                  T.C. Summary Opinion 2009-25



                      UNITED STATES TAX COURT



            MICHEAL AND CHANTEL DAVIS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10199-07S.             Filed February 23, 2009.



     Gwendolyn Baptist-Hewlett, for petitioners.

     Caroline R. Krivacka, for respondent.



     KROUPA, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect at the time the petition was filed.   Pursuant to section

7463(b), the decision to be entered is not reviewable by any




     1
      All section references are to the Internal Revenue Code for
the years at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure, unless otherwise indicated.
                               - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined a $10,302 deficiency in petitioners’

Federal income tax for 2003, a $27,723 deficiency for 2004, and a

$14,301 deficiency for 2005.   Respondent also determined a

$2,060.40 accuracy-related penalty under section 6662 for 2003, a

$5,544.60 accuracy-related penalty for 2004, and a $2,860.20

accuracy-related penalty for 2005.

     We must decide three issues.    First, we determine whether

petitioners are entitled to deduct certain unreimbursed employee

business expenses and a casualty loss claimed on Schedules A,

Itemized Deductions, beyond those respondent already allowed.      We

hold that they are not.   Second, we decide whether petitioners

received but failed to report self-employment income for 2003,

2004, and 2005 (the years at issue).     Finally, we decide whether

petitioners are liable for the accuracy-related penalties for the

years at issue.   We hold that they are.

                            Background

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.   Petitioners resided in Tennessee

at the time they filed the petition.

     Petitioners were both full-time employees during each of the

years at issue.   Petitioner wife was employed by the U.S.
                                - 3 -

Department of Agriculture, and petitioner husband was employed by

BellSouth.   Petitioner husband also did some freelance work in

the music business, and petitioner wife did some freelance

printing work.

     Petitioners timely filed their joint Federal income tax

return for each of the years at issue.    Petitioners reported

$97,756 of income for 2003 and claimed $77,885 of Schedule A

expenses.    Petitioners reported $100,517 of income for 2004 and

claimed $76,624 of Schedule A expenses.    Petitioners reported

$107,165 in income for 2005 and claimed $84,227 of Schedule A

expenses.

     Petitioners’ wages from the Department of Agriculture and

BellSouth were directly deposited into their joint bank account.

Petitioners also deposited significant non-wage amounts of money

(cash or checks) into their account.    The non-wage deposits

included at least $15,013.42 during 2003, $23,931.71 during 2004,

and $11,003.71 during 2005.

     Petitioners each claimed substantial expenses for the years

at issue relating to their freelance work.    Petitioner wife

claimed expenses of $12,805 for 2003 and $2,873 for 2004 for her

printing business.   Petitioner husband claimed expenses of

$16,394 for 2004 and $9,264 for 2005 in freelance DJ and music

producing activities.   Petitioner wife reported no income from

the printing business for any of the years, but her own records
                               - 4 -

reflect that she received at least $2,127.25 in 2003, $85 in

2004, and $300 in 2005.   The $12,805 expense amount claimed for

2003 consists of $6,480 in vehicle expenses for 18,000 business

miles, $375 for parking fees, tolls, and transportation, $1,500

for overnight travel expenses, $4,050 for other business

expenses, and $400 for meals and entertainment.   The $2,873

expense amount claimed for 2004 consists of $1,313 in vehicle

expenses for 3,500 business miles, $275 in parking fees, toll,

transportation expenses, $460 on overnight travel expenses, $600

on other business expenses, and $225 in meals and entertainment.

     Petitioner husband reported no income from his freelance

business, yet he admitted to the Appeals officer that he had

earned some income.   The $18,379 expense amount claimed for 2004

consists of $8,194 in vehicle expenses for 21,850 business miles,

$175 in parking fees, toll, and transportation, $2,875 for

overnight travel expenses, $5,150 for other business expenses,

and $1,985 for meals and entertainment.   The $9,264 expense

amount claimed for 2005 consists of $7,744 in vehicle expenses

for 17,500 business miles, $70 in parking fees, toll, and

transportation, $525 for overnight travel expenses, $675 for

other business expenses, and $250 for meals and entertainment.

     A house fire destroyed many of petitioners’ belongings in

2004.   Petitioners provided as evidence a list of the destroyed

items that they submitted to their insurance company.   Many of
                               - 5 -

the items listed had been purchased during the two years before

the fire.   Petitioners received $44,326.43 in insurance proceeds

after the fire.   Respondent issued a deficiency notice

disallowing the claimed expenses and casualty loss while

increasing petitioners’ income and determining that they are

liable for accuracy-related penalties.

     Petitioners timely filed a petition.

                             Discussion

     This is primarily a substantiation case in which we are

asked to decide whether petitioners may deduct certain expenses

from their freelance “businesses” to essentially offset their

wage income and whether they may claim a casualty loss.      We also

decide whether petitioners earned but failed to report self-

employment income and whether they are liable for accuracy-

related penalties for negligence.2     The parties resolved the

other issues before trial.

Burden of Proof

     We begin with the burden of proof.     Generally, the

Commissioner’s determinations in a deficiency notice are presumed

correct, and the taxpayer has the burden of proving the



     2
      Petitioners argue on brief that this Court lacks
jurisdiction with respect to 2003, claiming that the deficiency
notice was mailed after the expiration of the period of
limitations for that year. See sec. 6501(a). This argument is
without merit as the deficiency notice was mailed within 3 years
of petitioners’ filing the return for 2003.
                               - 6 -

Commissioner’s determinations to be in error.    Rule 142(a)(1);

Welch v. Helvering, 290 U.S. 111 (1933).    The burden of proof may

shift to the Commissioner in certain circumstances, however, if

the taxpayer introduces credible evidence and establishes that he

or she substantiated items, maintained required records, and

fully cooperated with the Commissioner’s reasonable requests.

Sec. 7491(a)(1) and (2)(A) and (B).    We find that petitioners

failed to provide credible evidence, failed to substantiate the

claimed expenses, and failed to maintain adequate records.    We

acknowledge that some of their records may have been destroyed in

the house fire, but petitioners failed to show how the lack of

records for 2005 was attributable to the fire.    The burden of

proof therefore remains on petitioners.

Substantiation

     Petitioners claimed substantial vehicle, overnight travel,

and meals and entertainment expenses from their freelance

businesses that essentially offset their $100,000 joint wage

income.   Petitioners claimed these expenses on Forms 2106,

Employee Business Expenses.   Petitioners improperly claimed these

expenses as unreimbursed employee business expenses.    Petitioner

wife was a Federal employee, but she failed to prove that any of

the expenses were attributable to her Federal job.    These

expenses are more properly reported on a Schedule C, Profit or

Loss From Business, as business expenses if petitioners incurred
                                 - 7 -

them in a trade or business.    Petitioners failed to prove that

they incurred these expenses in a trade or business and also

failed to prove that they were entitled to deductions for these

expenses.3

     Petitioners failed to substantiate any of the expenses other

than by providing self-serving testimony.       We are not required to

accept a taxpayer’s self-serving testimony when it is

uncorroborated by other evidence.        Beam v. Commissioner, T.C.

Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77

(1986)), affd. without published opinion 956 F.2d 1166 (9th Cir.

1992).   We therefore sustain respondent’s adjustments with

respect to these expenses.

Casualty Loss Deduction

     We next address whether petitioners are entitled to a

casualty loss deduction.   A taxpayer is allowed a deduction for

any loss sustained during the taxable year and not compensated

for by insurance or otherwise.    Sec. 165(a).     A taxpayer may

deduct a loss from fire, storm, shipwreck, or other casualty, or

from theft.   Sec. 165(c)(3).   A taxpayer’s basis in the damaged

or destroyed property must be known to determine a casualty loss

deduction.    Where a taxpayer fails to prove his or her basis, we

are unable to determine the amount of the casualty loss that is


     3
      A taxpayer is generally permitted to deduct all ordinary
and necessary expenses paid or incurred in carrying on a trade or
business. Sec. 162(a).
                                - 8 -

deductible.    Zmuda v. Commissioner, 79 T.C. 714, 727 (1982),

affd. 731 F.2d 1417 (9th Cir. 1984); sec. 1.165-1(c), Income Tax

Regs.

     Petitioners presented no evidence that they are entitled to

the casualty loss that they claimed for 2005 after the fire.

Petitioners never provided the complete insurance reimbursement

record.   They included no information to support their claimed

losses other than their own testimony and a chart that they

prepared themselves.   The chart included a disproportionately

high number of items that were purchased during 2003 and 2004,

the years immediately before the fire.   Petitioners also

presented no receipts for these items.   Moreover, we fail to see

how petitioners could have purchased these items during 2003 and

2004 when they had so little disposable income after their

expenses.    Additionally, petitioners received insurance proceeds

from the fire yet failed to prove that the damages they sustained

exceeded the amount of insurance proceeds.   We do not find the

evidence or any of the testimony credible, and accordingly, we

sustain respondent’s determination regarding the casualty loss

deduction.

Unreported Income

     Respondent also determined that petitioners received

unreported self-employment income by comparing the amounts

deposited into their bank account in excess of their wage income.
                                - 9 -

Bank deposits are prima facie evidence of income.      Tokarski v.

Commissioner, supra.   Petitioners bear the burden of proving that

respondent’s bank deposits analysis is incorrect.     See Parks v.

Commissioner, 94 T.C. 654, 658 (1990).      Petitioners argue that

some unexplained deposits were gifts from petitioner wife’s

mother to help pay for petitioners’ son’s private school tuition.

Although petitioner wife’s mother testified and corroborated

their story, the record is vague regarding the amount and

frequency of her deposits.    In addition, petitioners did not

produce checks or receipts to corroborate any gifts exceeding the

gift amounts respondent already allowed.

     Other amounts were attributed to what petitioners

characterized as using their account as a conduit between a

family friend, Ms. McKay, and her parents for the amounts of

$10,015 in 2003, $10,044 in 2004, and $2,222 in 2005.     Petitioner

wife and Ms. McKay testified that Ms. McKay’s parents used

petitioners’ bank account to get money to Ms. McKay because Ms.

McKay did not have a bank locally.      There were cash amounts shown

deposited to petitioners’ bank account.     In addition, petitioners

provided some checks made payable to Ms. McKay to prove that they

were acting as a conduit.    We give no weight to this evidence

however, because Ms. McKay provided child care services for

petitioners during 2003, and they purchased goods from her.

Also, the amounts of the checks made payable to Ms. McKay were
                              - 10 -

not the same as amounts deposited into petitioners’ account.    It

is unclear whether Ms. McKay’s parents used petitioners’ account

for the purposes petitioners claim or in the amounts they claim.

Moreover, we did not find petitioner wife or Ms. McKay credible.

     We sustain respondent’s determination regarding unreported

self-employment income petitioners received.

Accuracy-Related Penalties

     We finally consider whether petitioners are liable for the

accuracy-related penalties under section 6662(a).   Petitioners

conceded the issue of the penalties because they failed to

challenge the accuracy-related penalties in the petition.    See

Swain v. Commissioner, 118 T.C. 358 (2002).    Even if petitioners

had raised the issue in their petition, however, we would still

find them liable for the penalties.

     Respondent has the burden of production under section

7491(c) and must come forward with sufficient evidence that it is

appropriate to impose the accuracy-related penalties.    See Higbee

v. Commissioner, 116 T.C. 438, 446-447 (2001).

     A taxpayer is liable for an accuracy-related penalty for any

portion of an underpayment attributable to negligence or

disregard of rules and regulations, unless he establishes that

there was reasonable cause for the underpayment and that he acted

in good faith.   Secs. 6662(a) and (b)(1), 6664(c)(1).   Negligence

is defined as any failure to make a reasonable attempt to comply
                                - 11 -

with the provisions of the Code and includes any failure by the

taxpayer to keep adequate books and records or to substantiate

items properly.     Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs.     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).

Disregard is characterized as any careless, reckless, or

intentional disregard.     Sec. 6662(c); sec. 1.6662-3(b)(2), Income

Tax Regs.     Disregard of rules and regulations is careless if the

taxpayer does not exercise reasonable diligence to determine the

correctness of a return position that is contrary to the rule or

regulation.     Kooyers v. Commissioner, T.C. Memo. 2004-281.

        We find that respondent has met his burden of production.

Petitioners failed to report taxable income they received and

claimed deductions for expenses without proving how they were

entitled to deduct these expenses.       Petitioners aggressively and

unreasonably claimed expenses that essentially offset their joint

income of $100,000 for each of the years at issue.      Moreover, if

petitioners had actually paid the claimed expenses, they would

not have had sufficient income to provide food and shelter for

their family of five.     We therefore conclude that petitioners

failed to exercise reasonable diligence to determine the

correctness of their return positions and accordingly, they are

liable for the accuracy-related penalty for each of the years at
                              - 12 -

issue.   Petitioners also failed to prove that any reasonable

cause existed.

     For the foregoing reasons and because of the concessions of

the parties,


                                         Decision will be entered

                                    under Rule 155.
