                    T.C. Memo. 2012-2



                 UNITED STATES TAX COURT



              BAACEL ROUMI, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 29776-09.               Filed January 3, 2012.



     R determined additional interest income,
disallowed certain business expense deductions P
claimed on his 2007 tax return, and determined a
deficiency in income tax, an addition to tax for
failure to timely file under sec. 6651(a)(1), I.R.C.,
and an accuracy-related penalty under sec. 6662(a),
I.R.C., for P’s 2007 tax year.

     Held:   P is liable for the deficiency.

     Held, further, P is liable for the addition to tax
for failure to timely file his tax return under sec.
6651(a)(1), I.R.C.

     Held, further, P is liable for the accuracy-
related penalty under sec. 6662(a), I.R.C.



Baacel Roumi, pro se.

Nicole C. Lloyd, for respondent.
                               - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of an income tax deficiency, a section

6651(a)(1) addition to tax for failure to timely file a Federal

tax return, and a section 6662(a) accuracy-related penalty that

respondent determined for petitioner’s 2007 tax year.1    After a

concession by petitioner,2 the issues for decision are:   (1)

Whether petitioner is entitled to certain deductions claimed on

three separate Schedules C, Profit or Loss From Business; (2)

whether petitioner is liable for a section 6651(a)(1) addition to

tax for a failure to timely file a Federal income tax return; and

(3) whether petitioner is liable for a section 6662(a)

accuracy-related penalty.

                         FINDINGS OF FACT

     Some of the facts have been stipulated.   The stipulated

facts, with accompanying exhibits, are incorporated herein by

this reference.   At the time his petition was filed, petitioner

resided in California.




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the year at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
      At trial on Dec. 15, 2010, petitioner conceded he is liable
for income tax on $1,392 of unreported interest income.
                                 - 3 -

     Petitioner filed his 2007 Form 1040, U.S. Individual Income

Tax Return, on April 23, 2008.    In 2007 petitioner was employed

by Quick Loan Funding and Homefield Financial Inc., and was paid

wages reported on Forms W-2, Wage and Tax Statement, of

$127,319.47 and $79,052.24, respectively.     Petitioner included

three Schedules C with his Form 1040 for three separate

businesses in 2007.

     The first Schedule C was for petitioner’s business as a

“mortgage banker” and reported gross receipts of $2,309 and

claimed deductions for car and truck expenses of $10,242 for

driving 21,118 miles.   Respondent disallowed this expense.    The

Second Schedule C was for petitioner’s business “ZE Advertising

Co.” and reported no gross receipts or sales but claimed total

expenses of $69,893, of which $11,922 was for car and truck

expenses, for driving 24,582 miles.3     Respondent disallowed all

of the ZE Advertising Co. claimed expenses.     The third Schedule C

was for petitioner’s search engine optimization business,

“E-Gumball”, and reported gross income receipts of $43,218,

claimed costs of goods sold of $22,587, and claimed miscellaneous


     3
      The remainder of the expenses comprised the following:
Advertising expenses of $15,218; insurance expenses of $2,864;
legal and professional services totaling $2,852; office expenses
of $10,218; taxes and licenses totaling $385; “other expenses”
totaling $26,434 (which comprised Web and Internet costs of
$19,642; telephone answering service expense of $2,240; telephone
expense of $2,954; janitorial expenses of $480; equipment rentals
for $562; dues and subscriptions costing $388; and bank service
charges of $168).
                               - 4 -

expenses for advertising of $25,560.    Respondent disallowed

petitioner’s claimed E-Gumball expenses for advertising and costs

of goods sold.

                              OPINION

I.   Preliminary Evidentiary Matters

     At trial petitioner attempted to introduce into evidence

various bank account statements as Exhibits 8-P, 9-P, and 10-P.

These exhibits were not stipulated and were not provided to

respondent until the morning of the trial, contrary to the clear

direction in the standing pretrial order.4   The Court did not

issue a ruling on the admissibility of the exhibits at trial.

     The Court gave respondent and petitioner further time to

verify the authenticity of the exhibits, find and verify

additional documents, and supplement the stipulation of facts and

the attached exhibits.   The parties filed one such supplemental

stipulation during the 60-day period before the close of the

trial record, which was set to occur on February 14, 2011.      The



     4
      On July 9, 2010, the Court issued a standing pretrial order
requiring that

     documents or materials which a party expects to utilize
     in the event of a trial (except solely for
     impeachment), but which are not stipulated, shall be
     identified in writing and exchanged by the parties at
     least 14 days before the first day of the trial
     session. The Court may refuse to receive in evidence
     any document or material not so stipulated or
     exchanged, unless otherwise agreed by the parties or
     allowed by the Court for good cause shown.
                                 - 5 -

supplemental stipulation related to two checks, for $5,000 and

$3,000, which now constitute Exhibit 11-J.    The Court understands

and appreciates the resources and efforts petitioner has put

forth in order to produce copies of these two checks and file

them before the record closed.    Also included in the supplemental

stipulation was Exhibits 12-J and 13-J, a copy of a transcript

from the IRS showing that petitioner issued no Forms 1099-MISC,

Miscellaneous Income, during the 2007 tax year under his Social

Security number and a copy of a transcript showing that ZE

Advertising Co. issued no Forms 1099-MISC during the 2007 tax

year under ZE Advertising Co.’s taxpayer identification number,

respectively.   These exhibits are admitted and incorporated

herein by this reference.

     Exhibit 9-P is a summary of the bank account from which the

two checks contained in Exhibit 11-J were drawn.    At trial

petitioner put forth no credible evidence for which business the

$8,000 was paid on behalf of, nor did he establish the business

purpose of the payments.    When petitioner presented Exhibit 11-J

to respondent, he did so without additional documentation to

support that the checks were for a specific business or related

to a particular expense.    Petitioner has failed to show that

Exhibit 9-P or Exhibit 11-J has any relevance to the claimed
                                - 6 -

deductions on any of his three Schedules C.   Therefore the Court

rules that Exhibits 8-P, 9-P, and 10-P are not admissible.5

II.   Burden of Proof

      In general, the Commissioner’s determination of a taxpayer’s

tax liability is presumed correct, and the taxpayer bears the

burden of proving that the Commissioner’s determination is

improper.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain

circumstances.   Petitioner has neither alleged that section

7491(a) applies nor established his compliance with applicable

substantiation and recordkeeping requirements.    See secs. 6001,

7491(a)(2)(A) and (B); sec. 1.6001-1(a), Income Tax Regs.

Petitioner therefore bears the burden of proof.

      This case concerns certain deductions claimed on three

separate Schedules C attached to petitioner’s 2007 Federal income

tax return.   Deductions are a matter of legislative grace, and

taxpayers bear the burden of proving entitlement to any claimed

deduction.    Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).   Taxpayers are required to identify each deduction

available and show that they have met all requirements as well as



      5
      Even if admitted, the exhibits do not substantiate without
more supporting documents the expenses that petitioner reports on
his three Schedules C and therefore would have had no effect on
the ultimate outcome of this case.
                                - 7 -

to keep books or records that substantiate all claimed

deductions.    Sec. 6001; Roberts v. Commissioner, 62 T.C. 834,

836-837 (1974).

     Under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930), if a taxpayer claims a deduction but cannot fully

substantiate it, the Court, subject to certain exceptions, may

approximate the allowable amount, bearing heavily against the

taxpayer whose inexactitude in substantiating the amount of the

deduction is of his own making.    However, in order for the Court

to estimate the amount of a deduction, 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).

     If a taxpayer’s records are lost or destroyed through

circumstances beyond his control, the taxpayer may still

substantiate the claimed deductions by use of other credible

evidence.6    Malinowski v. Commissioner, 71 T.C. 1120, 1125

(1979).   A taxpayer is generally allowed, in such circumstances,

to substantiate the deductions by a reasonable reconstruction of

the expenditures or uses.    Evan v. Commissioner, T.C. Memo.


     6
      Even though a taxpayer can use evidence other than books or
records to substantiate claimed deductions, we are not bound to
accept a taxpayer’s unverified, undocumented testimony. Hradesky
v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976).
                                - 8 -

2004-180; see sec. 1.274-5T(c)(5), Temporary Income Tax Regs., 50

Fed. Reg. 46022 (Nov. 6, 1985).    Although the Court may estimate

amounts, any estimations must have a reasonable evidentiary

basis.    Villarreal v. Commissioner, T.C. Memo. 1998-420.

     Petitioner asserts that a fire in his house destroyed

records and documents pertaining to the claimed deductions on the

three Schedules C attached to his 2007 Federal income tax return.

Petitioner is not relieved of the burden of substantiation.     See

Evan v. Commissioner, supra.    If a fire destroyed his records,

petitioner had the opportunity to reconstruct them in order to

substantiate the claimed deductions.     While we sympathize with

his plight arising from the fire, petitioner failed to

reconstruct records in any meaningful manner.

III. Whether Petitioner Is Entitled to Certain Expense Deductions
     Claimed on Schedules C

     Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.    A trade or business

expense is ordinary for purposes of section 162 if it is normal,

usual, or customary within a particular trade, business, or

industry and is necessary if it is appropriate and helpful for

the development of the business.   Commissioner v. Heininger, 320

U.S. 467, 471 (1943); Deputy v. du Pont, 308 U.S. 488, 495

(1940).
                                - 9 -

     A.    First Schedule C Car and Truck Expenses

     On his 2007 Schedule C1 for the “Mortgage Banker” business

petitioner claimed car and truck expense deductions totaling

$10,242 for driving 21,118 business miles.    In certain

circumstances, the taxpayer must meet specific substantiation

requirements to be allowed a deduction under section 162.     See,

e.g., sec. 274(d).   The heightened substantiation requirements of

section 274(d) apply to:    (1) Any travel expense, including meals

and lodging while away from home; (2) any item with respect to an

activity in the nature of entertainment, amusement, or

recreation; (3) any expense for gifts; and (4) the use of “listed

property,” as defined in section 280F(d)(4), which includes any

“passenger automobile”.    To deduct such expenses, the taxpayer

must substantiate by adequate records or sufficient evidence to

corroborate the taxpayer’s own statement of the amount, the time,

the place, and the business purpose of the claimed car or truck

expense.   Sec. 274(d) (flush language).

     To satisfy the adequate records requirement of section

274(d), a taxpayer must maintain records and documentary evidence

that in combination are sufficient to establish each element of

an expenditure or use.    Sec. 1.274-5T(c)(1) and (2), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).    Although a

contemporaneous log is not required, corroborative evidence to

support a taxpayer’s reconstruction “of the elements * * * of the
                               - 10 -

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.

     In cases where section 274 requires substantiation of an

expense, the Court may not estimate the expense under Cohan.

Lewis v. Commissioner, 560 F. 2d 973, 977 (9th Cir. 1977), revg.

T.C. Memo. 1974-59.   Furthermore, if an expense is subject to the

strict substantiation requirements of section 274(d), no

deduction is allowable on the basis of any approximation or the

taxpayer’s unsupported testimony.    Sanford v. Commissioner, 50

T.C. 823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir.

1969).

     Petitioner claims to have traveled 21,118 business miles

with respect to his mortgage banking business.   However, he has

failed to offer any documents, contemporaneous or otherwise, to

substantiate the time, place, and business purpose of these

miles.    Petitioner’s claim that records related to the driving

expenses were destroyed by a fire does not relieve him of his

burden of substantiation.   See Evan v. Commissioner, supra.

Therefore we sustain respondent’s disallowance of the car and

truck expense deductions claimed on petitioner’s first Schedule C

for failure to meet the requirements of section 162 and section

274(d).
                                - 11 -

     Petitioner is also not allowed a deduction for the actual

costs of operating his vehicle, including Mercedes Benz lease

payments and gasoline expenditures.      Petitioner has provided no

substantiation that links these payments with his business.

Secs. 162, 274(d).    Therefore we sustain respondent’s

disallowance of the actual car and truck expenses reported on

petitioner’s first Schedule C, for failure to meet the

requirements of section 162 and section 274(d).

     B.    Second Schedule C Expenses

     On his Schedule C for ZE Advertising Co., petitioner claimed

$69,893 in expense deductions, including $11,922 of car mileage

expenses, which suffered from the same lack of substantiation

discussed above.     Section 162(a) provides that a taxpayer who is

“carrying on” a “trade or business” may deduct ordinary and

necessary expenses incurred in connection with the operation of

the business.   The Supreme Court held in Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987), that to be considered to be

carrying on a trade or business within the meaning of section

162, “the taxpayer must be involved in the activity with

continuity and regularity and * * * the taxpayer’s primary

purpose for engaging in the activity must be for income or

profit.”   In determining whether a taxpayer’s involvement with

the alleged business was sufficiently continuous and regular, it

is not controlling that the taxpayer intended to operate a
                               - 12 -

business, because a business may not exist or yet have commenced

without a single customer.   There is no business in active

operation where there are no customers and no evidence of any

sales efforts that could lead to customers.    Goodwin v.

Commissioner, 75 T.C. 424, 433 (1980), affd. without published

opinion 691 F.2d 490 (3d Cir. 1982); Wolfgram v. Commissioner,

T.C. Memo. 2010-69.

     Petitioner failed to establish that his claimed advertising

business was in fact an ongoing business for profit as required

by section 162(a).    There is no evidence in the record that

petitioner’s business was in operation in 2007.    At trial

petitioner testified that in 2007 the business was “in

development”.   ZE Advertising Co.’s taxpayer identification

number was not established until January 2008.    By that time

petitioner may have already abandoned the business, as he could

not remember at trial whether he terminated it in December 2007

or in 2008.   Furthermore, petitioner did not present evidence

that the business had ever generated revenue or that he had

claimed expense deductions relating to it in prior tax years.

Petitioner failed to convincingly explain why if it was an active

business he had no gross receipts or sales from its operations in

2007 but managed to generate $69,893 in expenses.

     We also note that even if petitioner’s business had been

active and in existence in 2007, we would still disallow the
                                - 13 -

business expense deductions claimed on the second Schedule C.

Petitioner failed to meet the substantiation requirements of

section 162 and section 274(d).    At trial he did not adequately

explain the expenses or how they were related to the business.

Repeatedly at trial petitioner testified that he could not

remember for what certain payments were used or for which

business the costs were incurred.     Consequently, we hold

petitioner may not deduct the expenditures claimed on the second

Schedule C for 2007.

     C.     Third Schedule C Expenses

     On Schedule C for E-Gumball petitioner claimed deductions

for $64,435 of expenses.     Respondent disallowed deductions of

$25,560 for advertising expenses and $22,587 for cost of goods

sold.     Petitioner presented no evidence to substantiate these

expenses.     At trial petitioner attempted to substantiate the

expenses for advertising but could not link them with any

specific payment.     Petitioner did not testify about, nor offer

any other credible evidence to substantiate, the claimed cost of

goods sold.     Without demonstrating that these expenditures were

ordinary and necessary to his business, or showing that they even

exist, he has failed to substantiate that he is entitled to the

deductions under section 162.     See Commissioner v. Heininger, 320

U.S. at 475; Hradesky v. Commissioner, 65 T.C. 87 (1975), affd.

per curiam 540 F.2d 821 (5th Cir. 1976).     Therefore, we must
                               - 14 -

sustain respondent’s determination disallowing deductions for

advertising and cost of goods claimed on petitioner’s third

Schedule C.

IV.   Section 6651(a)(1) Addition to Tax for Failure To Timely
      File Federal Income Tax Return

      Section 6651(a)(1) imposes an addition to tax for failure to

file a timely Federal income tax return unless the taxpayer can

demonstrate such failure was due to reasonable cause and not

willful neglect.7   Reasonable cause for the failure to file a

timely return exists if the taxpayer exercised ordinary business

care and prudence but was unable to file the return within the

time prescribed by law.    United States v. Boyle, 469 U.S. 241,

248-250 (1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

      Respondent determined that petitioner is liable for an

addition to tax under section 6651(a)(1) for 2007.   The parties

stipulated that petitioner filed his return on April 23, 2008, 8

days after its due date.   Petitioner made no arguments nor did he

offer any evidence that his failure to timely file his Federal

income tax return for 2007 was due to reasonable cause.   We

sustain respondent’s determination that petitioner is liable for

an addition to tax under section 6651(a)(1).




      7
      The amount of the addition to tax is 5 percent of the
amount required to be shown as tax on the return for each month,
or portion thereof, that the delinquency continues, up to a
maximum of 25 percent. Sec. 6651(a)(1).
                                - 15 -

V.     Section 6662 Accuracy-Related Penalty

       Section 6662(a) imposes an accuracy-related penalty of 20

percent of any underpayment that is attributable to causes

specified in subsection (b), including negligence and a

substantial understatement of income tax.      Sec. 6662(b)(1) and

(2).    Under section 7491(c), respondent bears the burden of

production with respect to petitioner’s liability for the section

6662(a) penalty.    This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.”      See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).    Respondent asserts two causes justifying

the imposition of the penalty:      Negligence and a substantial

understatement of income tax.      Sec. 6662(b)(1) and (2).

       “[N]egligence” includes “any failure to make a reasonable

attempt to comply with the provisions of * * * [the Internal

Revenue Code]”.    Sec. 6662(c).    Under caselaw, “‘Negligence is a

lack of due care or the failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),

affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

“‘Negligence’ also includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.”
                               - 16 -

Sec. 1.6662-3(b)(1), Income Tax Regs.    A substantial

understatement of income tax as to an individual is an

understatement that exceeds the greater of $5,000 or 10 percent

of the tax required to be shown on the return.    Sec.

6662(d)(1)(A).

     Petitioner had the duty to keep adequate records and to

substantiate items properly pursuant to section 1.6662-(3)(b)(1),

Income Tax Regs.    Petitioner asserts his records were destroyed

by a fire.    When respondent audited his return, petitioner had

the duty to make a reasonable effort to reconstruct his records

or at least to present other credible evidence to support a

reasonable estimate of the purposes and amounts of reported

expenses.    Lockett v. Commissioner, 306 Fed. Appx. 464, 467 (11th

Cir. 2009), affg. T.C. Memo. 2008-5.

     There is a substantial understatement of income tax because

claimed deductions were not substantiated and have been

disallowed.    See sec. 6662(d).   Petitioner reported tax due of

$13,403.    Respondent determined that the correct tax liability is

$69,801.    Therefore, the understatement of income tax is greater

than 10 percent of the amount required to be shown and greater

than $5,000.    Petitioner has not established substantial

authority for any item of the claimed deductions at issue, nor

has he proved that there was an adequate disclosure in his tax

return or in an attached statement of the full facts concerning
                              - 17 -

such deductions.   Petitioner also failed to demonstrate a

reasonable basis for his tax treatment of the claimed deductions

at issue.   See sec. 6662(d)(2)(B).

     In the light of petitioner’s failure to reconstruct his tax

records and substantiate his claimed deductions, as well as his

substantial understatement of income tax, respondent has met his

burden of production with regard to the section 6662(a)

accuracy-related penalty.   We recognize that there is an

exception to the penalty provided by section 6664(c) where

reasonable cause for the underpayment and good faith are shown to

exist.   But petitioner has made no such showing on either count.

We therefore sustain respondent’s determination of the section

6662 accuracy-related penalty.

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.    To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                      Decision will be entered

                                 for respondent.
