                  T.C. Summary Opinion 2001-93



                     UNITED STATES TAX COURT



         JOHN AWADALLAH AND SUSAN MALATY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3734-00S.                      Filed June 25, 2001.


     John Awadallah, pro se.

     Ross M. Greenberg, for respondent.




     PANUTHOS, Chief 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 year in issue.
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     Respondent determined a deficiency in petitioners’ 1996

Federal income tax in the amount of $7,566.   The issue for

decision1 is whether John Awadallah (hereinafter petitioner) is

entitled to various Schedule C deductions in excess of the

amounts allowed by respondent.

     Some of the facts have been stipulated, and they are so

found.   The stipulation of facts and attached exhibits are

incorporated herein by this reference.   At the time of filing the

petition, petitioners resided in Oldsmar, Florida.

Background

     Petitioner graduated in 1993 from pharmacy school.   Shortly

thereafter, petitioner passed the New York State licensing

examination for pharmacists.   Petitioner worked full time as a

pharmacist for Walgreen’s in 1995 and 1996.

     In 1995, petitioner consulted with his accountant, Nassaat

Antonious (Mr. Antonious), to create a side business.   Petitioner

established a tutoring activity in which he assisted students in


     1
          The notice of deficiency contains an adjustment to
petitioner’s employment tax. This is a computational adjustment
which will be affected by the outcome of the other issues to be
decided, and we do not separately address it.

     Petitioner Susan Malaty (Ms. Malaty) did not appear at trial
and did not execute the stipulation of facts. Accordingly, the
Court will dismiss this action as to her pursuant to respondent's
oral motion to dismiss for lack of prosecution. See Rule 123(b),
Tax Court Rules of Practice and Procedure; Basic Bible Church v.
Commissioner, 86 T.C. 110, 114 (1986). However, the decision
will be entered as to Ms. Malaty consistent with the decision
entered as to petitioner John Awadallah.
                                - 3 -

preparing for the New York State licensing examination for

pharmacists.

     Petitioner charged students $25 to $35 per hour.    Students

paid cash for the tutoring sessions.    Petitioner conducted his

activity in a one-bedroom apartment he rented from his father,

Samir Awadallah (Mr. Awadallah), in the Richmond Hill section of

Brooklyn, New York.    Petitioner paid Mr. Awadallah monthly in

cash for use of the apartment and utilities.    The apartment did

not have a telephone, and the apartment was otherwise unoccupied.

Petitioner did not maintain books and records for the activity.

     Petitioner’s mother, Mariem Awadallah (Ms. Awadallah),

performed some secretarial and administrative services for the

tutoring activity.    Petitioner paid Ms. Awadallah weekly or

monthly in cash.   Petitioner’s students contacted Ms. Awadallah,

who arranged his schedule.    Ms. Awadallah performed other duties,

such as copying documents and purchasing materials for repairs to

the apartment.

     For tax year 1995, petitioner reported on Schedule C, Profit

or Loss From Business, gross receipts of $4,200 and total

expenses of $22,707.    For tax year 1996, petitioner reported on

Schedule C gross receipts of $10,246.    Petitioner reported

expenses on Schedule C for tax year 1996 as follows:
                                 - 4 -

                      Expense                Amount

             Legal and professional          $9,847
             Rent or lease                   12,120
             Repairs and maintenance            463
             Supplies                           146
                                             22,576

Petitioner terminated the tutoring activity at the end of 1996.

       Respondent, in his notice of deficiency, disallowed all of

the deductions reported on Schedule C.       Respondent asserted that

the expenses were not paid or incurred, and that the expenses

were not ordinary and necessary.       At trial, respondent further

contended that, if petitioner is able to substantiate the

expenses, part of the expenses should be disallowed under section

183.

Discussion

       A.   General

       The record in this case is confused, disorganized, and

fraught with inconsistent assertions and theories.       The truth in

this case is elusive.     Of concern is that petitioner operated an

activity in cash, maintained no books and records, yet reported

specific amounts of income and deductions.       Petitioner and his

accountant have failed to provide sufficient detail as to

expenditures.     While we conclude that petitioner tutored some

students, the vague testimony makes it impossible to determine

the nature and extent of petitioner’s activities.       While

petitioner was generally credible, we are satisfied that the
                                 - 5 -

preparation of the return and testimony by petitioner’s

accountant bear little relationship to reality.

     While the record in this case has made fact finding

difficult, we nevertheless have carefully reviewed this record to

analyze the issues and make findings and conclusions.

     B. Schedule C Expenses

     Section 162(a) permits a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    An expense must be directly

connected with, or proximately result from, a trade or business

of the taxpayer.   See Kornhauser v. United States, 276 U.S. 145,

153 (1928); O’Malley v. Commissioner, 91 T.C. 352, 361 (1988).

Expenses that are personal in nature are generally not allowed as

deductions.   See sec. 262(a).   Deductions are a matter of

legislative grace, and taxpayers must comply with the specific

requirements for any deduction claimed.    See INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

     A taxpayer is required to maintain records sufficient to

establish the amount of his income and deductions.    See sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.    A taxpayer must

substantiate his deductions by maintaining sufficient books and

records to be entitled to a deduction under section 162(a).
                                 - 6 -

     When a taxpayer establishes that he has incurred a

deductible expense but is unable to substantiate the exact

amount, we are, in some circumstances, permitted to estimate the

deductible amount.     See Cohan v. Commissioner, 39 F.2d 540, 543-

544 (2d Cir. 1930).    We can estimate the amount of the deductible

expense only when the taxpayer provides evidence sufficient to

establish a rational basis upon which the estimate can be made.

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

     Petitioner did not keep books and records for his tutoring

activity.   Other than receipts for the repairs and maintenance of

the apartment, the only documentary evidence produced by

petitioner were his and his parents’ Federal income tax returns

for 1995 and 1996.    Mr. Antonious testified that we should rely

on the unsigned returns of petitioner’s parents as credible

evidence of payment.    We are not required to rely on petitioner’s

and Mr. Antonious’ self-serving testimony and documents.      See

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).       A taxpayer’s

income tax return is a self-serving declaration that may not be

accepted as proof for the deduction or exclusion claimed by a

taxpayer.   See Seaboard Commercial Corp. v. Commissioner, 28 T.C.

1034, 1051 (1957); Halle v. Commissioner, 7 T.C. 245 (1946),

affd. 175 F.2d 500 (2d Cir. 1949).       Therefore, petitioner failed

to substantiate the rent, supplies, and legal and secretarial

expenses.   Even if petitioner paid his parents, the payments do
                                - 7 -

not qualify as trade or business expenses.     Further, the amounts

for repairs and maintenance do not qualify as trade or business

expenses, as petitioner incurred the expenses to improve his

father’s property.

     Transactions among family members that result in the

distribution of income within a family unit “are subject to the

closest scrutiny.”    Van Zandt v. Commissioner, 40 T.C. 824, 830

(1963), affd. 341 F.2d 440 (5th Cir. 1965); Coombs v.

Commissioner, T.C. Memo. 1984-366.      A transaction that is entered

into solely for the purpose of tax reduction and that has no

economic or commercial objective to support it is a sham and

without effect for Federal income tax purposes.     See Rice’s

Toyota World, Inc. v. Commissioner, 81 T.C. 184 (1983), affd. in

part and revd. in part 752 F.2d 89 (4th Cir. 1985).

     Petitioner lacked a business purpose in making payments to

his parents.   Rather, the three principal purposes in this

financial arrangement were to assist his parents financially,

permit his parents to claim the earned income credit, and reduce

his own tax burden.

     Petitioner’s testimony indicates that a primary reason for

hiring his mother was to assist his parents:

          THE COURT: So either the gross receipts are
     underreported or the expenses are overreported. That’s
     the reasonable man conclusion, and you’ve got some
     burden here to show what it is, why I should accept
     those numbers.
                                - 8 -

          THE WITNESS: Got you. A very good point at hand.
     Actually, when my accountant was showing me the
     figures, I was quite astonished with that. The only
     reasoning behind the legal and professional fees as you
     specified is at the time I basically -- my parents had
     financial trouble as far as money was concerned and
     with the building that I was in, et cetera.

          So unfortunately, I wound up paying her quite a
     bit more than I would anyone else to try to -- so that
     I can try to resolve their issues. * * *

     Regarding the rental property, petitioner indicated that he

rented the apartment to assist his family.    Petitioner testified

that he “enjoyed helping the students and at the same time not

only was I helping the students but I was helping my parents. * *

* It was just something I was out to do to help students and help

my family.”

     As to the earned income credit, the money paid by petitioner

to his mother accounted for over 95 percent of his parents’ gross

income.   Ms. Awadallah’s salary allowed her and Mr. Awadallah to

claim the earned income tax credit under section 32, resulting in

a refund of $761 for 1996.     Mr. Antonious also prepared Mr. and

Ms. Awadallah’s joint income tax return, and his testimony

indicates that he planned the transactions so they could claim

the credit under section 32.

     Petitioner generated losses in both 1995 and 1996 which

reduced his gross income and effectively lowered his tax

liability.    We conclude that the expenses here at issue, if
                                 - 9 -

actually paid, are personal expenses and not deductible trade and

business expenses under section 162.

     In reaching our holdings herein, we have considered all

arguments made, and to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.2

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent as to

                                         petitioner John Awadallah, and

                                         an order of dismissal and

                                         decision will be entered as to

                                         petitioner Susan Malaty.




     2
          Petitioner contends that the burden of proof should
rest with respondent pursuant to sec. 7491(a). Petitioner failed
to comply with the requirements of sec. 7491(a)(2), such as
maintaining records. Therefore, the burden of proof remains with
petitioner. See Higbee v. Commissioner, 116 T.C. __ (2001).
