                  T.C. Summary Opinion 2003-16



                     UNITED STATES TAX COURT



          DANVIS S. AND SHERYL S. SMITH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9210-00S.            Filed February 28, 2003.



     Danvis S. Smith, pro se.

     Sara J. Barkley, for respondent.



     DINAN, 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 years in issue.
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     Respondent determined deficiencies in petitioners’ Federal

income taxes of $8,993 and $5,053, and accuracy-related penalties

of $1,799 and $1,011, respectively, for the taxable years 1995

and 1996.

     The issues for decision are:    (1) Whether petitioners are

entitled to charitable contribution deductions in 1995 and 1996;

(2) whether petitioners are entitled to certain miscellaneous

itemized deductions in 1995 and 1996 and business expense

deductions in 1995; and (3) whether petitioners are liable for

accuracy-related penalties under section 6662(a) for 1995 and

1996.1

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

Highlands Ranch, Colorado, on the date the petition was filed in

this case.

Charitable Contribution Deductions

     During the years in issue, petitioner husband (petitioner)

was the director of Alpha Ministries.    Petitioners provided

nearly all of the funds used by Alpha Ministries, and nearly all

of these funds were in turn used to pay for expenses of


     1
      Petitioners concede respondent’s determination that they
received $123 in unreported interest income in 1995. Respondent
determined that petitioners were entitled to unclaimed deductions
in 1995 of $463 for investment interest expense and $62 for
business office expense.
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petitioners, primarily in the form of a “housing allowance”.2

Petitioner, upon receiving paychecks from unrelated employment,

would sign the back of the paychecks over to Alpha Ministries

prior to depositing them into a checking account bearing the

designation “Alpha Ministries”.          The account into which the funds

were deposited was owned and controlled by petitioners, and

petitioners alone had authority to use the funds therein.

     Petitioners filed joint Federal income tax returns for the

years in issue.     On these returns, petitioners claimed deductions

of $27,150 in 1995 and $30,500 in 1996 for charitable

contributions purportedly made to Alpha Ministries.          In the

statutory notice of deficiency, respondent disallowed these

deductions in full.



     2
      Petitioners, relying on uncorroborated summary documents
entered into evidence, argue that Alpha Ministries had the
following income and expenses for each of the years in issue:
                                                1995       1996
     Income
        Cash donations by petitioners         $31,560    $25,740
        Cash donations by other individuals       290        100
        Interest on deposits                       12         18
                                               31,862     25,858
     Disbursements
        Petitioner’s housing allowance        $22,000    $24,775
        Petitioner’s health care allowance        700        -0-
        Petitioner’s auto/travel allowance        700        200
        Petitioner’s books and materials           94        -0-
        Loan to petitioner                      8,135        -0-
        Supplies, postage, fees, and copies        34        -0-
                                               31,663     24,975

Although we do not accept these figures as actual amounts of
income and expenses of Alpha Ministries, we accept them as an
admission by petitioners that any funds received by, or
designated for use by, Alpha Ministries were used almost
exclusively for the personal benefit of petitioners.
                                - 4 -

     As a general rule, personal, living, and family expenses are

nondeductible.   Sec. 262(a).   Subject to limitations not relevant

here, section 170(a) allows a deduction for charitable

contributions made during the taxable year to certain types of

organizations.   For a contribution to be deductible, it must be

made to an organization “no part of the net earnings of which

inures to the benefit of any private shareholder or individual”.

Sec. 170(c)(2)(C).

     The facts in the case before us are substantially similar to

the facts in a prior case before this Court, Miedaner v.

Commissioner, 81 T.C. 272 (1983).    In Miedaner, the taxpayers

established and subsequently operated an entity known as the

Church of Physical Theology.    They had established a separate

checking account for the church, but used funds from this account

for a variety of personal expenses, primarily for “living

allowances” for each of the taxpayers.    In sustaining the

Commissioner’s disallowance of deductions claimed by the

taxpayers for amounts purportedly contributed to the church, this

Court stated:

     the church was essentially inseparable from the personal
     interests of Terrel and Penelope, and we agree with
     respondent’s observation that petitioners literally bathed
     themselves in personal benefits. Their “contributions”
     funded their living allowances * * * . The church account
     was simply a magic wand whereby personal expenses were
     converted into tax deductions. Where contributions go to
                                - 5 -

     pay personal expenses, they are neither charitable nor
     deductible. * * *

Id. at 281.

     Assuming arguendo that petitioners made any contributions in

this case, petitioners, by their own admission, used any

contributed funds funneled through Alpha Ministries almost

exclusively for their own housing and for other expenses

benefitting only petitioners.   Thus, in accordance with section

170(c)(2)(C) and Miedaner v. Commissioner, supra, petitioners are

not entitled to the claimed charitable contribution deductions.

See also Davis v. Commissioner, 81 T.C. 806, 817 (1983), affd.

without published opinion 767 F.2d 931 (9th Cir. 1985) (no

charitable contributions were made where taxpayer retained

control of the funds and derived personal benefits therefrom).

Itemized and Business Deductions

     During 1995 and 1996, petitioner’s primary employment was as

a faculty member of Apollo Group, Inc. of Phoenix, Arizona.

Petitioner’s duties included class preparation, keeping records

of grades and attendance, communicating with the school

administration, conducting tests, and grading papers and tests.

In connection with this employment, petitioners claimed

miscellaneous itemized deductions with respect to the following

unreimbursed employee business expenses, in each respective year:
                                     - 6 -



                                                     1995      1996

     Vehicle expense                                $2,949    $2,520
     Parking fees, tolls, and transportation            24        32
     Other expenses
        “Business auto loan interest”                  698
        “Office rent”                                4,800
        “Postage and express”                           64
        “Office supplies”                               80
        “Grading services”                           7,513
        Unspecified                                            3,647
     Less reimbursements by employer                  (653)     (168)
     Total (adjusted for rounding errors)           15,474     6,031

Respondent disallowed the deductions with respect to expenses of

$13,011 in 1995 and $3,166 in 1996.3

     For taxable year 1995, petitioner filed a Schedule C, Profit

or Loss From Business, for a sole proprietorship known as “Smith

Table Pads”.    The schedule listed the principal business of the

proprietorship as “distributor of custom fitted table pads and

teaching”.    On the schedule, petitioners claimed deductions for,

among others, the following:         interest expense of $2,163; rent

expense of $5,800; travel expense of $2,642; and meal and

entertainment expense of $680.          Respondent disallowed each of

these deductions in full, except with respect to interest expense

of $731.

     During both of the years in issue, petitioners resided in

residences owned by petitioners in their own names.

     In 1995, petitioner organized a corporation under Colorado

law known as Smith Corporation.          The articles of incorporation


     3
      Respondent’s additional adjustment to the total of the 1995
miscellaneous itemized deductions, which was based on a change in
petitioners’ adjusted gross income, is computational and will be
resolved by the Court’s holding on the issues in this case.
                               - 7 -

were stamped received by the Colorado Secretary of State on

December 13, 1995.   The corporation never received an employer

identification number from the Internal Revenue Service and never

filed Federal income or employment tax returns.    Petitioner, the

sole shareholder, intended to use this corporation for a number

of separate activities:   First, the corporation was meant to

establish a vending machine route.     Second, petitioner hoped the

corporation would take over his table pad business.    Third,

petitioner thought that he could “pay” the corporation to provide

grading services needed for his Apollo Group employment, services

which he in turn would personally provide.    Finally, petitioner

thought that he could “pay” the corporation rent for use of his

residence in grading papers and other activities, while

petitioner and his wife personally owned the residence.    With

respect to the latter two activities, petitioner claimed

deductions on the 1995 return for alleged payments to the

corporation, which had been incorporated on or about December 13

of that year.   Petitioner never transferred any funds to the

corporation or to an account designated for corporate use.

     A taxpayer may deduct the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade

or business, including the trade or business of being an

employee.   Sec. 162(a); Primuth v. Commissioner, 54 T.C. 374,

377-378 (1970).   A taxpayer, however, generally must keep records
                                - 8 -

sufficient to establish the amounts of the items reported on his

Federal income tax return.   Sec. 6001; sec. 1.6001-1(a), (e),

Income Tax Regs.   In the event that a taxpayer establishes that a

deductible expense has been paid but is unable to substantiate

the precise amount, we generally may estimate the amount of the

deductible expense bearing heavily against the taxpayer whose

inexactitude in substantiating the amount of the expense is of

his own making.    Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930).   We cannot estimate a deductible expense, however,

unless the taxpayer presents evidence sufficient to provide some

basis upon which an estimate may be made.    Vanicek v.

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

     Furthermore, section 274(d) supersedes the Cohan doctrine

and prohibits estimating certain expenses.    Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d 201 (2d

Cir. 1969).   That section provides that, unless the taxpayer

complies with certain strict substantiation rules, no deduction

is allowable (1) for traveling expenses, (2) for entertainment

expenses, (3) for expenses for gifts, or (4) with respect to

listed property.   Listed property includes passenger automobiles

and other property used as a means of transportation.      Sec.

280F(d)(4).   To meet the strict substantiation requirements, the

taxpayer must substantiate the amount, time, place, and business
                                 - 9 -

purpose of the expenses.     Sec. 274(d); sec. 1.274-5T, Temporary

Income Tax Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).

     Petitioners have failed to substantiate any of the Schedule

C deductions or the employee business expense deductions

disallowed by respondent.4    Petitioners have failed to provide

evidence that the expenses were incurred, such as receipts, and

they have failed to sufficiently explain the underlying business

purposes.   For example, petitioners claim to have traveled to

Hawaii in connection with the business of the sole

proprietorship.   However, overlooking whether petitioners in fact

traveled to Hawaii primarily to sell table pads, they provided no

receipts for the travel, and their daily planner indicates that

their primary business-related activity was making phone calls--

calls which presumably could have been made from Colorado.

Petitioners assert that a flood destroyed many of the records

which would have provided substantiation.    Even if this were the

case, however, petitioners have not adequately attempted to

reconstruct any destroyed records, by such means as obtaining

copies of bank or credit card records.    Finally, petitioners have

not provided the Court with any basis upon which to estimate

expenses (with respect to those for which estimates may be made).




     4
      Sec. 7491(a) does not shift the burden of proof to
respondent here because petitioners have failed to produce any
credible evidence with respect to the disallowed deductions.
                              - 10 -

We sustain respondent’s disallowance of each of the deductions at

issue.5

Accuracy-Related Penalties

     Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for both years

in issue with respect to the underpayments resulting from the

total amounts of the deficiencies.     Respondent has the burden of

production with respect to the penalties but the burden of proof

remains on petitioners.   Sec. 7491(c); Higbee v. Commissioner,

116 T.C. 438 (2001).

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

of an underpayment attributable to any one 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 any failure to keep adequate books and

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

1.6662-3(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


     5
      The rent expense claimed by petitioners as both employee
business expense and Schedule C business expense was connected to
petitioner’s use of his own residence. Although petitioners do
not directly address the “home office” provisions of sec. 280A we
note that petitioners have not shown that any portion of their
residence was “exclusively used on a regular basis” for business
purposes. Sec. 280A(c)(1).
                                - 11 -

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

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.

     Petitioners claimed deductions for payments which were never

made, and they failed to properly substantiate various other

deductions claimed on their returns.     Furthermore, petitioners

used Alpha Ministries and Smith Corporation--entities which were

essentially alter egos of petitioner--to eliminate nearly all

Federal tax liability on their wage and salary income in each of

the years in issue.   The use of these entities in this manner is

not evidence of a reasonable attempt to comply with Federal tax

law and does not reflect reasonable cause and good faith for

petitioners’ actions.

     We find that petitioners were negligent and hold that they

are liable for the accuracy-related penalties determined by

respondent.

     Reviewed and adopted as the report of the Small Tax Case

Division.
                        - 12 -

To reflect the foregoing,

                                 Decision will be entered

                            for respondent.
