                   T.C. Summary Opinion 2009-123



                      UNITED STATES TAX COURT



                  PRESTON B. HANDY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2105-07S, 3614-07S.    Filed August 4, 2009.



     Jay Stuart Dankberg, for petitioner.

     Jessica R. Browde, for respondent.



     PANUTHOS, Chief Special Trial Judge:   These consolidated

cases were heard pursuant to the provisions of section 7463 of

the Internal Revenue Code in effect when the petitions were

filed.1   Pursuant to section 7463(b), the decision to be entered



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

in each docket is not reviewable by any other court, and this

opinion shall not be treated as precedent for any other case.

     The Internal Revenue Service (IRS) determined deficiencies

and penalties in petitioner Preston B. Handy’s Federal income tax

for taxable years 2003 and 2004 (the years in issue) as follows:

                                          Penalty
              Year   Deficiency         Sec. 6662(a)

              2003     $2,375              $475
              2004      2,196               439

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

entitled to itemized deductions in amounts greater than the

standard deductions the IRS allowed, and (2) whether petitioner

is liable for accuracy-related penalties under section 6662(a)

and (b)(1).

                           Background

     Some of the facts have been stipulated, and we incorporate

the stipulation and accompanying exhibits by this reference.

     Petitioner lived in New York when he filed each petition.

During the years in issue, petitioner was a professional actor

and performer and a dues-paying member of both the Screen Actor’s

Guild and the American Federation of Television and Radio

Artists.

     Petitioner has been an actor since 1973, with roles in

movies, television, and theatrical productions.   At a time not

apparent from the record, petitioner leased one or more rooms on
                              - 3 -

the third floor of a residential building in Brooklyn.

Petitioner occasionally lived at that location, where he also

stored his acting wardrobe and his business records.

     Petitioner timely filed his Federal income tax returns for

the years in issue, reporting the following income on Forms 1040,

U.S. Individual Income Tax Return:

              Income                        2003           2004

     Wages, salaries, tips                $18,014         $19,108
     Taxable interest                       2,584            -0-
     Taxable State tax refund                  56              312
     Unemployment compensation              7,148           5,559
       Total income                        27,802          24,979

     Petitioner claimed the following expenses on Schedules A,

Itemized Deductions, and Forms 2106, Employee Business Expenses:

                       Expenses                    2003       2004

     Job expenses & most miscellaneous
       deductions
         Parking fees, tolls and
           transportation, not including
           overnight travel or commuting         $4,007      $4,237
         Travel expenses while away from home
           overnight                                -0-       1,009
         Business expenses                       15,896      16,254
         50 percent of meals and entertainment
           expenses                               1,524       2,048
         Tax preparation fees                       350         -0-
       Total job & miscellaneous expenses        21,777      23,548
         2-percent sec. 67 limitation              (556)       (500)
       Total job & miscellaneous deduction       21,221      23,048
     State income taxes                             745         754
       Total itemized deductions                 21,966      23,802
                              - 4 -

     Petitioner did not provide any further details of his

business expenses on his 2003 return, but he included with his

2004 return the following schedule detailing his business

expenses:

                  Expense                     2004

     Agent’s fees                            $1,850
     Office                                   1,205
     Union dues                               1,597
     Postage                                  3,042
     Telephone                                3,569
     Professional research                    1,024
     Dues and subscriptions                     554
     Costumes                                 2,609
     Hairstyling                                505
     Business gifts                             175
     Miscellaneous                              124
       Total detailed business expenses      16,254

     The IRS issued a notice of deficiency for taxable year 2004

on October 17, 2006, and a separate notice of deficiency for

taxable year 2003 on November 8, 2006.    The IRS disallowed

petitioner’s unreimbursed business expenses for both years,

determining that petitioner failed to substantiate the expenses

and failed to establish that the expenses were ordinary and

necessary to petitioner’s business.   The IRS allowed petitioner

the standard deduction for each of the years in issue.

Petitioner timely petitioned this Court for redetermination.

     On March 8, 2007, the New York City buildings commissioner

ordered petitioner’s room in Brooklyn vacated because of
                               - 5 -

conditions deemed imminently perilous to life.   The order

prohibited reentry until the hazardous conditions were

eliminated.   Petitioner was away from his room in Brooklyn when

he received a telephone call informing him of this action.

Petitioner did not have an opportunity to remove his belongings.

Upon reentering the property after the city ordered it vacated,

petitioner found his acting wardrobe, business records,

furniture, and props wet and in some disarray.

                            Discussion

     In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and a taxpayer bears

the burden of proving that the determination is in error.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Pursuant

to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances.

Petitioner has neither alleged that section 7491(a) applies nor

established his compliance with its requirements.   Petitioner

therefore bears the burden of proof.

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving that he is entitled to any deduction

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

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

taxpayer is required to maintain records sufficient to enable the

Commissioner to determine his correct tax liability.     Sec. 6001;
                                 - 6 -

sec. 1.6001-1(a), Income Tax Regs.       Such records must

substantiate both the amount and purpose of the claimed

deductions.    Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

     When a taxpayer establishes that he has incurred a

deductible expense but is unable to substantiate the exact

amount, we are generally permitted to estimate the deductible

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

1930).    To apply the Cohan rule, however, the Court must have a

reasonable basis upon which to make an estimate.       Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).

     Congress overrode the Cohan rule with section 274(d), which

requires strict substantiation for certain categories of

expenses; in the absence of evidence demonstrating the exact

amounts of those expenses, deductions for them are to be

disallowed entirely.     Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).        Expenses

subject to section 274(d) include travel and meal expenses, as

well as expenses for listed property, such as passenger

automobiles, computers, and cellular telephones.       Secs. 274(d),

280F(d)(4).   A taxpayer must substantiate the amount, time,

place, and business purpose of these expenditures and must

provide adequate records or sufficient evidence to corroborate

his own statement.     See sec. 274(d); sec. 1.274-5T(c)(1),

Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
                                 - 7 -

     An exception allows a taxpayer to substantiate his expenses

through a reasonable reconstruction of his records, but only

where the taxpayer establishes that his records were lost due to

circumstances beyond his control, such as to fire, flood,

earthquake, or other casualty.    Sec. 1.274-5T(c)(5), Temporary

Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).

     Section 162(a) allows deductions for all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on a trade or business.      Performing services as

an employee constitutes a trade or business.      Primuth v.

Commissioner, 54 T.C. 374, 377-378 (1970).      Those expenses that

are (1) ordinary and necessary to the taxpayer’s business and (2)

paid or incurred in a given year are deductible that year;

however, personal, living, or family expenses are not deductible.

See secs. 162(a), 262(a); sec. 1.162-17(a), Income Tax Regs.

     Petitioner testified that his receipts and business records

were lost when the city “condemned” his room in Brooklyn.

Petitioner asserts that his records were lost due to a casualty

and through no fault of his own and argues that he should be

allowed to reconstruct his records.      Petitioner also testified

that at the time of trial he believed that the condemnation

occurred before he received notification from the IRS regarding

deficiencies for the tax years in issue.
                               - 8 -

     Respondent asserts that the city action and any water damage

occurred in March 2007, not only well after the IRS completed the

examination and issued both notices of deficiency in 2006 but

also after petitioner requested redetermination of the

deficiencies by filing petitions with this Court in January and

February 2007.   Respondent asserts that petitioner did not

produce any records to substantiate his expenses during the

examination of his returns and that petitioner has not provided

any corroboration of any loss of property at this location.2

     Petitioner introduced a sign from the New York City

buildings commissioner stating that the premises (the front room

on the third floor of the building in Brooklyn where he rented

space) had been vacated and that reentry was prohibited until the

conditions deemed imminently perilous to life were rectified to

the satisfaction of the New York City Buildings Department.    The

sign is dated March 8, 2007.   Petitioner also introduced a

listing of building violations which indicates that a notice of

violation regarding water leaking onto the third-floor public

hall was issued on January 17, 2007, but that entry did not

indicate that petitioner’s unit was affected.   The listing covers


     2
       Petitioner testified that he stored his acting wardrobe in
the room in Brooklyn and that he purchased insurance on his
acting wardrobe from Allstate Financial. At trial he did not
substantiate his loss (for example, by introducing evidence that
he filed a claim with Allstate for lost or damaged props or
costumes or by offering his 2007 Federal income tax return to
show that he claimed a casualty loss deduction).
                               - 9 -

the period from July 12, 2005, through March 13, 2007, but it

does not list any violation in March 2007 directly affecting

either the third floor or petitioner’s room, and it does not

describe the conditions that triggered the action taken by the

New York City Buildings Department on March 8, 2007.

     In preparation for trial petitioner’s counsel sent letters

to many businesses and individuals from whom petitioner asserts

he purchased goods and services related to his business in 2003

and 2004.   In these letters petitioner’s counsel asked each

vendor to specify the amounts petitioner paid the particular

vendor during the years in issue.   Some of the letters were

completed and returned.   Petitioner’s counsel offered the letters

into evidence.   Respondent’s counsel objected that the letters

are out-of-court statements offered for the truth of their

contents.   We sustained respondent’s hearsay objection.3   See

Fed. R. Evid. 801(c).

     The Court did provide petitioner an opportunity to review

each of the proffered documents one at a time.   After the review

of each document, petitioner was mostly unable to provide



     3
       Rule 174(b) provides that any evidence deemed by the Court
to have probative value shall be admissible in a small tax case.
When petitioner’s counsel attempted to lay a foundation for the
admission of the third-party statements, petitioner was unable to
adequately identify the documents or show any independent
recollection of the facts and circumstances that were the subject
matter of the particular documents. The Court thus concluded
that the documents had little, if any, probative value.
                               - 10 -

independent testimony as to the facts and circumstances

surrounding the particular expenditure that was the subject

matter of the document.    Although at times petitioner appeared to

indicate that his recollection was refreshed, as soon as a

particular document was out of his sight he was often unable to

provide any coherent testimony as to the subject matter of the

claimed deduction.    Thus, in most instances petitioner’s

recollection was not refreshed by the use of these numerous

exhibits.    See Fed. R. Evid. 612.

       Assuming arguendo that petitioner’s records were destroyed

after he was prohibited from entering his room in Brooklyn, he

has not reasonably reconstructed any records as required by the

exception to the strict substantiation requirement of section

274.    We may accept credible testimony of a taxpayer to

substantiate a deduction requiring strict substantiation when a

casualty to the taxpayer’s records has been established and no

documentation is available, but we are not required to do so.

Boyd v. Commissioner, 122 T.C. 305, 320 (2004) (citing Watson v.

Commissioner, T.C. Memo. 1988-29).      In this case there is

insufficient evidence of a casualty.     In any event we do not find

petitioner’s testimony sufficiently specific or credible to

satisfy the requirements of section 274 and the exception
                               - 11 -

thereto.4   Accordingly, we will not allow any deduction for

travel and meal expenses or for expenses for listed property,

such as passenger automobiles, computers, and cellular

telephones.   Thus, the remaining item for consideration is the

deduction claimed and identified by petitioner as “Business

Expenses” ($15,896 for 2003 and $16,254 for 2004).

     Petitioner included a schedule detailing his business

expenses with his 2004 return but did not include such a schedule

with his 2003 return.   His testimony indicates that he claimed

similar business expenses for each year.      We will use the

categories he provided for 2004 as a guide to our analysis of his

deductible expenses for each year.      The categories are:

              Agent’s fees
              Office
              Union dues
              Postage
              Telephone
              Professional research
              Dues and subscriptions
              Costumes
              Hairstyling
              Business gifts
              Miscellaneous



     4
       Petitioner testified that he incurred expenses in 2003 in
excess of $25,000. The claimed expenses exceed petitioner’s wage
income for 2003 of $18,014 and approach his total income of
$27,802. Petitioner alleges that his sleeping on friends’
couches and eating for free at movie and television sets enabled
him to live in New York City on only a few thousand dollars in
2003.
                              - 12 -

     Petitioner’s testimony indicates that he paid several agents

to help him secure work.   His explanation of office expenses

suggests that those expenses were directed to the same purpose;

to wit, preparing mailings to send to producers and others.      We

are satisfied that petitioner incurred expenses for agents and

promotional materials, and we allow a combined $1,500 deduction

for agent and office expenses for each year in issue.

     The parties stipulated that petitioner paid $609 and $531 in

union dues for 2003 and 2004, respectively.    We are not convinced

that he paid more than these amounts for the years in issue.

     Petitioner introduced a list of addresses to which he mailed

postcards and pictures and other promotional materials during

2003 and 2004 in order to solicit acting work.    We are satisfied

that he made many such mailings and allow $1,000 for postage

expenses for each year in issue.

     Petitioner testified that his telephone expenses included

payments for a voice mail service as well as for service for two

cellular telephones that he used strictly for business.      Under

section 274, we may not estimate expenses for listed property,

which includes cellular telephones.    Although petitioner

testified that he subscribed to a voice mail service, we note

that cellular telephone service typically includes voice mail.

Thus, we will not estimate any additional expense for an

additional voice messaging service.
                              - 13 -

     Petitioner’s testimony about professional research expenses

was general and vague, and those expenses appeared to overlap

with his payments to agents and with his claimed dues and

subscription expenses.   His testimony about dues and

subscriptions involved reciting the newsstand price and

publication frequency of several publications related to his

acting profession and claiming to have purchased each issue of

those items at newsstands.   On this record, we do not have a

reasonable basis to estimate any expenses for research, nor is

there any evidence that petitioner paid for subscriptions to any

trade publications.   We will not estimate an expense for

research, dues, or subscriptions.

     Petitioner testified that he developed an extensive acting

wardrobe.   Some of his promotional materials depict him in

costume, and some materials appear to list numerous costumes

petitioner apparently owned and in which he stood ready to act.

However, petitioner did not testify that he purchased any

particular costumes or props during either year in issue, and he

did not provide any detail of any roles he played during those

years that required him to add to his professional wardrobe.    We

do not have any reasonable basis on which to estimate an expense

for costume purchases in 2003 or 2004.   See Vanicek v.

Commissioner, 85 T.C. at 742-743; see also Yeomans v.

Commissioner, 30 T.C. 757, 767-769 (1958).
                              - 14 -

     Petitioner did not testify or introduce any other evidence

relating to his claimed hairstyling expenses.   Accordingly, we

apply the general rule that grooming is an inherently personal

expense and the cost is not deductible.   Hynes v. Commissioner,

74 T.C. 1266, 1291-1292 (1980).

     Petitioner’s testimony with respect to expenses for business

gifts indicates that he paid for meals and drinks for business

associates.   Meals and entertainment expenses are subject to the

strict substantiation requirements of section 274, and therefore

we may not estimate any expense for petitioner’s business gifts

for either year in issue.

     Petitioner did not testify or introduce any other evidence

relating to claimed miscellaneous expenses, and we cannot make an

informed estimate without some reasonable basis.

     As a result of our conclusions herein, petitioner’s

allowable itemized deductions are less than the standard

deduction for each year in issue.   Respondent’s determination

allowing the standard deduction for each year is accordingly

sustained.

     Respondent also determined an accuracy-related penalty for

each year in issue, asserting that petitioner’s deficiency

results from negligence or disregard of rules and regulations.

Pursuant to section 7491(c), the Commissioner bears the burden of

production and must produce sufficient evidence showing that the
                               - 15 -

imposition of the penalty is appropriate in a particular case.

Higbee v. Commissioner, 116 T.C. at 446.

     Respondent asserts that the magnitude of petitioner’s

claimed deductions (roughly 120 percent of his wages for each

year and 77 to 94 percent of his total income for each year) and

petitioner’s inability to substantiate his expenses even before

any alleged water damage to his room in Brooklyn collectively

indicate petitioner’s negligence and disregard for rules and

regulations.    Respondent has satisfied his burden to show that

the penalties are appropriate.

     Once the Commissioner meets his burden, a taxpayer must come

forward with persuasive evidence that the Commissioner’s

determination is incorrect.    Rule 142(a); Higbee v. Commissioner,

supra at 447.   To the extent that a taxpayer shows there was

reasonable cause for an underpayment and that he acted in good

faith, section 6664(c)(1) prohibits the imposition of a penalty

under section 6662.

     Petitioner used a return preparer to prepare his Federal

income tax returns for the years in issue.    He did not explain

what information he provided to his preparer or how the preparer

arrived at the amounts of expenses petitioner deducted on the

returns.   The damage to petitioner’s room in Brooklyn may provide

reasonable cause for his inability at trial to produce records

substantiating his expenses, but, as noted, the listing of
                              - 16 -

violations that petitioner introduced makes no mention of water

damage to his room, and he has not provided any evidence

supporting his loss.   Petitioner failed to establish reasonable

cause for the positions he took on his return and good faith in

taking those positions.   Respondent’s determination is sustained.

     To reflect the foregoing,


                                         Decisions will be entered

                                    for respondent.
