                  T.C. Summary Opinion 2004-51



                     UNITED STATES TAX COURT



             RICHARD WILLIAM CORDUAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9939-02S.                Filed May 4, 2004.


     Richard William Corduan, pro se.

     Kathleen C. Schlenzig, for respondent.



     DEAN, Special Trial Judge:     This case was heard under the

provisions of section 7463 of the Internal Revenue Code as in

effect at the time the petition was filed.    Unless otherwise

indicated, all other section references are to the Internal

Revenue Code in effect for the year at issue.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined a deficiency in petitioner's Federal

income tax of $5,592 and an accuracy-related penalty under

section 6662(a) of $1,118.40 for 1999.   Petitioner agrees that he

is not entitled to a dependency exemption deduction for his

father.   The issues remaining for decision are whether petitioner

is entitled to:   (a) A dependency exemption deduction for his

mother; (b) head of household filing status; and (c) business

expense deductions claimed on Schedule C, Profit or Loss From

Business.

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

The stipulation of facts, supplemental stipulation of facts, and

exhibits received in evidence are incorporated herein by

reference.   At the time the petition was filed, petitioner

resided in Trevor, Wisconsin.

                            Background

     On his 1999 Form 1040, U.S. Individual Income Tax Return,

petitioner listed his occupation as "factory worker".   He

reported his filing status as head of household and claimed

dependency exemption deductions for both his father and mother.

He attached to the return a Schedule C in the name of "Daybreak

IV Fishing LLC" for the activity of "Information Service for

Fishing".

     Petitioner's mother and father filed a joint Federal income

tax return for 1999.   His father received total income for 1999
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of $19,277.    His mother received Social Security payments of at

least $4,342 in 1999.

       On March 14, 1995, the State of Wisconsin filed articles of

organization of a "Limited Liability Company" (LLC), Daybreak IV

Fishing LLC (Daybreak).    The organizers named in the articles are

petitioner and his father, Richard W. Corduan, Sr.

       During 1999, Daybreak maintained a Web address at a cost of

$35.    On January 16, 1999, petitioner wrote a letter to the State

of Wisconsin Department of Industry, Labor, and Human Relations,

UI Division declaring:

       There has been no activity by Daybreak IV Fishing since
       1995 and no employees or payments of wages has been
       made since that time.

            We have been through extreme financial problems
       and any possibility of this venture ever being
       resurrected are minute.

       On January 17, 1999, petitioner wrote to the Department of

Revenue of the State of Wisconsin, stating:    "There has been no

activity by Daybreak IV Fishing since 1995".    He further

represented in the letter that the business "has been nonexistent

since 1995".    The parties agree that Daybreak has never filed a

"Federal income tax return".

       Petitioner reported his Daybreak activity on Schedule C as

producing gross receipts of zero, $5,037.70 in labor costs, car

and truck expenses of $2,079.89, legal and professional service

expenses of $13,580.37, rent or lease expenses for vehicles or
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equipment of $2,148.69, and unnamed other expenses of $6,241.45,

resulting in a net loss of $29,988.10.1

                            Discussion

     Because petitioner failed to meet the requirements of

section 7491(a), the burden of proof with respect to factual

issues relevant to the deficiency does not shift to respondent.

As to the accuracy-related penalty, respondent has the burden of

production; the burden of persuasion remains with petitioner.

See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001).

Dependency Exemption and Head of Household Filing Status

     A dependency exemption deduction is allowed under section

151(a) for a parent of a taxpayer only if, among other

requirements, the taxpayer provides over half of the parent's

support for the year.   See secs. 151(c) and 152(a)(4).    A

taxpayer is considered a head of household with respect to a

parent only if, among other requirements, the taxpayer maintains

a household which constitutes the principal place of abode of

that parent, and the taxpayer is entitled to a dependency

exemption deduction for the parent for that taxable year.      See

sec. 2(b)(1)(B).   Although the taxpayer is not required to reside

with his parents for purposes of section 2(b), he must maintain

the household, which means that he must pay more than one-half


     1
      The actual sum of the claimed items is $29,088.10.
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the cost of maintaining the household for the taxable year.    See

sec. 2(b)(1); sec. 1.2-2(c), Income Tax Regs.

     Nothing in the record shows or even estimates an amount

which petitioner provided for his mother's support or to maintain

the home.   The Court finds that petitioner did not provide over

half his mother's support for 1999.     Therefore, because

petitioner may not claim a dependency exemption deduction for

either of his parents, petitioner is not entitled to head of

household filing status.   The Court upholds respondent's

determinations with respect to both dependency exemption

deductions and filing status.

Schedule C Deductions

     A taxpayer generally must keep records sufficient to

establish the amounts of the items reported on his Federal income

tax return.   See sec. 6001; sec. 1.6001-1(a), (e), Income Tax

Regs.   However, in the event that a taxpayer establishes that a

deductible expense has been paid but is unable to substantiate

the precise amount, the Court generally may estimate the amount

of the deductible expense, bearing heavily against the taxpayer

whose inexactitude in substantiating the amount of the expense is

of his own making.    See Cohan v. Commissioner, 39 F.2d 540, 543-

544 (2d Cir. 1930).   The Court cannot estimate a deductible

expense, however, unless the taxpayer presents evidence
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sufficient to provide some basis upon which an estimate may be

made.   See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

     Section 274(d) imposes stricter requirements and supersedes

the Cohan doctrine.   See Sanford v. Commissioner, 50 T.C. 823,

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

Section 274(d) provides that, unless the taxpayer complies with

certain strict substantiation rules, no deduction is allowable:

(1) For traveling expenses, (2) for entertainment expenses, (3)

for expenses for gifts, or (4) with respect to listed property,

see sec. 280F(d)(4), including passenger automobiles, computers

and peripheral equipment, and cellular phones.   To meet the

strict substantiation requirements, the taxpayer must

substantiate the amount, time, place, and business purpose of the

expenses.   See sec. 274(d); sec. 1.274-5T, Temporary Income Tax

Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).

     An LLC with more than one member is treated as a partnership

for Federal income tax purposes unless the LLC elects otherwise.

See sec. 301.7701-3(b)(1)(i), Proced. & Admin. Regs.    The parties

stipulated that Daybreak never filed any "Federal income tax

returns".   From this stipulation the Court assumes that Daybreak

filed neither Forms 1065, U.S. Return of Partnership Income, nor

Form 8832, Entity Classification Election.    Petitioner merely

filed a Schedule C and claimed a net loss from the activity of

the LLC as though it were a proprietorship.   Petitioner, however,
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aside from a few summary schedules, presented no evidence to

support the claimed loss or the underlying expenses listed on the

Schedule C.

     Furthermore, early in 1999 petitioner admitted to two

agencies of the Wisconsin State government that Daybreak had not

engaged in any business activity since 1995 and was

"nonexistent".   Petitioner has not explained how Daybreak could

incur trade or business expenses in 1999 if it was not engaged in

a trade or business and was nonexistent.    The Court therefore

upholds respondent's disallowance.

Accuracy-Related Penalty

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of several factors,

including negligence or disregard of rules or regulations and a

substantial understatement of income tax.    See sec. 6662(b)(1)

and (2).

     "Negligence" includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, including any failure to keep adequate books and records or

to substantiate items properly.   A "substantial understatement"

includes an underpayment of tax of $5,000 or more.    See sec.

6662(c) and (d); secs. 1.6662-3(b)(1) and 1.6662-4(b), Income Tax

Regs.
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     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer's

position and that the taxpayer acted in good faith with respect

to that portion.   The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances.   See sec. 1.6664-4(b)(1), Income Tax Regs.   The

most important factor is the extent of the taxpayer's effort to

assess his proper tax liability for the year.    See id.

Petitioner failed to keep adequate books and records reflecting

expenses of his Daybreak activity and to properly substantiate

other items reported on his return.    See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.   There is an understatement of

tax greater than $5,000.   The Court concludes that respondent has

produced sufficient evidence to show that the section 6662

accuracy-related penalty is appropriate.    Nothing in the record

indicates petitioner acted with reasonable cause and in good

faith.   The Court holds that the record supports respondent's

determination that petitioner is liable for the accuracy-related

penalty.
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    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,

                                        Decision will be entered

                                for respondent.
