                          T.C. Memo. 1997-347



                        UNITED STATES TAX COURT



                  RILWAN ADISA SALAMI, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 12740-96.                      Filed July 29, 1997.



        Rilwan Adisa Salami, pro se.

        Linda Grobe, for respondent.


                          MEMORANDUM OPINION


        DINAN, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

     Respondent determined deficiencies in petitioner's Federal

income taxes for 1992 and 1993 in the amounts of $3,857 and

$1,877, respectively, and accuracy-related penalties pursuant to

section 6662(a) in the amounts of $771 and $329, respectively.

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

unreported Schedule C gross receipts in the amounts determined by

respondent; (2) whether petitioner is entitled to Schedule C

business expense deductions in excess of the amounts allowed by

respondent; (3) whether petitioner's net earnings from self-

employment are excludable from self-employment income because he

is a nonresident alien; and (4) whether petitioner is liable for

the section 6662(a) accuracy-related penalty.

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioner resided in Chicago,

Illinois, on the date the petition was filed in this case.

     Petitioner came to the United States in 1986.    He formerly

worked as a security guard in California.    Petitioner moved to

Chicago in January 1992 and began working as a taxicab driver.

     Petitioner shared a friend's taxicab from January 1992 to

April 1992.   The friend allowed petitioner to drive his 1990

Chevrolet Caprice at night.   From April 1992 to June 1992,

petitioner drove a car that he leased from Yellow Cab Company.

In July 1992, petitioner purchased his friend's 1990 Chevrolet

Caprice, which he drove until December 28, 1992.    From December
                                 - 3 -

28, 1992, to October 12, 1993, petitioner drove a 1992 Chevrolet

Caprice that he leased from Yellow Cab Company.

     Petitioner was granted permanent resident alien status on

September 25, 1996, by the U. S. Department of Justice

Immigration and Naturalization Service.

     The first issue for decision is whether petitioner had

unreported Schedule C gross receipts in the amounts determined by

respondent.   Respondent's determinations in the statutory notice

of deficiency are presumed to be correct, and petitioner bears

the burden of proving otherwise.    Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     All taxpayers are required to maintain records sufficient to

determine their correct tax liability.    Sec. 6001.   Such records

must be retained by the taxpayer "so long as the contents thereof

may become material in the administration of any internal revenue

law."   Sec. 1.6001-1(e), Income Tax Regs.

     If a taxpayer keeps no records or it appears that records

that are kept do not clearly reflect income, respondent may

reconstruct income under a method which does clearly reflect

income.   Sec. 446(b).   Once it is established that a

reconstruction is necessary, respondent has great freedom in the

method of reconstruction used.     Catalano v. Commissioner, 81 T.C.

8, 13 (1983), affd. without published opinion sub nom. Knoll v.

Commissioner, 735 F.2d 1370 (9th Cir. 1984).
                               - 4 -

     Petitioner introduced a printout from a friend's taximeter

that he contends shows his method of calculating his gross

receipts.   Petitioner, however, failed to present any like

printouts from the taximeters of his own taxicabs.   We find that

petitioner failed to maintain adequate records of his gross

receipts for 1992 and 1993.

     Since petitioner failed to maintain records that clearly

reflected his income, respondent's revenue agent, Tony Savage,

reconstructed petitioner's gross receipts for 1992 and 1993

through a method called the "cab formula".    Mr. Savage works in

respondent's market specialization program that deals with the

transportation industry (including taxicab drivers) and has used

the cab formula on numerous occasions with other taxicab drivers.

       As explained by Mr. Savage, the cab formula reconstructs

income by taking into account the claimed gas expenses, price per

gallon of gas, miles per gallon of the vehicle(s) used, occupancy

rate of the vehicle, number of customers and trips per day,

number of days worked per year, and amounts charged for both

entry and per mile fares.   Mr. Savage testified that he relied in

part on petitioner's statements during the audit, but necessarily

estimated some factors through the use of similar information

from other taxicab drivers who, unlike petitioner, had provided

him with records.

     Mr. Savage testified that he used conservative numbers in

reconstructing petitioner's gross receipts.   In particular, he
                              - 5 -

did not take into account any tips, which would have increased

the total gross receipts up to 15 percent.    We have considered

petitioner's miscellaneous objections to Mr. Savage's

calculations and, after carefully reviewing the record, are

convinced that the cab formula used by Mr. Savage clearly

reflects petitioner's gross receipts for 1992 and 1993.    We

therefore sustain respondent's determinations of petitioner's

unreported income.

     The second issue for decision is whether petitioner is

entitled to Schedule C business expense deductions in excess of

the amounts allowed by respondent.

     Petitioner claimed a deduction for car and truck expenses

for 1992 in the amount of $16,200.    In the statutory notice of

deficiency, respondent disallowed $7,473 of the claimed expenses.

Petitioner also claimed a deduction for repairs to his taxicab

for 1993 in the amount of $3,055.    Respondent disallowed $1,644

of the claimed repairs.

     Respondent's explanations in the statutory notice of

deficiency state that the amounts were disallowed because

petitioner did not establish that any amounts over the allowed

amounts were ordinary and necessary business expenses, and that

the section 274 substantiation requirements had not been met.

     Section 162(a) provides for the deduction of all ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business.    Deductions are strictly a
                                - 6 -

matter of legislative grace, and petitioner bears the burden of

proving his entitlement to any deduction claimed.   Rule 142(a);

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

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Petitioner's burden includes the requirement that he substantiate

any deductions claimed.    Hradesky v. Commissioner, 65 T.C. 87

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

     Section 274(d)(4) provides that no deduction shall be

allowed with respect to any listed property, defined in section

280F(d)(4)(A) to include passenger automobiles, unless the

taxpayer meets strict substantiation rules.   However, section

280F(d)(5)(B) provides that the term "passenger automobile" does

not include any vehicle used by the taxpayer directly in the

trade or business of transporting persons or property for

compensation or hire.   Since petitioner's claimed deductions are

for his use of passenger automobiles as taxicabs, section

274(d)(4) is not applicable in this case.

     Notwithstanding the nonapplicability of section 274(d)(4),

petitioner failed to present any records that show that he is

entitled to business expense deductions with respect to his

taxicabs in excess of the amounts allowed by respondent.    The

only receipts provided by petitioner are for repairs made to his

taxicab during 1993.    Such receipts are partially illegible and

do not exceed the amount allowed by respondent.   Petitioner has

failed to meet his burden of proof on this issue.   Rule 142(a).
                                - 7 -

     We hold that petitioner is not entitled to business expense

deductions in excess of the amounts allowed by respondent.

     The third issue for decision is whether petitioner's net

earnings from self-employment are excludable from self-employment

income because he was a nonresident alien.

     Section 1401(a) imposes a tax on self-employment income for

old-age, survivors, and disability insurance.   An additional tax

for hospital insurance is imposed on self-employment income

pursuant to section 1401(b).    Self-employment income is defined

as the net earnings from self-employment derived by an

individual, other than a nonresident alien individual, during any

taxable year.   Sec. 1402(b).   The phrase "net earnings from self-

employment" is in turn defined as gross income derived by an

individual from any trade or business carried on by such

individual, less any attributable deductions.   Sec. 1402(a).

     Petitioner argues that he is not liable for the section

1401(a) and (b) taxes on self-employment income because he was a

nonresident alien during 1992 and 1993.

     A nonresident alien never has self-employment income.    Sec.

1.1402(b)-1(d), Income Tax Regs.   While a nonresident alien who

derives income from a trade or business carried on within the

United States may be subject to the applicable income tax

provisions on such income, such nonresident alien will not be

subject to the taxes on self-employment income, since any
                                - 8 -

earnings which he may have from self-employment do not constitute

self-employment income.   Id.

     Section 7701(b) and the regulations thereunder provide rules

for determining whether an alien individual is a resident of the

United States.   Preece v. Commissioner, 95 T.C. 594, 601-602

(1990).   An individual is a nonresident alien if such individual

is neither a citizen of the United States nor a resident of the

United States.   Sec. 7701(b)(1)(B).    An alien individual is

treated as a resident of the United States with respect to any

calendar year if such individual:    (1) Is a lawful permanent

resident of the United States at any time during such calendar

year (green card test); (2) meets a substantial presence test; or

(3) makes an election to be treated as a resident of the United

States.   Sec. 7701(b)(1)(A).   There is no evidence that

petitioner was a lawful permanent resident of the United States

at any time prior to September 25, 1996, or that he made an

election to be treated as a resident in accordance with the

procedures set forth in section 301.7701(b)-4(c)(3)(v), Proced. &

Admin. Regs.   Therefore, petitioner will be treated as a resident

alien only if he meets the substantial presence test provided in

section 7701(b)(3).

     An individual generally satisfies the substantial presence

test with respect to any calendar year if such individual was

present in the United States for at least 31 days during that

calendar year and for at least l83 days during a 3-year period
                               - 9 -

that includes the calendar year.   Sec. 7701(b)(3)(A); sec.

301.7701(b)-1(c)(1), Proced. & Admin. Regs.     An individual is

treated as present in the United States on any day that such

individual is physically present in the United States at any time

during such day.   Sec. 7701(b)(7)(A).

     The record shows that petitioner was physically present in

the United States, working as a taxicab driver in Chicago, for

more than 183 days during 1992 and 1993.     In fact, petitioner

offered no evidence that he was physically absent from the United

States at anytime after his arrival in 1986.     Moreover,

petitioner never revealed what foreign country he claims as his

place of residency.   We find that petitioner satisfies the

section 7701(b)(3) substantial presence test and therefore must

be treated as a United States resident for 1992 and 1993.     We

hold that petitioner's net earnings from self-employment

constitute self-employment income.     Accordingly, petitioner is

liable for the self-employment taxes as determined by respondent.

     The fourth issue for decision is whether petitioner is

liable for the section 6662(a) accuracy-related penalty for

negligence.   Respondent's determination of negligence is presumed

to be correct, and petitioner bears the burden of proving that

the penalty does not apply.   Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933); Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972).
                                - 10 -

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

of the underpayment attributable to any one of various factors,

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

Sec. 6662(b)(1).   Respondent determined that petitioner is liable

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

his underpayment of taxes, and that such underpayment was due to

negligence or disregard of rules or regulations.    "Negligence"

includes a failure to make a reasonable attempt to comply with

the provisions of the Internal Revenue laws or to exercise

ordinary and reasonable care in the preparation of a tax return.

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

includes any careless, reckless, or intentional disregard of

rules or regulations.   Sec. 6662(c); sec. 1.6662-3(b)(2), Income

Tax Regs.

     Section 6664(c)(1), however, 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 with respect to that portion 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.    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.   Id.
                              - 11 -

     Petitioner testified that he prepared his own returns for

1992 and 1993.   He failed, however, to maintain adequate records

to substantiate the amounts claimed on his return.    Based on the

record, we hold that petitioner has not proved that his

underpayment was due to reasonable cause or that he acted in good

faith.

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.
