                            T.C. Memo. 1995-578



                          UNITED STATES TAX COURT



               RAHIM A. AND LISA R. MUNSHI, Petitioners v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 9423-94.               Filed December 5, 1995.


        Rahim A. Munshi, pro se.


        Maria Murphy, for respondent.


                            MEMORANDUM OPINION


        NAMEROFF, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1       Respondent determined a deficiency in petitioners' 1991

Federal income tax in the amount of $791.



        1
          All section references are to the Internal Revenue Code
in effect for the year at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                               - 2 -


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

Whether petitioners are entitled to Schedule C depreciation

expense in the amount of $3,200, and (2) whether petitioners are

entitled to Schedule C rental expense in the amount of $2,410.

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.   Petitioners resided in Cerritos,

California, at the time of the filing of this petition.    Because

the activities herein were conducted by Rahim A. Munshi, all

further references to "petitioner" will be to Mr. Munshi.     During

the year at issue, petitioner was a full-time engineer in the

aerospace department of Northrop Corporation.

     For some time, because of defense cutbacks and company

layoffs, petitioner had become concerned about job security.    He

decided to go into real estate as another source of income and

obtained a real estate salesperson license on July 2, 1990.

After obtaining his license, petitioner researched real estate

offices to find a place to hang his real estate license.

     Petitioner became associated as a real estate salesperson

with Real Estate Plus, Inc. (REP), which was operated by broker

Wray Beihagi.   Pursuant to the "Real Estate Special Commission

Choices" agreement signed by petitioner on October 10, 1990,

     2
           Respondent conceded $840 of the Schedule C rental
expense.   Petitioners conceded that they received interest income
of $265.
                               - 3 -


petitioner was to receive a 100-percent commission from the

listing and selling of real properties; however, petitioner was

required to pay REP $70 per month for sharing a desk and $100 at

the close of any escrow.   In addition, petitioner was required to

pay for all Board of Realtors and Multiple Listing Service (MLS)

fees, listing input fees, real estate forms, advertising,

stationery, real estate signs, and stamps.   Further, petitioner

was to keep track of, and was charged for, all telephone calls,

facsimiles, copy paper, use of REP's conference room, and

computer time (if charges were incurred).    Petitioner considered

these expenses an additional rental expense.

     Petitioner received monthly bills from REP, which charged

fees for the support services that were used by petitioner.

Petitioner did not pay these bills promptly because he was not

selling properties.   Petitioner usually paid these bills 2 to 3

months late.3

     In 1988 or 1989, petitioner purchased a MacIntosh 2X

computer.   Petitioner also purchased a color monitor, laser

printer, copy machine, and facsimile machine.   In addition,

petitioner purchased extensive software which he used, in part,

to access the MLS service.   Petitioner allegedly obtained a loan


     3
          Petitioner was invited to supplement the record with
copies of billing statements, receipts, invoices, or canceled
checks to support his claimed deduction for rental expense within
30 days after trial. No such documents have been submitted.
                               - 4 -


in the amount of $10,000 from his credit union to purchase all of

this equipment.4

     Petitioner kept his computer in a garage that he had

converted into an office.   Petitioner spent an average of 2 to 3

hours each evening in his garage office.    Generally, petitioner

spent more time in the garage office during the weekends.

Petitioner spent much of this time setting up the computer,

installing the software, debugging the system, and learning how

to use the computer and software.    In addition, petitioner spent

time learning to use MLS.   Although the computer allegedly was

primarily used for petitioner's real estate activities, he has

recently installed some computer games for his children.

     Petitioner kept no records of the amount of time he devoted

to his real estate activity in 1991.    During his first 2 years as

a real estate salesperson, petitioner learned the basics of how

to be a real estate salesperson.    By attending seminars and

training courses or teaching himself, petitioner learned how to

make cold calls, do appraisals, download data, and use MLS.

During 1991, petitioner had no income from his real estate

activity and did not have any clients.    However, respondent did



     4
          Petitioner's opportunity to supplement the record was
extended to include a copy of the loan agreement. See supra note
3. It is unclear whether the software for the MLS service was
purchased prior to petitioner's obtaining his real estate license
and becoming associated with REP.
                                - 5 -


not contend that petitioner was not "carrying on" this activity

or that section 183 is involved herein.

Depreciation

     On the Schedule C attached to petitioner's 1991 return,

petitioner claimed a deduction in the amount of $3,200 for

depreciation.   This deduction pertains to the computer and other

equipment allegedly purchased for $10,000.    Respondent disallowed

this entire amount.

     A taxpayer may deduct ordinary and necessary expenses paid

or incurred during the taxable year in carrying on a trade or

business.   Sec. 162(a).   Deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving that he is

entitled to any claimed deductions.     Rule 142(a); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.

Helvering, 290 U.S. 111, 115 (1933).    This includes the burden of

substantiating the amount and purpose of the item claimed.

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.

However, if certain claimed deductions are not adequately

substantiated, we are permitted to estimate them, provided we are

convinced from the record that the taxpayer has incurred such

expenses, and we have a basis upon which to make an estimate.

Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930); Vanicek v.

Commissioner, 85 T.C. 731, 735 (1985).
                                - 6 -


     Section 167 provides, in part, for a depreciation deduction

with respect to property used in a trade or business.

Depreciation allows the taxpayer to recover the cost of the

property used in a trade or business or for the production of

income.   United States v. Ludey, 274 U.S. 295, 300-301 (1927);

Southeastern Bldg. Corp. v. Commissioner, 3 T.C. 381, 384 (1944),

affd. 148 F.2d 879 (5th Cir. 1945).     To substantiate entitlement

to a depreciation deduction, the taxpayer must show that the

property was used in a trade or business (or other profit-seeking

activity).   In addition, the taxpayer must establish the

property's depreciable basis.   E.g., Delsanter v. Commissioner,

28 T.C. 845, 863 (1957), affd. 267 F.2d 39 (6th Cir. 1959);

Kerrigan v. Commissioner, T.C. Memo. 1995-483; Greenway v.

Commissioner, T.C. Memo. 1980-97.

     Petitioner has failed to substantiate any depreciable basis

for the office equipment.   According to petitioner's testimony,

he obtained a loan in the amount of $10,000, which he used to

purchase various pieces of office equipment in 1988 or 1989.

However, petitioner has failed to present detailed testimony, the

loan agreement, or any other documentation such as receipts,

invoices, or canceled checks to substantiate the cost of such

equipment.   Thus, petitioner has failed to substantiate any

depreciable basis for the equipment.    Moreover, petitioner has

failed to substantiate the extent to which the office equipment
                                - 7 -


was used in his trade or business or other profit-seeking

activity.    Accordingly, we sustain respondent on this issue.

Rental expense

     On the Schedule C attached to petitioner's 1991 return,

petitioner claimed a deduction in the amount of $3,500 for rental

expense.    Respondent has allowed $840.

     According to petitioner's testimony, he received bills from

REP for various support services that he used during 1991.

However, petitioner presented no documentation such as receipts,

invoices, canceled checks, or detailed testimony to substantiate

the amounts he spent, or the amounts charged by REP, for support

services.    Thus, petitioner has failed to substantiate the amount

disallowed.    Accordingly, we sustain respondent on this issue.

     To reflect the concessions in this case,


                                             Decision will be entered

                                        under Rule 155.
