                        T.C. Memo. 2005-267



                      UNITED STATES TAX COURT



          A. WAYNE AND LINDA D. DOUDNEY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 3548-04, 3549-04.     Filed November 17, 2005.


     A. Wayne Doudney and Linda D. Doudney, pro sese.

     Ronald S. Chun, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   By separate notices of deficiency,

respondent determined the following income tax deficiencies and

additions to tax with respect to petitioners’ Federal income

taxes:1

     1
      All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
                                                   (continued...)
                               - 2 -

                                             Addition to tax
         Year         Deficiency             sec. 6651(a)(1)
         1999          $23,553                  $1,040.75
         2000           32,153                   6,190.00

Petitioners filed a separate petition for each year contesting

respondent’s determinations.   Because these cases present common

issues of fact and law, they were consolidated for trial,

briefing, and opinion pursuant to Rule 141(a).

     After concessions,2 the issues for decision are:

     (1) Whether petitioners properly deducted capital losses on

Schedule D, Capital Gains and Losses, for 1999;

     (2) whether respondent properly determined that petitioners

had unreported capital gain income for 1999;

     (3) whether petitioners properly deducted various expenses

on Schedule C, Profit or Loss From Business, for 1999 and 2000;

     (4) whether petitioners properly deducted expenses on

Schedule F, Profit or Loss From Farming, for 1999 and 2000;

     (5) whether petitioners properly deducted real estate taxes,

charitable contributions, and unreimbursed business expenses on

Schedule A, Itemized Deductions, for 1999;



     1
      (...continued)
are to the Tax Court Rules of Practice and Procedure.
     2
      In the notice of deficiency for 2000, respondent included
$640 of unreported capital gain income in petitioners’ tax
determination. At trial, petitioner A. Wayne Doudney conceded
that this was taxable income to him and his wife.
                               - 3 -

     (6) whether petitioners properly deducted charitable

contributions and State and local taxes on Schedule A for 2000;

     (7) whether petitioners properly claimed a dependency

exemption for a child for 2000; and

     (8) whether petitioners are liable for additions to tax

under section 6651(a) for 1999 and 2000.3

                            Background

     Petitioners were married during 1999 and 2000.   Petitioners

resided in Detroit, Texas, when their petitions in these cases

were filed.   Unless otherwise indicated, petitioner refers to A.

Wayne Doudney.4

     On July 27, 2002, petitioners mailed Forms 1040X, Amended

U.S. Individual Income Tax Returns, for 1999 and 2000 to

respondent, who received them on July 29, 2002.5   After

petitioners mailed the amended returns, respondent requested



     3
      Respondent also determined self-employment adjustments of
$306 and $4,137 for 1999 and 2000, respectively. The adjustments
are computational and turn on our resolution of the issue of
deductibility of the Schedules C, Profit or Loss From Business,
and F, Profit or Loss From Farming, expenses. Petitioners did
not separately challenge the adjustments, and we do not further
discuss them.
     4
      Mr. Doudney attended the trial alone, but he stated on the
record that Mrs. Doudney authorized him to speak on her behalf
during the trial in these cases.
     5
      There is no evidence in the record to show whether
petitioners filed original Forms 1040, U.S. Individual Income Tax
Returns, for the years in issue and, if so, when.
                              - 4 -

documentation regarding the dependency exemption for a child and

for the following items:

              Description of item           1999       2000
         Short-term capital loss          ($1,889)      -0-
         Long-term capital loss              (531)      -0-
         Schedule C expenses               42,655    $42,567
         Schedule F expenses               15,171     15,988
         Real estate taxes                  8,445       -0-
         State/local income taxes            -0-       3,922
         Charitable contributions          22,636     23,127
         Unreimbursed business expenses     8,532       -0-
         Rate reduction credit               -0-         300

On a date that does not appear in the record, petitioners sent

respondent documentation substantiating certain of the items.

Respondent allowed the losses and Schedule A deductions that

petitioners substantiated.6

     On January 21, 2004, respondent issued separate notices of

deficiency for 1999 and 2000 that disallowed petitioners’

remaining capital losses, increased petitioners’ capital gains,

disallowed the remaining disputed expenses from Schedules A, C,

and F for lack of substantiation, and imposed additions to tax

for failing to file timely returns.   On February 27, 2004,

petitioners filed timely petitions contesting respondent’s

determinations.

     6
      For 1999, respondent allowed real estate taxes of $7,140
and cash contributions of $15,375. In 2000, respondent allowed a
deduction for State and local income taxes of $2,603 and the
standard deduction of $7,350. For 1999, respondent also allowed
a short-term capital loss of $469.46. However, respondent also
determined an unreported long-term capital gain in 1999 of
$9,882.80. The long-term capital gain is still in dispute.
                               - 5 -

     On December 9, 2004, respondent scheduled a Branerton

conference with petitioner regarding respondent’s adjustments to

petitioners’ 1999 and 2000 amended returns.   See Branerton Corp.

v. Commissioner, 61 T.C. 691 (1974).   Petitioner was unable to

attend the meeting, but his attorney-in-fact, Mr. Mattatall,

attended in his place.7   At the meeting, Mr. Mattatall produced

four “Affidavits of Fact” that summarily declared, among other

things, that all of the claimed losses, deductions, and

     7
      At the time of this trial, Mr. Mattatall had been enjoined
by the United States from directly or indirectly “acting as a
return preparer or assisting in or directing the preparation of
federal tax returns for any person or entity other than himself,
or further appearing as a representative on behalf of any person
or organization whose tax liabilities [are] under examination by
the IRS.” United States v. Mattatall, No. CV 03-07016 DDP
(PJWx), at 6 (C.D. Cal., Aug. 17, 2004) (order granting
plaintiff’s motion for contempt and second amended injunction of
which we take judicial notice pursuant to Fed. R. Evid. 201). In
a footnote to the order, the U.S. District Court for the Central
District of California provided the following pertinent
explanation:

     In support of its position, the Government attaches the
     transcript of an interview between the IRS and a
     taxpayer who brought Mattatall along as his return
     preparer and representative. At the interview,
     [Mattatall] insisted that the taxpayer could choose to
     submit an affidavit that his tax return was correct,
     and that regardless of the IRS’s request for documents
     or other information, the affidavit is all that the
     taxpayer need provide. The Government argues that
     Mattatall’s position is frivolous, and the Court
     agrees. Section 7602 of the Internal Revenue Code
     authorizes the IRS to examine “any books, papers,
     records, or other data” which “may be relevant” to an
     inquiry into “the correctness of any [tax] return.” 26
     U.S.C. §7602(a)(1). [Mattatall’s] assertion that an
     affidavit is sufficient is unfounded.
                                - 6 -

exemptions were correct as reported.8     Mr. Mattatall did not

offer any other documentation to respondent.

     On January 31, 2005, the trial in petitioners’ case was

held.    During the trial, petitioner introduced into evidence only

the four affidavits previously produced by Mr. Mattatall to

substantiate the disallowed losses, deductions, and exemption.

Although petitioner testified that he had records to support the

claimed deductions and losses, he did not provide the records to

respondent before trial as required by the Court’s Standing

Pretrial Order, nor did petitioner offer them into evidence at

trial.

     Petitioners contend that they have been denied due process

because they were deprived of the opportunity to substantiate the

amounts reported on their returns during the December 9, 2004,

meeting.

                             Discussion

Burden of Proof Generally

     Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.    Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      However, the burden of

proof may shift to the Commissioner under section 7491(a) if the

     8
        Mr. Doudney made two affidavits, one for 1999 and one for
2000.    Mrs. Doudney also made one affidavit for 1999 and one for
2000.
                                - 7 -

taxpayer has produced credible evidence relating to the tax

liability at issue and has met his substantiation requirements,

maintained required records, and cooperated with the Secretary’s

reasonable requests for documents, witnesses, and meetings.

     Petitioners have produced no credible evidence supporting

their disputed capital transactions or their disallowed

deductions and exemption.   Petitioners produced only summary

“Affidavits of Fact” that declared the accuracy of each line of

petitioners’ amended returns.   Petitioners made no effort to

provide respondent with any receipts, canceled checks, copies of

invoices, or other records to substantiate the items claimed on

their amended returns that respondent disallowed.   Because

petitioners failed both to cooperate with respondent and to

substantiate their losses and deductions, we conclude that

petitioners did not satisfy the requirements of section 7491(a)

and that the burden of proof remains with petitioners on all

issues.

Capital Transactions

     Section 1001(c) requires all gains or losses on the sale of

capital assets to be reported on the taxpayer’s return, unless a

separate Code section provides otherwise.    Although petitioners

provided some documentation during the examination to

substantiate a small capital loss for 1999, petitioners did not

substantiate the remaining losses claimed.   At trial, petitioners
                                   - 8 -

did not produce any credible evidence to substantiate the claimed

losses or to contest respondent’s determination that petitioners

had long-term capital gain income for 1999.9      Instead,

petitioners relied solely on the four summary affidavits

submitted to respondent during the examination of their 1999 and

2000 amended returns.

        Because petitioners have failed to prove that respondent’s

determinations disallowing petitioners’ capital losses and

adjusting petitioners’ capital gain income are in error, we

sustain respondent’s determination recalculating petitioners’

capital gain income for 1999 and respondent’s determination

disallowing the balance of petitioners’ 1999 capital losses.

Substantiation of Deductions

       Petitioners deducted business expenses on Schedules C and F

and claimed itemized deductions on Schedule A for 1999 and 2000.

The pertinent Code sections authorizing such deductions are

sections 162(a), 164, and 170.

       Under section 162(a), a taxpayer may deduct ordinary and

necessary business expenses incurred or paid during the taxable

year.       An ordinary expense is one that is common and acceptable

in the particular business.       Welch v. Helvering, 290 U.S. at 113-

114.       A necessary expense is an expense that is appropriate and

       9
      Respondent’s capital gain adjustment for 1999 resulted from
respondent’s disallowing the basis claimed by petitioners in
connection with reported sales of some stock.
                               - 9 -

helpful in carrying on a trade or business.   Heineman v.

Commissioner, 82 T.C. 538, 543 (1984).

     Under section 164, a taxpayer may deduct State and local

real property and income taxes paid or accrued during the taxable

year.   A real property tax is one that is imposed upon real

property to benefit the general public welfare.   Sec. 1.164-3(b),

Income Tax Regs.   A State or local tax is one that is imposed by

a State, by a possession of the United States, by a political

subdivision of either, or by the District of Columbia.      Sec.

1.164-3(a), Income Tax Regs.

     Section 170 allows a deduction for charitable contributions

made to qualifying organizations.   A taxpayer claiming a

charitable deduction of money must maintain a copy of the

donation check, a receipt of the donation by the donee

organization, or some other reliable written evidence of

donation.   Sec. 1.170A-13(a)(1), Income Tax Regs.   Contributions

of property require, at a minimum, a receipt by the donee

including the name of the donee, the date and location of the

donation, and a reasonable description of the property donated.

Sec. 1.170A-13(b).   Where it is unrealistic to obtain a receipt,

the taxpayer must maintain reliable written records of his

contributions.   See id.

     All deductions, however, are a matter of legislative grace,

and the taxpayer must clearly demonstrate entitlement to the
                                - 10 -

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

84 (1992).   A taxpayer must keep records adequate to allow the

Commissioner to establish the amount of his deductions.        See sec.

6001; sec. 1.6001-1(a), Income Tax Regs.      A taxpayer must also

produce those records upon request for inspection by authorized

internal revenue officers or employees.      Sec. 7602(a); sec.

1.6001-1(e), Income Tax Regs.    We are not required to accept an

interested party’s self-serving testimony that is uncorroborated

by persuasive evidence.    See Tokarski v. Commissioner, 87 T.C.

74, 77 (1986).

     Petitioners’ position throughout this case has been that

they have adequately substantiated their Schedules A, C, and F

expenses because they stated under oath that the expenses were

correct.   That position is wrong, and we reject it.      Petitioners

had an obligation to substantiate their deductions in the manner

required by the Code.    Sec. 6001; sec. 1.6001-1(e), Income Tax

Regs.   Petitioners also had an obligation to produce the required

records upon request by respondent.      Sec. 7602(a).   The

affidavits were not sufficient to satisfy petitioners’

affirmative obligation under sections 6001 and 7602 to keep

records substantiating their deductions and to produce those

records to respondent upon request.      See, e.g., Kolbeck v.

Commissioner, T.C. Memo. 2005-253.
                                - 11 -

     Because we do not disturb respondent’s determination when

the only evidence offered to refute it consists of petitioner’s

self-serving testimony and affidavits that the expenses claimed

are correct and accurate, we sustain respondent’s determination

disallowing petitioners’ claimed Schedules A, C, and F expenses

for 1999 and 2000.     Geiger v. Commissioner, T.C. Memo. 1969-159

(citing Halle v. Commissioner, 7 T.C. 245, 247 (1946), affd. 175

F.2d 500 (2d Cir. 1949)), affd. 440 F.2d 688 (9th Cir. 1971).

Dependency Exemption

     Section 151(a) and (c)(1) allows a taxpayer to claim a

personal exemption for each dependent.     In order to be entitled

to the deduction, the taxpayer must show that the person for whom

a dependency exemption is claimed meets the statutory definition

of “dependent”.   See sec. 152(a)(1).    Although petitioners

claimed that they were entitled to a dependency deduction for a

child on their 2000 amended return, petitioners did not introduce

any credible evidence to establish that the child satisfied the

definition of dependent under section 152.     Consequently, we

sustain respondent’s determination disallowing the dependency

exemption petitioners claimed for a child for 2000.

Section 6651(a) Addition to Tax

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

file a return in the amount of 5 percent of the tax liability

required to be shown on the return for each month during which
                               - 12 -

such failure continues, but not exceeding 25 percent in the

aggregate, unless it is shown that such failure is due to

reasonable cause and not due to willful neglect.    See sec.

6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985);

United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994);

Harris v. Commissioner, T.C. Memo. 1998-332.

     Section 7491(c) imposes the burden of production with

respect to additions to tax on the Commissioner.    Once the

Commissioner produces evidence that it is appropriate to impose

on a taxpayer the additions to tax, the taxpayer must then prove

that he is not liable for them.     Higbee v. Commissioner, 116 T.C.

438, 447 (2001).

     In this case, respondent did not satisfy his burden of

production under section 7491(c).    The extremely sparse record in

this case includes no evidence whether original returns were

filed and, if so, when.10   The only returns in the record are

petitioners’ amended returns for 1999 and 2000.    The only filing

date in the record is the filing date for the amended returns.

Because respondent has failed to produce any evidence that

petitioners failed to file timely original returns for 1999 and

     10
      In his pretrial memorandum, respondent represented that
“Respondent’s agent filed substitute filed returns (SFR’s) for
taxable years 1999 and 2000.” However, statements in pretrial
memoranda are not evidence. Respondent did not introduce Forms
4340, Certificates of Assessments, Payments, and Other Specified
Matters, or any other evidence from which we could determine that
petitioners failed to file timely returns for 1999 and 2000.
                               - 13 -

2000, we do not sustain respondent’s determination that

petitioners are liable for the section 6651(a)(1) addition to tax

for 1999 and 2000.

Due Process

       Petitioners’ principal argument in this case is that they

were denied due process during the December 9, 2004, meeting with

respondent.    Although petitioners’ argument is not entirely

clear, we understand the argument to be that petitioners were

entitled to document their return positions by affidavits and

that respondent denied them due process by refusing to accept the

affidavits.

       Due process requires that an “adequate opportunity * * *

[be] afforded for a later judicial determination of the legal

rights” of the taxpayer.    Phillips v. Commissioner, 283 U.S. 589,

595 (1931).    An adequate opportunity requires that the taxpayer

be heard “‘at a meaningful time and in a meaningful manner.’”

Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (quoting Armstrong

v. Manzo, 380 U.S. 545, 552 (1965)); see also Harper v.

Commissioner, 99 T.C. 533, 542 (1992) (Petitioner not denied due

process where he was “afforded ample opportunity to be heard and

explain”).    Petitioner’s right to a trial in this Court satisfies

that requirement.    See Catania v. Commissioner, T.C. Memo. 1986-

437.
                              - 14 -

     Petitioners have not been denied their due process rights.

They had several opportunities to verify the amounts reported on

their returns both before and during this litigation.

Petitioners did not produce records substantiating their disputed

return positions during the examination of their amended returns,

nor did they produce any at the December 9, 2004, meeting or for

trial.   Petitioners adamantly insisted that the affidavits were

sufficient to satisfy their obligations to maintain records and

produce them to respondent upon request.    Although petitioners’

position was misguided and ill-advised, they had opportunities

during the examination and during trial to be heard at a

meaningful time and in a meaningful manner.    Consequently, we

reject petitioners’ due process argument.

     To reflect the foregoing,

                                           Decisions will be entered

                                    under Rule 155.
