mailed

petitioner a second IDR for 2007, and (2) issued bank summonses

to obtain information with respect to two bank accounts known to

be held by petitioner.    Petitioner filed a motion in Federal

court (the record does not reveal which Federal court) to quash

the summonses.   That motion was denied.    Thereafter the bank

complied with respondent’s summonses.    The information the bank

provided was insufficient to show that petitioner received any

material amount of income during 2007.     Of the two accounts
                               - 6 -

summoned, one showed that it had been closed and the other showed

deposits of approximately $1,000.

     Inasmuch as petitioner did not respond to the second IDR and

because the bank records were not “illuminating”, in December

2008 the examining agent mailed a third IDR for 2007 to

petitioner.   Petitioner did not provide any information or

documentation in response to this IDR.

     The examining agent then used the source and application of

funds method to reconstruct petitioner’s income for 2007,

applying the guidelines set forth in the Internal Revenue Manual

(IRM).   The examining agent used this method to determine

petitioner’s income indirectly because the Schedule C business

expenses and claimed Schedule A itemized deductions exceeded the

income reported on petitioner’s 2007 income tax return.

     The source and application of funds method reconstructs the

estimated amount of the taxpayer’s income by determining the

excess of the taxpayer’s expenditures for the year over his known

sources of income.   The examining agent calculated petitioner’s

expenditures to be $101,536 by adding (1) petitioner’s Schedule A

deductions of mortgage interest and real estate taxes paid

totaling $51,201;3 (2) petitioner’s Schedule A State and local


     3
      As mentioned supra note 2, respondent conceded that
petitioner is entitled to Schedule A deductions totaling $51,201,
which is greater than the $37,984 claimed on petitioner’s 2007
tax return. The examining agent used this greater amount in
                                                   (continued...)
                              - 7 -

tax deduction of $186; (3) petitioner’s Schedule C expenses for

business supplies and what petitioner listed as “other expenses”

totaling $9,550;4 and (4) an estimate of petitioner’s personal

living expenses for 2007 of $40,599.   From the $101,536, the

examining agent subtracted $28,500, the amount petitioner

reported as Schedule C gross receipts.   Thus, the examining agent

determined petitioner had an excess application of funds, i.e.,

unreported income for 2007, totaling $73,036 ($101,536 -

$28,500).

     In estimating petitioner’s personal living expenses (e.g.,

food, housing, transportation, etc.) the examining agent used the

Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (the

survey) for the south region, which is the region for Maryland.

The estimate for personal living expenses includes mortgage

interest expense, property taxes, and State and local taxes.

Because the examining agent used petitioner’s actual expenses

with respect to the mortgage interest, property taxes, and State

and local taxes, he subtracted the survey’s estimates for these

items from his calculation.



     3
      (...continued)
reconstructing petitioner’s 2007 income.
     4
      The examining agent did not include petitioner’s claimed
Schedule C car and truck expenses of $14,065 in his
reconstruction of petitioner’s income because there was a
possibility that depreciation (a noncash item) was included in
those expenses.
                                - 8 -

      Although the examining agent used the business expenses set

forth on Schedule C in reconstructing petitioner’s income, he

determined that deductions for these expenses should be

disallowed for lack of substantiation.    The examining agent also

determined that for 2007 petitioner was liable for an addition to

tax pursuant to section 6651(a)(1) for failure to file a timely

return and an accuracy-related penalty pursuant to section

6662(a).

                             Discussion

I.   Disallowed Deductions

      Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to all

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).    Moreover, taxpayers must substantiate the

amount and purpose of the item deducted.    Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).    Taxpayers are required to maintain records

that are sufficient to enable the Commissioner to determine their

correct tax liability.   See sec. 6001; Meneguzzo v. Commissioner,

43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.

Under certain circumstances, if a taxpayer establishes

entitlement to a deduction but not the amount of the deduction,

the Court may estimate the amount allowable, Cohan v.
                               - 9 -

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), if the

taxpayer provides some rational basis on which an estimate may be

made, Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

     A.   Business Supplies

     Petitioner deducted Schedule C business supply expenses of

$6,800 on his 2007 income tax return.   At trial petitioner

admitted he did not provide the examining agent with any

documentation that would substantiate any of the claimed

expenses.   Nor did petitioner submit any substantiating documents

at trial.

     Petitioner asserts that he was “frantically busy learning

how to establish and carry on a CPA practice but had little time

to document the expenses” and that his failure in this regard was

an “honest belief that the petitioner was not doing anything

wrong.”   We do not find petitioner’s assertion credible.

Petitioner was a C.P.A. operating a tax preparation business.    He

knew, or should have known, that a taxpayer is required to

substantiate all claimed deductions.    Because petitioner failed

to provide any documentary evidence to substantiate the claimed

Schedule C business expenses, we have no reasonable basis on

which to estimate the amount of expenses he incurred.

Consequently, we sustain respondent’s disallowance of a deduction

for these expenses.
                                - 10 -

     B.   “Other Expenses”

     Petitioner deducted “other expenses” of $2,750 on Schedule

C.   With respect to these expenses, petitioner stated:     “Other

expenses of $2,750 may have been my, I think that has to do with

my enhanced educational [sic].”    Petitioner was unable to recall

the exact nature of the educational expenses but felt they

probably were for classes taken in pursuit of a law degree.

     Petitioner failed to substantiate these expenses.      Again, we

have no reasonable basis on which to estimate the amount of

expenses petitioner incurred.    Moreover, even had petitioner

substantiated these expenses, educational expenses are not

deductible if they are part of a course of study that will

qualify the taxpayer in a new trade or business.      Sec. 1.162-

5(b)(3), Income Tax Regs.    Consequently, we sustain respondent’s

disallowance of the deduction for these expenses.

     C.   Car and Truck Expenses

     Cars and trucks are “listed property” pursuant to section

280F(d)(4).   “[L]isted property” is subjected to the heightened

substantiation requirements of section 274(d).      Again, petitioner

provided no substantiation with respect to these expenses.

Indeed, petitioner was unclear as to whether he used his vehicle

for both business and personal use.      Consequently, we sustain

respondent’s disallowance of a deduction for these expenses.
                               - 11 -

II.   Unreported Income

      In determining the tax deficiency for 2007, the examining

agent reconstructed petitioner’s income using the source and

application of funds method.

      Section 6001 requires all taxpayers to maintain sufficient

records to determine their correct tax liabilities.   Where a

taxpayer fails to keep the required books and records, or if the

records the taxpayer maintains do not clearly reflect income, the

Commissioner is authorized by section 446 to reconstruct the

taxpayer’s income in accordance with a method that clearly

reflects the full amount of income received.    Petzoldt v.

Commissioner, 92 T.C. 661, 686-687 (1989); Meneguzzo v.

Commissioner, supra at 831.    The income reconstruction method

used need only be reasonable in light of all the surrounding

facts and circumstances.   Petzoldt v. Commissioner, supra at 687.

      The source and application of funds method is well accepted

as an appropriate method of reconstructing a taxpayer’s income.

United States v. Johnson, 319 U.S. 503, 517 (1943).    This income

reconstruction method is based upon the assumption that the

amount by which a taxpayer’s cash expenditures during the year

exceed the taxpayer’s known sources of income is income unless

the taxpayer can show that the expenditures were made from a

nontaxable source of funds.    A deficiency determined by the use

of this income reconstruction method is presumptively correct,
                               - 12 -

and the burden of proof is upon the taxpayer to demonstrate

otherwise.   DeVenney v. Commissioner, 85 T.C. 927, 930-931

(1985).   To meet his burden, the taxpayer must prove either that

someone else made the expenditures or that the funds used were

obtained from a nontaxable source such as a loan, an inheritance,

or assets on hand at the beginning of the year.    Id. at 931.

     In Holland v. Commissioner, 348 U.S. 121, 135-136 (1954),

the Supreme Court limited the Commissioner’s use of the net worth

method of reconstructing income by requiring the Commissioner to

track down relevant leads furnished by the taxpayer which are

reasonably susceptible of being checked and by requiring the

Commissioner to show that increases in net worth are attributable

to currently taxable income.   This Court has held this limitation

to be applicable in cases involving the source and application of

funds method.    DeVenney v. Commissioner, supra at 931.    However,

in Meier v. Commissioner, 91 T.C. 273, 296 (1988), we stated:

     Before the safeguards in Holland are triggered, * * *
     [the taxpayer] must either explain the source of or provide
     alternative nontaxable sources for the discrepancy in his
     expenditures and his reported income. This explanation
     commences respondent’s investigative requirements under
     Holland. * * *

     Petitioner testified that his wife helped pay the family

expenses.    Yet a review of her tax return shows that she did not

have sufficient income to pay petitioner’s expenses.5      Moreover,


     5
      Petitioner’s wife’s 2007 tax return shows total income of
                                                   (continued...)
                              - 13 -

even though petitioner’s wife was present in the courtroom, she

did not testify.   Because she did not testify, we assume her

testimony would not have corroborated her husband’s testimony.

See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,

1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

     Petitioner presented no other source of income or

explanation.   Instead he argued that he was able to get money by

“hustling and bustling”, and he testified:    “If I stand here

right now to tell you exactly how I came through with all of

those monies, I would be, I am under oath, cautious of it * * *

but certainly lots of people helped.”   On the record before us,

we conclude that the examining agent’s use of the source and

application of funds method was reasonable.

     Petitioner objects to the examining agent’s use of the

survey to estimate his personal living expenses, asserting his

actual living expenses were less than the survey estimates and

therefore use of the survey is inappropriate.    Petitioner refused

to provide the examining agent with documentation of his

expenses, which is the very reason the examining agent was forced

to rely on the survey to estimate petitioner’s personal living

expenses.



     5
      (...continued)
$32,918, tuition expenses of $4,000, State and local income tax
of $1,504, and unreimbursed employee expenses of $21,466. Thus,
petitioner’s wife had but $5,948 of disposable income for 2007.
                                - 14 -

     We have previously held that the Commissioner has “great

latitude” in determining a taxpayer’s tax liability, particularly

where the taxpayer refuses to cooperate.       See Giddio v.

Commissioner, 54 T.C. 1530, 1533 (1970).       With no other option

available, use of the survey to estimate petitioner’s personal

living expenses provides a reasonable estimate of his income.

     Petitioner next asserts:

     Respondent has not carried their [sic] burden of proving
     that petitioner actually received the $101,000 because
     respondent used a modified statistical method mixing average
     Amounts [sic] for actual amounts in his use of the indirect
     method Which [sic] has never been used in history of the
     Treasury regulations * * *.

Thus, petitioner objects to the examining agent’s use of

petitioner’s actual expenses where available (i.e., his mortgage

interest expense, his real estate tax expense, and his State and

local tax expense) as opposed to estimates used in the survey.

     We find petitioner’s assertion unpersuasive.       The IRM states

that BLS data (i.e., the survey) may be used to reconstruct

income and that this statistical data may be used in conjunction

with other available information, including information from a

taxpayer’s tax return.   IRM pt. 4.10.4.6.1.3.1(1) (Sept. 11,

2007).   The IRM provides that statistical data should be used as

the sole source of information only when all three of the

following conditions are met:    (a) The taxpayer produces income

other than as an employee; (b) the taxpayer is a nonfiler; and

(c) the taxpayer is uncooperative.       Id.   Condition (b) is not
                               - 15 -

herein present.    Thus, the examining agent was obliged by the IRM

to use petitioner’s known actual expenses in reconstructing his

income.   We find respondent’s use of both the personal living

expense estimates (as set forth in the survey) and petitioner’s

actual expenses reasonable under the circumstances.

     However, the examining agent erred to an extent in

calculating petitioner’s cash expenditures (i.e., the application

of funds).   The examining agent disallowed the amounts petitioner

claimed on Schedule C for business supplies and “other expenses”,

$6,800 and $2,750, respectively, a total of $9,550,6 because

petitioner failed to substantiate these expenses.   But the

examining agent used these disallowed unsubstantiated amounts in

determining petitioner’s cash expenditures.   We believe it was

not reasonable for the examining agent to disallow expenses for

lack of substantiation on the one hand and then, on the other

hand, claim that those unsubstantiated amounts reflect

petitioner’s expenditures.   See Cheesman v. Commissioner, T.C.

Memo. 1994-509.7   Consequently, we hold that the examining agent

may not use petitioner’s disallowed Schedule C expenses to


     6
      As noted supra note 4, the examining agent did not include
petitioner’s claimed car and truck expenses in his reconstruction
of petitioner’s income.
     7
      In Cherry v. Commissioner, T.C. Memo. 1998-360, the
Commissioner conceded at trial that a proper reconstruction of
the taxpayer’s income using the source and application of funds
method would not include any deductions claimed by the taxpayer
but disallowed by the Commissioner.
                                - 16 -

reconstruct his income.     Because of this error, respondent must

recalculate petitioner’s 2007 unreported income.     This can be

done in the Rule 155 computation.

III.   Addition to Tax Under Section 6651(a)(1)

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

taxpayer’s failure to timely file an income tax return unless the

failure to file is due to reasonable cause and not willful

neglect.    This addition to tax consists of adding to the amount

required to be shown as tax on the return 5 percent of the amount

of such tax for each complete or partial month in which the

failure to file continues, up to a maximum of 25 percent in the

aggregate.    Id.   Respondent has the burden of production pursuant

to section 7491(c).    To satisfy that burden, respondent must

produce sufficient evidence demonstrating that it is appropriate

to impose the addition to tax.     See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).     Once respondent has met his burden of

production, petitioner must come forward with evidence sufficient

to persuade the Court that respondent’s determination is

incorrect.    Id. at 447.

       Respondent has satisfied his burden of production.    The

record clearly reflects that petitioner did not timely file his

2007 income tax return.     And petitioner has not demonstrated that
                              - 17 -

his failure to timely file his 2007 income tax return was due to

reasonable cause8 and not due to willful neglect.

      Petitioner asserts that he filed late because respondent was

auditing his 2004, 2005, and 2006 tax returns and “in my view, if

these people were going hunting or fishing towards me, or

whatever is motivating them, I’ll wait until there is a

resolution on those audits before I file my tax return for 2007.”

Petitioner’s assertion that he delayed filing until the examining

agent completed auditing his 2004, 2005, and 2006 tax returns,

even if relevant, does not constitute reasonable cause.    See

Glowinski v. Commissioner, 25 T.C. 934, 936 (1956), affd. 243

F.2d 635 (D.C. Cir. 1957).   Petitioner is therefore liable for

the section 6651(a)(1) addition to tax.   However, respondent must

recompute the amount of the addition to tax to reflect the

recalculation of petitioner’s 2007 unreported income.     This can

be done in the Rule 155 computation.

IV.   Section 6662(a) Accuracy-Related Penalty

      Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment of tax attributable to, inter alia, negligence

or disregard of rules or regulations, as provided in section

6662(b)(1); or a substantial understatement of income tax, as


      8
      Reasonable cause requires a taxpayer to demonstrate that he
exercised ordinary business care and prudence but nonetheless was
unable to file a return within the prescribed time. United
States v. Boyle, 469 U.S. 241, 245-246 (1985); Bruner v.
Commissioner, T.C. Memo. 1998-246.
                                - 18 -

provided in section 6662(b)(2).     Negligence includes any failure

to make a reasonable attempt to comply with the provisions of the

Internal Revenue Code.     Sec. 6662(c).   Negligence also includes

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

to substantiate items properly.     Sec. 1.6662-3(b)(1), Income Tax

Regs.     The term “disregard” includes any careless, reckless or

intentional disregard.     Sec 6662(c).

     The section 6662(a) accuracy-related penalty does not apply

where the taxpayer shows that there was reasonable cause for the

underpayment and that he acted in good faith.     Sec. 6664(c)(1).

Such a showing depends on the facts and circumstances of each

case and includes the knowledge and experience of the taxpayer

and the reliance on the advice of a professional, such as an

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

     Respondent has the burden of production pursuant to section

7491(c).     To satisfy that burden, respondent must produce

sufficient evidence showing that it is appropriate to impose the

penalty.     See Higbee v. Commissioner, supra at 446.   On the

record before us, respondent has satisfied his burden by

producing evidence that petitioner failed to keep books and

records and failed to substantiate his claimed deductions.

        Petitioner has not demonstrated that there was reasonable

cause for the underpayment and that he acted in good faith.

Petitioner is a C.P.A. and holds a master’s degree in accounting
                              - 19 -

and taxation.   Yet when asked by the examining agent to provide

documentation to substantiate his claimed business expenses, he

failed to do so.   Petitioner asserted that this was not

negligence; rather, “it’s more or less when you’re starting out

doing something, like a medical doctor doing operations or maybe

a lawyer representing somebody in the courtroom, you have a lot

to learn.   You do make mistakes here and there.”   We find

petitioner’s cavalier attitude unacceptable.   This is not what a

reasonable person would do, particularly a C.P.A.

     We hold petitioner liable for the section 6662(a) accuracy-

related penalty.   However, respondent must recompute the penalty

according to our holding that there must be a recalculation of

petitioner’s 2007 unreported income.   Again, this can be done in

the Rule 155 computation.

     We have considered all of petitioner’s contentions that are

not discussed herein, and we conclude they are without merit,

irrelevant, and/or moot.

     To reflect the foregoing and respondent’s concessions,


                                         Decision will be entered

                                    under Rule 155.
