T.C. Memo. 2011-232



                      UNITED STATES TAX COURT



                GODFREY C. EKWENUGO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 13255-07, 15045-08,   Filed September 28, 2011.
                 29169-08.



     Godfrey C. Ekwenugo, pro se.

     Catherine S. Tyson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   In these consolidated cases, respondent

determined deficiencies, additions to tax, and accuracy-related

penalties with respect to petitioner’s Federal income taxes as

follows:
                                - 2 -

                                                  Accuracy-
                           Addition to tax     related penalty
Year       Deficiency       Sec. 6651(a)         Sec. 6662(a)

2001        $33,566            $7,773                $6,713
2002         45,352            10,697                 9,070
2003         94,168            22,896                18,834
2004         36,878             8,554                 7,376
2005         18,217             4,099                  -0-

Respondent also determined a section 6651(a)(2)1 addition to tax

for 2005.2    Petitioner timely petitioned this Court to contest

respondent’s determinations.




       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, in effect for the years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. All monetary figures have been rounded
to the nearest dollar.
       2
      Sec. 6651(a)(2) imposes an addition to tax for failure to
pay the amount shown as tax on a return by the payment due date.
The addition to tax accrues at a rate of 0.5 percent for each
month of nonpayment, not to exceed 25 percent in the aggregate.

       After concessions,3 the issues for decision are:        (1)

Whether petitioner had unreported gross receipts of $86,789,




       3
      Respondent concedes that the tax compliance officer who
performed the bank deposits analysis erroneously included some
items in income and that petitioner’s unreported income should be
reduced by $5,060, $16,155, and $260 for 2001, 2002, and 2003,
respectively. The amounts set forth in (1) above reflect these
concessions.

     After reviewing the documents introduced into evidence at
trial, respondent concedes that petitioner is entitled to
Schedule C deductions as follows:

                                                     Total deductions
                             Disallowed per notice    allowed after
Year          Per return         of deficiency         concessions

2001           $17,010             $15,010              $10,000
2002            30,356              28,668               10,000
2003             2,813               2,813              110,252
2004             2,556               2,556               31,879
2005       No return filed            ---                10,000

     Respondent also concedes that petitioner is entitled to
three personal exemption deductions for 2001 and 2002 and that
petitioner qualifies for head of household filing status for 2001
and 2002.

     Petitioner concedes that: (1) He is liable for the sec.
6651(a)(1) additions to tax for failure to timely file his 2001
to 2005 returns; (2) if this Court determines deficiencies for
2001 to 2004, he is liable for the sec. 6662(a) accuracy-related
penalties for those years; and (3) if this Court determines a
deficiency for 2005, he is liable for the sec. 6651(a)(2)
addition to tax.

     The following issues are computational: (1) Petitioner’s
eligibility for earned income tax credits for 2001 to 2004; (2)
petitioner’s standard deductions for 2001 to 2005; (3)
petitioner’s self-employment tax liabilities for 2001 to 2004;
and (4) the availability and extent of petitioner’s self-
employment tax deductions for 2001 to 2005.
                                 - 4 -

$107,539,4 $282,862, $125,641, and $82,010 for 2001, 2002, 2003,

2004, and 2005, respectively, as respondent determined using the

bank deposits method; and (2) whether petitioner substantiated

Schedule C deductions for 2001 to 2005 in excess of the amounts

respondent concedes.

                           FINDINGS OF FACT

        Some of the facts have been stipulated.   The stipulations of

fact are incorporated herein by this reference.      Petitioner

resided in Missouri when he filed his petitions.

I.      Petitioner’s Background and Businesses

     Petitioner emigrated from Nigeria to the United States in

1981.     He became a U.S. citizen in 1990.   Petitioner attended

Fontbonne University in St. Louis, Missouri, receiving a bachelor

of science degree in 1989 and a master’s degree in business

administration in 1990.

     Sometime in the 1990s petitioner started driving a cab for

the Harris Cab Co., and he continued driving for the company

through 2002.5    For a period that is not established in the

record, petitioner also operated a business called Comfort



     4
      Respondent’s opening brief incorrectly shows the total
gross receipts for 2002 after concessions as $60,566.
     5
      The parties stipulated that petitioner drove a cab during
2001 and 2002, but petitioner testified that he stopped driving a
cab in 2001.
                                 - 5 -

Limousine.    From 2001 to 2005 petitioner also operated a tax

return preparation business.

     In 2002 petitioner opened a nightclub called Comfort Zone,

which he operated through 2004.    The primary source of income for

Comfort Zone was liquor sales.     From 2002 to 2005 petitioner also

operated an establishment known as the Royal Crown.

     During all or part of the years at issue, petitioner

maintained three accounts at the St. Louis Postal Credit Union.

From 2001 to 2005 petitioner maintained an account with an

account number ending in 6671 (account 6671).       On the member

account agreement, petitioner represented that he was the sole

owner of the account and identified the account as both an

individual and a business account.       Petitioner listed his

occupation as self-employed accountant.

     From 2001 to 2005 petitioner also maintained an account with

an account number ending in 8886 (account 8886).       On the member

account agreement, petitioner represented that he was the sole

owner of the account and identified the account as an individual

account.   Petitioner listed his occupation as self-employed

accountant.

     On July 31, 2002, petitioner opened an account with an

account number ending in 3842 (account 3842).       On the account

agreement, petitioner listed Comfort Zone as the member and

himself as a joint member and identified the account as a
                                 - 6 -

business account.     Petitioner listed his occupation as self-

employed.

        Respondent determined that petitioner made taxable deposits

into the three accounts as follows:

                   Account    Account     Account
          Year       6671       8886       3842        Total

         2001     $87,006      $4,843       -0-       $91,849
         2002      62,721       1,295     $59,678     123,694
         2003       5,017          50     278,055     283,122
         2004        -0-         -0-      125,641     125,641
         2005        -0-          450      81,560      82,010

II.   Petitioner’s Returns and Notices of Deficiency

      Petitioner untimely filed his Federal income tax return for

2001.     On the Schedule C, Profit or Loss From Business (Sole

Proprietorship), petitioner reported total gross income of

$27,856 and claimed deductions totaling $17,010 as follows:       (1)

$159 for taxes and licenses; (2) $5,571 for commissions and fees;

(3) $3,780 for gas; and (4) a $7,500 payment to Harris Cab Co.

Petitioner identified the relevant business activity as “taxicab

service”.

      Respondent issued a notice of deficiency dated March 9,

2007, for 2001.     On the basis of petitioner’s bank deposits,

respondent determined that petitioner failed to report gross

receipts of $63,993.     Respondent also disallowed $15,010 of

petitioner’s Schedule C deductions.

      Petitioner untimely filed his Federal income tax return for

2002.     On the Schedule C, petitioner reported total gross income
                                - 7 -

of $41,450 and claimed deductions totaling $30,356 as follows:

(1) $12,000 for rent or lease of business property; (2) $1,932

for repairs and maintenance; (3) $10,551 for supplies; (4) $585

for taxes and licenses; (5) $2,856 for utilities; (6) $232 of

depreciation; (7) $1,850 for advertising; and (8) $350 for legal

and professional services.   Petitioner identified the related

business activity as Comfort Zone.

     Respondent issued a notice of deficiency dated March 18,

2008, for 2002.   On the basis of petitioner’s bank deposits,

respondent determined that petitioner failed to report gross

receipts of $82,244.   Respondent also disallowed $28,668 of

petitioner’s Schedule C deductions.

    Petitioner untimely filed his Federal income tax returns for

2003 and 2004 and failed to file a Federal income tax return for

2005.   On his Schedule C for 2003, petitioner reported total

gross income of $14,555 and claimed deductions totaling $2,813 as

follows:    (1) $1,668 for utilities; (2) $65 for advertising; and

(3) $1,080 for office expenses.   On his Schedule C for 2004,

petitioner reported total gross income of $15,115 and claimed

deductions totaling $2,556 as follows:   (1) $1,188 for utilities;

(2) $1,008 for office expenses; and (3) $360 for Internet

services.   Respondent prepared a substitute for return for 2005

pursuant to section 6020(b).
                               - 8 -

     Respondent issued a notice of deficiency dated August 26,

2008, for 2003 to 2005.   On the basis of petitioner’s bank

deposits, respondent determined that petitioner failed to report

gross receipts of $268,567, $110,526, and $82,010 for 2003, 2004,

and 2005, respectively.   Respondent also disallowed petitioner’s

Schedule C deductions of $2,813 and $2,556 for 2003 and 2004,

respectively.

                              OPINION

I.   Burden of Proof

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving that the determinations are erroneous.    Rule

142(a); Welch v. Helvering, 

, 115 (1933).    The burden

of proof shifts to the Commissioner, however, if the taxpayer

produces credible evidence to support the deduction or position,

the taxpayer complied with the substantiation requirements, and

the taxpayer cooperated with the Secretary6 with regard to all

reasonable requests for information.    Sec. 7491(a); see also

Higbee v. Commissioner, 

, 440-441 (2001).




     6
      The term “Secretary” means “the Secretary of the Treasury
or his delegate”, sec. 7701(a)(11)(B), and the term “or his
delegate” means “any officer, employee, or agency of the Treasury
Department duly authorized by the Secretary of the Treasury
directly, or indirectly by one or more redelegations of
authority, to perform the function mentioned or described in the
context”, sec. 7701(a)(12)(A)(i).
                                   - 9 -

        Petitioner does not contend that section 7491(a)(1) applies,

and the record does not permit us to conclude that petitioner

satisfied the section 7491(a)(2) requirements.       Accordingly,

petitioner bears the burden of proving that the Commissioner’s

determinations are erroneous.

II.     Petitioner’s Income for 2001 to 2005

      A.      In General

      Gross income includes “all income from whatever source

derived”.      Sec. 61(a).   A taxpayer must maintain books and

records establishing the amount of his or her gross income.         Sec.

6001.      If a taxpayer fails to maintain the required books and

records, the Commissioner may determine the taxpayer’s income by

any method that clearly reflects income.       See sec. 446(b);

Petzoldt v. Commissioner, 

, 693 (1989).       The

Commissioner’s reconstruction of income “need only be reasonable

in light of all surrounding facts and circumstances.”          Petzoldt

v. 

at 687.

      The bank deposits method is a permissible method of

reconstructing income.       Clayton v. Commissioner, 

,

645 (1994); see also Dodge v. Commissioner, 

, 353

(8th Cir. 1992), affg. in part and revg. in part 

(1991).      Bank deposits constitute prima facie evidence of income.

Tokarski v. Commissioner, 

, 77 (1986).       The

Commissioner need not show the likely source of a deposit treated
                              - 10 -

as income, but the Commissioner “must take into account any

nontaxable source or deductible expense of which it has

knowledge” in reconstructing income using the bank deposits

method.   Clayton v. 

at 645-646.    However, the

Commissioner need not follow any “leads” suggesting that a

taxpayer has deductible expenses.   DiLeo v. Commissioner, 

, 872 (1991), affd. 

(2d Cir. 1992).

     After the Commissioner reconstructs a taxpayer’s income and

determines a deficiency, the taxpayer must prove that the

reconstruction is in error and may do so, in whole or in part, by

proving that a deposit is not taxable.   See Clayton v.

at 645.   However, merely establishing that

some deposits are not taxable is insufficient to demonstrate that

the Commissioner acted arbitrarily in reconstructing income.

Estate of Mason v. Commissioner, 

, 658 (1975), affd.

(6th Cir. 1977).

     Respondent introduced credible evidence that petitioner did

not maintain the required books and records with respect to his

income and that petitioner had unreported income for 2001 to

2005.   The parties stipulated that during the years at issue

petitioner operated a taxicab service, owned and operated a

nightclub, prepared tax returns for compensation, and maintained

three bank accounts into which he deposited funds.     We find that
                               - 11 -

respondent acted reasonably in using an indirect method to

reconstruct petitioner’s income.

     B.     Returned Checks

     In determining income under the bank deposits method, the

Commissioner must take into account any nontaxable items of which

the Commissioner has knowledge.    Clayton v. 

at 645-646.    Nontaxable items include interaccount transfers and

returned checks.    See MacGregor v. Commissioner, T.C. Memo. 2010-

187; Taylor v. Commissioner, T.C. Memo. 2009-235.

     Respondent’s revenue agent, Mike Murphy (Mr. Murphy),

performed the bank deposits analysis.   Mr. Murphy testified that

he identified deposits in petitioner’s accounts, then subtracted

any deposits that constituted nontaxable income.    He determined

that the resulting amount minus petitioner’s reported gross

income constituted unreported gross income.

     During his testimony Mr. Murphy admitted that he erroneously

included in income some deposited checks that later were

returned.   On brief respondent conceded that Mr. Murphy

erroneously included in his income reconstruction for 2001 to

2005 deposited checks totaling $21,475 that were later returned.

     In addition to the items conceded above, an analysis of Mr.

Murphy’s income reconstruction and petitioner’s bank statements

reveals that respondent erroneously included additional returned

checks in calculating petitioner’s unreported income as follows:
                              - 12 -

     •    Respondent failed to exclude a returned check for $20

          deposited in account 6671 in 2001.   We will reduce

          petitioner’s 2001 unreported income accordingly.

     •    Respondent failed to exclude three returned checks

          totaling $2,800 deposited in account 3842 in 2003.    In

          addition, respondent failed to adjust his

          reconstruction to exclude a bank error correction of

          $200 in account 3842 in 2003.   We will reduce

          petitioner’s 2003 unreported income by $3,000 to adjust

          for these errors.

     •    Respondent failed to exclude three returned checks

          totaling $535 deposited in account 3842 in 2004, and

          we will reduce petitioner’s 2004 unreported income

          accordingly.

     •    Respondent failed to exclude three returned checks

          totaling $350 deposited in account 3842 in 2005, and we

          will reduce petitioner’s 2005 unreported income

          accordingly.

     C.   Disputed Items of Income

     Petitioner argues that respondent’s income reconstruction

treated other nontaxable deposits as income.   In defending

against the Commissioner’s reconstruction of income, the taxpayer

bears the burden of showing whether and to what extent the

Commissioner included deposits derived from nontaxable sources.
                                - 13 -

Dodge v. 

at 357.     A taxpayer’s

unsubstantiated and self-serving testimony that deposits are

nontaxable transfers between family members and friends

ordinarily is insufficient to meet this burden.    See Shea v.

Commissioner, 

, 189 (1999); see also Balot v.

Commissioner, T.C. Memo. 2001-73; Ahmad v. Commissioner, T.C.

Memo. 1997-85.   If a taxpayer contends that some deposits are

nontaxable transfers from family members or friends, the taxpayer

should normally introduce credible evidence, such as documents or

the testimony of the family members or friends who participated

in the alleged transfers, to prove that specific deposits are

nontaxable.   See Balot v. 

; see also

Ihlenfeldt v. Commissioner, T.C. Memo. 2001-259.     If a taxpayer

fails to produce relevant documentation or to call relevant

witnesses and fails to explain the absence of such evidence, we

may infer that the evidence would have been unfavorable.      See

Tokarski v. Commissioner, 

.

     Petitioner testified that his friends and family members

used his personal accounts to deposit their funds.      Petitioner

explained that his family imported and exported goods between the

United States, Africa, and Europe and deposited income from these

sales into his bank accounts.    Petitioner asserts that he either

repaid these amounts to his family members or used the funds to

purchase products for his family to sell in Africa.      To
                                - 14 -

corroborate his testimony, petitioner introduced handwritten

spreadsheets that purported to identify the source and purpose of

some deposits.   Petitioner did not introduce any other evidence

to corroborate his testimony.

     Petitioner also testified that a number of deposits in 2002

represented borrowed money and credit card advances that

petitioner used to start Comfort Zone.    Petitioner produced a

loan application from Larry’s Loan Co.    The loan application

indicates that petitioner requested a $20,000 loan for the

purchase of investment property.    However, petitioner introduced

no documentation to prove that the loan actually closed or that

he deposited the loan proceeds into one of his three accounts.

     Petitioner also testified that in 2004 Charles Code (Mr.

Code) began operating Comfort Zone after petitioner ceased

operating it and that a number of deposits were Mr. Code’s

income.   Petitioner testified that he assisted Mr. Code in

operating Comfort Zone and that all proceeds from credit card

transactions at Comfort Zone were deposited into petitioner’s

account 3842.    Petitioner testified further that he repaid these

deposits in two ways:    (1) Petitioner wrote Mr. Code checks

repaying the amounts; and (2) petitioner used the proceeds to pay

rent for Comfort Zone.

     Petitioner did not introduce any credible evidence to

support his self-serving testimony, such as documentation
                               - 15 -

concerning the lease agreement, the lease payments, or the

alleged credit card transactions.   Petitioner did not call Mr.

Code as a witness.

     Petitioner also testified that several deposits related to

an automobile insurance policy that he purchased for a friend,

Fadida Hill (Ms. Hill).   According to petitioner, several

deposits constituted payments from Ms. Hill to reimburse him for

the insurance.7   Petitioner did not produce the insurance policy

or call Ms. Hill as a witness.

     Petitioner also testified that he received payments of

$8,063 and $1,317 in 2001 from Farmers Insurance.   Petitioner

claimed that these payments derived from an insurance claim for

storm damage to his house.   Petitioner failed to introduce any

documentation to support his testimony, and we could not identify

specific deposits in 2001 from Farmers Insurance on the account

statements in the record.

     Petitioner offered several excuses for his failure to

introduce appropriate documentation in support of his

contentions.   For example, petitioner testified that when he

defaulted on the Comfort Zone lease, he no longer had access to




     7
      In addition, petitioner testified that a number of deposits
in accounts 8886 and 6671 were deposits for his children.
Petitioner provided no explanation as to the source of these
deposits or why these deposits would constitute nontaxable
income.
                               - 16 -

the income records that were inside the club.    He also testified

that he lost all records of his tax return preparation business.

     In the absence of corroborating evidence, we are not

required to accept petitioner’s self-serving testimony.      See Shea

v. 

at 189.    Petitioner introduced no

documentation to corroborate his testimony and did not call any

of the material witnesses.    We reject petitioner’s uncorroborated

testimony as not credible.    Therefore, we sustain respondent’s

determination that petitioner had unreported gross receipts for

2001 to 2005 adjusted to reflect respondent’s concessions and our

findings regarding the returned checks.

III. Schedule C Deductions

     Generally, a taxpayer is entitled to deduct ordinary and

necessary expenses paid or incurred in carrying on a trade or

business.   Sec. 162(a); Am. Stores Co. v. Commissioner, 

, 468 (2000).   An expense is ordinary if it is customary or

usual within the particular trade, business, or industry or if it

relates to a transaction “of common or frequent occurrence in the

type of business involved.”    Deputy v. du Pont, 

, 495

(1940).   An expense is necessary if it is appropriate and helpful

for the development of the business.     Commissioner v.

Heininger, 

, 471 (1943).    Personal, living, or family

expenses generally are not deductible.    See sec. 262(a).
                              - 17 -

     Deductions are a matter of legislative grace, and ordinarily

a taxpayer must prove that he is entitled to the deductions he

claims.   INDOPCO, Inc. v. Commissioner, 

, 84 (1992).

A taxpayer must maintain records to substantiate claimed

deductions and to establish the taxpayer’s correct tax liability.

Higbee v. Commissioner, 

; see also sec. 6001.     The

taxpayer must produce such records upon the Secretary’s request.

Sec. 7602(a); see also sec. 1.6001-1(e), Income Tax Regs.

Adequate substantiation must establish the nature, amount, and

purpose of a claimed deduction.   Higbee v. 

at

440; see also Hradesky v. Commissioner, 

(1975), affd.

per curiam 

(5th Cir. 1976).   In deciding whether a

taxpayer adequately substantiated a claimed deduction, we are not

required to accept the taxpayer’s “self-serving, unverified, and

undocumented testimony.”   Shea v. Commissioner, 

.

     When a taxpayer establishes that he paid or incurred a

deductible expense but does not establish the amount of the

expense, we may estimate the amount of the deductible expense.

Cohan v. Commissioner, 

, 542-544 (2d Cir. 1930).

However, we cannot estimate the amount unless the taxpayer

introduces evidence that he paid or incurred the expense and the

evidence is sufficient for us to develop a reasonable estimate.

Williams v. United States, 

, 560 (5th Cir. 1957).      In

estimating the amount, we bear heavily upon the taxpayer who
                               - 18 -

failed to maintain and produce the required records.   See Cohan

v. 

at 544.

     Petitioner argues that he properly deducted business

expenses for the years at issue, and he testified about some of

the alleged expenses at trial.   However, petitioner concedes that

he did not maintain any accounting ledgers or journals for his

business activities, and he did not introduce any receipts,

invoices, bills, canceled checks, or other items to prove he paid

the expenses he deducted.8   Petitioner conceded at trial that his

2002 return was “completely unreliable” because it understated

income and expenses.

     Petitioner did not introduce any documentation or other

credible evidence to substantiate Schedule C expenses in excess

of those respondent conceded or to provide any reasonable basis

for estimating the expenses.   Petitioner’s uncorroborated

testimony is insufficient to substantiate the disallowed

deductions in excess of amounts respondent conceded.   See

  Therefore, we sustain respondent’s determinations as

modified by concessions.


     8
      Petitioner also testified that he could not produce
receipts because Mr. Murphy failed to return relevant receipts to
him. Mr. Murphy testified that petitioner did not provide any
documentation to respondent during the audit process. He further
testified that while petitioner provided some receipts for a
related audit, he thought the receipts documented only 2005
expenses. Mr. Murphy testified that he returned the receipts to
petitioner’s bookkeeper, Ms. Maxie, who was the subject of the
related audit.
                             - 19 -

     We have considered the parties’ remaining arguments, and to

the extent not discussed above, conclude those arguments are

irrelevant, moot, or without merit.

     To reflect the foregoing,


                                           Decisions will be entered

                                      under Rule 155.