                   T.C. Summary Opinion 2006-111



                      UNITED STATES TAX COURT



              WARREN MCKINNLEY DOWDY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20836-04S.             Filed July 17, 2006.



     Warren McKinnley Dowdy, pro se.

     Margaret Burow, for respondent.



     CARLUZZO, Special Trial Judge:    This case for the

redetermination of a deficiency was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.    Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for 2001.   Rule references are to the Tax Court Rules of

Practice and Procedure.   The decision to be entered is not
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reviewable by any other court, and this opinion should not be

cited as authority.

     Respondent determined a $10,224 deficiency in petitioner’s

2001 Federal income tax.    The issues for decision are:   (1)

Whether petitioner is entitled to the cost of goods sold and

expense deductions reported on a Schedule C, Profit or Loss From

Business, included with his 2001 Federal income tax return; and

(2) whether petitioner is entitled to a charitable contribution

deduction.

                             Background

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

At the time the petition was filed, petitioner resided in

Yonkers, New York.

     At all times relevant petitioner was employed by the New

York Times.    Early in 2001, petitioner acquired an interest in a

business that operated what he describes as a “candy store”

located on Myrtle Avenue in Brooklyn, New York (the business

premises).    Pursuant to a Search Warrant On Written Affidavit,

issued April 4, 2001, agents from the Federal Bureau of

Investigation searched the business premises and seized “1 roll

of fax tape”, “2 Pokeman notebooks w/numbers written in there”,

“several index cards w/numbers”, “Nextel phone records”, and

“misc. paperwork”.    The criminal activity that gave rise to the
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search is not known, and petitioner was not charged with a

criminal offense as a result of the search.

     Petitioner’s timely 2001 Federal income tax return includes

a Schedule A, Itemized Deductions, and a Schedule C, Profit or

Loss From Business.   As relevant here, petitioner reported Gifts

to Charity totaling $4,405 on the Schedule A.   That amount

consists of $4,000 in cash gifts and $405 in property

contributions.   Because of the limitations on deductions allowed

by section 170, petitioner claimed a $2,310 deduction for these

gifts.

     No gross receipts are reported on the Schedule C included

with petitioner’s return.   The schedule shows cost of goods of

$45,800 and various deductions totaling $17,084.   Taking into

account the absence of any gross receipts, the cost of goods sold

and those deductions, a $62,884 business loss is reported on the

Schedule C.

     In the notice of deficiency, respondent disallowed, for lack

of substantiation, the business loss deduction and charitable

contribution deduction claimed on petitioner’s 2001 return.

Other adjustments made in the notice of deficiency have been

agreed to or are computational and need not be addressed.

                            Discussion

     As has often been stated, deductions are a matter of

legislative grace, and a taxpayer who claims a deduction must
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establish entitlement to it.   Rule 142(a);1 New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934).   In order to establish

entitlement to a deduction, the expense to which the deduction

relates must be properly substantiated.   Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976); see also sec. 6001; sec. 1.6001-1(a), (e),

Income Tax Regs. (requiring taxpayers to maintain sufficient

records to permit verification of deductible expenses).

1. Charitable Contribution Deduction

     The charitable contribution deduction claimed on

petitioner’s return consists of gifts in cash and property.

According to petitioner, throughout the year in issue he

regularly provided cash in increments from $50 to $800 to his

mother and grandmother who, in turn, donated the cash to a

religious organization.   Petitioner testified that he rarely

attended religious services with either his mother or

grandmother.   Petitioner also claims to have made cash

contributions to Greenpeace, Toys-For-Tots, the New York City

Fire Department, and the Special Olympics.   In addition to the

cash contributions, petitioner claims that he donated property,




     1
       Petitioner’s failure to substantiate the cost of goods
sold and deductions here in dispute render the provisions of sec.
7491(a)(1) inapplicable. See sec. 7491(a)(2).
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mostly used clothing, to either the Salvation Army or the Red

Cross.

       In general, a taxpayer is allowed to deduct any

contributions or gifts made to qualifying organizations for their

use.    See sec. 170(a).   Section 1.170A-13(a)(1), Income Tax

Regs., requires that charitable contribution deductions, whether

made by cash or otherwise, be substantiated by at least one of

the following:

            (i) A canceled check.

            (ii) A receipt from the donee charitable
       organization showing the name of the donee, the
       date of the contribution, and the amount of the
       contribution. A letter or other communication from the
       donee charitable organization acknowledging receipt of a
       contribution and showing the date and amount of the
       contribution constitutes a receipt * * *.

            (iii) In the absence of a canceled check or
       receipt from the donee charitable organization, other
       reliable written records showing the name of the donee,
       the date of contribution, and the amount of the
       contribution.

       If the donation is a small amount, any written or other

evidence from the donee charitable organization acknowledging

receipt is generally sufficient.     The reliability of the records

is determined on the basis of all relevant facts and

circumstances.    See sec. 1.170A-13(a)(2)(C), Income Tax Regs.

       In this case none of the contributions that petitioner

claims to have made are supported by any of the types of

substantiating documents described above.     That being so,
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petitioner is not entitled to the charitable contribution

deduction claimed on his return, and respondent’s disallowance of

that deduction is sustained.

2. Schedule C Items

     The Schedule C included with petitioner’s return shows a net

operating loss of $62,884, that, as described above, consists of

cost of goods sold, plus various expense deductions.    Cost of

goods sold is properly taken into account in determining a

taxpayer’s net income or loss from business, as are business

expenses deductions.   Sec. 162(a); sec. 1.162-1, Income Tax Regs.

Items that are included in the taxpayer’s computation of cost of

goods sold as well as business expense deductions must be

properly substantiated.

     Petitioner did not maintain any books of account for the

business.   At trial, petitioner suggested that if given more

time, he would be able to produce bank records, canceled checks,

and retirement plan documents that would support his claim to the

items shown on the Schedule C.    The record was held open for

approximately 90 days to allow petitioner to obtain and submit

additional evidence, but he failed to do so.    As it turns out,

other than petitioner’s vague testimony on the items, nothing in

the record supports his claim to the cost of goods sold or

deductions claimed on the Schedule C.    Respondent’s disallowances

of those items are sustained.
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    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,

                                        Decision will be entered

                                for respondent.
