                   T.C. Summary Opinion 2009-3



                     UNITED STATES TAX COURT



                  YORK T. HUANG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14252-07S.            Filed January 7, 2009.



     York T. Huang, pro se.

     Brooke S. Laurie, for respondent.



     PANUTHOS, Chief 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.1   Pursuant to

section 7463(b), the decision to be entered is not reviewable by



     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 -

any other court, and this opinion shall not be treated as

precedent for any other case.

     Respondent determined a deficiency of $17,706 in

petitioner’s 2004 Federal income tax and a $3,541.20 accuracy-

related penalty.

     After concessions,2 the issues for decision are:    (1)

Whether petitioner is entitled to claimed miscellaneous itemized

deductions; (2) whether petitioner is entitled to business

expense deductions in amounts greater than respondent allowed;

and (3) whether petitioner is liable for the penalty under

section 6662.

                           Background

     Some of the facts have been stipulated, and we incorporate

the stipulations and accompanying exhibits by this reference.

Petitioner lived in California when he filed the petition.

     In 2004 petitioner had a degree in business administration

and worked full time for Sun Microsystems, Inc. (Sun), as an

executive security specialist.    Petitioner provided personal

security for certain Sun executives.     Minimum qualifications for



     2
       Petitioner accepted respondent’s determination as to
unreported qualified dividends and capital gains and with respect
to taxes deducted as itemized deductions.
       Changes to petitioner’s adjusted gross income resulted in
adjustments to the amounts of self-employment tax owed and self-
employment deduction allowed. Petitioner did not challenge these
adjustments, and we will not address them further because they
are purely computational.
                                - 3 -

this job included proficiency in first aid, defensive driving,

martial arts, and the use of firearms.    Sun also required

petitioner to have a concealed weapons license and a U.S.

passport and to maintain the skills necessary for the job.

     Petitioner first obtained a license for his business,

Archangel Risk Management and Security Consultant (Archangel), in

1997, and he continued that activity through 2004, the year in

issue.    Archangel provided two lines of service:   (1) Business

consulting from the perspective of risk management; and (2)

personal, physical security for business people.     From 1997

through 2004 Archangel’s expenses consistently exceeded its

income.    Petitioner did not maintain any books or accounts for

Archangel in 2004; rather, he measured his income by the sums he

deposited in the bank, and he stored documentation for his

expenses in a big box.

     In 1992 petitioner purchased a three-bedroom house.      In 2004

he sold the house in order to reduce his expenses and purchased a

one-bedroom condominium (condo).    Petitioner used his house and

his condo for business, for storing supplies, and for maintaining

his physical fitness and martial arts skills.    He also lived in

the house and the condo.    Petitioner leased a BMW X5 sport

utility vehicle (SUV) and purchased a Honda Civic, both of which

he used for Archangel:    the SUV for high-end clientele and the

Honda sedan for clients demanding a lower profile.
                               - 4 -

     Petitioner entertained individuals, including current and

prospective Archangel clients, in attempts to solicit business.

At times he also paid to entertain their children so that he

could discuss business with his clients.   Petitioner traveled to

events where at-risk individuals could be found, hoping to be

hired to provide security.   Petitioner occasionally learned he

was improperly attired on arriving for a protection detail and

purchased appropriate clothing or footwear.   Petitioner

consolidated the insurance on his real estate, automobiles, boat,

and possibly a motorcycle in order to purchase an additional

umbrella policy that would provide blanket liability coverage,

including coverage for his actions on behalf of Archangel.

Petitioner used some proceeds from Archangel to contribute to an

annuity for himself.

     Petitioner prepared and timely filed his 2004 Federal income

tax return.   He reported his wages from working at Sun.     On

Schedule A, Itemized Deductions, petitioner claimed some

deductions that are not at issue but also claimed $6,778 for

unreimbursed job expenditures for uniforms, tools, and safety

equipment.3   On Schedule C, Profit or Loss From Business,

petitioner reported gross receipts of $7,825, cost of goods sold




     3
       After exceeding the 2-percent floor for miscellaneous
itemized deductions, petitioner deducted $5,946 for job-related
expenses.
                                - 5 -

of $225, gross income of $7,600, and total expenses of $60,249.

Petitioner claimed the following business expense deductions on

Schedule C:

              Expense description         Amount claimed

      Advertising                              $1,500
      Contract labor                            1,950
      Employee benefit programs                 2,000
      Insurance (other than health)             8,190
      Legal and professional services           7,245
      Office expenses                           5,411
      Vehicle leasing                           5,400
      Supplies                                  8,262
      Taxes and licenses                        1,131
      Travel                                    7,020
      50% of meals and entertainment            9,510
      Utilities                                 2,630
        Total                                  60,249


     In a notice of deficiency for 2004, respondent allowed a

$293 deduction for cellular telephone expenses that petitioner

substantiated, in lieu of the $2,630 utilities expense petitioner

claimed; allowed an $88 deduction for substantiated taxes and

licenses, rather than the $1,131 petitioner claimed; disallowed

the remaining Schedule C deductions; and disallowed in full

petitioner’s claimed job-expense deduction.

     In a timely petition, petitioner alleged that “All the

disallowed expenses are ordinary and necessary business cost

[sic] that are supported with receipts and are all at risk as the

investment for the business.”

     At trial respondent asserted that petitioner failed to

maintain adequate records of Archangel’s income and expenses and
                               - 6 -

that many of petitioner’s job-related expenses and Schedule C

expenses were not only inadequately substantiated but also

nondeductible personal, family, and living expenses.

                            Discussion

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

notice of deficiency are presumed correct, and the taxpayer bears

the burden of proving that these determinations are in error.

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

Pursuant to section 7491(a), the burden of proof as to factual

matters shifts to the Commissioner under certain circumstances.

Petitioner has neither alleged that section 7491(a) applies nor

established his compliance with its requirements.   Petitioner

therefore bears the burden of proof.

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to any

deduction claimed.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   Taxpayers are required to maintain records sufficient to

enable the Commissioner to determine their correct tax liability.

Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.   Such records must

substantiate both the amount and purpose of the claimed

deductions.   Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

     When a taxpayer establishes that he has incurred a

deductible expense but is unable to substantiate the exact
                                 - 7 -

amount, we are generally permitted to estimate the deductible

amount.     Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930).    To apply the Cohan rule, however, the Court must have a

reasonable basis upon which to make an estimate.      Vanicek v.

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

      Congress overrode the Cohan rule with section 274(d) which

requires strict substantiation for certain categories of

expenses; in the absence of evidence demonstrating the exact

amount of those expenses, deductions are to be disallowed

entirely.    Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969).      Expenses subject

to section 274(d) include travel and meal expenses, as well as

expenses for listed property, such as passenger automobiles,

computers, and cellular telephones.      Secs. 274(d), 280F(d)(4).

The taxpayer must substantiate the amount, time, place, and

business purpose of these expenditures and must provide adequate

records or sufficient evidence to corroborate his own statement.

See sec. 274(d); sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,

50 Fed. Reg. 46016 (Nov. 6, 1985).

I.   Unreimbursed Employee Business Expenses

      Section 162 allows deductions for all ordinary and necessary

business expenses paid or incurred during the taxable year in

carrying on a trade or business.    Performing services as an

employee constitutes a trade or business.      Primuth v.
                                - 8 -

Commissioner, 54 T.C. 374, 377-378 (1970).    Those expenses that

are (1) ordinary and necessary to the taxpayer’s business and (2)

paid or incurred in a given year are deductible that year.     Sec.

162(a); see sec. 1.162-17(a), Income Tax Regs.    However,

personal, living, or family expenses are not deductible.     See

secs. 162(a), 262(a); sec. 1.162-17(a), Income Tax Regs.

       On his Schedule A for 2004, petitioner described his job

expenses as “Uniform, tool, safety equipment”.

       Where business clothes are suitable for general wear, their

cost is typically not deductible.    However, where custom and

usage forbid wearing a uniform when off duty, deduction is

allowed.    The cost of maintaining clothes for work is deductible

when the purchase price was deductible.    Hynes v. Commissioner,

74 T.C. 1266, 1290 (1980).    Petitioner did not introduce any

testimony or other evidence proving that the clothing he

purchased for work was not suitable for everyday wear or that Sun

required him to wear anything other than normal business attire.

Accordingly, petitioner is not entitled to deduct his expenses

for buying or maintaining the clothes he wore when working for

Sun.

       Most of the other receipts petitioner submitted in support

of his unreimbursed employee business expenses appear completely
                                 - 9 -

unrelated to his work for Sun.4    The remaining receipts indicate

that he went to firing ranges, rented range time, and purchased

flashlights, knives, ammunition, and possibly firearms.    He did

not introduce any evidence that Sun required him to purchase

these items, however, nor any evidence that Sun did not provide

him with the equipment necessary to perform his job.    Although

the record contains some information regarding Sun’s policy with

respect to reimbursement for Sun-related travel expenses,

petitioner did not provide any evidence about whether Sun would

reimburse him for purchasing tools and equipment or for

maintaining his job-related skills, nor did he testify that he

sought reimbursement.     A taxpayer’s failure to seek reimbursement

from his employer prevents him from deducting those expenses as

unreimbursed employee business expenses.     Orvis v. Commissioner,

788 F.2d 1406 (9th Cir. 1986), affg. T.C. Memo. 1984-533; Lucas

v. Commissioner, 79 T.C. 1, 7 (1982).

      Respondent’s determination disallowing petitioner’s job-

related expenses is sustained.

II.   Business Expenses

      Petitioner began Archangel in 1997.   The expenses from this

activity exceeded the gross receipts every year from 1997 through


      4
       Petitioner submitted myriad receipts but generally failed
to show how any of the documented expenses were business related.
Clear documentation of what each expenditure purchased and how
each purchase was an ordinary and necessary business expense does
not appear in the record.
                                 - 10 -

the year in issue.   Petitioner admitted at trial that he did not

keep track of Archangel’s income during the year; rather, he

computed his income by reviewing his bank deposits.          He did,

however, place all his expense receipts in a big box.

     A.   Advertising Expenses

     Petitioner claimed a $1,500 advertising expense deduction

for Archangel in 2004.    He introduced a credit card statement

showing a $1,500 charge to Clear Channel Radio and a computer-

screen printout of an April 2004 e-mail titled “Summary Invoice”.

This printout lists the “Bill To” party as Sugar’s Magazine

(Sugar), and addresses the invoice to the attention of petitioner

and another individual but at a mailing address that does not

match either of petitioner’s residences (which were also

Archangel’s addresses).    The printout states “2004 billing: Net

amount paid: $1,500” and reports that Sugar purchased fifty 60-

second commercial announcements between April 14 and 25, 2004, on

KYLD Wild 94.9FM in San Francisco.        Petitioner offered vague

testimony that Sugar purchased bulk advertising and he purchased

advertising at a discount from Sugar.        However, the evidence

petitioner introduced indicates that Sugar bought $1,500 of radio

commercials.   It does not show that petitioner bought any of this

time for Archangel or that the announcements were for Archangel

rather than Sugar or some other party.        Respondent’s

determination disallowing this deduction is sustained.
                              - 11 -

     B.   Contract Labor

     Petitioner deducted $1,950 for contract labor expenses but

did not introduce any evidence or provide any testimony proving

that he actually incurred any contract labor expenses.

Respondent’s determination is sustained.

     C.   Employee Benefit Programs

     A taxpayer, including the owner of an unincorporated

business, is entitled to deduct all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

a trade or business, sec. 162(a), including any amount paid to an

employee pursuant to an employee benefit plan, sec. 162(a)(1);

sec. 1.162-10, Income Tax Regs.

     Petitioner introduced evidence showing that he paid $150 per

month for part of 2002 and part of 2004 into a “privileged assets

annuity” with American Partners Life Insurance Co.    He claimed an

expense of $2,000 for employee benefit programs.5

     Section 162, however, does not allow deductions for amounts

which may be used to provide benefits under an annuity plan.

Sec. 1.162-10(a), (c), Income Tax Regs.    Rather, such

contributions are controlled by section 404.    Id.   However,


     5
       It is not clear why petitioner introduced evidence
relating to 2002, considering that only tax year 2004 is at
issue. We note that even if petitioner contributed $150 monthly
to the annuity for all of 2004, as his evidence seems to ask us
to conclude, the total for 2004 would be $1,800, not the $2,000
petitioner claimed. No Code section authorizes petitioner to
round these expenditures up before claiming a deduction.
                               - 12 -

petitioner did not introduce any evidence that the annuity he

contributed to was a retirement annuity and part of a qualified

plan, as required by section 404(a)(2).

     Petitioner is not entitled to deduct any amount for employee

benefit plans for 2004.

     D.   Insurance

     Petitioner claimed an expense deduction of $8,190 for

insurance expenditures in 2004.   Petitioner testified that

business insurance is particularly expensive whenever firearms

are involved and that obtaining vehicle insurance for this type

of business is difficult.   As a result, petitioner alleged that

he was required to place all of his insurance (auto, home, boat,

commercial) with one company so that he could purchase a special

umbrella policy covering his use of any of his property in the

business, including two cars, both residences, his boat, and

possibly a motorcycle.    It appears that petitioner claimed all of

his insurance expenses (for both cars, both residences, his boat,

etc.) as business expenses because of his need to consolidate

policies in order to purchase the umbrella coverage.   Petitioner

also claimed that he used both automobiles only for Archangel

business, because he lived across the street from a mall and

because Sun provided him a company vehicle to use for his full-

time job.
                              - 13 -

     While there is no dispute that petitioner incurred insurance

expenses in 2004, respondent argues that these expenditures are

not all ordinary and necessary business expenses and that

petitioner is attempting to deduct personal and living expenses

as business expenses.   Petitioner did not introduce any evidence

to show that he used his boat for business, nor did he justify

deducting real estate insurance or substantiate any business use

of his automobiles.   Furthermore, in the absence of corroborating

evidence, we are not required to accept, and do not accept,

petitioner’s self-serving testimony that he used his automobiles

exclusively for Archangel business.6   See Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Madden v. Commissioner, T.C.

Memo. 2006-4.

     Petitioner asserts that because he used most of both of his

residences for Archangel he may deduct the costs to insure his

properties.   Yet he has not claimed any home office deduction.

     Finally, the documentation petitioner introduced in support

of his insurance expenses indicates that he paid between $27 and

$28 to Farmers Insurance for each of 3 months in 2004 for a




     6
       Petitioner did not claim any deduction for car and truck
expenses for 2004.
                              - 14 -

policy listed on three bills as “Commercial”.   While this policy

may be some form of business insurance, petitioner did not

provide any details of the coverage he purchased.

     On the basis of the entire record, we are satisfied that

petitioner claimed a plethora of personal insurance items as

business expenses.   Under these circumstances, we are unwilling

to assume that the unexplained commercial line item on three

bills was business insurance, and we decline to estimate an

annual deduction for insurance for Archangel.

     Respondent’s determination that petitioner is not entitled

to a deduction for insurance is sustained.

     E.   Legal and Professional Services

     Petitioner claimed a business expense deduction for $7,245

for legal and professional services.   He presented some vague

testimony that when his business consulting and risk management

advice to a business owner proved inaccurate, Archangel had to

pay for legal services to resolve the problem for its client.

Petitioner then explained inconsistently that Archangel would

pass this cost on to its clients and later that Archangel would

not be paid if the legal challenge failed.

     Petitioner’s documentation supporting Archangel’s legal

expenses consisted of copies of some bank statements with mostly

illegible handwritten notations; one statement with the words

“Attorney Fernando Hernandez” below the line reporting a $2,500
                               - 15 -

check; and a copy of that check for $2,500 payable to and

endorsed by Fernando Hernandez, but with a notation in the memo

field of the check that appears to refer to “Sugar’s U.S.

Landlord”.    This documentation does not support any deduction for

legal expenses incurred by Archangel in 2004.

     Petitioner testified that maintaining his protection skills

required him to take regular refresher courses.    He included

receipts showing $270 paid for firearms, baton, and chemical

agents training, and we allow this amount as a professional

expense.    Otherwise, respondent’s determination is sustained.

     F.    Office Expenses

     As indicated, petitioner did not claim any home office

deduction, but he did deduct $5,411 as office expenses in 2004.

Petitioner’s office expense documentation included receipts for

parking, tolls, his AAA membership, and canceled checks

reflecting unspecified payments to the California Department of

Motor Vehicles.    These items might be for car and truck expenses

(but petitioner did not deduct any car and truck expenses on

Schedule C) or for travel expenses.     Critically, these documents

do not identify any business purpose for the expenditures.

Likewise, the miscellaneous receipts submitted ostensibly to

support Archangel’s office expenses do not bear any indication of

what legitimate business expenses they represent.    Petitioner

introduced an undated bill for $100 from the Fictitious Business
                              - 16 -

Name Renewal Service for the renewal of Archangel’s business name

but did not introduce any documents to show he paid that bill.7

Petitioner also included a receipt from the John Elway Foundation

Auction which appears to document his purchase of five signed

items of sports and music memorabilia for $1,350.64.    This

receipt appears to be from September 2003 and does not indicate

any business purpose for this expenditure.

     Respondent’s determination disallowing petitioner’s claimed

office expense deduction is sustained.

     G.   Vehicle Leasing

     Petitioner submitted a (largely illegible) copy of what the

parties describe as petitioner’s lease agreement for his SUV.

Petitioner claimed a $5,400 deduction for vehicle rental,

suggesting that the lease payment for his 2002 SUV was $450 per

month in 2004.   Passenger automobiles are listed property, and

related expenses must be strictly substantiated or they may not

be deducted.   Secs. 274(d), 280F(d)(4).   Petitioner did not

provide any substantiation of the amount, time, place, and

business purpose of the use of his SUV.    Thus, even if the record

supported his paying $450 monthly lease payments, petitioner is


     7
       Petitioner also submitted two documents from April 2004:
One a handwritten receipt for a payment of $25 allegedly for a
fictitious business name, the other a printed receipt for $37 for
a fictitious business name. Neither receipt indicates what
fictitious name it paid for or whether the fee covered an initial
registration or a renewal. This is not reliable evidence that
would support our estimating this expense.
                               - 17 -

not entitled to deduct his cost to lease this passenger

automobile because he failed to maintain or provide adequate

business records.

     H.   Supplies

     Petitioner claimed a deduction for spending $8,262 on

supplies for Archangel.   Petitioner’s documentation supporting

his supplies deduction includes several documents regarding the

installation of fencing, apparently at the house petitioner

bought in 1992 and sold in 2004.   However, some of the documents

are in another person’s name, with an address different from

petitioner’s.   Petitioner also included a receipt for a garage-

door opener.    The business purposes of these expenses is unclear.

In any event, because fencing and garage door openers have useful

lives substantially beyond the year of installation, these are

capital expenditures, see sec. 1.263(a)-2(a), Income Tax Regs.,

and expenses that would otherwise be deductible under section 162

are not currently deductible if they are capital, secs. 261,

263(a).

     Petitioner’s remaining supplies receipts are predominantly

for the purchase of flowers, live Maine lobsters, and alcohol.

Petitioner did not explain or document any business purpose for

these expenses or identify the persons involved.

     Petitioner has not substantiated any legitimate supplies

expenses.   Respondent’s determination is sustained.
                               - 18 -

     I.   Taxes and Licenses

     Petitioner claimed $1,131 in taxes and licenses for 2004.

Respondent allowed a deduction of $88 for the renewal of

petitioner’s firearms license.   With his office expense

documentation, petitioner substantiated paying $150 to the City

of San Jose for business tax and paying $35 to the California

Bureau of Security and Investigative Services to renew his

security guard credentials.8

     We allow petitioner a deduction of $185 for Archangel’s

expenses for taxes and licenses in addition to the $88 allowed by

respondent.    Otherwise, respondent’s determination is sustained.

     J.   Meals and Entertainment

     The parties stipulated that petitioner expended $8,753 for

meals and entertainment expenses in 2004.   Petitioner claimed

business meals and entertainment expenses of $19,021, of which he

deducted 50 percent, $9,511.   Petitioner’s documentation included

a number of movie ticket stubs and hundreds of receipts for

eating and drinking at restaurants and bars.   Petitioner did not

provide any evidence of the persons entertained or the business

purpose of the meals, drinks, or movies, and the receipts do not

include any legible record of petitioner’s recording this

information.   Meals and entertainment expenses are subject to the


     8
       The remaining documents petitioner submitted to
substantiate his expenditures for taxes and licenses appear to
support his real estate taxes, itemized on Schedule A.
                               - 19 -

strict substantiation requirements of section 274(d).     Petitioner

is not entitled to any deduction for meals and entertainment

because of his failure to maintain adequate records of the people

invited and entertained and of the business purpose of these

expenditures.

     K.    Utilities

     Petitioner claimed business expense deductions for utilities

for Archangel amounting to $2,630.      Respondent allowed $293 in

substantiated cellular telephone expenses.      Petitioner’s evidence

includes water, electric, gas, cable television, telephone, and

cellular telephone bills, together with assessment statements

apparently from his condominium association.      Most of the bills

are in petitioner’s name, but some appear to be in the name of

one or more relatives at petitioner’s residential address.      None

is in the name of Archangel.

     Petitioner argues that he is entitled to deduct most of his

residential expenses (such as repairs, improvements, utilities,

and insurance) because his residences were used mostly for

business.    As noted, he did not claim any home office deduction

in 2004.    Petitioner alleged that he used 85 percent of his

three-bedroom house exclusively for Archangel.      This is

implausible.    He testified that when he moved himself and

Archangel into a one-bedroom condo, he continued to use 85

percent of his new residence exclusively for Archangel; i.e., his
                               - 20 -

living needs occupied an even smaller space.   This is simply not

credible.9   Petitioner alleges that most of his living space was

converted to a training area for self-defense practice and that

most of the bedroom space was occupied by firearms storage and

client paperwork.   He admitted that his living room continued to

hold normal furniture, including a couch.   Petitioner also

testified that the sole purpose of cable television service was

to enable him to monitor news and events and gather information

on potential threats and possible business opportunities.

     Respondent asserts that petitioner attempted to claim many

personal, family, and living expenditures as deductible business

expenses.    Petitioner has not introduced any evidence to convince

us that respondent is incorrect, and he has not shown that he is

entitled to these deductions.10   Respondent’s determination is

sustained.




     9
       The fact that some bills were in the name of one or more
of petitioner’s relatives suggests that petitioner may not have
been the sole occupant of these residences and casts further
doubt on petitioner’s allegation that nearly all of each
residence was used exclusively for Archangel.
     10
       Petitioner’s complaint that respondent is being unfair
and unreasonable in allowing only a few hundred dollars in
business expenses misses the point. Respondent allowed those
expenses that petitioner proved he incurred and that he
demonstrated were legitimate business expenses. Petitioner’s
failure to maintain accounting records for Archangel and his
failure to record and document the specific business purpose of
each of his expenditures compelled respondent’s disallowance of
the majority of petitioner’s deductions.
                                 - 21 -

       L.   Travel

       Although the record includes some documents potentially

related to petitioner’s claimed business travel in 2004,

petitioner did not provide any explanation, and the documents do

not include any description of any business purpose for any of

this travel.     Petitioner’s vague testimony and this meager

evidence fail to satisfy the strict substantiation required by

section 274(d).      Respondent’s determination is sustained.

III.    Accuracy-Related Penalty

       The Commissioner bears the burden of production and must

produce sufficient evidence showing that the imposition of any

penalty is appropriate in a particular case.      Sec. 7491(c);

Higbee v. Commissioner, 116 T.C. at 446.      Once the Commissioner

meets this burden, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect.

Rule 142(a); Higbee v. Commissioner, supra at 447.      To the extent

the taxpayer shows there was reasonable cause for an underpayment

and that he acted in good faith, section 6664(c)(1) prohibits the

imposition of a penalty under section 6662.

       Respondent determined a 20-percent penalty under section

6662(a) on the underpayment of tax resulting from petitioner’s

disallowed itemized and business expense deductions.      Respondent

asserts that the underpayment is attributable to negligence or

disregard of rules or regulations or to a substantial
                                - 22 -

understatement of income tax.    See sec. 6662(b)(1) and (2).    For

the purpose of section 6662, negligence includes any failure to

make a reasonable attempt to comply with tax laws, and disregard

includes any careless, reckless, or intentional disregard of

rules or regulations.   Sec. 6662(c).    A substantial

understatement of income tax is defined as an understatement

exceeding the greater of 10 percent of the tax required to be

shown on the return or $5,000.    Sec. 6662(d)(1).

     Respondent satisfied his burden of production under section

7491(c) because the record shows that petitioner substantially

understated his income tax for the year in issue.     See sec.

6662(d)(1)(A)(ii); Higbee v. Commissioner, supra at 446.

Furthermore, a review of this record reflects that petitioner

claimed substantial deductions for which he apparently maintained

no business records beyond storing receipts in a big box.11      There

is little dispute that petitioner paid the expenses claimed, yet

most of the claimed deductions for alcohol, boat insurance,

clothes, contributions to his personal annuity, flowers, signed

memorabilia, and utilities, for example, are clearly for

nondeductible personal items.    On the basis of the entire record,

we conclude that petitioner did not act with reasonable cause or



     11
       Petitioner’s failure to maintain books and records is
particularly significant in the light of his claim to holding a
degree in business administration and his allegedly providing
business consulting services to Archangel’s clients.
                             - 23 -

exercise good faith in claiming these deductions and that he is

liable for the penalty under section 6662(a).

     To reflect our disposition of the issues,



                                        Decision will be entered

                                   under Rule 155.
