                           T.C. Memo. 1997-7



                     UNITED STATES TAX COURT




                  JULIE PUSATERI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 7394-95.                       Filed January 2, 1997.




     David B. Crall, for petitioner.

     Christine V. Olsen, for respondent.




                       MEMORANDUM OPINION


     PAJAK, Special Trial Judge:     This case was heard pursuant to

section 7443A(b)(3) of the Code and Rules 180, 181, and 182.     All

section references are to the Internal Revenue Code in effect for
the year in issue.     All Rule references are to the Tax Court

Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioner's 1991

Federal income tax in the amount of $7,795, together with an

accuracy-related penalty under section 6662(a) of $1,356.

     We must decide:    (1)   Whether petitioner improperly reported

income and deductions on two Schedules C and on a Schedule E

attached to her 1991 Federal income tax return; (2) whether

petitioner is subject to additional self-employment tax;

(3) whether petitioner is entitled to a child care credit; and

(4) whether petitioner is liable for an accuracy-related penalty

under section 6662(a).

     Some of the facts have been stipulated and they are so

found.   Petitioner resided in Solana Beach, California, when her

petition was filed.

     For clarity and convenience, our findings of fact and

opinion have been combined.

     During 1991, petitioner was married but separated from her

husband.   During that year, petitioner was a paralegal licensed

to practice in California.     She operated two paralegal

businesses.   On her 1991 Federal income tax return, petitioner

reported income and expenses of her two paralegal business on two

Schedules C, "Julie Pusateri-Paralegal" (Schedule C-1), and

"Legal Assistance Center" (Schedule C-2).     The parties have used

the Schedule C-1 and Schedule C-2 terminology and so shall we.
                                - 3 -


     The paralegal business for Schedule C-1 was operated out of

an office owned by petitioner's husband.     The office was located

in her husband's house.   Petitioner did not pay rent to her

husband or to a landlord for the use of the office.     The office

had a fax machine, a computer, shelves for supplies, a telephone,

a printer, and similar items.   Petitioner paid for her own

supplies.   The paralegal business for Schedule C-2 was operated

out of the Legal Assistance Center.

     In 1991, petitioner maintained a checking account with Union

Bank.   She also maintained an account with Wells Fargo Bank under

the name "Legal Assistance Center".     Petitioner testified that

all earnings from her Schedule C-1 paralegal business were

deposited into the Union Bank account, and that all earnings from

her Schedule C-2 paralegal business were deposited into the Wells

Fargo bank account.   The parties stipulated that the total gross

receipts from petitioner's Schedule C-1 paralegal business in the

Union Bank checking account were $29,056 in 1991.     (The $258

difference between this amount and the $29,314 reported on the

Schedule C-1 was due to a mistake.)

     On her Schedule E, Supplemental Income and Loss, petitioner

reported "rent income" of $6,720 from "residential" property in

San Diego, and "rent income" of $1,600 from "equipment and

furniture", for a total of $8,320.      On the Schedule E, petitioner

also deducted expenses of $200 for cleaning, $100 for insurance,
                               - 4 -


$100 for utilities on the residential property in San Diego and

depreciation of $1,280 on equipment and furniture, for a total

deduction of $1,680.

     Respondent disallowed, for lack of substantiation, all of

petitioner's expenses claimed on the Schedule C-1 and some of the

expenses claimed on the Schedule C-2.     Respondent disallowed all

expenses claimed on the Schedule E and allocated the $8,320 of

Schedule E income to petitioner's Schedule C-1.

     Deductions are a matter of legislative grace.       A taxpayer

who seeks a deduction must be able to show that the taxpayer

comes within the express provisions of the statute.       New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).     Petitioner has

the burden of proving that respondent's determinations are

incorrect in all respects.   Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).

     We first turn to the expenses deducted on the Schedule C-1

and the Schedule C-2.   The parties agreed, by written and oral

stipulation, that petitioner substantiated the amounts set forth

below:
                          Schedule C-1

                               Expenses         Expenses
                               Claimed          Substantiated
Car                            $ 5,272          $4,060
Rent-vehicles, machinery
     and equipment               1,600
Rent-other business property     6,720
Supplies                         1,530           1,000
Meals and entertainment            246
Utilities                        1,220
                              - 5 -


Seminars                             525          495
Telephone                                         403
Visa/Mastercard                                   216
Certification                 _______             100
     Total Expenses           $17,113          $6,274
                         Schedule C-2

                              Expenses         Expenses
                              Claimed          Substantiated

Advertising                   $ 5,178          $5,078
Bad debt                          203
Car                             3,500
Legal & professional
     services                        950          500
Rent-other business
     property                      1,000
Supplies                           2,047
Taxes & licenses                     133
Meals & entertainment                162          162
Utilities                            271          242
Computer expenses                  1,698        1,348
Bank fees                            122          122
Law book                                           47
Depreciation                                      227
Business license fees         _______             133
     Total Expenses           $15,264          $7,859

     On her Schedule C-1, petitioner claimed rental expenses of

$1,600 and $6,720 for a total of $8,320.    Petitioner admitted

that she did not pay the $1,600 rental expense on machinery.

Petitioner also admitted that she did not pay $6,720 for rent for

the use of her husband's office.    In short, petitioner did not

pay the $8,320 deducted by her on the Schedule C-1.     Except to

the extent the parties stipulated that the expenses were

substantiated, respondent's disallowances of the Schedule C-1 and

Schedule C-2 deductions are sustained.
                                - 6 -


     We hold that the $8,320 reported by petitioner on the

Schedule E was not rental income.    Petitioner admitted that this

amount was paid to her by an attorney.      Petitioner claimed this

was to help make up for the fact that she supplied her own

facilities.

     Petitioner conceded that she did not incur any of the $1,680

of expenses claimed as deductions on her Schedule E.

Respondent's disallowance of that amount is sustained.

     The next issue is respondent's allocation of the $8,320 of

Schedule E income to petitioner's Schedule C-1.      Petitioner

argued that by claiming the $8,320 on her Schedule C-1 and

reporting the $8,320 on her Schedule E, she merely made a "paper

transfer" of the $8,320 from her Schedule C-1 to her Schedule E.

It was not merely a paper transfer.      We agree with respondent

that this was done to avoid the payment of self-employment tax.

However, petitioner further argues that by disallowing the $8,320

rent deduction on her Schedule C-1, and then attributing $8,320

from Schedule E to Schedule C-1 income, respondent has double-

counted the $8,320.   We find it significant that the amounts of

$6,720 and $1,600 included in income on petitioner's Schedule E

correspond to the amounts of $6,720 and $1,600 petitioner

deducted on her Schedule C-1.   We do not believe that petitioner

failed to report $8,320 of income.      Rather, we believe that

petitioner tried to "transfer" $8,320 to her false Schedule E and
                               - 7 -


to hide this by specious deductions on her Schedule C-1.    On this

record, we are satisfied that petitioner reported all of her

income, subject to correction for the $258 mistake in her favor.

Accordingly, we sustain petitioner on this issue.

     Petitioner's self-employment tax was increased by

respondent.   A taxpayer is liable for self-employment tax on net

earnings pursuant to section 1401.     Net earnings are defined as

"the gross income derived by an individual from any trade or

business carried on by such individual," less the allowable

deductions pertaining to such trade or business.    Sec. 1402(a).

It is not disputed that petitioner is self-employed in both her

businesses.   Accordingly, petitioner is liable for self-

employment taxes to the extent that petitioner has net earnings

under our findings.   The deduction of one-half of the self-

employment tax will be a computational adjustment.    Sec. 164(f).

     The parties stipulated that the gross receipts in the Union

Bank account were $29,056, which was $258 less than the gross

receipts of $29,314 reported on the Schedule C-1.    We conclude

that the gross receipts for the Schedule C-1 business were

$29,056.   When we deduct the expenses stipulated as substantiated

by petitioner of $6,274, petitioner had net profit of $22,782 for

her Schedule C-1 paralegal business.    This is in sharp contrast

to the net profit of $12,201 petitioner reported on the original

Schedule C-1.
                                - 8 -


     The gross receipts for the Schedule C-2 business were

$3,692.    When we deduct the expenses stipulated as substantiated

by petitioner of $7,859, petitioner had a net loss of $4,167 for

her Schedule C-2 paralegal business.    This again is in sharp

contrast to the $11,572 loss petitioner reported on the original

Schedule C-2.

     Petitioner made no argument with respect to the denial of

the $96 child care credit and we deem this issue conceded.

     Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a) for 1991.    Section

6662(a) and (b)(1) imposes a penalty on any portion of an

underpayment that is attributable to negligence or disregard of

rules or regulations.   The term "negligence" includes any failure

to make a reasonable attempt to comply with the statute, and the

term "disregard" includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   The penalty does not apply to any

portion of an underpayment for which there was reasonable cause

and with respect to which the taxpayer acted in good faith.      Sec.

6664(c).   Respondent's determinations are presumed correct, and

petitioner bears the burden to prove she is not liable for the

accuracy-related penalty under section 6662(a).    Rule 142(a);

Neely v. Commissioner, 85 T.C. 934, 947 (1985); Bixby v.

Commissioner, 58 T.C. 757, 791-792 (1972).
                                - 9 -


     Petitioner conceded that she took deductions on both the

Schedule C-1 and the Schedule E which were false.         She had no

right to claim these deductions.    She was unable to substantiate

many of the deductions she claimed on both the Schedule C-1 and

the Schedule C-2.    In fact, she only fully substantiated two

items originally deducted on the two Schedules C.         Petitioner

filed a false Schedule E that benefited her through the avoidance

of self-employment tax.

     Under the foregoing circumstances, we can only conclude that

she was negligent.    We find that petitioner is liable for the

accuracy-related penalty.

     To reflect the various adjustments,

                                             Decision will be entered

                                        under Rule 155.
