T.C. Memo. 2012-299



                        UNITED STATES TAX COURT



                    SCOTT CHRUSH, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23870-10.                       Filed October 25, 2012.



      Scott Chrush, pro se.

      Sarah E. Sexton and Rebecca S. Duewer-Grenville, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HALPERN, Judge: Respondent determined a deficiency in petitioner’s 2008

Federal income tax of $46,221 and an accuracy-related penalty of $9,244.
                                          -2-

[*2] The issues for decision are whether petitioner (1) is entitled to claimed business

expense and personal deductions and (2) is liable for the penalty.1

       Unless otherwise indicated, all section references are to the Internal Revenue

Code in effect for 2008, and all Rule references are to the Tax Court Rules of

Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.

       Petitioner bears the burden of proof. See Rule 142(a).2

                                FINDINGS OF FACT

       Petitioner resided in San Francisco, California, at the time he filed the

petition.

       During 2008, petitioner earned $46,077 as an employee of Lakespur Hotels.

       Petitioner timely filed his 2008 Form 1040, U.S. Individual Income Tax

Return, on which he claimed the filing status "Single" and reported total tax of

$274. Attached to his Form 1040 were various forms, including a Schedule A,




       1
       There are also certain computational adjustments that follow from the
adjustments at issue, but they are not in controversy and we need not discuss them.
       2
        Petitioner has not raised the issue of sec. 7491(a), which shifts the burden of
proof to the Commissioner in certain situations. We conclude that sec. 7491(a) does
not apply here because petitioner has not produced any evidence that he has
satisfied the preconditions for its application.
                                         -3-

[*3] Itemized Deductions, a Schedule C, Profit or Loss From Business (Sole

Proprietorship), and Form 8829, Expenses for Business Use of Your Home.

      On his Schedule C, petitioner claimed a business loss of $7,592 from C M

Management Co. (C.M. Management), therein described as a real estate consulting

business. Petitioner claimed business expense deductions for advertising,

commissions and fees, contract labor, legal and professional services, office

expenses, supplies, taxes and licensing, travel, and meals and entertainment, totaling

$89,820.

      He also claimed a $44,128 deduction for the business use of 500 square feet

of his 1,700-square-foot home in San Francisco. Petitioner coowned the home with

Jin H. Zhao (Ms. Zhao). Petitioner and Ms. Zhao were coborrowers on a home

equity loan with respect to the house.

      Michael Zhao (Mr. Zhao), a close friend of petitioner, did the bookkeeping

for C.M. Management.

      Petitioner claimed deductions on Schedule A of $88,805 for qualified

residence interest with respect to his house and $2,296 for job expenses and certain

miscellaneous expenses.
                                         -4-

[*4] Respondent examined the return and determined a deficiency in tax

principally on the ground that petitioner had not substantiated the claimed

deductions.

                                      OPINION

I.    Deductions

      A.      Schedule C Business Expense Deductions

      Petitioner claimed the following business expense deductions on

Schedule C:

                          Category                       Amount
               Advertising                                $7,500
               Commissions and fees                       75,000
               Contract labor                                700
               Legal and professional services             2,500
               Office expenses                             1,200
               Supplies                                      700
               Taxes and licensing                           120
               Travel                                        350
               Meals and entertainment                     1,750

      In general, section 162 allows a deduction for "all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying on any

trade or business". When called upon by the Commissioner, a taxpayer must
                                          -5-

[*5] substantiate his expenses. See, e.g., Good v. Commissioner, T.C. Memo.

2008-245; see also sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Moreover,

certain deductions, including those relating to travel, meals, and entertainment, are

subject to strict substantiation requirements. See sec. 274(d).

      Petitioner has not adequately substantiated any of his claimed deductions. He

has not provided any records, receipts, canceled checks, or other evidence to

support his claimed expenditures on advertising, commissions and fees, contract

labor, legal and professional services, or taxes and licensing. Nor has he attempted

to justify his lack of such support. At trial, petitioner offered only the testimony of

Mr. Zhao, who testified that the advertising expenses had been paid using an

American Express credit card, but neither petitioner nor Mr. Zhao provided a credit

card statement or any other records to support that claim.

      In support of the deductions claimed for office expenses, supplies, meals and

entertainment, and travel expenses, petitioner submitted over 40 uncategorized

pages of photocopied receipts, many of which are partially or completely

unreadable. Some of the receipts bear (for the most part, illegible) handwritten

notations of names or other information. Petitioner did not explain, except at a

general level, what the receipts were for or how they represent expenses ordinary

and necessary to his loan processing business. See Patterson v. Commissioner,
                                         -6-

[*6] T.C. Memo. 1979-362 (disapproving "shoebox method"). Nor did petitioner

attempt to demonstrate that he, and not another person, paid the amounts claimed.

With respect to the claimed meal, entertainment, and travel expenses, petitioner has

additionally failed to provide the adequate records or other corroborating evidence

required by section 274(d).

      Thus, petitioner has failed to substantiate his claimed business expenses.

With respect to the expenses not covered by section 274(d), this Court may estimate

the amount of allowable deductions where there is evidence that deductible

expenses were incurred. Cohan v. Commissioner, 

, 543-544 (2d Cir.

1930). In order to do so, however, we must have some basis upon which to make

such an estimate. Vanicek v. Commissioner, 

, 742-743 (1985).

Because the record in this case provides us with no such basis, we conclude that

petitioner has failed to prove that he is entitled to deduct any of the expenses

reported on the Schedule C. Therefore, we sustain respondent's disallowance of the

business expense deductions.

      B.     Business Use of Home

      On the Schedule C and Form 8829 attached to his 2008 return, petitioner

claimed a deduction of $44,128 for the business use of his home, on the basis of the

use of 500 square feet, or 29.41%, of that 1,700-square-foot home.
                                          -7-

[*7] Section 280A generally provides that no deduction otherwise allowable shall

be allowed with respect to the business use of a taxpayer's residence. Sec. 280A(a).

One exception to that prohibition is that, subject to certain limitations, a deduction

may be claimed to the extent it is allocable to a portion of a dwelling unit which is

exclusively used on a regular basis as the principal place of business for any trade or

business of the taxpayer. Sec. 280A(c)(1)(A). Thus, in order to qualify under

section 280A(c)(1)(A), petitioner must show that the claimed portion of his home

was used exclusively and regularly as C.M. Management's principal place of

business.

      The only evidence offered in support of petitioner's claim that he qualifies for

a deduction under section 280A is the testimony of Mr. Zhao, petitioner's

bookkeeper and close friend. Mr. Zhao merely reiterated petitioner's claim that 500

square feet of the home was used exclusively as a home office. He produced no

books, records, or other documentation in support of that claim. Mr. Zhao admitted

that he never measured the area himself but relied on appraisals of the home. He

did not provide copies of the appraisals. Given Mr. Zhao's close relationship with

petitioner and his failure to provide any documentary evidence, despite his role as

C.M. Management's bookkeeper, we give his testimony little weight.
                                         -8-

[*8] Petitioner offered no other evidence showing that the area claimed was the

principal place of business for C.M. Management or that it was used exclusively for

that purpose. Thus, petitioner is not entitled to deduct the home office expense. We

sustain respondent's disallowance of the deduction.

      C.     Mortgage Interest Deductions

      Petitioner claimed mortgage interest deductions on Schedule A totaling

$14,009 for home mortgage interest reported on Form 1098, Mortgage Interest

Statement, and $74,796 for home mortgage interest not reported on Form 1098.

      Subject to certain limitations, section 163(h)(2)(D) allows a deduction for

qualified interest paid on acquisition indebtedness or home equity indebtedness with

respect to a qualified residence. See also sec. 163(h)(3). Where the mortgaged

property is jointly owned and the coowners are jointly liable on the mortgage each

owner is entitled to a deduction for the mortgage interest that he actually pays out of

his own funds. E.g., Petrie v. Commissioner, T.C. Memo. 1995-592, 

, at *5.

      Petitioner has failed to substantiate his payment of any mortgage interest

during 2008. Petitioner submitted to respondent a Form 1098, issued to himself

and Ms. Zhao, reporting only $5,958 in interest paid for 2008, not the $14,009

stated on petitioner's tax return. Moreover, he has provided no evidence
                                         -9-

[*9] demonstrating that he, rather than Ms. Zhao, paid that interest. Petitioner has

not produced any other Forms 1098. He has similarly failed to produce any bank

statements, canceled checks, or other evidence demonstrating that he paid any

portion of the claimed interest not reported on Form 1098.3 Accordingly, petitioner

has failed to prove that he is entitled to a deduction for his alleged payment of home

mortgage interest.

      D.     Other Itemized Deductions

      Petitioner also claimed itemized deductions of $2,296 for job expenses and

certain miscellaneous expenses. Those miscellaneous expenses include $75 in tax

preparation fees, $2,500 in legal expenses, and $650 in other expenses, before the

application of the 2% floor. Petitioner offers no credible evidence in support of any

of those claimed deductions. He has failed to provide any evidence that would

permit us to estimate his allowable deductions under Cohan. Therefore, we sustain

respondent's disallowance of the deductions.




      3
        Petitioner also submitted into evidence an interest only fixed rate note and a
home equity credit line agreement and disclosure statement, both of which name
petitioner and Ms. Zhao as borrowers. Neither document is signed and, even if they
were signed, they would show only that petitioner incurred the debt, not whether the
interest had been paid. We accept neither as proving that petitioner paid any
interest.
                                         - 10 -

[*10] II.    Section 6662(a) Penalty

       Section 6662(a) and (b)(1) and (2) provides for an accuracy-related penalty

(the penalty) of 20% of the portion of any underpayment attributable to, among

other things, negligence or intentional disregard of rules or regulations (without

distinction, negligence) or any substantial understatement of income tax. A

substantial understatement of income tax exists for an individual if the amount of the

understatement exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. See sec. 6662(d)(1)(A).

       Section 6664(c)(1) provides that the penalty shall not be imposed with

respect to any portion of an underpayment if the taxpayer shows that there was

reasonable cause for, and that he acted in good faith with respect to, that portion.

       The determination of whether a taxpayer acted with reasonable cause
       and in good faith is made on a case-by-case basis, taking into account
       all pertinent facts and circumstances. * * * Circumstances that may
       indicate reasonable cause and good faith include an honest
       misunderstanding of * * * law that is reasonable in light of all the facts
       and circumstances, including the experience, knowledge, and education
       of the taxpayer. * * *

Sec. 1.6664-4(b)(1), Income Tax Regs.

       Respondent bears the burden of production with respect to the penalty. See

sec. 7491(c). The burden imposed by section 7491(c) is "only to come forward

with evidence regarding the appropriateness of applying a particular addition to
                                         - 11 -

[*11] tax or penalty to the taxpayer." Good v. Commissioner, T.C. Memo. 2008-

245, 

, at *9. Once that burden is met, petitioner bears the burden

of proving that he is entitled to relief under section 6664(c)(1). See Higbee v.

Commissioner, 

, 446 (2001).

      Respondent has established that petitioner's understatement of income tax for

2008 is substantial. Petitioner reported his taxes for 2008 to be $274. Respondent

determined, and we have sustained, a deficiency of $46,221. Thus, petitioner's

understatement exceeds both 10% of the correct tax and $5,000.4 Respondent has

satisfied his burden of production. To avoid the penalty, petitioner must come

forward with evidence that he acted with reasonable cause and in good faith.

      Petitioner did not specifically address the section 6662(a) penalty either at

trial or in his brief, and the evidence before us fails to demonstrate that he acted

with reasonable cause or in good faith. Petitioner has failed to carry his burden of

showing that he is entitled to relief under section 6664(c)(1). Therefore, we sustain

respondent's imposition of the 6662(a) penalty.




      4
       Because we find that petitioner substantially understated his income tax, we
need not consider whether he was negligent within the meaning of sec. 6662(b)(1).
                                       - 12 -

[*12] III.   Conclusion

       We sustain respondent's adjustments disallowing petitioner's Schedule C

and Schedule A deductions. We also sustain respondent's determination of a

section 6662(a) accuracy-related penalty.


                                                      Decision will be entered for

                                                respondent.