                       T.C. Memo. 2002-20



                     UNITED STATES TAX COURT



SARAH A. BLAND-BARCLAY AND FRANCIS BARCLAY, DECEASED, Petitioners
                                v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1014-00.              Filed January 22, 2002.


     Sarah A. Bland-Barclay, pro se.

     Chang Ted Li, for respondent.


                       MEMORANDUM OPINION

     GOLDBERG, Special Trial Judge:    Respondent determined a

deficiency in petitioners’ Federal income tax for the taxable

year 1996 in the amount of $9,356, and an accuracy-related

penalty in the amount of $1,854.   Unless otherwise indicated,

section references are to the Internal Revenue Code in effect for

the year in issue.
                                 - 2 -

     After a concession by petitioners,1 the remaining issues in

this case are:   (1) Whether wage income received by petitioners

in the amount of $87,118.92 in 1996, except for wages of $432.48

from Defense Finance and Accounting Service, an agency of the

Federal Government, is nontaxable, thereby resulting in an

overpayment of income tax for the taxable year; (2) whether

petitioners are entitled to Schedule A, Itemized Deductions, in

excess of the amounts which respondent allowed; (3) whether

petitioners are entitled to various Schedule C, Profit and Loss

From Business, deductions beyond that which respondent allowed;

and (4) whether petitioners are liable for an accuracy-related

penalty under section 6662(a).

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petition

was filed, Sarah A. Bland-Barclay resided in Baltimore,




1
     Petitioners conceded in the Stipulation of Facts that
petitioner Sarah A. Barclay received a Form W-2, Wage and Tax
Statement for 1996, from Olsten Home Healthcare, Inc. (Olsten),
reporting that she received $1,268.81 of wage income. We note
that in the notice of deficiency respondent determined that
petitioners failed to include wage income of $1,267. The record
does not explain the $1.81 discrepancy between the amount on the
Olsten Form W-2 and the notice of deficiency. We accept
respondent’s assertion that the amount in dispute is $1,267 as
stipulated by petitioners and determined in the notice of
deficiency.
                                 - 3 -

Maryland.2    During the year in issue, Sarah A. Bland-Barclay

(petitioner) and Francis Barclay (Mr. Barclay), were husband and

wife.

     During 1996, Mr. Barclay was a welder for the General Motors

Corp. at its Truck & Bus Group assembly plant in Baltimore.      Also

in 1996, petitioner began a career as a tax preparer at Jackson

Hewitt Tax Service after completing a 6- to 8-week tax training

program.     In further pursuit of her career, petitioner enrolled

in a 2-year associate’s degree program at Essex Community

College, majoring in accounting.    Petitioner has not completed

this program due to, in part, Mr. Barclay’s death in 1998.

Petitioner, in addition to her job as a tax preparer, had other

part-time employment.

     Petitioner and Mr. Barclay timely filed their joint 1996

Federal income tax return electronically, which was prepared by

Barclay’s Tax Service, a business operated by petitioner.    On

June 24, 1998, during their examination of their 1996 income tax

return, they submitted to respondent an amended 1996 Federal

income tax return, Form 1040X, Amended U.S. Individual Tax

Return, which had not been filed.

     On their 1996 income tax return, petitioner and Mr. Barclay

reported $86,282 of wages from the following sources:



2
     Francis Barclay died intestate in December 1998. Petitioner
Sarah A. Bland-Barclay was issued letters of administration by
the Orphans Court of Baltimore City.
                                  - 4 -



Employer                          Employee                 Amount

GM North American Operations      Francis Barclay          $80,595.65
  Truck & Bus Group

VTR Services, Inc.
  T/A Jackson Hewitt Tax Serv.    Sarah A. Bland Barclay    3,639.46

Defense Finance and Accounting    Sarah A. Bland Barclay      432.48
  Service

Manpower International, Inc.      Sarah A. Bland Barclay    1,615.00

 Total                                                     $86,282.59

     Attached to their 1996 income tax return were three Schedule

C forms for three businesses petitioner engaged in, in addition

to her part-time employment.      These businesses were Barclay’s

Consulting Services, Barclay’s Notary Services, and Barclay’s Tax

Services.    All of these businesses were carried on by petitioner

from her residence.      Petitioner reported gross receipts from

Barclay’s Consulting Services of $828 and business expenses of

$8,164, resulting in a net loss of $7,336.           Petitioner reported

$0 gross receipts from Barclay’s Notary Service and business

expenses of $2,721, resulting in a net loss of $2,721.              For

Barclay’s Tax Services, petitioners reported gross receipts of

$7,635 and expenses of $24,568, resulting in a net loss of

$16,933.

     In a notice of deficiency, respondent determined that

petitioner received additional wages of $1,267, which she and Mr.

Barclay failed to report on their return.           Respondent further

determined that they were not entitled to Schedule A itemized
                                        - 5 -

deductions consisting of the following amounts, due to lack of

substantiation:

                      Amount claimed       Amount allowed      Disallowed
   Deduction            on return          per examination       amount
                                                                 1
  Mortgage interest      $4,032                 $3,709            $323
                                                                     1
  Real estate taxes          1,659              1,526                 133

  Charitable
  contributions          12,500                 10,694           1,806

  Unreimbursed
  employee business
                         2                      2
  expense                 16,050                 1,734           14,316
     1
            Petitioners were allowed this amount as a deduction on their
            Schedule C for office in home. Respondent determined that 8
            percent of petitioners’ home residence qualifies as a home office.
     2
            Before application of the 2-percent limitation.

The following combined Schedule C expense deductions of $25,269

were also disallowed:

                                Amount claimed                 Amount
     Expense                      on return                  disallowed

     Advertising                     $1,500                   $1,114
     Car and truck                    2,790                    1,519
     Insurance                          402                      402
     Office                           9,700                    9,090
     Business use of home               -0-                     (455)
     Supplies                         9,527                    4,470
     Utilities                        9,894                    8,624
     Other                              505                      505

         Total                       $34,318                 $25,269

Respondent disallowed the above deductions because petitioners

failed to show that each claimed deduction was an ordinary and

necessary business expense, or because petitioners failed to

substantiate payment of each claimed deduction.               Respondent also

determined that petitioners were liable for an accuracy-related

penalty under section 6662.
                                 - 6 -

     On November 9, 2000, petitioners filed a motion to dismiss

on the ground that the period of limitations for assessment under

section 6501 and section 301.6501(a)-1, Proced. & Admin. Regs.,

had expired.    At the call of the trial calendar in Baltimore on

November 27, 2001, the Court heard arguments on the motion to

dismiss, and, after due consideration, denied petitioners’

motion.   The case was then set for trial on November 30, 2001.

     At trial, and subsequently in brief, petitioner continued to

argue that this case should be dismissed for lack of jurisdiction

because as citizens of the Maryland Republic petitioners are

exempt from the Federal income tax law, that the United States

Constitution forbids taxation of compensation received for

personal service, and that the Commissioner is without authority

to act absent self-assessment and voluntary compliance.

Specifically, petitioner argues that all income reported on the

Forms W-2, with the exception of income received from Defense

Finance and Accounting Service, an agency of the Federal

government, does not constitute gross income subject to Federal

income tax, and, therefore, petitioners are entitled to a refund.

     This Court and Federal courts across the nation have

repeatedly rejected the argument that wages do not constitute

income and that reporting and paying income taxes is strictly

voluntary.     Woods v. Commissioner, 91 T.C. 88, 90 (1988).   We

find petitioners’ arguments baseless and wholly without merit.
                                 - 7 -

As petitioners’ arguments have been addressed by this and other

courts, we need not exhaustively review and respond to them.

Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving the entitlement to any deduction

claimed.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).3

Section 162(a) allows a deduction for a taxpayer’s “ordinary and

necessary” business expenses paid or incurred during the taxable

year.   However, a taxpayer is required to maintain records

sufficient to establish the amount of his or her income and

deductions.   Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.

     At trial, petitioner failed to offer any evidence with

regard to the disallowed Schedules A and C deductions.     Her

testimony consisted chiefly of describing the nature of her

business activities during the year.     Petitioners failed to

substantiate any of the disallowed Schedules A and C deductions.

Based on the record, we find no credible basis for allowing any

deduction in excess of amounts previously allowed by respondent.

     The last issue for decision is whether petitioners are

liable for an accuracy-related penalty pursuant to section

6662(a) for the year in issue.    Section 6662(a) imposes a penalty


3
     Respondent does not bear any burden of proof or production
under sec. 7491 because the examination commenced prior to July
22, 1998.
                                 - 8 -

of 20 percent of the portion of the underpayment which is

attributable to negligence or disregard of rules or regulations.

Sec. 6662(b)(1).    Negligence is the “‘lack of due care or failure

to do what a reasonable and ordinarily prudent person would do

under the circumstances.’”      Neely v. Commissioner, 85 T.C. 934,

947 (1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506

(5th Cir. 1967), affg. in part and remanding in part 43 T.C. 168

(1964) and T.C. Memo. 1964-299).     It includes any failure by the

taxpayer to keep adequate books and records or to substantiate

items properly.    Sec. 1.6662-3(b)(1), Income Tax Regs.   The term

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   No penalty shall be imposed if it is

shown that there was reasonable cause for the underpayment and

the taxpayer acted in good faith with respect to the

underpayment.   Sec. 6664(c).

     As noted above, we found that petitioners did not

substantiate, during the examination or at trial, any of the

amounts of disallowed Schedule A itemized deductions and Schedule

C business expense deductions.     Petitioner was an income tax

return preparer during the year in issue.     As an income tax

return preparer, petitioner should have been aware of and

understood the substantiation requirements for deductions claimed

on the Schedules A and C.

     Because petitioners failed to offer any credible explanation

for their lack of due care in preparing and filing their 1996
                                 - 9 -

return, they are liable for the negligence penalty under section

6662(a)(1).

     At the hearing of petitioners’ motion to dismiss and before

the trial, the Court admonished petitioner against arguing that

wage income was not includable in gross income and therefore not

subject to income tax.    Petitioner ignored our warning.       Section

6673(a)(1) allows this Court to award a penalty not in excess of

$25,000 when proceedings have been instituted or maintained

primarily for delay, or where the taxpayer’s position is

frivolous or groundless; i.e., it is contrary to established law

and unsupported by a reasoned, colorable argument for a change in

the law.    Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir.

1986), affg. in part an unreported order of this Court.         We

believe that a penalty in this case is appropriate.       The

positions argued by petitioner are frivolous and wholly without

merit.     Moreover, we rejected petitioner’s frivolous arguments

when she raised them in her motion to dismiss.       Accordingly, we

will require petitioners to pay a penalty to the United States in

the amount of $1,500 under section 6673(a)(1).

     To reflect the foregoing,

                                         An appropriate order

                                 imposing the penalty under

                                 section 6673(a), and decision

                                 will be entered for respondent.
