                        T.C. Memo. 2002-72



                      UNITED STATES TAX COURT



         GARY G. GAGE AND CARRIE M. GAGE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16714-99.              Filed March 26, 2002.



     Gary G. Gage and Carrie M. Gage, pro sese.

     Sandra Veliz, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioners petitioned the Court to

redetermine respondent’s determination of deficiencies of $5,538,

$5,743, and $6,448 in their 1995, 1996, and 1997 Federal income
                                 -2-

taxes, respectively.    Following petitioners’ concession,1 we must

decide:

     1.    Whether petitioners are liable for self-employment taxes

of $4,923, $4,551, and $5,008 in 1995, 1996, and 1997,

respectively, as determined by respondent.    We hold they are.2

     2.    Whether petitioners may deduct charitable contributions

of $13,900, $20,575, and $23,467 on their respective 1995, 1996,

and 1997 Schedules C, Profit or Loss From Business.     We hold they

may not.

     3.    Whether we should penalize petitioners under section

6673.3    We hold we should and penalize them $1,000.

                          FINDINGS OF FACT

     Most facts were stipulated.    We incorporate herein by this

reference the parties’ stipulation of facts and the accompanying

exhibits.    Petitioners resided in Spokane, Washington, when their

petition was filed with the Court.




     1
       Respondent determined that petitioners received and failed
to report $115 in interest income in 1997. Petitioners’ petition
and brief are silent as to this determination. We sustain this
determination without further comment. See Jarvis v.
Commissioner, 78 T.C. 646, 658 n.19 (1982).
     2
       By virtue of this holding, we also sustain respondent’s
determination that petitioners may deduct one-half of each year’s
self-employment tax under sec. 164(f).
     3
       Section references are to the Internal Revenue Code in
effect for the subject years. Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 -3-

       Petitioners filed their 1995, 1996, and 1997 Forms 1040,

U.S. Individual Income Tax Return, within the time prescribed by

law.    On those returns, petitioners claimed income and expenses

relating to Best Buy Stoves, the Schedule C residential heating

equipment sales business of Gary G. Gage (Mr. Gage).    Petitioners

never reported or paid any self-employment tax on the business’s

1995 through 1997 net income and did not attach to any of their

returns the applicable form for self-employment tax, Schedule SE,

Self-Employment Tax.    Petitioners never received an exemption

letter from the Internal Revenue Service providing that they were

exempt from self-employment taxes for 1995 through 1997.

                               OPINION

1.   Self-Employment Tax

       Self-employment income of every individual is subject to

self-employment tax under section 1401(a).    The amount of this

tax is based upon a percentage of the self-employment income

earned by the individual.    Section 1402(g)(1) grants an exemption

from self-employment tax to members of certain religious faiths.

This exemption requires the approval of the Commissioner of

Social Security.    Section 1402(e)(1) grants an exemption from

self-employment tax to ministers of a church, members of

religious orders, or Christian Science Practitioners.    This

exemption requires the approval of either the Commissioner of
                                -4-

Internal Revenue or the Commissioner of Social Security under an

agreement with the Commissioner of Internal Revenue.

     On July 29, 1999, petitioners applied with the Commissioner

of Internal Revenue for an exemption from self-employment tax by

filing Form 4361, Application for Exemption From Self-Employment

Tax for Use by Ministers, Members of Religious Orders and

Christian Science Practitioners.   Shortly thereafter, the

Commissioner of Internal Revenue denied that application,

determining that petitioners did not meet the statutory

requirements of section 1402(e)(1).   Petitioners never received

from the Commissioner of Internal Revenue the required approval

for exemption from self-employment tax.4

     Petitioners alleged in their petition that they are not

liable for self-employment tax because an imposition of that tax

violates their constitutional rights.   Specifically, petitioners

claim, requiring them to participate in the Social Security

system infringes on their First Amendment right to the free

exercise of religion.   Respondent disagrees that petitioners’

constitutional rights are violated in this case.   Respondent




     4
       Nor does the record indicate that petitioners ever
received or requested an exemption from the Commissioner of
Social Security.
                                -5-

observes that the self-employment tax was imposed on petitioners’

income derived from Mr. Gage’s Schedule C business.

     We agree with respondent that petitioners are liable for

self-employment tax on their self-employment income.

Respondent’s denial of a self-employment tax exemption to

petitioners, assuming their claimed religious objections to the

Social Security system are sincere, was not in violation of their

free exercise rights.   In Droz v. Commissioner, 48 F.3d 1120 (9th

Cir. 1995), the Court of Appeals for the Ninth Circuit, the court

to which this case is appealable, held that the denial of

exemption from self-employment tax to a taxpayer who had

religious objections to the Social Security system did not

violate the taxpayer’s free exercise rights.   Our jurisprudence

contains a line of cases which hold similarly.   Randolph v.

Commissioner, 74 T.C. 284 (1980); Henson v. Commissioner, 66 T.C.

835 (1976); Palmer v. Commissioner, 52 T.C. 310 (1969); May v.

Commissioner, T.C. Memo. 1996-135; Grieve v. Commissioner, T.C.

Memo. 1986-453.   Because we find nothing in the instant case to

distinguish it from Droz and our line of cases, we hold that the

imposition upon petitioners of self-employment tax as determined

by respondent is not in violation of their First Amendment

rights.
                                  -6-

2.   Charitable Contributions

     Section 162(a) allows the deduction of all ordinary and

necessary expenses paid or incurred during a taxable year in

carrying on a trade or business.    Construing that section, the

Supreme Court explained in Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352-353 (1971), that a cash basis

taxpayer such as Mr. Gage may deduct an expenditure if it is:

(1) An expense, (2) an ordinary expense, (3) a necessary expense,

(4) paid during the taxable year, and (5) made to carry on a

trade or business.   Accord Lychuk v. Commissioner, 116 T.C. 374,

386 (2001).

     Deductions are a matter of legislative grace, and an

individual taxpayer bears the burden of proving that he or she is

entitled to the deductions claimed.5    Rule 142(a)(1); INDOPCO,

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

Helvering, 292 U.S. 435 (1934).    Payments which qualify as

charitable contribution deductions under section 170 are not

deductible as ordinary and necessary business expenses under

section 162 if they fail to qualify as legitimate business


     5
       Sec. 7491 was added to the Code by the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001(c), 112 Stat. 727, effective for court proceedings
arising from examinations commencing after July 22, 1998. Sec.
7491(a) provides that the burden of proof shifts to the
Commissioner in specified circumstances. Petitioners make no
argument that sec. 7491 applies to this case. Accordingly, we
conclude it does not.
                                  -7-

expenses.   Hartless Linen Serv. Co. v. Commissioner, 32 T.C. 1026

(1959).

     Petitioners claimed charitable contribution deductions on

their Schedules C as ordinary and necessary business expenses.

In this proceeding, however, petitioners failed to provide any

proof that these claimed contributions were paid as legitimate

business expenses.   We sustain respondent’s determination as to

this issue.   See id.   We allow petitioners to deduct these

amounts under section 170 as itemized deductions, as determined

by respondent.

3.   Penalty Under Section 6673

     Respondent moves the Court to require petitioners to pay to

the United States a penalty under section 6673.   Respondent

asserts that petitioners’ positions in this proceeding are

frivolous and groundless.   Under section 6673(a), a taxpayer may

be required to pay to the United States a penalty not in excess

of $25,000 whenever it appears to the Court that, among other

reasons, the proceedings have been instituted or maintained

primarily for delay or the taxpayer’s position is frivolous or

groundless.    Larsen v. Commissioner, 765 F.2d 939, 941 (9th Cir.

1985).    A taxpayer’s position is frivolous or groundless if it is

contrary to established law and unsupported by a reasoned, color

able argument for change in the law.    Coleman v. Commissioner,

791 F.2d 68, 71 (7th Cir. 1986).
                                -8-

     We agree with respondent that petitioners’ positions in this

proceeding are both groundless and frivolous.    Whereas

petitioners alleged in their petition that “assessing taxes that

require that I deny my religious beliefs are unconstitutional,”

petitioners proceeded in brief to abandon that argument and to

put forth only shopworn tax-protester-type gibberish aimed

directly at the validity of our income tax system rather than at

the validity of respondent’s determinations.    Petitioners’ sole

arguments in brief are that: (1) ”the tax system is voluntary,”

(2) Mr. Gage “is not a public sector employee,” (3) “the Internal

Revenue Code has not been enacted as positive law,” and (4) ”the

intervener, Gary Gene: Gage, [sic] is the holder in due course of

GARY G. GAGE.”

     Because petitioners’ positions are contrary to law and are

not supported by a reasonable argument for a change in the law,

we conclude that their positions are frivolous and groundless.

Accordingly, in the exercise of our discretion, we require them

to pay to the United States a $1,000 penalty under section 6673.

     Contentions we have not addressed are irrelevant, moot, or

merit less.   To reflect the foregoing,

                                           An appropriate order and

                                      decision will be entered.
