                       T.C. Memo. 1997-225



                     UNITED STATES TAX COURT



MARY K. FISHER AND CHARLES F. PATTERSON, ET AL., Petitioners1 v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 6382-95,                      Filed May 12, 1997.
                 6383-95,
                 6384-95.



     Charles F. Patterson, pro se.

     John E. Becker, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     PANUTHOS, Chief Special Trial Judge:    These consolidated

cases were heard pursuant to the provisions of section



     1
        The following cases are consolidated herewith: Charles
F. Patterson, docket No. 6383-95, and Mary K. Fisher, docket No.
6384-95.
                                      - 2 -

7443A(b)(3) and Rules 180, 181, and 182.2                 Respondent, in three

separate notices of deficiency, determined deficiencies in

petitioners' Federal income taxes and accuracy-related penalties

as follows:
                                                         Accuracy-Related Penalties
Docket No.   Year        Petitioner         Deficiency    Sec. 6662(c) Sec. 6662(d)

 6382-95     1992   Mary K. Fisher and
                     Charles F. Patterson     $7,337       $1,467.00        ---

 6383-95     1991   Charles F. Patterson      1,684          336.80        ---

 6384-95     1991   Mary K. Fisher            6,630          ---         $1,326

Petitioners filed individual Federal income tax returns for 1991

and a joint return for 1992.3          With respect to the 1991 taxable

year, petitioners evenly divided items of income and expense,

pertaining to their horse- and dog-breeding activities, on their

respective Schedules C.         After concessions,4 the issues remaining

      2
        All section references are to the Internal Revenue Code
as amended, unless otherwise indicated. All Rule references are
to the Tax Court Rules of Practice and Procedure.
      3
           Petitioners were married in 1992.
      4
        With respect to 1991, respondent has conceded the
following issues: (1) That petitioners' horse-breeding activity
was an activity engaged in for a profit; (2) that petitioner Mary
K. Fisher is entitled to deduct $18,622 and petitioner Charles F.
Patterson is entitled to deduct $18,621 of the Schedule C
expenses claimed on their respective returns, including claimed
depreciation expenses on each return in the amount of $1,405; (3)
that petitioner Mary K. Fisher did not have unreported income in
the amount of $5,539; (4) that petitioner Charles F. Patterson
did not have unreported income in the amount of $16,200; (5) that
petitioner Mary K. Fisher is not liable for the accuracy-related
penalty under sec. 6662(d); and (6) that petitioner Charles F.
Patterson is not liable for the accuracy-related penalty under
sec. 6662(c). Petitioners have each conceded that they are not
entitled to claimed depreciation expenses in the amount of $900.
                                                   (continued...)
                               - 3 -

for decision are:   (1) Whether we have jurisdiction to resolve

the issue of whether petitioner Charles F. Patterson (hereinafter

sometimes referred to as petitioner) is entitled to a net

operating loss carryover (NOL) in the amount of $113,259 claimed

on his 1991 return, and purportedly attributable to the tax years

1988 through 1990; (2) whether, if we do have jurisdiction over

the issue, petitioner is entitled to the claimed NOL carryover;

(3) whether petitioners are entitled to claimed casualty and

theft loss deductions attributable to their horse- and dog-

breeding activities in the total amount of $4,150 for the tax

year 1991;5 (4) whether petitioners are entitled to claim

amortization deductions for startup expenses attributable to

their horse-breeding activity in the total amount of $4,074 for

each of the tax years 1991 and 1992; (5) whether petitioners are

entitled to claimed depreciation expenses attributable to their

horse-breeding activity in the total amount of $9,900 for the tax


     4
      (...continued)
     With respect to 1992, respondent has conceded the following
issues: (1) That petitioners' horse-breeding activity was an
activity engaged in for a profit; (2) that petitioners are
entitled to $33,525 of the Schedule C expenses claimed on their
return, including depreciation expenses in the amount of $5,622;
(3) that petitioners did not receive unreported income in the
amount of $17,530; and (4) that petitioners are not liable
for the accuracy-related penalty under sec. 6662(c). Petitioners
concede that they are not entitled to $155 of the depreciation
expenses claimed on their return. Petitioners, however, claim
additional depreciation expenses in the amount of $899.
     5
        This represents the combined amounts claimed on
petitioners' individually filed returns.
                               - 4 -

year 1991, and in the amount of $3,288 for the tax year 1992;6

and (6) whether petitioners are entitled to a claimed deduction

for office expenses in the amount of $958 for the tax year 1992,

attributable to their horse-breeding activity.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time of filing the

petitions, petitioners' mailing address was located at Franktown,

Virginia.

1.   Petitioner Charles F. Patterson's Net Operating Loss

     On his 1991 return, petitioner Charles F. Patterson claimed

an NOL carryover, purportedly attributable to the tax years 1988

through 1990, in the amount of $113,259.    Upon examination,

respondent disallowed the claimed NOL carryover.    Respondent

argues that petitioner has failed to substantiate the loss in

question.   The record does not contain petitioner's returns for

the tax years 1988 through 1990.


     6
        On their respective 1991 returns, petitioners each
claimed depreciation expenses in the amount of $7,255. After
respondent's concession in the amount of $1,405, and each
petitioner's concession in the amount of $900, the amount of
depreciation remaining in dispute, with respect to each
petitioner, is $4,950. On their 1992 return, petitioners claimed
depreciation expenses in the amount of $8,166. After
respondent's concession in the amount of $5,622, petitioners'
concession in the amount of $155, and petitioners' claim for
additional depreciation in the amount of $899, the amount of
depreciation remaining in dispute is $3,288.
                               - 5 -

2.   Petitioners' Horse- and Dog-Breeding Activities

      On January 1, 1988, petitioners began operating a horse-

racing and horse-breeding business called Arabian Hill Horse Park

(Arabian Hill), which continued operations throughout the taxable

years in issue.   On Schedules C of their respective 1988 returns,

petitioners began reporting income and expenses attributable to

Arabian Hill.   Petitioners also bred American Kennel Club

registered dogs for sale during the tax years in issue.

      (a) Casualty and Theft Losses in 1991

      In 1990, petitioners purchased a horse named Since Gussie.

Petitioners each claimed depreciation expenses with respect to

Since Gussie on their respective 1990 returns, indicating an

original basis in the amount of $700.   In May 1991, Since Gussie

unexpectedly died from an uncertain cause.    Petitioners

calculated Since Gussie's adjusted basis to be $467 at the date

of death.   Petitioners have stipulated that they have offered no

substantiation in regard to the price they paid for Since Gussie

in 1990.

      During 1991, one of petitioners' puppies was stolen.   The

record does not indicate whether petitioners purchased the puppy

or whether the puppy was born on petitioners' ranch.

      On their 1991 returns, petitioners claimed casualty loss

deductions in the amount of $4,000, attributable to Since

Gussie's purported fair market value on the date of death, and in

the amount of $150, attributable to the puppy's fair market value
                               - 6 -

on the date it disappeared.   Upon examination, respondent

disallowed the claimed deductions, asserting that petitioners had

presented no evidence regarding their cost basis in either Since

Gussie or the puppy.



     (b)   Amortization of Startup Expenditures for 1991 and 1992

     Prior to commencing operation of Arabian Hill in 1988,

petitioners acquired horses and related assets during the years

1982 through 1987.   Petitioners estimate that they incurred

startup expenditures related to Arabian Hill in the amount of

$20,370.   Petitioners itemize their claimed startup expenditures

as follows:

     Research--assessing viability                     $1,680
     Asset search                                       3,130
     Seminars, clinics, and other events                3,060
     Tack and supplies                                 10,000
     Other developmental expenditures                   2,500

           Total                                       20,370

Petitioners assert that they are entitled to amortize these

expenditures as start-up expenditures, beginning with the taxable

year 1988 and continuing for the following 4 years.   Accordingly,

on each of their 1991 and 1992 returns, petitioners claimed an

amortization expense deduction in the amount of $4,074,

attributable to these purported expenditures.   Upon examination,

respondent disallowed petitioners' claims for amortization

deductions, asserting that petitioners had failed to make a

timely election to amortize the startup expenditures under
                                      - 7 -

section 195, and that petitioners had failed to adequately

substantiate the claimed expenditures.

(c)   Depreciation

      (1) 1991

      On Schedules C of their respective tax returns for the

taxable year 1991, petitioners claimed the following combined

depreciation:

      Assets placed in service before 1991                          $11,044
      Vehicles                                                        1,930
      Assets placed in service in 1991                                1,536

              Total depreciation                                     14,510

The claimed depreciation attributable to assets placed in service

before 1991 is as follows:

                                                        Placed in
      Property           Years   Percentage    Basis     Service     Deduction

20 horses                 3       66.67       $77,000    1/1/88       $5,723
Business equipment        5       40.00         3,895    1/1/88          449
Computer & peripherals    5       40.00         5,405    1/1/88          669
Machinery & equipment     5       40.00        12,693    1/1/88        1,462
Nonlisted vehicles        5       40.00         7,600    1/1/88          876
Office furniture          7       28.57         1,200    1/1/88          150
Professional library     20        7.50         4,125    1/1/88          272
3 horses                  3       66.67         1,954    1/1/90        1,027
Farm tools                5       40.00           479    1/1/89         ---
Business equipment        5       40.00           643    1/1/90          359
Professional library     20        7.50           526    1/1/89         ---
Professional library     20        7.50           265    1/1/90           57

      Total                                                           11,044


      Petitioners owned 19 horses when they commenced operation of

Arabian Hill on January 1, 1988.              Petitioners had acquired 14 of

the 19 horses in question, and the remaining 5 were foaled at

Arabian Hill.      Petitioners calculated the depreciable bases of
                                - 8 -

all 19 horses by using what petitioner Charles F. Patterson

considered to be the horses' combined fair market values on that

date.   Petitioners have stipulated that they have not provided

any substantiation as to the cost of any of the horses which they

acquired prior to 1988.    Petitioners also acquired a 20th horse

during 1988 and used the horse's purported cost as its

depreciable basis.    Petitioners have stipulated that they have

not supplied any substantiation as to the cost or acquisition

date of this horse.

     With respect to the business equipment, machinery and

equipment, nonlisted vehicles, office furnishings, and library

materials placed in service on January 1, 1988, petitioner

calculated depreciable bases from his estimate of the fair market

values of the assets on that date.      With respect to the computer

and peripherals placed in service on January 1, 1988, petitioner

calculated depreciable bases from the purported cost of the items

in question.   Petitioners have stipulated that they have not

provided any substantiation as to the acquisition dates or cost

of the specific items of business equipment, computer and

peripherals, machinery and equipment, nonlisted vehicles, office

furnishings, and library materials.

     Petitioners placed three horses, Moonsang, Since Gussie, and

Puget Sound, in service on January 1, 1990.     Petitioner listed

cost bases attributable to the horses in the amounts of $400,

$700, and $800, respectively.    In addition, petitioner added a
                                      - 9 -

total of $54 to the cost bases of the horses, purportedly

attributable to direct charges associated with their purchase.

Accordingly, petitioners claimed depreciation with respect to

these horses, calculating a total depreciable basis in the amount

of $1,954.      Petitioners have stipulated that they have not

supplied any substantiation as to the cost of these three horses.

     Petitioners claimed depreciation with respect to farm-

related tools and equipment placed in service on January 1, 1989,

and business equipment placed in service on January 1, 1990.

Petitioners have stipulated that they have not provided any

substantiation as to the cost of these items.

     Petitioners claimed depreciation with respect to library

materials placed in service on January 1, 1989 and 1990.

Petitioners have stipulated that they have not provided any

substantiation as to the cost of these items.

     Petitioners claimed depreciation with respect to the

following five vehicles:

              Business   Placed in   Cost     Remaining
Description     Use       Service    Basis      Basis     Years   Method   Deduction

Dodge 1-ton     100%     1/1/88      $2,500    $720        5      200 DB     $288
Jeep Wagon      100      1/1/88       1,200     346        5      200 DB      138
Ford 1-Ton      100      1/1/88       2,000     576        5      200 DB      230
Chevy C-50      100      8/6/91       2,196   2,196        5      ½ 200 DB    440
Dodge 3/4-ton   100      8/10/91      4,176   4,176        5      ½ 200 DB    834

 Total                                                                       1,930

Petitioner calculated the depreciable bases of the three vehicles

that were placed in service on January 1, 1988, from his estimate

of their respective fair market values as of that date.
                                   - 10 -

Petitioners have stipulated that they have not provided any

information regarding the acquisition dates and costs of these

three vehicles.     Petitioners have substantiated the $2,196 cost

basis of the Chevy C-50 and the $4,176 cost basis of the Dodge

3/4-ton.     Accordingly, respondent has conceded the depreciation

claimed by petitioners with respect to these two vehicles.

     Petitioners placed the following assets in service in 1991:

                   General
                Depreciation            Recovery
Property           System      Basis     Period     Method   Deduction

2 horses        3-yr. prop.    $3,100       3       200 DB   $1,033
Computer &
  peripherals   5-yr. prop.    2,226        5       200 DB      452
Office
  furniture     7-yr. prop.      210        7       200 DB       30
Business
  library       20 yr. prop.     562        20      150 DB       21

     Total                                                    1,536


Petitioners have substantiated the claimed costs of these assets.

Accordingly, respondent has conceded the depreciation claimed by

petitioners with respect to these assets.

     Petitioners have conceded that they erroneously computed a

portion of their claimed depreciation in 1991.         As a result of

these errors, petitioners conceded $1,800 of the $14,510 total

depreciation claimed for the 1991 taxable year.         On the basis of

petitioners' concession in the amount of $1,800, and respondent's

concession in the amount of $2,810, the remaining amount of

claimed depreciation in dispute is $9,900.         See supra note 4.

With respect to the amount remaining in dispute, respondent

argues that petitioners' failure to substantiate the depreciable
                                  - 11 -

bases in, or acquisition dates of, the assets in question

precludes their claims for depreciation.

     (2) 1992

     On Schedule C of their 1992 tax return, petitioners claimed

the following depreciation:
     Assets placed in service before 1991                $4,340
     Vehicle                                              3,634
     Assets placed in service in 1991                       202

             Total depreciation                          1
                                                          8,176
     1
      Petitioners' return, as well as the stipulation of facts,
incorrectly calculated this total as $8,166.


The claimed depreciation attributable to assets placed in service

before 1992 is as follows:

                                                    Placed in
     Property      Years      Percentage   Basis     Service    Deduction

3 horses (now 2)          3    66.67       $1,954    1/1/90        $434
2 horses                  3    66.67        3,100    1/1/91       1,378
Business equipment        5    40.00        3,895    1/1/88         269
Machinery/equipment       5    40.00       12,693    1/1/88         877
Farm tools                5    40.00          479    1/1/89          53
Business equipment        5    40.00          643    1/1/90         123
Computer & peripherals    5    40.00        2,226    1/1/91         710
Office furniture          7    28.57        1,200    1/1/88         107
Office furniture          7    28.57          210    1/1/91          51
Professional library     20     7.50        4,125    1/1/88         236
Professional library     20     7.50          526    1/1/89          33
Professional library     20     7.50          265    1/1/90          18
Professional library     20     7.50          562    1/1/91          41

     Total                                                        4,330


With respect to those assets placed in service before 1992, the

facts pertaining to petitioner Charles F. Patterson's calculation

of depreciable bases and petitioners' substantiation of costs and

acquisition dates are the same as those facts applicable to the

1991 taxable year, discussed supra.         Petitioners now claim
                                       - 12 -

additional depreciation in the amount of $374 for the taxable

year 1992, attributable to a computer and peripherals listed on

the 1991 return with a basis of $5,405, but for which no

depreciation had been claimed for the 1992 taxable year.

     Petitioners have established the bases of assets that were

placed in service in 1991.           Respondent, therefore, concedes that

petitioners are entitled to depreciation with respect to those

assets in the amount of $2,180 for the taxable year 1992.

     Petitioners claimed depreciation for the 1992 taxable year

with respect to six vehicles in the following amounts:

                Business   Placed in   Cost     Remaining
Description        Use      Service    Basis      Basis     Years Method   Deduction

Dodge 1-Ton     100%       1/1/88      $2,500    $432        5    100 DB      $173
Jeep Wagon      100        1/1/88       1,200     208        5    200 DB        83
Ford 1-Ton      100        1/1/88       2,000     346        5    200 DB       138
Chevy- C-50     100        8/6/91       2,196   1,756        5    ½ 200 DB     702
Dodge 3/4-Ton   100        8/10/91      4,176   3,340        5    ½ 200 DB   1,336
Ford F-350      100        2/15/92      6,010   6,010        5    ½ 200 DB   1,202

     Total                                                                   3,634

The first five vehicles listed are the same five vehicles upon

which petitioners claimed depreciation in 1991.                  The facts

pertaining to petitioners' calculation of the depreciable bases

of these five vehicles and petitioners' substantiation of their

costs and acquisition dates are the same as those facts

applicable to the 1991 taxable year.              Accordingly, respondent has

conceded that petitioners are entitled to depreciation relating

to the Chevy C-50 and Dodge 3/4-ton in the amounts of $702 and

$1,336, respectively.        Petitioners' claimed depreciation with

respect to the three vehicles placed in service on January 1,
                                  - 13 -

1988, remains in dispute.      In addition, petitioner placed in

service a Ford F-350 during the 1992 taxable year.            Petitioners

have substantiated the $6,010 cost basis of this vehicle, and

accordingly, respondent has conceded that petitioners are

entitled to depreciation with respect to that vehicle in the

amount of $1,202.

     Petitioners now contend that they used additional nonlisted

vehicles in the operation of Arabian Hill, included on their 1991

returns with a basis of $7,600, for which no depreciation was

claimed on their 1992 return.         Petitioners now claim additional

depreciation in the amount of $525 with respect to these

vehicles.

     Petitioners placed the following assets in service during

1992:

                           General
                       Depreciation               Recovery
    Property               System         Basis    Period    Method   Deduction

Machinery/equipment    5-yr. prop.       $543        5       200 DB    $109
Computer &
peripherals             5-yr. prop.       315        5       200 DB      63
Office furniture        7-yr. prop.       125        7       200 DB      18
Business library       20-yr. prop.       311       20       150 DB      12

        Total                                                           202


Petitioners have substantiated their bases in these assets.

Accordingly, respondent has conceded that petitioners are

entitled to claimed depreciation in the amount of $202.

        On the basis of petitioners' concession in the amount of

$155, petitioners' claim for additional depreciation in the

amount of $899 ($374 for computer peripherals plus $525 for
                                - 14 -

additional vehicles), and respondent's concession of $5,622 of

the $8,166 in depreciation claimed on their return, the total

amount of depreciation in dispute for 1992 is $3,288.      With

respect to the amount remaining in dispute, respondent argues

that petitioners' failure to substantiate the depreciable bases

in or acquisition dates of the assets in question precludes their

claim for depreciation.

     (d)   Office Expenses in 1992

     Just prior to trial, petitioners claimed deductions in the

amount of $958, attributable to office expenses, which were not

claimed on their 1992 return.    Although petitioners repeated

their assertion of this claim in their posttrial answering brief,

they did not discuss this issue at trial, and have presented no

evidence to substantiate these claimed expenses.

                                OPINION

     We begin by noting that respondent's determinations are

presumed correct, and petitioners bear the burden of proving that

those determinations are erroneous.       Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      Moreover, deductions are a

matter of legislative grace, and petitioners bear the burden of

proving that they are entitled to any deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

1.   Net Operating Loss

     We first address whether petitioner Charles F. Patterson is

entitled to claim an NOL on his 1991 return in the amount of
                                - 15 -

$113,259.   Petitioner's first argument is that we lack

jurisdiction to resolve this issue.      Petitioner's argument in

this regard, as we understand it, is that the Court lacks

jurisdiction because petitioner's claim for an NOL carryover in

1991 did not affect his tax liability for that year.      Petitioner

explains his position as follows:    "Petitioner Patterson's net

operating loss carryforwards and, $0.59 plus tax, will buy

amedium coffee at MacDonalds.    It is nothing.    The Court does not

have jurisdiction over 'nothing'."

     Petitioner's argument is without merit.      Section 6213(a)

vests this Court, upon filing of a taxpayer's timely petition,

with jurisdiction over the adjustments contained in the notice of

deficiency and claims made in the petition.     Petitioner claimed

an NOL carryover in the amount of $113,259 on his 1991 return.

Respondent, in the notice of deficiency, determined that

petitioner was not entitled to the claimed carryover.

Petitioner's petition in docket No. 6383-95 contests respondent's

determination insofar as it pertains to the disallowance of the

claimed NOL carryovers.   Therefore, we have jurisdiction with

respect to this issue.    Dorl v. Commissioner, 57 T.C. 720, 721

(1972), affd. per curiam 507 F.2d 406 (2d Cir. 1974)

      Petitioner next contends that, notwithstanding the

jurisdictional issue, he is entitled to the NOL carryover claimed

on his return.   An NOL is the excess of allowable deductions over
                                - 16 -

gross income.    Sec. 172(c).   An NOL for any taxable year is first

carried back to each of the 3 taxable years preceding the taxable

year of the loss and then carried over to each of the 15 taxable

years following the taxable year of the loss.     Sec. 172(b)(1)(A)

and (B) and (b)(2).    A taxpayer may elect to forgo the carryback

period, and carry over the entire NOL.     Sec. 172(b)(3).   The

amount of an NOL, as well as the carryback and carryforward

periods, is to be determined pursuant to the law applicable to

the year in which the losses occurred, without regard to the law

applicable to other years to which the losses are carried back or

forward.    Reo Motors, Inc. v. Commissioner, 338 U.S. 442, 446

(1950).    The taxpayer bears the burden of proving the fact and

the amount of the loss.    Rule 142(a); Ocean Sands Holding Corp.

v. Commissioner, T.C. Memo. 1980-423, affd. without published

opinion 701 F.2d 167 (4th Cir. 1983).

     Respondent argues that petitioner has not established that

he incurred the losses in question.7     Petitioner has failed to

present any evidence, including books, records, or tax returns

for the years 1988 through 1990, to substantiate the claimed

losses.8   Apart from his broad assertion that he is entitled to


     7
        Respondent also argues that petitioner did not properly
elect to forgo the 3-year net operating loss carryback period.
We need not, and do not, address this issue.
     8
        We recognize that petitioner's returns for the years 1988
through 1990 would not, standing alone, establish that petitioner
                                                   (continued...)
                              - 17 -

the claimed NOL, petitioner has failed to provide any hint as to

where the losses may have originated.     Petitioner has failed to

meet his burden of proof with respect to this issue.    We,

therefore, sustain respondent's determination.

2.   Horse- and Dog-Breeding Activities

      (a) Casualty and Theft Losses in 1991

      We now address whether petitioners are entitled to casualty

and theft losses claimed for 1991, relating to the death of Since

Gussie and the purported theft of a puppy.    Section 165 provides

that taxpayers may deduct certain losses, including losses

resulting from casualty or theft, sustained during the taxable

year and not compensated by insurance or otherwise.    Sec. 165(a),

(c)(3).   A taxpayer may deduct a casualty loss in the year in

which the loss is sustained and may deduct a theft loss in the

year in which the loss is discovered.     Sec. 165(a), (c)(3), (e).

The amount of a casualty or theft loss is equal to the lesser of

the fair market value or the adjusted cost basis of the property

in question.   Secs. 1.165-7(b) and 1.165-8(c), Income Tax Regs.

Therefore, if a taxpayer fails to establish the cost or other

basis of property underlying a claim for a casualty or theft loss

deduction, no deduction is allowable.     Zmuda v. Commissioner, 79

T.C. 714, 727 (1982), affd. 731 F.2d 1417 (9th Cir. 1984).

      8
      (...continued)
incurred the losses in question.   Wilkinson v. Commissioner, 71
T.C. 633, 639 (1979).
                                - 18 -

     Respondent denied petitioners' claim for a casualty loss

deduction relating to Since Gussie's death, arguing that

petitioners had improperly used Since Gussie's fair market value

at the time of death to compute the amount of the deduction when,

by petitioners' own calculations, Since Gussie's fair market

value exceeded adjusted basis.    Respondent further argues that

petitioners' failure to produce any documentation concerning

Since Gussie's adjusted basis precludes their entitlement to any

casualty loss whatsoever.    Petitioners argue that, despite the

plain language of the statute and the accompanying regulation,

the amount of the casualty loss deduction with respect to Since

Gussie should be determined with regard to her fair market value

rather than their adjusted basis, regardless of whether Since

Gussie's fair market value exceeded their adjusted basis at the

time of death.     In so doing, petitioners contend that race horses

are distinct assets and should be treated as such.    Petitioners

argue on brief that "An Affirmed can not be treated exactly the

same as his anvil nor would the human conscience allow it." (Fn.

refs. omitted.)9    Petitioners further state:

     That [Since Gussie's] adjusted basis was $467 at the
     time of death is of no importance, to the material
     matter or economic impact, beyond its part in the
     accounting equation. The great triple crown winner,
     Secretariat, was a home-bred and never had an adjusted
     basis; he under the Internal Revenue Code and

     9
        "Affirmed" refers to thoroughbred horse-racing's 1978
Triple Crown winner.
                               - 19 -

     Regulations was a zero ($0) and if he had been lost in
     the same way, no deduction for the loss would have been
     allowed under the interpretation that Respondent puts
     forth, and therein lies the error. The unequivocal
     intent of the tax code is equilibrium--to strike a
     balance amongst taxpayers so that all may receive
     fairest treatment and to be subject only to the fairest
     amount of tax.

     *         *        *        *        *        *          *

          Horses are discrete in terms of casualty losses of
     business property. Certainly the ilk of Since Gussie
     is. It is incumbent upon the Commissioner to
     discriminate, whether by adding another paragraph or
     otherwise to this regulation and the Petitioners look
     to this Court for a first step in that direction.

     We reject petitioners' argument.   Section 1.165-7(b), Income

Tax Regs., expressly and unambiguously provides that the

deductible casualty loss amount is the lesser of either the

asset's basis or its fair market value at the time of the

casualty.    There exists no exception for casualties involving

race horses, and it is beyond our authority to fashion such an

exception.    Furthermore, other than petitioner's oral testimony,

petitioners offered no evidence, such as receipts or bills of

sale, to prove their adjusted basis in Since Gussie.      Petitioners

similarly offered no evidence concerning their basis in the puppy

that was purportedly stolen.    Accordingly, we sustain

respondent's determination.

     (b)    Amortization of Startup Expenditures for 1991 and 1992

     We now address whether petitioners are entitled to amortize

startup expenditures with respect to Arabian Hill.     Section

195(a) provides that generally, taxpayers are not allowed to
                                - 20 -

deduct startup expenditures.    Taxpayers, however, may elect to

treat startup expenditures as deferred expenses which may be

amortized over a period of not less than 60 months as may be

selected by the taxpayer, beginning with the month in which the

active trade or business begins.    Sec. 195(b)(1).    Startup

expenditures include only those expenditures "which, if paid or

incurred in connection with the operation of an existing active

trade or business * * *, would be allowable as a deduction for

the taxable year in which paid or incurred."      Sec. 195(c)(1)(B).

For this reason, an expenditure which an existing trade or

business would capitalize, rather than wholly expense, cannot be

amortized as a startup expenditure.      S. Rept. 96-1036 at 12

(1980).   A taxpayer seeking to amortize startup expenditures must

elect do so no later than the time prescribed by law for filing

the return for the taxable year in which the trade or business

begins.   Sec. 195(d)(1).

     Respondent denied petitioners' claimed deduction seeking to

amortize startup expenditures for two reasons:      (1) Petitioners

failed to make a timely election to amortize startup

expenditures, as required by section 195, and (2) petitioners

have failed to meet their burden of substantiating the amount of

startup expenditures claimed.    With respect to respondent's first

argument, petitioners assert that they made a timely election to

amortize their startup expenditures.      At trial, petitioner

attempted to prove that he made a timely election to amortize
                              - 21 -

startup expenses on petitioners' respective 1988 returns by

introducing a completed Form 4562, Depreciation and Amortization,

as well as accompanying work papers purportedly drafted while

preparing petitioners' 1988 returns.   Petitioner did not provide

respondent with these documents prior to trial.

     We are troubled by petitioners' failure to provide

respondent with the documentation concerning their election to

amortize startup expenses until the date of trial.   Nevertheless,

we have reviewed these documents and find them insufficient for

the purposes of satisfying petitioners' burden, particularly when

the record does not contain petitioners' 1988 returns.    We are

not required to accept petitioner's self-serving testimony.

Masters v. Commissioner, 243 F.2d 335, 338 (3d Cir. 1957), affg.

25 T.C. 1093 (1956); Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).   We find that petitioners have failed to meet their

burden of proving that they executed a timely election to

amortize startup expenditures.   Therefore, petitioners are not

entitled to amortize the startup expenditures claimed during the

years in issue.   Krebs v. Commissioner, T.C. Memo. 1992-154.

     In addition to finding that petitioners failed to execute a

timely election, we also agree with respondent's second argument.

In an attempt to substantiate their purported startup

expenditures, petitioners have offered a list of the various

expenditures incurred between 1982 and January 1, 1988, the date

on which they officially commenced operation of Arabian Hill.
                              - 22 -

The list, which was not compiled contemporaneously, consists of

petitioner's estimates.   The record also contains several of

petitioner's monthly credit card statements dated 1987,

purportedly indicating that petitioners incurred startup expenses

attributable to the purchase of tack and other supplies in the

amount of $6,864.

     Petitioners' list is inadequate for the purposes of

substantiating the expenses in question.   Petitioner did not

contemporaneously compile the list, and we do not accept

petitioner's self-serving estimates of the expenditures in issue.

Cf. Farguson v. Commissioner, T.C. Memo. 1983-615 (rejecting

taxpayer's poorly detailed and noncontemporaneous ledger as

inadequate for substantiating purported expenses).   Furthermore,

many of the expenditures in question relate to the purchase of

bridles, saddles, and other equipment which had a useful life

beyond the year in which they were purchased.   These expenditures

are capital expenditures, and cannot be considered as startup

expenditures.   S. Rept. 96-1036, supra at 12; sec. 1.263(a)-2(a),

Income Tax Regs.; cf. Rodgers Dairy Co. v. Commissioner, 14 T.C.

66, 71 (1950) (allowing taxpayer's claim for depreciation with

respect to bridles and saddles).   Although the credit card

receipts indicate that petitioners may have incurred expenses

related to their horse-breeding and racing activities prior to

1988, we cannot discern from the record those items constituting
                              - 23 -

startup expenditures as distinguished from those constituting

capital expenditures.

     For both reasons, respondent is sustained on this issue.

     (c)   Depreciation for 1991 and 1992

     We now address whether petitioners are entitled to claim the

depreciation expenses remaining in dispute.   Section 167 allows a

taxpayer to claim depreciation in relation to property used in a

trade or business.   Section 1.167(g)-1, Income Tax Regs.,

provides that with respect to property which has not been used in

a trade or business and which is subsequently converted for use

in a trade or business, the basis for computing depreciation

shall be the property's fair market at that time if less than the

property's adjusted basis.   Petitioners bear the burden of

establishing the proper depreciable basis with respect to those

assets underlying their claims for depreciation.   Rule 142(a).

     Petitioners have failed to substantiate their cost basis in

each of the assets presently underlying their disputed claims for

depreciation.   Petitioner calculated the depreciable basis of

most of these assets by estimating each asset's fair market value

when placed in service.   Petitioners, in support of this

position, cite Internal Revenue Service (IRS) Publication 334,

Tax Guide for Small Business, at 19, which states:   "There are

many times when you cannot use cost as a basis.    In these cases,

the fair market value of the property, or the adjusted basis of

certain property may be important."    Petitioners interpret this
                              - 24 -

language to mean that when a taxpayer places an asset in service

in a trade or business but cannot determine his or her basis in

the asset, the taxpayer may freely elect to use the asset's fair

market value at that time as the asset's depreciable basis.

     Petitioners have misinterpreted the statutory provisions

governing depreciation.   Section 1.167(g)-1, Income Tax Regs.,

unambiguously provides that a taxpayer should use a property's

fair market value as the basis of computing depreciation only if

less than the property's adjusted basis.   An IRS publication,

such as the one cited by petitioners, is not to be construed as

an authoritative source of Federal income tax law.    Zimmerman v.

Commissioner, 71 T.C. 367, 371 (1978), affd. without published

opinion 614 F.2d 1294 (2d Cir. 1979).   In any event, the portion

of the IRS publication cited by petitioners does not pertain to

the determination of an asset's depreciable basis.

     On brief, petitioners contend that the fair market value of

many of the assets underlying the depreciation in dispute did not

exceed the adjusted basis when placed in service.    Petitioners,

however, have failed to present any evidence to substantiate the

cost bases of the assets which underlie the disputed claims for

depreciation.   As a result, we cannot determine whether the fair

market value of any of the assets in question was less than

adjusted basis when the assets were placed in service.   Moreover,

the record contradicts petitioner's assertion.   For example,

petitioner admitted at trial that he calculated the depreciable
                                - 25 -

basis of a horse named Jetta by estimating a fair market value of

$3,600 as of January 1, 1988, while acknowledging that he had

purchased the horse for less than that amount.

     Nevertheless, we believe that petitioners likely acquired,

for consideration, some of the assets underlying the disputed

claims for depreciation.   Petitioners had bases in these assets

upon which they could claim depreciation.       Where a taxpayer

establishes that he or she has incurred a trade or business

expense but cannot substantiate the precise amount of the

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

including expenses attributable to depreciation.       Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Bell v

Commissioner, 13 T.C. 344, 347-348 (1949).       We cannot, however,

allow a deduction unless the taxpayer presents some rational

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

85 T.C. 731, 743 (1985).   In this instance, petitioners' failure

to substantiate the costs of the assets underlying their claims

for depreciation would reduce any attempt on our part to estimate

petitioners' depreciation expenses to little more than guesswork.

We, therefore, sustain respondent's determination.

     (d) 1992 Office Expenses

     We now address petitioners' claim for a deduction for office

expenses in the amount of $958.    Petitioners did not discuss this

issue at trial, and the record contains no evidence to

substantiate the claimed expenses.       Petitioners have failed to
                              - 26 -

meet their burden of proof on this issue.    We, therefore, sustain

respondent's determination.   Rule 142(a).

     To reflect the foregoing,



                                         Decisions will be entered

                                    under Rule 155.
