                          T.C. Memo. 2008-182



                        UNITED STATES TAX COURT



                 STANLEY A. COOK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24547-06.                 Filed July 30, 2008.



     Stanley A. Cook, pro se.

     William J. Gregg, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     DEAN, Special Trial Judge:     Respondent determined a $12,104

deficiency in petitioner’s 2003 Federal income tax and additions

to tax of $162.67 and $93.99 under section 6651(a)(1) and (2),

respectively.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code (IRC), as in effect for the year at
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issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     Petitioner has conceded that he received in 2003:   (1) Wages

of $65,662.90; (2) gross rental income of $6,450; (3) taxable

dividend income of $822.26, of which $707.51 is qualified

dividends; (4) $75.91 of taxable interest; (5) a capital gain

distribution of $67; (6) self-employment income of $909.52; and

(7) taxable individual retirement account (IRA) distributions of

$338.97.

     Respondent has conceded that petitioner is entitled to:

(1) A $3,000 capital loss deduction; (2) a $900 deduction for an

IRA contribution; (3) a $64.26 deduction for self-employment

taxes; (4) a $5,900 standard deduction; (5) an $11,033.16 expense

deduction on Schedule E, Supplemental Income and Loss; (6) a

$3,050 personal exemption; (7) a foreign tax credit of $19; and

(8) a prepayment credit of $11,383.   Respondent also concedes

that only $338.97 of the $1,486.97 IRA distribution is taxable

and that petitioner is not liable for the section 6651(a)(1) and

(2) additions to tax.

     The issues remaining for decision are whether:

(1) Respondent erred in using a zero basis and determining a $972

capital gain with respect to petitioner’s sale of his “Sonera”

stock; and (2) petitioner is entitled to deduct rental real
                                 - 3 -

estate expenditures and losses greater than the amounts to which

respondent has agreed.

     The stipulated facts and exhibits received into evidence are

incorporated herein by reference.     At the time the petition was

filed, petitioner resided in Virginia.

                            FINDINGS OF FACT

     During 2003 petitioner was employed by the U.S.

Environmental Protection Agency, he provided financial services

to others, and he rented a townhouse to third parties (rental

activity).   Although petitioner received $75,314.04 in gross

income in 2003 from these activities and other sources, he did

not report the items on a timely filed Form 1040, U.S. Individual

Income Tax Return.

     Respondent, from third-party payor records, determined that

petitioner received the following income items in 2003:

                     Item                               Amount

      Compensation for services                        $65,662
      Deferred compensation (nontaxable)                11,658
      Gain on stock sale                                   972
      Interest                                              73
      Ordinary dividends                                   115
      Qualified dividends                                  706
      IRA distributions                                  1,486
      Capital gain                                          67
      Self-employment income                               700
        Total                                           81,439

     Respondent reduced the $81,439 figure by $11,658 (nontaxable

deferred compensation), determining an adjusted gross income

(AGI) of $69,781.    As determined by respondent, petitioner’s
                                - 4 -

taxable income was $60,781.50.1    He also determined a $12,104

deficiency.2    After applying $11,381 in “PRE-PAID CREDITS”, he

determined a net tax due of $723.    He also determined additions

to tax of $162.67 and $93.99 under section 6651(a)(1) and (2),

respectively.    Respondent issued a deficiency notice to

petitioner on September 5, 2006.

     In response to the deficiency notice, petitioner mailed a

Form 1040 for 2003 to the Internal Revenue Service (IRS); it was

received on April 6, 2007.    Petitioner reported the previously

unreported income items (some of which he reported in greater

amounts than respondent had determined).    He, however, claimed

that only $338.97 of the $1,486.97 IRA distribution was taxable.

He also claimed a $2,427.93 loss on the stock sale rather than

the $972 gain that respondent had determined.    On Schedule E he

reported $6,450 in rents received less $11,608.63 in “Total

expenses” for a $5,158.63 loss with respect to his rental

activity.    He reported the $5,158.63 loss as a reduction of gross

income.    He reported an AGI of $58,686.67, taxable income of

$49,736.67, and a “total tax” of $8,732.23.    His tax was offset




     1
        $69,781 (total income) less $3,050 (personal exemption),
$5,900 (standard deduction), and $49.50 (“ADJUSTMENT TO INCOME”).
     2
          $12,005 (income tax) plus $99 (self-employment tax).
                               - 5 -

by $11,383.43 in withholdings, and he claimed a $2,651.20

refund.3

                              OPINION

I.   Burden of Proof

      Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

to prove that the determinations are in error.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    But the burden of

proof on factual issues that affect a taxpayer’s tax liability

may be shifted to the Commissioner if the taxpayer introduces

credible evidence with respect to the issue.    See sec.




      3
        The Court has jurisdiction to determine petitioner’s
overpayment. See sec. 6512(b). The deficiency notice, dated
Sept. 5, 2006, appears to have been mailed during the third year
after the Apr. 15, 2004, due date (including extensions) for
filing petitioner’s return. See sec. 6512(b)(3). Although
petitioner included a copy of a Form 4868, Application for
Automatic Extension of Time To File U.S. Individual Income Tax
Return, with his trial memorandum, it does not contain a date
stamp “Received” by the IRS (and it was not received into
evidence at trial). Accordingly, the Court assumes that
petitioner did not receive an extension and that he is entitled
to the benefit of a 3-year lookback period. Petitioner’s tax was
paid within the 3-year lookback period. See secs. 6513(b)(1)
(any tax actually deducted and withheld at the source under
chapter 24 is deemed to have been paid by the income recipient on
the 15th day of April following the close of the taxable year),
6611(d) (provisions of sec. 6513 apply for purposes of
determining the date of payment for purposes of subsec. (a),
relating to interest on overpayments); see also Baral v. United
States, 528 U.S. 431, 437-439 (2000) (withheld amounts are “paid”
on the due date of the taxpayer’s Federal income tax return,
notwithstanding that the tax has not been assessed).
                               - 6 -

7491(a)(1).   Petitioner has neither alleged nor proven that

section 7491(a) applies; accordingly, the burden remains on him.

II.   Consequences of Petitioner’s Failure To Timely File:   $972
      Gain and Zero Basis

      Respondent determined a $972 amount realized, a zero basis,

and a $972 capital gain with respect to petitioner’s “Sonera”

stock.   See secs. 1001(a), (c), 1012.

      Petitioner, on his untimely Form 1040, reported a $972.79

amount realized, a $3,400.72 cost basis, and a $2,427.93 long-

term capital loss.

      If the taxpayer fails to file a return, “‘the amount shown

as the tax by the taxpayer upon his return’ shall be considered

as zero * * * and the deficiency is the amount of the income tax

imposed by” the IRC.   Sec. 301.6211-1(a), Proced. & Admin. Regs.;

see also Laing v. United States, 423 U.S. 161, 174 (1976) (“Where

there has been no tax return filed, the deficiency is the amount

of tax due”); Schiff v. United States, 919 F.2d 830, 832 (2d Cir.

1990); Roat v. Commissioner, 847 F.2d 1379, 1381 (9th Cir. 1988)

(“If no return is made the Commissioner simply proceeds with his

independent calculation”); Hartman v. Commissioner, 65 T.C. 542,

546 (1975); Widemon v. Commissioner, T.C. Memo. 2004-162.

      To overcome respondent’s determinations, petitioner must

prove that he is entitled to claim a $2,427.93 long-term capital

loss, and he must prove a basis greater than zero.   See Rule

142(a); Welch v. Helvering, supra at 115; Karara v. Commissioner,
                                 - 7 -

T.C. Memo. 1999-253, affd. without published opinion 214 F.3d

1358 (11th Cir. 2000); Bennett v. Commissioner, T.C. Memo.

1997-145 (and cases cited therein), affd. without published

opinion 141 F.3d 1149 (1st Cir. 1998); see also Laing v. United

States, supra at 174; Roat v. Commissioner, supra at 1381.

     Citing certain IRS publications that refer to the time

within which one may timely file a refund claim, petitioner

argues that his Form 1040 was timely filed and therefore the

IRS’s “policy” of using a zero basis “leads [the] IRS to make

false claims of indebtedness.”

     The language he refers to does not, however, negate a

taxpayer’s obligation to file a timely Federal income tax return.

See United States v. Boyle, 469 U.S. 241, 249 (1985) (Congress

placed upon taxpayers the “obligation to ascertain the statutory

deadline and then to meet that deadline”); Miller v.

Commissioner, 114 T.C. 184, 195 (2000).   An individual over age

65 is required to file a Federal income tax return if his gross

income for the taxable year equals or exceeds the sum of the

exemption amount, the basic standard deduction, and an additional

standard deduction.   Sec. 6012(a)(1)(A)(i), (B).   In the case of

returns filed pursuant to section 6012, calendar year returns
                                   - 8 -

“shall be filed on or before the 15th day of April following the

close of the calendar year”.       Sec. 6072(a).4

       Petitioner did not provide any evidence to respondent or to

the Court to substantiate the $3,400.72 amount that he claimed as

his basis or the claimed $2,427.93 long-term capital loss, as

required by the IRC and the regulations.5      See secs. 6001,

6011(a); secs. 1.6001-1(a), 1.6011-1(a) and (b), Income Tax Regs.

Accordingly, respondent’s determinations as to a zero basis and a

$972 capital gain are sustained.

III.       Petitioner’s Deductions for Expenditures Paid or Incurred
           in His Rental Activity

       Ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business are generally

deductible, sec. 162(a), while personal, living, and family

expenses are not deductible, sec. 262(a).       An individual’s rental

real estate activity can constitute a trade or business for

purposes of section 162(a).       See, e.g., Hazard v. Commissioner, 7



       4
        Petitioner’s gross income exceeded his $8,950 filing
threshold, and his return was not filed until Apr. 6, 2007.
       5
        At the calendar call, petitioner stated that he would
like to call a certain witness (a local broker) to testify as to
“what are legitimate costs for basis.” He was not allowed to
call the witness because he did not comply with the Court’s Rules
or the Federal Rules of Evidence or Procedure. See Rule 143(a),
(f) (regarding the submission of expert witness reports); see
also Fed. R. Evid. 602 (requiring witnesses to have personal
knowledge; there was no indication that the local broker had
personal knowledge as to petitioner’s basis in his “Sonera”
stock).
                               - 9 -

T.C. 372 (1946).   But see, e.g., Balsamo v. Commissioner, T.C.

Memo. 1987-477 (the taxpayer’s rental real estate activity did

not constitute a trade or business; rather, the property was held

for the production of income within the meaning of section

212(1)).

     As used in the IRC, the term “ordinary” means normal, usual,

or customary; the transaction that gives rise to the expense must

be a common or frequent occurrence within the activity involved.

Deputy v. du Pont, 308 U.S. 488, 495 (1940).   The term

“necessary” means the expenditures are appropriate and helpful.

Welch v. Helvering, 290 U.S. at 113.

     Respondent conceded that petitioner was entitled to deduct

$11,033.16 in “Total Expenses” with respect to his rental

activity.   The allowed expenditures offset the $6,450 rental

income, generating a $4,583.16 loss.

     Petitioner contends that he is entitled to deduct

expenditures, and their related losses, greater than the amounts

to which respondent has agreed.   The expenditures at issue

include a $500 deduction for legal and professional fees with

respect to the towing of petitioner’s automobile and a $148.80

deduction for a telephone installed in the basement of the

townhouse, which was used “like [a] storage room.”
                                - 10 -

     A.     The Telephone Expense

     Petitioner testified that the $148.80 expense was incurred

for a telephone used “when I would get into town”6 for conducting

business with contractors, prospective tenants, etc. while the

townhouse was vacant.     Tenants also had access to the phone

because it was not kept behind a locked door.     He also testified

that a “C.P.A.” said to just take “half [of the telephone

expense] and that should be fair.”

     Petitioner failed to show that the expenditure was an

ordinary and necessary expense of a rental real estate activity.

See secs. 162(a), 212(1) and (2), 262(a); see also secs.

1.162-1(a), 1.212-1(a)(1) and (2), 1.262-1(a) and (b), Income Tax

Regs.     He also failed to establish the amount of his business

versus personal use (i.e., by percentage or increments of time).

See secs. 162(a), 212(1) and (2), 262(a); secs. 1.162-1(a),

1.212-1(a)(1) and (2), 1.262-1(a) and (b), Income Tax Regs.

Accordingly, respondent’s disallowance of the expense is

sustained.

     B. $500 Legal Fee With Respect To Petitioner’s Automobile

     The Court must inquire into the origin and character of the

$500 legal fee to determine whether petitioner is entitled to

deduct the expense.     See United States v. Gilmore, 372 U.S. 39,



     6
        Petitioner testified that the townhouse was in
Charlottesville, Virginia.
                                - 11 -

51 (1963); see also secs. 162, 212, 262(a), 263; secs.

1.212-1(k), 1.263(a)-2(c), Income Tax Regs. (discussing certain

expenditures that must be capitalized).      The “origin-of-the-

claim” rule requires an examination of the facts and

circumstances to determine out of what kind of transaction the

litigation arose.     Boagni v. Commissioner, 59 T.C. 708, 713

(1973).   The Court also considers the issues, the action’s nature

and objectives, the defenses asserted, the purpose for the legal

fees, and the background of the litigation.       Id.

     In order for the $500 legal fee to be deductible, the origin

of the claim must be proximately related to petitioner’s rental

activity.   See United States v. Gilmore, supra at 51; D’Angelo v.

Commissioner, T.C. Memo. 2003-295.       Petitioner testified that he

kept a car “adjacent” to his rental property “for when I was

there”, see supra note 6, to “take care of the property, [and to]

go get things.”     He further explained that “There was this feud”

with the homeowner’s association over the car being there, and

the association had the car towed.       I “had to sue”, he testified,

thereby incurring the fees in dispute.      It was “declared

illegally towed, and I did get the property back.”

     The Court finds that the origin and character of the $500

legal fee are personal; therefore, the expense is not deductible.

See sec. 262(a); cf. Lare v. Commissioner, 62 T.C. 739 (1974)

(discussing a personal dispute unrelated to defending the
                             - 12 -

taxpayer’s interest in the estate), affd. without published

opinion 521 F.2d 1399 (3d Cir. 1975).    Accordingly, respondent’s

disallowance of the expense is sustained, and petitioner is not

entitled to a business loss greater than the amount to which

respondent has agreed.

     To reflect the foregoing,

                                     Decision will be entered under

                                 Rule 155.
