T.C. Memo. 2007-157



                   UNITED STATES TAX COURT



               GARY LEE COLVIN, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 16557-04.               Filed June 19, 2007.


     R disallowed a majority of P’s claimed business
expense deductions for 2000, due to a lack of
substantiation, and determined a deficiency. R mailed
the notice of deficiency to four separate addresses.
Each notice was returned to R.

     P claimed that he was a statutory employee
pursuant to sec. 3121(d), I.R.C., for 2000.

     Held: The notice of deficiency is valid as
petitioner received actual notice of the deficiency
without prejudicial delay and filed timely a petition.

        Held, further, P was not a statutory employee for
2000.

     Held, further, The majority of R’s deficiency
determinations are sustained. P failed to meet the
substantiation requirements of sec. 162, I.R.C., and
where applicable, sec. 274, I.R.C., for most of the
deductions, or portions thereof, that R disallowed.
                                - 2 -

     Gary Lee Colvin, pro se.

     Daniel N. Price, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for judicial review of a notice of deficiency that determined a

$13,018 deficiency for petitioner’s 2000 taxable year.1   After

concessions by both parties,2 the issues for decision are:


     1
      Unless otherwise indicated, all 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.
     2
      Petitioner received a Form W-2, Wage and Tax Statement,
from Technology Integration Group (TIG) which reflected that he
received wages of $12,004 in 2000. Petitioner also received a
W-2 from Daou Systems Inc. (Daou Systems) which reflected that he
received an $8,000 settlement in 2000. Petitioner included the
$20,004 on line 1 of his 2000 Schedule C, Profit or Loss From
Business. However, petitioner then took deductions that exactly
matched his income from TIG and Daou Systems. Petitioner
deducted $12,004 and $8,000 on Part V, Other Expenses, of his
Schedule C. Respondent disallowed the deductions. Petitioner
did not address these issues at trial or offer any evidence
relating to them. Accordingly, these deductions are deemed
conceded by petitioner. See Rule 142 (burden of proof generally
on taxpayer); Rule 149(b) (party’s failure to produce evidence,
in support of issue of fact as to which party has burden of
proof, may be ground for determination of issue against that
party).

     Respondent conceded that petitioner is entitled to the
following Schedule C, line 17 deductions for his 2000 taxable
year: (1) District Court appeal costs for Colvin v. O’Connor,

(9th Cir. 1995), in the amount of $105; (2) Central
Valley Reporters transcripts costs in the amount of $197; and
(3) legal fees and costs for Colvin v. Daou Sys. Inc., No. 97-CV-
                                                   (continued...)
                              - 3 -

     (1) Whether the notice of deficiency is valid;

     (2) whether petitioner was a statutory employee of

Technology Integration Group (TIG) for his 2000 taxable year;

     (3) whether petitioner is entitled to a deduction of $5,253

for automobile expenses he incurred in 2000;

     (4) whether petitioner is entitled to a deduction of $5,195

for loan interest that he allegedly paid to his mother in 2000;

     (5) whether petitioner is entitled to a deduction of $1,750

for fees he allegedly paid to his mother for accounting, tax

preparation, and representation services performed in 2000;

     (6) whether petitioner is entitled to $659 for cost of goods

sold in 2000;

     (7) whether petitioner is entitled to a deduction for

$1,689.65 in legal fees and costs incurred in 2000.

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.   At the time the petition

was filed, petitioner resided in Round Rock, Texas.


     2
      (...continued)
00305 (S.D. Cal. filed Feb. 25, 1997), in the amount of
$5,911.65. Petitioner conceded that if it is ultimately
determined that the Tax Court has jurisdiction over the instant
case, then $10,157 that petitioner claimed as attorney fees for
Colvin v. Pennant Village Homeowners Association, No. 96-CV-01654
(S.D. Cal. filed Sept. 23, 1996), on Schedule A, Itemized
Deductions, as a miscellaneous expense is a nondeductible
personal expense.
                               - 4 -

     During 2000, petitioner was a computer hardware salesperson

for TIG.   Petitioner signed a “formal offer of employment” on May

3, 2000, to indicate his acceptance of employment.   An

“Employment and Commission Agreement” (employment agreement)

between TIG and petitioner was executed by petitioner on May 9,

2000.3   Petitioner initialed the lower right corner of every page

on a space entitled “Employee” and signed the last page of the

agreement.   The employment agreement provides in pertinent part:

     1.   Employment. Employer engages Employee to serve as
     an Account Executive, and Employee hereby accepts such
     an engagement upon the terms and conditions set forth
     herein.

     2.   Term. This Agreement is for an initial period of
     one (1) year but is terminable by either party, with or
     without cause, at any time with or without notice.
     This Agreement will continue to govern the employment
     relationship for additional one (1) year terms unless a
     new agreement is negotiated and executed.

     3.   Duties. Employee shall perform such duties as are
     customarily performed by an Account Executive, and such


     3
      Petitioner, in the joint stipulation, objected to the
admission into evidence of Exhibit 26-R, the unemployment
agreement and related employment documents, from TIG on the
grounds of: (1) Lack of foundation; (2) hearsay; (3) Fed. R.
Evid. 106; (4) petitioner lacks personal knowledge of their
creation; and (5) respondent has failed to identify the
individual who allegedly created the documents. Respondent
obtained the documents from TIG pursuant to a subpoena duces
tecum.

     The Court concludes that Exhibit 26-R does not lack
foundation. The documents are business records, some bear
petitioner’s signature or initials, and are admissible. The
Court concludes that the documents are complete. Petitioner’s
remaining arguments are meritless. Accordingly, Exhibit 26-R is
admissible.
                         - 5 -

other duties as the President of Employer (“President”)
may require from time to time, with the understanding
that: (i) Employee will devote his/her utmost knowledge
and best skill to the performance of his/her duties;
(ii) Employee will devote his/her full business time to
the rendition of such services; and (iii) Employee will
not engage in any other gainful occupation which
requires his/her personal attention without prior
consent of the President.

4.   At-Will Employment. Employee and Employer
understand and expressly agree that Employee’s
employment may be terminated by Employer or by Employee
at any time, with or without notice and with or without
cause. Employee and Employer expressly agree that this
provision is intended by Employee and by Employer to be
the complete and final expression of their
understanding regarding the terms and conditions under
which Employee’s employment may be terminated.
Employee and Employer further understand and agree that
no representation contrary to this provision is valid,
and that this provision may not be augmented,
contradicted or modified in any way, except by a
writing signed by Employee and by the President.

          *    *    *    *       *   *   *

12. Personnel Policies and Procedures. The Employer
shall have the authority to establish from time to time
personnel policies and procedures to be followed by its
employees. Employee agrees to comply with the policies
and procedures of the Employer. To the extent any
provisions in Employer’s personnel policies and
procedures differ with the terms of this Agreement, the
terms of this Agreement shall apply. In no case shall
any personnel policies or procedures be deemed to
contradict the at-will employment provision contained
in paragraph 4 of this Agreement.

13. Commission Plan. Employee is employed by Employer
to engage in the sale of computer-related equipment and
computer service contracts. Employee will not engage
in the actual provision of technical services under the
service contracts that Employee will sell. Employee
will be paid on a commission basis pursuant to the
following commission plan:
                         - 6 -

     13.1      Draw. During the first four months (4)
of employment under this Agreement, Employee will
receive a non-recoverable draw on commission in the
amount of $5,000 per month (“Draw”). In months five
(5) and six (6), Employee will receive a non-
recoverable monthly draw of $2,500. Subsequent to the
6th month, draw will be recoverable month to month,
which amount shall be paid in biweekly installments
during the course of Employer’s regular payroll
periods.

     13.2      Draw Record. Employer shall maintain a
record of all Draws taken by Employee for the purposes
of recouping Draws from commissions as they are earned
by Employee (“Draw Record”);

     13.3      Monthly Gross Income Calculations. At or
around the 15th day of each month, Employer shall
determine the amount of gross profit on paid invoices
generated from Employee’s sales in the previous
calendar month. Employee will be allocated a
commission amount equal to 25% of such gross profit
amount (“Gross Commission”).

     13.4      Recoupment of Draws. After Employer
determines Employee’s Gross Commission, Employer shall
deduct from such Gross Commission all amounts due and
owing to the Employer for Draws taken by Employee.

          13.4.1.   Net Commission. Any balance
remaining after the deduction of the Draws and other
applicable payroll deductions from the Gross
Commission, shall be paid to Employee at the commission
payroll period (“Net Commission”).

          13.4.2.   Draws Exceeding Gross Commission.
If Employee’s Draws as reflected in the Draw Record
exceed Employee’s Gross Commission, Employee agrees
that Employer shall be entitled to deduct as much of
the amount due in Draws from the Gross Commission as
possible. In addition, Employee agrees that any
balance remaining in Employee’s Draw Record will be
carried over into subsequent months until Employee’s
Gross Commission has satisfied such balance.

          *    *    *    *       *   *   *
                               - 7 -

     15. Unauthorized Expenses. Employees will not be
     entitled to reimbursement for expenses that are not
     previously authorized in writing by the President of
     Employer.4

     16.   Fringe Benefits.

          16.1      Health Insurance. The Employer shall
     provide health insurance pursuant to the existing
     company health insurance plan.

     17. Automobile. Employee shall, at his/her own
     expense, procure an automobile for any use in traveling
     and making calls on clients and prospective clients.
     Employee agrees to indemnify and hold Employer harmless
     from any claims arising out of or relating in any way
     to the operation or use of that automobile by Employee.
     Furthermore, Employee shall at all times during the
     term of his/her employment keep in full force and
     effect, at his/her sole expense, a policy of automobile
     insurance on each automobile used by him/her at any
     time to carry out any of the duties of his/her
     employment. [Reproduced literally.]

     Petitioner did not enroll in TIG’s medical plan.

Petitioner, his girlfriend, Kathleen Santoni (Ms. Santoni), and

their two minor children were covered by Ms. Santoni’s Costco

medical insurance.   Petitioner did not participate in TIG’s

section 401(k) plan.

     Petitioner listed his address on his 2000 Form 1040, U.S.

Individual Income Tax Return, as “6064 Erlanger Street, San

Diego, CA 92122" (San Diego address).5   On his 2000 Form 1040


     4
      A handwritten notation to this provision added “A VICE
PRESIDENT OR THE” before “President”.
     5
      Petitioner, in the joint stipulation, objected to the
admission into evidence of his 2000 Federal income tax return
because of the “non-redaction of his and third parties’ social
                                                   (continued...)
                                - 8 -

Schedule C, Profit or Loss From Business, petitioner listed

“Consultant” as his principal business or profession, and “Colvin

Business Services II” as the name of his business.   Petitioner

reported his gross receipts or sales as $20,004 and did not check

the box on line 1 of his Schedule C to indicate that the income

was reported on a Form W-2, Wage and Tax Statement, that had the

statutory employee box checked.    On petitioner’s 2000 Form W-2,

TIG did not check the box on line 15 to indicate that petitioner

was a statutory employee.   Petitioner claimed a total of $52,968

in expenses and costs of goods sold.6   Petitioner’s Schedule C

indicated a net loss of $32,964.

     Petitioner owned two vehicles, a 1997 Volkswagen Cabriolet

and a 1997 Honda Accord.    He claimed a car and truck expense of

$6,033 on Schedule C of his 2000 Form 1040.   On Schedule C Part



     5
      (...continued)
security numbers, as well as the full names of his minor
children, and phone numbers.” Petitioner also objected to the
admission into evidence of his 1997, 2001, 2002, and 2003,
Federal income tax returns on the same grounds, and relevancy.
Although the Court, on January 16, 2007, proposed amendments to
its Rules of Practice and Procedure that would provide in Rule
22.2 for the redaction of Social Security numbers and minor
children’s names, the proposed amendments have not yet been
adopted. Further, petitioner has not filed a motion to redact
the Social Security numbers and minor children’s names, or to
seal that portion of the record. The Court concludes that
petitioner’s 1997, 2000, 2001, 2002, and 2003, Federal income tax
returns are admissible in their current form.
     6
      Petitioner’s total expenses of $52,968 consisted of $46,454
in general expenses, $3,323 in cost of goods sold, and $3,191 for
business use of his home.
                               - 9 -

IV, Information on Your Vehicle, petitioner did not complete the

section and indicated “SEE STMT”.    Petitioner attached a Schedule

C “Multiple Auto Statement”.   Under the heading “Vehicle 1”,

petitioner listed business miles of 14,200.    Under the heading

“Vehicle 2”, petitioner listed business miles of 4,000.

     For 2000, petitioner claimed a Schedule C interest deduction

on a loan he entered into with his mother, Rhoda Colvin, in the

amount of $5,195.   Respondent disallowed the entire deduction.

Petitioner presented as substantiation a photocopy of the front

of a check issued to his mother in the amount of $5,000.     A

handwritten notation on the memo line of the check indicated that

the check was for “Loan Repayment”.    Other handwritten notations

on the top of the check were “Loan Pay & Int 4575”, “Mar Mtg

425.00”, and “also Honda Ref $300 toward GLC Loan of $35,000”.

     Petitioner also claimed as a Schedule C deduction $1,750 in

fees he allegedly paid to his mother for accounting services, tax

preparation, and representation.    Petitioner’s 1997, 2000, and

2003, Federal tax returns indicate that they were prepared by his

mother.   Petitioner presented as substantiation an invoice in the

amount of $500 from Colvin Business Services, a business

conducted by petitioner’s mother, to Colvin Business Services II,

petitioner’s business.   The invoice, dated April 30, 2000,

reflects that petitioner paid the invoice with check No. 6718 on

June 5, 2000.   Petitioner’s original bank statements were
                               - 10 -

apparently lost somehow by either petitioner or respondent during

the tax examination.    In lieu of these, petitioner presented a

self-created computerized “Register Report” which petitioner

testified “is a check register”.    Notably, however, the Register

Report does not reflect check No. 6718's ever clearing

petitioner’s bank account.    The Court asked petitioner whether

the Register Report included “all your checks?”    Petitioner’s

answer was “Yes, sir.    Anything hitting my bank account” during

the 2000 taxable year.    Checks numbered 6717 and 6719 are shown

in the Register Report as cleared on June 12 and June 16, 2002,

respectively, but check No. 6718 is never mentioned.

     In addition, petitioner claimed a Schedule C deduction for

legal fees and costs in the amount of $7,903.    The parties

stipulated, as to that item, that the only issue still in

contention is petitioner’s legal fees of $1,689.65 for the case

Smyth v. Daou Sys., Inc, No. 97-CV-02013 (S.D. Cal. filed Nov. 7,

1997).7   Petitioner presented as substantiation a document

specifying the amount of the award he received, a Form W-2

characterizing the settlement as a bonus, the accompanying check

from Daou Systems for $5,918.82 ($8,000 less withholding taxes of

$2,081.18) payable to his attorney Michael Conger (Mr. Conger),




     7
      Petitioner was employed by Daou Systems as a Senior Network
Systems Engineer / Project Manager from Aug. 1995 to Mar. 1997.
Petitioner conceded that he was not a statutory employee.
                              - 11 -

as well as his attorney’s statement detailing the expenses and

fees incurred, and some court documents.

     Petitioner claimed on Schedule C $3,323 for cost of goods

sold (CGS).   The notice of deficiency disallowed $659 of

petitioner’s claimed CGS.   Petitioner’s CGS consisted of $2,833

of computer hardware and $490.39 of computer software.

Petitioner provided substantiation for $58.80 in computer

software receipts and was allowed a software CGS for that amount.

Petitioner’s Register Report listed computer hardware items and

the dates they were purchased, which respondent considered when

he allowed $2,605 of petitioner’s claimed hardware items CGS.

Respondent disallowed the balance of the claimed CGS for lack of

substantiation and because the items were allegedly used as

capital assets and not inventory.8

     On his 1997 Form 1040, petitioner used his San Diego

address.   On his 2001 and 2002 Forms 1040, petitioner listed

“2330 Candle Ridge Trail, Georgetown, TX 78626" (Georgetown,

Texas, address) as his address.

     Form 872, Consent to Extend the Time to Assess Tax, for

petitioner’s 2000 taxable year was signed by petitioner on



     8
      The cursory revenue agent’s report does not clearly
identify which hardware items were disallowed. Based on the
total dollar amount disallowed of $228 ($659 total CGS
disallowance minus $431 software disallowance), it appears the
items were: (1) “16MB FLASH” for $70; (2) floppy drive for $65;
(3) “RAM, zipdrive” for $23; and (4) a 56K modem for $70.
                              - 12 -

February 15, 2004, and by respondent on March 29, 2004.    On the

designated space for the taxpayer’s address on Form 872,

petitioner’s Georgetown, Texas, address is typed.   However, on

one of the copies of this form, which was produced by respondent

from his records in digital CD format, there is a photocopy of a

post-it note in the middle with the handwritten notation “1752 W.

Muirwood DR, Phoenix, AZ 85045, new address” (Muirwood, Phoenix

address).   It is not clear from the record when the handwritten

notation was added.   Respondent concedes that the record does not

indicate how the Internal Revenue Service (IRS) was informed of

the new address.

     On August 20, 2004, respondent received petitioner’s Form

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

Individual Income Tax Return, for taxable year 2003 that had

listed as his address “1111 South Creek Drive, #831, Round Rock,

TX 78664” (Round Rock, Texas, address).   Petitioner also listed

the Round Rock, Texas, address as his address on his earlier

filed Form 4868, Application for Automatic Extension of Time to

File U.S. Individual Income Tax Return, and on his 2003 Form

1040, which was mailed on October 15, 2004, and received by

respondent on October 22, 2004.

     Previously, respondent had issued a notice of deficiency on

June 10, 2004, for petitioner’s 2000 taxable year showing a

deficiency of $13,018.   The record reflects that the notice of
                                 - 13 -

deficiency was sent to four separate addresses.     One notice of

deficiency was addressed to “Gary L. Colvin, 1752 West Muirwood

Drive, Phoenix, AZ, 85045-1741”.9     A second similar notice was

addressed to “Gary L. Colvin, Unit #831, 1111 South Creek Drive,

Round Rock, TX, 78664-0000”.10    A third notice of deficiency was

addressed to “Gary L. Colvin, 2330 Candle Ridge Trail,

Georgetown, TX 78626-0000”.11    A fourth notice of deficiency was

addressed to “Gary L. Colvin, 6064 Erlanger Street, San Diego, CA

92122-0000”.12   All four copies of the notice of deficiency were

returned to the IRS as unclaimed.


     9
      The certified envelope containing that notice of deficiency
had notations reflecting that the U.S. Postal Service attempted
to deliver the notice to petitioner on June 12, June 17, and had
returned the undelivered envelope to the IRS on June 27, 2004.
The envelope also bore stamps of “UNCLAIMED”, “INTERNAL REVENUE
SERVICE RECEIVED JUL 06 2004”, and “90 DAY UNIT LAGUNA NIGUEL”.
     10
      The certified envelope containing that notice of
deficiency had a line through the address and bore stamps
providing “INTERNAL REVENUE SERVICE RECEIVED JUL 21 2004”, and
“90 DAY UNIT LAGUNA NIGUEL”.
     11
      The certified envelope containing that notice of
deficiency had a line through the address, notations reflecting
that the U.S. Postal Service attempted to deliver for a second
time the notice to petitioner on July 23, 2004. The
undeliverable envelope was returned to the IRS on July 30, 2004,
and bore stamps providing “INTERNAL REVENUE SERVICE RECEIVED AUG
09 2004”, and “90 DAY UNIT LAGUNA NIGUEL”.
     12
      The certified envelope containing this notice of
deficiency had a handwritten notation of “2nd Return 6-17",
reflecting that the U.S. Postal Service attempted to deliver the
notice to petitioner on at least one occasion, and bore stamps of
“RETURNED TO SENDER” with “ATTEMPTED NOT KNOWN” checked,
“INTERNAL REVENUE SERVICE RECEIVED JUN 23 2004”, and “90 DAY UNIT
LAGUNA NIGUEL”.
                              - 14 -

     Petitioner’s request for a copy of the notice of deficiency

from the IRS was received by the Taxpayer Advocate Service (TAS)

on July 23, 2004.   A copy of the notice of deficiency was

provided by the TAS in Laguna Niguel, California, and was

attached to a letter to petitioner dated July 28, 2004.   The

letter was addressed to petitioner’s Round Rock, Texas, address.

Petitioner petitioned timely this Court on September 8, 2004.

Petitioner stated on the petition his requests for relief and his

supporting reasons as follows:

     Deductions taken for employee mileage allowable as a
     Schedule A deduction; deductions taken for business
     mileage allowable as a Schedule C deduction; legal fees
     and costs are allowable as a deductible [sic] under
     I.R.C. Sections 212(1), 212(3), 216 and 262. Further,
     Commissioner acted in violation of multiple sections of
     Title 26 USC as well as its own I.R.C. when it
     deliberately failed to complete its audit of
     petitioner’s tax return; deliberately failed to
     consider any of the documents petitioner timely
     submitted to substantiate his personal, employee and
     business deductions; deliberately sent audit
     correspondence to an address it knew was improper so as
     to prevent petitioner from exercising his right to an
     administrative appeal hearing; deliberately sent the
     statutory 90-day notice to an address it knew it was
     improper thereby denying petitioner proper notice of
     the alleged deficiency; and falsified documents to make
     it appear notice was proper.


                              OPINION

I.   Burden of Proof

     As a general rule, the Commissioner’s determination of a

taxpayer’s liability is presumed correct, and the taxpayer bears

the burden of proving that the determination is improper.    See
                              - 15 -

Rule 142(a); Welch v. Helvering, 

, 115 (1933).

However, pursuant to section 7491(a), the burden of proof on

factual issues that affect the taxpayer’s tax liability may be

shifted to the Commissioner where the “taxpayer introduces

credible evidence with respect to * * * such issue”.    The burden

will shift only if the taxpayer has, inter alia, complied with

substantiation requirements pursuant to the Internal Revenue Code

and “cooperated with reasonable requests by the Secretary for

witnesses, information, documents, meetings, and interviews”.

Sec. 7491(a)(2).   In the instant case, petitioner failed to

comply with substantiation requirements and did not present

credible evidence at trial.   Petitioner’s original bank

statements were apparently lost during the tax examination.

However, petitioner’s lack of substantiation and failure to

present credible evidence were pervasive.    Accordingly, the

burden of proof remains on petitioner.

II.   Mailing of Notice of Deficiency

      Petitioner argues that this Court lacks jurisdiction.     The

two requirements for this Court’s jurisdiction in a deficiency

case are a valid notice of deficiency issued by the Commissioner

and a timely filed petition by the taxpayer.     Frieling v.

Commissioner, 

, 46 (1983).     Because petitioner filed

his petition on time, the only jurisdictional issue is the

validity of the notice of deficiency.
                                 - 16 -

     The purpose of the mailing under section 6212 is to provide

the taxpayer with notice that a deficiency has been determined

against him or her, and to provide the taxpayer with an

opportunity to petition this Court to challenge the

Commissioner’s determination.13

  When a taxpayer

receives actual notice of a deficiency and does not suffer

prejudicial delay in filing timely a petition with this Court,

the notice of deficiency, even though incorrectly addressed, is

valid under section 6212(a).14    Estate of Greenwood v.


     13
      Petitioner contends that Jones v. Flowers, 

(2006) “ruled that the government could not rely solely on an
unclaimed certified letter for properly notifying a taxpayer of
claimed tax liabilities.” Petitioner’s contention is mistaken
and Jones v. 

, is not applicable to petitioner’s
case. Jones v. 

, held that according to the
Fourteenth Amendment Due Process Clause, the State of Arkansas
should have taken additional reasonable steps to notify the
petitioner of a tax sale of his house after a certified letter
was returned unclaimed. Notably, Mr. Jones did not learn of the
tax sale until after the sale had occurred; whereas in the
instant case petitioner obtained a copy of the notice of
deficiency before the expiration of the 90-day filing period and
filed a timely petition.
     14
      Petitioner alleges that the notice of deficiency sent to
his Round Rock, Texas, address was addressed erroneously.
Petitioner alleges that because respondent placed “Unit 831"
before “1111 South Creek Drive” in addressing the notice of
deficiency, this “caused the US Postal Service to process the
letter as one destined to be delivered to a private mailbox or
‘PMB’ contained within a commercial facility such as a MAILBOXES
ETC., POSTNET, POSTAL ANNEX, and PAKMAIL; not the apartment
Petitioner resided at”. [Reproduced literally.] Petitioner
asserts that as a result of the misaddressing by respondent, the
notice of deficiency was returned to respondent.

     Petitioner also asserts that respondent committed criminal
                                                   (continued...)
                              - 17 -

Commissioner, T.C. Memo. 2003-98 (citing St. Joseph Lease Capital

Corp. v. Commissioner, 

, 891-892 (4th Cir. 2000),

affg. T.C. Memo. 1996-256; Estate of Biskis v. Commissioner, T.C.

Memo. 2001-94; Estate of Citrino v. Commissioner, T.C. Memo.

1987-565).   Petitioner had actual notice of the deficiency as he

requested, and received, a copy of the notice of deficiency from

the IRS TAS.   Petitioner filed a petition that was timely and,

therefore, did not suffer prejudicial delay.   Accordingly, the

Court concludes that the notice of deficiency is valid, and this

Court has jurisdiction.

III. Statutory Employee

     A. General Rules

     A statutory employee may properly reflect business income

and expenses in full on Schedule C of Form 1040, and thereby

avoid the Schedule A, Itemized Deductions, limitations on the

deduction of employee business expenses and the phaseout of




     14
      (...continued)
obstruction of justice by intentionally misaddressing the notice
of deficiency sent to the Round Rock, Texas, address. The Court
concludes that these allegations are unfounded, frivolous, and
meritless. If anything, the evidence indicates that respondent,
by sending four differently addressed notices of deficiency, was
very interested in ensuring that petitioner received the notice
of deficiency.

     Additionally, petitioner alleges that he did not receive a
complete copy of the notice of deficiency until 9 months after
filing his petition. However, petitioner attached a complete
copy of the notice of deficiency to his filed petition.
                                - 18 -

itemized deductions.15    See Prouty v. Commissioner, T.C. Memo.

2002-175 (citing Rev. Rul. 90-93, 1990-2 C.B. 33).     An individual

qualifies as a statutory employee pursuant to section 3121(d)(3)

only if such individual is not a common law employee pursuant to

section 3121(d)(2).     Ewens & Miller, Inc. v. Commissioner, 

, 269 (2001).     Section 3121(d) defines employee, in

pertinent part, as follows:

          (1) any officer of a corporation; or

          (2) any individual who, under the usual common law
     rules applicable in determining the employer-employee
     relationship, has the status of an employee; or

          (3) any individual (other than an individual who
     is an employee under paragraph (1) or (2)) who performs
     services for remuneration for any person--

          *    *      *     *    *    *    *

               (D) as a traveling or city salesman,
          other than as an agent-driver or commission-
          driver, engaged upon a full-time basis in the
          solicitation on behalf of, and the
          transmission to, his principal (except for
          side-line sales activities on behalf of some
          other person) of orders from wholesalers,
          retailers, contractors, or operators of
          hotels, restaurants, or other similar
          establishments for merchandise for resale or
          supplies for use in their business
          operations;


     15
      Generally, an employee may deduct unreimbursed employment
expenses on Schedule A subject to an overall 2-percent of
adjusted gross income limitation. See secs. 62(a), 67(a). A
statutory employee is not an employee for purposes of sec. 62.
See sec. 3121(d); Prouty v. Commissioner, T.C. Memo. 2002-175.
As the Court concludes, infra, that petitioner is not a statutory
employee, petitioner’s expenses are subject to this overall
2-percent of adjusted gross income limitation.
                                - 19 -


     if the contract of service contemplates that
     substantially all of such services are to be performed
     personally by such individual; except that an
     individual shall not be included in the term “employee”
     under the provisions of this paragraph if such
     individual has a substantial investment in facilities
     used in connection with the performance of such
     services (other than in facilities for transportation),
     or if the services are in the nature of a single
     transaction not part of a continuing relationship with
     the person for whom the services are performed * * *

     As an individual qualifies as a statutory employee only if

the individual is not a common law employee, the Court will

initially determine whether petitioner was a common law employee

of TIG.

     B. Common Law Employee

     Whether an individual is an independent contractor or common

law employee is a question of fact.      Weber v. Commissioner, 

, 386 (1994), affd. 

(4th Cir. 1995).     In the

Fifth Circuit, to which this case would normally be appealable,

doubtful questions should be resolved in favor of employment.

Breaux & Daigle, Inc. v. United States, 

, 52 (5th Cir.

1990).    Generally, petitioner has the burden of proving error in

respondent’s notice of deficiency determination that he was a

common law employee.   See Rule 142(a); Profl. & Executive

Leasing, Inc. v. Commissioner, 

, 231 (1987), affd. 

(9th Cir. 1988).     However, respondent conceded on brief
                                - 20 -

that he bears the burden of proof on the statutory employee issue

because it constitutes a new matter under Rule 142.16

     In determining whether a worker is a common law employee or

an independent contractor, the Court generally considers:

(1) The degree of control exercised by the principal; (2) which

party invests in work facilities used by the individual; (3) the

opportunity of the individual for profit or loss; (4) whether the

principal can discharge the individual; (5) whether the work is

part of the principal’s regular business; (6) the permanency of

the relationship; (7) the relationship the parties believed they

were creating; and (8) the provision of employee benefits.   See

Ewens & Miller, Inc. v. 

at 270; Weber v.

at 387; Profl. & Executive Leasing, Inc. v.

at 232; Simpson v. Commissioner, 

,

984-985 (1975); Cole v. Commissioner, T.C. Memo. 2006-44.    All of

the facts and circumstances of each case are considered, and no

single factor is dispositive.    Ewens & Miller, Inc. v.

at 270.

          1. Degree of Control

     The right of the principal to exercise control over the

agent, whether or not the principal does so, is the “crucial


     16
      Respondent conceded that he bears the burden of proof
pursuant to Rule 142 because “The issue of Petitioner’s status as
a statutory employee of TIG is a new matter since the Notice of
Deficiency frames the issue of Petitioner’s Schedule C expenses
from the perspective of substantiation.”
                              - 21 -

test” for the employer-employee relationship.     Weber v.

at 387.   “The employment relationship exists

when the principal retains the right to direct the manner in

which the work is done, and to control the methods used in doing

the work, and to control the details and means by which the

desired result is accomplished.”   Ellison v. Commissioner, 

, 152-153 (1970).   In order to obtain the requisite

degree of control, “the alleged employer need not ‘stand over the

employee and direct every move that he makes.’”     Simpson v.

at 985 (citing Atl. Coast Life Ins. Col. v.

United States, 

, 630 (E.D.S.C. 1948).    In fact,

the employer need not set the employee’s hours.    Workers who set

their own hours are not necessarily independent contractors.

Ewens & Miller, Inc. v. 

at 270.

     In his argument that petitioner was a common law employee,

respondent relies predominately on the employment agreement and

the TIG Employee Handbook Manual (employee manual).    Respondent

contends that TIG controlled the details of petitioner’s work

because the employment agreement provides that the “Employee

shall perform such duties as are customarily performed by an

Account Executive, and such other duties as the President of

Employer * * * may require from time to time”.    Respondent then

asserts, based on the employee manual, that “Such duties include

TIG’s requirement that Petitioner attend weekly meetings.    TIG
                               - 22 -

prescribed appropriate dress for Petitioner.    TIG specified how

its telephones, software, and company vehicles were to be used.”

Respondent also presented as evidence a “WRITTEN WARNING NOTICE”

from Mr. Rasmussen, petitioner’s supervisor, that reprimanded

petitioner for argumentative comments made during a “lunch-n-

learn” session with a vendor of TIG.

     Petitioner contends that he set his own work hours and sales

territory, defined the manner in which he performed his tasks,

worked principally from home, and was not required to utilize

TIG’s support staff or attend routine meetings.   Other than his

own testimony, petitioner did not provide any substantiation of

these facts.

     The Court concludes that respondent has met his burden of

proof as to the degree of control that TIG exercised over

petitioner.    The documentary evidence that respondent presented

indicates that TIG had the right to control, whether or not

exercised, how petitioner performed his work.   This is

particularly exemplified by the “WRITTEN WARNING NOTICE” issued

by Mr. Rasmussen and the employment history it recites.

Accordingly, this “crucial” factor weighs in favor of employee

status.

          2. Investment in Facilities

     The fact that a worker provides his or her own tools, or

owns a vehicle that is utilized for work, is indicative of
                               - 23 -

independent contractor status.

(citing Breaux &

Daigle, Inc. v. United 

).      Additionally,

maintenance of a home office is consistent with independent

contractor status, although alone it does not constitute

sufficient basis for a finding of independent contractor status.

Lewis v. Commissioner, T.C. Memo. 1993-635.

     Petitioner owned two vehicles and claimed he utilized both

for work purposes for 2000, although the extent of such use is

disputed.   The employment agreement provided that petitioner was

to maintain motor vehicle insurance at all times and that all

other related expenses were his responsibility.      The record

reflects that petitioner worked at least part-time from home.

Petitioner claimed as a Schedule C deduction $3,191 for business

use of his home, which respondent allowed.      Accordingly, the

Court concludes that this factor tends to weigh in favor of

independent contractor status.

            3. Opportunity for Profit or Loss

     Compensation on a commission basis is entirely consistent

with an employer-employee relationship.    Tex. Carbonate Co. v.

Phinney, 

, 292 (5th Cir. 1962); Capital Life & Health

Ins. Co. v. Bowers, 

, 944-945 (4th Cir. 1951).         While

petitioner could have conceivably suffered some loss as a result

of his sales activity for TIG, he may still be an employee under

the common law test if his risk of loss was negligible.      See
                                - 24 -

Lewis v. 

.      Petitioner worked for TIG for

approximately 6 months in 2000.     Petitioner was paid a

nonrecoverable draw in the amount of $5,000 for the first 4

months, and then $2,500 for the fifth and sixth months.

Thereafter, petitioner’s draw was recoverable against his sales

commission on a month-to-month basis.     In 2000, petitioner was

entitled to a nonrecoverable draw for the entire period he

worked; therefore, petitioner’s risk of loss was negligible, if

not nil.   The Court concludes that this factor weighs in favor of

an employer-employee relationship.

           4. Right To Discharge

     Employers typically have the power to terminate employees at

will.   Ellison v. 

at 155.     The employment

agreement provided that TIG could terminate petitioner at will

with or without cause or notice.     Notably, TIG exercised its

termination right.   Accordingly, the Court concludes that this

factor weighs in favor of an employer-employee relationship.

           5. Integral Part of Business

     Petitioner contends that he was not an integral part of

TIG’s business.   Petitioner claims that TIG was a “diverse

company with separate divisions that sold” the following:

(1) Services, (2) computer hardware, (3) office furnishings,

(4) office supplies, (5) outside help-desk functions, and

(6) “Application Service Processing”.     Petitioner further asserts
                               - 25 -

that TIG performed computer training and installed networking

cable and telephone systems.   As a result, petitioner argues that

he “was not a key connection with customers, only one of many

resources available to them”, and was therefore not an integral

part of TIG’s business.   However, the fact that TIG had several

separate divisions does not affect the analysis of whether

petitioner’s services were integral to TIG.   Petitioner’s

services could have been integral to the division in which he

worked, which would indicate that petitioner was an employee.

See Ewens & Miller, Inc., v. Commissioner, 

.

     Respondent was silent on the issue.   The Court concludes

that this factor is neutral and indicates neither independent

contractor status nor employee status.

          6. Permanency of the Relationship

     A transitory work relationship may weigh in favor of

independent contractor status.   Ewens & Miller, Inc. v.

at 273 (citing Herman v. Express Sixty-

Minutes Delivery Serv., Inc., 

, 305 (5th Cir. 1998)).

The principal’s right to discharge the worker, and the worker’s

right to quit, at any time, is an important factor.

TIG was for renewable 1-year terms.     It

was also at will and terminable by either party at any time, with

or without cause or notice, and petitioner was in fact

terminated.   The Court concludes that petitioner’s position was
                                 - 26 -

transitory as he worked for TIG for less than 13 months.17

Accordingly, this factor weighs in favor of independent

contractor status.

             7. Relationship the Parties Thought They Created

     The offer and employment agreement refer to workers, such as

petitioner, as employees, and to TIG as the employer.        Notably,

TIG did not check the box on line 15 of petitioner’s 2000 Form

W-2 indicating that he was a statutory employee.        It is evident

that for taxable year 2000 TIG thought of petitioner as an

employee based on the employment agreement, and that TIG treated

petitioner as a common law employee based on Forms W-2 and W-4,

Employee’s Withholding Allowance Certificate.18        Thus, the Court

concludes that petitioner and TIG intended to create an employer-

employee relationship.

             8. Provision of Employee Benefits

     The offer and employment agreement provide that TIG

employees are eligible to participate in a health insurance plan


     17
          Petitioner was terminated on May 29, 2001.
     18
      Respondent argued on brief that TIG had not checked
petitioner’s Form W-2 for 2001 indicating that he was a statutory
employee. In fact, the TIG Form W-2 for 2001 that is attached to
petitioner’s stipulated Federal tax return does bear an “X” in
the block on line 13 indicating that for 2001 TIG’s Form W-2
treated petitioner as a statutory employee. Inexplicably, the
copy of the TIG Form W-2 for 2001 attached to Exhibit 26-R, which
was also stipulated, seems identical to the copy of this form
attached to petitioner’s 2001 Federal tax return, but does not
contain the “X” in the block on line 13 indicating a statutory
employee.
                               - 27 -

and a section 401(k) plan.    These are benefits that are typically

provided to employees rather than independent contracts.    See

Weber v. Commissioner, 

.    Although petitioner

did not participate in TIG’s health insurance plan because he was

covered by his girlfriend’s health insurance, and did not

participate in TIG’s section 401(k) plan, the benefits were

available to him if needed.   See

tends to weigh in favor of employee status.

          9. Conclusion

     The relationship between petitioner and TIG had aspects that

were characteristic of an employer and employee relationship and

others characteristic of a principal and independent contractor

relationship.   After weighing the above factors, the Court

concludes that petitioner was a common law employee of TIG for

the 2000 taxable year.

     Petitioner was a common law employee of Daou Systems during

his employment from August 1995 to March 1997.   As a result, the

settlement he received from Daou Systems in 2000 is related to

his common law employment.    Petitioner claims to have conducted a

computer assembly and consulting business, Computer Consulting

Forum Company, in 2000.   As discussed infra, petitioner’s lack of

gross sales, as well as lack of substantiation, leads the Court

to conclude otherwise.
                                 - 28 -

      C. Statutory Employee

      As the Court has concluded that petitioner was a common law

employee of TIG for taxable year 2000, petitioner is precluded

from being a statutory employee pursuant to section 3121(d)(3).

Accordingly, petitioner is not entitled to deduct expenses on

Schedule C.

IV.   Petitioner’s Deductions

      In light of the Court’s conclusion that petitioner is not

entitled to deduct expenses on Schedule C, the Court must now

decide whether petitioner is entitled to deduct expenses incurred

in connection with his employment on Schedule A.   See sec. 67(a).

      A. Schedule A Deductions

      An individual performing services as an employee may deduct

miscellaneous itemized deductions incurred in the performance of

services as an employee only to the extent such expenses exceed 2

percent of the individual’s adjusted gross income.   Sec. 67(a).

      B. General Deduction Rules

      Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he is entitled to any

claimed deductions.   INDOPCO, Inc. v. Commissioner, 

,

84 (1992); New Colonial Ice Co. v. Helvering, 

, 440

(1934).   Taxpayers must maintain records relating to their income

and expenses and must prove their entitlement to all claimed
                               - 29 -

deductions, credits, and expenses in controversy.     See Sec. 6001;

Rule 142(a).

     Pursuant to section 162(a), a taxpayer is entitled to deduct

all of the ordinary and necessary business expenses paid or

incurred during the taxable year in carrying on a trade or

business.   The deduction for an employed individual’s

unreimbursed business expenses under section 162 is claimed on

Form 2106, Employee Business Expenses, and included in the

miscellaneous itemized deductions taken on Form 1040 Schedule A.

Expenses incurred in the performance of services as an employee

are to be reported and memorialized as required by the

regulations promulgated under section 162.      See sec. 1.162-17(a),

Income Tax Regs.   The taxpayer bears the burden of proving that

the claimed expenses were ordinary and necessary according to

section 162.   The employee must show the relationship between the

expenditures and the employment.    See Evans v. Commissioner, T.C.

Memo. 1974-267, affd. in part, revd. in part 

(5th

Cir. 1977).    In certain instances, the taxpayer must meet

specific substantiation requirements in addition to the

requirements of section 162.    See sec. 274.

     Generally, a claimed expense (other than those subjected to

heightened scrutiny under section 274) may be deductible even

where the taxpayer is unable to fully substantiate it, if there

is an evidentiary basis for doing so.    Cohan v. Commissioner, 39
                                - 30 -

F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 

, 742-743 (1985); Sanford v. Commissioner, 

,

827-828 (1968), affd. per curiam 

(2d Cir. 1969);

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

(Nov. 6, 1985).   In these instances, the Court is permitted to

make as close an approximation of the allowable expense as it

can, bearing heavily against the taxpayer whose inexactitude is

of his or her own making.     Cohan v. 

.

     C. Automobile Mileage

     Pursuant to section 162, expenses relating to the use of an

automobile that a taxpayer pays or incurs while commuting between

the taxpayer’s residence and the taxpayer’s place of business or

employment are not deductible because such expenses are personal,

and not business, expenses.    Sec. 1.162-2(e), Income Tax Regs.

Automobile mileage deductions are also subject to the strict

substantiation requirements of section 274(d).    Where petitioner

shows that his automobile expenses satisfy the requirements of

section 162, but fails to establish that his records satisfy the

heightened substantiation requirements of section 274(d), the

expenses will not be allowable.

     Section 274(d) applies to:    (1) Any traveling expense,

including meals and lodging away from home; (2) entertainment,

amusement, and recreational expenses; or (3) the use of “listed

property”, as defined in section 280F(d), including personal
                              - 31 -

computers and passenger automobiles.   To deduct such expenses,

the taxpayer must substantiate by adequate records or sufficient

evidence to corroborate the taxpayer’s own testimony:     (1) The

amount of the expenditure or use, which includes mileage in the

case of automobiles; (2) the time and place of the travel,

entertainment, or use; (3) its business purpose; and in the case

of entertainment, (4) the business relationship to the taxpayer

of each expenditure or use.   Sec. 274(d)(4).

     To satisfy the adequate records requirement of section 274,

a taxpayer must maintain records and documentary evidence that in

combination are sufficient to establish each element of an

expenditure or use.   Sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).   Although a

contemporaneous log is not required, corroborative evidence to

support a taxpayer’s reconstruction of the elements of the

expenditure or use must have “a high degree of probative value to

elevate such statement” to the level of credibility of a

contemporaneous record.   Sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

     In lieu of substantiating the actual amount of any

expenditure relating to the business use of a passenger

automobile, a taxpayer may use a standard mileage rate as

established by the IRS.   See sec. 1.274-5(j)(2), Income Tax Regs.

The standard mileage rate is to be multiplied by the number of
                               - 32 -

business miles traveled.    The use of the standard mileage rate

establishes only the amount deemed expended with respect to the

business use of a passenger automobile.

still establish the amount (i.e., business mileage), the time,

and the business purpose of each use.

car and truck deduction of $6,033 on

his 2000 Schedule C.    Respondent allowed only $780 of the claimed

deduction.    At trial, petitioner produced little additional

documentation.    Petitioner was unable to identify which of his

two vehicles, the Volkswagen or the Honda, was “Vehicle 1" on his

Schedule C.    Petitioner explained that he arrived at his total

mileage figure of 18,200 by estimation based on his fuel

expenditures for taxable year 2000, divided by the average miles

per gallon for his two vehicles.19   Petitioner has failed to meet


     19
      Petitioner claims that he spent $1,661.47 on gasoline (87
octane) in 2000. Petitioner determined, from unspecified public
records, the average price of gasoline in California for 2000 to
be between $1.30 and $1.60 per gallon. Petitioner then
determined that the average miles per gallon, combining street
and highway, for his two cars was between 30 and 32 miles.
Petitioner took his total gas expense, divided it by the average
cost of gas per gallon, and then multiplied it by the average
miles per gallon of his two cars, which came to approximately
32,000 miles traveled. Petitioner then testified that he assigned
approximately 12,000 miles to personal use, and approximately
18,000 to business-related use.

     Petitioner was required to use a standard mileage rate
established by the IRS in lieu of establishing the actual amount
of his expenditure. See sec. 1.274-5(j)(2), Income Tax Regs.
The business standard mileage rate for the 2000 taxable year was
32.5 cents per mile. Rev. Proc. 99-38, 1999-2 C.B. 525.
                                                   (continued...)
                                - 33 -

the substantiation requirements of section 274 to establish his

automobile mileage.     Accordingly, petitioner is allowed a

miscellaneous itemized Schedule A deduction in the amount of

$780, subject to the overall 2-percent of adjusted gross income

limitation.

     D. Loan Interest

     Pursuant to section 163(a), interest is deductible.

However, personal interest generally is not deductible.

Sec. 163(h).   Debt arrangements between family members are

subject to a high level of scrutiny.     Zohoury v. Commissioner,

T.C. Memo. 1983-597.     The following factors are used to

scrutinize intrafamily loans: (1) Whether a specific rate of

interest is charged to the taxpayer for the use of the money;

(2) whether there is a specific date for repayment; (3) whether

there is a written instrument evidencing the debt; (4) whether

there is a legitimate purpose for obtaining the loan; (5) whether

the taxpayer intended to repay the debt; (6) whether the relative

receiving the payments on the loan was impecunious; and

(7) whether the loan has economic substance.

      (...continued)
Petitioner’s 18,200 claimed business miles multiplied by the
business standard mileage rate of 32.5 cents totals $5,915. See

5.02, 1999-2 C.B. at 526-527. The Court
concludes that petitioner’s calculations do not comply with Rev.
Proc. 99-38, 1999-2 C.B. 525.
                               - 34 -

     Petitioner claimed $5,195 in interest expenses on his

Schedule C for 2000.    Respondent disallowed the entire deduction.

Petitioner’s only substantiation was a copy of a check he had

issued to his mother in the amount of $5,000.    Notations on the

check indicate that the $5,000 was to be put towards numerous

uses, including loan payment and interest in the amount of

$4,575, petitioner’s March 2000 mortgage in the amount of $425,

and a car loan in the amount of $300.   At trial, petitioner

testified that he was unsure how much of the $5,000 check

constituted interest.

     Notably, petitioner did not have a written loan agreement.

The loan was based on an oral agreement.    Petitioner’s mother

kept records relating to the loan in a written journal.    Those

records indicate that petitioner was not held to a strict

repayment schedule and that the interest rate fluctuated.

Petitioner has failed to satisfy the requirements to deduct

interest on an intrafamily loan.   Accordingly, the Court sustains

respondent’s determination on this issue.

     E. Accounting Fees

     Petitioner claimed $1,750 in fees he allegedly paid to his

mother for accounting services, tax preparation, and

representation, on his 2000 Form 1040 Schedule C.    Respondent

disallowed the entire deduction.   The only substantiation

petitioner offered was an invoice from his mother’s business that
                               - 35 -

indicated petitioner paid $500 for her services.      The invoice

specifically referenced payment by check No. 6718, which

apparently never cleared petitioner’s bank account.      Petitioner

has failed to substantiate his claimed accounting, tax

preparation, and representation fees.      Accordingly, the Court

sustains respondent on this issue.      Petitioner is not entitled to

a deduction for accounting fees.

     F. Cost of Goods Sold

     “The cost of goods purchased for resale, with proper

adjustment for opening and closing inventories, is deducted from

gross sales in computing gross income.”      Sec. 1.162-1(a), Income

Tax Regs.   A taxpayer may also deduct the cost of supplies and

materials consumed in the operation of his or her business during

the taxable year.   See sec. 1.162-3, Income Tax Regs.

     Petitioner claimed on Schedule C $3,323 for CGS.      Respondent

disallowed $659 of petitioner’s CGS.      Petitioner asserted that he

purchased the items constituting his CGS for use in his sales

activity for TIG and then provided substantiation for $58.50 in

computer software.20   The remaining items listed as his CGS were

allegedly used in his computer assembly and consulting business,

Computer Consulting Forum Company.      Petitioner claimed to have


     20
      Petitioner contended that he purchased a Palm Pilot which
he “used for appointments” that were “related to * * * [his]
business.” Petitioner further testified that the Palm Pilot
“actually got run over by a car and flattened. So it was a total
loss that year.”
                                - 36 -

assembled and sold some computers at cost during the 2000 taxable

year, although he failed to provide substantiation.    Notably,

petitioner’s 2000 Federal tax return did not report any gross

receipts from the alleged sales.

     The regulations promulgated under section 162 clearly

provide that CGS is deductible from “gross sales”.    Petitioner

did not report any “gross sales” from his computer assembly

business.   Petitioner failed to substantiate the cost of

materials and supplies allegedly used in his computer assembly

business.   Further, petitioner’s testimony established that he

purchased items he believed were CGS, such as the Palm Pilot, for

use, not for resale.   Petitioner has failed to substantiate the

CGS disallowed by respondent.    Accordingly, the Court sustains

respondent on this issue.    Petitioner is entitled to $2,664 in

CGS for taxable year 2000.

     G. Legal Fees

     Generally, legal fees are deductible on a Schedule C 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 business.     Test v.

Commissioner, T.C. Memo. 2000-362 (citing United States v.

Gilmore, 

(1963)), affd. 

(9th Cir.

2002).   Expenses not incurred in a trade or business activity but

in the production or collection of income are deductible only as
                                - 37 -

miscellaneous itemized deductions on Schedule A.    See secs.

67(b), 212(l); Test v. 

.     It is well

established that even though a taxpayer’s employee status may be

regarded as a trade or business, legal fees stemming from a

taxpayer’s employee status are not deductible in computing

adjusted gross income but are to be treated as miscellaneous

itemized deductions.   Test v. 

.

     The case Smyth v. Daou Systems, Inc., No. 97-CV-02013 (S.D.

Cal. filed Nov. 7, 1997), is related to petitioner’s former

employment with Daou Systems.    As a result of the litigation,

petitioner recovered a total of $8,000 from Daou Systems (which

was subject to withholding).    The net amount of $5,918.82 was

actually paid to petitioner’s attorney, Mr. Conger, who deducted

his legal fees of $1,689.65 and paid the remainder to petitioner.

The Court concludes that petitioner is entitled to deduct

$1,689.65 as a miscellaneous itemized expense on Schedule A,

subject to the overall 2-percent of adjusted gross income

limitation.

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.     To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.
                        - 38 -

To reflect the foregoing and concessions by both parties,



                                   Decision will be entered

                              under Rule 155.