                  T.C. Summary Opinion 2006-39



                     UNITED STATES TAX COURT



          CARL F. AND FRANCES R. BUTLER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20347-04S.            Filed March 16, 2006.


     Carl F. and Frances R. Butler, pro sese.

     Bradley C. Plovan, for respondent.



     GOLDBERG, 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, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax of $5,371 for the taxable year 2002.

     The issues for decision are:   (1) Whether petitioners are

entitled to an itemized deduction for medical expenses claimed on

their Schedule A; (2) whether petitioners are entitled to claim

Schedule C business expenses; and (3) whether petitioners are

entitled to Schedule E expenses of $3,368.

                            Background

     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.   Petitioners Carl F.

Butler (Mr. Butler) and Frances R. Butler (Mrs. Butler) were

married and resided in Keyser, West Virginia, during the taxable

year at issue and on the date the petition was filed in this

case.

     Petitioners’ daughter, Carla Rae Butler (Carla), was

diagnosed with cancer in 2001 and began chemotherapy treatments

at the Johns Hopkins Hospital (Hopkins) in Baltimore, Maryland.

During taxable year 2002, Carla continued receiving treatment at

Hopkins.   Mrs. Butler and Carla would drive to Baltimore and

would stay at Hopkins almost every week from “Tuesday through

Friday or Saturday” during Carla’s treatment and then return

home.   During this time, Mr. Butler stayed home in Keyser, West

Virginia, and looked after petitioners’ two other daughters.
                                - 3 -

Mrs. Butler usually stayed in Carla’s hospital room during the

treatments at Hopkins.    In connection with Carla’s treatment,

during taxable year 2002, petitioners received two grants of

financial assistance from the National Children’s Cancer Society

of $708 and $472.

     Also, during taxable year 2002, Mr. Butler was retired and

received Social Security benefits.      He suffered from a heart

condition, which required him to take several prescription

medications.   During 2002, he received Medicare reimbursements

which paid toward his medications and other medical expenses.

Mrs. Butler also had medical issues during 2002.

     During the year in issue, Mrs. Butler was employed as a

respiratory therapist at Potomac Valley Hospital in Keyser, West

Virginia.   Mrs. Butler’s employer, during 2002, deducted from her

earnings health insurance premiums totaling $1,528.30.      She was

also a self-employed respiratory therapist for Mid-State Medical

during the 2002 year.    As a self-employed therapist, she made

home visits to clients, performing respiratory therapy on them

and regulating their medical equipment.

     Also, during the year in issue, petitioners owned rental

property consisting of a 1972 Challenger trailer (trailer) and

land.   Mr. Butler purchased the trailer in 1974 and converted it

into rental property in either 1993 or 1994.      Petitioners rented
                                 - 4 -

the trailer to Frank and Nora Miller (Millers) for about 7

months.     The Millers paid petitioners $200 per month rent.

     Petitioners filed a joint Federal income tax return for

2002, which included a Schedule A, Itemized Deductions, a

Schedule C, Profit or Loss From Business, and a Schedule E,

Supplemental Income and Loss.     Their return was prepared by

Fout’s Accounting Service in Keyser, West Virginia.

     On their jointly filed 2002 tax return, petitioners reported

adjusted gross income of $30,878, and claimed Schedule A itemized

deductions of $16,094.

     On their Schedule A, petitioners claimed the following

deductions, in pertinent part:

                       Itemized Deductions                 Amount

     Line    1         Medical and dental expenses         $10,723
     Line    4         Net medical deduction                 8,407
     Line    5         State and local income taxes          1,409
     Line    6         Real estate taxes                     1,303
     Line    9         Total taxes                           2,712
     Line   10         Mortgage Interest                     3,083
     Line   14         Total interest deduction              3,083
     Line   15         Gifts by cash or check                1,642
     Line   16         Gifts other than by cash or check       250
     Line   18         Total gifts to charity                1,892
     Line   26         Net limited misc. deduction               0
     Line   28         Total itemized deductions            16,094

     Mrs. Butler attached to their 2002 Federal income tax return

a Schedule C.     On her schedule C for taxable year 2002, Mrs.

Butler listed as her principal business or profession:

“Respiratory Tech”.     She reported $10,510 of business income,

$10,659 in business expenses, and $771 for expenses for business
                                 - 5 -

use of petitioners’ home.    This resulted in a reported business

loss of $920.     Mrs. Butler’s Schedule C business expenses were as

follows:

     Line   10    Car and truck expenses                  $5,099
     Line   16b   Interest (other)                         1,042
     Line   17    Legal and professional services            125
     Line   18    Office expense                             656
     Line   23    Taxes and licenses                         150
     Line   24d   Travel, meals, and entertainment           703
     Line   25    Utilities                                  804
     Line   27    Other expenses                           2,080
     Line   28    Total expenses                         $10,659
     Line   30    Expenses for business use of your home     771
     Line   31    Net profit or loss                       ($920)

     On their Schedule E for taxable year 2002, petitioners

reported income of “rents received” of $1,200 and deducted $3,368

in expenses and depreciation.    This resulted in a reported

“Supplemental Loss” of $2,168.    Petitioners’ Schedule E expenses

were as follows:

     Line    6    Auto and travel                         $655
     Line   16    Taxes                                    237
     Line   17    Utilities                                224
     Line   18    Other (yard work and gas mower)          322
     Line   20    Depreciation expense or depletion      1,930
     Line   21    Total expenses                        $3,368

     On October 14, 2004, respondent issued petitioners a notice

of deficiency for taxable year 2002.     In the notice of

deficiency, respondent disallowed petitioners’ claimed deductions

for medical and dental expenses along with gifts to charity.     The

dollar amount of the remaining itemized deductions was less than

the 2002 standard deduction for taxpayers married filing jointly;

therefore, respondent computed petitioners’ 2002 tax deficiency
                                - 6 -

using the standard deduction.    Further, respondent, in the notice

of deficiency, disallowed petitioners’ claimed deductions for

Schedule C expenses of $10,659 and Schedule E expenses and

depreciation of $1,438 and $1,930, respectively.

     At trial, respondent conceded that petitioners have

substantiated taxes paid of $1,409, mortgage interest of $3,852,

and medical expenses of $4,468.    However, due to certain

limitations these amounts still do not exceed the standard

deduction for taxpayers married filing jointly in 2002.

                              Discussion

     In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct.       Welch v. Helvering,

290 U.S. 111, 115 (1933).   In pertinent part, Rule 142(a)(1)

provides the general rule that “The burden of proof shall be upon

the petitioner”.   In certain circumstances, however, if the

taxpayer introduces credible evidence with respect to any factual

issue relevant to ascertaining the proper tax liability, section

7491 places the burden of proof on the Commissioner.       Sec.

7491(a)(1); Rule 142(a)(2).    Credible evidence is “‘the quality

of evidence which, after critical analysis, * * * [a] court would

find sufficient * * * to base a decision on the issue if no

contrary evidence were submitted’”.1       Baker v. Commissioner, 122


     1
      We interpret the quoted language as requiring the
taxpayer’s evidence pertaining to any factual issue to be
                                                   (continued...)
                                 - 7 -

T.C. 143, 168 (2004) (quoting Higbee v. Commissioner, 116 T.C.

438, 442 (2001)).   Section 7491(a)(1) applies only if the

taxpayer complies with substantiation requirements, maintains all

required records, and cooperates with reasonable requests by the

Commissioner for witnesses, information, documents, meetings, and

interviews.   Sec. 7491(a)(2).   Although neither party alleges the

applicability of section 7491(a), we conclude that the burden of

proof has not shifted to respondent with respect to any of the

issues in the present case.

     Moreover, deductions are a matter of legislative grace and

are allowed only as specifically provided by statute.     INDOPCO,

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

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

     Section 6001 and the regulations promulgated thereunder

require taxpayers to maintain records sufficient to permit

verification of income and expenses.     As a general rule, if the

trial record provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the precise amount of the deduction to

which he or she is otherwise entitled, the Court may estimate the

amount of the deductible expense, bearing heavily against the



     1
      (...continued)
evidence the Court would find sufficient upon which to base a
decision on the issue in favor of the taxpayer. See Bernardo v.
Commissioner, T.C. Memo. 2004-199.
                                 - 8 -

taxpayer whose inexactitude in substantiating the amount of the

expense is of his own making, and allow the deduction to that

extent.   Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

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, 85 T.C. 731, 742-743

(1985).   Without such a basis, any allowance would amount to

unguided largesse.     Williams v. United States, 245 F.2d 559, 560-

561 (5th Cir. 1957).    With these well-established propositions in

mind, we must determine whether petitioners have satisfied their

burden of proving that they are entitled to the claimed expenses

mentioned above.

1.   Medical and Dental Expenses

     As previously stated, on their Schedule A for taxable year

2002, petitioners claimed a deduction of $10,723 for medical and

dental expenses incurred during taxable year 2002.    Respondent,

at trial, conceded that petitioners substantiated medical and

dental expenses incurred during taxable year 2002 of $4,468.

However, respondent notes that petitioners did receive

reimbursement from the National Children’s Cancer Society, Inc.

for medical expenses paid relating to Carla of $1,180, which

would decrease any deduction allowed for medical and dental

expenses paid.    Further, respondent contends that petitioners
                                - 9 -

have not substantiated medical and dental expenses incurred

during taxable year 2002 above the amount of $4,468.

       Section 213(a) allows as a deduction any expenses that are

paid during the taxable year for the medical care of the

taxpayer, his spouse, and dependents, and that are not

compensated for by insurance or otherwise.    Estate of Smith v.

Commissioner, 79 T.C. 313, 318 (1982).    The deduction is allowed

only to the extent the amount exceeds 7.5 percent of adjusted

gross income.    Sec. 213(a); sec. 1.213-1(a)(3), Income Tax Regs.

The term “medical care” includes amounts paid “for the diagnosis,

cure, mitigation, treatment or prevention of disease, or for the

purpose of affecting any structure or function of the body”.

Sec. 213(d)(1)(A); Estate of Smith v. Commissioner, supra at 318-

319.

       Petitioners claim they are entitled to a deduction of

$10,723 for medical expenses incurred as a result of Carla’s

cancer treatments, Mr. Butler’s heart ailments, and other

miscellaneous medical expenses relating to Mrs. Butler and

petitioners’ other children.

       At trial, petitioners offered into evidence handwritten

lists of medical expenses they claim were incurred during taxable

year 2002.    However, some expenses on these lists are

inconsistent with previous statements made by petitioners.     We

have taken into consideration all of the documents offered into
                             - 10 -

evidence by petitioners and find that petitioners have

substantiated for taxable year 2002:   (1) A mileage expense of

$926.402 for “miles traveled to and from hospitals and doctors”;

(2) a medical eye expense of $134; (3) a CT Scan expense of $163;

(4)a hotel expense of $100;3 and (5)other miscellaneous health

and hospital expenses of $3,117.   The amounts substantiated by

petitioners add up to medical and dental expenses paid of $4,440.

     Petitioners have not provided sufficient evidence to prove

that medical expenses above the conceded amount of $4,468 were

incurred during taxable year 2002.    Further, the evidence in the

record does not allow the Court to estimate any additional amount

of medical expenses under the Cohan rule.    Sec. 6001; sec.

1.6001-1(a), (e), Income Tax Regs.

     Due to the fact that the medical and dental expense

deduction is allowed only to the extent that the amount exceeds

7.5 percent of petitioners’ adjusted gross income and petitioners

have not substantiated any additional miscellaneous itemized

deductions which would add up to an amount that exceeds the

amount of the standard deduction, we sustain respondent’s



     2
      This amount was calculated by multiplying petitioners’
substantiated miles traveled of 7,720 by the taxable year 2002
allowable standard medical mileage rate of 12 cents per mile.
See Rev. Proc. 2002-61, 2002-2 C.B. 616.
     3
      Petitioners substantiated a hotel expense of $250.26 for an
evening of lodging away from home. However, this expense is
limited to $100 pursuant to sec. 213(d)(2).
                              - 11 -

disallowance of petitioners’ claimed itemized deductions in favor

of the standard deduction.

2.   Schedule C Expenses

     A taxpayer generally may not deduct personal, living, and

family expenses.   Sec. 262(a).   However, section 162(a) allows a

taxpayer to deduct all ordinary and necessary business expenses

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

or business.   To be “necessary” an expense must be “appropriate

and helpful” to the taxpayer’s business.    Welch v. Helvering, 290

U.S. at 113-114.   To be “ordinary” the transaction that gives

rise to the expense must be of a common or frequent occurrence in

the type of business involved.    Deputy v. du Pont, 308 U.S. 488,

495 (1940).

     As previously stated, section 6001 and the regulations

promulgated thereunder require taxpayers to maintain records

sufficient to permit verification of income and expenses.   If the

trial record provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the precise amount of the deduction to

which he or she is otherwise entitled, the Court may estimate the

amount of the deductible expense, bearing heavily against the

taxpayer whose inexactitude in substantiating the amount of the

expense is of his own making, and allow the deduction to that

extent.   Cohan v. Commissioner, supra.
                             - 12 -

     In the case of travel expenses, entertainment expenses, and

expenses paid or incurred with respect to listed property, e.g.,

passenger automobiles, section 274 overrides the Cohan doctrine,

and expenses are deductible only if the taxpayer meets the

section’s stringent substantiation requirements.   Secs. 274(d),

280F(d)(4); Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968),

affd. 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

     Section 274(d) specifically provides:

          SEC. 274(d). Substantiation Required.--No deduction or
     credit shall be allowed–-

               (1) under section 162 or 212 for any traveling
          expense (including meals and lodging while away
          from home),

               (2) for any item with respect to an activity which
          is of a type generally considered to constitute
          entertainment, amusement, or recreation, or with
          respect to a facility used in connection with such
          an activity,

               (3) for any expense for gifts, or

               (4) with respect to any listed property (as
          defined in section 280F(d)(4)),

     unless the taxpayer substantiates by adequate records or by
     sufficient evidence corroborating the taxpayer’s own
     statement (A) the amount of such expense or other item, (B)
     the time and place of the travel, entertainment, amusement,
     recreation, or use of the facility or property, or the date
     and description of the gift, (C) the business purpose of the
     expense or other item, and (D) the business relationship to
     the taxpayer of persons entertained, using the facility or
     property, or receiving the gift. * * *
                                - 13 -

This section “contemplates that no deduction or credit shall be

allowed a taxpayer on the basis of such approximations or

unsupported testimony of the taxpayer.”    Sec. 1.274-5T(a),

Temporary Income Tax Regs., supra.

     In order to substantiate a deduction by means of adequate

records, a taxpayer must maintain a diary, log, statement of

expenses, trip sheet, or similar record, and documentary evidence

which, in combination, are sufficient to establish each element

of each expense or use.     Sec. 1.274-5T(c)(2)(i), Temporary Income

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

log is not required, but corroborative evidence to support a

taxpayer’s record of the elements of expenditure or use must have

“a high degree of probative value to elevate such statement and

evidence” to the level of credibility of a contemporaneous

record.   Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., supra.

Thus, no deduction for expenses under section 274(d) may be

allowed on the basis of any approximation or the unsupported

testimony of the taxpayer.    See, e.g., Murata v. Commissioner,

T.C. Memo. 1996-321; Golden v. Commissioner, T.C. Memo. 1993-602.

     At trial, Mrs. Butler testified that she calculated the

Schedule C expenses herself and gave her accountant the

worksheets with these calculations to complete petitioners’ tax

return.   However, Mrs. Butler did not offer her detailed

worksheets into evidence.    She did not keep a trip sheet or log
                              - 14 -

to substantiate her claimed car and truck expenses.    Mrs. Butler,

however, provided the Court with a list of her purported business

expenses.   Also, included was a copy of a check made payable to

“WV Board of Respiratory Care” of $55.    We believe Mrs. Butler’s

testimony that she incurred other license expenses and continuing

education credits of $95 and $260.     However, when questioned as

to the amounts claimed for the remaining business expenses on her

Schedule C, Mrs. Butler’s testimony was vague.

     Furthermore, with regard to Mrs. Butler’s deductions for her

business use of her personal residence, section 280A is

controlling.   Under section 280A, the general rule is that,

except as provided by this section, no deduction is allowable

unless an allocable portion of the residence is exclusively used

as the principal place of any business activity conducted by the

taxpayer.   All deductions allowable to the business use of the

residence must be used to offset the amount of gross income from

the business activity and is subject to the 2-percent floor on

miscellaneous itemized deductions.     Sec. 280A(a), (c)(1), (c)(5).

     We have taken into consideration Mrs. Butler’s testimony and

the handwritten list of claimed Schedule C expenses.    We conclude

that petitioners are entitled to a business deduction totaling

$410.   However, we cannot estimate any amounts for petitioners’

other business deductions under the Cohan rule.     Sec. 6001; sec.

1.6001-1(a), (e), Income Tax Regs.
                                - 15 -

3.   Schedule E Expenses

     Section 212(2) allows a deduction for all the ordinary and

necessary expenses paid or incurred during the taxable year for

the management, conservation, or maintenance of property held for

the production of income, including real property.    Sec. 1.212-

1(h), Income Tax Regs.

     Further, section 167 generally allows as a depreciation

deduction a reasonable allowance for the exhaustion and wear and

tear of property used in a trade or business, or property held

for the production of income.

     However, as previously stated, a taxpayer is required to

maintain records sufficient to establish the amount of his income

and deductions.    Sec. 6001; sec. 1.6001-1(a), (e), Income Tax

Regs.    In order for a taxpayer to be entitled to a deduction

under section 212, he must substantiate his deductions by

maintaining sufficient books and records.

     Petitioners claim that when the Millers vacated the trailer

in 2002, they took the carpeting, furniture, refrigerator, and

stove.    Petitioners testified that they replaced these items in

taxable year 2002.

     Unfortunately, the record lacks any receipts or other

documentary evidence that would provide any substantiation or a

rational basis upon which the Court could allow any deduction and

depreciation with respect to the rental property.    Further, we
                             - 16 -

note that it appears from the record that the trailer would have

been fully depreciated by taxable year 2002.    Therefore, we

sustain respondent’s determination on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                   Decision will be entered

                              under Rule 155.
