T.C. Summary Opinion 2008-152



                      UNITED STATES TAX COURT



                   ORLIE E. FAY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 8916-07S, 8927-07S.     Filed December 8, 2008.



     James Allen Brown, for petitioner.

     Ann Darnold, for respondent.



     HAINES, Judge:   These consolidated cases were heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect when the petitions were filed.1    Pursuant to section

7463(b), the decisions to be entered are not reviewable by any




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
                                 - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

       Respondent determined deficiencies and additions to tax with

respect to petitioner’s Federal income taxes as follows:

                                   Additions to Tax
Year        Deficiency   Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654

2003          $25,861       $5,819           $4,008        $677
2004           17,672        3,976            1,679         513

       The issues for decision after concessions are: (1) Whether

petitioner is entitled to deduct business expenses related to car

and truck use, contract labor, tax return preparation, supplies,

office, and meals and lodging for 2003 and 2004; (2) whether

petitioner is entitled to deduct gambling losses for 2004; and

(3) whether petitioner is liable for additions to tax under

sections 6651(a)(1) and 6654.2    For all purposes hereafter, years

at issue will refer to 2003 and 2004.

                              Background

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

The stipulation of facts, together with the attached exhibits, is

incorporated herein by this reference.     At the time petitioner

filed his petitions, he resided in Arkansas.



       2
      Respondent concedes the proposed additions to tax under
sec. 6651(a)(2) for 2003 and 2004. Respondent also concedes that
petitioner is entitled to deductions for mortgage interest of
$1,223 for both 2003 and 2004, real estate taxes of $700 for both
2003 and 2004, general sales taxes of $542 for 2004, and gambling
losses of $17,100 for 2003.
                                - 3 -

     During the years at issue petitioner worked as an

independent contractor for Stallmann Construction Co. (Stallmann)

and Industrial Siding (Industrial), related Arkansas businesses

that specialized in the installation of siding, soffit, and

fascia.   In 2003 and 2004 Stallmann and Industrial paid

petitioner rental income of $18,970 and $13,055, respectively,

and nonemployee compensation of $56,913 and $40,570,

respectively.

     Petitioner failed to file Federal income tax returns for

2003 and 2004.    On February 26, 2007, respondent sent petitioner

separate notices of deficiency for those years.   In response,

petitioner hired an accountant, Roger D. Harrod (Mr. Harrod).    On

January 14, 2008, Mr. Harrod prepared and submitted petitioner’s

proposed Forms 1040, U.S. Individual Income Tax Return, for the

years at issue.   The Schedules C, Profit or Loss From Business,

attached to the proposed returns reported the following expenses:

            Expense                      2003        2004

     Car and truck                  $12,600        $12,600
     Contract labor                   8,556          8,556
     Legal and professional           3,375          3,375
     Supplies                        10,741         10,741
     Office                                          1,416
     Travel                             10,500       5,670
       Total                            45,772      42,358

The Schedules A, Itemized Deductions, attached to the proposed

returns reported gambling losses of $17,100 for 2003 and $15,613

for 2004.
                               - 4 -

I.   Schedule C Expenses

     A.   Car and Truck Expenses

     Petitioner drove a Chevrolet Silverado throughout central

Arkansas completing projects for Stallmann.    Petitioner did not

keep a mileage log but recorded his mileage from his odometer

after each trip.

     B.   Contract Labor

     Petitioner regularly hired and supervised laborers to help

with Stallmann projects.   Stallmann usually paid the laborers

directly, but petitioner would occasionally pay the laborers’

wages and motel expenses himself on Stallmann’s behalf.

     C.   Legal and Professional Expenses

     Petitioner retained the tax preparation firm J.K. Harris to

file his tax returns for the years at issue.   Petitioner provided

J.K. Harris with his tax records and financial information for

both 2003 and 2004.   J.K. Harris failed to file returns on

petitioner’s behalf and failed to return the majority of

petitioner’s records to petitioner.3

     D.   Supplies

     Between January 1, 2004, and November 11, 2007, petitioner

purchased $41,177 of equipment and supplies from Stallmann for

use on Stallmann projects.



     3
      Records made unavailable to petitioner because of the
alleged actions of J.K. Harris include motel receipts, mileage
notes, and, paradoxically, J.K. Harris receipts.
                               - 5 -

      E.   Office Expenses

      Petitioner deducted office expenses of $1,416 for 2004.    The

expenses related to petitioner’s use of a cellular telephone.

      F.   Travel Expenses

      Petitioner traveled extensively on behalf of Stallmann

during the years at issue and would stay in a motel when a

project required that he work too far from home to commute.

II.   Gambling Losses

      Petitioner frequently played Keno at Sam’s Town Casino

(Sam’s Town) in Tunica, Arkansas.   In 2003 and 2004 petitioner

had gambling income of $17,100 and $17,750, respectively.

Letters from Sam’s Town indicate that petitioner incurred a net

loss from gambling of $14,537 for 2003 and a net gain from

gambling of $2,137 for 2004.

                             Discussion

I.    Business Expense Deductions

      Deductions are a matter of legislative grace, and the

taxpayer must prove he or she is entitled to the deductions

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 

, 440 (1934).   The burden of proof may shift to the

Commissioner under section 7491(a) with respect to a factual

issue relevant to the liability of the taxpayer for tax if the

taxpayer introduces credible evidence regarding the issue and

establishes compliance with the requirements of section
                               - 6 -

7491(a)(2)(A) and (B) by substantiating items, maintaining

required records, and fully cooperating with the Secretary’s

reasonable requests.   As discussed below, we find that petitioner

has failed to substantiate his claimed expenses and to maintain

adequate records.   The burden of proof, therefore, does not shift

to respondent under section 7491(a).

     Section 162(a) provides that “There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   The regulations specify that ordinary and

necessary business expenses include “the ordinary and necessary

expenditures directly connected with or pertaining to the

taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs.,

such as “a reasonable allowance for salaries or other

compensation for personal services actually rendered”, sec.

1.162-7(a), Income Tax Regs.   Taxpayers are required to maintain

records sufficient to establish the amount of allowable

deductions and to enable the Commissioner to determine the

correct tax liability.   Sec. 6001; Shea v. Commissioner, 

, 186 (1999).

     As a general rule, if the trial record provides sufficient

evidence that the taxpayer has incurred a deductible expense, but

the taxpayer is unable to substantiate adequately the precise

amount of the deduction to which he or she is otherwise entitled,
                               - 7 -

the Court may estimate the amount of the deductible expense and

allow the deduction to that extent.    Cohan v. Commissioner, 

, 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. Commissioner, supra at 544.

However, in order for the Court to estimate the amount of an

expense, the Court must have some basis upon which an estimate

may be made.   Vanicek v. Commissioner, supra at 742-743.    Without

such a basis, any allowance would amount to unguided largesse.

Williams v. United States, 

, 560-561 (5th Cir. 1957).

     A.   Car and Truck Expenses

     Pursuant to section 274(d), automobile expenses otherwise

deductible as a business expense will be disallowed in full

unless the taxpayer satisfies strict substantiation requirements.

The taxpayer must substantiate the automobile expenses by

adequate records or other corroborating evidence of items such as

the amount of the expense, the time and place of the automobile’s

use, and the business purpose of its use.   See Sanford v.
                               - 8 -

Commissioner, supra at 827-828; Maher v. Commissioner, T.C. Memo.

2003-85.

     The only evidence of automobile expenses petitioner produced

at trial was the testimony of Mr. Harrod that petitioner drove

roughly 35,000 miles for business in each of the years at issue.

Mr. Harrod based this mileage on the reasonable mileage driven by

other siding contractors in central Arkansas.4    Petitioner failed

to produce any documentary evidence to support Mr. Harrod’s

testimony.   Accordingly, petitioner did not meet the adequate

records or other corroborating evidence requirement of section

274(d).

     Section 274(d)(4) overrides the Cohan rule with respect to

section 280F(d)(4) “listed property” and thus specifically

precludes the Court from allowing automobile expenses on the

basis of any approximation or the taxpayer’s uncorroborated

testimony.   For this reason we are unable to estimate

petitioner’s car and truck expenses for the years at issue.

     B.    Contract Labor

     Mr. Harrod testified at trial that he estimated petitioner’s

contract labor expenses for the years at issue using comparable

expenses listed in petitioner’s 2005 checkbook.    Mr. Harrod’s

testimony, based on a rough estimation, is insufficient to

     4
      The 35,000 figure for 2003 and 2004 does not take into
account the fact that petitioner’s income was 28 percent lower in
2004 than 2003, possibly indicating that petitioner drove fewer
miles for work in 2004.
                                - 9 -

substantiate petitioner’s contract labor expenses for the years

at issue.    See Shea v. Commissioner, supra at 189.

     Petitioner leaves us no basis upon which to estimate his

contract labor expenses.    Petitioner did not produce his 2005

checkbook at trial, nor did he produce any other documentary

evidence of those expenses.    Although it is reasonable to

conclude that a siding contractor in petitioner’s position would

incur contract labor expenses, the record is devoid of any

evidence that would allow us to estimate such expenses.     See

Vanicek v. Commissioner, supra at 742-743.

     C.     Legal and Professional Expenses

     Petitioner and Mr. Harris testified that petitioner paid

J.K. Harris $3,375 in both 2003 and 2004 to file petitioner’s tax

returns.    We find their testimony to be credible.    Therefore, we

hold that petitioner is entitled to a deduction for legal and

professional expenses of $3,375 for each of the years at issue

for fees paid for tax return preparation.

     D.     Supplies

     Petitioner failed to produce any personal records, such as

checkbooks or receipts, to substantiate his deductions for

supplies.    However, petitioner produced a notarized letter from

Stallmann (Stallmann letter) indicating that between January 1,

2004, and November 11, 2007, petitioner purchased from Stallman
                              - 10 -

pieces of equipment worth $41,177.     All of the items listed in

the Stallmann letter have a clear business purpose.5

     The Stallmann letter provides us a basis upon which to

estimate petitioner’s supply costs for the years at issue.       See

Cohan v. 

.     The letter identifies

each piece of equipment and its cost, but fails to specify each

item’s exact date of purchase.   Accordingly, we will allow

petitioner to deduct supply costs of $10,632 for 2003 and 2004.6

     E.     Office Expenses

     Expenses of a cellular telephone must be substantiated

pursuant to section 274(d).   The Court cannot estimate those

expenses.   Secs. 274(d)(4), 280F(d)(4)(v); sec. 1.274-5T(a),

Temporary Income Tax 

.

     The record is devoid of any documentary evidence regarding

petitioner’s 2004 office expenses.     At trial petitioner was

unable to remember the items to which his office expenses


     5
      The items consist of walk boards, double steppers,
extension ladders, ladder jacks, drills, trailers, bend breaks,
chaulk and staple guns, air compressors, saws, and other pieces
of equipment that would be of use to a siding contractor.
     6
      These figures are derived from prorating $41,177 over 46.5
months to obtain supply costs per month of $886. The costs per
month are then multiplied by 12 to obtain supply costs of $10,632
per year.

     Petitioner credibly testified that he spent roughly the same
amount on supplies for both years at issue despite earning
roughly 28 percent less in 2004 than in 2003. Therefore, we will
not adjust the supply cost figures to take into account the
discrepancy in petitioner’s gross income.
                               - 11 -

pertained.    Mr. Harrod testified that the expenses related to

petitioner’s use of a cellular telephone in 2004 and that he had

estimated the amount of those expenses using the cellular

telephone costs listed in petitioner’s 2005 checkbook.    Because

petitioner failed to produce any records pertaining to his use of

a cellular telephone in 2004, we will deny his deduction for

office expenses.

      F.    Travel Expenses

      Expenses related to meals and lodging must be substantiated

pursuant to section 274(d).    The Court cannot estimate those

expenses.    Sec. 274(d)(1); sec. 1.274-5T(a), Temporary Income Tax

.

      The record is devoid of any documentary evidence regarding

petitioner’s meal and lodging expenses for the years at issue.

Accordingly, we will deny petitioner’s deductions for those

expenses.

II.   Gambling Losses

      Gross income includes all income from whatever source

derived, including gambling.    See sec. 61; McClanahan v. United

States, 

, 631-632 (5th Cir. 1961).    In the case of a

taxpayer not engaged in the trade or business of gambling,

gambling losses are allowable as an itemized deduction, but only

to the extent of gains from such transactions.    Sec. 165(d);

McClanahan v. United States, supra at 632 n.1 (citing Winkler v.
                              - 12 -

United States, 

(1st Cir. 1956)).   In order to

establish entitlement to a deduction for gambling losses the

taxpayer must prove the losses sustained during the taxable year.

Mack v. Commissioner, 

(6th Cir. 1970), affg. T.C.

Memo. 1969-26; Stein v. Commissioner, 

(5th Cir.

1963), affg. T.C. Memo. 1962-19.

     Petitioner did not maintain a diary or any other

contemporaneous record reflecting either his winnings or his

losses from gambling during 2004.   However, petitioner produced a

letter from Sam’s Town indicating that he had net gambling

winnings of $2,137 in 2004.   As Sam’s Town was the only source of

petitioner’s gambling income and losses in 2004, we hold that

petitioner proved he sustained gambling losses of $15,613 for

2004.7

III. Additions to Tax

     Respondent determined that petitioner is liable for

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

income tax returns for 2003 and 2004 and under section 6654(a)

for failure to make estimated tax payments for 2003 and 2004.

Respondent bears the burden of production with respect to

petitioner’s liability for the additions to tax.   See sec.



     7
      The parties stipulated that petitioner had gambling income
of $17,750 for 2004. The gambling losses of $15,613 are derived
from deducting petitioner’s net gambling winnings of $2,137 from
his gross winnings of $17,750.
                              - 13 -

7491(c); Higbee v. Commissioner, 

, 446-447 (2001).

To meet his burden of production with respect to section 6651,

respondent must come forward with sufficient evidence indicating

that it is appropriate to impose the additions to tax.   See

Higbee v. Commissioner, supra at 446.

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

file a return on the date prescribed (determined with regard to

any extension of time for filing), unless the taxpayer can

establish that such failure is due to reasonable cause and not

due to willful neglect.   Petitioner admitted that he did not file

Federal income tax returns for 2003 or 2004.   Respondent has met

his burden of production.

     Petitioner argues that his failure to file his returns was

due to reasonable cause because he retained J.K. Harris to file

his returns and J.K. Harris failed to do so.   We disagree.    The

failure to timely file a tax return is not excused by the

taxpayer’s reliance on an agent, and such reliance is not

“reasonable cause” for a late filing under section 6651(a)(1).

United States v. Boyle, 

, 252 (1985).   We find that

petitioner’s failure to file Federal income tax returns for 2003

and 2004 was not due to reasonable cause and was due to willful

neglect.   Therefore, we hold that petitioner is liable for the

section 6651(a)(1) additions to tax for 2003 and 2004.

     A taxpayer has an obligation to pay estimated tax for a
                               - 14 -

particular year only if he has a “required annual payment” for

that year.   Sec. 6654(d).   A required annual payment is equal

to the lesser of (1) 90 percent of the tax shown on the

individual’s return for that year (or, if no return is filed, 90

percent of his or her tax for such year), or (2) if the

individual filed a return for the immediately preceding taxable

year, 100 percent of the tax shown on that return.    Sec.

6654(d)(1)(B); Wheeler v. Commissioner, 

, 210-212 (2006), affd. 

(10th Cir. 2008); Heers

v. Commissioner, T.C. Memo. 2007-10.

Respondent’s burden of production under section 7491(c) with

respect to the section 6654(a) addition to tax has been satisfied

by proof at trial that petitioner has a Federal income tax

liability for 2003 and 2004 and that petitioner made no estimated

payments for either year.    The parties also stipulated that

petitioner filed a Federal income tax return for 2002 showing a

tax of $11,478.   Petitioner offered no evidence whatsoever to

refute respondent’s evidence or to establish that one of the

statutorily provided exceptions applies.    See Recklitis v.

Commissioner, 

, 913 (1988).     Consequently, we hold

that respondent’s determination that petitioner is liable for the

section 6654 additions to tax must be sustained.    However, to the

extent respondent failed to take into account a required annual

payment of $11,478 for 2003 under section 6654(d)(1)(B)(ii) in
                             - 15 -

his calculation of petitioner’s addition to tax, we now direct

respondent to do so.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,

                                           Decisions will be entered

                                      under Rule 155.