                    T.C. Summary Opinion 2010-3



                       UNITED STATES TAX COURT



             RONALD STEWART ARMSTRONG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28922-07S.             Filed January 11, 2010.



     Ronald Stewart Armstrong, pro se.

     Christina E. Ciu, for respondent.



     LARO, 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



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

to 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 $7,445 in petitioner’s

2004 Federal income tax.   The issues for decision are whether:

(1) Petitioner may deduct $31,570 in business expenses reported

on his Schedule C, Profit or Loss From Business; (2) petitioner’s

itemized deduction for medical and dental expenses is limited to

the amount in excess of 7.5 percent of his adjusted gross income;

and (3) petitioner is entitled to an ordinary deduction for

worthless stock under section 1244.

                            Background

I.   Petitioner

     Petitioner is a lifelong musician and an entrepreneur who

has combined his passions for music and business in a variety of

business ventures.   A consultant by trade, petitioner filed his

2004 Federal income tax return in April 2005.   That return

included a Schedule C that listed petitioner’s business or

profession as “consultant” and claimed the following expense

deductions:
                                  -3-

           Expenses                                   Amount

      Multi-Labs, Inc.                                $3,000
      Research International                           3,000
      Diverse Investments, Inc.                        3,000
      Peterson Controls                                3,000
      Opsafe                                           3,000
      X-Factor Technologies                            3,000
      Wizard Guitars                                   3,000
      Bartolini, Inc.                                 10,570
        Total                                         31,570

      On September 19, 2007, respondent issued a notice of

deficiency (notice) disallowing petitioner’s deduction for

Schedule C expenses.    Because the disallowance increased

petitioner’s adjusted gross income, respondent also disallowed

petitioner’s deduction of $1,709 in medical and dental expenses

in excess of 7.5 percent of his adjusted gross income.

Petitioner requested redetermination of the deficiency by filing

a petition with this Court on December 14, 2007.      Petitioner

resided in California when the petition was filed.

II.   Bartolini

      A.    Petitioner’s Affiliation with Bartolini

      Petitioner was employed by Bartolini, Inc. (Bartolini), a

Nevada corporation formed in June 2004 to manufacture and sell

“electronic musical pickups”.     Petitioner was also a shareholder

of Bartolini.

      B.    Formation of Bartolini

      Bartolini was formed to acquire Bartolini Guitars, a sole

proprietorship owned by Bill Bartolini (Mr. Bartolini).
                                  -4-

Bartolini was formed under a resolution of its board of directors

that provided in relevant part:

     the Board of Directors of * * * [Bartolini] have
     determined that the Corporation shall be organized and
     managed so that it is a “Small Business Corporation” as
     defined in IRC Sec. 1244(1), as amended, and so that
     the shares issued by the Corporation are “section 1244
     stock” as defined in IRC Sec. 1244(c)(1), as amended.

               *    *    *       *      *   *   *

     BE IT THEREFORE RESOLVED:

     1.   Effective June 12, 2004 the proper officers of the
          Corporation are authorized to sell and issue
          common shares in an aggregate amount of money and
          other property (as contribution to capital and as
          paid in surplus), which together with the
          aggregate amount of common shares outstanding at
          the time of issuance, does not exceed $1,000,000.
     2.   That the sale and issuance of shares shall be
          conducted in compliance with IRC Sec. 1244, so
          that the Corporation and its shareholders may
          obtain the benefits of IRC Sec. 1244.

     Petitioner received 999 shares of Bartolini common stock

upon its formation in exchange for $13,250.     On July 1, 2004,

petitioner contributed another $4,000 to Bartolini in exchange

for 300 additional shares of Bartolini common stock.

     C.   Petitioner’s Employment With Bartolini

     During 2004 petitioner entered into an employment agreement

with Bartolini to serve as its president and chief executive

officer (CEO) from July 1, 2004 until 2009.     In exchange for his

services, petitioner was to receive the following remuneration:

(i) A guaranteed annual salary of $150,000; (ii) a guaranteed

annual bonus of $10,000; (iii) 1,000 shares of Bartolini stock;
                                   -5-

and (iv) warrants each year for 2,000 shares of stock.

Petitioner worked as president and CEO of Bartolini from July

2004 until March 2005 when Bartolini was dissolved.

III.    October 5, 2009, Trial

       A.     Overview

       On October 5, 2009, the Court held a trial in San Francisco,

California.      Petitioner was the only witness called by either

party.      The only evidence which petitioner presented to support

his reported 2004 Schedule C expenses was receipts related to

Bartolini.

       The receipts ranged in date from 2003 to 2005 with the

exception of one receipt that was undated.      The 2004 receipts

consisted of:      (i) A $95 invoice from the Carson City Treasurer

for “Base License Fee”; (ii) a $91 “consulting fee” paid to Mr.

Bartolini; and (iii) $35 in receipts for “Laughlein” expenses.

The undated receipt was from “McBee Systems Inc. Banking

Materials” in the amount of $56.67.      The other receipts are not

relevant to our decision and will not be discussed.

       B.     Amended Return

       Petitioner also introduced into evidence an amended 2004

Form 1040 (amended return) which he intended to file with

respondent.      The Court admitted this return into evidence as an

admission of petitioner’s intent relating to this case and not as
                                -6-

a filed tax return.2   On Schedule C of the amended return,

petitioner claimed $11,764 in expenses consisting of $5,659 in

expenses related to an unnamed “business consulting service” and

$6,105 in expenses related to “Building Design Services.”

     Petitioner also attached to his amended return a 2004

Schedule K-1, Partner’s Share of Income, Deductions, Credits,

etc., from Wizard Guitars.   The Schedule K-1 lists petitioner as

a 33.33-percent general partner of the entity.     The Schedule K-1

reports as to 2004 that petitioner’s beginning capital account

was $6,708 and that his ending capital account was $3,708 on

account of a $3,000 ordinary business loss from that year.3

                             Discussion

I.   Deductibility of Schedule C Expenses

     A.   Overview

     Respondent disallowed petitioner’s 2004 Schedule C expense

deductions because petitioner failed to (i) substantiate that the

expenses were paid or incurred during the taxable year; or (ii)

demonstrate that the expenses were ordinary and necessary to

petitioner’s consulting business.     Petitioner argues generally

that the expenses are valid section 162 ordinary and necessary




     2
      The record does not establish that the amended return was
filed by petitioner or accepted by respondent.
     3
      We are unaware of the origins of the purported business
loss or whether Wizard Guitars filed a return of partnership
income for 2004.
                                     -7-

business expenses and does not address the substantiation issue.

For the reasons set forth below, we hold for respondent.

     An income tax deduction is a matter of legislative grace and

is not an unqualified right.        See INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); Deputy v. du Pont, 308 U.S. 488, 493

(1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   A taxpayer such as petitioner bears the burden of

establishing his right to any amount claimed as a deduction.4

Rule 142(a); White v. United States, 305 U.S. 281, 292 (1938);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Roberts v.

Commissioner, 62 T.C. 834, 835 (1974).         Every taxpayer is also

required to maintain supporting records or statements for amounts

claimed as deductions.        See sec. 6001.

     B.     Deduction for Ordinary and Necessary Business Expenses

            1.     Overview

     A taxpayer may deduct ordinary and necessary expenses paid

or incurred during the taxable year in carrying on any trade or

business.    Sec. 162(a).      An expense is ordinary if it bears a

reasonably proximate relationship to the operation of the

taxpayer’s business.      Kornhauser v. United States, 276 U.S. 145,

153 (1928).      An expense is necessary if it is appropriate and




     4
      Sec. 7491 is inapplicable to this case because petitioner
did not produce credible evidence with respect to a factual issue
relevant to determining his tax liability.
                                   -8-

helpful to the functioning of the taxpayer’s business.      Welch v.

Helvering, supra at 113.

            2.     Expenses Related to Bartolini

                   a.   Overview

       Petitioner seeks to deduct $10,570 in various expenses

incurred on behalf of his involvement with Bartolini.

                   b.   2004 Base License Fee

       Petitioner presents a $95 invoice from the Carson City

treasurer for licensing fees of Bartolini incurred on December 1,

2004.    A corporation and its shareholders are separate taxable

entities, and therefore a shareholder may generally not deduct

expenses that would be corporate expenses even if paid by that

shareholder.     See Moline Props., Inc. v. Commissioner, 319 U.S.

436, 438-439 (1943); D’Angelo v. Commissioner, T.C. Memo. 2003-

295.    Petitioner may not deduct the licensing fees of Bartolini

because they are the expenses of the corporation--not of

petitioner.      See Wofford v. Commissioner, 5 T.C. 1152, 1165

(1945).

                   c.   Additional 2004 Expenses

       Petitioner also presents a $35 receipt for a Laughlein

certificate and $91 in receipts for consulting fees to Mr.

Bartolini.    There is no indication in the record that these

expenses are ordinary or necessary to petitioner’s consulting

business.    We deny petitioner a deduction for these items.
                                 -9-

               d.   2003, 2005, and Undated Expenses

     Petitioner also presents receipts for expenses incurred in

2003 and 2005 as well as an undated receipt.    Again, the record

does not support that these expenses were ordinary or necessary

to petitioner’s consulting business.   Even if petitioner did

demonstrate that these expenses satisfied the requirements of

section 162(a), they would still not be deductible.    Petitioner

may deduct expenses only for the year paid.    See, e.g., Carlisle

v. Commissioner, 37 T.C. 424, 428 (1961) (stating that a cash

method taxpayer’s otherwise deductible expense is not deductible

for any taxable year other than the year in which it is paid).

               e.   Summary of Expenses Related to Bartolini

     In summary, the record contains no evidence that allows us

to permit petitioner a deduction for expenses incurred in

connection with his involvement in Bartolini.   Accordingly, we

sustain respondent’s disallowance of the $10,570 deduction.

          3.   Expenses Related to Wizard Guitars

     Petitioner similarly provides no substantiation for expenses

incurred in connection with his affiliation with Wizard Guitars.

In lieu of receipts, petitioner presents a Schedule K-1 from

Wizard Guitars which reports that a $3,000 ordinary business loss

passed through to him in 2004.   The limited record before us does

not establish that petitioner is entitled to deduct any of this

$3,000.
                                 -10-

           4.   Deductibility of Remaining Expenses

      We similarly find no evidence in the record that supports

the $18,000 deduction for the claimed expenses related to Multi-

Labs, Inc., Research International, Diverse Investments, Inc.,

Peterson Controls, Opsafe, or X-Factor Technologies.        We find it

telling that petitioner’s amended return does not seek a

deduction for any of these claimed expenses.       We can only surmise

that petitioner omitted these expenses from the amended return

because he has no means of substantiating them.        We deny the

$18,000 in claimed deductions.

II.   Impact on Itemized Deductions

      Respondent argues that the increase to petitioner’s adjusted

gross income resulting from the disallowance of his Schedule C

deduction causes a computational disallowance of petitioner’s

claimed deduction for medical and dental expenses.        We agree.

      A taxpayer may deduct medical expenses incurred during the

taxable year provided that the expenses exceed 7.5 percent of the

taxpayer’s adjusted gross income.       Sec. 213(a).   Petitioner

claims $3,798 in medical and dental expenses for 2004.        As

reported on his return, $1,709 of that amount exceeded 7.5

percent of his adjusted gross income.       The disallowance of

petitioner’s $31,570 business expense deduction increases

petitioner’s adjusted gross income by a like amount, and thus the

7.5-percent floor imposed by section 213 is increased by
                                -11-

$2,367.75 ($31,570 x 0.075 = $2,367.75).     Petitioner, therefore,

is not entitled to deduct any of the $3,798 in claimed medical

and dental expenses.

III.    Section 1244 Stock

       Petitioner argues that section 1244 permits him to recognize

an ordinary loss on the worthlessness of his Bartolini stock.        We

disagree.

       Section 165(g)(1) and (2)(A) provides that a taxpayer

realizes a capital loss when stock that is a capital asset

becomes worthless.    A limited exception to this general rule

permits an individual to deduct as an ordinary loss any loss on

“section 1244 stock”.    Sec. 1244(a).   The term “section 1244

stock” includes common stock issued in exchange for cash when the

issuer is a domestic “small business corporation” (as defined in

section 1244(c)(3)), 50 percent of whose income does not come

from investment activity.    Sec. 1244(c)(1).   Qualification for

section 1244 status requires strict compliance with the

provisions of the statute and the regulations thereunder.      See

Godart v. Commissioner, 51 T.C. 937, 943 (1969), affd. 425 F.2d

633 (2d Cir. 1970); Morgan v. Commissioner, 46 T.C. 878, 889

(1966); Magee v. Commissioner, T.C. Memo. 1993-305.

       Petitioner has failed to prove that he meets the

requirements of section 1244.    In particular, he has failed to

show that Bartolini meets the definition of a “small business
                                  -12-

corporation” or establish the nature of its receipts.       Petitioner

has also failed to demonstrate that his Bartolini stock is

“worthless” within the meaning of section 165.       See Klepetko v.

Commissioner, T.C. Memo. 1990-644, affd. without published

opinion 956 F.2d 1159 (2d Cir. 1992).       Petitioner is not

permitted a deduction under section 1244 because he failed to

meet his burden of proof on these issues.

IV.   Conclusion

      Petitioner may not deduct the $31,570 in expenses claimed on

his 2004 Schedule C.   Petitioner may not deduct any of the

claimed $3,798 in medical and dental expenses.       Petitioner may

not deduct any of his basis in Bartolini.       We have considered all

arguments made by the parties and, to the extent not discussed

above, conclude they are without merit.

      To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
