                         T.C. Memo. 2011-264



                       UNITED STATES TAX COURT



                 JOYCE ANN LINZY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23538-09.              Filed November 7, 2011.



     Joyce Ann Linzy, pro se.

     Brian A. Press, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a deficiency of

$15,619 in petitioner’s Federal income tax for 2007 and an
                               - 2 -

accuracy-related penalty under section 6662(a)1 of $3,124.2

After concessions,3 the issues for decision are:   (1) Whether

petitioner substantiated deductions claimed on her Schedule C,

Profit or Loss From Business, and Schedule E, Supplemental Income

and Loss; (2) whether petitioner substantiated deductions for

medical expenses, charitable contributions, and home mortgage

interest;4 and (3) whether petitioner is liable for an accuracy-

related penalty under section 6662(a).5

                         FINDINGS OF FACT

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

The stipulations of facts and the attached exhibits are

incorporated herein by this reference.    Petitioner resided in

Illinois at the time the petition was filed.




     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
         All amounts are rounded to the nearest dollar.
     3
        Petitioner concedes that she failed to report gambling
income of $2,500 on her Form 1040, U.S. Individual Income Tax
Return, for 2007. Respondent concedes that the $12,960 of Social
Security income petitioner received on behalf of her minor
children was not taxable.
     4
        Petitioner claimed the standard deduction on her 2007 tax
return. At trial petitioner stated that she would like to
itemize her deductions.
     5
        Adjustments made to petitioner’s self-employment tax,
child tax credit, and earned income credit are computational and
will be resolved by our holding herein.
                               - 3 -

     During 2007 petitioner owned and operated an income tax

return preparation business (tax return business).6   Petitioner

operated her tax return business out of an apartment building

(building) that she owned.   The building consisted of two floors,

with separate apartments on each floor, and a basement.

Petitioner used the first floor apartment (unit one) for her tax

return business.   Petitioner used the basement and part of the

second floor apartment (unit two) for her personal residence.7

Petitioner rented the portion of unit two that she did not use as

her personal residence.8   In 2007 petitioner paid mortgage

interest and points of $14,971 on the building.

     Petitioner prepared her Form 1040 for 2007.   She attached a

Schedule C for her tax return business and attached a Schedule E

to report her gross income and expenses related to her rental

activity.

     On her Schedule C petitioner reported gross receipts of

$87,994 and total expenses of $73,503.   Respondent disallowed all



     6
        Petitioner had been employed as an income tax return
preparer since 1995 before she opened her own tax return business
in 2004.
     7
        Unit one is the same size as unit two. Petitioner did
not know the exact square footage of the building or each unit.
     8
        Respondent treated the rented room as one-sixth of the
building for purposes of the mortgage interest deduction
allowance. Petitioner did not object to this or establish that
she rented a greater portion of the house. Thus, for all
relevant purposes we treat petitioner as having rented one-sixth
of the building.
                                - 4 -

or part of petitioner’s claimed expenses for contract labor,

repairs and maintenance, and utilities.    Petitioner also claimed

a mortgage interest deduction of $7,250 on her Schedule C.

     On her Schedule E petitioner reported rents received of

$4,800 and expenses relating to her rental activity of $15,887.

The expenses included $7,250 of mortgage interest paid, of which

respondent disallowed $5,148.

     Petitioner did not elect to itemize her deductions but

rather claimed the standard deduction.    However, at trial

petitioner stated that she would like to itemize her deductions.

Petitioner stated that in 2007 she paid $12,000 for medical

expenses and contributed $12,350 to charities.    In 2007

petitioner made a $195 cash contribution to Lakeshore Public

Television, and on May 8, 2007, she contributed $2,400 to

Schneider Public School.    Petitioner also made several

contributions to Faith Deliverance Christian Center (Faith

Deliverance) during 2007.    The contributions to Faith Deliverance

are evidenced by a letter from the church dated January 19, 2010,

indicating that petitioner contributed a total of $7,500, and

several copies of checks, all for amounts of $250 or more.     In

addition petitioner made several contributions to Progressive

Ministries.   These contributions are evidenced by a tithing

statement from Progressive Ministries dated January 19, 2010,

stating that petitioner contributed a total of $2,255, and
                                  - 5 -

several copies of checks, some of which are for amounts less than

$250.

                                 OPINION

I.   Deficiency

      The Commissioner’s determinations are generally presumed

correct, and the taxpayer bears the burden of proving the

determinations erroneous.    Rule 142(a).   The taxpayer bears the

burden of proving that he or she is entitled to any deduction

claimed, and this includes the burden of substantiation.     Id.;

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

540 F.2d 821 (5th Cir. 1976).     A taxpayer must substantiate

amounts claimed as deductions by maintaining the records

necessary to establish he or she is entitled to the deductions.

Sec. 6001.

      A.   Schedule C Expenses

      On her Schedule C for her tax return business petitioner

reported $87,994 of gross income and $73,503 of total expenses.

Respondent denied all of petitioner’s claimed $34,880 of contract

labor expenses, $1,291 of petitioner’s claimed $4,000 utilities

expense, and $1,837 of petitioner’s claimed $7,800 repairs and

maintenance expense.
                               - 6 -

     Section 162(a) provides a deduction for certain business-

related expenses.9   In order to qualify for the deduction under

section 162(a), “an item must (1) be ‘paid or incurred during the

taxable year,’ (2) be for ‘carrying on any trade or business,’

(3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an

‘ordinary’ expense.”   Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971); see also Commissioner v.

Tellier, 383 U.S. 687, 689 (1966) (the term “necessary” imposes

“only the minimal requirement that the expense be ‘appropriate

and helpful’ for ‘the development of the [taxpayer’s] business’”

(quoting Welch v. Helvering, 290 U.S. 111, 113 (1933))); Deputy

v. du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”,

the expense must relate to a transaction “of common or frequent

occurrence in the type of the business involved”).   Whether an

expense is ordinary is determined by time, place, and

circumstances.   Welch v. Helvering, supra at 113-114.

     If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the expense, we may approximate the amount of the allowable

deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making.   Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930).   In order for the Court to


     9
        On the other hand, sec. 262(a) generally disallows a
deduction for personal, living, or family expenses.
                                - 7 -

estimate the amount of an expense, the Court must have some basis

upon which an estimate may be made.     Id. at 542-543.   Without

such basis, any allowance would amount to unguided largesse.

Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

     Petitioner presented canceled checks, bank account

statements, receipts, and invoices purporting to substantiate

various items claimed as business expense deductions.     These

records are not well organized and have not been submitted to the

Court in a fashion that allows for easy association with the

portions of deductions that remain in dispute.    Nevertheless, we

make what sense we can with what we have to work with and

summarize our findings in the following paragraphs.

          1.   Contract Labor

     In general, payments made or incurred by a trade or business

for personal services rendered are ordinary and necessary

business expenses and may be deducted under section 162.     Sec.

1.162-7(a), Income Tax Regs.    Petitioner claimed on her Schedule

C a deduction of $34,880 for contract labor.    Respondent

disallowed the entire amount for lack of substantiation.     None of

the numerous receipts petitioner offered in support of her

claimed contract labor expense were for contract labor.10

However, some of the receipts were for valid business expenses


     10
        For example, petitioner introduced receipts for blinds,
carpet, repairs, and furniture.
                                - 8 -

properly deductible elsewhere on petitioner’s Schedule C.       We

permit those expenses to be deducted and discuss them below in

the appropriate expense category.

     At trial petitioner attempted to claim a deduction for

additional contract labor expenses.     Petitioner introduced

photocopies of checks and a few pages of someone’s handwritten

timesheet.   The checks are photocopied such that the dates are

missing or incomplete, and the full amount cannot be determined

for one of the checks.   These records are incomplete, and there

is not enough information to permit a reasonable estimate.

Accordingly, respondent’s complete disallowance of petitioner’s

$34,880 deduction for contract labor is sustained.

           2.   Mortgage Interest

     Petitioner claimed a deduction of $7,250 for mortgage

interest related to her tax return business.     Petitioner is

permitted to deduct on her Schedule C only the mortgage interest

associated with her tax return business.     See sec. 162(a);

Coffman v. Commissioner, T.C. Memo. 2000-7 (permitting mortgage

interest relating to home office to be deducted on Schedule C).

Petitioner paid $14,971 in mortgage interest for the building in

2007.   One-third of the building was used for petitioner’s tax

return business.   Thus, petitioner is entitled to deduct one-

third of the mortgage interest, or $4,990, on her Schedule C.
                                 - 9 -

          3.     Repairs and Maintenance

     On her Schedule C petitioner claimed a deduction of $7,800

for repairs and maintenance.    Respondent allowed only $5,963.11

Petitioner introduced no evidence with respect to the portion of

the repairs and maintenance expense respondent denied.

Petitioner did, however, attempt to deduct $100 for repair work

on unit one’s security system as contract labor.    This expense is

properly deductible as a repairs and maintenance expense.    Thus,

in addition to the repairs and maintenance expense allowed in the

notice of deficiency, petitioner is entitled to deduct an

additional $100.

          4.     Utilities

     Petitioner claimed a deduction of $4,000 on her Schedule C

for utilities.    Respondent allowed only $2,709.   After reviewing

the evidence we conclude that petitioner is entitled to deduct

more than respondent allowed but less than what she claimed.    To

substantiate her utilities expense deduction, petitioner provided




     11
        Respondent allowed the following repair expenses:
$2,100 to Hugo Gomez (carpet), $438 to Butler Home (doors), $60
to Complete Relief (heating repair), $57 to Wal-Mart (totes),
$298 Anna’s Linen (window treatment), $600 to Rossi Custom (lamps
and tables), $2,360 to Rossi Custom (furniture), and $50 to
Century Tile (measuring for carpet). Several of these expenses
were expenses petitioner had claimed for contract labor.
                                  - 10 -

her monthly statements for gas, electricity, and security alarm

service.12

       According to her gas and electric statements, in 2007

petitioner paid $2,787 for gas and $685 for electricity for unit

one.    Petitioner paid $27 per month for security alarm services

for unit one, for a total of $324 paid during 2007.

       Accordingly, petitioner is entitled to deduct $3,796 for

utilities on her Schedule C.       Thus, in addition to the utilities

expense deduction allowed in the notice of deficiency, petitioner

is entitled to deduct $1,087.

              5.   Depreciation

       Petitioner listed no depreciation expense on her Schedule C.

However, during 2007 petitioner purchased several depreciable

items.       She did not depreciate the costs of these items but

instead claimed the costs as contract labor expenses.       Petitioner

must depreciate the property she purchased in 2007 for her tax

return business if the property has a useful life greater than 1

year.       See sec. 167; Bruns v. Commissioner, T.C. Memo. 2009-168

(requiring taxpayer to depreciate cost of CD player and furniture

because they had expected useful life greater than 1 year).        The

following expenses must be depreciated:       $850 for blinds (Eddie

Z), $1,133 for vacuum (Oreck), $135 for desk (Staples), $260 for

       12
        The utilities were billed separately to each unit; thus,
the utility bills for petitioner’s tax return business are
separate from the utility bills for her personal residence.
                                - 11 -

draw file (Staples), $4,803 for dining set (Wickes), and $633 for

fence (Ramirez Iron Works).

     The expenses petitioner incurred for siding and tuckpointing

the building are capital expenditures.     Capital expenditures

include any amount paid for permanent improvements or betterments

made to increase the value of any property.     See sec. 263(a)(1).

A taxpayer is not entitled to deduct a capital expenditure but

may be allowed a depreciation deduction if the property is used

in a trade or business or is held for the production of income.

Secs. 263(a)(1), 167; see INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 83-84 (1992).    Petitioner must capitalize the $2,859 paid for

siding (Grace Home Improvements) and the $1,467 paid for

tuckpointing (Grace Home Improvements).     Section 168(c) provides

that the recovery period for nonresidential real property is 39

years.    Petitioner has not suggested that any of the shorter

recovery periods listed in section 168(c) applies.     Improvements

made to real property are depreciated using the same recovery

period applicable to the underlying property as if the underlying

property were placed in service at the time the improvements were

made.    Sec. 168(i)(6).   Therefore, the amounts must be

capitalized with a 39-year recovery period.

     The parties shall determine in their Rule 155 computations

the exact amount of the depreciation deduction to which

petitioner is entitled.
                                - 12 -

     B.   Schedule E Mortgage Interest Deduction

     Petitioner reported on her Schedule E rents received of

$4,800 and expenses of $15,887 associated with her rental

activity.13    Petitioner claimed a deduction of $7,250 for

mortgage interest, and respondent allowed only $2,102.     Section

212 permits a deduction for all ordinary and necessary expenses

paid or incurred during the taxable year for the production or

collection of income and for the management, conservation, or

maintenance of property held for the production of income.

Therefore, petitioner is entitled to deduct the amount of the

mortgage interest paid that relates to her rental activity.

Petitioner used one-sixth of the building for her rental

activity.     Thus, in addition to the mortgage interest expense

allowed in the notice of deficiency, petitioner is entitled to

deduct $393 on her Schedule E.14

     C.     Schedule A

     As stated above, petitioner did not elect to itemize her

deductions for 2007.     At trial, however, petitioner stated that

she would like to itemize her deductions so that she could deduct

     13
        Respondent did not argue that petitioner failed to
actively participate in her rental real estate activity and would
therefore be unable to take advantage of the $25,000 offset for
rental real estate activities under sec. 469(i).
     14
        This amount is more than what respondent allowed because
respondent calculated the mortgage interest deduction using a
mortgage interest expense of $12,608 but we found petitioner had
$14,971 of mortgage interest expense for 2007.
                                 - 13 -

medical expenses paid and charitable contributions made in 2007.

See Carter v. Commissioner, T.C. Memo. 1976-23 (stating that the

standard deduction election is “not an irrevocable one”).

Petitioner claims that she paid $12,000 for medical expenses and

made charitable contributions of $12,350.     Respondent argues that

petitioner is not entitled to the deductions for medical expenses

and charitable contributions.

          1.   Medical Expense

     Section 213(a) generally allows a deduction for expenses

paid during a taxable year, not compensated for by insurance or

otherwise, for medical care of the taxpayer, his or her spouse,

or dependents, to the extent that such expense exceeds 7.5

percent of adjusted gross income.     To substantiate medical

expenses under section 213, the taxpayer must furnish the name

and address of each person to whom payment was made and the

amount and date of each such payment.     See sec. 1.213-1(h),

Income Tax Regs.    Petitioner has not established that she made

any uncompensated payments for medical expenses in 2007.

Accordingly, petitioner is not entitled to deduct her claimed

medical expenses.

          2.   Mortgage Interest Expense

     Home mortgage interest is generally deductible under section

163(a), subject to the requirements of subsection (h).

Therefore, petitioner is entitled to deduct the mortgage interest
                                  - 14 -

attributable to the portion of the building she used as her

residence.       Petitioner used the basement and most of the second

floor as her personal residence.       Thus, petitioner is entitled to

deduct $7,486 for home mortgage interest.15

            3.     Charitable Contribution

     In general, a taxpayer is entitled to deduct charitable

contributions made during the taxable year to or for the use of

certain types of organizations.       Sec. 170(a)(1), (c).   A taxpayer

is required to substantiate charitable contributions; records

must be maintained.       Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.     A contribution of cash in an amount less than $250 may be

substantiated with a canceled check, a receipt, or other reliable

evidence showing the name of the donee, the date of the

contribution, and the amount of the contribution.       Sec. 1.170A-

13(a)(1), Income Tax Regs.

     Contributions of cash or property of $250 or more require

the donor to obtain contemporaneous written acknowledgment of the

donation from the donee.16      Sec. 170(f)(8).   At a minimum, the



     15
        Schedule A mortgage interest deduction = $14,971 (total
mortgage interest) x 2/3 (portion of building used as personal
residence) - $2,495 (mortgage interest attributable to rental
business).
     16
        If a taxpayer makes separate contributions of less than
$250 to a donee organization during a taxable year, they are not
required to obtain contemporaneous written acknowledgment even if
the sum of the contributions is $250 or more. Sec. 1.170A-13(f),
Income Tax Regs.
                               - 15 -

contemporaneous written acknowledgment must contain a description

of any property contributed, a statement as to whether any goods

or services were provided in consideration, and a description and

good faith estimate of the value of any goods or services

provided in consideration.   Sec. 170(f)(8)(B).    A written

acknowledgment is contemporaneous if it is obtained by the

taxpayer on or before the earlier of (1) the date on which the

taxpayer files a return for the taxable year in which the

contribution was made, or (2) the due date (including extensions)

for filing such return.   Sec. 170(f)(8)(C).

                a.   Lakeshore Public Television

     Petitioner is entitled to deduct the $195 she contributed to

Lakeshore Public Television.   The cash contribution was for less

than $250 and was substantiated by a receipt evidencing the name

of the donee, the date of the contribution, and the amount of the

contribution.   See sec. 1.170A-13(a)(1), Income Tax. Regs.

                b.   Schneider School

     Petitioner is not entitled to a deduction for the $2,400 she

contributed to Schneider School.   The contribution must be

substantiated by a contemporaneous written acknowledgment because

it was for more than $250.   Although petitioner received a

receipt from the Chicago Public Schools, it does not qualify as a

contemporaneous written acknowledgment because it does not state
                                 - 16 -

whether she received any goods or services in exchange for her

contribution.   See sec. 170(f)(8)(B)(ii).

                  c.   Faith Deliverance

     Petitioner is not entitled to deduct the $7,500 she

contributed to Faith Deliverance.     Petitioner introduced a letter

from the church dated January 19, 2010, and copies of several

checks, each for more than $250 and made out to the church’s

pastor and his wife.     The letter does not state whether

petitioner received goods or services in exchange for

contribution and was not received by the earlier of her return’s

filing date or its due date of April 15, 2008.     See sec.

170(f)(8)(B)(ii), (C).     Thus, there is no contemporaneous written

acknowledgment from the donee that would permit petitioner to

deduct the contributions.

                  d.   Progressive Ministries

     Petitioner is entitled to deduct $375 of the $2,255

contributions she made to Progressive Ministries.     To

substantiate the Progressive Ministries contributions, petitioner

introduced checks made out to Progressive Ministries and a 2007

tithing statement from Progressive Ministries dated January 19,

2010.   Because petitioner did not receive the tithing statement

by the earlier of her return’s filing date or its due date of

April 15, 2008, it is not a contemporaneous written

acknowledgment.    See id.    Thus, petitioner does not have proper
                                 - 17 -

substantiation for the contributions of $250 or more.      However,

the tithing statement and canceled checks substantiate

petitioner’s contributions of less than $250.      See sec. 1.170A-

13(f)(1), Income Tax Regs.      Thus, petitioner is entitled to

deduct the following charitable contributions:      $175 contributed

on July 29, 2007; $100 contributed on September 9, 2007; and $100

contributed on November 25, 2007.

      Accordingly, petitioner is entitled to deduct $570 for

charitable contributions made during 2007.      Petitioner’s itemized

deductions of $8,056 exceed her head of household standard

deduction of $7,850, thus she can itemize her deductions.

II.   Section 6662(a) Penalty

      Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer

may be liable for a penalty of 20 percent of the portion of an

underpayment of tax:   (1) Due to negligence or disregard of rules

or regulations or (2) attributable to a substantial

understatement of income tax.      “Negligence” is defined as any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code; this includes a failure

to keep adequate books and records or to substantiate items

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

Negligence has also been defined as the failure to exercise due

care or the failure to do what a reasonable person would do under

the circumstances.   See Allen v. Commissioner, 92 T.C. 1, 12
                                - 18 -

(1989), affd. 925 F.2d 348, 353 (9th Cir. 1991); Neely v.

Commissioner, 85 T.C. 934, 947 (1985).    “Disregard” means any

careless, reckless, or intentional disregard.    Sec. 6662(c).

“Understatement” means the excess of the amount of the tax

required to be shown on the return over the amount of the tax

imposed which is shown on the return, reduced by any rebate.

Sec. 6662(d)(2)(A).   A “substantial understatement” of income tax

is defined as an understatement of tax that exceeds the greater

of 10 percent of the tax required to be shown on the tax return

or $5,000.   Sec. 6662(d)(1)(A).   The understatement is reduced to

the extent that the taxpayer has:    (1) Adequately disclosed his

or her position and has a reasonable basis for such position, or

(2) has substantial authority for the tax treatment of the item.

Sec. 6662(d)(2)(B).     The burden of production is on the

Commissioner to produce evidence that it is appropriate to impose

the relevant penalty.    See sec. 7491(c); Higbee v. Commissioner,

116 T.C. 438, 446 (2001).

     Petitioner’s records were insufficient to substantiate

several of her claimed deductions, and she failed to keep

adequate books and records.    Furthermore, petitioner, a tax

return preparer with more than 15 years’ experience, improperly

deducted the cost of numerous items instead of depreciating the

items as required by law.    Although petitioner credibly testified

as to the business purpose for her claimed deductions, her
                              - 19 -

underpayment was still attributable to her negligence.   See

Griggs v. Commissioner, T.C. Memo. 2008-234 (taxpayer, who

credibly testified regarding profit motive of business ventures,

was liable for accuracy-related penalty because he failed to

substantiate most claimed deductions and failed to keep adequate

books and records).   Accordingly, respondent has met his burden

of production.   See Smith v. Commissioner, T.C. Memo. 1998-33;

sec. 1.6662-3(b)(1), Income Tax Regs.

     The accuracy-related penalty is not imposed with respect to

any portion of the underpayment as to which the taxpayer shows

that he or she acted with reasonable cause and in good faith.

Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448.

Petitioner offered no evidence that she acted with reasonable

cause and in good faith.   Accordingly, we hold that petitioner is

liable for a section 6662(a) accuracy-related penalty due to

negligence or disregard of rules or regulations.17

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.




     17
        Furthermore, petitioner would also have been liable for
a sec. 6662(a) penalty insofar as the Rule 155 computations show
a substantial understatement of income tax.
