                  T.C. Summary Opinion 2004-115



                     UNITED STATES TAX COURT



                 DEBRA D. MCNAIR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7487-03S.               Filed August 25, 2004.


     Debra D. McNair, pro se.

     Laurie A. Nasky, for respondent.



     WOLFE, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.   Unless otherwise indicated,

all subsequent section references are to the Internal Revenue

Code in effect at relevant times, and all Rule references are to

the Tax Court Rules of Practice and Procedure.    The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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       Respondent determined deficiencies in petitioner’s Federal

income taxes and accuracy-related penalties under section 6662(a)

as follows:

                                            Penalties
              Year         Deficiency      Sec. 6662(a)

              1999           $5,280          $739.40
              2000            5,147           944.60

       After concessions, the issues for decision for 1999 and 2000

are:    (1) Whether petitioner is entitled to claimed dependency

exemption deductions and related child tax credits; (2) whether

petitioner is entitled to deductions claimed on Schedule C,

Profit or Loss From Business, with respect to her secretarial

services business; and (3) whether petitioner is liable for

accuracy-related penalties under section 6662.

                             Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    When she filed her

petition, petitioner resided in Richton Park, Illinois.

       On her Federal income tax returns for 1999 and 2000,

petitioner reported wages of $38,444 in 1999 and $42,005 in 2000

from her job as an administrative assistant at a law firm in

Chicago, Illinois.

       In her testimony petitioner disavowed most of the deductions

claimed on her tax returns for 1999 and 2000.    Petitioner’s
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returns contained numerous errors and claims for deductions to

which she clearly was not entitled.    Petitioner generally blamed

her tax return preparer for the mistakes.   She stated repeatedly

during her testimony that she provided her tax return preparer

with her tax documentation and other requested information, but

that she was not given the opportunity to review her returns

before the tax return preparer filed them electronically.    She

testified that she did not know of the inaccuracies in her

returns until they were selected for examination.   During the

examination of her returns, petitioner submitted a Form 1040X,

Amended U.S. Individual Income Tax Return for 1999, marked “For

Information Only Do Not Process,” with unsigned draft Forms 1040,

Individual Income Tax Return, marked “Amended” for 1999 and 2000.

None of these amended forms were filed.   These draft documents

were prepared by Sherwin Clark (Clark), to whom petitioner gave a

power of attorney to represent her before the Internal Revenue

Service.   As explained further herein, these draft returns were

used by petitioner and her representative in their administrative

negotiations with respondent and in explaining concessions.

A.   Dependency Exemption Deductions and Child Tax Credits

      Petitioner was unmarried during the years in issue and filed

her tax returns as head of household.   Petitioner claimed

dependency exemption deductions for her mother and three children

(the children) who were not her biological children.   Two of the
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children, Shawnda Swain and Ebony Redmond, were the children of

petitioner’s niece.    The other child, Tanisha Moore, was the

child of a person petitioner described as a friend or “partner in

crime” of her niece.    Petitioner testified that Shawnda Swain and

Ebony Redmond stayed with her for approximately 6 to 8 months in

1999 and 2000 and that Tanisha Moore lived with her for 5 to 6

months in 1999.   Petitioner admitted that Tanisha Moore did not

live with her in 2000 and that she should not have claimed a

dependency exemption deduction for her in 2000.

     In claiming the dependency exemption deductions for the

children, petitioner incorrectly described her relationship to

them.   On her 1999 return, petitioner stated that Shawnda Swain

and Tanisha Moore were her foster children and that Ebony Redmond

was her son.   On her 2000 return, petitioner incorrectly stated

that Tanisha Moore was her daughter, that Shawnda Swain was her

foster child, and that Ebony Redmond was her son.

     In addition to the dependency exemption deductions,

petitioner also claimed various child tax credits for Shawnda

Swain, Ebony Redmond, and Tanisha Moore.    On her 1999 return,

petitioner claimed a credit for child and dependent care expenses

of $960, a child tax credit of $889, and an additional child tax

credit of $611.   On her 2000 return, petitioner claimed a child

tax credit of $1,076 and an additional child tax credit of $424.
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      By notice of deficiency, respondent allowed petitioner a

dependency exemption deduction for her mother and permitted

filing as head of household, but respondent disallowed the

dependency exemption deductions and related child tax credits for

the three children.

B.   Schedule C Deductions

      Petitioner attached a Schedule C to each of her returns for

1999 and 2000 to reflect the results of the secretarial and

administrative services business she conducted under the name of

Debra’s Secretarial Services.

      Most of the receipts petitioner reported on Schedule C for

1999 were for administrative and secretarial tasks for the pastor

of a church.   On her 1999 Schedule C, petitioner reported a net

loss of $6,693 for Debra’s Secretarial Services, based on gross

income of $2,507 less deductions of $9,200.    The deductions

consisted of the following expenses:    $205 for advertising,

$4,752 for rented or leased vehicle expenses, $2,390 for repairs

and maintenance, and $1,845 in supplies.    During the examination

of her 1999 return, petitioner conceded that her 1999 Schedule C

contained many errors, such as the deduction for leased vehicle

expenses although petitioner admitted that she never leased a car

in 1999.   As stated previously, with assistance from her

authorized representative, Clark, petitioner prepared a draft

amended 1999 return that was used for discussion and settlement
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purposes but never was filed with the Internal Revenue Service.

On her draft amended 1999 Schedule C, petitioner stated that she

earned $400 of income in addition to the amount reported on her

return as filed, and she claimed $5,436 in expenses, including

$2,225 for mileage, $500 for tax preparation fees, $404 for

postage, $1,845 in supplies, and $462 for a cellular telephone.

This draft was petitioner’s position at trial.

     By notice of deficiency, respondent disallowed $8,367 of

petitioner’s claimed Schedule C expenses and determined an

additional $400 of unreported income.   The $833 in expenses

allowed by respondent included $293 for transportation expenses

(mileage from first job to second job), $75 for postage, $390 for

supplies (including depreciation on a computer), and $75 for a

cellular telephone.   At trial the parties stipulated orally that

the entire cost of the computer purchased in February 1999 was

$2,349 and that this amount properly was deductible as

petitioner’s business expense in 1999 pursuant to section 179.

Petitioner conceded the previously claimed deductions for

“supplies” other than the amount stipulated as the cost of the

computer and deducted pursuant to section 179.

     On her 2000 Schedule C, petitioner reported a net loss of

$4,400.   Petitioner reported gross income of $900 less deductions

of $5,300.   The deductions consisted of $3,600 for rented or

leased business property and $1,700 in repairs and maintenance.
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Petitioner admitted that her 2000 return contained many errors,

and with the assistance of her authorized representative, Clark,

petitioner prepared a draft amended 2000 return to facilitate

settlement.   In the unfiled draft amended 2000 Schedule C,

petitioner claimed $1,929 for transportation expenses (mileage

from first job to second job), $500 in tax preparation costs,

$215 for office expenses, $333 for supplies, and $356 for a

cellular telephone.   By notice of deficiency, respondent

disallowed all but $90 of petitioner’s Schedule C deductions.

Respondent’s determination of the business deductions allowed to

petitioner for 2000 was equal to 10 percent of the gross receipts

reported on petitioner’s 2000 Schedule C.   At trial petitioner

admitted that she had no substantiation of her business expenses

for 2000, except for a bill from her tax return preparer for

$408.   She conceded all deductions for business expenses in

excess of those allowed in respondent’s notice of deficiency,

except for claims for deductions for business transportation

expenses and for the tax return preparation bill.

                            Discussion

     In general, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.   Rule 142(a).   Section 7491(a) does

not apply in this case to shift the burden of proof to

respondent.   Petitioner has neither alleged that section 7491(a)
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applies nor established her compliance with the requirements of

section 7491(a)(2)(A) and (B) to substantiate items, maintain

required records, and cooperate fully with respondent’s

reasonable requests.

1.   Dependency Exemption Deductions and Related Child Tax Credits

       Section 151(c) provides for a dependency exemption deduction

for each of a taxpayer’s dependents as defined in section 152.

Section 24(a) provides for a child tax credit with respect to

each “qualifying child” of the taxpayer, and section 24(d)

provides for an additional child tax credit for a taxpayer with

three or more qualifying children.      Section 24(c)(1)(A) defines

the term “qualifying child” to mean any individual if the

taxpayer is allowed a deduction under section 151 with respect to

that individual for the taxable year, the individual has not

reached the age of 17 at the close of the calendar year in which

the taxpayer’s taxable year begins, and the individual bears a

relationship to the taxpayer specified in section 32(c)(3)(B).

Section 21(a) authorizes a credit for employment-related expenses

paid by the taxpayer to enable the taxpayer to be gainfully

employed for a period during which there are one or more

qualifying individuals with respect to the taxpayer.     The term

“qualifying individual” includes an individual under the age of

13 for whom the taxpayer is allowed a deduction under section

151.    Sec. 21(b)(1).
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     Generally, to qualify as a dependent under section 151, an

individual must (1) receive over half of his or her support from

the taxpayer in the calendar year in which the taxpayer’s taxable

year begins and (2) must satisfy a relationship or member-of-

household test as prescribed in section 152(a).    Sec. 152(a).   In

general, a grandnephew, a grandniece, or an otherwise unrelated

child may qualify as a dependent only if, for the taxable year of

the taxpayer, that individual has as his or her principal place

of abode the home of the taxpayer and is a member of the

taxpayer’s household.   Sec. 152(a)(9).   Section 1.152-1(b),

Income Tax Regs., provides that an individual is treated as a

member of the taxpayer’s household under section 152(a)(9) only

if he or she lives with the taxpayer and is a member of the

taxpayer’s household for the entire taxable year.    See Trowbridge

v. Commissioner, 268 F.2d 208 (9th Cir. 1959), affg. per curiam

30 T.C. 879 (1958); Golden v. Commissioner, T.C. Memo. 1997-355.

     Petitioner admits that neither Shawnda Swain, nor Ebony

Redmond, nor Tanisha Moore lived with her for the entire taxable

year in 1999 or 2000.   Accordingly, the children do not qualify

as petitioner’s dependents under section 152(a), and petitioner

is not entitled to dependency exemption deductions or the related

child tax credits for Shawnda Swain, or Ebony Redmond, or Tanisha

Moore.
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2.   Schedule C Expenses

      Section 162(a) allows a taxpayer to deduct ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business.    Generally, deductions

are a matter of legislative grace, and the taxpayer bears the

burden of proving that he or she is entitled to any claimed

deduction.   Rule 142(a); INDOPCO, Inc. v Commissioner, 503 U.S.

79, 84 (1992).   A taxpayer is required to maintain records

sufficient to substantiate deductions that he or she claims on

his or her tax return.     Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.

      If a taxpayer cannot fully substantiate a business

deduction, the Court generally may estimate the amount of certain

expenses if the taxpayer provides sufficient evidence that he or

she has incurred a deductible expense.     Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).    However, section 274(d)

overrides the so-called Cohan rule for expenses incurred for

travel or with respect to certain types of property such as a

passenger automobile, a computer or peripheral equipment, or a

cellular telephone or similar telecommunication equipment.     Under

section 274(d), a deduction is not allowed unless the taxpayer is

able to substantiate the expense by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement
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establishing the amount, time, place, and business purpose of the

expense.

     Since petitioner has conceded that the Schedules C to her

1999 and 2000 tax returns as filed were filled with errors, we

will not address the items from those original returns and will

instead review whether petitioner is entitled to the revised

items reported on the draft amended returns, on which she relied

at trial.

     For 1999, petitioner admitted that she underreported

receipts on her amended Schedule C by $400, and we hold that her

gross receipts are increased by this additional amount.     With

respect to the deductions she claimed on her draft amended 1999

Schedule C, petitioner produced a very limited amount of

supporting evidence.   Regarding her mileage deduction, petitioner

testified that she drove to various training seminars and

meetings with business contacts, and she produced photocopies of

calendar entries to document dates, places and purposes of those

trips.   The handwritten calendar entries show that petitioner

traveled to St. Louis, Milwaukee, Detroit, and Toledo to attend

courses in word processing and other document-production

programs, civil litigation, legal writing, and electronic

billing.    Petitioner did not produce certificates of attendance

or receipts showing payment for these courses.   In the absence of

sufficient substantiation, particularly in light of the strict
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substantiation rules for business travel under section 274(d), we

hold that petitioner is not entitled to a business travel

allowance in excess of the $293 allowed by respondent.

        In support of her claimed deduction for supplies,

petitioner produced a receipt dated February 23, 1999, for

purchase of a computer and inkjet printer for $2,348.98.

Applying a 200 percent declining balance method of depreciation,

respondent allowed petitioner a $390 deduction for “supplies”,

including computer depreciation in 1999.    At trial the parties

stipulated orally that petitioner was entitled to a deduction for

the full $2,348.98 cost of the computer under section 179 for

1999.    We consider the stipulation binding and hold that

petitioner is entitled to the $2,348.98 deduction under section

179 for 1999 but that no other amount is allowable for

“supplies”.

     Petitioner produced a $165 bill from Quick Refunds for the

preparation of her 1999 tax return, but the bill did not itemize

how much of the total bill was due to the preparation of her

Schedule C.    We allocate half the bill to preparation of

petitioner’s Schedule C, and we hold that petitioner is entitled

to deduct $82.50 for tax preparation fees on Schedule C to her

1999 return.    The balance of the tax return preparation fee is

not deductible since petitioner claimed the standard deduction.
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      Petitioner did not have any receipts for expenses in excess

of the $75 respondent allowed for the cellular telephone or the

$75 in postage, and accordingly, we sustain respondent with

respect to these matters.

      With respect to her draft amended 2000 Schedule C,

petitioner did not introduce any documentation except a bill from

her tax return preparer in the amount of $408.   As with her 1999

return, we hold that she is entitled to deduct half of that bill

on her Schedule C for the cost of preparing her 2000 Schedule C.

In addition, because of the lack of any further substantiation

and because of petitioner’s concessions, we sustain respondent’s

determination of petitioner’s receipts.1

3.   Accuracy-Related Penalties

      Section 6662 provides that a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax

due to negligence or disregard of rules or regulations.

“Negligence” is defined as any failure to make a reasonable


      1
        Petitioner conceded the claim for education credits set
forth on her tax return for 2000. During the hearing of this
case, petitioner conceded her claim for education expense
deductions for 2000, and that concession negates any claim for
education credits. In any event petitioner is not entitled to a
Hope Scholarship Credit under sec. 25A(b) because she failed to
show or even allege that she was a half-time student for any
portion of 2000. Sec. 25A(b)(2)(B) and (3). Petitioner is not
entitled to a Lifetime Learning Credit for 2000 because she
failed to show that during 2000 she paid “qualified tuition and
related expenses” within the meaning of sec. 25A(c)(1) and as
defined in sec. 25A(f)(1).
                                 - 14 -

attempt to comply with the provisions of the Internal Revenue

Code and includes any failure by the taxpayer to keep adequate

books and records or to substantiate items properly.     Sec.

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

includes any careless, reckless, or intentional disregard.       Sec.

6662(c).

     The accuracy-related penalty does not apply to any portion

of an underpayment of tax if it is shown that there was

reasonable cause for such portion and that the taxpayer acted in

good faith.   Sec. 6664(c)(1).    The determination of whether a

taxpayer acted 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.     Good faith reliance on an

accountant may in some circumstances satisfy the reasonable cause

and good faith exception.    United States v. Boyle, 469 U.S. 241,

250-251 (1985); Weis v. Commissioner, 94 T.C. 473, 487 (1990);

Peete v. Commissioner, T.C. Memo. 2004-31.     Where a taxpayer does

not exercise due care in filing her returns and does not review

the returns prior to filing, the fact that the returns were

prepared by an accountant is no defense to the imposition of the

section 6662(a) penalties.    Sandoval v. Commissioner, T.C. Memo.

2001-310, affd. 67 Fed. Appx. 252 (5th Cir. 2003).

     In this case it is clear that petitioner did not exercise

due care in the filing of her returns.     Petitioner did not review
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her returns before they were filed and clearly did not make a

reasonable effort to determine whether the returns were accurate

before authorizing her tax return preparer to file them.

Petitioner has not kept accurate records substantiating the

deductions claimed on her returns, and she and her authorized

representative testified that many of the deductions claimed on

her returns were based upon estimates or simply were made up.

Accordingly, we hold that petitioner is liable for the accuracy-

related penalties.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,



                                        Decision will be

                                   entered under Rule 155.
