                    T.C. Summary Opinion 2009-77



                        UNITED STATES TAX COURT



          GARY W. AND REGINA G. STEELE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1344-06S.              Filed May 14, 2009.



     Gary W. and Regina G. Steele, pro sese.

     John M. Tkacik, Jr., for respondent.




     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed.    Pursuant to section 7463(b), the decision to




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

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

shall not be treated as precedent for any other case.

     Respondent determined a deficiency of $4,095 in petitioners’

2002 Federal income tax.   The issues we must decide are:

     (1) Whether petitioners are entitled to certain deductions

and credits for 2002, including:

          (a) A deduction for alleged contributions to

     separate individual retirement accounts (IRAs);

          (b) a deduction for student loan interest paid;

          (c) a credit for the payment of qualified

     educational expenses; and

          (d) a deduction for claimed itemized deductions;

     (2) whether petitioners have correctly reported all their

income, specifically whether they included:

          (a) A State income tax refund; and

          (b) distributions from petitioners’ separate IRA

     accounts;

     (3) whether petitioners are liable for the section 72(t) 10-

percent additional tax for early distributions from their IRAs;

     (4) whether petitioners are entitled to deductions for

certain expenses made on behalf of and transactions entered into

with the Estate of Janice M. Steele (the estate), including:

          (a) A payment made to prevent foreclosure on real

     property held by the estate;
                               - 3 -

           (b) expenses paid to maintain and to allegedly

     convert the real property into rental real property;

           (c) a capital loss deduction on the sale of the

     real property held by the estate;

           (d) a theft loss and related legal fees paid to

     investigate and settle disputes concerning the estate;

     and

           (e) a deduction for a nonbusiness bad debt for an

     alleged loan made to the estate; and

     (5) whether petitioners are entitled to a dependency

exemption deduction for petitioner Regina G. Steele’s minor

sister.

                            Background

     There are no written or oral stipulations by the parties.

The exhibits received into evidence are incorporated by this

reference.   When the petition was filed, petitioners resided in

Ohio.

     Petitioners are husband and wife.   Petitioners timely filed

their 2002 Form 1040, U.S. Individual Income Tax Return (tax

return), on which they reported wages of $42,148, taxable

interest of $654, a capital loss of $3,000, and aggregate IRA

distributions of $4,081.2   On Schedule A, Itemized Deductions,



     2
       Petitioners reported only $2,081 of the IRA distributions
as taxable.
                                 - 4 -

petitioners claimed expenses of $15,2423 for medical and/or

dental expenses, $4,287 for taxes paid, $7,632 for qualified

residence interest paid, and $7,900 for charitable

contributions.4    Petitioners’ claimed itemized deductions totaled

$32,407.     For 2002 petitioners also claimed a $4,000 deduction

for IRA contributions and a $2,500 deduction for student loan

interest paid.

     On November 10, 2005, respondent issued to petitioners a

notice of deficiency (notice).     In the notice respondent

disallowed most of petitioners’ claimed deductions for lack of

substantiation and further adjusted petitioners’ income for

erroneously reported IRA distributions and an unreported State

income tax refund.     Respondent’s adjustments are as follows:

                              2002 Tax Year
                      Income Tax Examination Changes

         Adjustments to           Per         Per
            Income               Return       Exam      Adjustment

   IRA deduction                 $4,000        --         $4,000
   IRA distributions              2,081      $4,081        2,000
   State refunds,
     credits, or offsets           --           386           386



     3
       After application of the 7.5-percent floor, in accordance
with sec. 213, petitioners claimed a $12,588 itemized deduction
for medical and/or dental expenses.
     4
       On brief respondent concedes that in 2002 petitioners
paid $2,991 for deductible medical expenses, $4,533 for taxes,
and $8,838.57 for qualified residence interest. Respondent
further concedes that petitioners made charitable contributions
of $1,265.
                               - 5 -

   Student loan interest
     deduction                 2,500        --           2,500
   Capital gain or loss       (3,000)       --           3,000
   Itemized deductions        32,407      12,683        19,724
     Total adjustments
       to income                --          --         31,610
   Taxable income per
     return                     --          --         (3,024)
   Corrected taxable
     income                     --          --          28,586
   Tax (joint filing
     status)                    --          --          3,686
   Plus other taxes (tax
     on qualified plans)        --          --               409
     Total corrected tax
       liability                --          --          4,095

     After filing the tax return, petitioners submitted two Forms

1040X, Amended U.S. Individual Income Tax Return (amended

returns), dated June 1, 2004, and December 5, 2005, respectively.

Respondent received the amended returns but did not accept or

process them.   On the first amended return petitioners claimed a

rental loss of $54,303 on Schedule E, Supplemental Income and

Loss, reduced their taxable IRA distribution from $2,081 to $81,

claimed income of $5,000 for fiduciary fees, eliminated the

$4,000 deduction for IRA contributions, and reduced their claim

for a student loan interest deduction from $2,500 to $450.    On

the second amended return petitioners included a State income tax

refund of $386, eliminated the capital loss, eliminated the

student loan interest deduction, reduced the Schedule E rental

loss from $54,303 (as reported on the first amended return) to

$35,928, and claimed an additional dependency exemption deduction
                                 - 6 -

for petitioner Regina G. Steele’s (Mrs. Steele’s) minor sister

(RMW).5

     The Schedule E rental losses reported on petitioners’

amended returns relate to real property located on Warrendale

Road in South Euclid, Ohio (Warrendale property).     The Warrendale

property was owned by Janice M. Steele, the mother of petitioner

Gary W. Steele (Mr. Steele).     Janice M. Steele died on April 11,

2001.     After her death the Warrendale property was listed in the

name of “The Estate of Janice M. Steele”.     The Inventory and

Appraisal Form filed on August 27, 2001, with the probate court

of Cuyahoga County, Ohio, listed the value of the Warrendale

property at $95,000.     On January 31, 2002, the estate sold the

Warrendale property for $90,000.     Mr. Steele was both a

beneficiary and the executor of the estate.

                              Discussion

     Generally, the Commissioner’s determinations are presumed

correct and the taxpayer bears the burden of proving that the

determinations are in error.     Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).     Deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving entitlement

to the deductions claimed.     Rule 142(a); INDOPCO, Inc. v.




     5
       The Court refers to minor children by their initials.      See
Rule 27(a)(3).
                               - 7 -

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

     Section 6001 requires taxpayers to maintain records,

statements, and returns and to comply with such rules and

regulations as the Secretary prescribes.   Individual taxpayers

are to keep permanent books and records sufficient to verify

income, deductions, or other matters required to be shown on any

information or tax return.   Sec. 1.6001-1(a), Income Tax Regs.

     In accordance with section 7491(a) the burden of proof may

be shifted to the Commissioner where a taxpayer has introduced

credible evidence regarding factual issues relevant to

ascertaining his tax liability.   Rule 142(a)(2).    In order for a

taxpayer to shift the burden of proof to the Commissioner he must

produce credible evidence evincing that he has:     (1) Complied

with the substantiation requirements of the Code; (2) maintained

all records required by the Code; and (3) cooperated with

reasonable requests by the Secretary for witnesses, information,

documents, meetings, and interviews.   Sec. 7491(a)(2).

Petitioners have not asserted nor do we find that they have met

these requirements; thus, the burden of proof remains with

petitioners.
                                 - 8 -

I.   Certain Deductions Claimed on the Tax Return

      A.   IRA Contribution Deduction

      Section 219(a) provides:   “In the case of an individual,

there shall be allowed as a deduction an amount equal to the

qualified retirement contributions of the individual for the

taxable year.”    For 2002 the maximum deduction allowed is the

lesser of $3,000 or an amount equal to the compensation

includable in the individual’s gross income for the taxable year.

Sec. 219(b).    The deduction may be further limited if an

individual or the individual’s spouse is an active participant in

a retirement plan maintained by his employer.    Sec. 219(g).

      On the tax return petitioners claimed a $4,000 IRA

contribution deduction.    In the notice respondent determined that

petitioners were not entitled to an IRA contribution deduction.

      On both of the amended returns petitioners eliminated the

claim for an IRA contribution deduction.    Furthermore,

petitioners have neither offered any documentary or testimonial

evidence to substantiate any portion of the alleged IRA

contributions nor established whether they were active

participants in an employer-provided retirement plan.      See sec.

219(g).

      Because they failed to produce evidence to establish their

eligibility for an IRA contribution deduction, we hold that
                                  - 9 -

petitioners are not entitled to deduct any amounts contributed to

IRAs for tax year 2002.

     B.   Student Loan Interest Deduction

     Section 221(a) provides:     “In the case of an individual,

there shall be allowed as a deduction for the taxable year an

amount equal to the interest paid by the taxpayer during the

taxable year on any qualified education loan.”     For 2002 the

maximum allowable deduction for interest paid on a qualified

education loan was $2,500.   Sec. 221(b)(1).    The allowable

deduction is further limited by the taxpayer’s modified adjusted

gross income.   Sec. 221(b)(2).

     On the tax return petitioners claimed a $2,500 student loan

interest deduction.   In the notice respondent determined that

petitioners were not eligible for that deduction.     On the first

amended return petitioners reduced their student loan interest

deduction claim to $450.   On the second amended return, however,

petitioners eliminated their claim for a student loan interest

deduction.

     At trial petitioners again asserted that they had paid

student loan interest and were entitled to a corresponding

deduction.   Petitioners stated that they had consolidated their

student loan in 2001 and had “$13,000 worth of accrued interest.”

In an attempt to substantiate their claim, petitioners provided a

statement dated June 11, 2008, from Sallie Mae.     The Sallie Mae
                                - 10 -

statement was addressed to Mrs. Steele, but the payment history

shows only the last five payments made, all of which were made in

2008, and does not show what portion of the payments was

attributable to the payment of student loan interest.

     In any event, other than vague self-serving testimony

petitioners have failed to proffer any evidence establishing that

they actually paid student loan interest during 2002.

Accordingly, we hold that petitioners are not entitled to a

student loan interest deduction in 2002.

     C.    Education Credits

     Section 25A(a) provides:    “In the case of an individual,

there shall be allowed as a credit against the tax imposed by

this chapter for the taxable year the amount equal to the sum of

–-(1) the Hope Scholarship Credit, plus (2) the Lifetime Learning

Credit.”

     Petitioners first claimed a credit for qualified education

expenses paid in 2002 at trial when they asserted:    “we qualify

for the Hope Credit and Lifetime Credit.”    To substantiate their

eligibility, petitioners submitted a copy of a receipt showing

that they paid $277.80 to Cuyahoga Community College in 2002.

     At trial and on brief respondent has acknowledged and

conceded that petitioners substantiated $277.80 of qualified

education expenses for 2002.    On brief respondent states:   “The

amount allowable as a credit, if any, is a computational
                                 - 11 -

adjustment based on petitioners’ modified adjusted gross income.”

See sec. 25A(b), (c), and (d).     Accordingly, we find that

petitioners have substantiated that they paid $277.80 of

qualified education expenses in 2002 and, therefore, are entitled

to a corresponding educational credit subject to the limitation

provided in section 25A(d).

     D.    Itemized Deductions

     On Schedule A of the tax return petitioners claimed $32,407

of itemized deductions, which included $12,588 of medical and/or

dental expenses, $984 of real property taxes, $2,553 of State and

local income taxes, $750 of personal property taxes, $7,632 of

qualified residence interest, and $7,900 of charitable

contributions.    Petitioners’ first amended return increased their

claimed itemized deductions to $37,206.     Petitioners’ second

amended return reduced their claimed itemized deductions to

$29,187.    In the notice respondent reduced petitioners’ itemized

deductions to $12,683.

     Not only have petitioners failed to explain the reasons for

the changes made from their initial tax return, but they have

also failed to produce any evidence establishing entitlement to

any of the claimed itemized deductions.     On brief, however,

respondent concedes that petitioners are entitled to itemized

deductions as follows:    $2,991 for medical and/or dental

expenses; $4,533 for taxes paid; $8,838 for qualified residence
                               - 12 -

interest paid; and $1,265 for charitable contributions.

Accordingly, we hold that petitioners are entitled to itemized

deductions in the amounts respondent conceded.

II.   Unreported and Underreported Income

      Gross income includes all income from whatever source

derived, including accessions to wealth, clearly realized, and

over which the taxpayers have complete dominion.     Sec. 61(a);

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

      A.   State Income Tax Refund

      In the notice respondent determined that petitioners had

unreported income because of their failure to report a $386 State

income tax refund.    At trial Mrs. Steele stated:   “right after

we’d mailed our [Federal income] tax return * * * we got a

statement in the mail saying that we had a tax refund of $386

from the State.”    Inexplicably, however, petitioners did not

include the State income tax refund on the first amended return.

They did, however, finally report it on the second amended

return.    We interpret petitioners’ statements, actions, and

failure to contend otherwise as conceding that their $386 State

income tax refund is includable in gross income and so find.

      B.   IRA Distributions

      A distribution from an IRA is includable in gross income in

the manner provided in section 72 unless rolled over within 60
                               - 13 -

days after the distribution is received into another IRA or an

eligible retirement plan.   See secs. 72, 408(d)(1), (3).

     Both petitioners received Forms 1099-R, Distributions From

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

Insurance Contracts, etc., for 2002.    Mr. and Mrs. Steele

received IRA distributions of $2,035 and $2,046, respectively.

On the tax return petitioners reported $4,081 of IRA

distributions but claimed only $2,081 as taxable.    On the amended

returns petitioners reported $4,081 of IRA distributions but

claimed only $81 as taxable.   In the notice respondent determined

that petitioners had failed to adequately establish that any

portion of the $4,081 of IRA distributions was rolled over and,

therefore, the entire amount is includable in petitioners’ gross

income.

     The documentary evidence consisted of a letter prepared for

respondent wherein petitioners alleged that they rolled over Mrs.

Steele’s IRA distribution into “a qualified savings account plan”

at Dollar Bank and that Mr. Steele’s IRA distribution was used to

pay for medical premiums, and a photocopy of a check payable to

Dollar Bank for the benefit of Mrs. Steele.    At trial Mrs. Steele

testified that they did not believe the IRA distributions were

taxable because, as she stated:   “We used the funds to pay for

medical expenses.”   On brief petitioners continue to assert that
                               - 14 -

they rolled over Mrs. Steele’s IRA distribution and Mr. Steele’s

IRA distribution was used to “cover documented medical expenses.”

       While a determination of whether the funds from the IRA

distributions were used to pay eligible medical expenses is

relevant for determining whether the section 72(t) 10-percent

additional tax applies, it has no bearing on whether the

distributions are includable in petitioners’ gross income.       See

sec. 72.

       Petitioners have failed to adequately establish that any

portion of the IRA distributions was rolled over into either an

IRA or some other eligible retirement plan.    See sec. 408(d)(3).

Although petitioners provided a copy of Mrs. Steele’s

distribution check, which indicated that the funds were payable

to Dollar Bank for her benefit, other than their self-serving

testimony petitioners have offered nothing to substantiate that

the account the money was allegedly deposited into at Dollar Bank

was either an IRA or an eligible retirement plan account.

       Accordingly, we hold that in accordance with section 72(a)

petitioners’ IRA distributions of $4,081 are includable in their

gross income for 2002.

III.    10-Percent Additional Tax on Premature Distributions

       Section 72(t)(1) provides:

            (1) Imposition of additional tax.–-If any taxpayer
       receives any amount from a qualified retirement plan
                               - 15 -

     (as defined in section 4974(c)),[6] the taxpayer’s tax
     under this chapter for the taxable year in which such
     amount is received shall be increased by an amount
     equal to 10 percent of the portion of such amount which
     is includible in gross income.

Exceptions to this rule are found in section 72(t)(2).

Applicable to petitioners’ contention that they used a portion of

their IRA distributions to pay for medical expenses is section

72(t)(2)(B), which provides:

          (B) Medical expenses.--Distributions made to the
     employee * * * to the extent such distributions do not
     exceed the amount allowable as a deduction under
     section 213[7] to the employee for amounts paid during
     the taxable year for medical care (determined without
     regard to whether the employee itemizes deductions for
     such taxable year).

     In the notice respondent determined that petitioners were

not eligible for an exception to the section 72(t) 10-percent

additional tax and adjusted petitioners’ tax liability to include

an additional $409.8   At trial Mrs. Steele testified that the

funds from both IRA distributions were used to pay medical




     6
       Sec. 4974(c) defines the term “qualified retirement plan”
to include, inter alia, an IRA. See sec. 4974(c)(4).
     7
       Sec. 213 allows as a deduction the expenses paid during
the taxable year, not compensated for by insurance or otherwise,
for medical care of the taxpayer, his spouse, or a dependent, to
the extent that such expenses exceed 7.5 percent of adjusted
gross income.
     8
       The record is not clear as to how respondent determined
that 10 percent of the $4,081 distributed from petitioners’ IRAs
is $409.
                                - 16 -

expenses and therefore petitioners are not liable for the 10-

percent additional tax.    See sec. 72(t)(2)(B).

      While petitioners have failed to substantiate any medical

expenses paid, on brief respondent concedes that petitioners are

entitled to a $2,991 deduction for medical expenses paid in 2002.

Respondent’s concession leads us to the conclusion that this

amount represents the portion of paid medical expenses that

exceeds 7.5 percent of petitioners’ adjusted gross income.    See

sec. 213.    Thus, we conclude that the portion of petitioners’ IRA

distributions that does not exceed the deduction allowed under

section 213 is excepted from the 10-percent additional tax under

section 72(t).    See sec. 72(t)(2)(B).

IV.   Expenses Paid on Behalf of the Estate

      A.    $5,150 Payment To Prevent Foreclosure on the Warrendale
            Property

      Petitioners assert they are entitled to a $5,150 deduction

in 2002 for funds allegedly paid to Aurora Loan Service in 2001

to prevent foreclosure of the Warrendale property.    Petitioners

raised this issue for the first time at trial; neither

petitioners’ tax return, the amended returns, nor the notice

addresses this alleged payment.    At trial petitioners asserted

that the $5,150 payment should qualify either as a real property

taxes paid deduction or a qualified residence interest deduction.

      The scant documentary evidence petitioners proffered does

not establish that they actually paid $5,150 to prevent
                              - 17 -

foreclosure on the Warrendale property.   The only evidence they

provided consisted of a letter dated September 17, 2001,

addressed to “Mr. & Mrs. Gary Steele” at what purports to be the

Warrendale property address, confirming “that the amount to

REINSTATE the loan through September 30, 2001 is $5,739.53”, and

a photocopy of the customer’s copy of a $5,150 cashier’s check,

dated September 8, 2001, payable to Aurora Loan Service.    Both

the letter and the photocopy of the cashier’s check refer to the

same loan number, but neither document establishes that this loan

number pertains to the Warrendale property.   Furthermore, even

assuming that this loan number pertains to the Warrendale

property, petitioners have not established that the $5,150

cashier’s check was drawn on their personal account (as opposed

to the estate’s account) or that Aurora Loan Service received the

funds.   In fact, the partial accounting of the fiduciary’s

account filed with the probate court of Cuyahoga County, Ohio,

shows the estate, rather than petitioners, paid mortgage payments

of $7,674.53 on September 18, 2001.

     Even if petitioners had established that they actually paid

$5,150 to prevent foreclosure on the Warrendale property,

petitioners have not established their eligibility for either a

real property taxes paid deduction or a qualified residence

interest paid deduction in 2002 for the alleged payment.
                                - 18 -

     Section 164(a)(1) generally allows a deduction for the

payment of real property taxes for the taxable year within which

paid.     It is well established that, in general, taxes paid on

real property may be deducted as such only by the person on whom

the tax obligation is imposed.      Cramer v. Commissioner, 55 T.C.

1125, 1130 (1971); sec. 1.164-1(a), Income Tax Regs.      Petitioners

have not established that it was their obligation, as opposed to

the decedent’s or the estate’s, to pay any real property taxes to

prevent foreclosure on the Warrendale property.      Moreover,

petitioners have not substantiated what portion, if any, of the

alleged $5,150 payment was for real property taxes.

        Section 163 allows as a deduction all interest paid within

the taxable year on indebtedness.      Section 163(h)(1), however,

provides:     “In the case of a taxpayer other than a corporation,

no deduction shall be allowed under this chapter for personal

interest paid * * * during the taxable year.”      For this purpose,

personal interest does not include “any qualified residence

interest”.     Sec. 163(h)(2)(D).   Section 1.163-1(b), Income Tax

Regs., provides:     “Interest paid by the taxpayer on a mortgage

upon real estate of which he is the legal or equitable owner,

* * * may be deducted as interest on his indebtedness.”      However,

we need not determine whether petitioners were either legal or

equitable owners of the Warrendale property because they have

likewise failed to substantiate what portion, if any, of the
                                - 19 -

alleged $5,150 payment was attributable to the payment of

qualified residence interest.

     Furthermore, section 461(a) provides that deductions “shall

be taken for the taxable year which is the proper taxable year

under the method of accounting used in computing taxable income.”

Since petitioners are cash method calendar year taxpayers, they

may not claim as a deduction on the tax return an expense they

allegedly paid in 2001.     See id.; sec. 1.461-1(a), Income Tax

Regs.

     Accordingly, we hold that petitioners are not entitled to a

deduction for the alleged $5,150 payment made to prevent

foreclosure on the Warrendale property.

     B.     Expenses Paid for the Maintenance and Conversion of the
            Warrendale Property

        On the amended returns petitioners claimed entitlement to

deductions for various Schedule E expenses related to the

maintenance and conversion of the Warrendale property into rental

property.     On the first amended return petitioners claimed

Schedule E expenses totaling $54,303, including $10,033 for

depreciation or depletion expenses.      On the second amended return

petitioners reduced their Schedule E expenses to $35,928, in part

by eliminating depreciation or depletion expenses.     At trial and

on brief petitioners argued that as beneficiaries of the estate

they were entitled to a deduction for maintenance and conversion
                               - 20 -

costs because the estate, which would have been eligible to claim

it, did not.

     Petitioners, however, have failed to adequately substantiate

that either they or the estate paid the expenses reported on

Schedule E.    Petitioners have not submitted any receipts or other

documentary evidence that establishes that they paid the expenses

listed on the respective Schedules E.   Petitioners’ failure to

substantiate their claimed Schedule E expenses necessarily leads

to our conclusion that they are not entitled to deduct any of the

claimed Schedule E expenses in 2002.    Therefore it is unnecessary

to consider whether petitioners could qualify for any deduction

of the claimed expenses under section 642(h).

     C.   Capital Loss Deduction

     On their initial 2002 Schedule D, Capital Gains and Losses,

petitioners reported both a $1,500 short-term capital loss

carryover and a $1,500 long-term capital loss carryover.   In the

notice respondent disallowed the entire capital loss deduction

for lack of substantiation.   On the Schedule D attached to the

first amended return petitioners reported a short-term capital

loss carryover of $15,000 and a long-term capital loss carryover

of $15,000 but limited the deductible loss to $3,000 in

accordance with section 1211(b).   On the Schedule D attached to

the second amended return petitioners reported zero short-term

capital losses and left blank the line for long-term capital
                                - 21 -

gains and losses.   At trial and on brief, however, petitioners

asserted entitlement to a capital loss deduction for the sale of

the Warrendale property despite the fact that the property was

sold by the estate.     Petitioners assert that as beneficiaries of

the estate they are entitled to deduct a capital loss on capital

assets sold by the estate.

     On January 31, 2002, the estate sold the Warrendale property

for $90,000.9   Petitioners, however, have failed to establish the

estate’s basis in the Warrendale property.

     Section 1014(a)(1) provides:    “the basis of property in the

hands of a person[10] acquiring the property from a decedent or to

whom the property passed from a decedent shall * * * be–-(1) the

fair market value of the property at the date of the decedent’s

death”.   In an attempt to establish the basis of the Warrendale

property petitioners offered a letter written by an attorney,

which states in part:

     My check of the pertinent records indicates that the
     valuation of the property will be in the neighborhood
     of $100,000. To complete my appraisal of this
     property, you need to forward the original Inventory



     9
       Petitioners contend that the sale of the Warrendale
property resulted in a long-term capital loss of $20,000 ($75,000
price minus the alleged $95,000 fair market value on Apr. 11,
2001). However, the U.S. Department of Housing and Urban
Development Settlement Statement shows that the estate sold the
property for $90,000, not $75,000.
     10
       Sec. 7701(a)(1) provides: “The term ‘person’ shall be
construed to mean and include an * * * estate”.
                               - 22 -

     and Appraisal Form to my attention for me to affix my
     appraisal evaluation of the property.

The attached inventory and appraisal form shows the value of the

Warrendale property as $95,000, but the accompanying appraiser’s

certificate is unsigned; and there is no indication as to whether

$95,000 is the alleged fair market value on April 11, 2001, or

some other date.11   Because petitioners have failed to establish

the fair market value of the Warrendale property on the date of

the decedent’s death, we are unable to determine whether a

capital loss occurred upon the sale of the Warrendale property.

     We note again that even if we were to assume the date of

death fair market value of the Warrendale property was $95,000,

petitioners have not established that any resulting loss was

theirs as opposed to the estate’s.      Petitioners may not deduct on

the tax return losses or expenses incurred by the estate.

     Accordingly, we hold that petitioners are not entitled to a

capital loss deduction in 2002 from the sale of the Warrendale

property by the estate.

     D.    Theft Loss Deduction and Related Legal Fees

     Petitioners did not claim deductions for a theft loss and

the related legal fees on either the tax return or the amended

returns.    Petitioners first claimed these deductions at trial.


     11
       The Inventory and Appraisal Form filed with the probate
court of Cuyahoga County, Ohio, is stamped “filed” on Aug. 27,
2001. The other random dates that appear on the form are Apr. 19
and 25, 2001, and Sept. 19, 2001.
                                - 23 -

On brief petitioners continue to assert that they are entitled to

both a theft loss deduction and a deduction for the payment of

legal fees incurred in their attempt to recover the allegedly

stolen funds.    On brief respondent asserts that “there is no

evidence in the record as to the amount of the funds withdrawn or

that a theft occurred.”

     The limitation on deductions for losses under section 165

generally allows an individual a deduction for a loss arising

from theft.    See sec. 165(c)(3).   A loss that arises from theft

is treated as sustained during the taxable year in which the

taxpayer discovers such loss.    See sec. 165(e).   For this

purpose, theft is generally defined as larceny, embezzlement, or

robbery.    Sec. 1.165-8(d), Income Tax Regs.

     For tax purposes, whether a theft loss has occurred depends

upon the law of the jurisdiction wherein the particular loss

occurred.     Monteleone v. Commissioner, 34 T.C. 688, 692 (1960).

The statutory definition of theft in Ohio is as follows:

     (A) No person, with purpose to deprive the owner of
     property or services, shall knowingly obtain or exert
     control over either the property or services in any of
     the following ways:

          (1) Without the consent of the owner or person
     authorized to give consent;

          (2) Beyond the scope of the express or implied
     consent of the owner or person authorized to give
     consent;

            (3) By deception;
                                 - 24 -

            (4) By threat;

            (5) By intimidation.

      (B)(1) Whoever violates this section is guilty of
      theft. [Ohio Rev. Code Ann. sec. 2913.02 (Lexis Nexis
      2006).]

      Two days before her death, Mr. Steele’s mother signed and

executed a form adding both her minor son (DS) and DS’s

grandmother, Ms. Gillum, to her accounts maintained at Key Bank.

After her death the joint bank accounts were allegedly liquidated

by Ms. Gillum and DS.    Petitioners contend that Ms. Gillum and DS

did not have the proper authority to withdraw the funds from the

bank accounts.    Mr. Steele filed complaints with both Key Bank

and the Beachwood police department alleging that Ms. Gillum

either deceived his mother into signing or forged her signature

on the forms that added both Ms. Gillum and DS to the joint bank

accounts.

      Other than their allegation, petitioners have failed to

produce any evidence establishing that Mr. Steele’s mother was

deceived, threatened, or intimidated into executing the form

which added DS and Ms. Gillum to the joint bank accounts.     See

id.   Thus, we hold that petitioners have not met their burden of

proving that they are entitled to a theft loss deduction.

      Additionally, petitioners contend that they are entitled to

a deduction for legal fees paid in an attempt to recover the

allegedly stolen funds.      Petitioners hired an attorney to assist
                              - 25 -

in recovering the allegedly stolen funds.    While no charges for

theft were ever filed, petitioners’ efforts resulted in a

settlement agreement between DS and Mr. Steele as administrator

of the estate.

     The record indicates that the estate, rather than

petitioners, paid the attorney $6,560.     Although a photocopy of

the $6,560 check, payable to the attorney, was entered into

evidence, there is no indication as to whether it was drawn on

petitioners’ bank account.   The Final and Distributive Account

Form filed with the Cuyahoga County, Ohio, probate court,

indicates that the estate paid the attorney $6,560 for legal

services.   Petitioners have failed to substantiate that they

actually paid legal fees to recover the allegedly stolen funds

during 2002.

     Again, petitioners are claiming entitlement to a deduction

for an expense paid by the estate, to which they have not

established entitlement as beneficiaries.    Accordingly, we hold

that petitioners are not entitled to a deduction for legal fees

paid to recover the alleged theft loss.

     E.   Nonbusiness Bad Debt Deduction

     Petitioners did not claim a nonbusiness bad debt deduction

on either the tax return or the amended returns.    Petitioners

first claimed a nonbusiness bad debt deduction at trial.    On

brief petitioners continue to assert that they are entitled to a
                               - 26 -

nonbusiness bad debt deduction because they were not able to

recover any of the money lent to the estate before its

insolvency.    On brief respondent contends that petitioners have

not established that the alleged funds were ever transferred to

the estate or that a loan actually existed between petitioners

and the estate.

     Section 166(a) generally allows a deduction for any debt

which becomes worthless within the taxable year.    Section 166(d)

provides:

     SEC. 166(d).   Nonbusiness Debts.--

          (1) General rule.-– In the case of a taxpayer
     other than a corporation--

                   (A) subsection (a) shall not apply to
            any nonbusiness debt; and

                   (B) where any nonbusiness debt becomes
            worthless within the taxable year, the loss
            resulting therefrom shall be considered a
            loss from the sale or exchange, during the
            taxable year, of a capital asset held for not
            more than 1 year.

     Petitioners allege that they wrote a $13,914.22 check to the

estate as a loan to be repaid by December 31, 2002.    Petitioners

assert that the $13,914.22 check constituted a loan between

petitioners and the estate, that the debt became worthless in

March 2002, and that they are entitled to a nonbusiness bad debt

deduction.    Respondent contends that the debt did not become

worthless in March 2002 because petitioners’ bank statement shows

the $13,914.22 was not withdrawn from petitioners’ bank account
                               - 27 -

until April 25, 2002, and the record is devoid of any evidence

that the $13,914.22 check was ever deposited into an account

owned by or transferred to the estate.

      Petitioners provided a photocopy of a $13,914.22 check

payable to the order of the “Estate of Janice Steele”.      However,

there is no further evidence in the record to indicate that the

estate received these funds.    The final and distributive account

form filed with the probate court of Cuyahoga County neither

lists petitioners as creditors of the estate nor indicates that

the $13,914.22 was received by the estate.

      Even assuming that a bona fide loan existed between

petitioners and the estate, petitioners have failed to establish

that the debt became worthless in 2002.   The estate was not

closed until April 4, 2003, and any assets that remained in the

estate would have been available to pay the debt until the

estate’s termination.

      Thus we hold that petitioners have failed to establish

entitlement to a nonbusiness bad debt deduction.

V.   Dependency Exemption Deduction

      For the purpose of computing taxable income, section 151(a)

allows an individual to claim an exemption deduction for a

dependent.   A dependent is defined as follows:

      SEC. 152.   DEPENDENT DEFINED.

           (a) General Definition.-–For purposes of this
      subtitle, the term “dependent” means any of the
                               - 28 -

     following individuals over half of whose support, for
     the calendar year in which the taxable year of the
     taxpayer begins, was received from the taxpayer (or is
     treated under subsection (c) or (e) as received from
     the taxpayer):

               *      *    *     *      *       *     *

                 (3) A brother, sister, stepbrother, or
          stepsister of the taxpayer,

     In determining whether an individual received over one-half

of his or her support from the taxpayer, “the amount of support

received from the taxpayer as compared to the entire amount of

support which the individual received from all sources, including

support which the individual himself supplied” must be

considered.   Sec. 1.152-1(a)(2)(i), Income Tax Regs.     Petitioners

bear the burden of demonstrating the total amount of the child’s

support furnished from all sources for the year at issue.        See

Blanco v. Commissioner, 56 T.C. 512, 514 (1971).      If the total

support is not shown and cannot be reasonably inferred from the

competent evidence available, then it is not possible to conclude

that petitioners furnished more than one-half of RMW’s support.

See id. at 514-515.

     Petitioners did not claim RMW as a dependent on the tax

return or on the first amended return.      Only on the second

amended return did petitioners claim RMW as a dependent.

     Although petitioners allege they provided over one-half of

RMW’s support in 2002, they have failed to prove the total
                                - 29 -

support furnished to RMW from all sources in 2002.      The only

evidence petitioners proffered was a summary of expenses

estimating their dependent care expenses at $9,483 and a

statement allegedly made by RMW that she received her financial

support from Mrs. Steele in 2002.     Petitioners testified that RMW

also resided with Mrs. Steele’s brother in 2002.     According to

their summary of expenses, petitioners claimed to have provided

support for RMW for approximately 10 months during 2002.

However, petitioners have not provided any substantiating

documents, such as receipts, canceled checks, copies of mortgage

or rent payments, or copies of utility bills, of either their

alleged expenses or the total expenses paid for RMW’s support in

2002.

     Without adequate substantiation of both RMW’s total support

in 2002 and the portion of that support furnished by petitioners,

we cannot conclude from the record that petitioners provided more

than one-half of RMW’s support.     See Manukainiu v. Commissioner,

T.C. Memo. 1998-90.     Accordingly, we find that petitioners are

not entitled to a dependency exemption deduction for RMW in 2002.

        To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.
