T.C. Memo. 2009-100



                      UNITED STATES TAX COURT



           PETER I. AND DARIA A. BASALYK, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 572-07, 3712-07.      Filed May 14, 2009.



     Peter I. Basalyk, pro se.

     Katherine Lee Kosar, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   In these consolidated cases1 respondent

determined deficiencies, additions to tax, and accuracy-related

penalties with respect to petitioners’ Federal income taxes as

follows:


     1
       By order dated June 16, 2008, these cases were
consolidated for purposes of trial, briefing, and opinion.
                                        - 2 -

                          Peter I. and Daria A. Basalyk
                                docket No. 572-07

                            Addition to Tax       Accuracy-Related Penalty
Year         Deficiency     Sec. 6651(a)(1)            Sec. 6662(a)

1999          $24,200          $4,658.75                   $4,840.00
2001           52,467          12,057.57                   10,460.80


                                Peter I. Basalyk
                               docket No. 3712-07

                                                Additions to Tax
Year        Deficiency     Sec. 6651(a)(1)      Sec. 6651(a)(2)        Sec. 6654
                                                       1
2002          $9,340          $388.75                                  $245.83
2003           9,354            --                    --                241.15
                                                       1
2004           9,690         1,059.50                                   266.69
       1
       “The amount of the addition to tax per IRC 6651(a)(2)
cannot be determined at this time but an addition to tax of 0.5
percent will be imposed for each month, or fraction thereof, of
nonpayment, up to 25 percent, based upon the liability shown, or
the final determined liability, if less.”


                                Daria A. Basalyk
                               docket No. 3712-07

                                                Additions to Tax
 Year       Deficiency     Sec. 6651(a)(1)      Sec. 6651(a)(2)        Sec. 6654
                                                       1
2002         $11,363         $1,292.75                              $149.80
                                                       1
2003          10,629          1,129.25                               100.45
                                                       1
2004          48,312         10,557.25                             1,206.15
        1
       “The amount of the addition to tax per IRC 6651(a)(2)
cannot be determined at this time but an addition to tax of 0.5
percent will be imposed for each month, or fraction thereof, of
nonpayment, up to 25 percent, based upon the liability shown, or
the final determined liability, if less.”

        For 1999 respondent has conceded that petitioners rolled

over a pension distribution of $45,000 and there is no

corresponding income recognition, that petitioners are not liable
                               - 3 -

for the 10-percent additional tax under section 72(t),2 and that

petitioners have established a net capital loss of $40,000.3     For

2001 petitioners have conceded that they must report dividend

income of $638 and respondent has conceded that petitioners

established a net capital loss of $23,490.85.   The parties

further conceded that for tax year 2001 petitioners failed to

include in income a pension distribution of $16,000 and they are

liable under section 72(t) for a 10-percent additional tax of

$1,600.   Petitioners have further conceded that to the extent

there is a deficiency in 1999 or 2001 the additions to tax under

section 6651(a)(1) and the accuracy-related penalties under

section 6662(a) are applicable.   The parties have also agreed

that a computation is necessary to determine whether petitioners

must make statutory adjustments to their itemized deductions and

their exemptions for 1999 and 2001.

     The deficiencies for 2002, 2003, and 2004 were determined

using a filing status of married filing separately.   Respondent


     2
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     3
       Before trial petitioners maintained that they had made a
valid mark-to-market election under sec. 475. Respondent
disagreed. During trial, however, petitioners conceded the issue
of whether they made a valid mark-to-market election under sec.
475 for the years at issue; petitioner Peter I. Basalyk stated:
“I will agree with the Respondent’s perspective that I’m not
eligible to use the mark-to-market. * * * That will take one
issue off the table.”
                              - 4 -

has since conceded that petitioners are eligible to use a filing

status of married filing jointly.   For 2002, 2003, and 2004 the

parties have further resolved any dispute concerning the

following issues with respect to the notices of deficiency:

Unreported pension income; liability under section 72(t);

unemployment compensation; capital gains and losses;4 wages;

dividend income; interest income; and itemized deductions.

Petitioners have also conceded that to the extent there is a

deficiency in 2002, 2003, or 2004 the additions to tax under

sections 6654 and 6651(a)(1) and (2) are applicable.

     After concessions the issues for decision are:    (1) Whether

petitioners are entitled to depreciation deductions for two

residential rental properties claimed on Schedules E,

Supplemental Income and Loss, for 1999 and 2001; (2) whether

petitioners are entitled to deduct any of the other expenses

related to the two residential rental properties claimed on

Schedules E for 1999 and 2001; (3) whether petitioners are

subject to the limitations on deductibility of individual

retirement account (IRA) contributions made by “active

participants” in another retirement plan for 2002, 2003, and

2004; (4) whether petitioners are entitled to deduct educator

expenses for 2002, 2003, and 2004; (5) whether petitioners are

entitled to deduct the value of an automobile allegedly



     4
         See supra note 3.
                               - 5 -

contributed to a charitable organization in 2004; and (6) whether

the Court should require petitioners to pay a penalty pursuant to

section 6673.

                          FINDINGS OF FACT

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

The stipulations of fact, the stipulations and supplemental

stipulations of settled issues, and the attached exhibits are

incorporated herein by this reference.

     Petitioners are husband and wife.   At the time the petitions

were filed, petitioners resided in Ohio.

Tax Years 1999 and 2001

     Petitioners filed joint Federal income tax returns for 1999

and 2001 which respondent received on October 20, 2003, and

October 24, 2005, respectively.   During 1999 and 2001 petitioners

claim to have owned and operated two residential rental

properties:   One identified as 9120/9130 Memphis (Memphis

property) and the other identified as 1530C Forest Lakes (Forest

Lakes property).

     Respondent’s computer printout of petitioners’ 1999 Schedule

E shows that petitioners reported $22,980 of total rent received,

$29,457 of total expense deductions, and $7,318 of depreciation

expenses, which resulted in rent and royalty losses of $13,796

for 1999.   Respondent’s computer printout of petitioners’ 2001

Schedule E shows that petitioners did not report any rent
                                 - 6 -

received, depreciation expense, or other expenses related to the

two residential rental properties but claimed a rent and royalty

loss of $12,480 for 2001.

     On October 4, 2006, respondent issued to petitioners a

notice of deficiency for 1999 and 2001.       Petitioners subsequently

submitted to respondent copies of Schedules E for 1999 and 2001.

In contrast with respondent’s computer printouts of the Schedules

E, petitioners’ copies show:    Rent received of $22,330 in 1999

and $24,280 in 2001; depreciation expenses of $7,319 each for

1999 and 2001; and $28,341 and $26,836 of other expenses5 for

1999 and 2001, respectively.    On line 26 of petitioners’ copies

of the Schedules E, however, petitioners did not report any

rental real estate income or loss.       Petitioners have also

submitted a document titled “Depreciation Schedule” in which they

claim, inter alia, that the depreciable bases of the Memphis and

Forest Lakes properties were $92,480 and $53,880, respectively.

Tax Years 2002, 2003, and 2004

     During 2002, 2003, and 2004 petitioner Daria A. Basalyk

(Mrs. Basalyk) was an employee of the Brecksville-Broadview

Heights Board of Education.    Petitioner Peter I. Basalyk (Mr.

Basalyk) was an employee of IDS Life Insurance Co.


     5
       These “other expenses” include expenses claimed for
advertising, auto and travel, cleaning and maintenance,
commissions, insurance, legal and other professional fees,
management fees, mortgage interest, other interest, repairs,
supplies, taxes, and utilities.
                                - 7 -

in 2002 and of American Express Financial in 2003.   In 2002,

2003, and 2004 petitioners each contributed $3,500 to IRAs.

     Petitioners failed to file Federal income tax returns for

2002, 2003, and 2004.   Respondent subsequently prepared

substitutes for returns for each petitioner for those years.     On

November 13, 2006, respondent issued to each petitioner separate

notices of deficiency for 2002, 2003, and 2004.

     Petitioners filed petitions contesting respondent’s

determinations wherein they broadly assert that respondent “did

not make the appropriate assumptions in calculating tax liability

for each of the above years.”

     On June 4, 2008, the parties executed stipulations and

supplemental stipulations of settled issues addressing a number

of issues and identifying those that remained in dispute.   During

a hearing held that same day, Mr. Basalyk raised additional

issues regarding a charitable contribution in 2004 and educator

expenses in 2002, 2003, and 2004, none of which were addressed in

the notices of deficiency.   The Court, by order dated June 4,

2008, directed petitioners “to produce to respondent’s counsel on

or before 10:00 a.m. on June 11, 2008, all documents pertaining

to the charitable donation of a vehicle, all documents pertaining

to teaching expenses for petitioner wife, and completed 1040

forms for the years 2002, 2003, and 2004.”   In response

petitioners submitted to respondent joint Federal income tax
                               - 8 -

returns for 2002, 2003, and 2004.   On these joint returns

petitioners not only claimed deductions for the newly raised

issues of educator expenses and a charitable contribution of a

vehicle, but also claimed deductions for IRA contributions for

2002, 2003, and 2004.   Respondent argues that we should deny the

deductions for educator expenses and the charitable contribution

for lack of substantiation and that we should find that

petitioners’ deductions for IRA contributions are subject to the

limitations under section 219(g).

     Respondent also requested that we impose a penalty under

section 6673, asserting that petitioners instituted these

proceedings primarily for delay or have unreasonably failed to

pursue available administrative remedies.

     At the conclusion of the trial, the parties were directed to

file opening briefs on or before September 2, 2008.   Respondent

timely filed his brief.   Petitioners did not file a brief despite

having been granted additional time to do so.

                              OPINION

     The Commissioner’s determinations in a notice of deficiency

are generally presumed correct, and deductions are a matter of

legislative grace.   See Welch v. Helvering, 

, 115

(1933); see also INDOPCO, Inc. v. Commissioner, 

, 84

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

, 440

(1934).   In accordance with Rule 142(a) and the cases cited
                              - 9 -

above, a taxpayer generally bears the burden of proving that the

Commissioner’s determinations are in error and that the taxpayer

is entitled to the deductions claimed.6

     In order for the Secretary to determine whether a taxpayer

has correctly reported his income and expenses, the taxpayer is

required to keep permanent books, records, statements, and

returns sufficient to verify income, deductions or other matters

required to be shown on any information or tax return.   Sec.

6001; sec. 1.6001-1(a), Income Tax Regs.

Schedules E Depreciation Expense Deductions

     Section 167(a) allows a depreciation deduction for the

exhaustion, wear and tear of property used in a trade or business

or property held for the production of income.   To substantiate a

depreciation deduction the taxpayer must show that the property

was used in a trade or business (or other profit-oriented

activity) and establish the property’s depreciable basis by

showing the cost of the property, its useful life, and the

previously allowable depreciation.    Cluck v. Commissioner, 

, 337 (1995).

     The only evidence petitioners offered to substantiate their

claimed depreciation deductions was a depreciation schedule.    Mr.


     6
       Sec. 7491(a) provides that the burden of proof may be
shifted to the Commissioner where the taxpayers meet certain
conditions. Petitioners have not asserted nor do we find that
they have met the requirements necessary to shift the burden of
proof to respondent; thus the burden of proof is on petitioners.
                                - 10 -

Basalyk testified that he had prepared the depreciation schedule

approximately 2 weeks before trial.      Petitioners assert that the

depreciable bases of the Memphis and Forest Lakes properties are

$92,480 ($102,480 acquisition price - $10,000 land value) and

$53,880 ($59,880 acquisition price - $6,000 land value),

respectively.

     Even if we assume that petitioners own the Memphis and

Forest Lakes properties, they have failed to establish the

depreciable basis of either property by corroborating the

unsubstantiated figures asserted on the depreciation schedule

with credible testimonial or documentary evidence of the cost,

the useful life, or the previously allowable depreciation of the

properties.   See Cluck v. Commissioner, supra at 337.

     Accordingly, we hold that petitioners are not entitled to

the depreciation deductions for 1999 or 2001.

Schedule E Other Expenses

     A taxpayer may deduct all ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade

or business if the taxpayer maintains sufficient records to

substantiate the expenses.   Secs. 162(a), 6001; Deputy v. du

Pont, 

, 495-496 (1940); Hradesky v. Commissioner, 

, 90 (1975), affd. 

 (5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs.
                                - 11 -

     Aside from brief self-serving testimony offered by Mr.

Basalyk, which we are not required to and do not accept, see

Tokarski v. Commissioner, 

, 77 (1986), petitioners’

only evidence of their claimed Schedule E expenses was a 1999

mortgage interest statement and a 2001 loan statement.   Mr.

Basalyk testified that the interest and loan statements show the

mortgage interest and tax expenses of maintaining the Memphis and

Forest Lake properties.    Although both documents are addressed to

petitioners, each fails to establish whether it relates to the

Memphis property, the Forest Lakes property, petitioners’

residence, or all three.   Accordingly, we hold that petitioners

are not entitled to deductions for the expenses they claim to

have paid with respect to the Memphis and Forest Lakes properties

for tax years 1999 and 2001.7

IRA Contribution Deductions

     The parties stipulated that petitioners each made

contributions of $3,500 to IRAs in 2002, 2003, and 2004.

Respondent argues that petitioners have not established that they

are not active participants in another retirement plan, and,

therefore, they are subject to the limitation on deductibility in

accordance with section 219(g).



     7
       We note that petitioners did not report any information
regarding the Memphis and Forest Lakes properties on the 2002,
2003, and 2004 Federal income tax returns that they submitted to
respondent in June 2008.
                                - 12 -

     Generally, a taxpayer is entitled to deduct amounts

contributed to an IRA.    Sec. 219(a); sec. 1.219-1(a), Income Tax

Regs.    The amount allowable as a deduction, however, shall not

exceed the lesser of the deductible amount or an amount equal to

the compensation includable in the individual’s gross income for

such taxable year.    Sec. 219(b)(1).     For 2002, 2003, and 2004 the

deductible amount was $3,000.    Sec. 219(b)(5)(A).     The deductible

amount increased by $500 to $3,500 if the taxpayer was age 50 or

older before the close of the taxable year.       Sec. 219(b)(5)(B).

     The only evidence indicating petitioners’ ages was

respondent’s computer printouts of petitioners’ 1999 and 2001

joint Federal income tax returns, which show one petitioner’s

date of birth as October 30, 1948.       Although we are unable to

ascertain whether both petitioners qualify for the catch-up

contribution limit of $3,500 for 2002, 2003, or 2004, at least

one of either Mr. or Mrs. Basalyk had attained the age of 50

before 2002.

     The deductible amount of IRA contributions is limited,

however, where the taxpayer or spouse is an “active participant”8

in certain pension plans.   Section 219(g)(1) provides:

     If (for any part of any plan year ending with or within
     a taxable year) an individual or the individual’s
     spouse is an active participant, each of the dollar
     limitations contained in subsections (b)(1)(A) and
     (c)(1)(A) for such taxable year shall be reduced (but


     8
       See sec. 219(g)(5) for the definition of an “active
participant.”
                               - 13 -

     not below zero) by the amount determined under
     paragraph (2).

     Petitioners have adduced no credible testimonial or

documentary evidence to establish whether they were active

participants in another plan within the meaning of section 219(g)

during 2002, 2003, and 2004.    For taxpayers who are “active

participants” and file a joint return, the deduction is reduced

using a ratio determined by dividing the excess of the taxpayers’

modified adjusted gross income9 (AGI) by the applicable dollar

amount (which was $54,000 for 2002, $60,000 for 2003, and $65,000

for 2004) by $10,000.    Sec. 219(g)(3)(B)(i).   Under these

circumstances, this provision results in total disallowance of

the deduction where the total modified AGI exceeds $64,000 for

2002, $70,000 for 2003, and $75,000 for 2004.     The determination

of petitioners’ modified AGI is made without regard to the

deduction allowable under section 219.    Sec. 219(g)(3)(A).

     Accordingly, because it was petitioners’ burden to show that

they were not active participants but they have failed to do so,

we hold that both petitioners are active participants and

therefore subject to the limitations on deductibility of their

IRA contributions in accordance with section 219(g) for taxpayers

filing a joint return.


     9
       In applying sec.   219(g)(2) and (3), the Court looks to the
combined AGI of married   taxpayers filing jointly and not the
individual spouse’s AGI   to determine the reduction or elimination
of the IRA contribution   deduction. See Ho v. Commissioner, T.C.
Memo. 2005-133.
                               - 14 -

Educator Expenses

     Petitioners first broached the issue of educator expenses

during a hearing before this Court on June 4, 2008.    On line 23

of petitioners’ Forms 1040 for 2002, 2003, and 2004, which were

first given to respondent on June 11, 2008, they claimed educator

expenses of $250.    Additionally, petitioners claimed $100, $125,

and $100 of educator expenses as itemized deductions on Schedules

A for 2002, 2003, and 2004, respectively.    Respondent contends

that petitioners are not entitled to    deductions for educator

expenses because they have not substantiated what was purchased,

when it was purchased, by and for whom it was purchased, whether

Mrs. Basalyk is an eligible educator, whether the school at which

she works is an eligible school, and whether the expenses exceed

the amount excludable under section 135, 529(c)(1), or 530(d)(2).

See sec. 62(d)(2).

     Generally, section 62(a)(2) allows as a deduction certain

trade and businesses expenses of employees.    In the case of

elementary and secondary school teachers, section 62(a)(2)(D)

provides:

          (D) Certain expenses of elementary and secondary
     school teachers.–-In the case of taxable years
     beginning during 2002, 2003, or 2004, the deductions
     allowed by section 162 which consist of expenses, not
     in excess of $250, paid or incurred by an eligible
     educator in connection with books, supplies (other than
     nonathletic supplies for courses of instruction in
     health or physical education), computer equipment
     (including related software and services) and other
                                 - 15 -

     equipment, and supplementary materials used by the
     eligible educator in the classroom.

Section 62(d)(1)(A) defines an eligible educator as follows:

          (A) In general.–-For purposes of subsection
     (a)(2)(D), the term “eligible educator” means, with
     respect to any taxable year, an individual who is a
     kindergarten through grade 12 teacher, instructor,
     counselor, principal, or aide in a school for at least
     900 hours during a school year.

     The record is devoid of credible evidence establishing that

petitioners are entitled to any educator expense deductions for

2002, 2003, or 2004.   Petitioners have neither testified as to

what educator expenses they made nor produced receipts or other

credible evidence evincing such expenses.    We agree with

respondent and find that petitioners have failed to substantiate

their eligibility for educator expense deductions.    Accordingly,

we hold that petitioners are not entitled to deductions for

educator expenses for 2002, 2003, or 2004 as either “above-the-

line” deductions or itemized deductions.

Charitable Contribution Deduction

     For 2004 petitioners claim to have donated to the Salvation

Army of Cleveland a 1992 Isuzu Trooper LS Sport Utility 4D with a

fair market value of $4,950.10    Petitioners attached a Form 8283,

Noncash Charitable Contributions, to their 2004 Federal income


     10
       The $4,950 claimed fair market value of the vehicle
appears to have been determined by reference to a Kelley Blue
Book pricing report provided by petitioners. The report shows
the retail value of a “1992 Isuzu Trooper S Sport Utility 4D” was
$4,950 in Ohio on Jan. 22, 2005. No other documentation of the
vehicle’s fair market value was provided.
                              - 16 -

tax return.   The Form 8283 indicates that petitioners purchased

the vehicle on December 4, 1992, for $19,380, and donated it to

the Salvation Army of Cleveland on December 28, 2004.       Respondent

contends that petitioners have failed to provide a

“contemporaneous written acknowledgement from the Salvation

Army”, and therefore petitioners’ claimed deduction should be

disallowed.

     Section 170(a) generally allows as a deduction any

charitable contribution made by a taxpayer within the taxable

year.   No deduction is allowed, however, for any contribution of

$250 or more unless the taxpayer substantiates the contribution

by a contemporaneous written acknowledgment of the contribution

by a qualified donee organization.     Sec. 170(f)(8)(A).   The

deduction for a contribution of property equals the fair market

value of the property on the date contributed.     Sec. 1.170A-

1(c)(1), Income Tax Regs.   The fair market value of the property

is the price at which the property would change hands between a

willing buyer and a willing seller, neither being under any

compulsion to buy or sell and both having reasonable knowledge of

relevant facts.   Sec. 1.170A-1(c)(2), Income Tax Regs.

     A taxpayer claiming a charitable contribution deduction is

generally required to maintain for each contribution a receipt

from the donee charitable organization showing the name of the

organization, the date and location of the contribution, and a
                              - 17 -

description of the property in detail reasonably sufficient under

the circumstances.   Sec. 1.170A-13(b)(1), Income Tax Regs.

     Petitioners have neither testified to nor provided

documentary evidence of a contemporaneous written acknowledgment

of their alleged charitable contribution.   See sec. 170(f)(8)(A).

Accordingly, we hold that petitioners are not entitled to the

charitable contribution deduction claimed on their 2004 Federal

income tax return.

Section 6673 Penalty

     Respondent requests imposition of a penalty pursuant to

section 6673.   Section 6673(a)(1)(A) authorizes the Tax Court to

require a taxpayer to pay to the United States a penalty not in

excess of $25,000 whenever it appears to the Court that the

taxpayer instituted or maintained proceedings primarily for

delay.

     Even though we find that petitioners’ failure to comply with

the standing pretrial order, their lack of preparation for trial,

their failure to appear on time for trial, and their failure to

submit a posttrial brief11 exhibit a disinterest in presenting or

proving the merits of their case, we also recognize that most of

the issues were agreed to before trial.



     11
       Petitioners submitted to the Court six separate motions
requesting additional time to file their posttrial brief.
Despite their requests for additional time and the Court’s grant
extending the filing deadline from Sept. 2, 2008, to Oct. 17,
2008, petitioners have not filed a posttrial brief.
                              - 18 -

     We will not impose a section 6673 penalty on petitioners in

these cases.   However, petitioners are warned that if in the

future they conduct themselves in this Court in the same manner,

they can anticipate being sanctioned pursuant to section 6673.

     To reflect the foregoing,


                                         Decisions will be entered

                                    under Rule 155.