Clifton v. Commissioner

T.C. Memo. 1995-528

UNITED STATES TAX COURT

GRETA ANN CLIFTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6047-93. Filed November 7, 1995.

Greta Ann Clifton, pro se.

Yolanda R. Garcia, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined a deficiency in and

additions to petitioner's Federal income tax as follows:

Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(a)(1) 6653(a)(2) 6661(a)
1
1985 $10,398 $520 $2,600
 - 2 -
1
50 percent of the interest due on the portion of the
underpayment attributable to negligence.

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

Whether petitioner had unreported Schedule C income. We hold

that she did to the extent set out below. (2) Whether petitioner

may deduct claimed Schedule C expenses in excess of the amounts

allowed by respondent. We hold that she may not except as set

out below. (3) Whether petitioner may deduct claimed employee

business expenses. We hold that she may not. (4) Whether

petitioner may deduct a claimed capital loss. We hold that she

may not. (5) Whether petitioner had additional self employment

income. We hold that she did. (6) Whether petitioner is liable

for the additions to tax for negligence under section 6653(a)(1)

(2).2 We hold that she is liable. (7) Whether petitioner is

liable for an addition to tax for substantial understatement of

tax under section 6661(a). We hold that she is liable.

1
Respondent conceded that petitioner is allowed Schedule C
deductions of $2,485 and $986 for legal expenses and office
expenses, respectively. Petitioner conceded that she had
unreported Schedule C income of $433, and that she is not
entitled to a $20 Schedule C deduction for dues and publications,
or a $403 Schedule C deduction for insurance.
The parties agree that, due to the increase in petitioner's
adjusted gross income, petitioner's claimed general sales tax
deduction and child and dependent care credit must be
mathematically adjusted. The parties can make these adjustments
in their Rule 155 computations.
2
All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
 - 3 -

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulated

facts and the accompanying exhibits are incorporated into our

findings by this reference. Petitioner, Greta Ann Clifton,

resided in Albuquerque, New Mexico, on the date the petition was

filed.

Petitioner is an accountant. During 1985, petitioner was

the Controller of Knappco, Inc. (Knappco), a company located in

Kansas City, Missouri. While working for Knappco, petitioner

lived at 599 Highway 224, Wellington, Missouri.

While petitioner was working at Knappco, Cheryl Daro (Daro)

babysat petitioner's child. During April of 1985, petitioner and

Daro formed Cena Enterprises (Cena). Cena was formed to provide

computer data entry services for Knappco. Cena was licensed to

do business in Napoleon, Missouri. Petitioner and Daro opened a

joint checking account at Napoleon Bank, Napoleon, Missouri, in

the name of Cena (Cena account). During 1985, both petitioner

and Daro made deposits to and withdrawals from the Cena account.

Petitioner and Daro, doing business as Cena, prepared

letters, mailing lists, and inventory tables for Knappco. More

specifically, petitioner would bring a computer to Daro's home in

Napoleon, Missouri, and Daro would type the letters, mailing

lists, etc. while petitioner was working at Knappco.
 - 4 -

Cena did not file a Form 1065, U.S. Partnership Return of

Income, for the year 1985. Cena had gross receipts of $24,463

for the year 1985. Petitioner and Daro each reported $12,216 of

Cena's gross receipts on their 1985 individual Federal income tax

returns.3

On May 9, 1985, petitioner and Daro opened a joint bank

account at Norbank, North Kansas City, Missouri (Norbank), in the

name of petitioner and Daro doing business as "Orad Associates"

(Orad account and Orad). The signature cards for the Orad

account bear the signatures of both petitioner and Daro.

Included in the records of the Norbank account was a document

entitled "Partnership Certificate" for the "General Co-

partnership known as Orad Associates."

Although Daro signed the aforementioned partnership

certificate, she testified that she was not a partner in Orad.

Furthermore, she testified that she had nothing to do with Orad,

and that petitioner operated Orad exclusively.

During 1985, $20,971 was deposited into the Orad account.

With the exception of a $500 deposit (which was made from

petitioner's personal bank account at Norbank) and a $2,000

deposit (which was made by Cena), all the remaining deposits into

the Orad account were from Knappco, payable to Orad. The checks

from Knappco, payable to Orad, were all signed by petitioner,

3
The record does not establish why petitioner and Daro included
only $12,216 each on their returns, when one-half of Cena's
$24,463 of gross receipts is $12,231.50.
 - 5 -

presumably in her capacity as controller of Knappco. Every check

drawn on the Orad account was endorsed by petitioner. There was

no activity in the Orad account from August 1985 until May 1986,

when petitioner endorsed a check payable to herself for $1,300,

leaving a balance in the account of $13.69. Thereafter, there

was no activity from June 1986 through January 1987, when the

account was closed by the bank for failure to pay service

charges.

Orad did not file a Form 1065, U.S. Partnership Return of

Income, for tax year 1985. Orad had gross receipts of $18,471 in

1985. Petitioner included one half of Orad's gross receipts on

her 1985 Federal income tax return, or $9,235. Daro, however,

did not include any of Orad's gross receipts on her 1985 Federal

income tax return.

Petitioner's employment with Knappco terminated on August

27, 1985, when she was fired for allegedly stealing from Knappco.

Subsequently, petitioner was charged with two felony counts of

stealing by deceit money owned by Knappco. Count 1 charged

petitioner with issuing an unwarranted check in the amount of

$6,576 payable to Orad, and count 2 charged petitioner with

issuing an unwarranted check in the amount of $3,405 payable to

Cena. On June 6, 1986, petitioner pled guilty to both felony

counts of stealing by deceit from Knappco.

Petitioner testified that she owned three vehicles during

1985: A 1965 Ford Mustang, a 1976 Chevrolet pickup truck
 - 6 -

(truck), and a 1985 Ford Mustang. Petitioner further testified

that the 1965 Mustang and the truck were used partially for

business use and partially for personal use, while the 1985

Mustang was used exclusively for personal use. The truck was

purchased by petitioner in May of 1985. Petitioner purchased the

truck for $3,330, paying with two separate checks drawn on the

Orad account. The 1985 Mustang was purchased by petitioner on

June 12, 1985, with a down payment in the amount of $7,000, paid

with a check drawn on the Orad account. During 1985, petitioner

sold her 1985 Mustang.

OPINION

Issue 1. Unreported Schedule C Income

Respondent determined that all of the income derived by Orad

should be included in petitioner's return. Petitioner asserts

that Orad was a partnership; thus, only one-half of the income

from Orad is taxable to her.

As a general rule, the Commissioner's determinations are

afforded a presumption of correctness, and the taxpayer bears the

burden of proving that those determinations are erroneous. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

A partnership is broadly defined as "a syndicate, group,

pool, joint venture, or other unincorporated organization,

through or by means of which any business, financial operation,

or venture is carried on". Sec. 7701(a)(2); sec. 1.761-1(a),

Income Tax Regs. Generally, a partnership exists when persons
 - 7 -

"join together their money, goods, labor, or skill for the

purpose of carrying on a trade, profession, or business and when

there is community of interest in the profits and losses."

Commissioner v. Tower, 327 U.S. 280, 286 (1946). The existence

of the requisite purpose is a question of fact that turns on the

parties' intent. Commissioner v. Culbertson, 337 U.S. 733, 742

(1949). Moreover, while the existence or nonexistence of a

partnership under common law or State law may be relevant,

Federal law controls classification for Federal tax purposes.

Estate of Kahn v. Commissioner, 499 F.2d 1186 (2d Cir. 1974),

affg. Grober v. Commissioner, T.C. Memo. 1972-240; Luna v.

Commissioner, 42 T.C. 1067, 1077 (1964); sec. 1.761-1(a), Income

Tax Regs.

There are several factors to be weighed in determining

whether a partnership exists, none of which alone is

determinative. Alhouse v. Commissioner, T.C. Memo. 1991-652,

affd. sub nom. Bergford v. Commissioner, 12 F.3d 166 (9th Cir.

1993). The test is whether:

considering all the facts--the agreement, the conduct of the
parties in execution of its provisions, their statements,
the testimony of disinterested persons, the relationship of
the parties, their respective abilities and capital
contributions, the actual control of income and the purposes
for which it is used, and any other facts throwing light on
their true intent--the parties in good faith and acting with
a business purpose intended to join together in the present
conduct of the enterprise. [Commissioner v. Culbertson,
supra at 742; fn. ref. omitted]

Petitioner argues that she and Daro operated Orad as a

partnership. Petitioner notes that she and Daro each signed the
 - 8 -

signature card for the Orad account, and that they each signed a

partnership agreement. Furthermore, petitioner notes that Orad

is Daro's name spelled backwards.

Although a partnership certificate was signed by both

petitioner and Daro, the terms of the agreement relate

exclusively to the Orad joint checking account. The agreement is

a one-page document that addresses the relationship of

petitioner, Daro, and the bank relative to the joint checking

account; the document does not address the signatories' business

relationship, if any. Accordingly, we find that this agreement

alone does not demonstrate petitioner's and Daro's intent to

carry on a business as partners. In addition, such an intent was

specifically denied by Daro. Daro testified that she was not a

partner in Orad, that she had nothing to do with Orad, and that

petitioner operated Orad exclusively. This testimony is

supported by the record, since every check drawn on the Orad

account was endorsed by petitioner. Thus, it appears that

petitioner had exclusive control over Orad's income.

Petitioner argues that both she and Daro received

distributions from Orad, indicating a partnership relationship.

Specifically, petitioner noted that a $1,000 check drawn on the

Orad account was made out to Daro. Respondent argues that this

payment to Daro was merely a reimbursement of one half of the

$2,000 contributed to Orad by Cena. Daro corroborated

respondent's argument, noting that Cena contributed $2,000 to
 - 9 -

Orad so Orad could open a bank account and that the $1,000

payment she received from Orad was repayment of her 50-percent

share of the Cena contribution. Since the parties agree that

petitioner and Daro were partners in Cena and Cena did contribute

$2,000 to Orad, we find that Orad's payment to Daro was a mere

reimbursement, not a partnership distribution. In addition, we

find that this transaction supports respondent's position that

petitioner and Daro were not co-proprietors of Orad, since Daro

never made a capital contribution to Orad.

Petitioner's own testimony also indicates the lack of a co-

proprietor relationship. Petitioner testified that she

"controlled the Orad account," and that she "got the Orad money."

Based on the foregoing, we find that petitioner has failed

to carry her burden of establishing that Orad was a partnership

for the year at issue. Accordingly, we sustain respondent's

determination.4

Issue 2. Schedule C Deductions

Respondent determined that petitioner was not entitled to

deduct a number of claimed Schedule C expenses. Petitioner

asserts that such expenses are allowable.

4
Although we sustain respondent's determination that Orad was
not a partnership, we find that petitioner had $9,236 of
unreported Schedule C gross receipts from Orad, not $9,710 as
alleged by respondent. The $9,236 represents one half of Orad's
gross receipts ($18,471). Petitioner already included the
remaining $9,235 in her 1985 Federal income tax return.
 - 10 -

A taxpayer may deduct ordinary and necessary expenses paid

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

business. Sec. 162(a). Deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving that she is

entitled to claimed deductions. Rule 142(a); New Colonial Ice

Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering,

supra at 115. This includes the burden of substantiating the

amount and purpose of the item claimed. Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs. However,

if certain claimed deductions are not adequately substantiated,

we are permitted to estimate them, provided we are convinced from

the record that the taxpayer has incurred such expenses and we

have a basis upon which to make an estimate. Cohan v. Commis-

sioner, 39 F.2d 540 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 743 (1985).

A. Bank Service Charges

Respondent determined that petitioner was not entitled to a

deduction for bank service charges. Petitioner asserts that such

a deduction is allowable.

During 1985, petitioner had three bank accounts in her name:

A Norbank account, a Lafayette County Bank (Lafayette Bank)

account, and a Blue Springs Bank account. Petitioner's account

with Norbank was separate from Orad's Norbank account.

Petitioner had $105 in bank service charges arising from her
 - 11 -

three individual accounts. On her 1985 Federal income tax

return, petitioner deducted the entire $105 in bank charges. In

her notice of deficiency, respondent disallowed this deduction.

Petitioner argues that, since she conducted her Avon

business through these three accounts, the service charges are

deductible. However, petitioner conceded that she also used the

accounts for "personal" purposes. Petitioner did not attempt to

quantify the personal use versus the business use. Respondent

conceded that petitioner was entitled to deduct $24 of the $105

in service charges, apparently recognizing that the portion of

the service charges attributable to the Avon business was

deductible. Petitioner has failed to substantiate that the

remaining $81 claimed was a deductible business expense.

Therefore, we sustain respondent's determination.

B. Car and Truck Expenses

Petitioner claimed a deduction of $1,564 for car and truck

expenses on Schedule C of her 1985 Federal income tax return.

Respondent determined that only $420 of such amount was

allowable. Petitioner asserts that the entire amount claimed is

allowable.

When a taxpayer uses a vehicle for both business and

personal purposes, she must produce sufficient evidence by which

this Court can determine what portion of such expenses was for

business purposes and what portion was for personal purposes.

Cobb v. Commissioner, 77 T.C. 1096, 1101 (1981).
 - 12 -

Petitioner had three vehicles in 1985. She testified that

she claimed deductions only for the expenses related to two of

her vehicles, the 1965 Mustang and the truck. According to

petitioner, she used both the 1965 Mustang and the truck for

business purposes and personal purposes. Respondent determined

that petitioner would qualify for the standard mileage deduction

and allowed such deduction for 1985. We believe that petitioner

used the 1965 Mustang in her Avon business and the truck in the

Orad business; however, petitioner presented no evidence as to

what portion of her claimed expenses was for business purposes

and what portion was for personal purposes. Therefore, we

sustain respondent's determination with respect to this item.

See Cobb v. Commissioner, supra; Shelley v. Commissioner, T.C.

Memo. 1994-432; Cady v. Commissioner, T.C. Memo. 1990-474.

C. Depreciation

Respondent determined that petitioner was not entitled to

the depreciation deduction claimed on her 1985 Federal income tax

return. Petitioner asserts that such deduction is allowable.

Section 167 provides, in part, for a depreciation deduction

with respect to property used in a trade or business.

Depreciation allows the taxpayer to recover the cost of the

property used in a trade or business or for the production of

income. United States v. Ludey, 274 U.S. 295, 300-301 (1927);

Southeastern Bldg. Corp. v. Commissioner, 3 T.C. 381, 384 (1944),

affd. 148 F.2d 879 (5th Cir. 1945). To substantiate entitlement
 - 13 -

to a depreciation deduction, the taxpayer must show that the

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

oriented activity). In addition, the taxpayer must establish the

property's depreciable basis, by showing the cost of the

property, its useful life, and the previously allowable

depreciation. E.g., Delsanter v. Commissioner, 28 T.C. 845, 863

(1957), affd. 267 F.2d 39 (6th Cir. 1959).

In her 1985 Federal income tax return, petitioner claimed a

depreciation deduction of $4,495. Petitioner computed the

claimed deduction as follows:

1976 Chevrolet truck $825
1984 Mark twain boat 1,320
Kaypro 16 computer 2,150
Petitioner's home 200
Total 4,495

Respondent disallowed this amount in full. Subsequently,

petitioner conceded that she was not entitled to deduct a

depreciation expense in the amount of $1,320 in connection with a

1984 Mark Twain boat, since the boat was never used in a trade or

business. Therefore, the amount at issue is $3,175 ($4,495 less

$1,320), which includes depreciation claimed on the truck, the

computer, and petitioner's home.

In addition to claiming depreciation on the truck,

petitioner also claimed a deduction based on the applicable

mileage rate. Respondent allowed a portion of such deduction.

See supra p. 12. A depreciation deduction is not allowed where a
 - 14 -

taxpayer claims a deduction based on a mileage rate. Nash v.

Commissioner, 60 T.C. 503, 520 (1973); Alisobhani v.

Commissioner, T.C. Memo. 1994-629. Accordingly, we sustain

respondent's disallowance of petitioner's claimed depreciation

arising from the truck.

In regard to the depreciation claimed on the computer,

respondent argued that petitioner did not substantiate her

purchase of the computer. To substantiate her entitlement to a

depreciation deduction for the computer, petitioner must

establish, among other things, the computer's depreciable basis,

by showing the cost of the property. Delsanter v. Commissioner,

supra; Kerrigan v. Commissioner, T.C. Memo. 1995-483; Greenway v.

Commissioner, T.C. Memo. 1980-97.

To demonstrate Orad's cost basis in the computer, petitioner

provided a purported bill of sale dated February 28, 1985; the

bill of sale shows that Knappco purchased a computer from Kansas

City Digital Systems. Petitioner also provided a check made to

the order of Lafayette Bank for $5,985, which she claims to have

used to purchase a cashier's check. Petitioner claims she then

gave Knappco the cashier's check in exchange for the computer.

Finally, petitioner produced a purported bill of sale from

Knappco to Orad, which indicates that Knappco sold a Kaypro
 - 15 -

computer to Orad for $5,985. This document was purportedly

signed by K. E. Haslow (Haslow).5

Respondent argues that the purported bill of sale from

Knappco to Orad is not authentic. To support this assertion,

respondent introduced a letter from Haslow, wherein Haslow

indicates that Knappco did not sell a Kaypro computer to

petitioner. Furthermore, respondent contends that the check

payable to Lafayette Bank was in fact a principal payment for

petitioner's mortgage on her house, since the notation on the

check reads "For 599 Hwy 224", which is the address of a house

petitioner purchased in 1985.

We find that petitioner has failed to substantiate her cost

basis in the Kaypro computer. The bill of sale from Kansas City

Digital Systems lists the purchaser as Knappco, not petitioner or

Orad. And, most importantly, petitioner did not produce a copy

of the cashier's check allegedly used to purchase the computer

from Knappco; rather, she testified that her attorney in her

criminal case had a copy of such check. Since petitioner cannot

establish that she purchased the Kaypro computer, we hold that

she may not claim a deduction for its depreciation. See

Delsanter v. Commissioner, supra; Kerrigan v. Commissioner,

supra; Greenway v. Commissioner, supra.

5
Haslow was the vice president of administration for Mercury
Metal Products, Inc. Knappco was a division of Mercury Metal
Products, Inc. in 1985.
 - 16 -

Finally, in regard to petitioner's claimed deduction for the

depreciation of her home, respondent argued that petitioner was

claiming a double deduction for this depreciation. It is well

settled that the Internal Revenue Code should not be interpreted

to allow the equivalent of a double deduction. United States v.

Skelly Oil Co., 394 U.S. 678, 684 (1969). Here, petitioner

claimed, and respondent allowed, a depreciation deduction arising

from petitioner's home in the computation of her home office

expense. Petitioner is not allowed to claim a deduction twice.

Therefore, we affirm respondent's determination as to this issue.

D. Repair and Maintenance Expenses

Respondent determined that petitioner was not entitled to

claim a Schedule C deduction for repairs and maintenance in the

amount of $852.

Petitioner claims that $531 of the claimed deduction arises

from a computer service contract between Orad and Kansas City

Digital Systems. To substantiate payment for the service

contract, petitioner presented the check, discussed above, made

to the order of Lafayette Bank for $5,985. Petitioner claims she

used this check to purchase both the computer and the service

contract. Also, in support of the claimed deduction, petitioner

presented a service contract. Petitioner did not present any

evidence in regard to the remaining $321 of her claimed deduction

($852 minus $531).
 - 17 -

We find that petitioner has not substantiated her

entitlement to her claimed repair and maintenance deduction. The

service contract presented by petitioner is between Kansas City

Digital Systems and Knappco, not between Kansas City Digital

Systems and petitioner or Orad. Furthermore, as discussed above,

petitioner did not establish that the check payable to Lafayette

Bank was used to purchase a cashier's check. See discussion

supra p. 16. Since petitioner has failed to substantiate that

she is entitled to any deduction for repairs and maintenance, we

sustain respondent's determination.

E. Supply Expenses

Petitioner claimed a $4,586 deduction for supplies on her

1985 Federal income tax return. Respondent determined that

$4,278 of such amount was not allowable. Subsequently,

respondent allowed an additional deduction of $1,866. Thus,

respondent has allowed $2,174 of the $4,586 claimed by

petitioner. Petitioner asserts that the remaining $2,412 is

allowable.

To substantiate her entitlement to $2,412 of disallowed

deductions, petitioner presented a schedule and a number of

canceled checks. Petitioner presented $1,624 of checks to All

American Appliance, but, at trial, she could not provide any

explanation for the nature of such expenditures. Furthermore,

petitioner presented a receipt for $190 for a "red couch", which

she claimed was for her truck. Petitioner also presented a $598
 - 18 -

receipt for a camper top and running boards, among other things,

for her truck.

In total, the amounts paid to American Appliance and the

amounts paid for improvements to the truck equal the amount

disallowed by respondent--$2,412. Petitioner has failed to prove

that any of these disallowed amounts was a necessary expense for

a business, rather than personal, purpose. Therefore, petitioner

failed to sustain her entitlement to a deduction for supplies in

any amount greater than $2,174. Accordingly, we sustain

respondent's determination.

F. Travel and Entertainment Expenses

Petitioner claimed a deduction of $446 on her 1985 Federal

income tax return for travel and entertainment. Respondent

determined that petitioner was not entitled to this deduction.

Section 274(d) requires that the taxpayer substantiate by

adequate records or by sufficient evidence corroborating her own

statement expenses claimed for travel and entertainment by

showing (1) the amount of the expense, (2) the time and place of

travel or entertainment, (3) the business purpose of the travel

or entertainment, and (4) the business relationship to the

taxpayer of each person entertained. These four elements must be

established for each separate expenditure. Sec. 1.274-5(c)(1),

Income Tax Regs.

Petitioner presented a schedule showing the breakdown of the

$446 deduction claimed -- expenditures in the amount $218, $119,
 - 19 -

and $109. In regard to the $218 expenditure, petitioner

presented a cancelled check to Lama Tours International dated

August 14, 1985, a Braniff airlines receipt dated August 15,

1985, and testimony regarding the business purpose of the trip.

However, with regard to the two remaining checks, petitioner

could not recall the time and place of each trip, nor could she

remember the business purpose for each trip. We find that

petitioner has adequately substantiated her entitlement to a $218

travel and entertainment deduction. As to the remainder of the

amount claimed, we sustain respondent's determination.

G. Utilities and Telephone

Petitioner claimed a $482 deduction for utilities and

telephone on her 1985 Federal income tax return. Respondent

determined that such amount was not allowable. Subsequently,

respondent allowed $332 of this amount. The remaining $150 is in

dispute.

Petitioner offered no evidence to show that she is entitled

to any expense for utilities and telephone in an amount greater

than $332. Since petitioner has failed to sustain her burden of

proof, we affirm respondent's determination.

H. Contract Labor

Petitioner claimed a $1,288 deduction for contract labor on

her 1985 Federal income tax return. Respondent determined that

$654 of such amount was not allowable. Subsequently, respondent

allowed an additional deduction of $580. Thus, respondent
 - 20 -

concedes that $1,214 of the claimed deduction is allowable.

In regard to the remaining $74 at issue, petitioner

testified that she could not substantiate such amount.

Accordingly, we sustain respondent's determination.

I. Charitable Expense

Petitioner claimed a charitable deduction of $50 on Schedule

C of her 1985 Federal income tax return, which was disallowed.

Subsequently, respondent allowed petitioner a $25 charitable

deduction on Schedule A. Petitioner asserts that the remaining

$25 is allowable.

Petitioner offered no evidence to demonstrate her

entitlement to a charitable deduction in excess of that allowed

by respondent. Consequently, we sustain respondent's

determination.

Issue 3. Employee Business Expense Deductions

Petitioner claimed a $3,150 employee business expense

deduction on her 1985 Federal income tax return, which respondent

disallowed.

Since petitioner offered no evidence to substantiate the

deduction, she has failed to carry her burden of proof.

Therefore, we affirm respondent's determination.

Issue 4. Capital Loss

Petitioner claimed a $3,000 capital loss in connection with

the sale of her 1985 Mustang automobile (Mustang). Respondent

determined that this amount was not allowable. Petitioner
 - 21 -

asserts that the loss is allowable as a business loss. In the

alternative, petitioner asserts that the loss is a casualty loss,

since her incarceration by the State of Missouri caused the loss.

Section 165(a) allows a taxpayer to deduct "any loss

sustained during the taxable year and not compensated for by

insurance or otherwise." However, section 165(c) limits the

scope of this deduction for individuals. Individuals may take

deductions only for losses which are incurred in a trade or

business, losses incurred in transactions entered into for

profit, and certain casualty and theft losses. Sec. 165(c)(1),

(2), and (3).

To demonstrate that a loss was incurred in a trade or

business or a transaction entered into for profit, the taxpayer

must show that the activity in question was undertaken with the

primary intention and motivation of making a profit. Jasionowski

v. Commissioner, 66 T.C. 312, 319 (1976).

During trial, petitioner conceded that the Mustang was used

only for personal use. Except for this testimony, petitioner

presented no evidence indicating that the Mustang was used in any

activity which she engaged in for profit. Accordingly, we find

that petitioner may not claim a deduction for the loss she

sustained on the sale of the Mustang under either section

165(c)(1) or (2). Seletos v. Commissioner, 254 F.2d 794, 797

(8th Cir. 1958), affg. T.C. Memo. 1956-283; Newton v.

Commissioner, 57 T.C. 245, 248 (1971).
 - 22 -

A deduction is authorized, with certain limitations, for

losses of property even though not connected with a trade or

business or a transaction entered into for profit if the loss

arises from "fire, storm, shipwreck, or other casualty, or from

theft." Sec. 165(c)(3).

Here, petitioner appears to argue that her incarceration was

an "other casualty," thus entitling her to the claimed deduction.

This Court has generally adhered to the view that in construing

the term "other casualty" as used in section 165(c)(3), the rule

of ejusdem generis is applicable; that is, in order for the loss

to be deductible, the taxpayer must prove that the destructive

event or happening was similar in nature to a fire, storm, or

shipwreck. Newton v. Commissioner, supra. Accordingly, we have

found that the term "other casualty" covers losses arising from

sudden, unexpected forces exerted on property, forces which

abruptly change the property's form. E.g., Marx v. Commissioner,

T.C. Memo. 1991-598; Wold v. Commissioner, T.C. Memo. 1963-154.

The sale of a car is not the type of casualty covered by

section 165(c)(3), even if such sale is compelled by a person's

imminent incarceration. Accordingly, petitioner is not entitled

to deduct her realized loss under section 165(c). Therefore, we

sustain respondent's determination as to this issue.

Issue 5. Self-Employment Tax

Respondent determined that petitioner had additional self-

employment income subject to tax under section 1401.
 - 23 -

Section 1401 imposes taxes on the self-employment income of

every individual. Section 1402(b) defines self-employment income

as the net earnings from self-employment derived by an

individual. Section 1402(a) defines an individual's net earnings

from self-employment as the gross income derived by an individual

from any trade or business carried on by such individual, reduced

by income tax deductions attributable to the trade or business.

Petitioner bears the burden of proving that she is not liable for

additional taxes imposed by section 1401. Rule 142(a).

Petitioner does not dispute that she had additional self-

employment income during the year at issue. Therefore, we affirm

respondent's determination.

Issue 6. Negligence

Respondent determined that petitioner was liable for the

additions to tax for negligence under section 6653(a)(1) and (2).

Section 6653(a)(1) provides for an addition to tax of 5

percent of the underpayment if any part of the underpayment is

due to negligence or intentional disregard of rules or

regulations. Section 6653(a)(2) provides for an addition to tax

of 50 percent of the interest payable under section 6601 with

respect to the portion of the underpayment which is attributable

to negligence or intentional disregard of rules or regulations.

Negligence under section 6653(a) is a "'lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances.'" Neely v. Commissioner, 85
 - 24 -

T.C. 934, 947 (1985) (quoting Marcello v. Commissioner, 380 F.2d

499, 506 (5th Cir. 1967), affg. in part and remanding in part 43

T.C. 168 (1964) and T.C. Memo. 1964-299). The taxpayer has the

burden of proving that the Commissioner's determination of the

additions to tax under section 6653(a) is erroneous. Rule

142(a); Bixby v. Commissioner, 58 T.C. 757 (1972).

Petitioner has not presented evidence to establish that she

was not negligent or did not disregard rules or regulations.

Accordingly, we sustain respondent's determination.

Issue 7. Substantial Understatement

Respondent determined that petitioner was liable for the

addition to tax for substantial understatement under section

6661(a).

Section 6661(a) imposes an addition to tax on a substantial

understatement of income tax. The section provides that if there

is a substantial understatement of income tax, there shall be

added to the tax an amount equal to 25 percent of the amount of

any underpayment attributable to such understatement. Sec.

6661(a).6 The taxpayer bears the burden of proving that the

6
Sec. 6661, as originally enacted in 1982, set the amount of
the addition at 10 percent of the amount of any underpayment
attributable to the substantial understatement. Sec. 8002 of the
Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, 100
Stat. 1874, 1951, amended sec. 6661(a) to increase the amount of
the addition to 25 percent for additions assessed after October
21, 1986. See Pallottini v. Commissioner, 90 T.C. 498, 501-502
(1988). Since the addition will not be assessed until the
Court's decision is final, the 25-percent rate applies. Kim v.
Commissioner, T.C. Memo. 1991-288.
 - 25 -

Commissioner's determination as to the addition to tax under

section 6661(a) is erroneous. Rule 142(a).

An understatement is substantial where it exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000. Sec. 6661(b)(1)(A). An understatement is the

difference between the amount required to be shown on the return

and the amount actually shown on the return. Sec. 6661(b)(2);

Tweeddale v. Commissioner, 92 T.C. 501 (1989); Woods v.

Commissioner, 91 T.C. 88 (1988). The section 6661 addition to

tax is not applicable, however, if there was substantial

authority for the taxpayer's treatment of the items in issue or

if relevant facts relating to the tax treatment of those items

were disclosed on the return. Sec. 6661(b)(2)(B)(i) and (ii).

Petitioner has not argued that either exception applies

here, nor has she presented any evidence which would invoke

either exception. Accordingly, petitioner has failed to sustain

her burden of proof. Therefore, if the recomputed deficiency

under Rule 155 satisfies the statutory percentage or amount,

petitioner will be liable for that addition to tax.

Finally, petitioner asserts that her constitutional rights

have been violated. We see no need to catalog petitioner's

contentions and painstakingly address them, as they are without

merit. As the Court of Appeals for the Fifth Circuit has

remarked: "We perceive no need to refute these arguments with

somber reasoning and copious citation of precedent; to do so
 - 26 -

might suggest that these arguments have some colorable merit."

Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).

To reflect the foregoing opinion and the concessions of the

parties,

Decision will be entered

under Rule 155.