                        T.C. Memo. 2011-197



                      UNITED STATES TAX COURT



                   ADAN SUCILLA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10888-10.             Filed August 15, 2011.



     Adan Sucilla, pro se.

     John M. Wall, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax for 2007 and 2008 of $60,227 and

$9,869, respectively, and accuracy-related penalties under

section 6662(a)1 of $12,045 and $1,974, respectively.    The


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended and in effect for the
                                                   (continued...)
                               - 2 -

deficiencies were the result of the disallowance of expense

deductions claimed on petitioner’s Schedules C, Profit or Loss

From Business, attached to his 2007 and 2008 Federal income tax

returns.   The issues for decision after concessions2 are whether

petitioner is entitled to various Schedule C deductions.   We must

further decide whether petitioner is liable for the accuracy-

related penalties under section 6662(a).

                         FINDINGS OF FACT

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

The stipulation of facts, together with the attached exhibits, is

incorporated herein by this reference.   At the time petitioner

filed his petition, he resided in Fresno, Californa.

     Throughout 2007 and 2008 petitioner operated Sucilla Farm

Labor Contractor, a sole proprietorship providing farm labor

services in the Fresno, California, area.   Petitioner timely

filed Forms 1040, U.S. Individual Income Tax Return, for taxable

years 2007 and 2008.   Attached to the respective returns were

Schedules C pertaining to petitioner’s farm labor business.

Petitioner reported gross income of $2,351,207 and total expenses



     1
      (...continued)
taxable years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
the nearest dollar.
     2
      In a stipulation of settled issues petitioner concedes that
he received and failed to report $686 of cancellation of
indebtedness income for taxable year 2007.
                                 - 3 -

of $2,262,421 on his 2007 Schedule C.    On his 2008 Schedule C

petitioner reported gross income of $1,342,334 and total expenses

of $1,287,945.

     Petitioner did not keep separate books for his business.       He

relied on bank statements, subcontractor checks, and receipts for

his expenses.    He did, however, hire a certified public

accountant to prepare his 2007 and 2008 Federal income tax

returns.    The Internal Revenue Service agent who examined the

returns found that all business income was reported accurately,

but not all expenses deducted could be substantiated because

petitioner had either lost or misplaced a number of his receipts.

For 2007, out of a total of $2,262,421 in expenses, $165,386 was

not substantiated.    For 2008, out of a total of $1,287,945 in

expenses, $35,920 was not substantiated.    But the auditing agent

allowed deductions totaling $38,635 and $18,585 for 2007 and

2008, respectively, for previously unclaimed but allowable

expenses.

     On March 30, 2010 respondent sent a notice of deficiency for

petitioner’s 2007 and 2008 income tax returns.    In his notice of

deficiency, respondent disallowed 2007 Schedule C expense

deductions totaling $165,387.3    Respondent also disallowed 2008


     3
      These disallowed deductions related to: (1) Insurance
expenses; (2) office expenses; (3) rent or lease for vehicles,
machinery, and equipment expenses; (4) repairs and maintenance
expenses; (5) supplies expenses; (6) taxes and licenses expenses;
                                                    (continued...)
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Schedule C expense deductions totaling $35,921.4   Petitioner filed

a timely petition with this Court.

                             OPINION

I.   Business Deductions

     Deductions are a matter of legislative grace, and the

taxpayer must prove he or she is entitled to the deductions

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934).   Section 162(a) provides that “There shall

be allowed as a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on any trade

or business”.   The regulations specify that ordinary and

necessary business expenses include “the ordinary and necessary

expenditures directly connected with or pertaining to the

taxpayer’s trade or business”.    Sec. 1.162-1(a), Income Tax Regs.

Taxpayers are required to maintain records sufficient to

establish the amounts of allowable deductions and to enable the

Commissioner to determine the correct tax liability.   Sec. 6001;

Shea v. Commissioner, 112 T.C. 183, 186 (1999).

     In addition to satisfying the criteria for deductibility

under section 162, certain categories of expenses must also


     3
      (...continued)
(7) meals and entertainment expenses; (8) utility expenses; and
(9) other expenses.
     4
      These disallowed deductions related to: (1) Car and truck
expenses; (2) legal and professional expenses; (3) rent or lease
for vehicles, machinery, and equipment expenses; (4) repairs and
maintenance expenses; and (5) other expenses.
                               - 5 -

satisfy the strict substantiation requirements of section 274(d)

in order for a deduction to be allowed.   The expenses to which

section 274(d) applies include, among other things, meals and

entertainment expenses and expenses for passenger automobiles.

See secs. 274(d)(1), (2), (4), 280F(d)(4).

     If the trial record provides sufficient evidence that the

taxpayer has incurred a deductible expense but the taxpayer is

unable to substantiate adequately the precise amount of the

deduction to which he or she is otherwise entitled, the Court may

estimate the amount of the deductible expense and allow the

deduction to that extent (Cohan rule).    Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,

827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); see

also sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).   In these instances, the Court is permitted

to make as close an approximation of the allowable expense as it

can, bearing heavily against the taxpayer whose inexactitude is

of his or her own making.   Cohan v. Commissioner, supra at 544.

However, in order for the Court to estimate the amount of an

expense, the Court must have some basis upon which an estimate

may be made.   Vanicek v. Commissioner, supra at 742-743.   Without

such a basis, any allowance would amount to unguided largesse.

Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).
                                - 6 -

      Section 274(d) overrides the Cohan rule and thus

specifically precludes the Court from allowing a deduction for

travel expenses, entertainment expenses, gifts, and expenses with

respect to section 280F(d)(4) “listed property” (including

passenger automobiles) “unless the taxpayer substantiates by

adequate records or by sufficient evidence corroborating the

taxpayer’s own statement”:   (1) The amount of the expense or

other item; (2) the time and place of the travel, entertainment

or use, or date and description of the gift; (3) the business

purpose of the expense or other item; and (4) in the case of

entertainment or gifts, the business relationship to the taxpayer

of the recipients or persons entertained.

      Other than those deductions respondent conceded, petitioner

failed to provide receipts, logs, books, or any other kind of

documentation to substantiate the deductions claimed on his 2007

and 2008 Federal income tax returns.    Without more information

regarding the claimed deductions, we sustain respondent’s

determinations with regard to petitioner’s 2007 and 2008 Federal

income tax returns.

II.   Section 6662(a) Penalty

      Section 6662(a) and (b)(2) imposes a 20-percent accuracy-

related penalty upon any underpayment of tax resulting from a

substantial understatement of income tax.   An understatement is

substantial if it exceeds the greater of 10 percent of the tax
                                 - 7 -

required to be shown on the return or $5,000.     Sec.

6662(d)(1)(A).   The Commissioner bears the burden of production

with respect to penalties.    Sec. 7491(c); Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001).    Petitioner accurately reported his

income on his 2007 and 2008 Federal income tax returns.    However,

petitioner was unable to substantiate various deductions claimed.

Thus, respondent calculated that petitioner understated his tax

liability by $60,227 in 2007 and $9,869 in 2008.    Petitioner had

reported taxes of $14,176 and $7,585 on his 2007 and 2008

returns, respectively.   The amount of each understatement was

substantial because each exceeded the greater of:    (1) 10 percent

of the tax required to be shown on the return for the taxable

year, or (2) $5,000.    Consequently, respondent has satisfied his

burden of production.

     The accuracy-related penalty is not imposed, however,

with respect to any portion of the underpayment for which the

taxpayer can establish that he acted with reasonable cause and in

good faith.   Sec. 6664(c)(1).   The decision as to whether the

taxpayer acted with reasonable cause and in good faith depends

upon all the pertinent facts and circumstances.    Sec. 1.6664-

4(b)(1), Income Tax Regs.    Circumstances indicating that a

taxpayer acted with reasonable cause and in good faith include

“an honest misunderstanding of fact or law that is reasonable in
                                 - 8 -

light of all of the facts and circumstances, including the

experience, knowledge, and education of the taxpayer.”     Id.

     Petitioner asserts that he acted with reasonable cause

and in good faith, pointing out that:    (1) He accurately reported

his gross business income; (2) he provided bank statements,

subcontractor checks, and receipts to substantiate the deductions

claimed to the best of his ability; (3) expense deductions

previously unclaimed were allowed; and (4) he hired a certified

public accountant to prepare his Federal income tax returns for

2007 and 2008.   Given the circumstances, we find petitioner acted

with reasonable cause and in good faith, although we would

encourage him to keep better business records in the future.

Accordingly, we hold that petitioner is not liable for the

accuracy-related penalties under section 6662(a).

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
