T.C. Memo. 2007-130



                     UNITED STATES TAX COURT



         MILA ALEMASOV AND VICTOR POPOV, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11223-05.               Filed May 22, 2007.


     William E. Taggart, Jr., for petitioners.

     Margaret Burow, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:    Respondent determined a

$14,241 deficiency in petitioners’ Federal income tax for 2002, a

$570 addition to tax under section 6651(a)(1) for failure to file

timely, and a $314 accuracy-related penalty under section
                               - 2 -

6662(a).1   After concessions,2 there are two issues for decision:

(1) Whether petitioners are entitled to deductions under section

162(a) for expenses relating to a real estate activity, and (2)

whether petitioners are liable for an addition to tax under

section 6651(a)(1) for failure to file their 2002 return timely.

                             Background

     At the time the petition was filed, Mila Alemasov

(petitioner) and Victor Popov were married and resided in San

Francisco, California.3

     Petitioner was born in Russia, immigrated to the United

States when she was a child, and has resided in San Francisco

since 1979.   She has a bachelor’s degree in international

business from San Francisco State University and a master’s


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
      In the notice of deficiency, respondent determined that
petitioners had rental income of $3,876 not reported on Schedule
E, Supplemental Income and Loss. At trial, respondent conceded
$3,692 of this adjustment. Respondent conceded the remaining
$184 of the adjustment in his brief to the Court. These
concessions prompted respondent to further concede that
petitioners were not liable for the sec. 6662(a) accuracy-related
penalty since that adjustment was based on the conceded
unreported rental income.
     3
      The parties did not submit an agreed stipulation of facts
at trial as required by Rule 91(a); yet, of the 17 exhibits
accepted into evidence during the trial, 16 were filed as joint
exhibits. Counsel for the parties are experienced attorneys
before this Court, and such practices are not in accord with the
spirit of this Court’s Rules of Practice and Procedure.
                                 - 3 -

degree in business and finance from the University of San

Francisco.   Petitioner held a number of jobs before 1998, the

year she began working for Bank of America in the fields of

finance and securities investment.       She worked for Bank of

America until she was released sometime in 2001.

     In connection with her release, petitioner received

“settlement fees” of $400,000 from Bank of America during 2002.4

In addition, petitioner received unemployment compensation of

$13,840 that year.     With the money received from these sources,

petitioner began an activity as a real estate finder and

consultant, an activity that allowed her to attend to her two

minor children.5    Petitioner testified that she traveled to

Hawaii, Korea, China, and Las Vegas during 2002 on behalf of her

clients to search for prospective real estate investment

opportunities.     However, petitioner’s lack of a salesperson’s



     4
      The nature and terms of these fees were not made part of
the record; however, petitioners included the $400,000 as income
on their income tax return for 2002.
     5
      Petitioner decided to begin an activity as a real estate
finder and consultant sometime in September 2001. Petitioner
claimed that as a real estate finder she searched for real estate
investments on behalf of clients interested in purchasing
property. She would, assuming that properties she recommended
were purchased, receive a fee for her services. At trial,
petitioner conceded that she did not enter into any written
agreements in 2002 with her clients. Although she testified that
she had numerous e-mail exchanges with clients during the year at
issue, she did not offer into evidence any of these e-mail
communications. Petitioner claimed she had oral agreements
regarding fee arrangements with her clients.
                                 - 4 -

license inhibited her ability to enter into real estate

transactions.   During 2002, petitioner did not earn any income

for her services as a real estate consultant and finder.    In an

effort to expand her business, petitioner obtained a

salesperson’s license during 2003 to enhance her ability to act

on her clients’ behalf.

     Petitioners were granted an extension of time to August 15,

2003, to file their Federal income tax return for 2002; however,

their joint return for that year was filed on September 16, 2003.

Petitioners contend that their return preparer submitted a Form

2688, Application for Additional Extension of Time To File U.S.

Individual Income Tax Return, requesting an extension of time to

October 15, 2003, for the filing of their 2002 income tax return.

Respondent has no record that such a request was made.    According

to respondent’s Form 4340, Certificate of Assessments, Payments,

and Other Specified Matters, for 2002, a late filing penalty was

imposed on September 21, 2003.    However, respondent’s records,

the Form 4340, reflect that the penalty was abated on October 20,

2003.

     On petitioners’ 2002 joint income tax return, they reported

adjusted gross income of $357,729 and total tax due of $94,659.

Petitioners included with their 2002 joint income tax return a
                               - 5 -

$27,000 payment.6   The 2002 return reported as income the

$400,000 settlement fee that had been paid to petitioner by Bank

of America and included a Schedule C, Profit or Loss From

Business, relating to an activity with the principal business

purpose described as “Real Estate Investments”.    The return

reflected a loss of $31,261 from the Schedule C activity.

     Petitioners’ 2002 Federal income tax return was selected for

examination.   They were issued information document requests by

the IRS and were requested to substantiate the deductions claimed

on Schedule C of their 2002 return.    When petitioners did not

provide the requested documents timely, respondent issued a 30-

day letter proposing to disallow all of the claimed Schedule C

expenses.   Petitioners protested the proposed deficiency and

engaged the services of an enrolled agent; however, the agent was

unable to resolve the matter with respondent’s Appeals Office.

     Respondent then issued to petitioners a notice of deficiency

determining a deficiency of $14,241 in their Federal income tax

for 2002.   In the notice of deficiency, respondent disallowed all

of petitioners’ claimed Schedule C deductions for 2002 for the

reason that


     Since you did not establish that the business expense
     shown on your tax return was paid or incurred during


     6
      The unpaid portion of the $94,659 is not at issue in this
case, and there are indications in the record that petitioners
made subsequent payments on the 2002 liability.
                                 - 6 -

     the taxable year and that the expense was ordinary and
     necessary to your business, we have disallowed the
     amount shown.

     We are not allowing the amount on your return because
     we did not get an answer to our request for information
     to support your entries. You cannot claim deductions,
     credits, exemptions, or other tax benefits unless you
     can show that you meet all of the requirements to be
     eligible for them.


Petitioners filed a timely petition in this Court.

                              Discussion

     The Commissioner’s determinations in a notice of deficiency

are generally presumed correct, and the taxpayer bears the burden

of proving that the determinations are in error.    Rule 142(a);

Welch v. Helvering, 

, 115 (1933).     Deductions are a

matter of legislative grace, and the taxpayer has the burden of

proving entitlement to any claimed deduction.    Rule 142(a); New

Colonial Ice Co. v. Helvering, 

, 440 (1934); Welch v.

.     This includes the burden of substantiation.

Hradesky v. Commissioner, 

, 90 (1975), affd. per curiam

(5th Cir. 1976).

     At the commencement of trial, petitioners filed a motion to

shift the burden of proof to respondent under section 7491(a),

contending that they had provided credible evidence to support

their Schedule C deductions for the year at issue as required by

section 7491(a)(2).    Respondent objected to petitioners’ motion.
                                - 7 -

     Section 7491(a) places the burden of proof on the

Commissioner as to any issue upon which the taxpayer introduces

credible evidence and which is relevant to the taxpayer’s tax

liability.    However, for the burden of proof to be placed on the

Commissioner, the taxpayer must comply with the substantiation

and record-keeping requirements of the Internal Revenue Code.

Moreover, section 7491(a) requires that the taxpayer cooperate

with reasonable requests for “witnesses, information, documents,

meetings, and interviews”.   Sec. 7491(a)(2)(B).

     The notice of deficiency, upon which this case is based,

states with respect to the expenses claimed:   “We are not

allowing the amount on your return because we did not get an

answer to our request for information to support your entries.”

Petitioners failed to cooperate with reasonable requests by

respondent for documents as required by section 7491(a)(2)(B).

On the record, the Court has denied petitioners’ motion.

     The first issue is whether petitioners are entitled to

deductions under section 162(a) for expenses which they claim

petitioner incurred in a real estate trade or business activity

for profit.

     Section 162(a) allows a deduction for all ordinary and

necessary expenses incurred in carrying on a trade or business.

Section 212 allows a deduction for all ordinary and necessary

expenses paid or incurred for the production of income.
                                 - 8 -

Generally, a taxpayer must establish that deductions claimed

under sections 162 and 212 are ordinary and necessary expenses,

and the taxpayer must maintain records to substantiate the

deductions claimed.   Sec. 6001; Meneguzzo v. Commissioner, 

, 831-832 (1965); sec. 1.6001-1(a), (e), Income Tax Regs.

     On Schedule C of their 2002 Federal income tax return,

petitioners reported the following gross income and expenses:


     Income                                           -0-
     Expenses:
       Advertising                          $376
       Car and truck                       4,991
       Depreciation                        8,586
       Other interest                        336
       Office                              1,689
       Supplies                              143
       Travel                              9,615
       Meals and entertainment             1,940
       Other                               3,585
       Total                             $31,261
     Loss                                          ($31,261)


     With respect to certain business expenses subject to section

274(d), more stringent substantiation requirements apply than

with respect to other ordinary and necessary expenses.   Section

274(d) disallows deductions for traveling expenses, gifts, and

meals and entertainment, as well as expenses related to listed

property, unless the taxpayer substantiates by adequate records

or by sufficient evidence corroborating the taxpayer’s own

statement:   (1) The amount of the expense; (2) the time and place

of the travel or entertainment, or the date and description of
                                - 9 -

the gift; (3) the business purpose of the expense; and (4) the

business relationship to the taxpayer of the persons entertained

or receiving the gift.    The substantiation requirements of

section 274(d) are designed to encourage taxpayers to maintain

records and documentary evidence to substantiate each element of

the expense sought to be deducted.      Sec. 1.274-5T(c)(1),

Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

The term “listed property” is defined in section 280F(d)(4) and

includes any passenger vehicle, any other property used as a

means of transportation, and computers.      Sec. 280F(d)(4)(A)(i),

(ii), (iv).

       Under section 274(d), substantiation by means of adequate

records requires a taxpayer to maintain a diary, a log, or a

similar record, and documentary evidence that, in combination,

are sufficient to establish each element of each expenditure or

use.    Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46017 (Nov. 6, 1985).    To be adequate, a record must

generally be written, and each element of an expenditure or use

that must be substantiated should be recorded at or near the time

of that expenditure or use.    Sec. 1.274-5T(c)(2)(ii)(A),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

       The primary evidence that petitioners paid or incurred the

expenses related to their real estate activity consists of

petitioner’s testimony and spreadsheets that she compiled for
                              - 10 -

each of the categories of expenses.    In addition to petitioner’s

testimony, petitioners provided a host of credit card statements

to purportedly substantiate the claimed expenses.   Notations were

made beside some of the charges, and petitioners, in preparation

for trial, categorized some of the expenses on spreadsheets

attached to the credit card statements.   In particular, the Court

considers the expenses claimed by petitioners as follows.

Advertising Expenses

     With respect to the advertising expenses of $376,

petitioners’ spreadsheet reflects payments of cash in March,

June, July, and September of 2002 for advertisements in Russian

papers directed to real estate investors.   Aside from the

spreadsheet, no evidence, such as copies of the advertisements,

was offered to support the claimed deduction for advertising.

Petitioners’ evidence does not satisfy the Court that those

expenses were incurred.   Accordingly, the Court sustains

respondent’s determination disallowing the claimed advertising

expenses.

Car and Truck Expenses

     Petitioners claimed car and truck expenses of $4,991.    To

substantiate these expenses, petitioners provided a spreadsheet

detailing the date, location, and amount of each expense, along

with a very brief description of the nature of the expense.    For

almost every car and truck expense that petitioners claimed to
                              - 11 -

have paid in cash, they did not provide receipts or any type of

documentary evidence to support the payment.7   With regard to the

other claimed car and truck expenses, petitioners provided a

small number of receipts.   Most of the documentation to support

these expenses consisted of monthly credit card statements or

annual gas card statements.

     Petitioners presented no records to substantiate that the

car and truck expenses claimed on their Schedule C for 2002 were

related to the real estate activity or were other than personal

expenses.   Although statements from Chevron and Shell reflected

the total amounts charged on credit cards during 2002, there is

no documentation or other evidence to show that the charges were

for ordinary and necessary expenses related to the claimed

business rather than for personal use.   Similarly, other receipts

and monthly credit card statements show that money was paid to

Union 76 and Geary Automotive Service; however, petitioners

likewise failed to establish that these were ordinary and

necessary expenses of the real estate activity.   For these

reasons, respondent’s determination disallowing petitioners’

Schedule C car and truck expenses is sustained.




     7
      The claimed expenses for which no receipts were provided
include those for gasoline, repairs, and licenses.
                               - 12 -

Depreciation

     Petitioners claimed an $8,586 depreciation and section 179

expense deduction.   Pursuant to section 167, a depreciation

deduction is generally allowed for the exhaustion, wear, and tear

of property used in a trade or business or held for the

production of income.   The purpose of the deduction for

depreciation is to allow the taxpayer to recover over the useful

life of the property its cost or other basis.    United States v.

Ludey, 

, 300-301 (1927).

     Petitioners claimed a depreciation deduction on their

Schedule C for a vehicle placed in service in 2002 as well as a

computer purchased during that year.    Other than petitioner’s

uncorroborated, self-serving testimony, which we do not find

probative, petitioners offered nothing to substantiate that the

vehicle and the computer were not used primarily for personal

purposes.    Accordingly, on account of the lack of substantiation

that those items of property were used in the real estate

activity or otherwise held for the production of income,

respondent is sustained in disallowing the depreciation deduction

of $8,586.

Other Interest

     Petitioners claimed a deduction of $336 for “other

interest”, which related to interest on their credit cards.

Petitioners offered into evidence statements of their Chevron and
                              - 13 -

Visa credit cards.   On their Chevron credit card, petitioners

incurred monthly finance charges every month during 2002.    The

five Visa credit card statements show, along with interest and

finance charges, transactions at Kinko’s, Safeway, Whole Foods

Market, and Bally Total Fitness, among other places, indicating

that the interest related substantially to credit card charges

for personal purposes.

     Section 262 expressly disallows deductions for personal,

living, or family expenses.   Petitioners failed to substantiate

that any interest expense associated with the credit card charges

was other than a nondeductible personal expense.   No portion of

the interest was shown to be related to the real estate activity.

The claimed interest, therefore, is not allowed as a deduction.

Office Expenses

     Petitioners offered monthly credit card statements and

copies of two checks to substantiate the $1,689 for office

expenses.   Absent further corroborating evidence to support these

expenses and their relationship to the real estate activity, the

Court sustains respondent’s disallowance of these expenses.8


     8
      The $1,689 also included what appear to be utility expenses
attributed to two vendors or service providers listed as “PG&E”
and “Water”. Regardless of their classification, petitioners did
not establish that those expenses were related to the real estate
activity or were other than personal.
     Petitioners also claimed as office expenses cellular phone
charges to T-Mobile. Cellular phones are classified as listed
property under sec. 280F(d)(4)(A)(v), and petitioners offered no
                                                   (continued...)
                              - 14 -

Supplies

     Petitioners claimed a $143 deduction for supplies.   To

substantiate this item, petitioners submitted two Visa credit

card statements.   The statements indicate petitioners made

purchases at Aaron Brothers, Office Max, and The Container Store

in May and November of 2002; the spreadsheets petitioner prepared

indicate that these expenses were incurred for frames, notebooks,

pens, and “items”.   The relationship of these expenses to

petitioner’s real estate activity was not established.

Petitioners also claim that they paid cash for some supplies, but

they did not present any receipts or canceled checks to support

these expenses.

     On the basis of the submitted Visa credit card statements,

it is clear that petitioners made purchases at stores that sell

office supplies.   There is no evidence, however, other than

petitioner’s self-serving testimony, which we do not find

probative, that these expenses were related to or incurred in

connection with petitioner’s real estate activity.   Without

further substantiating evidence, the Court sustains respondent’s

determination disallowing such expenses.




     8
      (...continued)
evidence to satisfy the heightened substantiation requirements
associated with listed property.
                             - 15 -

Travel

     Petitioners contend that the $9,615 claimed for traveling

expenses was for trips to Hawaii, Korea, China, Las Vegas, and

Chicago, for the purpose of locating potential real estate

investment opportunities for petitioner’s clients.    With the

exception of expenses for airfare to Hawaii and Chicago, a rental

car in Hawaii, lodging in Hawaii and Las Vegas, and a few

incidental traveling expenses, petitioners contend that they paid

the traveling expenses in cash.   In support of these expenses,

petitioners offered airline receipts, a few credit card

statements, and two taxi cab receipts.

     Although section 162(a) expressly permits a deduction for

traveling expenses away from home in the pursuit of a trade or

business, section 274(d) imposes strict substantiation

requirements for deductions related to traveling expenses.     A

deduction for traveling expenses demands, pursuant to section

274(d), that the taxpayer substantiate by adequate records or by

sufficient evidence the amount of the expense, the time and place

of the travel, and the business purpose of the expense.      On the

record, the Court holds that petitioners’ limited receipts and

lack of evidence to corroborate their own statements fail to

satisfy the strict substantiation requirements of section 274(d).

See sec. 274(d); sec 1.274-5T(b)(2), Temporary Income Tax Regs.,

50 Fed. Reg. 46014 (Nov. 6, 1985).    Despite petitioner’s
                              - 16 -

insistence that all of the traveling expenses were exclusively

for a business purpose, the strict substantiation requirements of

section 274(d) cannot be ignored.    In addition, petitioner

admitted at trial that her two minor children accompanied her on

a claimed business trip to Hawaii.     Section 274(m)(3) provides

that, in general, no deduction is permitted for any traveling

expenses paid for dependents accompanying a taxpayer on business

travel.   Accordingly, respondent’s determination disallowing the

claimed deduction for traveling expenses is sustained.

Meals and Entertainment

     Petitioners claimed a Schedule C deduction of $1,940 for

meals and entertainment.9   The spreadsheet petitioners provided

for these expenses listed the dates and locations of the meals,

along with the clients’ names and a very brief description of

each client (i.e., “prospective investor” or “investment

opportunity”).   To support the amounts on the spreadsheet,

petitioners included a number of monthly credit card statements

and a few receipts.   As for many of their other claimed Schedule

C expenses, no receipts or other documentary evidence was

provided for those expenses paid in cash.

     Pursuant to section 274(d), a taxpayer, with respect to

meals and entertainment, must substantiate the amount, time,



     9
      Petitioners claimed meal expenses totaled $3,881, which
they reduced by 50 percent as required by sec. 274(n).
                               - 17 -

place, and business purpose of the expenditure and must provide

adequate records or sufficient evidence to corroborate the

claimed expense.    Sec. 274(d); sec. 1.274-5T(c)(1), Temporary

Income Tax 

.    In order to meet the “adequate records”

requirement, a taxpayer must maintain an account book, diary,

statement of expenses, or similar record and documentary evidence

(such as receipts, paid bills, or similar evidence) which, when

combined, establish each element of the expense that section

274(d) requires to be established.      Sec. 1.274-5T(c)(2)(i),

Temporary Income Tax 

.      Petitioners’ credit card

statements and the spreadsheet that was created after the year at

issue do not meet the adequate records requirement for meals and

entertainment expenses of section 274(d) and the regulations

because they fail to sufficiently corroborate petitioners’ own

statements.

not provide the required

substantiation for these expenses, they are not entitled to the

deduction for meals and entertainment expenses.

Other Expenses

     Petitioners claimed a deduction of $3,585 for other

expenses, including books, postage, printing, Internet access at

Kinko’s, and other items.    Aside from monthly credit card

statements and nonitemized credit card receipts, petitioners

offered no documentary evidence to support the claimed expenses.

Additionally, petitioners did not establish that these expenses
                                - 18 -

were those of petitioner’s real estate activity.      For these

reasons, respondent is sustained in disallowing the claimed

deduction for other expenses.

Section 6651(a)(1) Addition to Tax

     Respondent determined that petitioners were liable for an

addition to tax under section 6651(a)(1).    Under section 7491(c),

the Commissioner has the burden of production in any court

proceeding with respect to the liability of any individual for a

penalty or addition to tax.     Higbee v. Commissioner, 

, 446-447 (2001).   In order to meet this burden of production,

the Commissioner must come forth with sufficient evidence

indicating that it is appropriate to impose, as in this case, an

addition to tax for failure to file a timely return.

Once the Commissioner has met this burden, the taxpayer must come

forward with evidence sufficient to persuade the Court that the

Commissioner’s determination is incorrect.

     Section 6651(a)(1) imposes an addition to tax for failure to

file a Federal income tax return by its due date, determined with

regard to any extension of time for filing previously granted.

The addition equals 5 percent for each month that the return is

late, not to exceed 25 percent.    Sec. 6651(a)(1).    An addition to

tax under section 6651(a)(1) is imposed for failure to file a

return on time unless the taxpayer establishes that the failure

was due to reasonable cause and not willful neglect.      Sec.
                              - 19 -

6651(a)(1); United States v. Boyle, 

, 245 (1985).

“Reasonable cause” requires the taxpayer to demonstrate that he

exercised ordinary business care and prudence.    United States v.

Stanford, 

, 1514 (11th Cir. 1992).   “Willful

neglect” is defined as a “conscious, intentional failure or

reckless indifference.”   United States v. Boyle, supra at 245.

     Petitioners concede that, although they were given an

extension of time to file their 2002 return until August 15,

2003, the return was not filed until September 16, 2003.     Since

the return for the year at issue was filed late, the only issue

that remains is whether the late filing is excused by reasonable

cause.   Sec. 6651(a)(1); United States v. Boyle, supra at 245.

Petitioners’ explanation for failure to file their return timely

was that their return preparer filed a Form 2688 to request

additional time to file their 2002 return.   Respondent has no

record that such a request was made.   Additionally, petitioners

contend that respondent’s Appeals Office conceded the section

6651(a)(1) addition to tax.   In support of this argument,

petitioners point to the Certificate of Assessments, Payments,

and Other Specified Matters, which was offered into evidence by

respondent and shows that, for the year at issue, respondent

abated the addition to tax on October 20, 2003.   Respondent

denies making such a concession and insists that imposition of
                                - 20 -

the addition to tax for failure to file a timely return is

appropriate.

     Section 6213(a) prohibits assessment of a deficiency during

the period within which a taxpayer may petition this Court for a

review of that deficiency.    Additionally, once a petition has

been filed with this Court for review of a deficiency, assessment

of that deficiency is prohibited until this Court’s decision has

become final.

the record suggests that

respondent abated the section 6651(a)(1) addition to tax because

assessment was premature and in violation of the strictures of

section 6213(a), not because the Appeals Office conceded the

addition to tax.

     Petitioners explained that they requested an additional

extension of time to file because they had not yet compiled the

information necessary to accurately file their return for the

year at issue.   The unavailability of records does not, however,

establish reasonable cause for failure to file a return timely.

See Elec. & Neon, Inc. v. Commissioner, 

, 1342-1344

(1971), affd. without published opinion 

(5th Cir.

1974); see also Ruddel v. Commissioner, T.C. Memo. 1996-125.

Moreover, petitioners failed to establish what records were

unavailable, and the record does not indicate that they attempted

to obtain the information necessary to prepare their 2002 return

from other sources.    See Crocker v. Commissioner, 

,
                                - 21 -

913 (1989) (section 6651(a) addition to tax upheld where

taxpayers failed to show what records were needed or what actions

they took to obtain such records).

     To support the claim that their return preparer requested an

additional extension of time to file their 2002 return,

petitioners offered an unsigned copy of a Form 2688 and contend

that this is similar to what was submitted.    Notwithstanding

their attempt to shift responsibility for their late filing to

their return preparer, such reliance on one’s accountant or

return preparer does not constitute “reasonable cause” for a late

filing under section 6651(a).    United States v. Boyle, supra at

252; see also Ruddel v. 

.    On this record, the

Court holds that petitioners are liable for the section

6651(a)(1) addition to tax.

     The Court has considered all other arguments advanced by the

parties, and, to the extent those arguments have not been

specifically addressed, the Court concludes they are without

merit.


                                          Decision will be entered

                                     under Rule 155.