                         T.C. Memo. 1997-447



                       UNITED STATES TAX COURT



                EUGENE C. JOSEPH, SR., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 7574-95.                  Filed September 30, 1997.



       Eugene C. Joseph, Sr., pro se.

       John T. Lortie, for respondent.



                         MEMORANDUM OPINION


       PARR, Judge:   Respondent determined a deficiency in, and

additions to, the income taxes of petitioner as follows:

                                            Additions to Tax
Year             Deficiency             Sec. 6651      Sec. 6654
1986               $13,147                $3,287          $635
                                - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

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

entitled to claimed deductions for business expenses for the year

1986.   We hold he is to the extent set out below.     (2) Whether

petitioner is liable for an addition to tax under section 6651

for the year 1986.   We hold he is.     (3) Whether petitioner is

liable for an addition to tax under section 6654 for the year

1986.   We hold he is.

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

The stipulated facts and accompanying exhibits are incorporated

herein by this reference.   Petitioner resided in Sunrise,

Florida, at the time the petition was filed.

     In 1986, petitioner was employed by U.S. Geological

Services, Inc.   This was an S corporation of which petitioner was

the sole stockholder and its only employee.      The corporation was

located in Las Vegas, Nevada, and its business purpose was to

negotiate oil and gas leases.
                              - 3 -

     In connection with petitioner's business, petitioner claimed

on his 1986 Federal income tax return the following income1 and expenses:

     Gross receipts                      $37,850
     Advertising                                    $2,480
     Bank service charges                               69
     Car and truck expenses                          6,980
     Commissions                                     4,440
     Dues and publications                             990
     Freight                                           140
     Insurance                                       1,400
     Legal and professional services                   600
     Office expense                                    798
     Rent on business property                       2,400
     Repairs                                         2,006
     Supplies                                          985
     Taxes                                             398
     Travel and entertainment                          698
     Utilities and telephone                         1,295
     Airline travel                                  1,490
     Hotel                                             895
     Answering service                                 185
     Taxi and bus                                      390
           Total expenses                          $28,639

     Respondent determined that all of petitioner's claimed

business deductions were disallowed for lack of substantiation.

Petitioner kept records of his business expenses for 1986;

however, these records were destroyed in a fire in Trenton, New

Jersey, in 1988 or 1989.

Business Deductions

     Respondent disallowed all of petitioner's claimed business

deductions for lack of substantiation.   Petitioner asserts that

he is entitled to deduct the entire amount of $28,639.



     1
          Petitioner further reported interest income of $277 and
gambling winnings of $782 for 1986.
                                 - 4 -

     We begin by noting that, as a general rule, the

Commissioner's determinations are presumed correct, and the

taxpayer bears the burden of proving otherwise.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).     Moreover,

deductions are strictly a matter of legislative grace, and the

taxpayer has the burden of establishing entitlement to any

deduction claimed on the return.     Deputy v. du Pont, 308 U.S.

488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).

     The taxpayer's burden of establishing his entitlement to a

deduction includes the burden of substantiation.     Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).    The Court is not bound to accept

unverified, undocumented testimony of the taxpayer.     Id.

Accordingly, section 6001 and the regulations promulgated

thereunder require the taxpayer to maintain records sufficient to

enable the Commissioner to determine the taxpayer's correct tax

liability.    Meneguzzo v. Commissioner, 43 T.C. 824, 831-832

(1965); sec. 1.6001-1(a), Income Tax Regs.

     As a general rule, the mere fact that a taxpayer cannot

prove the precise amount of an otherwise deductible item is

ordinarily not fatal because we may, if the trial record provides

sufficient evidence, estimate the amount of the deductible

expenses incurred.     Cohan v. Commissioner, 39 F.2d 540 (2d Cir.
                                - 5 -

1930).    However, the estimate must have some reasonable

evidentiary basis.    Vanicek v. Commissioner, 85 T.C. 731, 743

(1985).    The estimate must show that at least the estimated

amount was actually spent or incurred for the stated purpose.

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

However, in making an estimate, the Court may bear heavily on the

taxpayer whose inexactitude is of his own making.       Cohan v.

Commissioner, supra.

     Section 162(a) provides in relevant part that "There shall

be allowed as a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on any trade

or business".    The regulations promulgated thereunder state that

only those ordinary and necessary business expenses "directly

connected with or pertaining to the taxpayer's trade or business"

may be deducted.    Sec. 1.162-1(a), Income Tax Regs.

     Whether an expense is "ordinary and necessary" is generally

a question of fact.    Commissioner v. Heininger, 320 U.S. 467, 475

(1943).    To be "necessary" within the meaning of section 162, an

expense need only be appropriate and helpful to the taxpayer's

business.    Welch v. Helvering, supra at 113.   To be an "ordinary"

expense, "the transaction which gives rise to it must be of

common or frequent occurrence in the type of business involved".

Deputy v. du Pont, supra at 495 (citing Welch v. Helvering, supra

at 114).
                               - 6 -

      Under section 274(d), no deduction may be allowed for

expenses incurred for travel, entertainment, or certain other

expenses, on the basis of any approximation or the unsupported

testimony of the taxpayer.   See, e.g., Joly v. Commissioner, T.C.

Memo. 1995-413.   Section 274(d) imposes stringent substantiation

requirements to which taxpayers must strictly adhere.   Thus,

section 274(d) specifically proscribes deductions for travel or

entertainment expenses in the absence of adequate records or of

sufficient evidence corroborating the taxpayer's own statement.

Id.

      Section 274(d)(4) also provides that no deduction is

allowable with respect to listed property, as defined in section

280F(d)(4), unless the deductions are substantiated in accordance

with the strict substantiation requirements of section 274(d) and

the regulations promulgated thereunder.   Included in the

definition of listed property in section 280F(d)(4) is any

passenger automobile or any other property used as a means of

transportation.   Sec. 280F(d)(4)(A)(i), (ii).

      To substantiate a deduction attributable to listed property,

a taxpayer must maintain adequate records or present

corroborative evidence to show the following:    (1) The amount of

the expense; (2) the time and place of use of the listed

property; and (3) the business purpose of the use.   Sec. 1.274-

5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,
                                - 7 -

1985).   In order to substantiate a deduction by means of adequate

records, a taxpayer must maintain a diary, a log, or a similar

record, and documentary evidence which, in combination, are

sufficient to establish each element of each expenditure or use.

Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg.

46017 (Nov. 6, 1985).   To be adequate, a record generally must be

written.   Furthermore, each element of an expenditure or use that

must be substantiated should be recorded at or near the time of

that expenditure or use.    Sec. 1.274-5T(c)(2)(ii)(A), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).    Thus, under

section 274(d), as it applies to listed property, no deduction

may be allowed for expenses incurred for use of a passenger

automobile or any other property used as a means of

transportation on the basis of any approximation or unsupported

testimony of the taxpayer.   See, e.g., Golden v. Commissioner,

T.C. Memo. 1993-602.

     We must now determine whether petitioner is entitled to

deduct expenses allegedly incurred in his business activity of

negotiating oil and gas leases.   Petitioner provided no written

substantiation for any of these expenses; however, this was not

due to his own inexactitude.   To explain his lack of

substantiation, petitioner testified that all of his records had

been destroyed in a fire.
                                - 8 -

     When a taxpayer's records have been destroyed or lost due to

circumstances beyond his control, he is generally allowed to

substantiate his deductions through secondary evidence.    A

taxpayer in this type of situation may reconstruct his expenses

through other credible evidence.    Watson v. Commissioner, T.C.

Memo. 1988-29; sec. 1.274-5(c)(5), Income Tax Regs.    If no other

documentation is available, we may, although not required to do

so, accept credible testimony of a taxpayer to substantiate a

deduction.    Watson v. Commissioner, supra.

     Petitioner's testimony regarding his business expenses was

candid and credible.   Petitioner testified that he kept books and

receipts.    Further, he was able to itemize certain expenditures

in detail at trial.    In contrast, respondent did not controvert

petitioner's testimony in any respect.   Respondent neither

questioned whether petitioner was in fact involved in a

"business", nor claimed that any of petitioner's deductions were

fabricated or overstated.   Further, respondent did not challenge

petitioner's claim that his records were destroyed in a fire.

     The amounts claimed as business deductions by petitioner in

1986 are allowable provided the expenditures were ordinary and

necessary in petitioner's trade or business.    Sec. 162(a).   As

stated above, we believe that petitioner has met his burden of

substantiating that he actually incurred the expenses.
                               - 9 -

Furthermore, it is clear that, since petitioner reported $37,850

in gross receipts, he must have incurred some business expenses.

     Thus, respondent's complete disallowance of petitioner's

deductions cannot be sustained.   Nor can petitioner's deductions

be allowed in full, as he has not satisfied the stringent

requirements of section 274(d).   Section 274(d) requires

petitioner to substantiate the business use of his automobile or

other property used as a means of transportation by keeping

adequate records of his business use.   Further, section 274(d)

requires petitioner to substantiate his travel and entertainment

expenses.   Petitioner has not provided the Court with any

evidence to support these expenditures.   Since petitioner failed

to do so, he is not entitled to such deductions.

     Accordingly, we sustain respondent's disallowance of

petitioner's deductions for car and truck, travel and

entertainment, airline travel, hotel, taxi, and bus expenditures.

The remaining deductions claimed are allowed.

Addition to Tax Under Section 6651(a)

     Respondent determined an addition to tax under section

6651(a) for failure to file a return.   Petitioner asserts that he

is not liable for this addition to tax.   Under section 6012(a),

petitioner was required to file a return for 1986.   In light of

the foregoing, we sustain the addition to tax.
                              - 10 -

     We discussed at length whether petitioner in fact filed a

return for 1986 in our previous opinion regarding respondent's

motion for partial summary judgment, Joseph v. Commissioner, T.C.

Memo. 1996-77.   We concluded that petitioner did not file a

return for 1986, and our discussion does not merit repetition

here.

     Accordingly, respondent's addition to tax under section

6651(a) is sustained.2

Addition to Tax Under Section 6654

     Respondent determined an addition to tax under section 6654

for underpayment of individual estimated tax.   Petitioner asserts

that he is not liable for this addition to tax.   Petitioner

failed to pay his estimated tax.   Accordingly, in light of the

foregoing, we sustain the addition to tax.3

     For the foregoing reasons,



                                          Decision will be entered

                                     under Rule 155.




     2
          This addition, however, must be recomputed taking into
account petitioner's allowable business deductions.
     3
          This addition, however, must be recomputed taking into
account petitioner's allowable business deductions.
