Halle v. Commissioner

T.C. Memo. 1996-116

UNITED STATES TAX COURT

WILLIAM W. HALLE IV, AND JANICE C. HALLE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5120-94. Filed March 11, 1996.

William W. Halle IV, pro se.

Sara J. Barkley, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: Respondent determined a deficiency of

$60,952 in petitioners' Federal income tax for 1990, a section
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6651(a)(1)1 addition to tax of $2,989, and a section 6662(a)

accuracy-related penalty of $12,190.

Prior to or at trial, respondent made several concessions

resulting in a substantial reduction of the determined deficiency

and the elimination of the section 6651(a)(1) addition to tax.

Because of petitioner2 William Halle's contention that the notice

of deficiency was arbitrary and that the burden of proof shifted

to respondent, the concessions made by respondent are fully set

forth below.

On petitioners' Schedule C attached to their 1990 Federal

income tax return, they claimed Schedule C business expenses in

the total amount of $117,871. During the examination of their

return, respondent allowed in full the amounts claimed for

repairs, travel, meals and entertainment, which totaled $4,026.

For all the remaining categories of expenses claimed on the

return, respondent determined in the notice of deficiency that

petitioners were entitled to Schedule C expenses in the amount of

$63,013 and disallowed $50,832. During the preparation of this

case for trial, respondent increased the amount of Schedule C

expenses to which petitioners were entitled by $6,072.91 and

1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year 1990,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
2
Subsequent references herein to petitioner individually
are to William W. Halle IV.
 - 3 -

disallowed only $44,759.09. Thus, at trial, respondent agreed

that petitioners are entitled to $69,085.91 in Schedule C

expenses (instead of the $63,013 allowed by respondent in the

notice of deficiency), which amount is in addition to expenses of

$4,026 allowed by respondent for repairs, travel, meals and

entertainment.

In the notice of deficiency, respondent determined that

petitioners had an unreported capital gain of $140,000 from the

sale of their New Jersey personal residence. In the stipulation

of facts, respondent conceded that petitioners did not have a

$140,000 capital gain from the sale of their personal residence

during 1990 because it was not sold until February 1991.

On Form 4797 attached to their Federal income tax return for

1990, petitioners reported the sale of business property and

reported a gain of $22,000. This reported gain was from the sale

of the portion of petitioners' New Jersey residence used for

business. Because their personal residence was not sold during

1990, this gain of $22,000 should not have been reported by them

in that year.

In Exhibit AL respondent proposed that no gain or loss

should be recognized by petitioners on the trade-in of a

Chevrolet Cavalier because they did not follow the rules under

section 1031 for like kind exchanges when they traded in the

Chevrolet Cavalier on the lease of a Chevrolet van. Respondent's

position was based on the fact that petitioners had advised
 - 4 -

respondent that they had treated the lease of the van as a

purchase and not as a lease. At trial, however, petitioner

testified that in subsequent years the lease was treated as a

lease and not as a purchase, and that petitioners were not

entitled to depreciation on the van. Consequently, respondent

concedes part of the loss claimed on petitioners' 1990 Federal

income tax return for the trade-in of the Chevrolet Cavalier for

the van.

In the notice of deficiency, respondent determined that

petitioners were liable for an addition to tax under section

6651(a)(1) in the amount of $2,989. However, in the stipulation

of facts, respondent conceded that petitioners timely filed their

1990 Federal income tax return and, consequently, are not liable

for that addition to tax.

In the notice of deficiency, there is an adjustment to

petitioners' self-employment tax, which was increased by

respondent. There is no dispute as to whether petitioner's net

earnings from his Locksmith/Burglar Alarm business are subject to

self-employment tax. That adjustment is computational.

In addition, respondent adjusted petitioners' medical

expenses deduction. There is no dispute as to whether

petitioners incurred the medical expenses claimed on the return.

That adjustment is also computational.

Petitioner, in his answering brief, has raised two

preliminary issues, namely, whether respondent should bear the
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burden of proof because the deficiency notice was allegedly

arbitrary and excessive, and whether the testimony of

respondent's witness, Alan Hull, should be rejected as

unreliable. The two substantive issues remaining for decision

are (1) whether petitioners are entitled to Schedule C business

expense deductions in excess of the amounts allowed by

respondent, and (2) whether petitioners are liable for the

section 6662(a) accuracy-related penalty for negligence or

disregard of rules or regulations.

For convenience we are combining our findings of fact and

opinion in this case.

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

Petitioners William W. Halle IV, and Janice C. Halle resided

in Cheyenne, Wyoming, at the time their petition was filed. They

timely filed their joint Federal income tax return for 1990.

Prior to and during 1990, petitioner operated a locksmith

and burglar alarm business (the locksmith business) as a Schedule

C business. He used the accrual method of accounting in that

business. His personal residence and locksmith business were

located in New Jersey until late December 1990. Petitioner used

50 percent of the New Jersey personal residence for the locksmith

business. He also leased additional space in a separate location
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from November 1, 1989, to October 31, 1990. The lease agreement

called for 12 payments in the amount of $525 per month.

In December 1990, petitioner moved his family, personal

residence, and locksmith business to his current location in

Cheyenne, Wyoming. He continued to operate his locksmith

business in Wyoming and used a portion of his Wyoming residence

for his locksmith shop.

In December 1990, petitioners signed an agreement with North

American Van Lines to transport their belongings from New Jersey

to Wyoming. Actual delivery was made by North Park

Transportation Co. on January 10, 1991. Although petitioners

contracted to sell their New Jersey personal residence in

December 1990, the sale did not occur until February 1991.

In 1990, petitioner used two vehicles in his locksmith

business, a Chevrolet Cavalier and a Chevrolet van. Petitioner

owned the Cavalier, having acquired it in 1986 at a cost of

$13,500. Until 1990, the Cavalier was used 100 percent for

personal purposes. On June 1, 1990, petitioner converted the

Cavalier to 56 percent business use. On December 20, 1990,

petitioner traded in the Cavalier as a downpayment on a 4 year

lease for a Chevrolet van. The amount credited to petitioner for

the Cavalier trade-in was $2,000. The van was used 100 percent

for petitioner's locksmith business. His lease payments for the

van were $301 per month.
 - 7 -

In 1990, as in previous years, petitioner maintained the

financial records for his locksmith business and prepared the

Schedule C for the business as well as the rest of petitioners'

joint Federal income tax return. Petitioner did not hire an

accountant, return preparer, or anyone else to help him maintain

his business or financial records or prepare the tax return.

During 1990, petitioner used two different computer

accounting systems to maintain his financial records. He

personally made all entries into both systems.

Petitioner first used computer accounting system software

called Managing Your Money (MYM). From January 1, 1990, until

approximately July 15, 1990, petitioner entered expense items

into the MYM system on his computer.

After using MYM for a time, petitioner discovered that it

did not perform tasks he felt were necessary for his business.

To remedy this situation, a second computer accounting software,

DAC Easy (DAC), was installed on petitioner's computer prior to

July 15, 1990. Petitioner was then able to use either MYM or

DAC. From approximately July 15, 1990, to December 31, 1990,

petitioner entered his business expenses into DAC, and he no

longer made entries into MYM.

Thus, at the end of 1990, petitioner essentially had two

separate expense records, one on MYM and the other on DAC.

Neither the MYM nor the DAC expense records were complete. MYM
 - 8 -

covered only approximately the first 6 months of 1990, and DAC

covered only approximately the last 6 months of 1990.

Recognizing this problem, petitioner set out to consolidate

the MYM and DAC expense records by transferring the MYM expenses

into the DAC system. To accomplish this, petitioner created a

summary of the MYM expenses (MYM Summary). The MYM Summary is

dated December 31, 1990. On the same date, petitioner

transferred each expense from the MYM Summary into the DAC

system. This transfer is recorded on the DAC General Ledger

Listing Report (DAC Ledger) dated December 31, 1990, at 10:29

a.m.

On December 31, 1990, at 4:47 p.m., petitioner created his

DAC Accounting Summary. This summary lists total DAC system

expenses by account number under the column heading "Balance

YTD".

Therefore, when petitioner completed the entries on December

31, 1990, he had successfully accomplished his goal of

consolidating the locksmith business expenses for the entire year

into one system, the DAC system.

Petitioner prepared the 1990 joint Federal income tax return

on April 15, 1991, more than 3 months after he had consolidated

his expenses in the DAC system. To prepare the tax return, he

created a series of numbered tally sheets called "scratch pads"

on his computer. The purpose of the scratch pads was to give

petitioner the dollar amount for total business expense items by
 - 9 -

category for the 1990 tax year. The scratch pad categories are

identical to the expense categories listed on Schedule C of

petitioners' 1990 tax return. Petitioner personally created all

the scratch pads.

To create each scratch pad, petitioner retrieved an expense

item for a Schedule C category from the MYM system. He then

listed the MYM expense on a numbered scratch pad.3 Petitioner

also retrieved the DAC expense for the same category and then

listed it on the same numbered scratch pad.4 The computer added

the MYM items to the DAC items to produce a scratch pad dollar

amount total for each Schedule C category. Finally, the computer

recorded the dollar amount total from a scratch pad onto the

appropriate line of petitioner's Schedule C.

I. Preliminary Issues

A. Burden of Proof

Respondent initially determined a deficiency in the amount

of $60,952. After concessions, the deficiency was substantially

reduced. Petitioner argues that respondent's determination was

arbitrary, and, thus, the burden of proof shifted to respondent.

A statutory notice of deficiency is presumed correct. Rule

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

3
The MYM amounts listed on each scratch pad are
identical to the amounts listed on the MYM Summary.
4
The DAC amounts are identical to the amounts on the DAC
Accounting Summary under the column "Balance YTD".
 - 10 -

the burden of proving that the determination was arbitrary.

Foster v. Commissioner, 80 T.C. 34, 228 (1983), affd. on this

issue 756 F.2d 1430 (9th Cir. 1985). If the taxpayer shows that

the deficiency notice is arbitrary or without foundation, the

burden of going forward with the evidence shifts to the

Commissioner. Dellacroce v. Commissioner, 83 T.C. 269, 280

(1984). Generally, this Court will not look behind the notice of

deficiency to review the information used or respondent's motives

or procedure involved in making the determination. Greenberg's

Express, Inc. v. Commissioner, 62 T.C. 324, 327-328 (1974). Our

decision with respect to the tax liability is based on the

evidence submitted at the trial of the case and not on any record

previously developed at the administrative level. Id.

Petitioner made three arguments in support of this

contention. First, he argues that respondent's concessions

before and at trial rendered the deficiency notice arbitrary as

to the remaining issues. Petitioner is incorrect. Respondent's

concession of an issue or issues prior to or at trial does not

destroy the presumptive correctness of the deficiency notice as

to the remaining issues. United States Holding Co. v.

Commissioner, 44 T.C. 323, 328 (1965), and cases cited therein.

Second, petitioner contends that the deficiency notice is

arbitrary because his canceled checks and other records were not

used to determine the deficiency. He testified that he delivered

these documents to the Internal Revenue Service (IRS) office in
 - 11 -

Cheyenne, Wyoming, at the auditor's request. He did not keep

copies of the documents or obtain a receipt from anyone. He

testified that he put the documents on a receptionist's desk

because no one was in the office. He failed to return to the

office or telephone to verify that the receptionist, auditor, or

any other IRS employee actually received the documents.

The auditor notified petitioner by letter dated April 9,

1992, that the documents could not be located and requested that

he resubmit them. In response, petitioner submitted his MYM

Summary, DAC Ledger, DAC Trial Balance, DAC Accounts Payable

Listing, and other documents detailing his business expenses.

These records were stamped "received" by the IRS on May 1, 1992.

The same records were later returned to petitioner. He then

submitted them to respondent, at her request, prior to the

issuance of the deficiency notice. Moreover, all of petitioner's

scratch pads used to calculate the total expense claimed for each

Schedule C category were attached to the 1990 joint Federal

income tax return.

Although the inability to produce a record that has been

unintentionally lost, whether by petitioner, respondent, or a

third party, alters the type of evidence that may be offered to

establish a fact, the burden of proof is not affected. Fed. R.

Evid. 1004; American Police and Fire Foundation, Inc. v.

Commissioner, 81 T.C. 699, 706 (1983); Malinowski v.

Commissioner, 71 T.C. 1120, 1124-1125 (1979).
 - 12 -

Thus, notwithstanding the purported unavailability of

petitioner's original canceled checks and other documents,

petitioner provided ample, detailed records of his claimed

business expenses prior to the issuance of the deficiency notice

on January 13, 1994. Petitioner testified at trial that he made

these records very detailed so that he "gave a complete audit

trail". Consequently, we think petitioner cannot now complain

that respondent lacked his business records and thus arbitrarily

determined the deficiency.

Third, petitioner contends that the deficiency notice did

not state that the adjustments were made because he claimed

certain business expenses twice; i.e., duplicated deductions.

Instead, the notice of deficiency states that "it has not been

established that any amount in excess of the corrected amount was

for an ordinary and necessary business expense or was expended

for the purpose designated". A list of adjustments by category

and dollar amount followed.

Although petitioner correctly notes that the deficiency

notice does not use the word "duplication", the lack of

specificity preferred by petitioner does not prove that the

notice is arbitrary. A notice of deficiency must describe the

basis for and identify the amounts of tax due, any additional

amounts, additions to tax, and assessable penalties. Sec.

7522(a) and (b). An inadequate description does not invalidate

the notice. Id. The notice must fairly advise the taxpayer that
 - 13 -

the Commissioner has determined a deficiency and specify the year

and amount. Abrams v. Commissioner, 84 T.C. 1308, 1310 (1985),

affd. sub nom. Alford v. Commissioner, 800 F.2d 987, 988 (10th

Cir. 1986) (also affd. by six additional circuits); Mayerson v.

Commissioner, 47 T.C. 340, 348-349 (1966).

The notice of deficiency adequately described the basis for

respondent's determination as excessive ordinary and necessary

business expense deductions. It fairly advised petitioner that a

deficiency was determined. It specified the year as 1990, and it

contained a comprehensive list of amounts by category (13 in all)

that are identical to petitioner's Schedule C categories. See

Hustead v. Commissioner, T.C. Memo. 1994-374, affd. without

published opinion 61 F.3d 895 (3d Cir. 1995) (notice of

deficiency clearly served to advise the taxpayers which of their

claimed deductions had been disallowed); Burnside v.

Commissioner, T.C. Memo. 1994-308 (notice of deficiency which

specified the years, amount of deficiencies, and additions to tax

complied with section 7522(a) and (b)(1)).

Petitioner attempts to shift the burden of proof to

respondent under Rule 142(a) by arguing that respondent first

raised the "duplication" grounds at trial. That is not so.

Respondent's counsel stated that she made several attempts prior

to trial to communicate precisely this point to petitioner.

Furthermore, respondent's Trial Memorandum, filed May 25, 1995,

explained that certain expenses were duplicated. Petitioner had
 - 14 -

ample notice of respondent's duplication grounds. Mayerson v.

Commissioner, 47 T.C. at 349.

Accordingly, we conclude that the notice of deficiency was

not arbitrary and that the burden of proof with respect to the

disputed issues remained with petitioner.

B. Testimony of Alan Hull

In his answering brief, petitioner contends that the

testimony of respondent's witness, Alan Hull, should be rejected

by the Court. While petitioner did not object to Mr. Hull's

testimony at trial, he argues that Mr. Hull lacked the necessary

foundation to testify because he was not involved in the audit or

the issuance of the deficiency notice. We disagree.

Mr. Hull is a Technical Advisor to the IRS District Counsel.

He has been an IRS employee for 18 years and is a Certified

Public Accountant in Colorado. Mr. Hull, who had reviewed

petitioner's records, the IRS administrative file, and the

stipulation of facts with attached exhibits, was called as

respondent's witness to explain which of petitioner's expenses

were duplicated or otherwise disallowed. He was a qualified,

competent, and thorough witness who gave reliable and detailed

testimony.

Tax Court trials are conducted according to the rules of

evidence applicable in trials without a jury in the United States

District Court for the District of Columbia. Sec. 7453; Rule

143(a). These rules include the Federal Rules of Evidence.
 - 15 -

Conti v. Commissioner, 99 T.C. 370, 373 (1992), affd. 39 F.3d 658

(6th Cir. 1994). Departing from these rules would remove the

certainty of what this Court may consider in finding the facts.

Snyder v. Commissioner, 93 T.C. 529, 531-532 (1989).

Fed. R. Evid. 602 requires that the witness have personal

knowledge of the matter to which he testifies. Mr. Hull

testified that petitioner duplicated certain business expense

deductions. He based his conclusions on his analysis of detailed

computer records of the locksmith business expenses supplied by

petitioner--records that petitioner acknowledged were so

comprehensive as to create an audit trail. Thus, Mr. Hull had

personal knowledge of the matters about which he testified. He

need not have been involved in the audit or the issuance of the

deficiency notice in order to have first-hand knowledge.

Fed. R. Evid. 103(a)(1), the controlling rule for

objections, requires that "a timely objection or motion to strike

appear of record". An objection that is not timely made

generally is waived. United States v. Jamerson, 549 F.2d 1263,

1266-1267 (9th Cir. 1977). Petitioner's objection to Mr. Hull's

testimony was first made in his answering brief and not at the

trial. It is untimely and, therefore, treated as waived.

Moreover, it lacks merit.
 - 16 -

II. Disallowance of Claimed Schedule C Business Expense

Deductions

As previously indicated, petitioners claimed total Schedule

C business expense deductions of $117,871 on their 1990 Federal

income tax return. Of that total amount respondent allowed

$4,026 for repairs, travel, meals and entertainment, and

$69,085.91 with respect to the other claimed expenses.

Respondent disallowed $44,759.09, i.e., $32,888.92 of duplicated

expenses and the remainder attributable to nondeductible personal

expenses, incorrect depreciation, a moving expense, or the

incorrect basis used to compute a loss on an automobile.

A. Duplicated Expenses

In addition to the expenses claimed for repairs, travel,

meals and entertainment, petitioner claimed the following

expenses on Schedule C relating to his locksmith business:

Expense Amount Claimed

Advertising $2,739
Car and truck 8,280
Depreciation 22,476
Insurance 3,632
Interest 2,729
Legal and prof. 9,468
Moving 1,254
Office expense 10,101
Other expense 5,876
Rent 3,675
Supplies 22,830
Taxes 11,686
Utilities 9,099

Total $113,845
 - 17 -

Petitioner is allowed a deduction for the ordinary and

necessary expenses paid or incurred in carrying on his trade or

business. Sec. 162. It is clear that a business expense

incurred only once cannot be claimed twice. Deductions are a

matter of legislative grace, New Colonial Ice Co. v. Helvering,

292 U.S. 435, 440 (1934), and petitioner has the burden of

proving that he is entitled to any deductions claimed. Rule

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

Petitioner acknowledged at trial that some of the expenses

he claimed were duplicated. He indicated that when he hastily

prepared the Federal income tax return on or about April 15,

1991, he may have forgotten that he had transferred the MYM

expense items into the DAC system in December 1990.

The evidence shows that petitioner deducted various expenses

included in the MYM system twice, once as deductions based on the

MYM system and a second time when the same expenses were

transferred to the DAC system and included as deductions claimed

based on the DAC system. The duplicated expenses included on

petitioner's Schedule C for 1990 are as follows:

Expense Amount Duplicated

Advertising $637.47
Car and truck 1,076.64
Insurance 1,327.26
Legal and prof. 3,440.00
Moving 1,254.00
Office expense 2,778.84
Other expense 2,540.96
Rent 1,575.00
Supplies 8,969.29
 - 18 -

Taxes 6,150.72
Utilities 3,138.74

Total $32,888.92

Accordingly, we sustain respondent's disallowance of the

duplicated expenses.

B. Personal Allocation of Expenses

(1) Utilities

During 1990, petitioners utilized 50 percent of their

residence located in New Jersey for personal use and allocated 50

percent of the use to petitioner's Schedule C locksmith business.

On the Schedule C for the business $9,099 was deducted for

utilities. Of that amount $3,138.74 claimed for utilities was

duplicated. Of the remaining amount of utilities deducted,

$1,158.26 was attributable to utilities for petitioners' personal

residence. Because petitioner used the residence 50 percent for

his business, only $579.13 is deductible on Schedule C. The

other $579.13 is a nondeductible personal expenditure. Sec. 262.

Petitioners presented no evidence that respondent's calculation

of the portion of the utilities attributable to personal use was

incorrect. Therefore, respondent is sustained as to this

adjustment.

(2) Insurance

According to petitioners' Federal income tax return,

petitioner used a van 100 percent for business use and a vehicle

56 percent for business use. On Schedule C the amount of $3,632
 - 19 -

was deducted for insurance. Of that amount $1,327.26 was

duplicated. The remaining amount of insurance, after subtracting

the duplication, was attributable to insurance on petitioners'

two vehicles, one being used exclusively for the Schedule C

business and the other one being used 56 percent for business

use. The portion of the insurance attributable to the personal

use of one of petitioners' vehicles is not deductible because it

is a nondeductible personal expenditure. Respondent determined

that the portion of the insurance expense attributable to

personal use was $507.10. Petitioners presented no evidence that

respondent's calculation was incorrect. Therefore, respondent is

sustained as to this adjustment.

(3) Car and Truck Expense

On Schedule C petitioners deducted car and truck expenses in

the amount of $8,280 of which $1,076.64 was duplicated and $2,301

was a payment for the lease of a Chevrolet van. The remaining

expenses of $4,902.36 deducted on Schedule C were not allocated

by petitioners between business and personal use, even though one

of the vehicles was used 44 percent for personal use.

Petitioners should have allocated the expenses between business

and personal use. Consequently, they are not entitled to deduct

expenses of $1,078.52, the amount allocated by respondent to

personal use of one of the vehicles.
 - 20 -

(4) Taxes

Petitioners deducted $11,686 for taxes on Schedule C for the

business. Of that amount $6,150.72 was duplicated. Of the

remaining amount of taxes deducted, $2,540 was attributable to

sales taxes paid by petitioner in his Schedule C business which

are deductible in full on Schedule C, and $2,994 was attributable

to real property taxes paid by petitioners on their personal

residence. On their Schedule A, petitioners deducted real estate

taxes paid on their personal residence in the amount of $2,452.

Since petitioners used the residence 50 percent for business,

$1,497 is deductible on Schedule C and the remaining $1,497 is

deductible on Schedule A, instead of the $2,452 claimed by

petitioners on Schedule A.

(5) Interest

On Schedule C for the business, petitioner deducted $2,729

for interest. Interest of $1,864.75 paid to Midatlantic Bank was

attributable to the mortgage on petitioners' personal residence.

Because the residence was used 50 percent for business, only

$932.38 is deductible on Schedule C. The remaining $932.37 is

deductible on Schedule A as an itemized deduction.

C. Depreciation

Petitioners claimed depreciation deductions in the total

amount of $22,476 for 1990. This amount included depreciation

for a Chevrolet van, a Chevrolet Cavalier, and the Wyoming

locksmith shop. The amount of $6,136.38 was correctly
 - 21 -

disallowed. Thus the correct allowable depreciation is

$16,339.62 instead of $15,995.11 allowed by respondent.

Section 167(a) allows as a depreciation deduction a

"reasonable allowance for exhaustion, wear and tear (including a

reasonable allowance for obsolescence) -- (1) of property used in

the trade or business, or (2) of property held for the production

of income." The burden of proving the claimed depreciation

deductions rests with petitioners. Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933); see Hamilton & Main, Inc. v.

Commissioner, 25 T.C. 878, 883 (1956). In order to meet their

burden, they must affirmatively establish the cost or other basis

of the assets, their age, condition, remaining useful life, and

the portion of their cost or other basis which has been recovered

in prior years. O. Bee, Inc. v. Commissioner, T.C. Memo. 1959-

160; Moore v. Commissioner, a Memorandum Opinion of this Court

dated Aug. 14, 1953; see Smith v. Commissioner, 31 T.C. 1, 7

(1958).

(1) Chevrolet Van

Petitioner leased a Chevrolet van and placed it in service

in his locksmith business on December 20, 1990. Depreciation was

claimed on Schedule C for the van in the amount of $1,540.

Petitioner also claimed a deduction for lease payments in the

amount of $2,301 on the 1990 Federal income tax return for the

lease of the van. Petitioner testified that he did not treat the

lease as a purchase, but as a lease, and admitted that he was not
 - 22 -

entitled to depreciate it. Therefore, petitioners are allowed to

deduct their lease payments of $2,301 for 1990. However, they

are not allowed a depreciation deduction.

(2) Chevrolet Cavalier

Petitioner claimed a section 179 deduction of $2,660 for the

Cavalier. Respondent disallowed this deduction, and instead

allowed depreciation of $1,347.78.

To claim a section 179 deduction, petitioner must have

acquired the property by purchase for use in the active conduct

of his trade or business. Sec. 179(d); Campana v. Commissioner,

T.C. Memo. 1990-395 (car purchased as family car and later also

used in taxpayer's trade or business does not qualify for section

179 deduction).

Petitioner did not purchase the Cavalier for use in his

locksmith business. He purchased it for personal use on November

1, 1986, and subsequently converted it to 56 percent business use

nearly 4 years later. Thus, petitioner is not entitled to a

section 179 deduction for the Cavalier.

We agree with respondent's allowance of depreciation in the

amount of $1,347.78 for petitioner's business use of the

Cavalier. Respondent accepted petitioner's 56 percent business

use. Respondent arrived at her depreciation figure by reducing

petitioner's basis in the Cavalier from $13,500 (cost) to $9,627

(fair market value) and by allocating 56 percent of the reduced

basis to business use. Petitioner offered no evidence as to the
 - 23 -

Cavalier's fair market value. Respondent relied on the National

Automobile Dealers Association (NADA) used car guide for the fair

market value.

The basis of property which has not been used in the trade

or business and which is thereafter converted to such use is the

lesser of fair market value on the date of conversion or the

adjusted basis on the date of conversion. Sec. 1.167(g)-1,

Income Tax Regs. Because petitioner converted the Cavalier to

business use, the appropriate basis for depreciation is fair

market value. Petitioner provided no evidence as to the

Cavalier's fair market value on June 1, 1990, the date of

conversion. Consequently, respondent's valuation is sustained.

See Lillis v. Commissioner, T.C. Memo. 1983-142, affd. without

published opinion 740 F.2d 974 (9th Cir. 1984) (taxpayers failed

to carry their burden of proof as to amount claimed for

depreciation where no evidence was introduced to establish basis

or other component of their depreciation formula); see also Boggs

v. Commissioner, T.C. Memo. 1981-224 (the Commissioner's estimate

of salvage value based on the NADA guide was sustained where the

taxpayer failed to introduce evidence to refute it).

(3) Wyoming Locksmith Shop

Petitioner claimed depreciation of $3,300 for the Wyoming

locksmith shop. Respondent does not challenge petitioner's

entitlement to depreciation. Rather, the parties disagree as to

the amount of depreciation to be allowed. Petitioner placed the
 - 24 -

locksmith shop in service on December 24, 1990. He calculated

the $3,300 amount of depreciation using the 150 percent declining

balance method, a 15-year recovery period, and half year

convention. Respondent allowed petitioner 1 month's depreciation

in the amount of $15.84 based on a determination that the

locksmith shop is nonresidential real property. Hence, in

effect, respondent argues that the straight line method, 31.5

year recovery period, and mid-month convention apply.

Section 1685 controls the computation of allowable

depreciation. Depreciation is to be computed by using the

applicable depreciation method, the applicable recovery period,

and the applicable convention. Sec. 168(a).

Petitioner offered no testimony or other evidence to support

his selection of depreciation method, recovery period, or

convention for reporting the locksmith shop depreciation. He

thus failed to carry his burden of proof to refute respondent's

depreciation adjustment. See Stafford v. Commissioner, T.C.

Memo. 1992-637 (where taxpayer failed to introduce any evidence

to establish that respondent's depreciation calculations based on

a shorter recovery period were incorrect, taxpayer did not

overcome the presumption of correctness of those adjustments);

Barron v. Commissioner, T.C. Memo. 1992-598 (where the record

5
Sec. 168 as amended by the Tax Reform Act of 1986, Pub.
L. 99-514, sec. 201, 100 Stat. 2085, 2121, for property placed in
service after Dec. 31, 1986, and in taxable years ending
thereafter.
 - 25 -

contained no evidence that a shorter recovery period was more

appropriate, taxpayers failed to carry their burden of proof).

Therefore, we sustain respondent as to the $15.84 of allowed

depreciation.

D. Moving Expenses

On his Schedule C, petitioner claimed moving expenses in the

amount of $1,254 attributable to his locksmith business assets.

Respondent disallowed the entire amount on the ground that the

expense was a contingent liability in 1990.

On January 10, 1991, petitioners paid North Park

Transportation Co. $1,253.37 for shipment of the locksmith

business assets from New Jersey to Wyoming. The bill of lading,

dated December 21, 1990, issued by North American Van Lines shows

that payment in the amount of $3,349.98 was to be "C.O.D.". Two

Consignee Memos, dated January 8, 1991, in the total amount of

$1,253.37, were issued by North Park Transportation Co. Both

were presented to petitioners on January 10, 1991, stamped

"Driver collect on Delivery". Both bear the handwritten notation

"paid" and petitioners' check number.

Petitioner elected the accrual method of accounting for the

business. Sec. 446. Under this method, an expense is deductible

when all events have occurred to establish the fact of liability,

the amount can be determined with reasonable accuracy, and

economic performance has occurred. Sec. 461(h)(1), (4); United

States v. General Dynamics Corp., 481 U.S. 239, 243 (1987)
 - 26 -

(accrual method taxpayer may not deduct a contingent liability);

Security Flour Mills Co. v. Commissioner, 321 U.S. 281, 287

(1944) (amount must be definite); Lucas v. North Texas Lumber

Co., 281 U.S. 11, 13 (1930) (liability must be unconditional);

Levert v. Commissioner, T.C. Memo. 1989-333 (taxpayer's

contractual liability was contingent because it depended on

completion of the promised services); sec. 1.461-1(a)(2), Income

Tax Regs.

Economic performance occurred on January 10, 1991, when

petitioner's goods were delivered to Wyoming. Furthermore,

petitioner's liability to pay the moving expenses was contingent

under both parts of the "all events test" until January 10, 1991.

The obligation to pay the carrier for shipment was contingent on

delivery of petitioner's goods to Cheyenne, Wyoming. Had

delivery not occurred, petitioner would not have been obligated

to pay the carrier. Delivery occurred on January 10, 1991.

Moreover, the amount of the liability was not reasonably certain

or definite until the Consignee Memos were presented to him for

payment on January 10, 1991. The anticipated freight cost,

according to the bill of lading, was $3,349.98. The actual cost

shown on the Consignee Memos was $1,253.37, which includes a 50

percent discount not reflected on the bill of lading. Hence the

amount of petitioner's liability to the carrier was not

reasonably certain until the Consignee Memos were presented to
 - 27 -

petitioner on January 10, 1991. Accordingly, we sustain

respondent's disallowance of the claimed moving expenses.

E. Loss on Disposition of Chevrolet Cavalier

Petitioner claimed a loss in the amount of $8,350 when the

Cavalier was traded in for the leased van. He calculated the

loss by using a cost basis of $13,500. Respondent reduced the

amount of this loss to $2,043.34. Respondent arrived at this

figure by reducing petitioner's basis in the Cavalier from the

$13,500 cost basis to the $9,627 fair market value based on the

NADA used car guide. Respondent accepted petitioner's 56 percent

business use of the Cavalier and allocated $5,391.12 of the fair

market value basis to business use.

The basis for determining a loss on the disposition of

property used in a trade or business is "the cost * * *, except

as otherwise provided in this subchapter". Secs. 165(a), (b) and

(c), 1011, 1012. However, losses on personal property are not

deductible. Sec. 262. The depreciable basis for property

converted from personal to business use is the lesser of cost or

fair market value at the time of conversion. Sec. 1.167(g)-1,

Income Tax Regs. Thus, the basis for determining a loss under

section 165 for an automobile converted from personal to business

use is the lesser of cost or fair market value. Gross v.

Commissioner, T.C. Memo. 1972-221. To conclude otherwise would

allow petitioner through conversion to recognize a loss which was

realized during the period of personal use. Id. Therefore, we
 - 28 -

sustain respondent's position as to the amount allowed for the

loss on the Cavalier.

III. Section 6662(a) Accuracy-Related Penalty

Respondent determined that petitioners are liable for the

accuracy-related penalty. Section 6662(a) and (b)(1) provide

that an amount equal to 20-percent of that portion of the

underpayment that is attributable to negligence or disregard of

rules or regulations shall be added to the tax. Negligence is

the failure to exercise due care or to do what a reasonable and

ordinarily prudent person would do under the circumstances.

Neely v. Commissioner, 85 T.C. 934, 947 (1985). Negligence

includes failure to make a reasonable attempt to comply with

provisions of the Internal Revenue Code. Sec. 6662(c).

Petitioner has the burden of proving that respondent's

determination is in error. Rule 142(a); Bixby v. Commissioner,

58 T.C. 757 (1972).

Taxpayers have a duty to keep accurate records and to

carefully prepare their returns. See secs. 6001, 6011; secs.

1.6001-1(a), 1.6011-1(b), Income Tax Regs.

Petitioner overstated 13 out of 16 items listed on his

Schedule C primarily by duplication. Most of the duplication

errors occurred when he prepared the scratch pads, which he then

used to compute total deductible expenses. As petitioner listed

expenses on the scratch pads, he forgot that the DAC system

included the MYM expenses. He transferred the MYM expenses into
 - 29 -

the DAC system on December 31, 1990. As a result of his

forgetfulness, petitioner listed both the MYM expenses and the

DAC expenses on the scratch pads, added them together, and caused

the computer to copy the inflated figure onto his Schedule C.

There is no evidence that petitioner attempted to verify

whether the MYM expenses were already included in the DAC totals,

as in fact they were. On the contrary, petitioner testified that

"I knew I had to get this return done. It was April 15, and * *

* I had to get those figures in there. And I just kind of --

just jumped into it and started keypunching".

Petitioner personally created the DAC Ledger, DAC Accounting

Summary, DAC Accounts Payable Listing, and DAC Trial Balance on

his computer prior to April 15, 1991. No one else made entries

for petitioner. If copies of those records were unavailable on

April 15, 1991, petitioner had only to cause the computer to

generate another copy. Petitioner should have reviewed his own

computer records, as both this Court and respondent have done, to

see that the MYM expenses should not have been listed on the

scratch pads in addition to the DAC expenses. There is no

explanation in the record as to why petitioner did not do so

other than his own testimony that his duplication errors were the

result of haste.

Petitioner's contention that his records were complete and

carefully prepared is self-serving and not supported by the

evidence. The scratch pads were a key component of his tax
 - 30 -

preparation because the totals were merely copied onto the

matching lines of the Schedule C. The scratch pads were

carelessly prepared in petitioner's admitted haste to complete

his tax return.

Petitioner's carelessness also caused him to fail to

properly allocate the personal use portion of expenses for

utilities, home mortgage interest, vehicle insurance, car and

truck expenses, and property taxes.

Furthermore, petitioner's carelessness caused him to claim

both depreciation and the rental expenses for the leased van.

In our judgment petitioner's conduct was neither reasonable

nor prudent. His numerous errors are due to his failure to keep

accurate records and to verify the correct amount of his business

expenses. Therefore, we conclude that respondent's imposition of

the section 6662(a) penalty for negligence was justified.

To reflect the concessions made by respondent and our

conclusions with respect to the disputed issues,

Decision will be entered

under Rule 155.