                  T.C. Summary Opinion 2001-25



                     UNITED STATES TAX COURT



    BASAVARAJ A. HOOLI AND VINODINI B. HOOLI, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27592-96S.                Filed March 8, 2001.



     Basavaraj A. Hooli, pro se.

     Robert Dillard, for respondent.



     WOLFE, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the years in issue.
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     Respondent determined deficiencies in petitioners’ Federal

income taxes for 1992 and 1993 of $7,796 and $5,140,

respectively.   The issues for decision are:   (1) Whether

petitioners have substantiated their claimed deductions for

expenses reported on Schedule C, Profit or Loss From Business,

for 1992 and 1993, and (2) whether petitioners’ import/export

activity was functioning during 1992 and 1993 or still was in a

preopening or startup situation.

     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.   Petitioner Basavaraj A.

Hooli resided in Daleville, Alabama, and Vinodini B. Hooli

resided in St. Petersburg, Florida, when the petition in this

case was filed.   References to petitioner in the singular are to

petitioner Basavaraj A. Hooli.

     During the years in issue, petitioner was employed as a

medical technician.   From this employment, petitioner reported

wage income of $40,497 and $44,305 for 1992 and 1993,

respectively.   Petitioner contends that during these years he

worked as a medical technician only on weekends.

     Petitioner also contends that during 1992 and 1993, he and

his brother, who lived in India, engaged in an import/export

activity named “H.I.T.C. USA” (HITC).    On Schedules C attached to

petitioners’ 1992 and 1993 Federal income tax returns, petitioner
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reported no gross receipts for the import/export activity and

claimed the following deductions:

                                     1992            1993
Car and truck expenses             $13,941         $11,860
Travel                              14,889           9,523
Meals and entertainment              1,354           1,354
Other business expenses              5,979             -0-
Telephone                            3,956           2,388
  Total                             40,119          25,125

     Petitioner contends that his brother initially paid the bulk

of these expenses and that he later reimbursed his brother.     At

trial, petitioner attempted to substantiate, by introducing

copies of traveler’s checks, that he reimbursed his brother.

These copies of traveler’s checks do not indicate that they were

cashed by petitioner’s brother.

     Petitioner further asserts that HITC entered into contracts

with agencies of the Government of India to supply the Indian

Government with railroad ties.    Petitioner alleges that the

contracts ultimately were canceled because he was unable to

demonstrate to the Government of India and its agencies that HITC

was properly financed.

     Respondent determined that petitioners are not entitled to

deductions for the Schedule C expenses they claimed on their 1992

and 1993 Federal income tax returns because petitioners have

failed to demonstrate that the claimed expenses were incurred for

business purposes.   Alternatively, respondent determined that

petitioners failed to establish that petitioner was actively

carrying on a trade or business.
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     Generally, a taxpayer is permitted to deduct all ordinary

and necessary expenses paid or incurred in carrying on a trade or

business.    See sec. 162(a).   No deduction is allowed for

personal, living, or family expenses.     See sec. 262.

Consequently, where an expenditure is primarily associated with

business purposes, and where personal benefit is distinctly

secondary and incidental, the expenditure may be deducted under

section 162.    See International Artists, Ltd. v. Commissioner, 55

T.C. 94, 104 (1970).    Conversely, if an expenditure is primarily

motivated by personal considerations, generally no deduction will

be allowed.    See Henry v. Commissioner, 36 T.C. 879, 884 (1961).

     Taxpayers are required to keep sufficient records to enable

the Commissioner to determine their correct tax liability.     See

sec. 6001.     Under certain circumstances, where a taxpayer

establishes entitlement to a deduction but does not establish the

amount of the deduction, the Court is permitted to estimate the

amount allowable.    See Cohan v. Commissioner, 39 F.2d 540 (2d

Cir. 1930).    However, there must be sufficient evidence in the

record to permit the Court to conclude that a deductible expense

was incurred in at least the amount allowed.     See Williams v.

United States, 245 F.2d 559, 560 (5th Cir. 1957).     In estimating

the amount allowable, the Court bears heavily against the

taxpayer whose inexactitude is of his own making.     See Cohan v.

Commissioner, supra at 544.
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     However, certain business deductions described in section

274 are subject to rules of substantiation that supersede the

Cohan doctrine.   Section 274(d) provides that no deduction shall

be allowed with respect to:   (a) Any traveling expense, including

meals and lodging away from home; (b) any item with respect to an

activity of a type generally considered to be entertainment,

amusement, or recreation; or (c) the use of any “listed

property”, as defined in section 280F(d)(4) unless the taxpayer

substantiates certain elements.   Passenger automobiles are listed

property under section 280F(d)(4)(A)(i).

     Under section 274, a taxpayer must substantiate the amount,

time, and business purpose of the expenditures and must provide

adequate records or sufficient evidence to corroborate his own

statement.   See sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,

50 Fed. Reg. 46016 (Nov. 6, 1985).      Adequate records are defined

as an account book, diary, log, statement of expense, trip sheet,

or similar record.   See sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

     When a taxpayer’s records have been destroyed or lost due to

circumstances beyond his control, such as destruction by fire,

flood, earthquake, or other casualty, the taxpayer has the right

to substantiate his deductions by reasonable reconstruction of

his expenditures.    See sec. 1.274-5T(c)(5), Temporary Income Tax

Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).     A taxpayer in this

situation may reconstruct his expenses through other credible
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evidence.   See Watson v. Commissioner, T.C. Memo. 1988-29.    If no

other documentation is available, we may accept credible

testimony of a taxpayer to substantiate a deduction.     Watson v.

Commissioner, supra.

     Moreover, expenses that are incurred before the commencement

of business operations constitute preopening or startup expenses

and are not deductible under section 162.     See Jackson v.

Commissioner, 864 F.2d 1521, 1525-1526 (10th Cir. 1989), affg. 86

T.C. 492 (1986); Hardy v. Commissioner, 93 T.C. 684, 687-693

(1989); Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), affd.

without published opinion 691 F.2d 490 (3d Cir. 1982).

     Generally, petitioner failed to introduce any reliable

written substantiation for his claimed traveling expenses.

Petitioner testified that he kept receipts that substantiated his

traveling expenses, but that the receipts were stolen.

Petitioner’s testimony regarding his traveling expenses was

generally vague and unconvincing.    At times he was almost

hysterical.   Nevertheless, his presentation was at best a

dramatic effort to explain his failure to provide substantiation

of his claimed travel expenses.   Petitioner also failed to

demonstrate that he attempted to reconstruct these expenses.     He

did not present testimony of any other witness, except his wife,

to substantiate his own testimony.     Mrs. Hooli’s testimony was

brief and generally in the form of responses to her husband’s

leading questions.   We cannot give this unconvincing testimony
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any weight.   Petitioner mentioned many individuals as

participants in his efforts, but none of these people testified.

Accordingly, we find that petitioner has failed to substantiate

his claimed traveling expenses.

     Petitioner also failed to establish the amount or business

purpose of the claimed telephone expenses.    At trial, petitioner

attempted to substantiate the claimed telephone expenses by

presenting copies of telephone bills.    Contrary to petitioner’s

argument, these telephone bills do not establish the business

purpose for the telephone expenses.    The bills could represent

personal calls as easily as they could business calls.

     Petitioner attempted to substantiate the claimed car and

truck expenses and meals and entertainment expenses by

introducing a mileage log and a diary.    Contrary to petitioner’s

assertions, the mileage log and diary do not substantiate these

expenses.   At trial, petitioner testified that the diary

represented expenses paid by his brother, who died in India prior

to trial.   Petitioner also testified that the mileage log

represented car and truck expenses incurred by his brother.

Petitioner also stated that most of the entries in the log had

been made by his brother’s driver in India.    The business

function of the travel has not been established.    Petitioner’s

brother was a practicing physician in India, and the record does

not show whether the expenses he allegedly paid were for his

medical practice, were personal, or were for some aspect of the
                               - 8 -
alleged import/export business.   Moreover, petitioner has failed

to present convincing evidence that he reimbursed his brother for

these alleged expenses.

     With regard to the other claimed expenses, petitioner has

failed to present any document or testimony to substantiate them.

We have no reasonable evidentiary basis on which to make an

estimate pursuant to Cohan v. Commissioner, 39 F.2d 540 (2d Cir.

1930).

     Even if we were to find that petitioners’ claimed deductions

were substantiated, petitioner has failed to establish that his

alleged import/export activity went beyond the preopening stage

during 1992 and 1993.   Petitioner argues that he reported income

for the activity in prior years, and therefore the activity had

progressed beyond the preopening stage during the years in issue.

On a Schedule C attached to his 1990 Federal income tax return,

petitioner reported gross income from the import/export activity

of $5,000 and deductions of $28,004, resulting in a net loss of

$23,004.   On a Schedule C attached to his 1991 Federal income tax

return, petitioner reported gross income from the import/export

activity of $7,170 and deductions of $23,510, resulting in a net

loss of $16,340.   Petitioner’s 1991 Schedule C indicates that

$5,500 of the $7,100 of income reported was received for “setting

up” a medical practice.   Moreover, on the Schedules C attached to

his 1990 and 1991 Federal income tax returns petitioner reported

only minimal amounts of income and claimed larger deductions
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resulting in net losses.    Based upon this record, we do not find

petitioner’s 1990 and 1991 Federal income tax returns convincing

evidence that petitioner’s import/export activity constituted an

active trade or business.

     Petitioner has convinced us that he wanted to enter the

import/export business during the years in issue.          He had at

least one plan, and he tried to get a start.       But his own

evidence convinces us that he never bought, manufactured, or sold

a product or otherwise was able to get his plan into operation.

     We hold that petitioners are not entitled to claimed

deductions for Schedule C expenses for 1992 and 1993.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
