                   T.C. Summary Opinion 2002-13



                      UNITED STATES TAX COURT



                   FRANK FRANKLIN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 15383-99S.              Filed February 14, 2002.


     Frank Franklin, pro se.

     Matthew A. Mendizabal, for respondent.



     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7463 in effect at the time the petition was

filed.1   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.




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


     Respondent determined a deficiency of $1,866 in petitioner's

Federal income tax for 1996 and an accuracy-related penalty under

section 6662(a) of $127.   At trial, respondent conceded an

addition to tax under section 6651(a)(1).

     Following concessions by petitioner,2 the issues remaining

for decision are:   (1) Whether petitioner is entitled to trade or

business expense deductions under section 162(a) in excess of

amounts allowed by respondent; (2) whether $1,193 of a $5,348

distribution received by petitioner from Metropolitan Life

Insurance Co. during 1996 constituted gross income; and (3)

whether petitioner is liable for the accuracy-related penalty

under section 6662(a).3


     2
          At trial, petitioner conceded unreported income amounts
of $1,503 and $748, consisting, respectively, of a State income
tax refund and unemployment compensation benefits.
     3
          The Internal Revenue Service Restructuring & Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added sec.
7491, which, under certain circumstances, places the burden of
proof on the Secretary with respect to any factual issue relevant
to a taxpayer's liability for taxes in court proceedings arising
in connection with examinations commencing after July 22, 1998.
Respondent stated in the pretrial memorandum that the audit of
petitioner's joint income tax return for 1996 commenced with a
letter dated May 4, 1998, addressed to petitioner and his wife
scheduling an appointment with them with respect to the audit of
their 1996 return, an appointment that neither petitioner nor his
spouse honored. Thereafter, however, petitioner's spouse met
with a representative for respondent and presented documentation
that respondent accepted as substantiation for the expenses
described hereafter in the opinion. The burden of proof,
therefore, has not shifted to respondent under section 7491,
since the examination commenced prior to July 22, 1998, nor has
                                                   (continued...)
                                - 3 -


     Some of the facts were stipulated.     Those facts and the

accompanying exhibits are so found and are incorporated herein by

reference.   Petitioner's legal residence at the time the petition

was filed was Taft, California.

     Petitioner was engaged in a loan brokerage business, wherein

he arranged mortgage loan refinancing between customers and

various lending institutions.   He conducted this activity for

approximately 16 years.   Petitioner received commissions for his

services based on varying percentages of the amount of the loans

involved.    At the time of trial, petitioner was no longer engaged

in this activity.

     Petitioner and his wife, Freddie T. Franklin, filed a joint

Federal income tax return for 1996.     The income and expenses

related to petitioner's loan brokerage business were reported on

a Schedule C, Profit or Loss From Business.     For 1996, petitioner

and his spouse reported on Schedule C gross income of $15,100,

expenses of $28,223, and a net loss of $13,123.     In the notice of

deficiency, respondent adjusted some of the expenses as follows:




     3
      (...continued)
petitioner contended otherwise.
                                    - 4 -


                         Claimed            Amount         Amount
     Expense            on Return           Allowed      Disallowed

Outside services         $ 7,300            $ 2,500        $4,800
Appraisal fees             1,500              1,100           400
Telephone                  1,743              1,200           543
Postage                      618                400           218
Rent                       4,860              4,400           460
Car & truck expenses       5,772              3,960         1,812
 Totals                  $21,793            $13,560        $8,233


No adjustments were made as to the reported gross income or the

other Schedule C expenses.     The adjustments shown above were

disallowed for lack of substantiation.4

        Section 162(a) allows a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.       An expense must be ordinary and

necessary within the meaning of section 162(a).       Deputy v.

duPont, 308 U.S. 488, 495 (1940).       A taxpayer is required to

maintain records to establish the amount of income and deductions

claimed on a return.     Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.


     4
          Petitioner did not participate in the audit process due
to his incarceration for a criminal infraction associated with
his loan brokerage business. Freddie T. Franklin, petitioner's
wife, presented substantiating information to respondent during
the audit process that resulted in the expenses allowed shown
above. Prior to issuance of the notice of deficiency, Mrs.
Franklin applied for and was administratively granted relief from
joint liability for the 1996 tax year, presumably under sec.
6015. None of the documentation surrounding Mrs. Franklin's
relief was offered into evidence, and petitioner raised no
objection in this case toward the granting of relief to his
spouse. Respondent did not issue a notice of deficiency to Mrs.
Franklin.
                                 - 5 -


     At trial, petitioner presented no documentary evidence to

support his claim for deductions in excess of the amounts allowed

by respondent.   Petitioner argued he had records to substantiate

amounts that would exceed those allowed by respondent; however,

his records were "scattered" in several places, and, with

sufficient time, he could produce such records that would

establish his entitlement to additional deductions.     The Court

notes that trial of this case was continued once because of

petitioner's incarceration; however, he had been released from

incarceration approximately 3 months prior to trial of this case.

The Court is not convinced that petitioner did not have

sufficient time to prepare his case.     Moreover, as noted earlier,

petitioner's wife presented their business records to respondent

in the audit process, and, based on the documentation she

presented, respondent allowed the expenses shown above.     There

are circumstances, however, where the Court is allowed to

estimate the amount of an allowable deduction under what has been

referred to as the Cohan rule.     Cohan v. Commissioner, 39 F.2d

540 (2d Cir. 1930).   To apply that rule, the Court must find that

the taxpayer is entitled to a deduction but is unable to

establish the amount of the deduction.    On this record,

petitioner failed to present any evidence that would satisfy the

Court that the expenses he incurred were in excess of the amounts

allowed by respondent.   Moreover, travel, meals, and
                               - 6 -


entertainment expenses, as well as expenses relating to listed

properties, are subject to strict substantiation requirements

under section 274(d), and this Court is precluded from applying

the Cohan rule to such expenses.   Some of the expenses at issue

in this case are subject to the section 274(d) restriction.    On

this record, the Court holds that petitioner is not entitled to

deductions for his Schedule C expenses in amounts exceeding those

allowed by respondent.   Respondent, therefore, is sustained on

this issue.

     The second issue relates to respondent's determination that

petitioner failed to include in gross income on his 1996 return

$1,193 in payments or distributions petitioner received from

Metropolitan Life Insurance Co.

     Respondent offered into evidence an Information Returns

Master File Transcript with respect to petitioner for 1996.    That

transcript identifies information returns filed by payors of

payments or distributions to taxpayers during a taxable year.

Respondent's transcript lists an information return by

Metropolitan Life Insurance Co. of New York, NY, and the issuance

to petitioner of an IRS Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., reflecting a gross distribution to petitioner

during 1996 of $5,348, of which $1,193 was a taxable amount and

from which $119 was withheld in taxes.   The transcript does not
                                 - 7 -


indicate the type of plan involved.      Petitioner did not include

the $1,193 in gross income on his 1996 income tax return.

     At trial, petitioner acknowledged receiving moneys from

Metropolitan Life Insurance Co. and testified that he had a life

insurance policy with that insurer.      Petitioner contends the

distribution he received was a policy loan and, therefore, was

not gross income.     Petitioner presented no documentary evidence

to establish that he had received such a loan.      Petitioner agreed

that loan proceeds from an insurance policy generally do not

constitute gross income, yet, was unable to answer why his

insurance company considered $1,193 of the distribution as a

taxable amount.     The Court concludes that petitioner has not

established that the proceeds he received from Metropolitan Life

Insurance Co. during 1996 were the proceeds of a loan or that

such distributions did not constitute gross income.      Respondent,

therefore, is sustained on this issue.

     In the notice of deficiency, respondent determined that

petitioner was liable for the accuracy-related penalty under

section 6662(a) for negligence or intentional disregard of rules

or regulations with respect to the following adjustments:


     State income   tax refund                       $1,503
     Unemployment   compensation                        748
     Form 1099-R,   Metropolitan Life Ins. Co.        1,193
     Tax withheld   by Metropolitan Life Ins. Co.       119
                                - 8 -


     Under section 6662(a), there shall be added to the tax an

accuracy-related penalty of 20 percent of the portion of any

underpayment to which section 6662(a) is applicable.

     Section 6662(b)(1) provides that section 6662 shall apply to

any underpayment attributable to negligence or disregard of rules

or regulations.   "Negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue laws, and the term "disregard" includes any careless,

reckless, or intentional disregard of rules or regulations.     Sec.

6662(c).    Negligence also includes any failure by the taxpayer to

keep adequate books and records or to substantiate items

properly.   See sec. 1.6662-3(b)(1), Income Tax Regs.   However,

under section 6664(c), the penalty is not applicable if there was

reasonable cause for the underpayment, and the taxpayer acted in

good faith with respect thereto.5

     With respect to the two unreported income items, the State

income tax refund and the unemployment compensation benefits,

petitioner readily admitted at trial that he knew those two items

constituted income and offered no explanation why these income

payments were not reported on his return.   Respondent is



     5
          Even if sec. 7491 were applicable in this case, and the
burden of proof would be on respondent, under Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001), with respect to
penalties, the burden of proof is on the taxpayer under sec.
7491(c) with respect to reasonable cause, substantial authority,
or similar provisions.
                               - 9 -


sustained on the section 6662(a) penalty with respect to these

two items.

     Respondent did not determine that the section 6662(a)

penalty was applicable to petitioner's Schedule C disallowed

expenses; however, as noted above, respondent determined that the

penalty was applicable to the payments petitioner received from

Metropolitan Life Insurance Co.   With respect to this adjustment,

the Court notes that the payor, Metropolitan Life Insurance Co.,

withheld $119 in taxes on the taxable portion of the

distribution.   On petitioner's income tax return, on page 2 of

Form 1040, line 52, Federal income tax withheld from Forms W-2

and 1099, petitioner claimed a credit of $3,779 for prepaid

taxes.   However, on the Information Returns Master File

Transcript that respondent offered into evidence, the transcript

reveals that petitioner's prepayments of tax through withholdings

totaled $3,895.   The difference between the transcript amount and

the amount petitioner claimed as a prepayment credit on his

return is $116.   Since both the tax return and the transcript

used rounded numbers, it is evident to the Court that, while

petitioner and his wife failed to report the Metropolitan Life

Insurance Co. income, they likewise failed to claim as a credit

the taxes that had been withheld by Metropolitan Life Insurance

Co. on the distributions made to petitioner.   Therefore, the

Court is not convinced that petitioner negligently or
                             - 10 -


intentionally disregarded rules or regulations in failing to

report the $1,193 in Metropolitan Life Insurance Co. payments.

Moreover, there was no underpayment of tax with respect to this

item because the tax thereon was withheld at the source and

presumably remitted by the payor to respondent.   Sec. 6664(a).

The Court, therefore, sustains petitioner on the section 6662(a)

penalty with respect to the $1,193 income item.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                        Decision will be entered

                                   under Rule 155.
