T.C. Summary Opinion 2007-184



                     UNITED STATES TAX COURT



                 SHARON T. MYRICK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10717-05S.             Filed October 29, 2007.


     Sharon T. Myrick, pro se.

     Russell K. Stewart, for respondent.

     PANUTHOS, Chief Special Trial Judge:1   This case was heard

pursuant to the provisions of section 7463 of the Internal


     1
       After the death of Special Trial Judge Carleton D. Powell
on Aug. 23, 2007, the parties were directed to file, on or before
Oct. 2, 2007, a response consenting to the reassignment of this
case or file a notice objecting to the reassignment together with
a motion for a new trial or a motion to supplement the record,
stating reasons in support of either motion. On Sept. 6, 2007,
counsel for respondent filed a response consenting to the
reassignment of this case; however, no response has been filed by
petitioner. After allowing ample time for a response to be filed
by petitioner, the Chief Judge reassigned this case to Chief
Special Trial Judge Peter J. Panuthos, for disposition on the
existing record.
                                - 2 -

Revenue Code in effect when the petition was filed.    Pursuant to

section 7463(b),2 the decision 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 $4,888 deficiency in petitioner’s

2001 Federal income tax and a $977.60 accuracy-related penalty

pursuant to section 6662(a).    After concessions,3 the issues for

decision are:   (1) Whether petitioner is entitled to deductions

claimed on Schedule C, Profit or Loss From Business; (2) whether

petitioner correctly reported gross receipts on Schedule C; and

(3) whether petitioner is liable for the accuracy-related penalty

under section 6662(a).

                            Background

     Some of the facts have been orally stipulated and are so

found.   The stipulated facts and exhibits, as well as additional

exhibits introduced at trial, are incorporated herein by this

reference.   Petitioner resided in Philadelphia, Pennsylvania,

when the petition was filed.




     2
       Unless otherwise indicated, subsequent 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.
     3
       Petitioner concedes in full the deductions she claimed on
Schedule A, Itemized Deductions. Respondent concedes that a
computational error of $828 was made in the notice of deficiency
to self-employment income.
                               - 3 -

     During 2001, petitioner worked for the U.S. Department of

the Treasury.   She also sold products for Avon Products, Inc.

(Avon).   Petitioner generally sold the Avon products from her

home, although she occasionally met customers elsewhere.

Petitioner had a desk, computer, printer, a postage meter, and

other equipment in her home.

     Petitioner owned both a Chevrolet Trailblazer and a Dodge

Neon.   Petitioner used the Trailblazer to commute to her job at

the Treasury Department in 2001.   Petitioner also used the

Trailblazer to transport Avon products.    It is not clear the

extent to which petitioner used the Neon for personal or business

purposes.

     Petitioner was also involved with a company called Prepaid

Legal Services in 2001.   According to petitioner, she paid a fee

that allowed her to contact Prepaid Legal Services and receive

legal advice.   Petitioner used Prepaid Legal Services for both

personal and business-related matters.    Petitioner became an

associate of Prepaid Legal Services in or about May 2001.

Although the record does not disclose what her duties were,

petitioner earned some amount of income from Prepaid Legal

Services after she became an associate.

     In addition to the above-described activities, petitioner

attended one or more flea markets in 2001 where she attempted to

sell goods.   The record contains little information about the
                                - 4 -

extent of petitioner’s involvement with flea markets or her

success in earning income from this activity.

     Petitioner attached a Schedule C to her 2001 tax return.

Except as described below, petitioner combined the income and

expenses of Avon, Prepaid Legal Services, and the flea markets on

the Schedule C.    Petitioner reported $7,791 of gross receipts and

$24,171 of expenses for a $16,380 loss.    Respondent did not

adjust the gross receipts.    However, respondent disallowed all

but $172 of the claimed expense deductions.    Petitioner filed a

timely petition for review of respondent’s determination.

                             Discussion

     In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of showing that the determinations are in error.     Rule

142(a); Welch v. Helvering, 

, 115 (1933).     Deductions

and credits are matters of legislative grace, and the taxpayer

bears the burden of proving entitlement to any deduction or

credit claimed on his return.    See INDOPCO, Inc. v. Commissioner,

(1992).

     Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain

circumstances.    Petitioner has neither alleged that section

7491(a) applies nor established her compliance with the

requirements of section 7491(a)(2)(A) and (B) to substantiate
                               - 5 -

items, maintain records, and cooperate fully with respondent’s

reasonable requests.   Petitioner therefore bears the burden of

proof.

I.   Schedule C Deductions

      A taxpayer who carries on a trade or business generally may

deduct ordinary and necessary expenses paid or incurred in

connection with the operation of the business.   Sec. 162(a); see

also FMR Corp. & Subs. v. Commissioner, 

, 414 (1998).

Personal expenses, in contrast, generally are not deductible.

Sec. 262(a).   Respondent does not dispute that each of the three

activities in question qualifies as a trade or business for

Federal income tax purposes.   Thus, we address only whether the

expenses petitioner claimed were ordinary and necessary, and

whether they were paid or incurred in connection with a trade or

business.

      Before discussing the deductions in issue, we note that

petitioner lost a number of receipts when she accidentally threw

them away.   When a taxpayer’s records have been lost or destroyed

through circumstances beyond his control, the taxpayer is

entitled to substantiate a deduction by reconstruction of his

expenditures through other credible evidence.    Smith v.

Commissioner, T.C. Memo. 1998-33; see also Malinowski v.

Commissioner, 

, 1125 (1979).   We do not find that
                                 - 6 -

petitioner’s records were lost through circumstances beyond her

control.

     Where a taxpayer establishes that he incurred a business

expense but cannot prove the amount of the expense, the Court may

approximate the amount allowable, bearing heavily against the

taxpayer whose inexactitude is of his own making.     Cohan v.

Commissioner, 

, 544 (2d Cir. 1930).    To apply the

Cohan rule, however, we must have a reasonable basis for

estimating the amount of the expense.     Vanicek v. Commissioner,

, 742-743 (1985).    We are not required to accept a

taxpayer’s unsubstantiated testimony that he is entitled to a

deduction.    See Tokarski v. Commissioner, 

, 77 (1986);

Hoang v. Commissioner, T.C. Memo. 2006-47.

     A.    Advertising

     Petitioner claimed a $1,200 deduction for advertising which

respondent disallowed in full.    Petitioner testified that she

incurred this expense in connection with two Internet Web sites

she maintained and brochures she distributed to potential

customers, but she provided no credible evidence to corroborate

the amount or purpose of the expense.    See Tokarski v.

.     Respondent’s determination on this issue

therefore is sustained.
                                 - 7 -

     B.     Legal and Professional Services

     In general, legal fees are deductible under section 162 only

if the matter with respect to which the fees were incurred

originated in the taxpayer’s trade or business and only if the

claim is sufficiently connected to that trade or business.        See

United States v. Gilmore, 

(1963); Kenton v.

Commissioner, T.C. Memo. 2006-13.

     Petitioner claimed a $500 deduction for legal and

professional services, representing the fee she paid Prepaid

Legal Services for legal advice, which respondent disallowed in

full.     At trial, the parties agreed that petitioner paid $358 of

that amount.     Petitioner testified that she used the service for

both personal and business matters.       However, the record does not

provide a reasonable basis for allocating the cost of the service

between personal and business use.       We therefore do not apply the

Cohan rule, see Vanicek v. 

, and respondent’s

determination is sustained.

     C.     Supplies and Office Expense

     Petitioner claimed a $1,852 deduction for supplies and a

$1,900 deduction for office expense which respondent disallowed

in full.     At trial, the parties agreed that petitioner paid $472

for a postage meter, $176 for “Postal Privilege”, which

petitioner defined as the cost of postage used in connection with

the postage meter, and $270 for a water cooler.      Petitioner
                                 - 8 -

provided no other receipts or canceled checks for the remaining

supplies and office expense deductions she claimed.

     Petitioner credibly testified that she used the postage

meter to mail fliers and brochures to customers.   Although it is

possible that petitioner used the postage meter for personal

matters, such use was likely de minimis in comparison to the

business use.   We therefore conclude that petitioner is entitled

to deduct $648 for the cost of the postage meter and the “Postal

Privilege”.

     Petitioner testified that she purchased or leased the water

cooler for the benefit of customers who came to her home.

Petitioner did not establish, however, that the water cooler was

used primarily by customers and not by her family.    Because

petitioner has failed to meet her burden of proof, she cannot

deduct the $270 cost of the water cooler.

     Respondent’s determinations with respect to supplies and

office expense is modified to the extent that petitioner is

entitled to a deduction of $648.

     D.   Utilities

     Petitioner claimed a $2,172 deduction for utilities which

respondent disallowed in full.    At trial, the parties agreed that

petitioner paid $1,311 to Verizon, presumably for telephone

service, and $243 for wireless Internet service.   Petitioner did

not demonstrate that these amounts were incurred solely for
                               - 9 -

business purposes, nor did she apportion the expenses between

personal and business use.   Section 262(b) disallows any

deduction for basic telephone service as a personal expense.

Because the record does not provide a reasonable basis for

estimating the amount attributable to business purposes, see

Vanicek v. 

, respondent’s determination on

this issue is sustained.

     E.   Rent or Lease of Other Business Property

     Petitioner claimed a $472 deduction for rent or lease of

other business property which respondent disallowed in full.

Petitioner did not identify the property in question or how it

relates to a trade or business.     Respondent’s determination on

this issue is sustained.

     F.   Repairs and Maintenance

     Petitioner claimed a $700 deduction for repairs and

maintenance which respondent disallowed in full, but petitioner

introduced no evidence to support the claimed deduction.

Respondent’s determination on this issue is sustained.

     G.   Car and Truck Expenses

     Section 274(d) imposes strict substantiation requirements

for listed property, travel, entertainment, and meal expenses.

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

(Nov. 6, 1985).   Listed property generally includes passenger
                              - 10 -

automobiles and any other property used as a means of

transportation.4   Sec. 280F(d)(4)(A)(i) and (ii).

     To obtain a deduction for such expenses, a taxpayer must

substantiate by adequate records or by sufficient evidence

corroborating the taxpayer’s own testimony the amount of the

expense, the time and place of the use, the business purpose of

the use, and, in the case of entertainment, the business

relationship to the taxpayer of each person entertained.    Sec.

274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985).   The Cohan rule does not apply to

expenses governed by section 274(d).   Sanford v. Commissioner, 

, 827-828 (1968), affd. per curiam 

(2d Cir.

1969).

     Petitioner claimed a $5,338 deduction for car and truck

expenses in connection with the Trailblazer which respondent

disallowed in full.5   As discussed above, petitioner used the

Trailblazer for both personal and business purposes.    When a

taxpayer uses an automobile for personal and business purposes,

only that percentage of the expenses which represents business



     4
       Although there are exceptions to this rule, see, e.g.,
Sullivan v. Commissioner, T.C. Memo. 2002-131 n.2, petitioner has
not argued or demonstrated that any such exception applies.
     5
       Although petitioner may also have used the Neon for
business purposes, she provided almost no testimony or other
evidence concerning this vehicle. We therefore confine our
discussion to the Trailblazer.
                                - 11 -

use is deductible.    See Cobb v. Commissioner, 

,

1101-1102 (1981), affd. without published opinion 

(5th Cir. 1982).     Petitioner did not keep a mileage log or

otherwise distinguish between personal and business use of the

Trailblazer.    Petitioner therefore fails to meet the requirements

of section 274(d), and respondent’s determination on this issue

is sustained.

     H.   Depreciation and Insurance

     Petitioner claimed an $8,310 deduction for depreciation and

a $1,202 deduction for insurance in connection with the

Trailblazer which respondent disallowed in full.     As discussed

above, however, she failed to establish the extent to which the

Trailblazer was used for business purposes.     Respondent’s

determination on this issue is sustained.

     I.   Travel, Meals, and Entertainment

     Petitioner claimed a $279 deduction for travel and a $74

deduction for meals and entertainment expenses which respondent

disallowed in full.     Petitioner testified that she incurred these

expenses when she traveled to Delaware, but she did not introduce

receipts, canceled checks, or other evidence to corroborate her

testimony.   Sec. 274(d).    Respondent’s determination on this

issue is sustained.
                                  - 12 -

II.    Gross Receipts on Schedule C

       Petitioner reported gross receipts of $7,791 on Schedule C.

During the examination of her return, petitioner indicated this

figure represented $7,055 from sales of Avon products, a $102

bonus she received from Avon, and $634 from flea market sales.

Respondent accepted the gross receipts as reported.

       At trial, petitioner asserted that she had overstated gross

receipts.       Petitioner’s testimony was vague, however, and she

introduced no credible evidence to indicate that the figure

reported on Schedule C was incorrect.       Furthermore, petitioner

conceded that she failed to report income from Prepaid Legal

Services on Schedule C even though she reported the expenses.

Under the circumstances, we conclude that no adjustment to gross

receipts is appropriate.6

III.       Accuracy-Related Penalty

       Section 6662(a) provides that a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax

attributable to negligence or disregard of rules or regulations.

Sec. 6662(a) and (b)(1).       Negligence includes any failure to make

a reasonable attempt to comply with the law or maintain adequate

books and records.       Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax


       6
       Although petitioner acknowledged that she did not report
income from Prepaid Legal Services, respondent did not attempt to
assert an increased deficiency. Accordingly, we do not modify
the gross receipts that were reported by petitioner and accepted
by respondent.
                                - 13 -

Regs.     Disregard of rules or regulations includes any careless,

reckless, or intentional disregard.      Sec. 1.6662-3(b)(2), Income

Tax Regs.     The Commissioner bears the burden of production with

respect to the accuracy-related penalty.     See sec. 7491(c);

Higbee v. Commissioner, 

, 446 (2001).

         Petitioner concedes that she did not maintain accounting

records for her business activities or mileage logs for her use

of the Trailblazer.     Petitioner also concedes that she failed to

report gross receipts from Prepaid Legal Services.     Petitioner

therefore failed to make a reasonable attempt to comply with the

law or maintain adequate records, and respondent has met his

burden of production.     See sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs.

        An exception to the section 6662 penalty applies when the

taxpayer demonstrates there was reasonable cause for the

underpayment and the taxpayer acted in good faith with respect to

the underpayment.     Sec. 6664(c).   Whether the taxpayer acted with

reasonable cause and in good faith is determined by the relevant

facts and circumstances on a case-by-case basis.     See

Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec.

1.6664-4(b)(1), Income Tax Regs.

        Petitioner testified that she had receipts for many of her

expenses but threw the receipts away when she moved her office

from one part of her house to another.      Such circumstances do not
                               - 14 -

constitute reasonable cause.     Furthermore, petitioner made little

if any attempt to reconstruct the lost records.    Accordingly, we

conclude that petitioner has failed to demonstrate reasonable

cause and good faith.   Respondent’s determination on this issue

is sustained.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.