                         T.C. Memo. 1998-333



                       UNITED STATES TAX COURT



               RUSSELL A. CONDELLO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25375-96.               Filed September 22, 1998.



     Russell A. Condello, pro se.

     Shelley T. Van Doran and James F. Prothro, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency of

$9,719 and an addition to tax under section 6651(a)(1) of $1,569

with respect to petitioner's 1992 Federal income tax.1


     1
       Unless otherwise indicated, all 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 -


     The issues for decision are:    (1) Whether petitioner may

exclude from his income one-half of his wages, Schedule C

insurance business income, interest income, dividend income, and

capital gains distribution pursuant to Texas community property

law; (2) whether petitioner is entitled to Schedule A, C, and E

deductions in amounts greater than those respondent allowed in

the statutory notice of deficiency; (3) whether petitioner is

liable for self-employment tax; (4) whether petitioner is

entitled to dependency exemptions for his two children; (5)

whether petitioner is entitled to file as head of household; and

(6) whether petitioner is liable for an addition to tax for

failure to file a timely return.

                         FINDINGS OF FACT

     Oral stipulations of fact were made at trial.2    The oral

stipulation of facts and the referenced exhibits are incorporated

herein by this reference.   Petitioner resided in Dallas, Texas,

at the time he filed his petition.

     On May 2, 1987, petitioner married Carol L. Condello (Mrs.

Condello).   In 1991, petitioner and Mrs. Condello separated.

During 1992, they were engaged in an acrimonious divorce

proceeding and did not reside together.     On March 29, 1994, a

final decree of divorce was rendered.


     2
       These stipulations were made pursuant to a Rule 91(f)
hearing.
                                 - 3 -


     Petitioner and Mrs. Condello have two children.    Under the

divorce decree issued in 1994, petitioner and Mrs. Condello were

given joint custody of the children.     During 1992, however, the

children resided with Mrs. Condello.

     For the 1992 taxable year, petitioner and Mrs. Condello

filed separate Federal income tax returns.    Petitioner filed his

1992 Federal income tax return (the return) in or around October

1995.   On the return, petitioner reported 100 percent of his

C.P.A. business income and only one-half of his other income.     He

also reported approximately one-half of Mrs. Condello's 1992

income on the return.

     On the return, petitioner also claimed numerous deductions

that respondent denied.   On his Schedule A, petitioner deducted

$8,500 for legal fees relating to his divorce proceeding.

Petitioner also deducted on Schedule A one-half of the total

mortgage interest and real property taxes paid on a house located

at 5012 Bridgewater Drive (the Bridgewater house).    Mrs. Condello

paid the mortgage and real property taxes on the Bridgewater

house with rental income from her separate property. On his

Schedule C for his C.P.A. business, petitioner claimed deductions

in the amount of $12,478 relating to that business.    On his

Schedule E, petitioner claimed deductions relating to a rental

property located at 5900 Oregon Trail Court (the rental property)

and reported a loss of $2,132.
                               - 4 -


      During 1992, petitioner was a sole proprietor and reported a

net profit from his C.P.A. business on the return for that year.

For the 1992 taxable year, petitioner did not pay any self-

employment tax.

                              OPINION

I.   Petitioner's Taxable Income

      During 1992, petitioner and Mrs. Condello resided in Texas.

Texas is a community property state.    Tex. Fam. Code Ann. secs.

3.001-3.005. (Vernon 1998); Lange v. Phinney, 507 F.2d 1000, 1005

(5th Cir. 1975).   Under Texas law, community property includes

property acquired during the marriage by either spouse except for

property acquired by gift, devise, descent, or in the recovery

for personal injuries.   See Tex. Fam. Code Ann. secs. 3.001,

3.002.   Income derived during marriage from separate property is

also community property.   Maben v. Maben, 574 S.W.2d 229, 232

(Tex. Civ. App. 1978).   Generally, for Federal income tax

purposes, spouses residing in a community property state must

report one-half of their community income (the general rule).

United States v. Mitchell, 403 U.S. 190 (1971).    Neither party

contests that petitioner's 1992 income was community income.

Thus, under the general rule, petitioner should report only one-

half of his and Mrs. Condello's 1992 community income.
                               - 5 -


     Respondent determined that under section 66(b) petitioner

should have included 100 percent of his income on the return.3

Section 66(b) allows respondent to deny petitioner the benefit of

community property laws with respect to any income if the

following requirements are satisfied:   (1) The taxpayer acted as

if solely entitled to such income, and (2) the taxpayer failed to

notify his spouse of the nature and amount of such income before

the due date of the return.

     Petitioner provided Mrs. Condello with various tax documents

relating to his 1992 income.   These documents were intended to

help Mrs. Condello prepare her 1992 return.   Among these

documents were petitioner's 1992 Forms W-2 and 1099.   Petitioner

hand-delivered these documents to Mrs. Condello before the due

date of Mrs. Condello's 1992 return (i.e., April 15, 1993).

     We find that petitioner provided Mrs. Condello with

sufficient notice of the nature and amount of his 1992 income

before the due date of her return and conclude that respondent


     3
       On brief, respondent also argued that sec. 66(a) supported
the determination. We consider sec. 66(a) to be a new matter
because it would require the presentation of different evidence
than the evidence required under sec. 66(b), and respondent would
bear the burden of proof as to that issue. See, e.g., Achiro v.
Commissioner, 77 T.C. 881, 890 (1981). Sec. 66(a) was not
referenced in the statutory notice of deficiency, and respondent
never amended his answer. We find that this issue is not before
the Court. See Foil v. Commissioner, 92 T.C. 376, 418 (1989),
affd. per curiam 920 F.2d 1196 (5th Cir. 1990); Markwardt v.
Commissioner, 64 T.C. 989, 997 (1975).
                                  - 6 -


may not rely on section 66(b) to deny petitioner the benefit of

community property laws.4

           II.    Deductions

     Deductions are a matter of legislative grace, and the

taxpayer has the burden of showing that such taxpayer is entitled

to any deduction claimed.      See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).     Taxpayers must

substantiate amounts claimed as deductions by maintaining the

records necessary to establish such entitlement.      Sec. 6001; sec.

1.6001-1(a), Income Tax Regs.; see Hradesky v. Commissioner, 65

T.C. 87 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     A.   Schedule A Deductions

           1.    Legal Expenses

     Petitioner claimed $8,500 in legal fees on the return.

Section 162 allows a deduction for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

Personal expenses are not deductible.     Sec. 262.   Generally,

legal fees associated with a divorce proceeding are nondeductible

personal expenses.     Melat v. Commissioner, T.C. Memo. 1993-247;

sec. 1.262-1(b)(7), Income Tax Regs.




     4
       We note that petitioner reported 100 percent of his C.P.A.
business income on the return. Petitioner did not raise this
issue in his petition or at trial; therefore, we do not consider
it before the Court.
                                - 7 -


      In United States v. Gilmore, 372 U.S. 39, 48 (1963), the

Supreme Court held that the test for whether legal fees are

business or personal expenses depends upon whether the claim

arises in connection with the taxpayer's profit-seeking

activities or his personal activities.   Under this "origin of the

claim" test, the Court held that legal expenses paid to defeat

claims arising from a marital relationship were personal and non-

deductible.   Id. at 51.   The Court noted that it is irrelevant

whether the taxpayer's income-producing property would be

affected by the outcome of the divorce proceeding.   See id. at

48.

      Petitioner testified that his legal fees were "related to

the divorce proceeding as it related to [his] business."

Petitioner's uncorroborated testimony was general, vague, and

conclusory.   Under these circumstances, we are not required to,

and do not, rely on petitioner's testimony to sustain his burden

of establishing error in respondent's determination.   See Lerch

v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989), affg.

T.C. Memo. 1987-295; Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).   Petitioner provided no further evidence that the legal

expenses arose out of his businesses.    In applying the Gilmore

test, the origin of petitioner's claim arose from the marital

relationship between petitioner and Mrs. Condello, and not from
                                    - 8 -


petitioner's business;    therefore, we conclude that the legal

expenses were nondeductible personal expenses.

            2.   Mortgage Interest and Property Tax Expenses

     Under sections 163 and 164, mortgage interest on a qualified

residence and real property taxes are deductible.         If a couple

resides in a community property state, generally, each spouse is

entitled to deduct one-half of all deductible expenses properly

chargeable against community income.          Johnson v. Commissioner, 72

T.C. 340, 347 (1979).

     On the return, petitioner deducted $4,340 of mortgage

interest expense and $2,031 of real property taxes (one-half of

the total mortgage interest and real property tax expenses)

relating to the Bridgewater house.          Mrs. Condello testified that

she made the mortgage payments on the Bridgewater house out of a

checking account that contained rental income from her separate

property.    During marriage, income from separate property is

community income.     Maben v. Maben, 574 S.W.2d at 232.       We find

that Mrs. Condello used community income to make the mortgage

payments, and petitioner is entitled to deductions for one-half

of the mortgage interest and one-half of the real property taxes.

     B.     Schedule C Deductions

     Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.          On his Schedule C, petitioner
                                  - 9 -


claimed $12,478 of deductions for his C.P.A. business.

Respondent allowed $755 of these deductions.

     In order to substantiate these expenses, petitioner

submitted a voluminous exhibit at trial containing copies of

checks and receipts.   The exhibit included receipts from

restaurants, checks written to individuals, an airplane ticket

stub, etc.   Other than his uncorroborated testimony, petitioner

did not present any evidence showing how these checks and

receipts related to his C.P.A. business.      As stated earlier, we

find petitioner's testimony general, vague, and conclusory.      We

do not rely on petitioner's testimony to sustain his burden of

establishing error in respondent's determination.      See Lerch v.

Commissioner, supra at 631-632; Tokarski v. Commissioner, supra

at 77.    We conclude that petitioner is not entitled to any trade

or business deductions in excess of those allowed by respondent.

     C.   Schedule E Deductions

     On his Schedule E, petitioner claimed numerous deductions

relating to a rental property that he owned prior to marriage

located at 5900 Oregon Trail Court.       The deductions resulted in a

loss of $2,132.   Respondent denied many of the deductions

petitioner claimed, including mortgage interest expense, property

taxes, and hazard insurance, and determined that petitioner had

income from the rental property.

     Section 212 permits a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year for
                                  - 10 -


the production or collection of income and for the management,

conservation, or maintenance of property held for the production

of income.       Petitioner submitted a Form 1098 for 1992 that showed

the following amounts were paid on the rental property:         Mortgage

interest expense in the amount of $4,500, property taxes in the

amount of $1,414, and hazard insurance in the amount of $234.

Petitioner testified that he paid these expenses.       We conclude

that petitioner established his entitlement to deduct the

foregoing expenses in addition to the deductions already allowed

by respondent.5

III.       Self-Employment Tax

       During 1992, petitioner had self-employment income from his

C.P.A. business in the following amounts:       (1) $2,442 he reported

on the return, and (2) the disallowed Schedule C deductions.

Section 1401 imposes self-employment tax on self-employment

income.       Section 1402(a) defines net earnings from self-

employment as the gross income derived by an individual from the

carrying on of any trade or business by such individual less

allowable deductions attributable to such trade or business.

       Petitioner did not dispute that his C.P.A. business income

was subject to self-employment tax.        Instead, petitioner argued



       5
       We note that the disallowance of deductions claimed for
other expenses creates additional income for petitioner, and
petitioner should report one-half of the income pursuant to Texas
community property laws. See Tex. Fam. Code Ann. secs. 3.001,
3.002 (Vernon 1998); see also our discussion regarding sec.
66(b), supra.
                               - 11 -


that all Social Security taxes had been paid relating to his

insurance business income.    The notice of deficiency addressed

only the issue of self-employment tax on petitioner's C.P.A.

business income.   We conclude that petitioner is liable for self-

employment tax on his C.P.A. business income based upon the

amount shown on the return and the amount of disallowed Schedule

C deductions.

IV.   Dependency Exemptions

      On brief, petitioner argued for the first time that he is

entitled to dependency exemptions for his two children.

Respondent argues that (1) petitioner is not entitled to

dependency exemptions because during 1992 he did not provide more

than one-half of his children's support, and (2) in the

alternative, the dependency exemption issue is not before the

Court.

      Section 151(c) allows a deduction for a "dependent" as

defined in section 152.   Sons or daughters of the taxpayer, over

half of whose support during the calendar year is provided for by

the taxpayer, are "dependents".    Sec. 152(a).   Section 152(e)(1),

however, further provides that if a child receives over half of

his support during the calendar year from parents who live apart

at all times during the last 6 months of the calendar year, and

if the child is in the custody of one or both of his parents for

more than one-half of the calendar year, then the child is

treated as receiving over half of his support during the year
                              - 12 -


from the parent having custody for a greater portion of the

calendar year (custodial parent).   Section 152(e)(2) provides an

exception to this rule where the custodial parent releases his

claim to the exemption for the year.

     To determine who has "custody" for purposes of section

152(e), the regulations provide that custody is determined by the

terms of the most recent divorce decree or subsequent divorce

decree.   Sec. 1.152-4(b), Income Tax Regs.   Where parents have

joint custody under the divorce decree, the regulations further

provide that custody "will be deemed to be with the parent who,

as between both parents, has the physical custody of the child

for the greater portion of the calendar year."    Id.    For a

parent to be considered as having "physical custody", the child,

generally, must reside with the parent.   See White v.

Commissioner, T.C. Memo. 1996-438; Whitaker v. Commissioner, T.C.

Memo. 1988-418.

     In 1992, petitioner's children received over half of their

support from their parents, and their parents lived apart at all

times during the last 6 months of 1992.   Under the subsequent

divorce decree entered in 1994, petitioner and Mrs. Condello had

joint custody of the children.   During 1992, the children resided

with Mrs. Condello, and, therefore, Mrs. Condello had physical

custody of the children.   White v. Commissioner, supra.    We

conclude that during 1992 Mrs. Condello was the custodial parent

for purposes of section 152(e), and there is no evidence that
                               - 13 -


Mrs. Condello released her claim to the exemptions.

Consequently, petitioner is not entitled to dependency exemptions

for his children in that year.

V.    Filing Status

       Petitioner argues that he is entitled to file as head of

household.    Respondent determined that petitioner should have

filed as married filing separately.     We agree with respondent.

       A taxpayer may file as head of household only if the

taxpayer is not married at the close of his taxable year and is

not a surviving spouse.    Sec. 2(b).   Section 2(c), however,

allows a married taxpayer to be treated as "not married" if he is

so treated under section 7703(b).    To be treated as "not married"

requires, among other things, that a taxpayer maintain as his

home a household which constitutes for more than one-half of the

taxable year the principal place of abode of a child with respect

to whom the taxpayer is entitled to claim a dependency exemption

(or would be so entitled had the claim not been released pursuant

to section 152(e)(2)).    Sec. 7703(b).

       As discussed above, petitioner is not entitled to claim a

dependency exemption for his children.     Therefore, petitioner

cannot file as head of household.

VI.    Addition to Tax

       Respondent determined that petitioner is liable for an

addition to tax under section 6651(a)(1).     Section 6651(a)(1)

imposes an addition to tax for failure to file a return on the
                                - 14 -


date prescribed (determined with regard to any extension of time

for filing) unless the taxpayer can establish that such failure

is due to reasonable cause and not due to willful neglect.      The

taxpayer has the burden of proving that the addition to tax is

improper.    Rule 142(a); United States v. Boyle, 469 U.S. 241, 245

(1985).

       Petitioner filed the return in or around October 1995--more

than 2 years late. Petitioner claims that he was unable to timely

file because of his divorce.    Petitioner is a C.P.A. and an

educated man who teaches classes in tax and accounting at the

University of Texas at Arlington.      He should have known of his

duty to file a timely return.      Petitioner has not established

reasonable cause for his late filing.      Accordingly, we sustain

the Commissioner's determination with respect to the addition to

tax.

       In reaching all of our holdings herein, we have considered

all arguments made by the parties, and, to the extent not

mentioned above, we find them to be irrelevant or without merit.

       To reflect the foregoing,

                                            Decision will be entered

                                       under Rule 155.
