                        T.C. Memo. 2008-254



                      UNITED STATES TAX COURT



   ELOUISE LORRETA AND RAYMOND ALBERT HAWKINS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24567-06.               Filed November 12, 2008.



     Elouise Lorreta Hawkins and Raymond Albert Hawkins, pro

sese.

     Elizabeth Downs, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined deficiencies and

penalties with respect to petitioners’ Federal income taxes as

follows:
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                                         Accuracy-related penalty
     Year           Deficiency                Sec. 6662(a)

     2003            $10,042                     $2,008
     2004              5,907                      1,181

     The issues for decision after concessions are:   (1) Whether

petitioners are entitled to deductions claimed on Schedules C,

Profit or Loss From Business, of $45,666 and $44,458 for 2003 and

2004, respectively; (2) whether petitioners received and did not

report taxable Social Security income of $9,703 for 2003;1 (3)

whether petitioners are subject to self-employment tax of $3,328

and $333 and are entitled to self-employment tax deductions of

$1,664 and $167 for 2003 and 2004, respectively; (4) whether

petitioners overstated their Schedule C income for 2003 and 2004;

(5) whether petitioners are entitled to a theft loss deduction

for 2004; and (6) whether petitioners are liable for a section

6662(a) penalty for 2003 and 2004.2

                        FINDINGS OF FACT

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

The stipulation of facts and the supplemental stipulation of

facts, together with attached exhibits, are incorporated herein



     1
      Respondent concedes petitioners’ taxable Social Security
benefits for 2004 should be decreased by $191, rather than
increased by $6,750.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
                               - 3 -

by this reference.   Petitioners were married during the years at

issue, and when they filed their petition they resided in

Arkansas.

     In 2003 and at least some portion of 2004, Mrs. Hawkins

operated a children’s therapy business.    Mrs. Hawkins called her

business “Duchess Love-N-Hugs/Kids II” on petitioners’ 2003 joint

Form 1040, U.S. Individual Income Tax Return, and “Duchess/Kids

II” on their 2004 return.   Mrs. Hawkins provided the physical

space in which the therapy was conducted and arranged for

transportation of the children to and from therapy.    An

occupational therapist and a speech therapist provided the

therapy because Mrs. Hawkins was not a therapist.    Petitioners

billed and received payment from Medicaid for therapy services

from February through June of 2003 of over $36,000.

     On March 19, 2004, petitioners’ residence was burglarized

and the following items were stolen:    77 brass fixtures, 16

glassware items, 2 lamps, and 2 brass lamps.    A police report

detailing the incident indicates that petitioners estimated that

the total value of the goods stolen was $1,170.

     Petitioners reported gross income on their Schedules C of

$31,000 for 2003 and $6,800 for 2004.    Petitioners failed to

report that they had Social Security Income in 2003.

     On August 24, 2006, respondent sent petitioners a notice of

deficiency denying petitioners’ deductions for Schedule C
                                - 4 -

expenses claimed with respect to Duchess Love-N-Hugs/Kids II and

Duchess/Kids II.    The disallowed Schedule C expenses comprised

the following items:

          Expense                       2003        2004

     Wages                         $24,800         $4,200
     Utilities                       4,369          5,361
     Supplies                          120          5,380
     Rent                            1,800            n/a
     Office expense                  1,550            115
     Legal/professional                853            475
     Employee benefits               2,968            n/a
     Depreciation/sec. 179           2,011           (191)
     Contract labor                  1,859         23,420
     Car and truck                   5,071          3,675
     Advertising                       265            885
     Insurance                         n/a          1,138
       Total                        45,666         44,458

     Petitioners submitted a timely petition, and trial was held

on February 4, 2008.

                               OPINION

I.   Business Expense Deductions

     As a preliminary matter, Rule 34(b)(5) requires that a

taxpayer’s petition contain clear and concise statements of fact

to support the allegations of the Commissioner’s errors.      The

only business expense issue raised in petitioners’ petition deals

with respondent’s disallowance of petitioners’ deduction for

wages.   Accordingly, we deem respondent’s determinations

regarding all other business expenses conceded.    See Rule

34(b)(4); Funk v. Commissioner, 123 T.C. 213 (2004).
                                - 5 -

     Deductions are a matter of legislative grace, and the

taxpayer must prove he or she is entitled to the deductions

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934).    The burden of proof may shift to the

Commissioner under section 7491(a) with respect to a factual

issue relevant to the liability of the taxpayer for tax if the

taxpayer introduces credible evidence regarding the issue and

establishes compliance with the requirements of section

7491(a)(2)(A) and (B) by substantiating items, maintaining

required records, and fully cooperating with the Secretary’s

reasonable requests.    As discussed below, we find that

petitioners have failed to substantiate their claimed expenses

and to maintain adequate records.    The burden of proof,

therefore, does not shift to respondent under section 7491(a).

     Section 162(a) provides that “There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   The regulations specify that ordinary and

necessary business expenses include “the ordinary and necessary

expenditures directly connected with or pertaining to the

taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs.,

such as “a reasonable allowance for salaries or other

compensation for personal services actually rendered”, sec.
                               - 6 -

1.162-7(a), Income Tax Regs.   Taxpayers are required to maintain

records sufficient to establish the amount of allowable

deductions and to enable the Commissioner to determine the

correct tax liability.   Sec. 6001; Shea v. Commissioner, 112 T.C.

183, 186 (1999).

     Petitioners produced no business records or other

documentary evidence to support the deductions respondent

disallowed with respect to their 2003 and 2004 Schedules C.

Petitioners failed to establish that they expended the specific

amounts in issue for the purposes claimed or that the

expenditures were ordinary and necessary to the conduct of Mrs.

Hawkins’ therapy business.

     The only deduction items Mrs. Hawkins addressed in her

testimony at trial were the Schedule C wage deductions.   Mrs.

Hawkins testified that, before June 2003, she received all

payments made by Medicaid for speech and occupational therapy,

but paid 80 percent of the amount received to the speech and

occupational therapist who provided the therapy services to the

clients.   Mrs. Hawkins testified that after June 2003 she

continued to operate the business as before but was compensated

by the therapists at a rate of 20 percent of the amount they

billed Medicaid for their services.    However, petitioners failed

to present evidence, such as bank or business records,

establishing the correct amount of the payments they made to or
                               - 7 -

received from their therapists.   Mrs. Hawkins’ testimony is

insufficient to establish entitlement to wage deductions.

     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 substantiate adequately 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.    Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,

827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).   In these instances, the Court is permitted to

make as close an approximation of the allowable expense as it

can, bearing heavily against the taxpayer whose inexactitude is

of his or her own making.   Cohan v. Commissioner, supra at 544.

However, 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, supra at 742-743.   Without

such a basis, any allowance would amount to unguided largesse.

Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

     While it is reasonable to conclude that petitioners paid the

therapists some portion of their Medicaid receipts before June

2003, the record is devoid of anything that would allow us to
                                - 8 -

approximate this expense.    Mrs. Hawkins’ testimony indicates that

after June 2003 she did not pay wages to the therapists from her

earnings.    Nothing in the record indicates petitioners’

entitlement to any other business expenses, much less the amount

of such expenses.    Consequently, we will not apply the Cohan rule

to estimate the amount of petitioners’ business expenses.

II.   Social Security Income

      Section 86 requires taxpayers to include in gross income up

to 85 percent of any Social Security benefits received.     Reimels

v. Commissioner, 123 T.C. 245, 247-248 (2004), affd. 436 F.3d 344

(2d Cir. 2006).    Respondent determined that petitioners received

Social Security benefits of $11,415 and taxable Social Security

benefits of $9,703 in 2003.    Petitioners did not contest this

determination in their petition or at trial.    Accordingly,

petitioners are deemed to have conceded this issue.    See Rule

34(b)(4); Funk v. Commissioner, supra.

III. Self-Employment Tax

      Respondent determined Mrs. Hawkins’ net profit from the

operation of her therapy business in 2003 and 2004 constituted

self-employment income and was subject to self-employment tax.

Petitioners bear the burden of proving that determination

incorrect.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933); Yip v. Commissioner, T.C. Memo. 2007-139.
                                - 9 -

      Self-employment tax is imposed on the self-employment income

of every individual for old-age, survivors, and disability

insurance, and hospital insurance.      Sec. 1401(a) and (b).   Self-

employment income includes net earnings from self-employment

derived by an individual during a taxable year.      Sec. 1402(b).

The term “net earnings from self-employment” means the gross

income derived by an individual from a trade or business of that

individual, reduced by allowable deductions attributable to that

trade or business.    Sec. 1402(a).

      Petitioners offered no testimony or other evidence on this

issue.   Accordingly, we find that petitioners are subject to

self-employment tax of $3,328 and $333 and are entitled to self-

employment tax deductions of $1,664 and $167 for 2003 and 2004,

respectively.

IV.   Schedule C Income

      Petitioners claim that they overstated their income from the

therapy business.    Petitioners bear the burden of proof on new

issues raised in their petition.      See Rule 142(a).

      Petitioners presented no evidence to support their

allegation that receipts from Mrs. Hawkins’ therapy business were

overstated in either year at issue.      The only documentary

evidence submitted at trial, Mrs. Hawkins’ partial Medicaid

billing record, indicates that she received over $36,000 in 2003.

This is substantially more than the $31,000 petitioners reported
                                - 10 -

on their 2003 return.   Accordingly, we find that petitioners did

not overstate their Schedule C income in either year at issue.

V.   Theft Loss

     Petitioners assert that they operated a resale shop within

their residence which was burglarized in 2004.    As a general

rule, under section 165 a taxpayer may deduct any loss sustained

during a taxable year, including a loss from theft which is not

compensated by insurance or otherwise, if the taxpayer meets the

requirements of section 165 and related regulations.    A theft

loss is treated as sustained when discovered.    Sec. 165(e).    A

loss proven to have been incurred in conduct of a trade or

business is fully deductible, but personal casualty losses are

allowed only to the extent that the amount of loss from each

casualty exceeds $100 and only if the total amount of casualty

losses for the taxable year exceeds 10 percent of the adjusted

gross income of the taxpayer.    Sec. 165(c)(3), (h)(1) and (2)(A).

Petitioners have the burden of proof as to the occurrence of the

loss and its amount.    See Burnet v. Houston, 283 U.S. 223 (1931).

     Petitioners filed no Schedule C reflecting the operation of

a resale shop in 2004, nor did they present business records

pertaining to the operation of a resale shop.    Petitioners also

presented no evidence of the cost or of the fair market value of

the items they claim were stolen.    Petitioners have not met their

burden of proof and are not entitled to a theft loss deduction in
                                - 11 -

2004.     See Fingar v. Commissioner, T.C. Memo. 1997-557, affd.

without published opinion 176 F.3d 493 (11th Cir. 1999); Sobhani

v. Commissioner, T.C. Memo. 1990-150.

VI.     Section 6662 Penalty

        Section 6662(a) and (b)(2) imposes an accuracy-related

penalty upon any underpayment of tax resulting from a substantial

understatement of income tax.     The penalty is equal to 20 percent

of the portion of any underpayment attributable to a substantial

understatement of income tax.     Id.    The term “substantial

understatement” is defined as exceeding the greater of: (1) 10

percent of the tax required to be shown on the return for the

taxable year, or (2) $5,000.     Sec. 6662(d)(1)(A).    Section

6662(a) and (b)(1) also imposes a penalty equal to 20 percent of

the amount of an underpayment attributable to negligence or

disregard of rules or regulations.       Negligence includes any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.       Sec. 6662(c).

        We hold that petitioners are liable for the penalty for

substantial understatement of income tax in 2003 and negligence

in 2004.     Petitioners’ understatement of income tax as reflected

in the notice of deficiency is greater than $5,000 and 10 percent

of the tax required to be shown on the return in each of the

years 2003 and 2004.     Respondent’s concession with respect to the

Social Security income adjustment for 2004 will reduce
                                - 12 -

petitioners’ understatement of income tax for that year to less

than $5,000, thus preventing the understatement for 2004 from

being a “substantial understatement”.      However, petitioners’

failure to produce any business records or other credible

evidence to support their Schedule C expense deductions supports

the imposition of the accuracy-related penalty for negligence for

2004.     Thus, respondent has met his burden of production under

section 7491(c).

     An accuracy-related penalty is not imposed on any portion of

the underpayment as to which the taxpayer acted with

reasonable cause and in good faith.      Sec. 6664(c)(1).   The

taxpayer bears the burden of proof with regard to those issues.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

        Petitioners have failed to show reasonable cause,

substantial authority, or any other basis for reducing the

penalties.     Mrs. Hawkins testified that she was unable to show

documentation supporting her deductions because of the emotional

and physical stress she endured because of the death of her

grandson by homicide in September 2003.      The Court sympathizes

with petitioners for their loss.     Unfortunately, given the dearth

of evidence to substantiate petitioners’ business income,

business expenses, and theft loss, we are unable to mitigate the

penalties.     Accordingly, we find petitioners liable for the

section 6662 penalty for 2003 and 2004 as commensurate with
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respondent’s concessions and our holding.   See Higbee v.

Commissioner, supra at 446.

     In reaching these holdings, the Court has considered all

arguments made and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,

                                        Decision will be entered

                                   for respondent.
