                     T.C. Summary Opinion 2006-52



                      UNITED STATES TAX COURT



                ESTHER A. D’AVILAR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10097-04S.            Filed April 17, 2006.



     Esther A. D’Avilar, pro se.

     Michelle L. Maniscalco, 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 2000.   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 $3,026 deficiency in petitioner’s

2000 Federal income tax.   Petitioner has conceded the correctness

of the adjustments that give rise to the deficiency.   The dispute

between the parties focuses on petitioner’s entitlement to

deductions not claimed on her original return.

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

entitled to various itemized and business expense deductions

shown on an amended return not processed by respondent (the

unprocessed amended return); (2) whether respondent may claim an

increased deficiency based upon income reported on a Schedule C

included with the unprocessed amended return; and (3) whether

respondent may now assert a section 6662(a) accuracy-related

penalty based upon petitioner’s failure to keep records to

substantiate deductions claimed on the unprocessed amended

return.

                           Background

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

the time the petition was filed, petitioner resided in Brooklyn,

New York.

     During the year in issue, petitioner:   (1) Was employed by

the City of New York and earned wages totaling $23,646.39,

evidenced by the issuance of a Form W-2, Wage and Tax Statement,
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that also shows $942.31 of Federal income tax withholdings; (2)

prepared Federal income tax returns for other individuals; and

(3) made cash contributions totaling $1,315 to the Brooklyn

Tabernacle Deliverance Center.

     Petitioner’s timely filed 2000 Federal income tax return

shows her name as the “paid preparer” and “Marcy Multiservice

Center” as the name of the firm of the paid preparer.     On that

return petitioner:   (1) Reported wage income of $12,360; (2)

claimed exemption deductions for herself and three dependents;

(3) claimed the standard deduction; and (4) claimed an earned

income credit computed by treating each of two dependents as a

qualifying child.    Petitioner did not elect to itemize deductions

on her 2000 return, and she did not include a Schedule C, Profit

and Loss from Business, with that return.     Her return shows no

taxable income and no income tax liability.     The $4,157 refund

claimed on petitioner’s return consists of $1,245 of Federal

income tax withholdings from her wages and a $2,912 earned income

credit.   Attached to petitioner’s return is a Form W-2 from the

City of New York that reports the wages and income tax

withholdings shown on petitioner’s return.1

     In the notice of deficiency respondent increased

petitioner’s income by $11,286, which is the difference between


     1
       No explanation has been provided for the discrepancies
between the Forms W-2 contained in the record.
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the wages she was paid by the City of New York and the wages she

reported on her return.   Respondent also allowed a $1,000 child

tax credit, although no such credit was claimed on petitioner’s

return.   The income tax liability shown in the notice of

deficiency is $646.   When added to the computational reduction in

the earned income credit ($2,380) that results from the increase

in petitioner’s income, the deficiency amounts to $3,026.

     In April 2001, petitioner submitted an amended return to

respondent.   The amended return was not processed by respondent

and none of the items reported on the amended return are taken

into account in the notice of deficiency.   The amended return

includes a Schedule A, Itemized Deductions, on which the

following deductions are claimed:   (1) $1,111 for State and local

income taxes, (2) $10,800 for home mortgage interest; and (3)

$4,355 for gifts to charity.   The amended return also includes a

Schedule C, Profit or Loss From Business, on which gross income

of $11,038 is reported, and the following expenses are deducted:

(1) $1,284 for advertising; (2) $1,450 for commissions and fees;

(3) $2,250 for rent; (4) $5,400 for repairs and maintenance; (6)

$3,652 for supplies; (7) $3,254 for utilities; and (8) $7,366 for

“other expenses”.   When offset against the gross income reported

on the Schedule C, the foregoing deductions result in the $13,738

net loss shown on that schedule.
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                            Discussion

     As noted above, petitioner now agrees that she underreported

her wages from the City of New York on her 2000 return.    She now

challenges respondent’s refusal to adjust the deficiency here in

dispute to take into account the deductions claimed on the

Schedules A and C attached to her amended return.

1. Itemized Deductions

     In computing an individual’s taxable income, the individual

may elect to itemize deductions.   Sec. 63(b), (d) and (e).    The

election is made on the individual’s return.   Sec. 63(e)(2).   In

the absence of such an election, the individual’s taxable income

is computed with reference to the standard deduction.   Sec. 63(b)

and (c).   Here, petitioner did not elect to itemize deductions on

her 2000 return, but she elected to do so on the amended return.

This she is entitled to do.   Sec. 63(e)(3); sec. 1.63-1(a),

Income Tax Regs.   Nevertheless, she is required to substantiate

the deductions claimed on the Schedule A included with the

amended return.    Sec. 6001; 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.   Furthermore, to have any

consequence here, the total of the allowable itemized deductions

must exceed the standard deduction; i.e., $6,450.

     Mathematically, the itemized deductions claimed on the

Schedule A can exceed the standard deduction only if all, or at
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least a portion of the “home mortgage interest” expense deduction

is allowed.   In general and simply put, a taxpayer is entitled to

a deduction for qualified residence interest (referred to on the

Schedule A as “home mortgage interest”).    Sec. 163(h)(2)(D).

     In this case, petitioner has failed to establish that any

such interest has been paid.   She produced a copy of a mortgage,

but the instrument shows that the underlying indebtedness is

payable “on demand”.   Assuming, without finding, that the real

estate subject to the mortgage is a “qualified residence” within

the meaning of section 163(h)(3) and (4), it remains that

petitioner has not produced any documents evidencing that any

payments on the mortgage had been made during the year in issue.

Petitioner is not entitled to the deduction for home mortgage

interest claimed on the Schedule A included with the unprocessed

amended return.

     That being so, as noted above, we need not consider whether

petitioner is entitled to the deductions for State income taxes

and gifts to charity because the total of those two claimed

deductions, even if allowed in full, would be less than the

standard deduction.

2. Schedule C Items

     In general, a taxpayer is entitled to a deduction for all

ordinary and necessary business expenses.    Sec. 162(a).   The

types of deductions claimed on the Schedule C included with the
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unprocessed amended return consisted of the types of expenses

contemplated by section 162(a).   Nevertheless, except for her

employment with the City of New York, we cannot tell with any

degree of certainty whether petitioner was otherwise employed

during the year in issue.   Furthermore, to the extent she was,

with the possible exception of the deduction for “commissions and

fees”, petitioner has failed to substantiate any of the

deductions claimed on the Schedule C.   Petitioner is not entitled

to any of the deductions claimed on the Schedule C included with

the unprocessed amended return.

3. Respondent’s Claim for an Increased Deficiency

     At trial, respondent requested leave to claim an increased

deficiency based upon the income reported on the Schedule C

included with the unprocessed amended return.    Ignoring various

technical and procedural infirmities surrounding respondent’s

request, we note that respondent has been in possession of the

unprocessed amended return since April 2001.    As best can be

determined from the record, that return has been treated, more or

less, as a nullity from the date of receipt until the date of

trial.   We see no reason to change its status at this point in

the proceeding.   Respondent’s request to claim an increased

deficiency is denied.
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4. Respondent’s Request To Impose a Section 6662(a) Penalty

     At trial, respondent also requested leave to impose a

section 6662(a) penalty upon the ground that petitioner failed to

maintain adequate records to substantiate the deductions claimed

on the unprocessed amended return.       See sec. 1.6662-3(b), Income

Tax Regs.   Again, ignoring the technical and procedural

infirmities surrounding respondent’s request, given the manner in

which the amended return has been treated, imposition of the

penalty is not appropriate.   Respondent’s request is denied.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,



                                         Decision will be entered

                                 for respondent.
