                         T.C. Memo. 2010-184



                       UNITED STATES TAX COURT



                  MYRTIS STEWART, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10376-08.              Filed August 16, 2010.



     Myrtis Stewart, pro se.

     Shawna A. Early and Robert A. Baxer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    For 2004 and 2005 respondent determined

deficiencies in petitioner’s Federal income taxes and section

6662(a)1 accuracy-related penalties as follows:


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
                                                   (continued...)
                                 - 2 -

                                               Penalty
      Year          Deficiency               Sec. 6662(a)

      2004            $9,240                  $1,848.00
      2005            12,447                   2,489.40

     The issues for decision are whether petitioner is:

(1) Entitled to deductions for losses of $25,000 for rental

expenses claimed on Schedule E, Supplemental Income and Loss, for

each year; (2) entitled to deductions for theft losses of $12,093

and $23,525.75 claimed on Schedules A, Itemized Deductions, for

2004 and 2005, respectively; (3) entitled to carryover losses of

$1,521.13 and $1,521 for 2004 and 2005, respectively; and (4)

liable for the section 6662(a) accuracy-related penalties.

                          FINDINGS OF FACT

     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.   Petitioner resided in New

York when the petition was filed.

     Petitioner has worked for the Internal Revenue Service (IRS)

as an international examiner, i.e., a revenue agent, for over 21

years, including 2004 and 2005.    Through her work, which includes

examining tax returns, she has acquired a general knowledge of

the Federal income tax laws and the substantiation requirements

of the Code and the regulations thereunder.    She also made



     1
      (...continued)
Practice and Procedure.
                                - 3 -

several business investments before or during 2004 and 2005

(discussed infra).

I.   116 Highland Lake (Highland Lake property), Highland, N.Y.
     and 112 Hillside (Hillside property), Barryville, N.Y.

      A.   Background

      Petitioner and Mary Anastasio (Ms. Anastasio) invested in

several properties together.    They acquired the Hillside property

sometime before the years in issue.     The Hillside property covers

4 to 5 acres of land and has a New England style double Cape Cod

house with an adjoining garage.    Petitioner used the Hillside

property as her headquarters for the management of her real

estate.

      Petitioner and Ms. Anastasio purchased the Highland Lake

property in or around 1995 for about $200,000 with a $25,000

downpayment.    Petitioner paid $12,500 of the downpayment.

According to petitioner, Ms. Anastasio acquired the Highland Lake

property in her name because petitioner,2 an African American,

was not “able to purchase this property * * * in this town.”      The

Highland Lake property is a 22-room Victorian style house with a

wraparound porch, which petitioner and Ms. Anastasio renovated.

They purchased it because they planned to operate a bed and

breakfast out of the house.    But they sometimes rented it out.




      2
        Petitioner has purchased several properties in her name
or in a coinvestor’s name.
                                 - 4 -

     A first mortgage on the Highland Lake property of about

$100,000 was held by First National Bank of Jeffersonville (FNB),

and a second mortgage of about $100,000 was held by the seller of

the Highland Lake property.    Petitioner and Ms. Anastasio each

made mortgage payments of $788.623 per month until Ms. Anastasio

became ill in 2000 and could not work.    Thereafter, petitioner

paid both mortgages.

     Petitioner used both properties to store her collectibles.

     B.    Collectibles Kept at the Highland Lake and Hillside
           Properties

            1.   Stamps, Coins, and Currency Sheets

     Petitioner has been collecting stamps and coins for over 50

years.    As a young child she started collecting stamps and

Lincoln wheat pennies, Indian head pennies, and buffalo nickels.

In her teen years she started buying uncirculated and proof coins

from the Mint.    In her twenties she started buying coins and

proof coins at coin shows and from coin shops.    She usually

purchased stamps at trade shows or stamp shops.       She recorded her

purchases in books (inventory records).

     Petitioner accumulated a large coin collection:      she had

rolls of coins, unopened bags of Mint nickels and dimes, and

uncut currency sheets of various denominations, including a


     3
        The mortgage payments amounted to $1,577.23 per month
($777.67 and $799.56 for the first and second mortgage,
respectively); $788.62 represents their equal share of both
payments.
                                 - 5 -

Hawaiian dollar bill.     She kept the less valuable coins at her

Manhattan apartment and kept the more valuable coins at her

Highland Lake and Hillside properties.     She stored the coins in

closets in plastic containers that were on rollers like toolboxes

at her Highland Lake property.     At the Hillside property,

petitioner stored her coins in a glass curio cabinet and in a

glass display cabinet with some stamps on a wall in her library.

           2.   Books

     Petitioner also collected books for her libraries at the

Highland Lake and Hillside properties.     She purchased a set of 20

books on financial rating services with yearly updates for her

professional library at the Highland Lake property and entire

collections of books from auctions for her library at the

Hillside property.

           3.   Artwork

     Petitioner also collected art.      Specifically, she owned a 2-

by 3-foot painting that depicts Custer’s Last Stand at the Battle

of the Little Bighorn in 1876 and was signed by the artist.     She

kept this painting at the Hillside property.

     C.   Falling Out and Thefts

     Petitioner and Ms. Anastasio’s business relationship

fragmented and eventually, in or around 2004, petitioner stopped

doing business with Ms. Anastasio.
                               - 6 -

     Ms. Anastasio filed for bankruptcy and allowed the Highland

Lake property to go into foreclosure.   Petitioner filed a notice

of pendency4 for the Highland Lake property in Ms. Anastasio’s

bankruptcy proceeding because Ms. Anastasio allegedly did not

comply with the terms of a settlement agreement and because

petitioner wanted to protect her interest in the Highland Lake

property.   Ms. Anastasio sold the Highland Lake property in 2001

or 2002 without petitioner’s knowledge.   Petitioner did not

receive any proceeds from the sale.

     Petitioner’s collectibles allegedly were stolen from the

Hillside and Highland Park properties at some point.    She

discovered the thefts from the Hillside and Highland Park

properties in 2004 and 2005, respectively, when she went to the

properties and discovered that the items were gone.    Neither

property had been broken into or forcibly entered.    The items

were purportedly stolen by an acquaintance of Ms. Anastasio to

whom Ms. Anastasio had given the keys to both properties.

Petitioner filed police reports in New Jersey for the thefts.5




     4
        A notice of pendency informs others about a lawsuit
affecting the title to or an interest in property. See, e.g.,
Debral Realty, Inc. v. DiChiara, 420 N.E.2d 343 (Mass. 1981).

     5
        Petitioner testified that she filed police reports in New
Jersey because the New York police would not allow her to file
police reports since the alleged perpetrators resided in New
Jersey.
                                - 7 -

     D.   Deductions Claimed for the Highland Lake and Hillside
          properties

           1.   Legal Expenses and Bad Debt Deduction

     Petitioner claimed on her 2004 Schedule E a deduction for

legal expenses of $768 for the Highland Lake property.    She

provided a copy of a settlement agreement and a complaint for

another lawsuit that she filed against Ms. Anastasio as

substantiation of her legal expenses.   The settlement agreement

provides in pertinent part that Ms. Anastasio will allow

petitioner to remove “clothing, books, shoes, furniture, toys,

and other collectibles” from the Highland Lake property.

     Petitioner concluded that she had suffered a loss for a bad

debt in 2004 and 2005 after she had exhausted all legal avenues

against Ms. Anastasio.   She claimed on her 2004 and 2005

Schedules E deductions for bad debts of $18,926.76 and

$18,328.62, respectively, for the Highland Lake property.      She

reconstructed her mortgage payments from 1996 to 2000 and for

each of the years 2004 and 2005 deducted as a bad debt 2 years of

mortgage payments as her “basis” in the Highland Lake property.

     Petitioner provided an account statement from FNB for

February 2 to May 1, 1996, to substantiate her basis.    The

account statement shows that three mortgage payments of $777.67

were drawn from petitioner and Ms. Anastasio’s joint account.
                                  - 8 -

             2.   Theft Loss Deduction

      Petitioner was not compensated by insurance or otherwise for

the thefts of her collectibles, and she deducted the purchase

prices of the items as the amounts of her theft losses.

      Petitioner claimed on her 2004 Schedule A a deduction for

theft losses of $12,093 for the Hillside property.     Her deduction

for the theft loss relates to coins, paintings, antiques,

furniture, her library, and appliances.6

      Petitioner claimed on her 2005 Schedule A a deduction for

theft losses of $18,525.75 for the Highland Lake property.     Her

deduction for the theft loss relates to coins, paintings,

antiques, furniture, her professional library, and appliances.7

II.   229 East 29th Street (East 29th Street property), New York,
      N.Y.

      A.    Background

      Petitioner, Ms. Anastasio, and another coinvestor purchased

the East 29th Street property in 2003.     They paid $3,000 and

assumed the $21,000 or $27,0008 debt to which the East 29th

Street property was subject.     Ms. Anastasio and the other

coinvestor purchased the East 29th Street property in their names



      6
        Petitioner’s testimony about the items stolen in each
theft loss was less than clear.
      7
        Petitioner did not describe the antiques, furniture,
appliances, and paintings.
      8
           Petitioner could not recall the exact amount of the debt.
                                 - 9 -

because, according to petitioner, she was not allowed to purchase

that property in her name.   The East 29th Street property is a

co-op apartment that was occupied by tenants.    Petitioner, Ms.

Anastasio, and the other coinvestor invested in the East 29th

Street property to obtain the benefits of appreciation and tax

deductions.   Petitioner reported rental income received of $2,304

for 2004 and 2005.

     B.   Deductions Claimed for the East 29th Street Property

     Petitioner claimed on each of her 2004 and 2005 Schedules E

deductions for management fees of $2,652.06 and property taxes of

$2,114.31 for the East 29th Street property.    The management fees

include about $50 per month for maintenance.    The property taxes

include some special assessments that were billed at the end of

each year.    She paid $309.01 per month for the management fees,

maintenance fees, and property taxes.9   She   made the payments by

checks drawn from her account.

     Petitioner provided carbon copies of checks of $309.01 for

November 2004 and May 2005 payable to “229 E. 29th St. Owners

Corp.” to substantiate some of her payments.    She also provided

copies of bank statements for the period November 2003 to




     9
        Ms. Anastasio and/or the other coinvestor gave petitioner
their portions of the expenses, and petitioner paid the payments
in whole. The $309.01 per month did not include amounts paid for
additional amounts owed at the end of each year, including
amounts paid for special assessments.
                                    - 10 -

November 2004 that show checks of $309.01 were drawn from her

account.

III. Tighe Avenue (Tighe Ave. property) and Brookside
     Lots (Brookside property), Newburgh (Newburgh) and Harriman,
     N.Y.

       A.     Background

       Petitioner purchased the Tighe Ave. and Brookside properties

for investment purposes with the intent to develop them.           She

purchased the Tighe Ave. property in 2003 for $500 at an auction.

The Tighe Ave. property is undeveloped land.        She rented the

Tighe Ave. property to a person who resided at the Tighe Ave.

property in an “RV” trailer or mobile home.        The record is

unclear as to how and when petitioner acquired the Brookside

property.       The Brookside property consists of two undeveloped,

“buildable”, and nonadjoining lots in a development.         Petitioner

reported rental income received of $1,000 and $1,015 for 2004 and

2005, respectively.

       B.     Deductions Claimed for the Tighe Ave. and Brookside
              Properties

       Petitioner claimed the following deductions for her Tighe

Ave. and Brookside properties:

            Auto./         Auto.   Cleaning
Year        Travel         Ins.     Maint.    Supplies    Mail      Rent

2004       $1,500.00   $816.00        -0-       -0-        -0-     $3,048
                        1
2005        1,526.01      916.23   $489.62    $525.36    $120.02    3,168
       1
        Petitioner explained that her $916.23 deduction for
automobile insurance was erroneously reported as an other
interest expense on Schedule E.
                               - 11 -

          1.   Automobile and Travel Expenses

     Petitioner kept a car in Newburgh to travel to, from, or

between her Tighe Ave. and Brookside properties.   Her deductions

for automobile insurance, automobile expenses, and travel

expenses are based on her actual costs, not mileage.   Her actual

costs include amounts she paid for automobile insurance, travel

to, from, and between her properties with her car; bus fare from

her New York apartment to Newburgh, and taxi fare for travel

between the Tighe Ave. or Brookside properties and the taxi stand

at a Newburgh bus stop.   She did not keep a mileage log for the

use of her car, and other than her testimony she did not provide

any written evidence to substantiate her expenditures.

          2.   Rent Expenses

     Petitioner deducted payments of $254 per month to Uncle

Bob’s Storage as rent, of which she paid $52 per month for the

storage of her car and $202 per month for the storage of office

furniture, filing cabinets, and files.10   She moved the office

furniture, filing cabinets, and files from the Hillside property

to the Newburgh area.

     Petitioner provided copies of account statements for the

period November 2003 to November 2004 to substantiate her rent




     10
        Petitioner’s rent expense increased by $120 in 2005.      It
is unclear from the record how much, if any, of the $120 is
attributable to the storage of her car.
                                 - 12 -

payments.    The account statements show that checks of $254 per

month were drawn from her account in 2004.

            3.    Cleaning and Maintenance Expenses

      Petitioner paid $489.62 in cash to a company to cut back and

clear the Tighe Ave. property because of downed power lines

caused by a storm.

             4.   Supplies and Mail Expenses

      Petitioner deducted supplies expenses of $525.36 and mail

expenses of $120.02 for 2005.     The supplies expenses were paid in

cash.

IV.   Other Real Property

      A.    Background

      Petitioner and a coinvestor also invested in other real

property that they later sold.     When the property was purchased,

it had a factory located on it that contained gold-spinning

machines from the 1700s to the 1800s.      The gold-spinning machines

made gold threads for clothing from spools of gold.      Petitioner

and the coinvestor agreed that petitioner could remove half of

the gold-spinning machines before the sale.      The coinvestor,

however, locked the property, and petitioner could not remove her

half of the gold-spinning machines.       Petitioner filed a lawsuit

against the coinvestor, and while the lawsuit was pending, the

gold-spinning machines disappeared from the property.
                               - 13 -

      B.   Deductions Claimed for the Other Real Property

      Petitioner claimed on her 2005 Schedule A a theft loss

deduction of $5,000 for the theft of her gold-spinning machines.

She testified that her gold-spinning machines were worth a lot of

money and that her basis in them was $5,000.    She explained that

she deducted only $5,000 because she was being conservative, and

the fair market value of her gold-spinning machines was

uncertain.    According to petitioner, the purchase price of the

gold-spinning machines was included in the purchase price of the

real property, but it might have been separately listed.    She

filed a police report in New Jersey for the theft, but she was

not compensated by insurance or otherwise for the theft.

V.   Carryover Losses

      Petitioner reported on Schedules E carryover losses of

$1,521.1311 and $1,521.2312 for 2004 and 2005, respectively, that

would carryover to 2005 and 2006.    Respondent disallowed the

carryover losses in the notice of deficiency because petitioner

had not provided any information to substantiate her expenses.

                               OPINION

     Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to any


      11
        $26,521.13 (claimed Schedule E losses) - $25,000 (sec.
469(i) limitation for individuals).
      12
        $26,521.23 (claimed Schedule E losses) - $25,000 (sec.
469(i) limitation for individuals).
                               - 14 -

deductions claimed.13   Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).    In addition, taxpayers bear the

burden of substantiating the amount and purpose of the item

claimed as a deduction.    Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).    Taxpayers

are also required to maintain records that are sufficient to

enable the Commissioner to determine their correct tax liability.

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

     When taxpayers establish that they have incurred deductible

expenses but are unable to substantiate the exact amounts, we can

estimate the deductible amounts, but only if the taxpayers

present sufficient evidence to establish a rational basis for

making the estimates.    See Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731,

742-743 (1985).    In estimating the amount allowable, we bear

heavily upon the taxpayer whose inexactitude is of his or her own

making.    See Cohan v. Commissioner, supra at 544.   We may not use

the Cohan doctrine, however, to estimate expenses covered by

section 274(d).    See Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec.




     13
           Petitioner does not claim or show that sec. 7491(a)
applies.     Accordingly, she bears the burden of proof. See Rule
142(a).
                              - 15 -

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

6, 1985).

     Generally, we find petitioner’s testimony and that of her

witness, Nelson Abrahante14 (Mr. Abrahante), honest and credible.

They testified credibly as to the investment purpose of many of

the deductions claimed on petitioner’s returns.   For some of

those deductions, petitioner recalled the amounts of her

expenses.   Where petitioner’s testimony provided a sufficient

basis for the Court to estimate the amounts of her expenditures,

we have done so, taking account of her inexactitude where

appropriate.   Where the original documents were lost, but where

petitioner presented credible reconstructions of her expenses, we

have allowed the claimed amounts.15


     14
        Mr. Abrahante is a coinvestor and a former coworker of
petitioner.
     15
        It is well established that the Court may permit a
taxpayer to substantiate deductions through secondary evidence
where the underlying documents have been unintentionally lost or
destroyed. Boyd v. Commissioner, 122 T.C. 305, 320-321 (2004);
Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); Furnish v.
Commissioner, T.C. Memo. 2001-286; Joseph v. Commissioner, T.C.
Memo. 1997-447; Watson v. Commissioner, T.C. Memo. 1988-29.
Moreover, even though Congress imposed heightened substantiation
requirements for certain deductions by enacting sec. 274, the
regulations thereunder allow a taxpayer to substantiate a
deduction by reasonable reconstruction of his or her expenditures
when records are lost through no fault of the taxpayer. Sec.
1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022
(Nov. 6, 1985).

     Petitioner testified that Ms. Anastasio took some of her
records and that other records were submitted to other courts in
                                                   (continued...)
                                - 16 -

I.   Section 165 and 166 Theft Loss and Bad Debt Deductions

      Section 165(a) provides that there shall be allowed as a

deduction any loss sustained during the taxable year and not

compensated by insurance or otherwise.    Section 165(c) limits the

loss deduction for individuals to losses incurred in a trade or

business, losses incurred in a transaction entered into for

profit, and certain other losses including those arising from a

theft.     Petitioner has the burden of proving that she sustained a

loss during the taxable year.

      Section 166(a) generally provides that a taxpayer may deduct

a debt that become worthless during the taxable year.    A bona

fide debt is a debt that arises from a debtor-creditor

relationship reflecting an enforceable and unconditional

obligation to repay a fixed sum of money.    Sec. 1.166-1(c),

Income Tax Regs.    The existence of a bona fide debt is a factual

inquiry, and the taxpayer bears the burden of proving that a bona

fide debt existed.     Dixie Dairies Corp. v. Commissioner, 74 T.C.

476, 493 (1980); Litton Bus. Sys., Inc. v. Commissioner, 61 T.C.

367, 377 (1973).




      15
      (...continued)
her lawsuits against Ms. Anastasio.
                               - 17 -

     A.   Highland Lake Property

     As stated supra, petitioner claimed on her 2004 and 2005

Schedules E deductions for bad debts of $18,926.76 and

$18,328.62, respectively, for the Highland Lake property.

     Respondent asserts that to the extent petitioner has

realized a gain or loss on the Highland Lake property, the gain

or loss is capital and was incurred upon the disposition of the

property in 2001 or 2002, not during either of the years in

issue.    Therefore, according to respondent, petitioner is not

entitled to her deductions for bad debts.

     Petitioner’s testimony on this issue was less than clear.

She testified that she had initiated lawsuits against Ms.

Anastasio, which she later withdrew, and that ownership of the

Highland Lake property was being negotiated as part of a

settlement.    She also testified, however, that she was occupying

the Hillside property and had exchanged her interest in the

Highland Lake property for Ms. Anastasio’s interest in the

Hillside property.    But, according to petitioner, Ms. Anastasio

breached their settlement agreement; and she initiated another

lawsuit against Ms. Anastasio, which she also withdrew.    She

testified further that Ms. Anastasio sold the Highland Lake

property without her knowledge in either 2001 or 2002, and she

did not receive any of the proceeds.    She explained that she

deducted 2 years of mortgage payments as her basis in the
                              - 18 -

Highland Lake property as a bad debt in 2004 and 2005 after she

exhausted her legal remedies and concluded that she had sustained

a loss.

     Petitioner has not established that a debt owed to her by

Ms. Anastasio became worthless during either year in issue or

that she otherwise sustained a loss during either year with

respect to the Highland Lake property.   Petitioner’s testimony on

this issue and her records are confused, uncertain, and

ambiguous.   She has not substantiated a basis in the Highland

Lake property or in a purported debt owed to her by Ms.

Anastasio.   See secs. 165(b), 166(b); Whitaker v. Commissioner,

T.C. Memo. 1988-418.   Consequently, respondent’s disallowance of

the bad debt deductions claimed in respect of the Highland Lake

property is sustained.

     B.   Antiques, Artwork, Coins and Currency Sheets, Libraries,
          Gold-Spinning Machines, Furniture, and Appliances

     As stated supra, petitioner claimed deductions for theft

losses of $12,093 and $23,525.7516 for 2004 and 2005,

respectively.   She deducted her bases and not the fair market

values of her artwork, coins and currency sheets, libraries,

gold-spinning machines, furniture, and appliances as the amount

of her theft losses.


     16
        As stated supra, $18,525.75 is attributable to the theft
of her coins, paintings, antiques, furniture, her professional
library, and appliances, while $5,000 is attributable to the
theft of her gold-spinning machines.
                                - 19 -

      Petitioner has not substantiated the items’ fair market

values immediately before the alleged theft.     See secs. 1.165-

7(b)(1), 1.165-8(c), Income Tax Regs. (in the case of property

held for personal use the amount of the theft loss is the lesser

of the property’s fair market value immediately before the theft

or its adjusted basis).    She also has not substantiated the

items’ bases.    See Hubert Enters., Inc. v. Commissioner, T.C.

Memo. 2008-46 (the basis of property, under section 1012, is

generally defined as cost and that cost is adjusted pursuant to

section 1016); see also Kikalos v. Commissioner, T.C. Memo.

1998-92 (it is settled that the deductible amount of a theft loss

may not exceed basis), revd. on other grounds 190 F.3d 791 (7th

Cir. 1999).     Neither the items’ fair market values nor their

bases can be determined from the record with any degree of

certainty.    Therefore, we cannot apply the Cohan rule to

determine a reasonable allowance for the theft losses.

Consequently, petitioner is not entitled to her claimed theft

losses, and respondent’s determinations in that respect are

sustained.

II.   Section 212 Expenses

      Section 212 allows an individual to deduct all of the

ordinary and necessary expenses paid or incurred:     (1) For the

production of income; (2) for management, conservation, or

maintenance of property held for the production of income; or
                                - 20 -

(3) in connection with the determination, collection, or refund

of a tax.

     A.   Legal Expenses

     We apply the origin of the claim test to determine whether a

taxpayer’s legal expenses are personal, for the production of

income, or capital.    The ascertainment of a claim’s origin and

character is a factual determination that must be made on the

basis of the facts and circumstances of the litigation.     United

States v. Gilmore, 372 U.S. 39, 47-49 (1963).    The most important

factor to consider is the circumstances out of which the

litigation arose.     Boagni v. Commissioner, 59 T.C. 708 (1973).

     Petitioner testified that she initiated the lawsuit against

Ms. Anastasio because Ms. Anastasio breached a settlement

agreement allowing petitioner to remove “clothing, books, shoes,

furniture, toys, and other collectibles” from the Highland Lake

property.

     Petitioner has not established that her claim against Ms.

Anastasio, out of which her legal expenses arose, has its origin

in a profit-seeking activity as distinct from a personal one.

Petitioner, therefore, is not entitled to her claimed deductions

for legal expenses, and respondent’s determination, in that

respect, is sustained.
                                - 21 -

     B.   Management Fees and Property Taxes

     Petitioner credibly testified about the amounts of and the

purposes for her deductions for management fees and property

taxes for 2004 and 2005 for the 229 East 29th Street property.

She also provided additional substantiation for some of her 2004

payments with copies of her account statements and carbon copies

of checks.   Petitioner is entitled to her claimed deductions for

management fees of $2,652.06 and property taxes of $2,114.31 for

2004 and 2005.

     C.   Cleaning and Maintenance Expenses

     Petitioner credibly testified that she paid $489.62 in 2005

to a company to cut back and clear the Tighe Ave. property

because of downed power lines caused by a storm.      Petitioner is

entitled to her claimed deduction for cleaning and maintenance

expenses of $489.62 for 2005.

     D.   Supplies and Mail Expenses

     Petitioner credibly testified that she paid $525.36 for

supplies expenses and $120.02 for mail expenses in 2005 for the

Tighe Ave and Brookside properties.      Petitioner is entitled to

her claimed deductions for supplies and mail expenses.

     E.   Rent Expenses

     Petitioner credibly testified that she paid about $202 per

month in 2004 and 2005 for the cost of storing office furniture,

filing cabinets, and files (we discuss the storage of her car
                                 - 22 -

infra).     She also provided additional substantiation for some of

her 2004 payments with copies of her account statements.

Petitioner is entitled to deductions of $202 per month for rent

expenses for 2004 and 2005.17

III.    Section 212 Expenses Subject to Section 274

       In addition to satisfying the criteria for deductibility

under section 212, certain expenses must also satisfy the strict

substantiation requirements of section 274(d).      Section 274(d)

and section 1.274-5T(a), (b)(2), and (6), Temporary Income Tax

Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985), provide that no

deduction or credit shall be allowed for travel or automobile

expenses unless the taxpayer substantiates his or her expenses

with adequate records or other corroborating evidence.

       A.   Travel Expenses

       For travel away from home expenses, section 274(d) and the

regulations thereunder require the taxpayer to substantiate:

(1) The amount of each expenditure; (2) the time of the travel;

(3) the place of the travel; and (4) the business purpose of the

travel.     Sec. 1.274-5T (b)(2), Temporary Income Tax Regs., supra.

       As stated supra, petitioner’s travel expenses include her

actual costs of travel by taxi between her properties and a taxi

stand and travel by bus to Newburgh.      It is unclear from the

record whether petitioner’s travel to Newburgh was travel away


       17
            See supra note 10.
                                  - 23 -

from home--that is, overnight trips in which the exigencies of

her investment activity required her to sleep or rest before

returning home.    See United States v. Correll, 389 U.S. 299

(1967); Lackey v. Commissioner, T.C. Memo. 1977-213; see also

I.T. 3395, 1940-2 C.B. 64.     To the extent, however, that

petitioner’s travel was travel away from home, she has not

complied with the substantiation requirements of section 274(d).

Petitioner is not entitled to deduct her travel expenses under

section 212, and respondent’s determination, in that respect, is

sustained.     See Lackey v. Commissioner, supra.

       B.   Automobile Expenses

       For automobile expenses, section 274(d) and the regulations

thereunder require the taxpayer to substantiate:     (1) The amount

of each expenditure or use; (2) the time of the expenditure or

use; and (3) the business or investment purpose of the expense or

use.     See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs.,

supra.

       As stated supra, petitioner’s automobile expenses include

her actual costs for automobile insurance, travel with her car

to, from, or between her properties, and $52 per month for the

storage cost of her car.

       Other than the $52 per month petitioner paid for the storage

of her car, she did not substantiate the amounts of her

expenditures.     She also did not substantiate the amounts or the
                              - 24 -

times of the automobile’s use.    Consequently, petitioner is not

entitled to her deductions for automobile expenses or the

deductions claimed for storage costs attributable to her car.

The Cohan rule is not applicable, see Sanford v. Commissioner, 50

T.C. at 827, and respondent’s determinations, in that respect,

are sustained.

IV.   Carryover Losses

      As stated supra, petitioner reported on Schedules E losses

of $1,521.13 and $1,521.23 for 2004 and 2005, respectively, that

would carry over to 2005 and 2006.

      The section 469 passive activity loss rules generally

disallow the current deduction of losses and credits from

activities in which the taxpayer does not materially participate.

Rental activity is generally treated as a per se passive activity

regardless of whether the taxpayer materially participates.    Sec.

469(c)(2).   Section 469(i)(1), however, permits a passive

activity loss up to $25,000 attributable to a rental real estate

activity in which an individual actively participates (subject to

certain phaseouts not applicable here).   Amounts disallowed may

be carried forward to subsequent years.   Sec. 469(b); sec.

1.469-1(f)(4), Income Tax Regs.

      Petitioner reported on Schedules E rental income totaling

$3,304 and $3,319 for 2004 and 2005, respectively.   We have
                              - 25 -

allowed petitioner Schedule E deductions of $7,190.3718 and

$8,325.3719 for 2004 and 2005, respectively, which result in

losses of only $3,886.3720 and $5,006.3721 for 2004 and 2005,

respectively.   Petitioner, therefore, does not have any carryover

loss for either year.

V.   Section 6662(a) Accuracy-Related Penalties

      Section 7491(c) provides that the Commissioner will bear the

burden of production with respect to the liability of any

individual for additions to tax and penalties.    The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount.    Higbee v.

Commissioner, 116 T.C. 438, 446 (2001); see also Swain v.

Commissioner, 118 T.C. 358, 363 (2002).   Once the Commissioner

satisfies this burden of production, the taxpayer must persuade

the Court that the Commissioner’s determination is in error by




      18
        $2,652.06 (management fees) + $2,114.31 (property tax) +
$2,424 (rent expense).
      19
        $2,652.06 (management fees) + $489.62 (cleaning and
maintenance expense) + $525.36 (supplies expense) + $120.02 (mail
expense) + $2,114.31 (property tax) + $2,424 (rent expense).
      20
        $3,304 (total rental income) - $7,190.37 (total rental
expenses).
      21
        $3,319 (total rental income) - $8,325.37 (total rental
expenses).
                               - 26 -

supplying sufficient evidence of an applicable exception.     Higbee

v. Commissioner, supra at 446.

     Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer

may be liable for a penalty of 20 percent on the portion of an

underpayment of tax due to negligence or disregard of rules or

regulations or a substantial understatement of income tax.22     The

term “negligence” includes any failure to make a reasonable

attempt to comply with the Code and 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.

     Petitioner failed to provide respondent with any records and

was unable to substantiate her deductions at the administrative

level.    Accordingly, respondent has met his burden of production.

See sec. 1.6662-3(b)(1), Income Tax Regs.; see also Smith v.

Commissioner, T.C. Memo. 1998-33.

     The accuracy-related penalty, however, is not imposed with

respect to any portion of the underpayment as to which the

taxpayer acted with reasonable cause and in good faith.   Sec.

6664(c)(1).   The decision as to whether the taxpayer acted with

reasonable cause and in good faith depends upon all the pertinent




     22
        Because we find that petitioner was negligent, we need
not discuss whether she substantially understated her Federal
income taxes. See sec. 6662(b); Ochsner v. Commissioner, T.C.
Memo. 2010-122; Fields v. Commissioner, T.C. Memo. 2008-207.
                               - 27 -

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 or her proper tax liability.     Id.   Petitioner

argues she has shown reasonable cause or good faith on account of

her medical illness and/or lost or stolen records.

     Although we sympathize with petitioner’s circumstances

(i.e., her alleged illnesses), we are reluctant to rely on her

self-serving and uncorroborated testimony about her illness.

Moreover, she continued to work for the IRS and to participate in

her investment activity during the years in issue.     Consequently,

petitioner’s illness does not support a reasonable cause or good

faith defense.

     In certain circumstances, however, the loss or theft of a

taxpayer’s records may support a reasonable cause or good faith

defense to an accuracy-related penalty.   See Allemeier v.

Commissioner, T.C. Memo. 2005-207; Brown v. Commissioner, T.C.

Memo. 1997-418; Burkart v. Commissioner, T.C. Memo. 1984-429;

Cavell v. Commissioner, T.C. Memo. 1980-516.

     As stated supra, petitioner claimed deductions for bad debts

and legal expenses for the Highland Lake property that she was

not able to substantiate.   Petitioner credibly testified that she

maintained records, but that Ms. Anastasio took some of the

records, some records were submitted to other courts in her

lawsuits against Ms. Anastasio, and in either case, petitioner
                              - 28 -

was unable to retrieve the records.    She also attempted to

reconstruct her records for the Highland Lake property.      We find

that petitioner has a reasonable cause or good faith defense for

the portions of the underpayments attributable to her claimed

deductions for bad debts and legal expenses attributable to the

Highland Lake property.   See Irving v. Commissioner, T.C. Memo.

2006-169; Lyons v. Commissioner, T.C. Memo. 1991-84; Haley v.

Commissioner, T.C. Memo. 1977-348.

     Petitioner’s claimed deductions for theft losses related to

coins and uncut currency sheets, paintings, antiques, furniture,

her libraries, appliances, and the gold-spinning machines.     She

credibly testified that she maintained records of her purchases

of her coins and uncut currency sheets and that her inventory

records were stolen with her coin collections and uncut currency

sheets.   It is unclear from the evidence, however, whether she

maintained records of her purchases for the other stolen items.

The evidence also provides no mechanism for allocating the

amounts of her theft losses among the stolen items.23   In

addition, she did not attempt to reconstruct the records of her

purchases for any of the stolen items.   Consequently, petitioner

does not have a reasonable cause or good faith defense for the

portions of the underpayments attributable to her claimed


     23
        On her 2004 Schedule A, petitioner only wrote “Orange
Co. The”, and on her 2005 Form 4684, Casualties and Thefts,
petitioner only wrote “Su-Berryvil Prop.”
                               - 29 -

deductions for theft losses.   See Kolbeck v. Commissioner, T.C.

Memo. 2005-253; Cherry v. Commissioner, T.C. Memo. 1998-360;

Smith v. Commissioner, supra; Cook v. Commissioner, T.C. Memo.

1991-590.

     Similarly, there is no evidence that petitioner maintained

records during the years in issue sufficient to meet the strict

substantiation requirements of section 274(d) for travel and

automobile expenses.   Moreover, even if such records existed,

there is no evidence that those records were lost or stolen.     And

except for the amounts of her parking expenses, she did not

attempt to reconstruct those records.   Consequently, petitioner

does not have a reasonable cause or good faith defense for the

portions of the underpayments attributable to her claimed

deductions for travel and automobile expenses.   See Makspringer

v. Commissioner, T.C. Memo. 1994-468; Robbins v. Commissioner,

T.C. Memo. 1981-449.

     In reaching all of our holdings herein, we have considered

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

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
