                        T.C. Memo. 2005-253



                      UNITED STATES TAX COURT



                ROBERT C. KOLBECK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7043-04.             Filed October 31, 2005.


     Robert C. Kolbeck, pro se.

     Michael R. Skutley and Edwin Herrera, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   Respondent determined a deficiency in

petitioner’s Federal income tax of $32,009 and an accuracy-
                                 - 2 -

related penalty, pursuant to section 6662(a),1 of $6,402 for

2000.

     The issues for decision2 are:

     (1) Whether petitioner is entitled to the deductions he

claimed on Schedule C, Profit or Loss From Business, of his 2000

return; and

     (2) whether petitioner is liable for the accuracy-related

penalty under section 6662(a).

                             Background

     Petitioner resided in Anaheim, California, when his petition

in this case was filed.

     During 2000, petitioner was a trucker who worked both as a

union employee and as an independent contractor for Consolidated

Freightways, a trucking company.     Consolidated Freightways

permitted its employees to maintain records in an office at the

end of its loading dock, and petitioner kept his business records

there throughout 2000.    Petitioner testified that he used these

records in the preparation of his 2000 Federal income tax return.




     1
      All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure. All monetary
amounts are rounded to the nearest dollar.
     2
      Respondent also determined an increase in petitioner’s
self-employment tax. The adjustment is computational and turns
on our resolution of the Schedule C deduction issue.
                               - 3 -

Petitioner reported the income and expenses from his trucking

activity on Schedule C, Profit or Loss From Business.

     In 2002, Consolidated Freightways stopped using union labor

and barred union members, including petitioner, from access to

its premises.   Petitioner was unable to retrieve the records that

he left on the premises.

     Sometime before January 27, 2003, respondent began an

examination of petitioner’s 2000 return.   On January 27, 2003,

petitioner and his representative, J.A. Mattatall,3 met with


     3
      Petitioner’s 2000 return was prepared by J.A. Mattatall, an
unenrolled agent, who, at the time of trial, had been enjoined by
the United States directly or indirectly from “acting as a return
preparer or assisting in or directing the preparation of federal
tax returns for any person or entity other than himself, or
further appearing as a representative on behalf of any person or
organization whose tax liabilities [are] under examination by the
IRS.” United States v. Mattatall, No. CV 03-07016 DDP (PJWx), at
6 (C.D. Cal., Aug. 17, 2004) (order granting plaintiff’s motion
for contempt and second amended injunction of which we take
judicial notice pursuant to Fed. R. Evid. 201). In a footnote to
the order, the U.S. District Court for the Central District of
California provided the following pertinent explanation:

          In support of its position, the Government
     attaches the transcript of an interview between the IRS
     and a taxpayer who brought Mattatall along as his tax
     preparer and representative. At the interview, * * * *
     [Mattatall] insisted that the taxpayer could choose to
     submit an affidavit that his tax return was correct,
     and that regardless of the IRS’s request for documents
     or other information, the affidavit is all that the
     taxpayer need provide. The Government argues that
     Mattatall’s position is frivolous, and the Court
     agrees. Section 7602 of the Internal Revenue Code
     authorizes the IRS to examine “any books, papers,
     records, or other data” which “may be relevant” to an

                                                    (continued...)
                               - 4 -

respondent’s revenue agent to discuss the examination.     At the

meeting, petitioner produced an “Affidavit of Facts of Robert

Kolbeck” summarily declaring, among other things, that his

entries on his 2000 Schedule C were accurate and correct.

Because petitioner did not adequately substantiate his Schedule C

expenses, respondent issued a report proposing to disallow all of

the expenses.

     Petitioner appealed respondent’s proposed disallowance of

his Schedule C expenses to respondent’s Appeals Office.     An

Appeals conference was scheduled, but petitioner did not attend

the conference or make any effort to reschedule it.      On February

5, 2004, respondent issued a notice of deficiency in which he

disallowed all of petitioner’s Schedule C deductions for lack of

substantiation as follows:

                  Expense                 Amount disallowed

         Cost of sales                         $33,798
         Advertising                             3,909
         Commissions and fees                   15,012
         Insurance                               4,698
         Rent/Lease - veh./mach./equip.         14,819
         Rent/Lease - other                      3,900
         Taxes and licenses                      2,914
         Cell phone                              1,904
         Fuel                                   14,983
         Other expenses                            429
         Repairs/Maintenance                    12,012
           Total                               108,378


     3
      (...continued)
     inquiry into “the correctness of any [tax] return.” 26
     U.S.C. §7602(a)(1). * * * [Mattatall’s] assertion that
     an affidavit is sufficient is unfounded.
                                - 5 -

     Petitioner timely petitioned this Court to redetermine

respondent’s adjustments and the section 6662(a) penalty.      On a

date not specified in the record, petitioner requested a meeting

with respondent’s counsel to discuss the present case.      Although

a meeting was scheduled, petitioner failed to attend.

                             Discussion

Schedule C Deductions

     Burden of Proof

     Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.   Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      However, the burden of

proof may shift to the Commissioner under section 7491(a) if the

taxpayer has produced credible evidence relating to the tax

liability at issue and has met his substantiation requirements,

maintained required records, and cooperated with the Secretary’s

reasonable requests for documents, witnesses, and meetings.

     Petitioner argues that the summary affidavit of facts he

produced at the January 27, 2003, meeting is sufficient proof of

his Schedule C deductions.   We construe his argument, at least in

part, to be that the affidavit is also sufficient under section

7491(a) to shift the burden of proof to respondent.

     The affidavit that petitioner submitted to respondent and to

this Court is not sufficient to satisfy the requirements in
                               - 6 -

section 7491(a) that petitioner introduce credible evidence,

substantiate his deductions, and cooperate with respondent.    See

Higbee v. Commissioner, 116 T.C. 438, 445 (2001) (document

summarizing amounts allegedly owed and paid as business expenses

insufficient to shift burden); see also Davis v. Commissioner,

T.C. Memo. 2005-160 (taxpayer’s vague, conclusory, and general

testimony insufficient to shift burden under section 7491(a)).

The affidavit simply repeats the listing of deductions on the

Schedule C and affirms that they are correct.   The affidavit does

not describe petitioner’s trucking activity or explain the types

of expenses generated by the activity.   The affidavit does not

contain any credible evidence that the deductions in question

were actually paid or that the expenses were ordinary and

necessary expenses and were reasonable in amount as required by

section 162.   The affidavit also contains no information to

establish that requirements of other applicable Code sections,

such as section 274, were satisfied.

     We conclude that the requirements of section 7491(a) are not

satisfied by the affidavit on which petitioner relies.

Consequently, petitioner bears the burden of proving that he paid

deductible expenses during 2000 in connection with his trucking

activity.
                                - 7 -

     Substantiation of Schedule C Deductions

     Under section 162(a), a taxpayer may deduct ordinary and

necessary business expenses incurred or paid during the taxable

year.    However, deductions are a matter of legislative grace, and

the taxpayer must clearly demonstrate entitlement to the claimed

deductions.    INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).    A taxpayer must keep records sufficient to establish the

amount of his deductions.   Sec. 6001; sec. 1.6001-1(a), Income

Tax Regs.

     If the taxpayer claims a business expense deduction but

cannot fully substantiate it, we may estimate the allowable

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

1930).    However, there must be sufficient evidence in the record

to provide a basis for the estimate.    Vanicek v. Commissioner, 85

T.C. 731, 743 (1985).

     For certain types of expenses, such as those for cellular

telephones, automobiles, and trucks, section 274(d) overrides the

rule of Cohan.    See Sanford v. Commissioner, 50 T.C. 823, 827

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

section 274(d), a taxpayer must meet strict substantiation

requirements before any of the listed expenses will be allowable.

See also sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.     We

may not apply the Cohan rule to those expenses covered by section
                               - 8 -

274(d).   See Sanford v. Commissioner, supra at 827; sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).

     Petitioner’s position throughout this case has been that he

has adequately substantiated his Schedule C expenses because his

business records were destroyed and because he has stated under

oath that the expenses he claimed on his Schedule C were correct.

That position is wrong, and we reject it.    While we accept as

true the fact that petitioner kept some records and that the

records were lost or destroyed as a result of the actions of

petitioner’s former employer, petitioner still had an obligation

to substantiate his deductions.   Petitioner made no effort to

reconstruct his records or to submit any documentation to assist

us in evaluating the credibility of his sworn statements.

     Even if we assume for purposes of argument that petitioner

incurred ordinary and necessary business expenses in connection

with his trucking activity, petitioner has not provided us with a

reasonable evidentiary basis upon which to estimate those

expenses.   Petitioner testified at trial in very general terms

regarding his advertising, fuel, broker’s commission, cell phone,

insurance, licenses and taxes, repairs, and rental expenses, but

the testimony did not provide sufficient detail to permit us to

estimate his expenses in these categories.    Petitioner offered no
                                - 9 -

testimony regarding his cost of sales other than his testimony

that he paid his drivers in cash.

     Because we do not disturb respondent’s determination based

solely on petitioner’s self-serving testimony that the Schedule C

deductions claimed are correct and accurate, we sustain

respondent’s determination disallowing petitioner’s Schedule C

deductions.    See Geiger v. Commissioner, T.C. Memo. 1969-159,

(citing Halle v. Commissioner, 7 T.C. 245, 247 (1946), affd. 175

F.2d 500 (2d Cir. 1949)), affd. 440 F.2d 688 (9th Cir. 1971); see

also Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (“we are not

required to accept the self-serving testimony of petitioner * * *

as gospel”).

Section 6662 Accuracy-Related Penalty

     Section 6662 imposes an accuracy-related penalty upon any

underpayment of tax resulting from negligence or disregard of the

tax rules or regulations or from any substantial understatement

of income tax.   Negligence includes the failure of a taxpayer to

keep proper records or to substantiate his reported expenses.

Sec. 1.6662-3(b)(1), Income Tax Regs.   The penalty does not

apply, however, to any portion of the underpayment for which

there was reasonable cause and with respect to which the taxpayer

acted in good faith.   Sec. 6664(c)(1); sec. 1.6664-4(b), Income

Tax Regs.
                               - 10 -

     Respondent contends that petitioner was negligent in

underpaying his income taxes and that he acted without reasonable

cause and good faith.    Petitioner counters that, because his

records were missing, he had reasonable cause for and acted in

good faith regarding the alleged underpayment.

     Under section 7491(c), the Commissioner has the burden of

production where a penalty is imposed.    To satisfy this burden,

the Commissioner must produce sufficient evidence to show that

the relevant penalty is appropriate but does not need to produce

evidence relating to defenses such as reasonable cause or

substantial authority.    Higbee v. Commissioner, 116 T.C. at 446.

Once the Commissioner satisfies his burden of production, the

taxpayer has the burden of producing evidence sufficient to show

the Commissioner’s determination is incorrect.    Id. at 447.

     In this case, respondent has satisfied his burden of

production due to petitioner’s failure to substantiate his

Schedule C deductions.    Failure to substantiate deductions as

required by sections 274 and 6001 may be negligent conduct within

the meaning of section 6662.    See, e.g., Schladweiler v.

Commissioner, T.C. Memo. 2000-351, affd. 28 Fed. Appx. 602 (8th

Cir. 2002).   Petitioner is required, therefore, to prove that he

had reasonable cause for the underpayment and that he acted in

good faith with respect to the underpayment.    Sec. 6664(c).
                              - 11 -

     The unexpected loss of records beyond the taxpayer’s control

does not preclude a taxpayer from substantiating deductions by

alternate means.   See Brown v. Commissioner, T.C. Memo. 1996-43

(“when a taxpayer’s records have been lost or destroyed through

circumstances beyond his control, he is entitled to substantiate

the deductions by reconstructing his expenditures through other

credible evidence”); 6 Administration, Internal Revenue Manual

(CCH), sec. 20.1.1.3.1.2.5, at 45,014 (Aug. 20, 1998).4    The most


     4
      The Internal Revenue Manual contains the following
instructions for evaluating a taxpayer’s inability to obtain
records as it bears on the taxpayer’s claim that he had
reasonable cause for an underpayment:

     (1)   Explanations relating to the inability to
           obtain the necessary records may constitute
           reasonable cause in some instances, but may
           not in others.

     (2)   Consider the facts and circumstances relevant
           to each case and evaluate the request for
           penalty relief.

     (3)   If the taxpayer was unable to obtain records
           necessary to comply with a tax obligation,
           the taxpayer may or may not be able to
           establish reasonable cause. Reasonable cause
           may be established if the taxpayer exercised
           ordinary business care and prudence, but due
           to circumstances beyond the taxpayer’s
           control they were unable to comply.

     (4)   Information to consider when evaluating such
           a request includes, but is not limited to an
           explanation as to:

           •    Why the records were needed to
                comply.

                                                    (continued...)
                               - 12 -

important factor in determining reasonable cause and good faith

is the extent of the taxpayer’s effort to assess his proper tax

liability.    Sec. 1.6664-4(b)(1), Income Tax Regs.    We may give

weight to a taxpayer’s oral testimony regarding the fact and

amount of his claimed deductions.    Patterson v. Commissioner,

T.C. Memo. 1972-82.    However, we have declined to do so when the

taxpayer did not make a good faith effort to reconstruct his

expenses or provide any documentation or corroborative evidence



     4
      (...continued)
          •    Why the records were unavailable
               and what steps were taken to secure
               the records.

          •      When and how the taxpayer became aware
                 that they did not have the necessary
                 records.

          •      If other means were explored to
                 secure needed information.

          •      Why the taxpayer did not estimate
                 the information.

          •      If the taxpayer contacted the
                 Service for instructions on what to
                 do about missing information.

          •      If the taxpayer promptly complied
                 once the missing information was
                 received; and

          •      Supporting documentation such as
                 copies of letters written and
                 responses received in an effort to
                 get the needed information.

6 Administration, Internal Revenue Manual (CCH), sec.
20.1.1.3.1.2.5, at 45,014 (Aug. 20, 1998).
                              - 13 -

to establish the credibility of his testimony.   See Smith v.

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

     In this case, petitioner failed to take any steps to

recreate his records, and he intentionally avoided communications

with respondent.   Although petitioner could have reconstructed at

least some of his expenses if he had made a good faith effort to

do so, petitioner did not make a meaningful attempt to contact

third parties who might have been able to verify the nature and

amount of his Schedule C expenses and/or provide copies of

invoices and receipts for such expenses.   At trial, petitioner

did not produce any receipts, invoices, or other credible

evidence, including third-party testimony, to support his

Schedule C expense deductions.   Additionally, although petitioner

attempted to estimate his expenses at trial at the prompting of

this Court,5 his recollection was too vague and imprecise for the

Court to make a reasonable estimate.   See, e.g., Schaefer v.


     5
      For example, petitioner testified that he owned and
operated five trucks yet he took no steps to produce the records
necessary to verify that he owned five trucks during 2000 or his
basis in the vehicles. He did not obtain duplicate records from
his insurance company to substantiate his insurance payments. He
made no effort to reconstruct his fuel receipts by contacting the
companies from which he purchased fuel, and he did not call any
witnesses who might have verified that he purchased fuel during
2000. Although petitioner testified that he paid commissions to
brokers for referrals during 2000, he could not identify how much
he paid the brokers, and he did not call any of the brokers as
witnesses. He did not attempt to get duplicate copies of the
checks he used to pay the commissions from his bank. He did not
even produce a duplicate receipt for the union dues he testified
he paid.
                             - 14 -

Commissioner, T.C. Memo. 1998-163, affd. without published

opinion 188 F.3d 514 (9th Cir. 1999).

     Because the underpayment is attributable to negligence of

petitioner and he has not proven that he had reasonable cause for

the underpayment and acted in good faith regarding the

underpayment, we sustain respondent’s determination that

petitioner is liable for the accuracy-related penalty.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.
