                  T.C. Summary Opinion 2005-81



                     UNITED STATES TAX COURT



        DEBORAH Y. AND DONALD J. EVERHART, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2897-03S.               Filed June 9, 2005.


     Deborah Y. and Donald J. Everhart, pro sese.

     Laurie A. Nasky, for respondent.



     GOLDBERG, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
                                   - 2 -

       Respondent determined a deficiency in petitioners’ Federal

income tax of $12,120 and an accuracy-related penalty in the

amount of $2,424 pursuant to section 6662(a) for the taxable year

2000.

       After a concession by petitioners,1 the issues for decision

are:       (1) Whether petitioners failed to report income, received

by petitioner Donald J. Everhart, from Ronald Muhammad for

contracting work; and (2) whether petitioners are liable for an

accuracy-related penalty in the amount of $2,424 pursuant to

section 6662(a) for the taxable year 2000.

                                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.       Petitioners resided in

Chicago, Illinois, on the date the petition was filed in this

case.

       Petitioners timely filed a Federal joint income tax return

for the taxable year 2000.       During taxable year 2000, Donald J.

Everhart (petitioner) was a contractor licensed by the city of

Chicago.       Petitioner was retained in that capacity by Ronald

Muhammad (Mr. Muhammad) to perform construction services at

rental property owned by Mr. Muhammad.



       1
      Petitioners conceded that they failed to include in gross
income for taxable year 2000, $28 of interest income.
                                     - 3 -

       To do the necessary repairs, Mr. Muhammad obtained a home

rehabilitation loan of $32,949.85 from Wells Fargo Home Mortgage,

Inc.    Petitioner was the general contractor of record on this

home rehabilitation loan.         Wells Fargo Home Mortgage, Inc. issued

the proceeds of Mr. Muhammad’s home rehabilitation loan on August

28, 2000, and October 11, 2000, by checks jointly payable to both

Mr. Muhammad and petitioner in the amounts of $12,261.67 and

$20,688.18, respectively.         Both Mr. Muhammad and petitioner

endorsed these checks.        Mr. Muhammad deposited the proceeds from

these checks into his bank account at Shore Bank.          Wells Fargo

Home Mortgage, Inc. also issued to petitioner a Form 1099-Misc,

Miscellaneous Income, for taxable year 2000 reflecting a

distribution to petitioner of nonemployee compensation in the

amount of $32,949.85.

       At the beginning of their work relationship, petitioner and

Mr. Muhammad did not enter into any contract outlining the scope

of the work to be performed.         Petitioner testified he and Mr.

Muhammad entered into a contract later in taxable year 2000.

However, no contract was offered into evidence at trial.

       Petitioner received and negotiated the following checks

totaling $24,312 drawn on Mr. Muhammad’s Shore Bank account

payable to petitioner:

        Date        Check #          Memo                      Amount

       09/03/2000   4656                                        $100
       09/12/2000   4657      Tax from Wells Fargo 12261       1,861
       09/24/2000   4661            Dumpster                     300
                                  - 4 -
     09/27/2000   4666       Soffit for kitchen                  350
     09/27/2000   4667        Roofing material                   800
     10/04/2000   4674             Roof                          900
     10/07/2000   4717       Front roof shingles                 700
     10/13/2000   4720    Roofing rubbish closet drywall         600
     10/22/2000   4732 Wiring intercom recess lighting...      1,000
     10/22/2000   4733 1st ½ payment for concrete for basement 3,250
     10/22/2000   4730       Final payment for heating...        350
     10/22/2000   4731 Copping chps + bricking of 1st floor...   400
     10/24/2000   4734              Tax                        3,101
     10/26/2000   4736   Plumbing roofing labor roof bal...    1,100
     10/27/2000   4737    Final payment concrete basement      3,250
     11/01/2000   4739       Roofing labor material              300
     11/04/2000   4741                                           450
     11/08/2000   4743    Insulation + drywall flashing        1,700
     11/16/2000   4750             Drywall                       700
     11/24/2000   4752       Electrical + labor                  800
     12/01/2000   4754     Electrical drywall carpentry        1,200
     12/08/2000   4758       Drywall installation                700
     12/22/2000   4763                                           400
                                                       Total $24,312

     Petitioner also maintained a checking account with Shore

Bank during taxable year 2000.       During the period from October

25, 2000, through December 31, 2000, petitioner made deposits in

his Shore Bank account as follows:

                          Date            Amount

                      10/25/2000          $500
                      10/27/2000           300
                      11/01/2000           100
                      11/06/2000           100
                      11/08/2000         1,600
                      11/16/2000           400
                      11/24/2000            50
                      12/01/2000           125
                      12/08/2000           375
                      12/22/2000           100
                              Total     $3,650

     During the period from October 25, 2000, through December

31, 2000,   petitioner wrote checks totaling $3,509 drawn on his

Shore Bank account as follows:
                              - 5 -
 Date        Check #        Description                      Amount

10/25/2000    95       Payable to: Deborah Everhart           $200
                       Memo: Roof material
10/26/2000    96       Payable to: Cash                        100
                       Memo: Material plumb
10/28/2000    97       Payable to: Cash                        100
                       Memo: Material
10/30/2000    99       Payable to: Cash                        100
                       Memo: Expense
10/30/2000   100       Payable to: Cash                         50
                       Memo: Material
11/01/2000    98       Payable to: Cash                         60
                       Memo: Labor
11/03/2000             Payable to: Cash                         70
11/06/2000   102       Payable to: Cash                         50
                       Memo: Expense
11/07/2000   101       Payable to: Capital one                  50
                       Memo: Collections
11/07/2000   103       Payable to: Cash                         50
                       Memo: Expense
11/08/2000   104       Payable to: Deborah Everhart            130
                       Memo: McKey + Pogue
11/08/2000   106       Payable to: Julius Jones                 35
11/09/2000   107       Payable to: Kozmiwski                    24
                       Memo: Apples
11/09/2000   108       Payable to: Cash                        800
                       Memo: Material
11/10/2000   109       Payable to: Cash                        100
11/12/2000   110       Payable to: Deborah Everhart            100
                       Memo: Labor 4343
11/13/2000   112       Payable to: Cash                        100
                       Memo: Expense
11/13/2000   113       Payable to: Cash                        100
                       Memo: Expense
11/14/2000   114       Payable to: Cash                        100
                       Memo: Expense
11/15/2000   115       Payable to: Cash                         50
                       Memo: Expense
11/16/2000   116       Payable to: Cash                         75
11/17/2000   117       Payable to: Cash                        300
11/20/2000   118       Payable to: Cash                         60
11/21/2000   119       Payable to: Cash                         30
11/21/2000   121       Payable to: Cash                         30
11/28/2000   122       Payable to: Cash                         30
                       Memo: Expense
12/04/2000   124       Payable to: Cash                         30
12/06/2000   125       Payable to: Cash                         40
                       Memo: Expense
12/07/2000   126       Payable to: Cash                         30
12/09/2000   127       Payable to: Deborah Y. Everhart         300
                       Memo: Donald Everhart loan
12/12/2000   128       Payable to: Cash                          50
12/12/2000   129       Payable to: Cash                          25
12/12/2000   131       Payable to: Cash                          30
12/18/2000   132       Payable to: Cash                          10
12/26/2000   133       Payable to: Cash                         100
                                                     Total   $3,509
                               - 6 -

     Petitioner also signed a document entitled “Final Waiver of

Lien”, which was dated August 28, 2000.   This document

acknowledged petitioner’s receipt of $28,143.43 for labor and

material furnished for the renovation of Mr. Muhammad’s rental

property.

     By notice of deficiency, respondent determined that

petitioners failed to report on their Federal income tax return

for the taxable year 2000 income earned by petitioner, received

from Mr. Muhammad, for contracting work in the amount of

$30,468.2   Respondent also determined that petitioners are liable

for an accuracy-related penalty in the amount of $2,424 pursuant

to section 6662(a) for the taxable year 2000.

                            Discussion

     In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and the taxpayer bears

the burden of showing that the determination is in error.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     As one

exception to this rule, section 7491(a) places upon the

Commissioner the burden of proof with respect to any factual

issue relating to liability for tax if the taxpayer maintained

adequate records, satisfied the substantiation requirements,



     2
      This amount was determined by the Form 1099-Misc,
Miscellaneous Income, from Wells Fargo Home Mortgage, Inc., which
reported nonemployee compensation of $32,949, less self
employment tax deduction of $2,481.
                                 - 7 -

cooperated with the Commissioner, and introduced during the Court

proceeding credible evidence with respect to the factual issue.

Although neither party alleges the applicability of section

7491(a), we conclude that the burden of proof has not shifted to

respondent with respect to the unreported income.     Respondent has

the burden of production with respect to the accuracy-related

penalty, however.   Sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).     Therefore, petitioner bears the burden of

showing that the deposits made to his account, checks cashed, and

checks written on his account, were not includable in his 2000

income as determined by respondent.      Bank deposits have been held

to be prima facie evidence of income.      Tokarski v. Commissioner,

87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C.

651, 656 (1975), affd. 566 F.2d 2 (6th Cir. 1977).

1.   Unreported Income

     As stated previously, respondent determined that petitioners

failed to report income in tax year 2000 in the amount of

$30,468.   However, petitioner argues that such payments were made

pursuant to a contractor relationship he had with Mr. Muhammad,

and, therefore, petitioner claims he was merely a conduit between

Mr. Muhammad and the subcontractors that petitioner hired to

perform the work.

     Section 61(a) defines gross income as “all income from

whatever source derived,” unless otherwise provided.     The Supreme
                              - 8 -

Court has consistently given this definition of gross income a

liberal construction “in recognition of the intention of Congress

to tax all gains except those specifically exempted.”

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955); see

also Roemer v. Commissioner, 716 F.2d 693, 696 (9th Cir. 1983),

(all realized accessions to wealth are presumed taxable income,

unless the taxpayer can demonstrate that an acquisition is

specifically exempted from taxation), revg. 79 T.C. 398 (1982).

     However, pursuant to section 162, a taxpayer may deduct

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on his or her trade or business.    A

taxpayer is engaged in a trade or business if the taxpayer is

involved in the activity (1) with continuity and regularity, and

(2) with the primary purpose of making a profit.   Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987); Antonides v. Commissioner,

893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C. 686 (1988).

     Petitioner has the burden of proving that he was engaged in

a trade or business and, as stated previously, that the deposits

made to his account, checks cashed, and checks written on his

account, were not includable in his 2000 income as determined by

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

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934); Welch v. Helvering, supra.
                                - 9 -

     Petitioner does not deny that he received the payments from

Mr. Muhammad in the amounts determined by respondent.     In any

event, substantial evidence was presented which leads us to the

conclusion that petitioner received the amounts calculated by

respondent.   Petitioner asserts that such payments were not

income to him but advances made by Mr. Muhammad to pay

subcontractors and purchase materials for the renovation of Mr.

Muhammad’s rental property.    Petitioner also asserts that he

received the payments as agent for Mr. Muhammad.

     Petitioner contends that he functioned merely as a conduit

through which Mr. Muhammad purchased labor and materials for the

renovation project, with the result that the payments received

from Mr. Muhammad are not taxable to him.     Petitioner does not

clearly explain the legal basis for this position, and he cites

no cases in support thereof.

     We would agree that a taxpayer need not treat as income

moneys which he did not receive under a claim of right, which

were not his to keep, and which he was required to transmit to

someone else as a mere conduit.    See Diamond v. Commissioner, 56

T.C. 530, 541 (1971), affd. 492 F.2d 286 (7th Cir. 1974); see

also Mill v. Commissioner, 5 T.C. 691, 694 (1945); Parker v.

Commissioner, T.C. Memo. 1985-263.      On the other hand, if a

taxpayer receives moneys under a claim of right and without

restriction or limitation as to the disposition of the moneys,
                             - 10 -

then the taxpayer has received income, even though it may still

be claimed that he is not entitled to retain the money, and even

though he may be liable to restore its equivalent.    See North Am.

Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932).

     Assuming petitioner was correct in his conduit or agency

argument, he would still have to substantiate that the deposits

made to his account, checks cashed, and checks written on his

account, were not includable in his 2000 income.

     However, the record as a whole in the present case leads to

the inescapable conclusion that petitioner was a self-employed

contractor licensed by the city of Chicago during taxable year

2000, and that petitioner was the general contractor of record on

the Wells Fargo Home Mortgage, Inc. rehabilitation loan.

Therefore, it is unnecessary to consider petitioner’s “conduit”

or “agency” argument.

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

business expenses paid or incurred during the taxable year in

carrying on any trade or business.    To be “ordinary” the

transaction that gives rise to the expense must be of a common or

frequent occurrence in the type of business involved.    Deputy v.

du Pont, 308 U.S. 488, 495 (1940).    To be “necessary” an expense

must be “appropriate and helpful” to the taxpayer’s business.

Welch v. Helvering, supra at 113-114.
                                - 11 -

     Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he is entitled to any

deduction claimed.   Rule 142(a); New Colonial Ice Co. v.

Helvering, supra.    This includes the burden of substantiation.

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976).

     Section 6001 and the regulations promulgated thereunder

require taxpayers to maintain records sufficient to permit

verification of income and expenses.     As a general rule, if the

trial record provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the precise amount of the deduction to

which he or she is otherwise entitled, the Court may estimate the

amount of the deductible expense and allow the deduction to that

extent, bearing heavily against the taxpayer whose inexactitude

in substantiating the amount of the expense is of his or her own

making.   Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

However, in order for the Court to estimate the amount of an

expense, the Court must have some basis upon which an estimate

may be made.   Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).   Without such a basis, any allowance would amount to

unguided largesse.     Williams v. United States, 245 F.2d 559, 560-

561 (5th Cir. 1957).
                               - 12 -

     It appears from the testimony presented at trial that

petitioner and Mr. Muhammad had a “loose” work relationship in

which Mr. Muhammad would supply sums of money to petitioner in

the form of cash and checks.   Petitioner would then use these

moneys to pay off expenses incurred in the renovation of Mr.

Muhammad’s rental property; any surplus or net profit was used to

pay petitioner’s personal debts.   Both petitioner and Mr.

Muhammad testified that they had receipts which could

substantiate the expenditures of the renovation project; however,

such receipts were lost or stolen.      Neither petitioner nor Mr.

Muhammad attempted to contact third parties to receive duplicate

receipts, and neither individual attempted to reconstruct a list

of such expenditures.

     At trial, petitioner elicited testimony from Robert Blacher

(Mr. Blacher), who was a subcontractor who did concrete work in

the renovation of Mr. Muhammad’s rental property.     Mr. Blacher

testified that he received payment of $6,500 for his services

from petitioner.   Petitioner also elicited testimony from Rafiq

Ahmad (Mr. Ahmad) who did drywall work in the renovation project.

Mr. Ahmad testified that he received payment of approximately

$700 for his services from petitioner.

     Petitioner offered into evidence copies of the

aforementioned checks and applicable bank statements.      Petitioner

also testified that these payments were made for the renovation
                                - 13 -

project.    Petitioner also testified that the proceeds from these

payments were used to pay for the labor and materials incurred in

the renovation project.

     Based upon all of the facts and circumstances of this case,

we find that petitioner’s general contracting business had gross

income of $32,949 in taxable year 2000.    We further find that

petitioner has substantiated business expense deductions relating

to his general contracting business of $18,4003 for taxable year

2000.    As a result, petitioners realized net income of $12,068

for the taxable year in issue from petitioner’s general

contracting business.

2.   Accuracy-Related Penalty

     As stated previously, respondent determined that petitioners

are liable for an accuracy-related penalty pursuant to section

6662(a) with respect to the underpayment attributable to the

unreported income of petitioner.

     Section 7491(c) provides that the Commissioner shall have

the burden of production in any court proceeding with respect to

the liability of any individual for any penalty, addition to tax,

or additional amount.    Specifically, section 7491(c), which was



     3
      It is possible that petitioner has incurred business
expense deductions in excess of this amount; however, due to
petitioner’s lack of clear records, petitioner is unable to
substantiate further deductions, and we are unable to estimate
any further deductions under the rule in Cohan v. Commissioner,
39 F.2d 540 (2d Cir. 1930).
                               - 14 -

enacted by the Internal Revenue Service Restructuring and Reform

Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3001(a), 112 Stat.

726, provides as follows:

          SEC. 7491(c). Penalties.--Notwithstanding any other
     provision of this title, the Secretary shall have the burden
     of production in any court proceeding with respect to the
     liability of any individual for any penalty, addition to
     tax, or additional amount imposed by this title.

As previously stated, section 7491(c) is effective with respect

to court proceedings arising in connection with examinations

commencing after July 22, 1998.    RRA 1998 sec. 3001(c)(1), 112

Stat. 727.    There is no dispute that the examination in the

present case commenced after July 22, 1998.

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any of various factors, one of

which is negligence or disregard of rules or regulations.    Sec.

6662(b)(1).   “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, including failure to keep adequate books and

records or to substantiate items properly.    Sec. 6662(c); sec.

1.6662-4(b)(1), Income Tax Regs.    Section 6664(c)(1) provides

that the penalty under section 6662(a) shall not apply to any

portion of an underpayment if it is shown that there was

reasonable cause for the taxpayer’s position and that the

taxpayer acted in good faith with respect to that portion.      The

determination of whether a taxpayer acted with reasonable cause
                                  - 15 -

and 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.    The most important factor is the

extent of the taxpayer’s effort to assess his proper tax

liability for the year.     Id.

     It is clear that petitioner was negligent with respect to

the $12,068 that was received by him through his general

contracting business.     Petitioner did not keep adequate books and

records, or otherwise substantiate the $12,068, as required by

the Internal Revenue Code.    Thus, the amount of the accuracy-

related penalty applicable to petitioners’ unreported income for

taxable year 2000 requires computation from the foregoing.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect petitioners’ concessions and our resolution of

the disputed matters,

                                       Decision will be entered

                                  under Rule 155.
