                        T.C. Memo. 2011-201



                      UNITED STATES TAX COURT



                    LUIS BULAS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18977-09.             Filed August 17, 2011.



     Luis Bulas, pro se.

     Michelle M. Robles, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency of $5,441

with respect to petitioner’s 2007 Federal income tax.1   The




     1
      Unless otherwise indicated, all 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. Amounts are rounded to the nearest dollar.
                                -2-

issues for decision are:2   (1) Whether petitioner is entitled to

deductions on Schedule C, Profit or Loss From Business, for

expenses related to the business use of his personal residence;

and (2) whether petitioner is entitled to Schedule C deductions

for wages paid to his two daughters.

                        FINDINGS OF FACT

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

The stipulation of facts and the supplemental stipulation of

facts, together with the attached exhibits, are incorporated




     2
      At trial respondent alleged that petitioner had double-
counted car insurance expenses on Schedule C by including them in
both car and truck expenses and insurance expenses. This issue
was not raised in the pleadings. Rule 41(b)(1) provides that in
appropriate circumstances, an issue that was not expressly
pleaded but was tried by express or implied consent of
the parties may be treated in all respects as if raised in the
pleadings. LeFever v. Commissioner, 103 T.C. 525, 538-539
(1994), affd. 100 F.3d 778 (10th Cir. 1996). This Court, in
deciding whether to apply the principle of implied consent, has
considered whether the consent results in unfair surprise or
prejudice to the consenting party and prevents that party from
presenting evidence that might have been introduced if the issue
had been timely raised. See WB Acquisition, Inc. & Subs. v.
Commissioner, T.C. Memo. 2011-36; Krist v. Commissioner, T.C.
Memo. 2001-140; McGee v. Commissioner, T.C. Memo. 2000-308.

     Petitioner testified that he did not know whether the
insurance expense claimed for his accounting business was for car
insurance or another form of insurance and that he needed time to
investigate. Because respondent raised this issue for the first
time at trial, we find that petitioner would be unfairly
prejudiced if we were to consider this issue without petitioner’s
having the opportunity to conduct an investigation of his 2007
insurance records. Accordingly, we do not find implied consent
pursuant to Rule 41(b)(1), and the Court will not consider
whether petitioner double-counted car insurance expenses.
                                  -3-

herein by this reference.    At the time petitioner filed his

petition, he lived in Florida.

     Petitioner has a master’s degree in accounting from Florida

International University.    He worked for the Internal Revenue

Service for 7 years, working as a tax technician, revenue agent,

Appeals auditor, and Appeals officer.     In 1985 petitioner started

the accounting business he continues to operate today.     This

business provides tax return preparation services and has helped

prepare approximately 180-220 returns per year.

     Petitioner has two daughters.      In 2007 his daughters were 17

and 20 years old, respectively.    His older daughter was a full-

time student at Rutgers University from September 1, 2005,

through May 9, 2007.    His younger daughter was a high school

student in 2007.    Petitioner’s daughters provided administrative

assistance in his accounting business, but the business did not

issue either a Form W-2, Wage and Tax Statement, or a Form 1099-

MISC, Miscellaneous Income, to report any wages to either

daughter.    Petitioner paid his daughters’ credit card bills.

        Petitioner’s residence includes a house, a garage, and a

guesthouse.    The residence covers a total area of 2,677.34 square

feet.    Petitioner uses one of the bedrooms in the residence as an

office for his accounting business.     The area of this bedroom is

226.3 square feet.    Petitioner built a bathroom across the hall
                                 -4-

from this bedroom for his clients’ use.    Family members and

personal guests used this bathroom on occasion.

     Petitioner timely filed his 2007 Form 1040, U.S. Individual

Income Tax Return.    On Schedule C of his return he claimed

deductions of $9,019 and $18,000 for expenses related to the

business use of his residence and for wages paid to his

daughters, respectively.3   On May 11, 2009, respondent issued a

notice of deficiency, denying petitioner’s claimed deductions for

the business use of his residence and for wages paid to his

daughters.   Petitioner timely filed his petition with this Court

on August 10, 2009.

                               OPINION

I.   General Requirements

     Deductions are a matter of legislative grace, and the

taxpayer must prove he is entitled to the deductions claimed.

Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   Section 162(a) provides that “There shall be allowed as

a deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   Taxpayers are required to maintain records sufficient


     3
      Petitioner offset his business income by the amounts paid
to his daughters, which he reported as cost of goods sold on his
return. These amounts do not reflect the cost of goods sold of
petitioner’s business. Rather, amounts paid to his daughters are
expenses for wages on Schedule C and, therefore, we have
recategorized them as such.
                                -5-

to establish the amounts of allowable deductions and to enable

the Commissioner to determine the correct tax liability.   Sec.

6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).

      If a factual basis exists to do so, the Court may in some

circumstances approximate an allowable expense, bearing heavily

against the taxpayer who failed to maintain adequate records.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).   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).

II.   Business Use of Personal Residence

      In addition to the requirements discussed above, section

280A(a) provides the general rule that deductions with respect to

the use of the taxpayer’s residence are not allowable unless an

exception applies.   The exceptions are found in section 280A(c),

which provides in relevant part:

           SEC. 280A(c). Exceptions for Certain Business or
      Rental Use; Limitation on Deductions for Such Use.--

                (1) Certain business use.--Subsection (a) shall
           not apply to any item to the extent such item is
           allocable to a portion of the dwelling unit which is
           exclusively used on a regular basis--
                                   -6-

                      (A) as the principal place of business for
                 any trade or business of the taxpayer,

                      (B) as a place of business which is used by
                 patients, clients, or customers in meeting or
                 dealing with the taxpayer in the normal course of
                 his trade or business * * *

Because there are business and personal motives for the expenses

related to petitioner’s residence, we must determine what portion

of the residence was used regularly and exclusively for

petitioner’s business.   See Intl. Trading Co. v. Commissioner,

275 F.2d 578, 584-587 (7th Cir. 1960), affg. T.C. Memo. 1958-104;

Deihl v. Commissioner, T.C. Memo. 2005-287.   Combined personal

and business use of a section of the residence precludes

deductibility.   See generally Sam Goldberger, Inc. v.

Commissioner, 88 T.C. 1532, 1557 (1987).

     Petitioner used one of the bedrooms of his residence

exclusively as his office for his accounting business.

Petitioner argued that he also used the hallway and the bathroom

adjacent to this bedroom exclusively for his accounting business.

Petitioner testified, however, that his children and other

personal guests occasionally used the bathroom.   Accordingly, the

hallway and the bathroom were not used exclusively for business

purposes.

     The area of the bedroom petitioner used for his accounting

business is 226.30 square feet.   The total area of petitioner’s

residence is 2,677.34 square feet.   As 226.30/2,677.34 represents
                                 -7-

about 8.45 percent of the total area of the residence, petitioner

is entitled to 8.45 percent of his allowable expenses allocable

to the portion of the residence used exclusively for business

purposes.

III. Compensation Paid to Petitioner’s Daughters

     Petitioner argues that both his daughters were paid wages

for administrative work performed for his accounting business in

2007.   However, neither daughter was issued a paycheck, Form

1099-MISC, or Form W-2.   Further, neither had tax withheld.

Petitioner testified that he paid his daughters for their work by

paying their credit card bills but has not provided any evidence

to substantiate amounts paid.    Accordingly, we sustain

respondent’s determinations with respect to the wages paid to

petitioner’s daughters.

     In reaching these holdings, the Court has considered all

arguments made and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.
