                               T.C. Memo. 2013-31



                        UNITED STATES TAX COURT



                 SAMUEL I. OLEKANMA, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 15337-08.                         Filed January 30, 2013.



      Samuel I. Olekanma, pro se.

      William John Gregg, for respondent.



                          MEMORANDUM OPINION


      CARLUZZO, Special Trial Judge: In a notice of deficiency dated April 18,

2008 (notice), respondent determined a $6,390 deficiency in petitioner’s 2005
                                          -2-

[*2] Federal income tax and imposed a $1,278 section 6662(a)1 accuracy-related

penalty. The issues for decision are: (1) whether petitioner understated gross

receipts on two Schedules C, Profit or Loss From Business, included with his 2005

Federal income tax return (return); (2) whether petitioner is entitled to certain trade

or business expense deductions in excess of amounts allowed by respondent; and

(3) whether petitioner is liable for a section 6662(a) accuracy-related penalty.

                                     Background

      At the time the petition was filed, petitioner resided in Maryland.

      Petitioner’s return was prepared by a paid Federal income tax return preparer.

The return includes two Schedules C, one for Sankara Motors (Sankara) and the

other for Samez Group Investments Corp. (Samez). Both businesses involve the

sale of used automobiles.2

      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended and in effect for the year in issue. Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
        The business form of Samez is unclear. Petitioner’s return suggests that
Samez is a sole proprietorship. Up until trial, nothing submitted by either party
suggested otherwise. In an interrogatory propounded upon petitioner by respondent,
petitioner was asked to explain the differences between Sankara and Samez.
Apparently, petitioner failed to respond to the interrogatory. At trial petitioner took
the position that Samez is a corporation, and therefore the income and deductions of
Samez should not have been reported on a Schedule C. Given the timing of
petitioner’s claim, we will not consider it. We proceed as though Samez is properly
                                                                          (continued...)
                                         -3-

[*3] The Sankara Schedule C shows the following income and deductions:

                                                                 2005
              Income:

                Gross receipts                                    $42,000
                Cost of goods sold                                  5,000
                Gross income                                       37,000

              Expenses:

                Car and truck                                      12,950
                Legal and professional services                       102
                Rent or lease of other business property           18,000
                Other1                                              5,882
                  Total                                            36,934

                     Net profit                                         66
     1
      This deduction includes: (1) $2,080 for auction fees, (2) $52 for tags, and (3)
$3,750 for towing.

         The Samez Schedule C shows the following income and deductions:

                                                                 2005
              Income:

                Gross receipts                                    $54,000
                Cost of goods sold                                  -0-
                Gross income                                       54,000




         2
        (...continued)
treated as a sole proprietorship.
                                             -4-

[*4]             Expenses:

                    Car and truck                                       12,991
                    Depreciation and section 179                           720
                    Legal and professional services                      5,102
                    Office                                               1,700
                    Rent or lease of other business property            18,000
                    Repairs and maintenance                              8,530
                    Supplies                                               400
                    Travel                                                850
                    Deductible meals and entertainment                      50
                    Other1                                               5,500
                      Total                                             53,843

                        Net profit                                         157
       1
           This deduction includes: (1) $700 for license fees, and (2) $4,800 for towing.

           Petitioner did not maintain separate books of account with respect to either

business. He did, however, maintain a separate checking account for each, and

apparently he retained various receipts for certain business-related expenditures.3

Petitioner did not keep any sort of contemporaneous log or journal in which he

recorded vehicle or travel expenses.

           It would appear that petitioner was less than cooperative with respondent’s

revenue agent during the examination of the return. He refused to provide the agent

with his bank records, and those records were obtained through the use of an



           3
       No receipts showing an expenditure that relates to any of the deductions here
in dispute are in evidence.
                                          -5-

[*5] administrative summons. Those records show deposits into the Sankara and

Samez accounts that total $91,649 and $15,450, respectively, in 2005. Comparing

the items shown on the return with the information shown in the summoned bank

records, the revenue agent, using what is commonly referred to as the bank

deposits indirect method of income determination,4 concluded that petitioner had

understated the gross receipts and the cost of goods sold reported on the Schedules

C. The revenue agent also concluded that petitioner was not entitled to some or

some portions of the deductions claimed on the Schedules C.

      The revenue agent’s conclusions are reflected in the adjustments made in

the notice. The adjustments for “Gross Receipts or Sales” and “Cost of Goods

Sold” result from the bank deposits analysis (omitted income adjustments).5 Many

of the adjustments made in the notice relate to deductions claimed on the

Schedules C. According to the notice, some or all of the deductions claimed on


      4
       The bank deposits method is one of the indirect methods of income
determination relied upon by the Commissioner if a taxpayer fails to keep books and
records, or a taxpayer’s records do not clearly reflect the taxpayer’s income. See
sec. 446(b); Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989). “The use of the
bank deposits method for computing income has long been sanctioned by the
courts.” Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975), aff’d, 566
F.2d 2 (6th Cir. 1977).
      5
        Actually, the net effect of these adjustments is a reduction in petitioner’s
gross income, a point apparently lost on petitioner.
                                           -6-

[*6] the Schedules C were disallowed because petitioner “has not * * * established

that the deduction[s] * * * [were] incurred, paid, or expended for the designated

purpose.” Other adjustment made in the notice are computational and will not be

discussed. Except for the computational adjustments, all of the adjustments made in

the notice, including the imposition of a section 6662(a) penalty, are in dispute.

                                       Discussion

      Generally, the Commissioner’s determinations are presumed correct, and the

taxpayer bears the burden of proving that those determinations are erroneous. Rule

142(a); see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933).6

Omitted Income Adjustments

      Respondent now concedes that the adjustments that increase the gross

receipts reported on the Schedules C are overstated. According to petitioner,

respondent’s concession along with other improper assumptions (not related to

respondent’s concession) made by the revenue agent render the analysis flawed,

and therefore the adjustments that flow from the bank deposits analysis must be

rejected. We disagree with petitioner regarding the consequences of respondent’s

concession. We do, however, have concerns with some of the revenue agent’s

      6
          The provisions of sec. 7491(a) are not applicable here.
                                         -7-

[*7] assumptions, even though we recognize that the agent made certain

assumptions because petitioner failed or refused to provide requested information.

      Under the circumstances, we see no need to discuss our concerns in a point-

by-point critique of the revenue agent’s application of the bank deposits method.

Petitioner challenges the validity of the adjustments resulting from the bank deposits

method, and, even if for different reasons, we are willing to go along with his

challenge. The adjustments to gross receipts and cost of goods sold as shown in the

notice are not to be taken into account in the computation of the deficiency in

petitioner’s 2005 Federal income tax.7

Adjustments Reducing Claimed Trade or Business Expense Deductions

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish

entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. at 84; New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934). This burden requires the taxpayer to substantiate deductions

claimed by keeping and producing adequate records that enable the Commissioner


      7
       Eliminating these adjustments from the computation of the deficiency as
determined in the notice results in an increased deficiency. Because respondent has
not asserted an increased deficiency, however, the deficiency cannot exceed the
amount determined in the notice. See sec. 6214.
                                        -8-

[*8] to determine the taxpayer’s correct tax liability. Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821

(5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

      In general, a trade or business expense, if properly substantiated, is allowed

as a deduction. See sec. 162. Petitioner has presented to the Court no

substantiating documents for any of the deductions here in dispute. We recognize

that in the absence of substantiating records, trade or business expense deductions

may be estimated. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).8

However, the Court must have a reasonable basis on which to make an estimate.

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

      Petitioner identified various expenses, such as towing, inspection, and repairs,

reasonably expected to be incurred by a taxpayer in the used car business, but his

generalized testimony provides no basis for us to estimate the amounts of these

expenses that he might have incurred during the year in issue. Accordingly,

petitioner is not entitled to deductions in excess of the amounts respondent already

allowed.




      8
      Certain trade or business expense deductions, such as deductions for vehicle
expenses and travel expenses, are subject to strict substantiation requirements and
may not be estimated. See secs. 274(d), 280F(d)(4).
                                         -9-

[*9] The Accuracy-Related Penalty

      Section 6662(a) imposes a penalty of 20% of the portion of the underpayment

of tax attributable to, among other things, a substantial understatement of income

tax. Sec. 6662(b)(2). An understatement of income tax is substantial within the

meaning of section 6662 if, as relevant here, the understatement exceeds $5,000.

See sec. 6662(d); sec. 1.6662-4(b), Income Tax Regs.

      Respondent bears the burden of production with respect to the imposition of

the penalty here in dispute, see sec. 7491(b), and that burden has been satisfied

because the understatement of income tax, which equals the deficiency, exceeds

$5,000, see secs. 6211, 6662(d)(2), 6664(a). That being so, it is petitioner’s burden

to establish that the imposition of the penalty is not appropriate. See Higbee v.

Commissioner, 116 T.C. 438, 447 (2001); see also Rule 142(a); Welch v.

Helvering, 290 U.S. at 115.

      According to petitioner, he is unsophisticated in matters of Federal income

taxation, and the penalty is not applicable because he relied upon his paid income

tax return preparer to compute the Federal income tax liability shown on his return.
                                        - 10 -

[*10] Section 6664(c)(1) provides an exception to the imposition of the

accuracy-related penalty if the taxpayer establishes that there was reasonable cause

for, and the taxpayer acted in good faith with respect to, the underpayment. Sec.

1.6664-4(a), Income Tax Regs. The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case basis, taking into

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs. Under certain circumstances, a taxpayer’s reliance upon professional advice

may establish the taxpayer’s “reasonable cause” and “good faith” with respect to an

underpayment of tax if the taxpayer establishes that (1) the professional was

provided with complete and accurate information, (2) an incorrect return was a

result of the preparer’s mistakes, and (3) the taxpayer demonstrates good faith

reliance on a competent professional. See Estate of Goldman v. Commissioner, 112

T.C. 317, 324 (1999), aff’d without published opinion sub nom. Schutter v.

Commissioner, 242 F.3d 390 (10th Cir. 2000); see also Neonatology Assocs., P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      Although his return was prepared by a paid income tax return preparer,

petitioner has failed to establish that he provided his return preparer with complete

and accurate information or that he reasonably relied upon any advice the return
                                        - 11 -

[*11] preparer might have provided. Accordingly, petitioner failed to establish that

he acted in good faith with respect to any portion of the underpayment of tax or that

any portion of the underpayment is due to reasonable cause. Petitioner is liable for a

section 6662(a) accuracy-related penalty, and respondent’s imposition of that

penalty is sustained.

      To reflect the foregoing,


                                                 Decision will be entered

                                       under Rule 155.
