                  T.C. Summary Opinion 2006-37



                     UNITED STATES TAX COURT



               M. MICHAEL STEWART, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13167-04S.            Filed March 2, 2006.


     M. Michael Stewart, pro se.

     Thomas Newman, for respondent.



     PANUTHOS, Chief 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 $27,629 deficiency in petitioner’s

2001 Federal income tax.    In an answer filed with the Court

respondent asserted an increased deficiency totaling $35,555.

The issues for decision are:    (1) Whether petitioner is entitled

to the nonrecognition provisions of section 1031 with respect to

gain realized of $111,715 from the sale of real property; (2) if

petitioner must recognize any portion of the realized gain of

$111,715, whether she is entitled to a theft or casualty loss

relating to the attempted reinvestment of a portion of the gain;

and (3) whether petitioner is entitled to certain claimed

Schedule C, Profit or Loss From Business, deductions.1

                           Background

     Some of the facts have been stipulated, and they are so

found.    The stipulation of facts and attached exhibits are

incorporated herein by this reference.    At the time the petition

was filed, petitioner resided in San Jose, California.

     Petitioner and her now-deceased husband Earl Stewart (Earl)

purchased a condominium on February 24, 1998, in San Diego.     The

purchase price was approximately $124,000.    Earl died on May 9,

1998.    Petitioner and her husband had purchased the condominium

with the intention of residing in it upon retirement.    However,

petitioner and Earl did not move into the condominium, and after


     1
        Other adjustments to Social Security income, itemized
deductions and a personal exemption are computational in nature
resulting from the change in adjusted gross income.
                               - 3 -

Earl’s death, petitioner decided to offer the condominium for

rent and in fact rented it for a period of time.   On July 20,

2001, petitioner sold the condominium for $345,000.     The parties

agree that petitioner’s basis in the condominium was $253,576 and

petitioner’s gain on the sale was $111,715.

     The proceeds of the sale of the condominium were deposited

with First American Exchange Corporation (FAEC), as petitioner

intended to purchase other property in a like-kind exchange

pursuant to section 1031.   In a letter dated October 30, 2001,

petitioner requested, through her attorney, a return of the funds

held by FAEC.   The letter stated among other things:

     Although it is outside the normal business practice of
     First American Exchange Corporation of California to
     release these funds and the release may be prohibited
     pursuant to Paragraph 8.2 of the above mentioned
     agreement as well as disallowed pursuant to section
     1.1031(k)-1(g)(6) of the IRC, Exchangor has determined
     that it is impossible for qualified intermediary to
     acquire any of the identified Replacement Properties
     because they have been sold to other parties and are no
     longer for sale and therefore has made the above demand
     for the release of the funds. First American Exchange
     Corporation of California is hereby held harmless from
     and against any and all tax liabilities, which may or
     may not be incurred by the Exchange or due to this
     release or any other matters relating to the Tax
     Deferred Exchange transaction and the property or
     properties contained therein.

In a letter dated November 7, 2001, FAEC advised that the funds

were wired to petitioner’s account on October 31, 2001.    FAEC

also forwarded with the letter a copy of a Form 1099 to

petitioner.   Petitioner did not purchase other property in
                                - 4 -

exchange for the San Diego property within 180 days of the sale

of the San Diego condominium.

     On November 6, 2001, petitioner authorized two wire

transfers of $30,000 each from her account to the account of her

cousin, James F. Graves (Graves).    Petitioner was told by Graves

that he was going to invest the funds in a business which would

satisfy the provisions of a section 1031 exchange.     Petitioner

received a promissory note dated November 8, 2001, signed by

Graves.    The note reflected a promise to pay a sum of $60,000

with a maturity date of February 8, 2002, and interest at 9

percent.    Petitioner believed that Graves attempted to invest the

funds in real estate but was unable to do so.     The record

reflects that the funds may have been directed to ESPO

Entertainment Center, LLC (ESPO) in an attempt to acquire

property.    It further appears that property was never purchased,

and ESPO went out of business in 2002 or 2003.2    At the date of

trial, petitioner had not received any return of funds from

Graves or from any other person or entity relating to the $60,000

forwarded to Graves.




     2
        The record is sparse as to the relationship between ESPO,
Graves, and petitioner. A Form K-1, Partner’s Share of Income,
Credits, Deductions, etc., was issued to petitioner (through her
revocable living trust), reflecting negative income for 2003. A
letter from a law firm in 2005 indicates that ESPO filed a final
return for 2003 and that it was dissolved by the Illinois
Secretary of State in 2004.
                               - 5 -

     Petitioner also carried on an activity of publishing a

visitor’s guide for the geographic area of Mountain View, San

Mateo, Foster City, and Half Moon Bay.   Petitioner rented an

apartment for 3 months in San Bruno while conducting this

activity.   She also rented furniture for the apartment.   The cost

of the furniture rental was $1,000.68.   Petitioner incurred some

interest expense and entertainment expense relating to the

activity of publishing the visitor’s guide.   Petitioner traveled

sometimes to conduct this activity, but there is nothing in this

record indicating the extent of the travel.

     Petitioner filed an individual Federal income tax return for

the taxable year 2001.   Petitioner attached to the return a Form

8824, Like-Kind Exchanges.   Petitioner reported a realized gain

of $111,715 on the sale of the San Diego condominium and a

deferred gain of the same amount.   Petitioner also reported on

Schedule C among other items, rent or lease of vehicle of $1,001,

rent of $6,000, and deductions for interest expense of $4,742.

Petitioner listed the principal business as “Advertising”.

     In a notice of deficiency, respondent determined that

petitioner was not entitled to defer the gain on the sale of the

San Diego condominium.   Respondent determined that petitioner

should recognize a $86,857 capital gain from the sale of the San

Diego condominium.   The notice further disallowed certain

Schedule C deductions as follows:   (1) $1,001 in claimed rent or
                                 - 6 -

lease of vehicle; (2) $4,000 of the claimed $6,000 rental

deduction; and (3) the full amount of the $4,742 claimed interest

deduction.

      After the notice of deficiency was issued and a petition was

filed, respondent concluded that the notice did not accurately

reflect the correct adjustments.    Apparently some confusion was

created by the return, since petitioner listed other property on

Schedule E, Supplemental Income and Loss, and also incorrectly

reported the purchase of a “warehouse” on Form 8824.    In his

answer respondent claimed that the realized gain on the sale of

the San Diego condominium was composed of a capital gain of

$91,424 and an ordinary gain of $20,291.    The total of these two

amounts, $111,715, was reported on the 2001 return as realized,

but deferred gain.     This claimed adjustment results in a $7,926

increase in the deficiency.    Petitioner agrees to the correctness

of this revised computation but nevertheless argues that the gain

should be deferred or that she is entitled to a theft or casualty

loss.

                              Discussion

I.   Burden of Proof

      Generally, the burden of proof is on the taxpayer.   Rule

142(a)(1).   Under section 7491, the burden of proof shifts from

the taxpayer to the Commissioner if the taxpayer produces

credible evidence with respect to any factual issue relevant to
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ascertaining the taxpayer’s liability.   Sec. 7491(a)(1).

However, where the Commissioner raises a new matter or claims an

increase in the deficiency, the burden of proof is on the

Commissioner.   Rule 142(a)(1); Achiro v. Commissioner, 77 T.C.

881, 889-890 (1981); Burris v. Commissioner, T.C. Memo. 2001-49;

Jamerson v. Commissioner, T.C. Memo. 1986-302.

     As to the adjustments set forth in the notice of deficiency,

petitioner has neither argued that the burden of proof should

shift nor satisfied the criteria that would cause the burden of

proof to shift.   As to petitioner’s alternative position that

there was a theft loss, petitioner did not raise this issue until

trial; therefore petitioner did not satisfy the requirements of

section 7491(a)(2) (complied with requirements to substantiate

any item and maintained records required and cooperated with

reasonable requests for information, documents, etc.), and the

burden of proof remains with petitioner.   As to the remaining

issues, given the lack of documentation and information provided

by petitioner, we conclude that the burden of proof remains with

her with respect to all adjustments determined in the notice of

deficiency.   As to the burden of proof with respect to the

nonrecognition of gain, including the adjustment claimed in

respondent’s answer, petitioner has agreed that respondent’s

computation of the gain is correct and there is otherwise no
                                  - 8 -

factual dispute.      Accordingly, the burden of proof does not play

a role in this regard.

II.    Section 1031

       Section 1031 provides that no gain or loss is recognized

when business or investment property is exchanged solely for

other business or investment property of like kind.       A taxpayer

must satisfy a number of technical requirements to come within

the nonrecognition provisions of section 1031 including that

timing requirements are met regarding identification and receipt

of replacement property.     Sec. 1031(a)(3).    Here, there was no

replacement property, and petitioner withdrew the proceeds of

sale from the exchange company prior to forwarding the funds to

Graves.    Petitioner does not seriously argue that she complied

with the provisions of section 1031.       While she may have been

misled by Graves, it is clear that she did not satisfy any of the

provisions of section 1031.     Petitioner’s intent to exchange the

property and qualify for nonrecognition treatment is not

sufficient to satisfy the statute.        See Biggs v. Commissioner,

632 F.2d 1171 (5th Cir. 1980), affg. 69 T.C. 905 (1978).

Petitioner does not qualify for nonrecognition treatment, and

respondent is sustained on this issue.

III.    Theft Loss

       Section 165(a) provides a deduction for any loss sustained

during the taxable year not compensated for by insurance or
                               - 9 -

otherwise.   Under section 165(c), losses of individuals are

limited to (1) losses incurred in a trade or business, (2) losses

incurred in any transaction entered into for profit, though not

connected with a trade or business, and (3) losses of property

not connected with a trade or business or a transaction entered

into for profit, if such losses arise from fire, storm,

shipwreck, or other casualty, or from theft.   Section 165(e)

provides that any loss arising from theft will be treated under

section 165(a) as sustained during the taxable year in which the

taxpayer discovers the loss.

     Whether a loss constitutes a theft loss is determined by

examining the law of the State where the alleged theft occurred.

Bellis v. Commissioner, 540 F.2d 448, 449 (9th Cir. 1976), affg.

61 T.C. 354 (1973); Edwards v. Bromberg, 232 F.2d 107, 111 (5th

Cir. 1956); Viehweg v. Commissioner, 90 T.C. 1248, 1253 (1988).

Section 484(a) of the California Penal Code (West Supp. 2004)

defines theft as follows:

     Every person who shall feloniously steal, take, carry,
     lead, or drive away the personal property of another,
     or who shall fraudulently appropriate property which
     has been entrusted to him or her, or who shall
     knowingly and designedly, by any false or fraudulent
     representation or pretense, defraud any other person of
     money, labor or real or personal property * * * is
     guilty of theft. * * *

To support a finding of theft by false pretense in California,

section 484(a) of the California Penal Code requires intent on

the part of the defrauder to obtain for himself the victim’s
                              - 10 -

property.   People v. Ashley, 267 P.2d 271, 279 (Cal. 1954);

People v. Fujita, 117 Cal. Rptr. 757, 764 (Ct. App. 1974); People

v. Conlon, 24 Cal. Rptr. 219, 222 (Dist. Ct. App. 1962).

     A theft loss requires a criminal appropriation of another’s

property.   Edwards v. Bomberg, supra at 110; Bellis v.

Commissioner, 61 T.C. 354, 357 (1973), affd. 540 F.2d 448 (9th

Cir. 1976); Harcinske v. Commissioner, T.C. Memo. 1984-132.

     The record in this case is sparse as to the circumstances in

which petitioner wired Graves $60,000.    The record does reveal

that petitioner was given a note; thus it appears that petitioner

initially believed that the transaction was designed as a loan.

We have no information as to what Grave’s intentions were with

respect to the funds.   There is nothing in this record indicating

that any civil or criminal action was taken against Graves upon

his failure to either invest or return the funds.    Whether a

theft occurred, it is unclear whether the theft occurred at the

time the funds were wired to Graves, or at some later time.      More

importantly, if there was a theft, the record is unclear as to

when petitioner discovered the theft and whether she pursued a

claim for reimbursement.

     As indicated, for purposes of section 165(a), a loss arising

from theft is treated as sustained during the taxable year in

which the taxpayer discovers such loss.    Sec. 165(e); sec. 1.165-

8, Income Tax Regs.; see Lolli v. Commissioner, T.C. Memo. 1996-
                               - 11 -

121.    Further, if there is a claim for reimbursement for which

there is a reasonable prospect of recovery, the regulations

require that a taxpayer claim the loss in the taxable year in

which it can be ascertained with reasonable certainty whether or

not reimbursement will be received.     Sec. 1.165-1(d)(3), Income

Tax Regs.    As there is a total lack of evidence with respect to

the existence of a theft loss, the year of discovery of any loss,

and any prospect of reimbursement, we cannot conclude that

petitioner satisfies the requirements for a theft loss for the

taxable year 2001.    Respondent is sustained on this issue.

IV.    Schedule C Deductions

       Section 162(a) permits a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    Expenses that are personal in

nature are generally not allowed as deductions.    Sec. 262(a).    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.    A taxpayer must substantiate his

deductions by maintaining sufficient books and records to be

entitled to a deduction under section 162(a).    When a taxpayer

establishes that he has incurred a deductible expense but is

unable to substantiate the exact amount, we are generally

permitted to estimate the deductible amount.     Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).     We can
                              - 12 -

estimate the amount of the deductible expense only when the

taxpayer provides evidence sufficient to establish a rational

basis upon which the estimate can be made.   Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).

     Section 274(d) supersedes the general rule of Cohan v.

Commissioner, supra, and prohibits the Court from estimating the

taxpayer’s expenses with respect to certain items.   Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969).   Section 274(d) imposes strict substantiation

requirements for listed property as defined in section

280F(d)(4), gifts, travel, entertainment, and meal expenses.

Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).   To obtain a deduction for a listed property,

travel, meal, or entertainment expense, a taxpayer must

substantiate by adequate records or sufficient evidence to

corroborate the taxpayer’s own testimony the amount of the

expense, the time and place of the use, the business purpose of

the use and, in the case of entertainment, the business

relationship to the taxpayer of each person entertained.   Sec.

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

Reg. 46014 (Nov. 6, 1985).   Section 274 requires that expenses be

recorded at or near the time when the expense is incurred.    Sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
                              - 13 -

(Nov. 6, 1985).   Listed property includes passenger automobiles.

Sec. 280F(d)(4)(A)(i).

     Petitioner testified that some of the expenses in issue

related to travel, meals, and lodging.    Petitioner presented some

credit card receipts and other miscellaneous and disorganized

records in an attempt to substantiate the Schedule C deductions

in issue.   Petitioner failed to establish that the claimed rental

and interest expenses were ordinary and necessary business

expenses paid or incurred during 2001 in carrying on a trade or

business.   With respect to travel expenses, petitioner did not

satisfy the substantiation provisions of section 274(d).

Respondent’s determination is sustained in this regard.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent.
