                         T.C. Memo. 2001-140



                       UNITED STATES TAX COURT



          BRUCE A. AND KATHY J. KRIST, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22563-97.                        Filed June 15, 2001.


     Bruce A. Krist, pro se.

     Joanne B. Minsky, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION

     DAWSON, Judge: This case was assigned to Special Trial Judge

Pajak pursuant to section 7443A(b)(4), Internal Revenue Code in

effect when the petition was filed, and Rules 180, 181, and 183,

Tax Court Rules of Practice and Procedure.     The Court agrees with

and adopts the opinion of the Special Trial Judge, which is set

forth below.
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               OPINION OF THE SPECIAL TRIAL JUDGE

     PAJAK, Special Trial Judge: Respondent determined a

deficiency of $5,977 in petitioners' Federal income tax for 1995

and a section 6651(a)(1) addition to tax of $219.60.    Unless

otherwise indicated, section references are to the Internal

Revenue Code in effect for the year in issue, and Rule references

are to the Tax Court Rules of Practice and Procedure.

     Respondent, in an answer to the amended petition filed

herein, claims an increased deficiency of $12,030 and an

increased section 6651(a)(1) addition to tax of $522 for 1995.

The parties have stipulated that petitioners incurred at least

$2,890 in advertising and telephone expenses deductible under

section 162(a) which relate to the locksmith business of Bruce

Krist (petitioner).

     We must decide:   (1) Whether petitioners are entitled to

deduct the remaining disallowed Schedule C expenses of $19,976

($22,866 total disallowed minus $2,890) for the locksmith

business; (2) whether petitioners had $19,640 of unreported

income for 1995 in the form of unexplained bank deposits; (3)

whether petitioners had $14,093 of additional unreported income

in the form of unexplained bank deposits, an issue raised for the

first time on brief; (4) whether petitioners are entitled to a

casualty loss of $15,800 for the seizure and destruction of the

guns held for their alleged firearms business; and (5) whether
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petitioners are liable for the section 6651(a)(1) addition to tax

for failure to file a timely income tax return.

                          FINDINGS OF FACT

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

Petitioners resided in Poinciana, Florida, at the time they filed

their petition.

     In 1995, petitioner and Kathy Krist (Mrs. Krist) resided in

Hazel Crest, Illinois.    They filed their 1995 Federal income tax

return electronically on May 14, 1996.   On April 16, 1999, they

filed an amended return for 1995.   The notice of deficiency was

timely mailed to petitioners on August 13, 1997.

     During 1995, petitioner operated BK Locksmith, a locksmith

business.   His brother Brett Krist (Brett) worked for the

locksmith business in 1995.   Petitioner also had a Federal

firearms license in the name of Illinois Firearms Service, owned

a rental property, operated a limousine business, and was in the

process of rehabilitating a house for sale.   Petitioner was

engaged part-time in these activities.   However, during 1995, he

spent more time rehabilitating the house than he spent working in

his locksmith business.

     Mrs. Krist was employed full-time as a receptionist at Baker

& McKenzie, a law firm, and part-time at Archibald Candy Corp.,

where she worked for Fannie May Candies during the Easter

holiday.
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     Petitioners had four bank accounts:    one was Mrs. Krist's

personal account; one was an account for the locksmith business

and firearms service (locksmith account); one was for the

rehabilitation of the house and the limousine business

(rehabilitation account); and one was for the rental activity

(rental account).   Receipts from the locksmith business and the

firearms service were deposited in the locksmith account and

receipts from the rental activity were deposited in the rental

account.

     Petitioners took out a bigger loan than was required for the

purchase of the house because they needed money to restore it.

They put the borrowed money in an account that belonged to

petitioner's mother so that it would earn interest.    His mother

would apportion their borrowed money as they needed it.    In 1995,

they received $10,200 of their borrowed money from the mother’s

account and deposited it in the rehabilitation account along with

deposits from the limousine business.

     As part of the locksmith business, petitioner made keys for

houses, businesses, and cars, and also made keys for repossessed

automobiles for one of his clients.    Much of petitioner's work

was done in the evenings after regular business hours.    BK

Locksmith was located in petitioner's garage (apparently not

detached) at his house in Hazel Crest, Illinois.    Because one of

his clients was the management company of an apartment building
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located near his house, petitioner had customers who would come

to his house.   The management would bring the locks over to be

rekeyed whenever a tenant moved out.    If someone lost a key,

petitioner would make it at his house.    Two other car dealer

clients would bring automobiles by his house for him to rekey.

Much of petitioner’s work was done onsite such as at a client's

house where a lockout occurred or at a car dealership.

Petitioner kept some machines and equipment in his garage.

Petitioner kept records of his daily sales and of his supplies in

a checkbook and in a business journal.    Petitioner did not place

his business journal in evidence.   Petitioner provided his

customers with invoices, but he used the type that were

duplicates, and, to get more for his money, he used both parts

for different jobs, essentially making 100 invoices out of what

should have been 50.   Therefore, he kept no copy of the invoices.

Petitioner kept some inventory on hand, but usually bought it

when needed.

     Petitioner's brother, Brett, did work for the locksmith

business in 1995.   However, petitioner did not file a Form 1099

reporting income he paid to his brother.    He claimed he did not

know what to file, and he figured it did not matter because his

brother was family.    Petitioner claimed he kept a ledger of how

much Brett was paid, but the ledger was not produced.    Respondent

calculated that in the check register about $3,600 was recorded
                               - 6 -


as paid to Brett.   Petitioner stated that the complete records

were in a spiral notebook.   However, he destroyed the pages in

the notebook on a weekly basis.

     In the notice of deficiency respondent disallowed the

following expenses claimed by petitioners on Schedule C of their

1995 Federal income tax return that pertained to the locksmith

business:

               Advertising             $ 5,350
               Commissions              12,105
               Telephone                 1,252
               Home office                 960
               Supplies                  1,704
               Car/truck                 1,495


                              OPINION

     Section 162(a) allows the deduction of "ordinary and

necessary" expenses paid or incurred during the taxable year in

carrying on a trade or business.   Whether an expenditure is

ordinary and necessary is a question of fact.      Commissioner v.
Heininger, 320 U.S. 467, 475 (1943).     An ordinary and necessary

expense is one which is appropriate and helpful to the taxpayer's

business and which results from an activity that is a common and

accepted practice in the business.      Boser v. Commissioner, 77

T.C. 1124, 1132 (1981), affd. without published opinion (9th Cir.

1983).

     We find petitioner's testimony to be truthful.     It is clear

that petitioner operated a locksmith business in 1995.     In the
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operation of such a business he would have incurred expenses for

advertising, telephone, supplies, car and truck, and commissions.

Deductions are strictly a matter of legislative grace.    INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice

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

substantiate claimed deductions.    Hradesky v. Commissioner, 65

T.C. 87, 89 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976).   Moreover, taxpayers must keep sufficient records to

establish the amounts of the deductions.   Meneguzzo v.

Commissioner, 43 T.C. 824, 831 (1965); Sec. 1.6001-1(a), Income

Tax Regs.   Generally, except as otherwise provided by section

274(d), when evidence shows that a taxpayer incurred a deductible

expense, but the exact amount cannot be determined, the Court may

approximate the amount, bearing heavily if it chooses against the

taxpayer whose inexactitude is of his own making.    Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).   The Court,

however, must have some basis upon which an estimate can be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

1.   Claimed Expenses for Advertising, Telephone, Supplies, and
     Commissions

     Petitioner's check register, for the most part, showed his

expenses in a consistent manner.   Thus, we are able to estimate

some of the claimed expenses.   In addition to the allowance of

the $2,890 for the advertising and telephone expenses agreed to

by the parties, we find that petitioners are entitled to deduct

additional expenses of $1,856 for advertising and telephone.     We
                               - 8 -


also find that they are entitled to deduct $852 as expenses for

supplies.

     The amount of $12,105 claimed as “commissions” paid to Brett

for his work in the locksmith business is allowed only to the

extent of $3,600, the amount recorded in the check register.     No

other evidence was provided by petitioners.

2.   Claimed Car and Truck Expenses
     Section 274(d) imposes stringent substantiation requirements

for the deduction of travel expenses and expenses of certain

listed property defined under section 280F(d)(4), such as an

automobile.   For such expenses taxpayers must substantiate by

adequate records certain items in order to claim deductions, such

as the amount and place of each separate expenditure, the

property’s business and total usage, the date of the expenditure

or use, and the business purpose for an expenditure or use.    Sec.

274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985).   To substantiate a deduction by means
of adequate records, a taxpayer must maintain an account book,

diary, log, statement of expense, trip sheets, and/or other

documentary evidence which, in combination, are sufficient to

establish each element of expenditure or use.   Sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.

6, 1985).   If an expense item comes within the requirements of

section 274(d), this Court cannot rely on Cohan v. Commissioner,

supra, to estimate the taxpayer’s expenses with respect to that
                               - 9 -


item.   Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd.
per curiam 412 F.2d 201 (2d Cir. 1969).

     The record does not contain any documentary evidence to

support petitioner’s claimed car and truck expenses.   Petitioner

failed to maintain adequate records such as a diary, log book, or

trip sheets to show the distances he purportedly traveled in

furtherance of his locksmith business.    Therefore, in view of the

strict substantiation rules of section 274(d), we hold that

petitioners are not entitled to deduct car and truck expenses for

1995.

3.   Claimed Home Office Expenses

     Section 280A limits the situations in which a deduction of

expenses related to a home office are allowable.   There is an

exception if a portion of the dwelling unit is used exclusively

on a regular basis as the principal place of business for any

trade or business of the taxpayer or as a place of business which

is used by patients, clients, or customers in meeting or dealing
with the taxpayer in the normal course of his trade or business.

Sec. 280A(c)(1)(A),(B).   Incidental or occasional meetings with

customers are not enough to qualify the home office for this

exception.   Crawford v. Commissioner, T.C. Memo. 1993-192.

     In Commissioner v. Soliman, 506 U.S. 168 (1993), the Supreme

Court held that when a taxpayer carries on business in more than

one location the principal place of a taxpayer’s business is the

most important or significant place of business.   This turns on
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two conditions:   (1) the relative importance of the activities

performed at each business location, and (2) the time spent at

each place.   Here we find that most of petitioner’s locksmith

work was done on the premises of customers or third parties.     The

alleged home office in his garage was not petitioner’s principal

place of business.   Although petitioner stored certain equipment,

machines, and some inventory of the locksmith business in his

garage, he failed to show that the office was used exclusively

for business purposes.   We are aware of the exception provided in

section 280A(c)(1)(C) that if an office is a “separate structure”

not attached to the dwelling unit and is used in connection with

the taxpayer’s trade or business, a home office deduction may be

justified.    However, the statute requires that the separate

structure be used exclusively for business purposes in order to

qualify for the deduction.    The Senate committee report that

accompanied the legislation enacting section 280A(c)(1)(C) states

“with respect to a separate structure not attached to the

dwelling unit, if the taxpayer uses such structure (e.g., a

detached garage) for both trade or business and personal

purposes, the exclusive use test is not met”.    S. Rept. 94-938,

at 148 (1976), 1976-3 C.B. (Vol. 3) 57, 186.

     Here petitioner provided limited testimony regarding his use

of the garage office.    While he introduced into evidence a hand

drawn sketch of the alleged office, it is not possible to

determine from the drawing whether the garage unit is a detached
                               - 11 -


garage.    But even if the garage was detached, the drawing shows

that the garage was used for both personal and business purposes.

     Accordingly, on the basis of the facts in the record, we

sustain respondent’s disallowance of the claimed home office

deduction.

4.   Unreported Income Using Bank Deposits Analysis
     Respondent alleged in the answer that petitioners had

$19,640 of bank deposits that were unaccounted for.    On brief,

respondent requested that we address whether an additional

$14,093 of unexplained bank deposits, the amount of Mrs. Krist's

wages, should be included in petitioners' income because of

petitioner's testimony that his wife maintained her own bank

account.

     It is well settled that this Court will not consider issues

raised for the first time on brief when to do so prevents the

opposing party from presenting evidence that that party might

have introduced if the issue had been timely raised.    Estate of

Gillespie v. Commissioner, 75 T.C. 374, 381 (1980); Estate of

Horvath v. Commissioner, 59 T.C. 551, 555 (1973); Theatre

Concessions, Inc. v. Commissioner, 29 T.C. 754, 760-761 (1958).

Therefore, we shall not consider whether an additional $14,093 of

unexplained bank deposits should be included in petitioners'

income because, although petitioners knew they had to account for

$19,640, they were not aware either before or during trial that

respondent was asking them to account for an additional $14,093.
                                 - 12 -


     As to the $19,640 of unexplained bank deposits raised by the

answer, respondent bears the burden of proof.     Rule 142(a).

Section 61 provides that gross income means all income from

whatever source derived.     Section 6001 imposes a duty on all

persons liable for any tax to maintain records.     It is well

established that where a taxpayer fails to maintain adequate

records, the Commissioner may prove the existence and amount of

unreported income by any method that will clearly reflect the

taxpayer's income.     Sec. 446(b); Harper v. Commissioner, 54 T.C.
1121, 1129 (1970); Sindik v. Commissioner, T.C. Memo. 1996-47.

     In this case petitioners' return did not clearly reflect the

activity in their bank accounts.     Respondent used a bank deposit

analysis to determine the amount of income.     Under the bank

deposit analysis, the total of all the deposits is treated as

petitioners' income.      Sindik v. Commissioner, supra.   Adjustments

are then made to eliminate deposits that reflect nonincome items

such as gifts, loans, transfers between bank accounts, and
redeposits.     Id.   Respondent determined that $65,090.01 was

deposited in petitioner's three bank accounts.     Respondent

alleged that petitioners accounted for $45,450 of the income on

their return.    The $45,450 consists of Mrs. Krist's wages, the

locksmith income, the rental income, and the limousine income.

Thus, respondent contends, a rounded amount of $19,640 remains to

be accounted for.
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     As previously stated, petitioners had borrowed $10,200 that

was deposited in an account held for them by petitioner’s mother.

That amount is not income to petitioners.     On this record we find

there were no other nonincome items to reduce the remaining

$9,440.    Consequently, we find that petitioners had unreported

additional income of $9,440 under the bank deposits method.

     We agree with respondent that this additional $9,440 is

subject to self-employment tax under section 1401, and

petitioners are entitled to a corresponding 50-percent deduction

under section 164(f).

5.   Claimed Casualty Loss
     Respondent contends that petitioners are not entitled to a

casualty loss of $15,800 for the seizure and destruction of the

guns held for their alleged firearms business.     Petitioners

claimed this loss on their amended return filed on April 16,

1999.     No evidence was presented regarding this issue.

Accordingly, we deem petitioners to have abandoned it.      Calcutt
v. Commissioner, 84 T.C. 716, 721-722 (1985); German v.

Commissioner, T.C. Memo. 1993-59, affd. without published opinion

46 F.3d 1141 (9th Cir. 1995).    We hold that petitioners are not

entitled to a casualty loss.

6.   Addition to Tax for Failure To File Timely Returns

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

file a Federal income tax return by its due date, determined with

regard to any extension of time for filing previously granted.
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The addition equals 5 percent for each month that the return is

late, not to exceed 25 percent.      Sec. 6651(a)(1).   Additions to

tax under sections 6651(a)(1) are imposed unless the taxpayer

establishes that the failure was due to reasonable cause and not

willful neglect.    Petitioners must prove both reasonable cause

and a lack of willful neglect.       Crocker v. Commissioner, 92 T.C.
899, 912-913 (1989).    "Reasonable cause" requires the taxpayers

to demonstrate that they exercised ordinary business care and

prudence.    United States v. Boyle, 469 U.S. 241, 246 (1985).

Willful neglect is defined as a "conscious, intentional failure

or reckless indifference."    United States v. Boyle, Id. at 245.

       Petitioners filed their 1995 Federal income tax return

electronically on May 14, 1996.      They did not testify as to why

they did not file their return on time.      They failed to prove

that they had reasonable cause for their late filing and that

there was a lack of willful neglect.      Therefore, we hold that

petitioners are liable for the section 6651(a)(1) addition to
tax.

       To reflect the foregoing,



                                        Decision will be entered

                                   under Rule 155.
