T.C. Summary Opinion 2001-187



                      UNITED STATES TAX COURT


               RONALD AND NANCY SWEET, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

                  RONALD T. SWEET, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 4479-00S, 4480-00S.     Filed December 21, 2001.


     Charles A. Borek and Robb Longman (specially recognized),

for petitioners.

     Chang Ted Li, for respondent.


     GOLDBERG, Special Trial Judge:    These consolidated cases

were heard pursuant to the provisions of section 7463 of the

Internal Revenue Code in effect at the time each petition was

filed.   The decisions to be entered are not reviewable by any

other court, and this opinion should not be cited as authority.

Unless otherwise indicated, subsequent section references are to
                                     - 2 -

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

       In separate notices of deficiency, respondent determined

that petitioners are liable for the following deficiencies in

Federal income taxes, additions to tax, and penalty:

Docket No. 4479-00S                  Ronald and Nancy Sweet

                                 Additions to Tax          Penalty
  Year        Deficiency    Sec. 6651(a) Sec. 6653(a)    Sec. 6662(a)

  1988         $1,137         $284           $89               --
  1989          6,635        1,829            --               --
  1993          1,587          --             --              $317


Docket No. 4480-00S                  Ronald T. Sweet

                                     Addition to Tax
  Year         Deficiency             Sec. 6651(a)

  1990         $17,986                  $4,497
  1991          10,472                   2,618
  1992          12,722                   3,181

       After concessions by respondent,1 the issues for decision

are:       (1) Whether petitioners are entitled to deduct certain

Schedule C expenses;2 (2) whether petitioners are liable for


       1
          Respondent concedes for the tax year 1993, that
petitioners in docket No. 4479-00S have substantiated Schedule C,
Profit or Loss From Business, cost of goods sold of $1,640, and
repairs expense deduction of $2,994, and are not liable for the
accuracy-related penalty under sec. 6662(a).
       2
          Petitioners reported as cost of goods sold for tax
years 1989, 1990, 1991, and 1993, amounts purportedly paid to
various subcontractors or workers. For purposes of this opinion,
                                                   (continued...)
                                - 3 -

additions to tax for failure to timely file returns under section

6651(a) for tax years 1988 to 1992; and (3) whether petitioners

are liable for an addition to tax for negligence under section

6653(a)(1) for tax year 1988.   Adjustments to self-employment

income taxes and the deductions therefor, and the earned income

credits are computational and will be resolved by the Court’s

holding on the issues in these cases.

     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.    At the time the

respective petitions were filed, petitioners resided in

Baltimore, Maryland.   Petitioners Ronald and Nancy Sweet are

husband and wife.   References to petitioner in the singular are

to Ronald T. Sweet.

     From 1988 through 1993, petitioner was a window installation

contractor and a tax return preparer.    Petitioner installed

windows for Washington Energy Corporation (Washington Energy) as

an independent contractor.   Upon acceptance of a contract or

“job” from Washington Energy, petitioner would employ other

workers, if necessary.

     Petitioners testified that it was a common practice in the

window installation business for a contractor receiving a payment


     2
      (...continued)
we treat these items of cost of goods sold as additional labor
expenses. Infra.
                                - 4 -

in the form of a business check upon the completion of the job to

cash such payment and divide the cash among the workers.

Petitioner testified that it would be impossible for him to

complete some of the jobs by himself due to the deadlines and the

diverse locations of the jobs, thereby requiring him to engage

the services of other installers.

       Petitioner kept “several books” with information of various

payments made to workers.    However, he admitted that upon

reviewing the books he could not “make sense of them ... they’re

kind of sporadic”.    The books were not brought to trial and are

not a part of the record.

       Petitioners filed joint Federal income tax returns for tax

years 1988, 1989, and 1993.    The joint returns for tax years 1988

and 1989 were signed by petitioners on March 1, 1997, and stamped

received by the Cincinnati Service Center on June 17, 1997.    The

1993 joint return was timely filed.

       Petitioner filed separate Federal income tax returns for tax

years 1990, 1991, and 1992.    These returns were signed on March

1, 1997, and stamped received by the Cincinnati Service Center on

June 17, 1997.

       Respondent disallowed the following Schedule C deductions

and cost of goods sold:

1988        $1,500    Schedule C - Construction Expense - paid to
                      Joseph Sweeney
1989        20,798    Schedule C - Cost of Goods Sold - paid to
                      Charles Hoerl
                                - 5 -

1990        50,812    Schedule C - Cost of Goods Sold - paid to
                      Charles Hoerl ($42,812) and James Eckelt
                      ($8,000)1
1991        30,837    Schedule C - Cost of Goods Sold - paid to
                      Charles Hoerl
1991         1,500    Schedule C - Construction Expense - paid to
                      subcontractor Gary Keener
1992        40,880    Schedule C - Cost of Goods Sold -paid to
                      subcontractors
       1
            The parties stipulated that James Eckelt denied
       receiving $8,000 from petitioner during 1990.

Joseph Sweeney, Charles Hoerl, James Eckelt, and Gary Keener were

not called as witnesses and did not testify at trial.

       Respondent disallowed deductions and cost of goods sold in

the amounts shown above because petitioner failed to maintain

adequate records to substantiate the claimed amounts.

       Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving the entitlement to any deduction

claimed.    INDOPCO, Inc. v. Commissioner, 

, 84 (1992);

New Colonial Ice Co. v. Helvering, 

, 440 (1934).      A

taxpayer is required to maintain records sufficient to establish

the amount of his or her income and deductions.    Sec. 6001; sec.

1.6001-1(a), (e), Income Tax Regs.

       Section 162(a) allows a taxpayer to deduct all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business.    To be “necessary” an

expense must be “appropriate and helpful” to the taxpayer’s

business.    Welch v. Helvering, 

, 113 (1933).    To be

“ordinary” the transaction which gives rise to the expense must
                                - 6 -

be of a common or frequent occurrence in the type of business

involved.    Deputy v. Du Pont, 

, 495 (1940).     No

deduction is allowed for personal, living, or family expenses.

Sec. 262(a).

     Generally, if a claimed business expense is deductible, but

the taxpayer is unable to substantiate it, the Court is permitted

to make as close an approximation as it can, bearing heavily

against the taxpayer whose inexactitude is of his or her own

making.    Cohan v. Commissioner, 

, 543-544 (2d Cir.

1930).    The estimate must have a reasonable evidentiary basis.

Vanicek v. Commissioner, 

, 743 (1985).

     The issue is whether petitioners substantiated the amounts

purportedly paid to various subcontractors or workers during the

years in issue.

     Petitioners ask the Court to find they incurred ordinary and

necessary business expenses during the years in issue.      Although

they admit they do not have the records to substantiate every

dollar spent, they believe their testimony and other evidence

sufficiently establish that labor expenses were incurred during

the years in issue.    We agree with petitioners that it is

plausible that petitioners hired workers to assist in the

installation process; however, we have no basis for determining

how much was actually paid during the years in issue.    The Cohan

rule allows the Court to make as close an approximation as it can
                                 - 7 -

of a claimed business expense.     Cohan v. 

.

The rule also allows the Court to bear heavily against the

taxpayer whose inexactitude is of his or her own making.    At

trial, petitioners failed to provide any corroborating evidence,

besides their self-serving testimony, that payments were made.

The Court has discretion to disregard testimony which we find

self-serving.   Niedringhaus v. Commissioner, 

, 212

(1992).   Petitioners could not recollect the number of jobs

completed in a particular year, the person or persons hired for a

particular job, or how the amount claimed as a deduction or cost

of goods sold was calculated.    Petitioners did not call as

witnesses any of the purported subcontractors or workers who

rendered services for petitioners during the years in issue.

Under Vanicek v. 

, any estimation of business

expenses incurred by a taxpayer must be based on a reasonable

evidentiary basis.   Petitioners failed to establish any

reasonable evidentiary basis.

     Based upon the above, we find that petitioners failed to

substantiate, and therefore are not entitled, to Schedule C

deductions for labor expenses during the years in issue.

     Respondent determined additions to tax as a result of

petitioners’ failure to timely file their respective tax returns

for tax years 1988 to 1992.   Section 6651(a)(1) imposes an

addition to tax for failure to timely file a tax return.    The
                                 - 8 -

addition to tax is equal to 5 percent of the amount of the tax

required to be shown on the return if the failure to file is not

for more than 1 month.    Sec. 6651(a)(1).   An additional 5 percent

is imposed for each month or fraction thereof in which the

failure to file continues, to a maximum of 25 percent of the tax.

are applicable unless petitioners establish

that their failure to timely file the returns was due to

reasonable cause and not willful neglect.     

exercised ordinary business care and prudence and were

nonetheless unable to file their returns within the date

prescribed by law, then reasonable cause exists.     Sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.    “Willful neglect” means a

“conscious, intentional failure or reckless indifference.”

United States v. Boyle, 

, 245 (1985).

      Petitioners’ 1988 and 1989 Federal income tax returns were

due on April 17, 1989, and April 16, 1990, respectively.

Petitioners did not file their returns until June 17, 1997, after

the commencement of the audit.

      Petitioner’s separate 1990, 1991, and 1992 Federal income

tax returns were due on April 15, 1991, April 15, 1992, and April

15, 1993, respectively.    These returns were also not filed until

June 17, 1997.

      Petitioners offered no explanation for their failure to
                              - 9 -

timely file their respective returns.    Petitioners failed to show

that they exercised ordinary care and prudence in these cases.

Accordingly, petitioners are liable for the additions to tax

under section 6651(a)(1) as determined in the notices of

deficiency.

     Section 6653(a)(1) for taxable year 1988 provides that if

any portion of an underpayment of tax is due to negligence or

disregard of rules or regulations, an amount equal to 5 percent

of the underpayment is added to the tax.    Negligence is defined

as the failure to exercise the due care that a reasonable and

ordinarily prudent person would employ under the circumstances.

Neely v. Commissioner, 

, 947 (1985).     The question is

whether a particular taxpayer’s actions in connection with the

transactions were reasonable in light of his experience and the

nature of the investment or business.     Henry Schwartz Corp. v.

Commissioner, 

, 740 (1973).     Respondent’s

determinations are presumed correct and petitioners bear the

burden of establishing otherwise.     Welch v. 

; Bixby v. Commissioner, 

, 791-792 (1972).3

     Petitioners maintain that they prepared Form 1099 for window

installation services rendered by Joseph Sweeney in 1988.    The

record shows that petitioners failed to prepare and file a return


     3
          We note that sec. 7491 is inapplicable in these cases
because petitioners’ respective examinations commenced prior to
July 22, 1998.
                             - 10 -

for tax year 1988 until June 17, 1997.    The record also shows

that respondent did not receive a copy of Form 1099 prior to the

commencement of petitioners’ respective audits.    As noted above,

we found that petitioners did not substantiate the Schedule C

expenses deducted on their 1988 return.    Based on the record, we

can find no credible basis for the Schedule C deductions claimed.

Petitioner was a tax preparer during the years in issue.    It goes

without saying that as a tax preparer petitioner should have

understood the substantiation requirements for deductions claimed

on their Schedule C.

     Because petitioners failed to offer any credible explanation

for their lack of due care in preparing and filing their 1988

return, they are liable for an addition to tax under section

6653(a)(1).

     We have considered all arguments by the parties, and, to the

extent not discussed above, conclude that they are irrelevant or

without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decisions will be entered

                                   under Rule 155 in docket No.

                                   4479-00S and for respondent in

                                   docket No. 4480-00S.