                          T.C. Summary Opinion 2012-19


                         UNITED STATES TAX COURT



             CARL A. OSER AND DORIS J. OSER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10680-10S.                          Filed March 1, 2012.



      Carl A. Oser and Doris J. Oser, pro sese.

      Christopher A. Fisher, for respondent.



                              SUMMARY OPINION


      DEAN, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was filed.
                                         -2-

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.

Unless otherwise indicated, subsequent 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.

      Respondent issued a notice of deficiency to petitioners in which he

determined deficiencies of $34,572 and $27,038 for 2006 and 2007, respectively.

After concessions,1 the issues for decision are whether petitioners are entitled to

deduct: (1) business expenses reported on Schedules C, Profit or Loss From

Business; and (2) certain expenses reported on Schedules E, Supplemental Income

and Loss.2

                                     Background

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

facts as supplemented and the attached exhibits are incorporated herein by

reference. Petitioners resided in Ohio when they filed their petition.


      1
       Petitioners concede that $40,000 of the $70,068 reported as rents received
on Schedule E should properly be reported as gross receipts from D. Palmer
Properties, L.L.C., on Schedule C.
      2
       Other adjustments made in the notice of deficiency are computational and
will not be discussed.
                                             -3-

      Carl A. Oser (petitioner)3 has been in the real estate business for more than

60 years. At the time of trial, he was a licensed real estate broker and agent in

Ohio. Petitioner, however, has not sold any property as a real estate broker or agent

in the past 15 years.

      Petitioners and their family owned more than 50 properties in the Massillon,

Ohio, area. These properties were a combination of petitioners’ personal residence,

rental properties, and properties held for investment.

      On August 17, 2006, petitioners transferred ownership of 10 parcels of

property to their grandson, Andrew Oser. No gift tax returns were filed for the

transfers, and the transfers were not reported as taxable transfers for 2006.

      In 2006 petitioner owned a 40% interest in D. Palmer Properties, L.L.C. (D.

Palmer).4 D. Palmer was operated out of petitioners’ home and managed a shopping

center in 2006. Petitioner provided management services and “hands-on work” to

D. Palmer in 2006.

      Petitioners filed a Schedule C and a Schedule E with their 2006 joint Federal

income tax return. They listed “Real Estate Sales & Commissions” as petitioner’s




      3
          Petitioner wife did not appear at trial.
      4
          Dillion Palmer is one of petitioners’ grandsons.
                                          -4-

principal business on Schedule C. Petitioners reported no income and claimed

deductions for the following expenses:

                        Expense                 Amount

                      Car and truck             $3,740
                      Insurance                  2,825
                      Office                     2,709
                      Utilities1                 2,403
                      Other2                     2,815
      1“
           Telephone and Fax” is handwritten next to the heading.
      2
          “Dues & Pub.” is handwritten next to the heading.

      Petitioners claimed deductions on Schedule E for their rental property

expenses as if almost all of the expenses related to one property. They claimed a

deduction for rental expenses of $118,049 for 2006.5 No rental property addresses

were listed on the Schedule E.

      Petitioners also filed a Schedule C and a Schedule E with their 2007 joint

Federal income tax return. They listed “Real Estate Sales” as petitioner’s principal

business on the Schedule C. Petitioners reported no income and claimed deductions

for the following expenses:




      5
     Petitioners filed an amended return to correct the depreciation schedule for a
lawnmower and to add a pickup truck to the list of depreciable property.
                                              -5-

                                Expense             Amount

                              Car and truck         $4,593
                              Office                 3,115
                              Utilities1             1,663
                              Other2                 4,297

        1
            “Telephone & Fax” is handwritten next to the heading.
        2
            “Dues & Publication” is handwritten next to the heading.

        Petitioners again claimed deductions on Schedule E for their rental property

expenses as if almost all of the expenses related to one property. They claimed a

deduction for rental expenses of $141,391 for 2007. No rental property addresses

were listed.

        The expenses reported on the Schedules C were not in connection with or in

support of petitioners’ rental properties or properties held out for rent in 2006 or

2007.

        Respondent issued petitioners a notice of deficiency for 2006 and 2007. He

disallowed all of their Schedule C expense deductions for 2006 and 2007.

Respondent allowed petitioners Schedule E expense deductions of $24,811 and

$29,898 for 2006 and 2007, respectively.6


        6
        Petitioners’ 2006 Schedule E expenses are listed as $116,363 as per the
return in the notice of deficiency. Petitioners claimed a deduction for rental
expenses of $118,049 for 2006. There is no explanation in the record for the
                                                                         (continued...)
                                          -6-

                                      Discussion

      Generally, the Commissioner’s determinations are presumed correct, and the

taxpayer bears the burden of proving that those determinations are erroneous. Rule

142(a); see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933). In some cases the burden of proof with

respect to relevant factual issues may shift to the Commissioner under section

7491(a). Petitioners did not argue or present evidence that they satisfied the

requirements of section 7491(a). Therefore, petitioners bear the burden of proof

with respect to the issues in the notice of deficiency.

      Deductions and credits are a matter of legislative grace, and the taxpayer

bears the burden of proving that he or she is entitled to any deduction or credit

claimed. Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Additionally, a taxpayer must

substantiate all expenses. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89

(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976).



      6
        (...continued)
discrepancy. Petitioners’ 2007 Schedule E expenses are listed as $141,165 as per
the return in the notice of deficiency. Petitioners claimed a deduction for rental
expenses of $141,391 for 2007. The difference is $226 of depreciation expense
reported for property “B” on Schedule E.
                                         -7-

Petitioners’ Schedule C Expenses

      Section 162 generally allows a deduction for ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade or business.

      As a general rule, if the trial record provides sufficient evidence that the

taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately

substantiate the precise amount of the deduction to which he or she is otherwise

entitled, the Court may estimate the amount of the deductible expense and allow the

deduction to that extent, bearing heavily against the taxpayer whose inexactitude in

substantiating the amount of the expense is of his or her own making. Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930). In order for the Court to estimate the

amount of an expense, the Court must have some basis upon which an estimate may

be made. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without such a

basis, any allowance would amount to unguided largesse. Williams v. United

States, 245 F.2d 559, 560-561 (5th Cir. 1957). Certain business expenses,

however, are subject to more stringent substantiation requirements and no

estimation may be made. See sec. 274(d).

      Petitioner testified that the expenses reported on the Schedules C related to

the work he did for D. Palmer and to other properties. He also testified that he did
                                         -8-

not keep records for individual properties or details such as where exactly one of his

trucks delivered or picked up materials. He could not delineate what percentage of

the expenses was related to the work he did for D. Palmer. Petitioners provided no

documentary evidence of the expenses they reported on the Schedules C.

Petitioners have failed to substantiate any of the deducted Schedule C expenses and

have not provided a basis upon which the Court could estimate those expenses that

may be estimated. See Cohan v. Commissioner, 39 F.2d 540; Vanicek v.

Commissioner, 85 T.C. at 742-743. Therefore, respondent’s determination to

disallow all of petitioners’ Schedule C expenses for 2006 and 2007 is sustained.7

Petitioners’ Schedule E Expenses

      Section 212 allows for the deduction of all ordinary and necessary expenses

paid or incurred during the taxable year for the management, conservation, or

maintenance of property held for the production of income. Petitioners deducted

$118,049 and $141,391 of expenses on their Schedules E for 2006 and 2007,




      7
       In the notice respondent stated that the reason for disallowing the Schedule
C expenses was that investment costs must be capitalized. At trial respondent
asserted that the expenses might be allowable as expenses for the production of
income under sec. 212 on Schedule A, Itemized Deductions. Even if the expenses
were allowable on Schedule A, petitioners failed to substantiate them.
                                         -9-

respectively. Respondent allowed $24,811 and $29,898 of the deducted expenses

for 2006 and 2007, respectively.

      At trial Revenue Agent Nadine Christie testified for respondent. Respondent

introduced into evidence several spreadsheets RA Christie compiled from public

records and the information petitioner presented during the audit. Petitioner gave

RA Christie a stack of receipts for expenses at the audit. She asked him to separate

the expenses by property. Petitioner responded that he did not keep records that

way and that the task was impossible.

      RA Christie determined that petitioners and their family owned 57 parcels of

property. Seven of the parcels were removed from the total--four parcels that made

up petitioners’ personal residence and three parcels that were sold in 2005. During

the audit it became clear to RA Christie that petitioners claimed deductions for

expenses related to properties that they had transferred or sold to family members.

She determined that 7 of the 50 properties were actually rental properties or

properties held out for rent that petitioners owned. RA Christie then used that ratio,

7/50, to determine the rental expenses to which petitioners were entitled.8


      8
       At trial RA Christie testified that there might be a mistake in her calculations
and that the ratio should be 8/50 because one of the rental properties is made up of
                                                                          (continued...)
                                        - 10 -

      Petitioners’ arguments to rebut RA Christie’s evidence are that they paid the

expenses for all of the properties, that the number of properties they and their family

owned was inflated, that respondent made up the amounts of expenses to which they

were entitled, and that none of their receipts were accepted during the audit.

      Petitioners are not allowed deductions for expenses that relate to properties

they, personally, did not hold for the production of income. See sec. 212(2).

Therefore, petitioners are not allowed deductions for expenses related to properties

they transferred or sold to family members.

      Petitioners provided no evidence to buttress their arguments that respondent

incorrectly calculated the number of their properties or that respondent rejected all

of their receipts. In fact the record supports the opposite. Respondent allowed

cleaning and maintenance, mortgage interest, repairs, and dumpster expenses on the

basis of the 7/50 allocation of receipts or bills for those expenses. Respondent did

not allow petitioners deductions for the receipts they could not associate with a

specific property. Although petitioner testified that he provided RA Christie with




      8
       (...continued)
two parcels. Respondent conceded that 8/50 was the proper ratio. The ratio 8/50
should be used for the parties’ Rule 155 computations.
                                          - 11 -

receipts at the audit that were not accepted, he provided none of those receipts at

trial.

         The Court finds RA Christie’s testimony credible and finds her approach used

to determine the expenses to which petitioners are entitled reasonable.

         Petitioners have failed to prove that they are entitled to more Schedule E

expenses than respondent’s determinations allowed. Thus, respondent’s

determinations are sustained.

         We have considered all of petitioners’ arguments, and, to the extent not

addressed herein, we conclude that they are moot, irrelevant, or without merit.

         To reflect the foregoing,


                                                            Decision will be entered

                                                     under Rule 155.
