T.C. Memo. 2009-22


                      UNITED STATES TAX COURT



                JOHN M. RODRIGUEZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16342-04.                 Filed January 29, 2009.



     Jerry B. Register, for petitioner.

     Randall Durfee, for respondent.


                        MEMORANDUM OPINION


     HOLMES, Judge:   John Rodriguez is a real-estate sales

manager who also had personal real-estate investments.   He did

not file income tax returns from 1998 through 2001.    The IRS

noticed, and created “substitutes for returns” (SFRs) for him,

calculating his tax liability and penalties.    The Commissioner

then issued him a notice of deficiency for each year.    Rodriguez
                                - 2 -

filed a petition challenging the deficiencies, and then submitted

his own Forms 1040 for the missing years.     Rodriguez claims that

his returns should take precedence over the SFRs and that the

Commissioner has the burden of proving the deductions which he

claimed on them are not allowable.      The parties also argue about

many of those deductions, as well as about the penalties and

additions to tax that the Commissioner has determined.

                            Background

     Rodriguez’s entrepreneurial talents showed up early.     While

still in college, he began a landscaping and irrigation business

under the name of Waterfowl.    In 1998, he became an independent

contractor selling and managing parcels of land for SunTex-Fuller

Corporation in a new development called Montgomery Trace, near

Conroe, Texas.   That prompted him to shift Waterfowl’s focus away

from irrigation and into real-estate development.

     During all the years in question, Rodriguez had a bank

account under the name Waterfowl with the First Bank of Conroe.

He often used this account, though it was in his business’s name,

to pay his personal expenses.   He also mixed business and

personal expenses on his credit card.

     The parties agree that in 1998, 1999, 2000, and 2001,

Rodriguez earned income from his sales manager job; and in 1998,

he also made money selling real estate:
                                - 3 -

     Tax Year        Sales Manager Job        Sale of Real Estate
         1998              $14,138                  $137,900
         1999              139,324                     -0-
         2000              93,653                      -0-
         2001              125,825                     -0-

     Because Rodriguez didn’t file returns for these years, the

Commissioner prepared SFRs in April 2004 and issued notices of

deficiency in June 2004.    The notices of deficiency determined

that he owed more than $150,000 on this income, plus additions

for failure to timely file his returns and timely pay the tax

owed, and penalties for underwithholding.

     Rodriguez was a resident of Texas when he filed his

petition, and we tried his case in Houston.

                              Discussion

I.   Preliminaries

     Though Rodriguez is represented by counsel, the parties were

able to settle very few issues, so we begin by reviewing some of

the basics of substantiation.    The most important is that

taxpayers have to keep records.      Section 60011 and its

accompanying regulations tell taxpayers to keep records that

would enable the IRS to verify their income and expenses.      See

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


     1
        Unless otherwise noted, all section references are to the
Internal Revenue Code as amended and in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 4 -

     As a general rule, we presume the Commissioner’s

determination in the notice of deficiency is correct.     Because

the taxpayer is usually in a better position to show what he

earned and what he spent, it is he who generally has the burden

of proof.    At least for tax years after 1998, that burden can

shift to the Commissioner, but only if a taxpayer produces

credible evidence meeting the requirements of section 7491(a).

See also Rule 142(a); Welch v. Helvering, 

, 115

(1933).     But with few exceptions, it does him no good to argue

that the Commissioner wasn’t working with good information--the

notice of deficiency puts issues in play for trial; it is not

itself the focus of litigation.     Dellacroce v. Commissioner, 

, 280 (1984).

     Rodriguez objects to the Commissioner’s decision to prepare

SFRs for his missing returns.     But section 6020(b)(1) states that

“If any person fails to make any return required by any internal

revenue law or regulation made thereunder at the time prescribed

therefor * * * the Secretary shall make such return from his own

knowledge and from such information as he can obtain through

testimony or otherwise.”2     We’ve held that this means that the

IRS has full authority to prepare an SFR for anyone who fails to



     2
       Rodriguez mischaracterizes Spurlock v. Commissioner, 

(2002), as holding that the Commissioner has no
authority to file SFRs. Spurlock actually held only that SFRs
were not returns under section 6211(a).

file his own return.     Millsap v. Commissioner, 

, 931

(1988).    And section 6020(b)(2) provides that an SFR, once filed,

is “prima facie good and sufficient for all legal purposes.”        In

this case, the good and sufficient SFRs were used by the

Commissioner to calculate Rodriguez’s tax liability in the

notices of deficiency.     Rodriguez’s late-filed 1040s simply do

not take precedence over the SFRs.

       Rodriguez next argues that the best evidence rule somehow

lets his 1040s trump the SFRs.    He argues that when both parties

produce evidence to support their claims, the best evidence rule

determines whose evidence should prevail.

       But that’s not what it means.     Rule 1004 of the Federal

Rules of Evidence--the version of the best evidence rule that

federal courts use--provides that where an original writing is

lost or destroyed, secondary evidence of the contents of the

writing is admissible unless the proponent lost or destroyed the

writings in bad faith.    McMahon v. Commissioner, T.C. Memo. 1991-

355.    It’s a rule about the admissibility of possibly flawed

copies of a document.    It doesn’t apply here, because Rodriguez

is not trying to introduce his 1040s as evidence of the contents

of some other document that has been lost.

        Rodriguez’s 1040s are good evidence of one thing–-they may

be admissions of his income.     See Lare v. Commissioner, 

, 750 (1974), affd. without published opinion 

                                - 6 -

(3d Cir. 1975).   But when it comes to deciding whether he’s

entitled to the deductions that he claims, Rodriguez has to

provide substantiating evidence for any deduction that he claimed

on his late-filed 1040s.    We can’t just take them at face value,

but must review them item by item.

II.   Rodriguez’s Deductions

      Rodriguez pecks away at the flock of disallowed deductions

with ledgers that he created in 2005–-he kept no contemporaneous

books or other accounting of his business expenses during the

years in question.   Many of the expenses in these ledgers are not

substantiated with other evidence.      We treat them then as

argument--not evidence--and use them only to guide us to the

appropriate canceled check or credit-card statement.      We rely on

those checks and statements, as well as Rodriguez’s testimony to

the extent we find it credible, to decide what deductions he has

adequately substantiated.

      A.   Cost of Goods Sold

      Rodriguez claimed costs of goods sold (COGS) of:

       1998            1999               2000            2001
      $3,728          $8,756             $20,383         $34,823

      A taxpayer engaged in a manufacturing or merchandising

business can subtract the COGS from gross receipts to arrive at

gross income.   Sec. 1.61-3(a), Income Tax Regs.; see also sec.

1.162-1(a), Income Tax Regs.    Though the COGS is technically an
                               - 7 -

adjustment to gross income and not a deduction, Rodriguez still

has to substantiate the amounts he claimed.    See Said v.

Commissioner, T.C. Memo. 2003-148.

     Rodriguez’s first problem is that he’s not clear about what

he’s claiming as COGS; his accountant testified that Rodriguez

classified the amounts listed above in his ledger only after he

had received the notices of deficiency.    The only entries that

seem to correspond with claimed COGS are entries for “payroll

expenses” in 2000 and 2001, and entries for “bonus expenses” in

1999.

     For 1998, there are no journal entries matching the amounts

claimed as COGS on Rodriguez’s 1040.   The canceled checks for

that year and the testimony offered at trial give us no

additional information.   We therefore disallow the 1998 COGS.

     For 1999, the amounts Rodriguez lists as “bonus expenses” in

his ledger matches amounts claimed as COGS on his 1040.      These

turn out to be sales incentive trips, one to Las Vegas and

several others dealing somehow with water sports.    They also

include a $150 entry for a “Cook Off Team” and “boxing” expenses

totaling $620, substantiated by an entry on a credit card

statement for the purchase of “sporting good/equip.”    One journal

entry is for $280 from a liquor store.    Drinking, sparring,

fishing, and gambling are not properly categorized as COGS.

Although they may have been business entertainment under section
                               - 8 -

274(a), Rodriguez has not substantiated a business purpose for

any of them as required by section 274(d).3   We therefore

disallow the 1999 COGS.

     For 2000 and 2001, the “payroll expenses” entries for 2000

and 2001 consist largely of checks made out to specific

individuals, at least hinting that they may be labor expenses.

Though we can verify some of the other individual expenses that

make up his cumulative COGS using their date, amount, or location

from canceled checks or credit card statements, there is no

evidence to substantiate their business purpose.   Rodriguez

credibly testified that he would occasionally have laborers work

on his home property--a personal expense, of course--and

sometimes they would work on his investment property.   Checks

indicate they also sometimes worked on property owned by a

partnership he formed.

     But even if the amount spent on improving the investment

property was adequately substantiated, it would still be a

capital expense and not part of COGS.   See sec. 263(a)(1).

Rodriguez has given us no way to estimate the amounts going to

home maintenance versus partnership property versus investment

property.   We therefore disallow all 2000 and 2001 COGS.


     3
       And for expenses listed in section 274(d), Congress
demands strict substantiation. Sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985); see Sanford
v. Commissioner, 

, 827-28 (1968), affd. 

(2d Cir. 1969).
                                  - 9 -

     B.     Advertising

     When asked at trial about advertising expenses, Rodriguez

stated, “There is a huge amount of money spent by the developer.

On my personal items, I would advertise, but I didn’t, we would

run little line ads to our cell phones * * * but the major

expense was taken on by the developer.”      Rodriguez certainly

claimed more than personal ads on his Schedule C:

           1998                    1999                 2000
          $4,465                  $3,173               $3,473

     Section 162(a) allows a taxpayer to deduct advertising

expenses that are both “ordinary and necessary” in conducting a

“trade or business.”      Section 6001 requires a taxpayer to keep

and present the Commissioner with sufficient documentation to

substantiate his tax liability.

     Below is Rodriguez’s list of advertising expenses for 1998

from his ledger:


 Date         Name              Note       Amount     Substantiated
 1/27     Davy Roberts    For pens         $70.00    Check No. 2436
 5/15     Fed-Ex          Messenger fee     41.00          No
 7/09     George R.B.     Seminar           40.00          No
 7/12     George Self     Referral fee     597.00    Check No. 2562
 7/21     Walmart         Prop. owner       43.21          No
                          picnic
 8/15     Furrow’s        Lumber for        66.89          No
                          signs
 8/15     Labor           Built signs      475.00          No
 8/15     Labor           Put out signs    100.00          No
                                  - 10 -

 8/22   Labor           Put out signs        100.00          No
 8/29   Labor           Put out signs        100.00          No
 9/02   Sam’s           Labor Day          1,158.91    Check No. 2600
                        picnic
 9/25    Louisiana P    Lumber                42.36          No
10/06   Ducks           Sponsorship          250.00    Check No. 2627
        Unlimited
10/13   Ducks           Ticket–Brandon        40.00    Check No. 2630
        Unlimited
10/14   Ducks           Banquet              300.00    Check No. 2633
        Unlimited
10/14   Ducks           Banquet              970.00          No
        Unlimited
10/24   Walmart         Prop. owner           57.22          No
                        picnic
11/07   Texas Lotto     Lotto                  3.00          No
12/18   Amer. Inst.     Donation              10.00          No

For this year, Rodriguez produced canceled checks as evidence for

some of his claimed deductions.       However, referral fees,

charitable donations, and picnics don’t qualify as advertising

expenses without evidence to substantiate that they were ordinary

and necessary business expenses under section 162.       He provided

no such evidence, and so we sustain the disallowance of these

deductions.

     We find Rodriguez’s testimony concerning signs to be

credible, however.     We treat his testimony as an invocation of

the rule of Cohan v. Commissioner, 

, 544 (2d Cir.

1930), that we must make “as close an approximation as [we] can,

bearing heavily if [we choose] upon the taxpayer whose

inexactitude is of his own making.”        Even the Cohan rule,
                                   - 11 -

however, requires that we have some basis for estimating--where

we don’t, we can’t just guess.           But on this item, we will use the

Cohan rule and allow Rodriguez to deduct $500 for the building

and placing of signs in 1998.

       For 1999, Rodriguez claimed deductions for gifts, donations,

and even a $1 losing Texas lottery ticket, among other things, as

advertising expenses without providing evidence or testimony of

how they were ordinary and necessary business expenses.           We

sustain the Commissioner’s disallowance of all these expenses for

1999.

       For 2000, Rodriguez listed as advertising expenses in his

ledger:

 Date         Name               Note           Amount     Substantiated
 3/7      Sign It        7.5 AC & 10 AC        $1,585.86   Check No. 3296
 3/25     Collin McGee   Signs 10 AC               73.20   Check No. 3309
 4/24     Excel Signs    Sign 19.78 AC          1,302.00   Check No. 3318
 5/6      Collin McGee   -                        126.00   Check No. 3323
 5/15     Collin McGee   10 AC                     21.00   Check No. 3342
 7/10     Collin McGee   10 AC                    106.00   Check No. 3381
12/31     Newspapers     Various ads              259.00    Credit cards

       We are satisfied that these expenses were ordinary and

necessary.    Rodriguez provided copies of canceled checks or

credit-card statements for all of them with specific notations as

to their advertising purpose.           We therefore allow Rodriguez to

deduct $3,473 for advertising expenses in 2000.
                                 - 12 -

     C.    Interest

     Rodriguez claimed home mortgage interest deductions in his

Schedule A for 1999 and 2000, and the Commissioner allowed his

itemized deductions for those years.      However, Rodriguez also

claimed the following interest deductions on his Schedule C:

      1998               1999              2000           2001
     $3,168             $6,509            $4,882         $31,332

     Interest is defined as “compensation for the use or

forbearance of money.”     Deputy v. du Pont, 

, 498

(1940).   Whether a fee associated with a debt is interest or

compensation for bank services (such as compensation for the

expenses of collecting past-due amounts, for example) is a

question of fact.     See West v. Commissioner, T.C. Memo. 1991-18,

affd. without published opinion 

(9th Cir. 1992).

Rodriguez offered no evidence as to how his credit-card company

and bank apply fees; for at least one account, the bank appeared

to charge a flat $5-per-use ATM fee and a flat $20 not-

sufficient-fund fee, which seem like compensation for the use of

the ATM and compensation for account services.     Rodriguez has the

burden of proof here, and his failure to provide any evidence

regarding the nature of these bank fees leads us to find that

those types of fees are not interest for any year.

     For tax year 1998, Rodriguez claims a deduction for interest

of $3,168.    Of this amount, he claims $1,500 in the ledger as
                              - 13 -

interest on car payments and labels $1,357 as finance charges for

his position as sales manager; for his position at Waterfowl, he

claims $311.   Rodriguez provided no evidence to substantiate what

proportion of his car payments represented business interest and

what represented payments of principal or other fees.   We have no

basis to estimate any amount using the Cohan rule.

     The $1,357 that he listed as finance charges from his job as

a sales manager were calculated from his credit cards and

checking account with the First Bank of Conroe.   The alleged

finance charges include maintenance fees, ATM fees, returned

check fees, and other charges.    We categorically deny these,

which means Rodriguez gets no interest deduction for 1998.

     However, for tax years 1999-2001, we are able to determine

some valid interest deductions.   For 1999, Rodriguez deducted

$6,509 for interest, but accounts for only $4,899 in the ledger.4

Disregarding the numerous bank fees that are not interest, we

find that there are monthly finance charges that are legally

deductible interest.   Sifting through the record, we determine

that for tax year 1999, Rodriguez incurred $1,515.43 of interest

in the form of credit card finance charges.   We can’t entirely

disentangle the pervasive intermingling of personal and business


     4
       Rodriguez has another ledger entry for 1999 related to
interest claimed as a deduction for a home office on his Form
8829, Expenses for Business Use of Your Home. We treat this as a
home-office expense, which we analyze infra section J, Home
Office.
                              - 14 -

expenses on the cards, and it appears that Rodriguez did not pay

some of this interest but let his credit card balances accrue, so

we apply Cohan and allow $606.17, which is 40 percent of the

$1,515.43.

     For 2000, the ledger once again fails to tell us how

Rodriguez could have possibly arrived at his claimed deduction of

$4,882 (especially since the ledger itself says there is zero

interest for the year).   Instead, using the same method as used

for tax year 1999, we allow Rodriguez a deduction of $438.24, or

40 percent of the $1,095.60 worth of combined finance charges, a

number we obtained again by looking through credit-card

statements.

     For 2001, Rodriguez deducted $31,332, listed as mortgage

interest on line 16(a) of his Schedule C.   We have verified the

amount directly from record evidence, but it is only by inference

that we can determine the purpose of the mortgaged property.    We

agree with the Commissioner that the record clearly identifies

other mortgages on Rodriguez’s personal real estate and his

partnership’s property.   By process of elimination we find that

the interest Rodriguez paid was on the mortgage for property he

was holding for resale.

     Section 163(d) says in part:

          (1) In general. In the case of a taxpayer
     other than a corporation, the amount allowed as a deduction
     under this chapter for investment interest for any taxable
                                 - 15 -

     year shall not exceed the net investment income of the
     taxpayer for the taxable year.

          (2) Carry forward of disallowed interest--
     The amount not allowed as a deduction for any taxable year
     by reason of paragraph(1) shall be treated as investment
     interest paid or accrued by the taxpayer in the succeeding
     taxable year.

     This means that Rodriguez cannot claim a deduction for

investment interest for any year that is greater than his

investment income that year.     There is no evidence that Rodriguez

received any income in 2001 from his investment property, so he

may not claim the $31,332 deduction for interest in 2001, but may

be able to carry it forward as allowed by section 163(d)(2).

     D.   Legal Expenses

     Rodriguez claimed deductions for legal expenses:

      1998               1999              2000          2001
     $1,777             $7,902            $10,830       $7,509

     Rodriguez testified that these expenses arose from two

controversies.    The first, which appears to have been conducted

in 1999, was a lawsuit filed after he allegedly bought property

from an individual who had already contracted to sell it to a

third party.     Section 162 generally allows the deduction of legal

fees related to the taxpayer’s trade or business.    This suit was

essentially a title dispute, and the regulations do not allow a

taxpayer to deduct legal “expenses paid or incurred in defending

or perfecting title to property, in recovering property (other

than investment property and amounts of income which, if and when
                               - 16 -

recovered, must be included in gross income), or in developing or

improving property.”    Sec. 1.212-1(k), Income Tax Regs.

Rodriguez must capitalize these expenses.   Therefore, we disallow

Rodriguez’s legal fee deductions related to the first suit.

     The second suit, which he apparently filed in 2000, was to

win reimbursement from Bennett Ebner, the general contractor and

developer for all of Montgomery Trace, for some expenses that

Rodriguez incurred in sprucing up the grounds at the development.

According to Rodriguez, Ebner offered to reimburse Rodriguez for

his costs in an effort to increase sales.    Rodriguez understood

that he wouldn’t profit directly, but he believed that

beautifying Montgomery Trace would increase sales of the parcels

that he managed himself.   The agreement did not end well when

Ebner allegedly failed to pay Rodriguez for his expenses.

     The test for deductibility here is whether Rodriguez’s legal

expenses had a sufficiently close relationship to his trade or

business.    The controlling criteria are the origin and character

of the controversy.    See United States v. Gilmore, 

,

49 (1963).    At the time that this controversy began, Rodriguez

worked for a marketing company hired to sell the Montgomery Trace

lots on behalf of the owner and developer, Ebco.   Rodriguez cared

about the appearance of Montgomery Trace; he was the sales

manager for that property and received a sales commission for

each property he sold as well as an “override” on each property
                               - 17 -

sold by other salespersons.    Rodriguez testified that he

suggested the landscaping deal to Ebco, stating:    “If we want to

increase our sales here, we really need to make this place

presentable when we have families out on the weekends.”

Therefore, although Rodriguez had no expectation of profit for

Waterfowl, he did the landscaping with the business purpose of

increasing his income from his business of selling property at

Montgomery Trace.    His credible testimony reflects this business

motive.   We therefore find that Rodriguez’s deal with Ebner was

business related.

     Rodriguez still has to substantiate, or at least give us

enough to estimate, the amounts that he paid in legal fees.      The

substantiating checks and statements often do not indicate which

lawsuit they cover.    But Rodriguez credibly testified that it was

at most his 2000 legal fees that paid for his litigation with

Ebco.   We therefore find that the Ebco litigation did not

commence until 2000.

     For 2000, the ledger lists professional fees going to

William Fowler, S. Patrick Rhodes, Jeffery Moon & Associates, and

J. Patrick Roeder.    The record is clear that Rhodes and Roeder

are architects, and therefore these fees are not “legal”; who

Jeffery Moon is remains unclear.    Checks made out to Fowler,

however, are frequently made out to the “Law Offices of William

T. Fowler” and indicate legal purposes in the memo lines.
                              - 18 -

Therefore, we look to checks numbered 3265, 3328, and 3429 made

out to William Fowler totaling roughly $750.    None of these

checks indicate whether they paid for Ebco litigation or title

litigation; we find that some of them did go to the former and,

applying Cohan, we allow Rodriguez $500 in legal-fee deductions

for 2000.

     For 2001, the “professional expenses” category includes

checks to Fowler, “DCC,” and “McCathern Moody.”    The memo on the

check for DCC bears no indication of legal purpose.    The check

for “McCathern Mooty Buffington LLP” indicates that it is for a

partnership agreement.   We ignore both of these and consider only

the checks made out to Fowler.   These two total $6,977.08 but

bear no indication of whether they were for the Ebco litigation.

We therefore estimate under Cohan and allow $4,700 in legal-fee

deductions for 2001.

     E.     Car and Travel

     Certain categories of deductions have enhanced

substantiation requirements under sections 274 and 280F.    These

categories include travel, certain forms of “listed property,”

and entertainment expenses.   To deduct any of these expenses, a

taxpayer must “[substantiate] by adequate records or by

sufficient evidence” the amount, time and place, and business

purpose of the expenditure.   Sec. 274(d).   The term “listed
                               - 19 -

property”, as incorporated into section 274, includes any

passenger automobile.    Sec. 280F(d)(4)(A)(i).

     For the years in issue, Rodriguez offered no evidence to

substantiate the amount, time and place, or business purpose of

his claimed deductions for car and travel.    Rodriguez and his

accountant testified that they used estimates of mileage to

calculate deductions, but that Rodriguez kept no travel log.      The

strict substantiation requirements of section 274(d), however,

mean that neither this Court nor Rodriguez can approximate

expenses.    We therefore find that he is not allowed any

deductions for car and travel expenses for the years in question.

See Sanford v. Commissioner, 

, 827 (1968), affd. 

(2d Cir. 1969); see also sec. 1.274-5T(a), Temporary

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

     F.     Supplies

     For tax year 1998, there is no substantiating evidence for

Rodriguez’s claimed deductions for supplies:

             Waterfowl                       Sales Manager
               $6,930                             $9,937

The credit-card statements and checks do not match entries in the

ledger for the most part, and when they do, there is no

indication that they are purchases for a business purpose.

Rodriguez may not deduct any expenses for supplies for 1998.
                               - 20 -

     For 1999-2001, Rodriguez claimed these amounts as deductions

for supplies:

           1999                  2000                   2001
          $8,237               $12,856                 $3,906

Most of these purchases can be verified in their amount and

location by credit-card statements and canceled checks.        However,

there is nothing in the record to support a finding that the

expenses at Home Depot, Walmart, Best Buy, etc., were business

and not personal.    Rodriguez’s pervasive intermingling of

business and personal expenses means that we can not allow him

all of his claimed deductions.    But we can apply the Cohan rule

to estimate a reasonable amount.      See Feingold v. Commissioner,

T.C. Memo. 1956-214.    We find that Rodriguez is entitled to

deduct much, but not most -- we estimate 40 percent -- of his

claimed deductions for the tax years in question and allow him:

           1999                  2000                   2001
          $3,295               $5,142                  $1,562

     G.     Meals and Entertainment

     The enhanced substantiation requirements of section 274(d)

also apply to deductions for meals and entertainment expenses.

Rodriguez used canceled checks and credit-card statements to

estimate deductions for meals and entertainment.     These exhibits,

even when enhanced with his testimony, fail to provide sufficient

substantiating evidence that any of the claimed expenses had a
                                 - 21 -

legitimate business–-and not just personal--purpose.         This means

that we disallow all Rodriguez’s deductions for meals and

entertainment for all the years in question.

     H.    Other Expenses

     The next category was a catch-all for “Other Expenses” of:

      1998               1999              2000               2001
    $27,803            $10,481            $10,078            $8,718

The bulk of this category consists of three types of expenses:

security, telephone and contract-labor charges.        There were also

tolls, subscriptions, dues, and miscellaneous expenses that were

not substantiated.     The second Schedule C for 1998 showed an

“other” expense of $168 for bank charges, which we disallow;

Rodriguez has not shown whether they are nondeductible finance

charges or unsubstantiated “other” bank charges, but neither

characterization would make them deductible.        The rest of these

“other expenses” we look at one by one.

     1.   Security

     The 1998 and 1999 security expenses of:

               1998                                  1999
              $1,546                                $7,115

are, we find, for the grooming and veterinary care of two dogs

that Rodriguez kept on a piece of property where he stored his

equipment and a trailer.     Deductibility of such expenses depends

on a showing that the expenses are “directly connected” with a
                                - 22 -

trade or business.     Sec. 1.162-1(a), Income Tax Regs.   Rodriguez

did not credibly testify that the dogs were primarily guarding

business property, and we find that these expenses are just for

his family dogs.   They are not deductible.     See Stone v.

Commissioner, T.C. Memo. 1998-437 (disallowing deductions for

dogs kept at taxpayer’s residence); see also Jenkins v.

Commissioner, T.C. Memo. 1995-563 (disallowing expenses of family

dog’s fences, food, and veterinary bills).

     2.   Telephones

     Rodriguez had both a home phone and a cell phone, neither of

which was a dedicated business line.      He did not provide any

breakdown of the personal-versus-business use of either phone.

His claimed deductions:

          1998                   2000                   2001
          $841                  $4,035                 $6,218

     Section 262(b) bans deduction of any charge for basic phone

service for the first line to his home.     The cost of a cell phone

and extra charges (e.g., long distance or dial-up connections)

may be deductible, but Rodriguez must first show that he meets

the requirements of section 162(a).      And under that section, the

phone expenses are deductible if they are “ordinary and

necessary” and paid or incurred in carrying on a trade or

business.   Rodriguez, however, failed to show that he would not

have had the phones but for the business use.     See Wedemeyer v.
                               - 23 -

Commissioner, T.C. Memo. 1990-324, affd. without published

opinion 

(9th Cir. 1992).    He also introduced no

records showing that particular long-distance or toll-call

charges related to identifiably business activities.     This alone

is enough to deny a deduction for both phones.

     Cell phones are also listed property under section

280F(d)(4)(A)(v) and thus subject to section 274(d).     To

substantiate expenses for listed property, a taxpayer must

establish the amount of business use and the amount of total use

for such property.   See sec. 1.274-5T(b)(6)(i)(B), Temporary

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

had credit-card summaries showing payments for a cell phone in

1998 and 1999, but he gave us no evidence of the amount of his

business use compared to his total use of the phone.     No

deductions here.   See Nitschke v. Commissioner, T.C. Memo. 2000-

230 (denying deduction for expenses on cellular phone due to

failure to establish the amount of business use despite receipts

and checks).

     3.   Contract Labor

     Rodriguez also claimed deductions for labor costs:

      1998             1999              2000            2001
    $24,697           $3,269            $5,875         $2,350

He claimed that these costs were wages which he paid to day

laborers to clean up around the investment properties.    However,
                                    - 24 -

Rodriguez could not provide any information about these workers--

either their names or contact information.             He did not produce

Forms 1099 for them.        He did not establish that these costs did

not duplicate at least in part the labor costs he claimed as COGS

on his Schedule C.        He did testify credibly that laborers

sometimes worked at his personal house, and his checks show that

they sometimes worked on his partnership’s property; but there

are no checks made out to laborers working specifically on

investment properties.         Even the ledgers are unclear as to which

labor expenses were for what properties.          We have no way to

estimate these expenses, so we disallow them.

     I.         Depreciation

     Rodriguez also claimed deductions for depreciation:

         1998              1999               2000               2001
    $1,626                $27,074            $10,256            $6,936

For tax years 1999 and 2000, Rodriguez attempted to elect to

expense depreciation under section 179(a).5            Taxpayers are

allowed to deduct a reasonable amount for the depreciation of

property used in trade or business, or property held for the

production of income, sec. 167(a), but must prove the deduction

with adequate records, sec. 6001.


     5
        “A taxpayer may elect to treat the cost of any section
179 property as an expense which is not chargeable to capital
account. Any cost so treated shall be allowed as a deduction for
the taxable year in which the section 179 property is placed in
service.” Sec. 179(a).
                                 - 25 -

     Rodriguez did not.   His descriptions of the property are

wholly insufficient, limited to general terms like “Equipment”,

“Office Equipment”, and “Furniture and Fixtures.”          He failed to

introduce any records that substantiate individual purchases of

depreciable assets or their bases.        He also failed to specify

what individual items he chose to expense.          See sec. 1.179-

5(a)(2), Income Tax Regs.      Rodriguez has not thus proven that he

is entitled to a depreciation deduction for any of the tax years

in question, and he has also failed to substantiate his election

under section 179.   This dooms whatever recourse he might have to

the Cohan rule for this category.

     J.   Home Office

     Rodriguez claimed home-office expenses of:

      1998              1999                2000              2001
      $936           $17,676               $3,070            $2,968

     Section 280A(a) states:     “Except as otherwise provided in

this section, in the case of a taxpayer who is an individual * *

*, no deduction otherwise allowable under this chapter shall be

allowed with respect to the use of a dwelling unit which is used

by the taxpayer during the taxable year as a residence.”          The

Code then provides an exception to this general rule to permit a

deduction for home-office expenses “allocable to a portion of the

dwelling unit which is exclusively used on a regular basis as the

principal place of business for any trade or business of the
                                - 26 -

taxpayer.”    Sec. 280A(c)(1)(A).   A taxpayer may deduct home-

office expenses if he shows his home office is:

     !       used for a trade or business;

     !       used exclusively for that purpose; and

     !       his principal place of business.

     According to Rodriguez, he set aside two of the five rooms

in his house for business.     He put a drafting table and filing

cabinet in a small bedroom.     He also enclosed the center atrium

of the home with drywall and created an office with a desk and

computer.     He claimed that he conducted “all” of his personal

business at the house by making keep-in-touch calls and calls

involving buying and selling properties, and also kept private

investment records there.     He made at least ten sales calls per

night except on Tuesday and Thursday nights when he was usually

at Montgomery Trace.     He also stated that he was unable to

conduct his personal business at the sales offices at Montgomery

Trace because it was against the developers’ policy.     We do find

Rodriguez credible on this point, and so find that he did conduct

personal real-estate business in his home office.

     We also find him credible in claiming that his home office

was the principal place for his personal real-estate business.

Rodriguez worked as a sales manager for several real-estate

developers in sales offices from which he supervised personnel

and conducted sales.     At the same time, he also conducted
                              - 27 -

personal real-estate business at home.   Compare Curphey v.

Commissioner, 

(1980) (dermatologist who also managed

rental properties entitled to home office deduction), with

Commissioner v. Soliman, 

(1993) (anesthesiologist

who administered anesthesia in hospitals denied home-office

deductions).   We won’t apply the Soliman two-prong test, invoked

when a taxpayer’s job spans several locations, because we find

that Rodriguez ran his personal real-estate business only out of

his home and that it was separate from his sales-manager

position.

     However, we do not find Rodriguez to be credible in

allocating 40 percent of his house to his home office.    Revenue

Ruling 62-180, 1962-2 C.B. 52, 54, reasonably states that the

business percentage of a residential home may be calculated by

comparing the square footage of office space to the home’s total

square footage or comparing the number of rooms used for the home

office to the total, or any other reasonable method.     The

Commissioner later clarified this by announcing that the room

comparison method may be used only if the rooms are all about the

same size.   IRS Pub. 587 Business Use of Your Home (2007).    We

have found similar methods of allocation to be reasonable in the

past.   Feldman v. Commissioner, 

, 8 (1985), affd. 

(9th Cir. 1986).   However, we have also rejected a room

comparison method when a “more precise” method was available.
                                   - 28 -

his house has five rooms, two of which

he used for an office; we must decide if his allocation was

reasonable and sufficiently precise.

      We are uncertain how he arrived at his calculation of five

rooms; during trial, Rodriguez mentioned a master bedroom, a

small bedroom in which he initially put his office, and a living

room in which he kept his television.        We assume that his house

also had a bathroom and a kitchen, which would total five rooms.

But Rodriguez also divided an atrium into two rooms so that he

could have a larger office.        It is unclear from the record

whether the atrium encompasses any of the other rooms already

mentioned.        If it does, the division of the atrium would give

Rodriguez’s house six rooms, bringing his business percentage to

33 percent.       If the atrium doesn’t, Rodriguez would have seven

rooms in his home, making his business percentage 28.5 percent.

The Commissioner does not challenge Rodriguez’s allocation, and

therefore we presume the rooms are of roughly similar size.

Under Cohan, we weigh against a taxpayer who asks us to estimate;

therefore, we find that Rodriguez may claim only 28.5 percent

business percentage for his home office deduction.

      K.     Net Operating Loss

      Rodriguez claims net operating loss (NOL) carryforwards:

           1999                    2000                  2001
       $26,678                   $24,881                $40,996
                                - 29 -

The IRS disallowed the NOLs because Rodriguez failed to provide

sufficient substantiation of the amount of the losses.    Rodriguez

also did not file any election to carry the losses forward

without carrying them back first.

     Under section 172, NOLs are ordinarily carried back to the

two taxable years before the loss year and, if losses have not

been fully absorbed, forward to the twenty succeeding years.   In

general, the taxpayer bears the burden of establishing the actual

amount of NOL carrybacks and carryforwards.    Keith v.

Commissioner, 

, 621 (2000).   If a taxpayer carries

losses forward without filing an election, and fails to provide

us with sufficient information to determine whether prior years

would have been able to absorb some of the loss, we deny him the

carryforward.   Whyte v. Commissioner, T.C. Memo. 1986-486, affd.

(7th Cir. 1988).

     Rodriguez failed to give us any evidence of either the

amount of NOLs he was claiming or whether he had income available

in years before 1999 to carry his NOLs back.   We are thus unable

to find there was any loss available in 1999, 2000, or 2001 and

therefore deny his claimed NOLs for each of those years.

     L.   Schedule D Gain

     In 1998, Rodriguez sold three parcels of land.   The

documents refer to the first two parcels, Lots 10 and 11, by the

numbers assigned to them in the original development survey for
                               - 30 -

Montgomery Trace.   The property those documents call “5 Acres”

apparently is a plot in Montgomery County.      We’ll follow the

parties in discussing Lots 10 and 11 together, and 5 Acres

separately.   We compute gain or loss on the sale of property by

subtracting basis from sale price.      Sec. 1001(a).

     We start with Lots 10 and 11.      The parties have not

stipulated to the basis, but did stipulate that Rodriguez could

include in basis a $34,661.04 first mortgage and a $8,028.96

second mortgage, and both lots secured these mortgages.        So we

have a basis of at least $42,690.    The taxpayer bears the burden

of substantiating basis, see Doll v. Commissioner, T.C. Memo.

2005-269; Knauss v. Commissioner, T.C. Memo. 2005-6, so

Rodriguez’s failure to substantiate any basis greater than these

two mortgages leaves him with $42,690.      Rodriguez provided

credible evidence that he sold Lot 10 for $59,000 and Lot 11 for

$53,900, totaling $112,900.    His gain for Lots 10 and 11 is

therefore $112,900 less $42,690, or $70,210.

     As for 5 Acres, Rodriguez proved that he bought it for

$25,000.   We find that he sold it for $25,000.     He therefore had

no gain or loss on the sale.

     This all means that Rodriguez had basis of $67,690 in the

three properties, sold them for $137,900, and had a total gain of

$70,210.
                              - 31 -

     M.   Schedules C and E--Rent

     For 1999, 2000, and 2001, Rodriguez went several creative,

but losing, rounds with the Commissioner regarding rents claimed

on Schedules C and E.   For each year, Rodriguez, doing business

as Waterfowl, claimed to pay rent to a partnership which owned an

office building called 101 West Phillips.     He deducted that rent

on his Schedule C.   Rodriguez was also a partner in this

partnership.   He then claimed the rents he paid to 101 West

Phillips as partnership income on his Schedule E.

     Rodriguez loses his Schedule C rent deduction because he

failed to provide credible substantiation.     Rodriguez did not

provide a lease for the 101 West Phillips building.     He testified

that he made out his rent checks to either partner Brandon

Creighton or to 101 West Phillips.     A scan of the checks in

evidence shows several checks made out to Brandon Creighton, and

a few more made out to Brandon Creighton and Matt Rodriguez.

(Rodriguez often goes by his middle name.)     Unlike normal rent

payments, the “rent” amounts vary and the payments do not occur

at regular intervals.   With few exceptions, the memo lines on the

checks do not indicate a reason for the payments or indicate

unclear reasons (such as “chambers”).     Even more damning is the

fact that Rodriguez himself appears able to cash some of these

checks, implying that he never truly lost control of the money.
                               - 32 -

     Given the possibility of a related-party transaction and the

sketchy facts above, we doubt that these payments were actually

“rent,” but we need not reach this issue.   We find that Rodriguez

did not credibly substantiate or explain his rent deductions,

foreclosing the possibility of a Cohan estimate, and therefore

cannot claim them on his Schedule C.

     We next turn to whether Rodriguez properly accounted for the

partnership “rent” income to 101 West Phillips on his Schedule E.

The Commissioner makes several claims about the Schedules E for

1999, 2000, and 2001: (1) Rodriguez misreported the rental income

on his Schedule E; (2) Rodriguez could not use Creighton’s

statement of partnership expenses as substantiation for his own

Schedule E items; and (3) Rodriguez is not entitled to the

deductions from partnership income reflected on his Schedules E.

We address these points in order.

     First, we find that Rodriguez did miscalculate his

partnership’s rental income.   He included all of the “rent” he

paid to the partnership as income on his Schedule E, which is an

admission.   However the partnership agreement confirms that

Rodriguez is merely a 35-percent partner, though in his

interrogatory responses Rodriguez claimed that he is a 45-percent

partner.   And his accountant asserted that Rodriguez is a 50-

percent partner.   We’ll go with the partnership agreement, and
                                - 33 -

find that Rodriguez should have included only 35 percent of the

rental income on his Schedule E.

     Next, we find that the document proffered as Creighton’s

statement of partnership expenses is insufficient substantiation.

It is not even clear that this statement is in fact Brandon

Creighton’s.   It does not appear to be a contemporaneous log of

expenses as they were incurred and has no substantiating receipts

or cashed checks.    On this point it is immaterial whether

Rodriguez and Creighton were in fact 50-percent partners; the

evidence is just not sufficient to prove the existence or amount

of these expenses regardless of Rodriguez’s partnership share.

     We therefore find that Rodriguez failed to substantiate his

partnership expenses, and so he loses the deductions on his

Schedule E.    The Commissioner should recalculate Rodriguez’s

partnership income to reflect his partnership percentage, but not

reduce this income by any of the claimed partnership expenses.

     N.   Self-Employment Tax

     Rodriguez did not report owing any self-employment tax from

1998 through 2001.    We agree with the IRS that Rodriguez’s

submission of Schedules C reporting income from a trade or

business is an admission.    Rodriguez is thus subject to the self-

employment tax for each of the years at issue.    See secs. 1401-

1403.
                                 - 34 -

       O.   Additions to Tax

       The last contested items are the additions to tax that the

Commissioner determined against Rodriguez for failure to timely

file his returns and failure to timely pay the tax owed.     On

these, the Commissioner has the burden of production.      Sec. 7491

(c).    Once the Commissioner meets that burden, the taxpayer must

come forward with evidence sufficient to persuade us that the

Commissioner’s determination is incorrect.     Higbee v.

Commissioner, 

, 447 (2001).

       1.   Section 6651(a)(1)

       The first is the section 6651(a)(1) addition to tax for

failure to timely file.     The parties stipulated that Rodriguez

failed to file timely returns for the tax years in question.

Rodriguez explained at trial that his tardiness was due to the

death of his tax preparer--a death that also caused the permanent

disappearance of many of his tax records.    Rodriguez, however,

could not name the tax preparer.     We do not find him credible on

this issue, and sustain the addition.

       2.   Section 6651(a)(2)

       We likewise sustain the Commissioner’s assertion of a

section 6651(a)(2) addition for failure to timely pay.     The SFRs

that the Commissioner prepared meet the requirements of section

6020(b)(2), and so triggered the start of the period under

section 6651(a)(2) for additions to tax for failing “to pay the
                              - 35 -

amount shown as tax on any specified return.”    Rodriguez did not

provide any evidence to show that his failure to file timely tax

returns was due to reasonable cause.   We therefore sustain the

addition to tax under section 6651(a)(2).

     3.   Section 6654

      Section 6654 imposes a penalty when a taxpayer fails to

make estimated tax payments during the year.    The estimated tax

required for a taxpayer who fails to file--and the returns which

Rodriguez filed after starting his case don’t count for this

purpose, see Mendes v. Commissioner, 

, 324-25 (2003)-

-is the lesser of 90 percent of the tax due or 100 percent of the

tax shown on the previous year’s return (if one was filed).    Sec.

6654(d)(1)(B).   The Commissioner concedes the section 6654

penalty for 1998 because he didn’t offer evidence of Rodriguez’s

tax liability for 1997.   See Wheeler v. Commissioner, 

(2006), affd. 

(10th Cir. 2008).

     The section 6654 penalties for 1999, 2000, and 2001 remain

contested, and the Commissioner has the burden of production.     He

bore it by proving that Rodriguez owes tax, and had paid

insufficient estimated tax, for each of those years.    That’s all

the law requires--we sustain the penalties for those years.



                                    Decision will be entered under

                               Rule 155.