                   T.C. Summary Opinion 2001-7



                     UNITED STATES TAX COURT



              TINA AND SHEAFEN KUO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17217-99S.                 Filed January 25, 2001.



     Sheafen Kuo, pro se.

     Howard J. Schneck, for respondent.



     DINAN, 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
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effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioners’ Federal

income tax of $4,202 and an accuracy-related penalty in the

amount of $36 for the taxable year 1996.

     After concessions noted below, the issues for decision are:

(1) Whether petitioners are entitled to business and rental

expense deductions in excess of those allowed by respondent; (2)

whether petitioners are entitled to a child care credit in excess

of the amount allowed by respondent or, alternatively, entitled

to exclude from income the cost of child care services under

section 129(a); (3) whether petitioners received but did not

report dividend income; and (4) whether petitioners are liable

for an accuracy-related penalty under section 6662(a) for

negligence or disregard of rules or regulations.

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Staten Island, New York, on the date the petition was filed in

this case.

     The first issue for decision is whether petitioners are

entitled to business and rental expense deductions in excess of

those allowed by respondent.   Petitioners claimed $14,920 of

business expenses on Schedule C, Profit or Loss From Business,
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and rental expenses of $9,330 on Schedule E, Supplemental Income

and Loss.   Respondent disallowed $13,529 of the business expenses

and $7,292 of the rental expenses.1

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

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Section 212(2) allows a

deduction for the ordinary and necessary expenses paid during the

taxable year for the management, conservation, or maintenance of

property held for the production of income.    Section 262 provides

that no deduction is allowed for personal, living, or family

expenses.

     Taxpayers generally must keep sufficient records to

establish the amounts of claimed deductions.   See sec. 6001;

Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).      With

certain exceptions, in the event that a taxpayer establishes that

a deductible expense has been paid but is unable to substantiate

the precise amount, we may estimate the amount of the deductible

expense, bearing heavily against the taxpayer whose inexactitude

in substantiating the amounts of the expenses is of his own

making.    See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930).    We cannot estimate deductible expenses, however, unless

the taxpayer presents evidence sufficient to provide some basis



     1
      Petitioners concede several individual business and rental
expense deductions which we need not list in detail.
                               - 4 -

upon which estimates may be made.    See Vanicek v. Commissioner,

85 T.C. 731, 743 (1985).   Furthermore, section 274(d) provides

that, unless the taxpayer complies with strict substantiation

rules, no deduction is allowable for any traveling expenses under

section 162, for any entertainment expenses, or with respect to

any listed property.   See sec. 274(d)(1), (2), (4).    The taxpayer

must substantiate the amount, time, place, and business purpose

of these expenses by adequate records or by sufficient evidence

corroborating his own statement.    See sec. 274(d).   These

substantiation rules of section 274(d) supersede the Cohan

doctrine.   See Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. 412 F.2d 201 (2d Cir. 1969).

     Petitioner husband (Mr. Kuo) testified that in 1996 he was

the sole proprietor of a business named Kuos Technologies which

was involved in the development of a computer security system.

Assuming arguendo that Mr. Kuo in fact was engaged in a trade or

business during 1996, petitioners have failed to produce any

reliable evidence that he paid business expenses in excess of

those allowed as deductions by respondent.    Furthermore, the

testimony by Mr. Kuo at trial indicated that many of the expenses

claimed are nondeductible personal expenses.    Similarly,

petitioners failed to produce any reliable evidence showing the

proper amounts of additional rental expenses.    We note that, even

if petitioners had provided such evidence, the propriety of the
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deductions would still be in question because the claimed rental

property was the first floor of their personal residence which

was purportedly being rented to their own alleged business.     We

uphold respondent’s determinations regarding the business and

rental expenses.

     The second issue for decision is whether petitioners are

entitled to a child care credit in excess of the amount allowed

by respondent or, alternatively, entitled to exclude from income

the cost of child care services under section 129.     Petitioners

claimed a credit of $960, of which respondent disallowed $894.

     Petitioners do not contend that they are eligible for the

section 21 child care credit in any amount greater than that

allowed by respondent.   We so hold.     Rather, they argue that $894

(or some greater amount) of child care services should be

excluded from income under section 129.     Section 129(a) provides

that “Gross income of an employee does not include amounts paid

or incurred by the employer for dependent care assistance

provided to such employee if the assistance is furnished pursuant

to” certain types of programs.    Petitioners have not established

that any of the income reported on their return was an amount

paid or incurred by an employer for dependent care assistance.

They are therefore not entitled to exclude any such amount from

income.
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     The third issue for decision is whether petitioners received

but did not report dividend income.     Respondent determined that

petitioners failed to report $772 in dividend income from Charles

Schwab.2

     Gross income generally includes income from whatever source

derived, including dividends.   See sec. 61(a)(7); sec. 301(c)(1).

Petitioners do not deny receiving the $772 of dividend income

from Charles Schwab.   Rather, Mr. Kuo testified that the dividend

income was reported on the Schedule C as gross receipts (the

remainder of the reported $1,720 in gross receipts was

purportedly a mistake and not income).    We find this testimony to

be incredible; we do not believe that petitioners reported

dividend income as the sole income from their computer-related

business, and that in the process they somehow mistakenly entered

$1,720 instead of $772.   We uphold respondent’s determination

that petitioners received $772 in unreported income.

     The final issue for decision is whether petitioners are

liable for an accuracy-related penalty under section 6662(a).

Respondent determined that petitioners are liable for an

accuracy-related penalty imposed by section 6662(a) for the

portion of the underpayment of tax for 1996 attributable to


     2
      Respondent concedes the following amounts reflected in the
notice of deficiency as unreported income: $221 of dividends and
$3 of interest from Herzog Geduld, and $200 of dividends and $1
of interest from E Trade Securities. Petitioners concede
receiving unreported interest income of $33 from Summit Bank.
                               - 7 -

petitioners’ failure to report a total of $1,193 of dividend

income,3 because such underpayment was due to negligence or

disregard of rules or regulations.

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

one of which is negligence or disregard of rules or regulations.

See sec. 6662(b)(1).   “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code and also includes any failure to keep adequate books

and records or to substantiate items properly.    See sec. 6662(c);

sec. l.6662-3(b)(1), Income Tax Regs.    Section 6664(c)(1)

provides that the penalty under section 6662(a) shall not apply

to any portion of an underpayment if it is shown that there was

reasonable cause for the taxpayer’s position and that the

taxpayer acted in good faith with respect to that portion.    The

determination of whether a taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into

account all the pertinent facts and circumstances.    See sec.

1.6664-4(b)(1), Income Tax Regs.    The most important factor is

the extent of the taxpayer’s effort to assess his proper tax

liability for the year.   See id.




     3
      Respondent concedes the portion of the penalty attributable
to $421 of this amount.
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     Petitioners have failed to introduce any evidence that would

show reasonable cause and good faith on their part.       On the

contrary, the record shows an absence of adequate books and

records and meager efforts to properly assess their tax liability

for 1996.   We uphold respondent’s determination that petitioners

are liable for the accuracy-related penalty.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                 under Rule 155.
