                  T.C. Summary Opinion 2009-109



                     UNITED STATES TAX COURT



               DAVID AND TRANG LE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                     DAVID LE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 18789-07S, 18791-07S.      Filed July 13, 2009.



     David and Trang Le, pro sese.

     Erin R. Hines, for respondent.



     PANUTHOS, Chief Special Trial Judge:    These consolidated

cases were heard pursuant to the provisions of section 7463 of

the Internal Revenue Code in effect when the petitions were
                               - 2 -

filed.1   Pursuant to section 7463(b), the decision to be entered

in each docket is not reviewable by any other court, and this

opinion shall not be treated as precedent for any other case.

     The Internal Revenue Service (IRS) determined a $5,418

deficiency and a $1,083.60 accuracy-related penalty in

petitioner’s 2004 Federal income tax.   The IRS determined a

$4,448 deficiency and an $889.60 accuracy-related penalty in

David and Trang Le’s (hereinafter petitioners) 2005 Federal

income tax.

     After concessions,2 the issues for decision are:    (1)

Whether petitioner is entitled to a trade or business loss

deduction for taxable year 2004; (2) whether petitioners are

entitled to itemized deductions greater than those respondent

allowed for 2004 or 2005; (3) whether petitioners are entitled to

an education credit for 2005; and (4) whether petitioners are

liable for accuracy-related penalties under section 6662(a) and

(b)(1).




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       Respondent conceded at trial that petitioners are entitled
to claimed deductions for State and local taxes and for real
estate taxes paid in taxable years 2004 and 2005. Respondent
also conceded that petitioners are entitled to joint filing
status for 2004.
                               - 3 -

                            Background

     Some of the facts have been stipulated, and we incorporate

the stipulation and the accompanying exhibits by this reference.

Mrs. Le moved to the United States in 2004 and married Mr. Le in

August 2004.   Petitioners remained married throughout the years

in issue.   They purchased a home in 2004 and lived in Maryland

when they filed the petitions.3

     Petitioner has been an officer in the Metropolitan Police

Department for the District of Columbia (MPDC) since 1999.   In

2004 petitioner worked in the bicycle division.   During 2004 he

spent approximately $30 every 2 weeks to maintain his uniforms.

He also paid union dues of $16 every 2 weeks.

     In 2005 he joined the canine division, and the MPDC issued

him a German Shepherd trained for bomb-sniffing and police work.

Before the MPDC would allow him to keep his dog at home in

connection with his work as a canine officer, the MPDC required

him to construct, at his own expense, a kennel that met certain

specifications.4   Petitioner spent approximately $3,500 in 2005




     3
       On Oct. 6, 2008, we consolidated these two cases for trial
and opinion.
     4
       The MPDC kennel requirements included at least 100 square
feet of open space, solid flooring, chain link fence sides, and a
chicken wire fence top.
                               - 4 -

to build a kennel in his backyard that met or exceeded each MPDC

specification.5

     In 2004 petitioner briefly worked as a security consultant

at a construction site in the District of Columbia in addition to

his work for the MPDC.   He terminated this activity after he

learned that the MPDC would not approve his working at that

site.6   The construction company issued petitioner a Form 1099-

MISC, Miscellaneous Income, for 2004.

     In 2004 and 2005 petitioner gave money to his parents to

donate at functions raising money for people and projects in

Vietnam, where both petitioners were born.   Petitioner also sent

money to individuals in Vietnam to contribute to Buddhist

temples.   Petitioner did not obtain any receipts for funds he

contributed, nor did he obtain any documentation about the

organizations that received his donations.   He also did not

inform his return preparer that his donations went to

unidentified organizations in a foreign country.




     5
       For example, petitioner’s kennel provides 144 square feet
of open space and a doghouse.
     6
       With approval, an MPDC officer may provide security
services in his off-duty hours but not within the part of the
District of Columbia he regularly patrols. Because the
particular construction site was within petitioner’s usual patrol
area, the MPDC would not approve the work.
                                 - 5 -

     In 2004 petitioner paid $1,356 to attend a class in criminal

justice at University of Maryland University College.      The record

further reflects that petitioner paid student loan interest of

$69.81 in 2004 and $62.73 in 2005.       In the fall semester of 2005

Mrs. Le attended an English as a second language (ESL) class at

Montgomery College.   Although the record includes an unofficial

transcript reflecting a grade of A in that 6.8-credit-hour class,

petitioners did not offer any records of the amounts paid for

Mrs. Le’s education in 2005.

     Petitioners engaged a paid return preparer to prepare the

2004 and 2005 Federal income tax returns.

     Because Mrs. Le did not receive a taxpayer identification

number or a Social Security number until 2005, petitioner claimed

single filing status for 2004.    On his 2004 income tax return

petitioner reported on Schedule C, Profit or Loss From Business,

income of $3,600 from his security work at the construction site,

together with expenses of $5,468.    This Schedule C activity

produced a net loss of $1,868, which he deducted as a business

loss on Form 1040, U.S. Individual Income Tax Return.      In

addition to deductions for medical expenses and home mortgage

interest which the Internal Revenue Service (IRS) allowed and for

State income taxes and property taxes which respondent concedes,

petitioner claimed itemized deductions for charitable

contributions, unreimbursed employee business expenses, and other
                               - 6 -

expenses.   On his 2004 income tax return petitioner did not claim

a student loan interest deduction on line 26, but he did claim a

$1,356 tuition and fees deduction on line 27.

     Petitioners filed a joint Federal income tax return for

2005.   In addition to medical expense and home mortgage interest

deductions which the IRS allowed and State income tax and

property tax deductions which respondent concedes, petitioners

claimed deductions for charitable contributions, unreimbursed

employee business expenses, and tax preparation fees.

Petitioners claimed a $63 student loan interest deduction on line

33 of Form 1040.   They did not claim a tuition and fees deduction

on line 34, but they did claim a $1,500 Hope Scholarship

education credit on line 50 for 2005.

     In the notice of deficiency for 2004 the IRS disallowed

petitioner’s business loss determining that, because he failed to

substantiate his business expenses, the IRS would not allow

expenses in excess of his Schedule C income.    The IRS also

disallowed in full the following itemized deductions petitioner

claimed on Schedule A Itemized Deductions:
                               - 7 -

                                                          Amount
                        Description                      Claimed

     Charitable contributions (cash)                     $6,521
     Job expenses & other miscellaneous deductions1
       Job expenses (uniform, union dues, edu)              2,656
       Other expenses (parking, equip, telephone,
         closing cost, legal fee, appr)                  6,876
           1
             These miscellaneous deduction amounts reflect
      amounts petitioners reported before application of the
      2-percent limitation of sec. 67.

     In the notice of deficiency for 2005 the IRS disallowed

petitioners’ claimed education credit because no qualifying

educational institution had issued a Form 1098-T, Tuition

Statement, to petitioners for 2005 and because the IRS had not

received any verification that petitioners made qualified tuition

payments in 2005.   The IRS disallowed in full the following

itemized deductions petitioners claimed on Schedule A:


                                                          Amount
                        Description                      Claimed

     Charitable contributions (cash)                     $7,254
     Job expenses & other miscellaneous deductions
       Business expense                                     5,477
       Tax preparation fee                                    350


                            Discussion

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

notice of deficiency are presumed correct, and the taxpayer bears

the burden of proving that these determinations are in error.
                                - 8 -

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.

Petitioners have neither alleged that section 7491(a) applies nor

established their compliance with its requirements.     Petitioners

therefore bear the burden of proof.

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving that he is entitled to any deduction

claimed.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).        A

taxpayer is required to maintain records sufficient to enable the

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

sec. 1.6001-1(a), Income Tax Regs.      Such records must

substantiate both the amount and purpose of the claimed

deductions.    Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

     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).    To apply the Cohan rule, however, the Court must have a

reasonable basis upon which to make an estimate.      Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).

     Congress overrode the Cohan rule with section 274(d), which

requires strict substantiation for certain categories of
                                 - 9 -

expenses; in the absence of evidence demonstrating the exact

amount of those expenses, deductions for them are to be

disallowed entirely.   Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).    Expenses

subject to section 274(d) include travel and meal expenses, as

well as expenses for listed property, such as passenger

automobiles, computers, and cellular telephones.    Secs. 274(d),

280F(d)(4).   The taxpayer must substantiate the amount, time,

place, and business purpose of these expenditures and must

provide adequate records or sufficient evidence to corroborate

his own statement.   See sec. 274(d); sec. 1.274-5T(c)(1),

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

An exception allows the taxpayer to substantiate his expenses

through a reasonable reconstruction of his records, but only

where the taxpayer establishes that his records were lost because

of circumstances beyond his control, such as to fire, flood,

earthquake, or other casualty.    Sec. 1.274-5T(c)(5), Temporary

Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).

1.   Business Loss Deduction

     Respondent disallowed petitioner’s claimed business loss

deduction for 2004, limiting petitioner’s allowed deduction for

Schedule C business expenses to the income earned in his security

activity.   Petitioner reported the following on Schedule C:
                             - 10 -

                     Description              Income (expense)

           Gross income                           $3,600
           Car and truck expenses                 (1,713)
           Supplies expenses                        (650)
           Cell phone expenses                      (985)
           Software/computer expenses             (2,120)
             Net profit or (loss)                 (1,868)


     Section 274(d) imposes strict substantiation requirements

for traveling expenses and expenses related to listed property,

which include petitioner’s claimed car and truck expenses, cell

phone expenses, and computer/software expenses.   Petitioner did

not provide any records to substantiate those expenses.7

     Because petitioner has been unable to substantiate business

expenses in excess of his business income, we sustain the

disallowance of his claimed business loss.




     7
       Petitioner thought he needed to retain records for only 3
years, and he discarded records for tax year 2004 in 2007 and for
tax year 2005 in 2008. At trial he acknowledged respondent’s
counsel’s explanation that he should retain records for at least
3 years from the date his return is filed or the date it is due,
whichever is later. Furthermore, his asserted retention
procedure does not explain why he would not have had all of his
records for 2005, at least, at the time the IRS issued the notice
of deficiency on May 21, 2007.

       Petitioner prematurely discarded whatever records he had
(which does not constitute a circumstance beyond his control),
and, in any event, his vague testimony is not sufficient either
to reconstruct the records or to satisfy the strict
substantiation requirements of sec. 274.
                                - 11 -

2.   Itemized Deductions

     a.      Charitable Contributions

     Section 170 allows deductions for charitable contributions

to qualified donee organizations made during a taxable year,

provided the taxpayer verifies the contributions.     Taxpayers are

required to substantiate donations made by cash or check via:

(1) Canceled checks, (2) receipts from the donee (showing the

donee’s name and the date and amount of the donation), or (3)

other reliable written records.     Sec. 1.170A-13(a)(1), Income Tax

Regs.     Taxpayers must substantiate gifts of property via receipts

from the donee (showing the donee’s name, the date and location

of the contribution, and a description of the property

contributed).     Sec. 1.170A-13(b)(1), Income Tax Regs.   For

charitable contributions over $250, additional substantiation is

required.     Sec. 170(f)(8).

     Petitioners did not provide support for their contributions.

Furthermore, petitioners were unable to name any organizations to

which they donated funds, nor could they provide specific amounts

of money given.     Accordingly, we sustain the disallowance of

their charitable contribution deductions for both 2004 and 2005.

     b.      Miscellaneous Itemized Deductions

             i.   2004

     Section 162 allows deductions for all ordinary and necessary

business expenses paid or incurred during the taxable year in
                              - 12 -

carrying on a trade or business.    Performing services as an

employee constitutes a trade or business.     Primuth v.

Commissioner, 54 T.C. 374, 377-378 (1970).    Those expenses that

are (1) ordinary and necessary to the taxpayer’s business and (2)

paid or incurred in a given year are deductible that year.      Sec.

162(a); see sec. 1.162-17(a), Income Tax Regs.    However,

personal, living, or family expenses are not deductible.     See

secs. 162(a), 262(a); sec. 1.162-17(a), Income Tax Regs.

     Where business clothes are suitable for general wear, their

cost is typically not deductible.     Yeomans v. Commissioner, 30

T.C. 757, 767-769 (1958).   However, where custom and usage

preclude wearing a uniform when off duty, deduction is allowed.

The cost of maintaining clothes for work is deductible when the

purchase price was deductible.     Hynes v. Commissioner, 74 T.C.

1266, 1290 (1980).   We will allow petitioner to deduct the $30 he

spent every 2 weeks to clean and maintain his police uniforms.

     Petitioner is also entitled to deduct the $16 he paid every

2 weeks in union dues.

     Petitioner claimed $2,656 in unreimbursed employee business

expenses for 2004.   We have allowed $1,196 for uniform

maintenance and union dues, which leaves a balance of $1,460.

Petitioner explained that unspecified equipment purchases and

education made up this balance.    However, equipment is listed

under other expenses on Schedule A, and petitioner could not
                              - 13 -

remember what equipment he purchased or how much he spent on

equipment in 2004.   Furthermore, petitioner’s education costs for

2004 were also claimed as tuition and fees expenses and may not

be deducted twice.   Thus, we conclude that petitioner is entitled

to $1,196 of unreimbursed employee business expenses.

     Petitioner also claimed $6,876 in other expenses for 2004.

These expenses included parking fees, equipment purchases for

work, telephone expenses, and various costs associated with the

petitioners’ purchase of a home in 2004.   Parking expenses are

subject to the strict substantiation requirements of section 274.

The record provides almost no detail as to the specific

expenditures, beyond petitioner’s vague testimony about paying

for parking for work-related court appearances.   Considering

petitioner’s lack of records, we sustain respondent’s

disallowance of the deductions claimed for travel expenses.

Petitioner explained that the MPDC required its officers to have

a “landline” home telephone for emergency contact and

notification purposes.   Section 262(b) provides that charges for

basic telephone service on the first telephone line in a

residence are a personal expense of the taxpayer, and section

262(a) provides that a taxpayer’s personal, family, and living

expenses and nondeductible.   We sustain the disallowance of the

deductions claimed for telephone expenses.
                                - 14 -

     As noted, petitioner was unable to identify any specific

equipment he purchased in 2004 or to estimate its cost.     His

claimed equipment expense deduction will not be allowed.

     Petitioners purchased a home in 2004.    Respondent has

allowed or conceded their claimed deductions for property taxes

and home mortgage interest; however, petitioner also claimed

deductions for closing costs, legal fees, and real estate

appraisal expenses related to the home purchase.     Petitioner has

neither substantiated any of these expenses nor explained why he

thought these were deductible expenses.     His claimed home

purchase expense deduction will not be allowed.

     As the 2-percent floor of section 67 exceeds petitioner’s

allowed employee business expenses and all of his claimed

deductions for other miscellaneous itemized expenses have been

disallowed, petitioners are not entitled to any miscellaneous

itemized deductions for 2004.

          ii.   2005

     Petitioners’ 2005 Schedule A includes a $350 tax preparation

fee and $5,477 in business expenses.     Petitioners did not

introduce any evidence to support their payment of any specific

amount for tax return preparation for 2005, other than vague

testimony that they used a paid preparer.     Bearing heavily upon

petitioners, whose inexactitude is of their own making, we will
                                 - 15 -

allow $100 for tax return preparation for 2005.    Cf. Cohan v.

Commissioner, 39 F.2d at 544.

     Petitioner’s unreimbursed employee business expenses for

uniform maintenance and union dues were similar in 2005 to those

expenses for 2004.   Accordingly, we will allow $1,196 for uniform

maintenance and union dues for 2005.

     We accept petitioner’s documentary evidence and testimony

that he built the kennel required for his new position as an MPDC

canine officer and that he paid approximately $3,500 in 2005 for

labor and supplies to build the kennel.    Respondent argues that

even if petitioner expended the funds in 2005, the expenditure

should be capitalized and not expensed.    We are satisfied that

the kennel petitioner had constructed in his backyard for his

police dog was not a building as defined in section 1250 but

rather was depreciable personal property.    See, e.g. Moore v.

Commissioner, 58 T.C. 1045 (1972), affd. 489 F.2d 285 (5th Cir.

1973); Estate of Morgan v. Commissioner, 52 T.C. 478, 483-484

(1969), affd. 448 F.2d 1397 (9th Cir. 1971).    It was thus section

1245 property.   Sec. 1245(a)(3).    As such, the kennel qualifies

as section 179 property and is eligible to be expensed under

section 179.   Sec. 179(d)(1).

     Petitioners have not substantiated other employment or

miscellaneous expenses.   Accordingly, we allow them $100 for tax

preparation, $1,196 for uniforms and union dues, and $3,500 for
                               - 16 -

building the kennel.    The total of the miscellaneous itemized

deductions allowed is $4,796, which is subject to the 2-percent

limitation of section 67.

3.   Education Credit

     Petitioners claimed a $1,500 education credit in their

electronically filed 2005 return, and their Form 8863, Education

Credits, indicates that they claimed a Hope Scholarship Credit.

     A student eligible for the Hope Scholarship Credit must be

pursuing the first 2 years of postsecondary education, sec.

25A(b)(2), and   “carrying at least ½ the normal full-time work

load for the course of study the student is pursuing”, sec.

25A(b)(3)(B).    There is no evidence that Mrs. Le took any more

than the single ESL course reflected in her transcript, that she

was involved in any postsecondary course of study, or of what the

full-time workload was for students at Montgomery College in

2005.   Thus, petitioners have not demonstrated that Mrs. Le was

eligible for the Hope Scholarship Credit.

     The Lifetime Learning Credit is less restrictive, providing

credit not only for courses that are part of a postsecondary

course of study but also for courses taken to acquire or improve

an eligible student’s job skills.    Sec. 25A(c)(2)(B).   The

Lifetime Learning Credit provides a credit equal to 20 percent of

a taxpayer’s first $10,000 in eligible tuition and related

expenses for each tax year after 2002.    Sec. 25A(c)(1).
                                   - 17 -

     Petitioners introduced a tuition and fee schedule for the

fall semester of 2008 and offered vague testimony that the

tuition charges did not change much between 2005 and 2008.     The

2008 schedule indicates that the total cost of 7 credit hours in

2008 was $929.60.     As noted, petitioners claimed a $1,500 credit

and introduced evidence that Mrs. Le took 6.8 credit hours of ESL

classes in 2005, but they did not provide any evidence of amounts

paid in 2005 for tuition or qualified expenses.

     We are satisfied that Mrs. Le took the ESL class and earned

an A.     Bearing heavily upon petitioners, whose inexactitude is of

their own making, we estimate petitioners’ education expense at

$750 in 2005.     Cf. Cohan v. Commissioner, supra at 544.   Thus,

petitioners are entitled to a Lifetime Learning Credit for 2005

of 20 percent of $750, or $150.

4.      Accuracy-Related Penalty

        The IRS determined accuracy-related penalties with respect

to petitioners’ 2004 and 2005 tax underpayments.     Section 6662(a)

and (b)(1) provides for a 20-percent penalty on the portion of an

underpayment of tax due to negligence or a disregard of rules and

regulations.     Negligence is any failure to make a reasonable

attempt to comply with the provisions of the internal revenue

laws.     See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Moreover, negligence has been described as the failure to

exercise due care or the failure to do what a reasonable and
                              - 18 -

prudent person would do under the circumstances.   See Neely v.

Commissioner, 85 T.C. 934, 947 (1985).   Disregard includes any

careless, reckless, or intentional disregard of rules or

regulations.   See sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax

Regs.   Once the Commissioner has determined an accuracy-related

penalty pursuant to section 6662(b)(1), the taxpayer bears the

burden of proof as to this issue.   See Bixby v. Commissioner, 58

T.C. 757, 791 (1972).

     Pursuant to section 7491(c), respondent has the burden of

production with respect to the accuracy-related penalties.

Petitioners claimed business expenses for 2004 for which they

maintained no records and which they can neither explain,

support, nor recall; made charitable contributions roughly

equivalent to 10 percent of their gross income but without

obtaining any receipts or identifying the organizations to which

they made donations; and claimed deductions for the same

education expenses in two places on their 2004 return.

Respondent has satisfied his burden of producing evidence

indicating that the accuracy-related penalties are appropriate.

     The accuracy-related penalty does not apply to any part of

an underpayment of tax as to which the taxpayer shows that he

acted with reasonable cause and in good faith.   Sec. 6664(c)(1).

The determination of whether a taxpayer acted in good faith is

made on a case-by-case basis, taking into account all the
                                - 19 -

pertinent facts and circumstances.       Sec. 1.6664-4(b)(1), Income

Tax Regs.   A taxpayer bears the burden of proving that he had

reasonable cause and acted in good faith with respect to an

underpayment.     See Higbee v. Commissioner, 116 T.C. 438, 449.

     Other than vague assertions that they relied upon their

return preparer, petitioners have not demonstrated reasonable

cause for their underpayments.    They have not demonstrated that

they acted with good faith in claiming the disallowed deductions

for 2004 or 2005.    Accordingly, the accuracy-related penalties

are sustained.8

     To reflect our disposition of the issues,


                                             Decisions will be entered

                                      under Rule 155.




     8
       Because we have allowed some deductions the IRS disallowed
for 2005, and respondent has conceded petitioners’ entitlement to
joint filing status for 2004, the amounts of tax required to be
shown on petitioners’ returns will be different from the amounts
shown on the notices of deficiency, and the accuracy-related
penalties will also differ. We leave the calculation to the
parties’ Rule 155 computations, but we remind the parties of
petitioner’s $69.81 student loan interest expense for 2004, which
apparently was not deducted because of the income phaseout under
sec. 221(b)(2). However, in view of respondent’s concession that
petitioners are entitled to joint filing status for 2004, a
different income limit will now apply.
