CLARK-HERNANDEZ v. COMMISSIONER

T.C. Summary Opinion 2001-15

UNITED STATES TAX COURT

DANIELLE L. CLARK-HERNANDEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14928-98S. Filed February 20, 2001.

Douglas H. Frazer, for petitioner.

Christa A. Gruber, for respondent.

GOLDBERG, Special Trial Judge: This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
 - 2 -

Respondent determined the following deficiencies, additions

to tax, and penalties with respect to petitioner’s Federal income

taxes:
Addition to Tax Penalty
Year Deficiency Section 6651(a) Section 6662(a)
1991 $4,896 $1,291.75 $979.20
1992 4,029 633.75 805.80
1993 5,382 — 1,076.40

After concessions by petitioner,1 the issues for decision are:

(1) Whether petitioner is entitled to deduct certain Schedule C,

Profit or Loss From Business, expenses in excess of amounts

allowed by respondent for the years in issue; (2) whether

petitioner is entitled to claim cost of goods sold for the

1
At trial, petitioner conceded respondent’s
determination allowing 80 percent of the car and truck expenses
for 1991, 1992, and 1993. As to the remaining 20 percent,
petitioner’s arguments will be discussed infra. Petitioner
further conceded 90 percent of respondent’s determination
disallowing some utility expenses for 1991, 1992, and 1993. As
to the remaining 10 percent, petitioner’s arguments will be
discussed infra.

The items and amounts listed below represent expenses
disallowed by respondent that were not addressed by petitioner.
As a result, petitioner is deemed to have conceded these items.
See Rules 142(a), 149; Pearson v. Commissioner, T.C. Memo. 2000-
160.

Claimed Deduction Amount
1991 1993
Rent - Vehicle — $3,734
Commissions --- 288
Insurance $46 ---

Respondent also determined that petitioner was entitled to
additional depreciation deductions of $303 and $641 in 1992 and
1993, respectively. Petitioner is deemed to have conceded these
items because she did not address these matters at trial. See
Rules 142(a), 149; Pearson v. Commissioner, supra.
 - 3 -

taxable years 1991 and 1992; (3) whether petitioner is liable for

additions to tax for failure to timely file returns under section

6651(a) for the taxable years 1991 and 1992; and (4) whether

petitioner is liable for accuracy-related penalties pursuant to

section 6662(a) for the years in issue.

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioner resided in Milwaukee, Wisconsin.

A. Background

Petitioner graduated from Milwaukee Area Technical College

(Technical College), a 2-year college. At the Technical College,

petitioner studied business data processing and business

management. After completing Technical College, petitioner

worked in data processing. She also participated in classes

provided by the Small Business Administration, including courses

in basic accounting, management, and other skills related to

small business. During the years in issue petitioner was not

married.

B. History of Petitioner’s Cleaning Business

Prior to 1987, petitioner operated a residential and office

cleaning business called “Quest Cleaning” in Aurora, Colorado.

Petitioner moved back to Milwaukee in 1987 and changed the name

of the cleaning business to “Dustbusters Janitorial Services”
 - 4 -

(Dustbusters).

Once back in Milwaukee, petitioner rented a one-room office

from which she operated Dustbusters. Petitioner did not store

any equipment or supplies at this location.

From 1987 through part of 1992, petitioner stored equipment

and supplies in the basement of her mother’s condominium. The

storage space at Ms. Clark’s condominium was approximately 8 feet

by 13 feet with a back entrance providing for easy loading of

cleaning materials and supplies. Petitioner sometimes gave her

mother $250 per month or in lieu of monetary payment made

improvements to the condominium, e.g., painting, decorating, and

carpentry. During this time petitioner also resided with her

mother until she moved into her own personal residence, a four-

room apartment located at 1693 N. Cass Street (Cass St. address).

The apartment building was owned by petitioner’s grandmother.

Petitioner stored supplies, equipment, and materials in a storage

room she had built in the basement. Petitioner used water from

her apartment to dilute cleaning chemicals.

Petitioner employed various people for different client

accounts during the years in issue, including Richard Comeau, Ms.

Sigrist, and Bill Reynolds (Mr. Reynolds). Ms. Sigrist and Mr.

Reynolds each received a Form 1099 from Dustbusters representing

amounts earned for cleaning services rendered during 1991.

Petitioner’s client accounts consisted of cleaning contracts for
 - 5 -

a fixed time period, e.g., once a week for a year; cleaning

contracts for the duration of a project, e.g., during the

construction of a building; or one-time cleaning jobs.

Petitioner averaged about 12 steady accounts from 1991 through

1992. The number of accounts, however, increased and decreased

during the following years depending upon new accounts and one-

time cleaning jobs.

Petitioner’s clients were located in various areas

including, but not limited to, Milwaukee, Brookfield, Waukesha,

Mequon, Deansville, Madison, and Kenosha. At times, petitioner

provided snacks, e.g., coffee, donuts, or sandwiches, to her

employees in the office and at the job site. It was not uncommon

for petitioner to work at multiple accounts during a single day.

Petitioner traveled to each site, often returning to earlier

locations to lock up the building or check the status of the

work.

In 1992 and 1993, petitioner was employed by Oscar J. Boldt

Construction Co. (Oscar Boldt) for the Milwaukee County Jail

project (jail project) in addition to operating Dustbusters.

Petitioner worked from 7 a.m. to 3:30 p.m. at her job with Oscar

Boldt, and then on a Dustbusters’ contract at the same jail

project after 3:30 p.m. If petitioner had other accounts she

would attend to them before or after the jail project.

Petitioner was laid off from the jail project in 1992; however,
 - 6 -

she was retained as a subcontractor to clean offices. Oscar

Boldt retained petitioner to work for a second project on North

Avenue through 1993. Petitioner’s Form W-2, Wage and Tax

Statement, reflected wages of $10,754.59 and $11,413.76, for the

taxable years 1992 and 1993, respectively.

Petitioner leased a Mazda pickup truck from Fleet Services

from 1989 through 1993. Under the lease terms, petitioner was

responsible for certain specified maintenance (as defined by the

lease contract) and gasoline expenses. Mileage and other

maintenance expenses were included in the lease contract

payments.

Sometime before 1991, petitioner developed an interest in

Japanese culture. Petitioner frequented a local Japanese

restaurant and sushi bar called Izumi’s. At times, petitioner

ate both lunch and dinner, sometimes daily, at Izumi’s. Through

petitioner’s interaction with other Izumi’s patrons, petitioner

acquired a few new cleaning customers, including GE and Star

Automation. Petitioner often bought meals and gifts for her new

Japanese acquaintances. She visited Japan in 1990, 1991, and

1994 to learn more about its language and culture, and to visit

various companies for the purpose of obtaining new accounts.

Petitioner took Japanese language classes in order to communicate

with the Japanese contacts she met. Many of the Japanese

business people petitioner met did not work for companies in the
 - 7 -

Milwaukee area. Rather, they were representatives of Japanese

companies located in Japan and San Francisco. Petitioner

frequently called these acquaintances in Japan and developed

friendships with them.

C. Maintenance of Petitioner’s Business Records

Petitioner used binders or folders to collect receipts for

various expenses. For instance, all cleaning expense receipts

went into one folder, and all meal receipts went into another

folder. At the end of the year, petitioner gathered all her

receipts for a given category or expenditure, ran a tape total,

wrote the total on a piece of paper, and entered the tape total

amount on a line on the Schedule C that closely related to the

expense. Expenses were paid through a business checking account,

petitioner’s personal checking account, and petitioner’s personal

credit card. Petitioner also kept track of receipts paid by

“petty cash”. All categorization of business expenses was made

at the time petitioner placed the receipts into the respective

folder.

Petitioner prepared her Federal income tax returns for the

years in issue. She did not seek or obtain advice from a

professional tax preparer or anyone else relative to the

accounting or bookkeeping of her business.

On Schedules C attached to her 1991, 1992, and 1993 Federal

income tax returns, petitioner reported gross receipts of
 - 8 -

$50,407, $36,560, and $37,246, respectively. Petitioner reported

a net Schedule C profit of $1,915 for 1991, a loss of $11,939 for

1992, and a loss of $15,610 for 1993.

D. Respondent’s Determination

Respondent issued a notice of deficiency and made the

following adjustments to Schedule C deductions by petitioner:

1991 1992 1993
Claimed Allowed Dis- Claimed Allowed Dis- Claimed Allowed Dis-
allowed allowed allowed
Advert. $210 $210 0 $948 $948 0 $975 $975 0
Car and 7,709 5,462 2,247 7,865 4,020 3,845 2,249 4,244 (1,995)
truck
Commission -- -- -- -- -- -- 288 0 288
Insurance 408 362 46 1,104 1,104 0 1,935 2,034 (99)
Legal and 696 696 0 898 898 0 407 407 0
prof. serv.
Office 4,829 2,758 2,071 8,535 2,195 6,340 9,308 1,451 7,857
expense
Rent - -- -- -- -- -- -- 3,734 0 3,734
Vehicle
Rent - 1,620 1,700 (80) 4,375 1,200 3,175 6,900 1,200 5,700
Other
Taxes 6 6 0 12 12 0 5 5 0
Travel 1,619 311 1,308 392 392 0 645 645 0
Meals/Ent. 8,964 1,000 7,964 6,677 1,000 5,677 7,252 1,000 6,252
Utilities 3,341 1,553 1,788 2,864 1,564 1,300 3,724 1,220 2,504
Wages 600 0 600 4,583 4,583 0 2,085 2,085 0
Donations 600 0 600 100 0 100 -- -- --
Payroll 1,015 1,015 0 1,040 1,049 (9) 222 249 (27)
Gifts 640 205 435 683 142 541 2,643 25 2,618
Cleaning 949 0 949 -- -- -- 7,337 3,359 3,978
Supplies
Outside -- – – -- -- -- 1,487 1,425 62
Services
Deprec. -- -- -- 0 303 (303) 0 641 (641)
Repairs/ –- -- -- -- -- -- 1,660 197 1,463
Maint.
Total 33,206 15,278 17,928 40,076 19,410 20,666 52,856 21,162 31,694

Cost of Goods Sold
Claimed Allowed Dis- Claimed Allowed Dis- Claimed Allowed Dis-
allowed allowed allowed
Cost of 8,838 8,838 0 1,696 1,527 169 -- -- --
Labor
Material/ 6,448 4,932 1,516 6,702 3,827 2,875 -- -- --
Supplies
Available 15,286 13,770 1,516 8,398 5,354 3,044 -- -- –-

Also, for 1991, 1992, and 1993, respondent allowed

petitioner adjusted deductions of $1,373, $832, and $1,137,
 - 9 -

respectively, for one-half of the self-employment tax due.

Respondent disallowed deductions in the amounts shown above

because they were not ordinary and necessary and were not

incurred in carrying on a trade or business. Further, respondent

determined that petitioner failed to maintain adequate records,

failed to substantiate the claimed deductions, and untimely filed

her returns. We agree with respondent.

E. Schedule C Expense Deductions

Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving the entitlement to any deduction

claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). A taxpayer is required to maintain records sufficient to

establish the amount of his or her income and deductions. See

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

Section 162(a) allows a taxpayer to deduct all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business. To be “necessary” an

expense must be “appropriate and helpful” to the taxpayer’s

business. Welch v. Helvering, 290 U.S. 111, 113 (1933). To be

“ordinary” the transaction which gives rise to the expense must

be of a common or frequent occurrence in the type of business

involved. Deputy v. Du Pont, 308 U.S. 488, 495 (1940). No

deduction is allowed for personal, living, or family expenses.
 - 10 -

See sec. 262(a).

Generally, if a claimed business expense is deductible, but

the taxpayer is unable to substantiate it, the Court is permitted

to make as close an approximation as it can, bearing heavily

against the taxpayer whose inexactitude is of his or her own

making. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930). The estimate must have a reasonable evidentiary basis.

See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

Section 274 supersedes the doctrine in Cohan v.

Commissioner, supra, see sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985), and requires strict

substantiation of expenses for travel, meals and entertainment,

and gifts, and with respect to any listed property as defined in

section 280F(d)(4), see sec. 274(d). Listed property includes

any passenger automobile or any other property used as a means of

transportation. See sec. 280F(d)(4)(A)(i) and (ii).

A taxpayer is required by section 274(d) to substantiate a

claimed expense by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement establishing the

amount, time, place, and business purpose of the expense. See

sec. 274(d). Even if such an expense would otherwise be

deductible, the deduction may still be denied if there is

insufficient substantiation to support it. See sec. 1.274-5T(a),

Temporary Income Tax Regs., supra.
 - 11 -

1. Travel

Respondent disallowed $1,308 of petitioner’s 1991 travel

expense deduction for failure to substantiate the amounts by the

necessary records.

The amount of business travel must be substantiated “by the

use of a contemporaneous log of business travel, or by any

reasonable means establishing the number of miles traveled, the

date, the place, and the business purpose of such miles”.

Kravette v. Commissioner, T.C. Memo. 1987-124 (citing Smith v.

Commissioner, 80 T.C. 1165, 1171-1173 (1983)); see also sec.

1.274-5T(a)(1), Temporary Income Tax Regs., supra.

Petitioner testified that she traveled to Brookfield,

Wisconsin, for a seminar but failed to provide the location and

title of the seminar and an explanation of how the seminar was

related to her business. Petitioner also traveled to Boston with

her fiancé to visit a cousin who was purportedly interested in

opening a franchise of Dustbusters. Finally, petitioner provided

a Budgetel Inn invoice for an overnight stay without a disclosed

location and purpose. Besides being unable to substantiate the

amount claimed on petitioner’s Schedule C by the receipts

provided, petitioner failed to submit any evidence of a

contemporaneous notation showing how the expenses were reasonable

and necessary in the pursuit of her business. At trial,

petitioner testified to the business purpose of the travel
 - 12 -

expenses for the receipts as noted above. It is well settled,

however, that we are not required to accept a taxpayer’s self-

serving testimony in the absence of corroborating evidence. See

Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992).

Respondent is sustained on this issue.

2. Meals and Entertainment

Petitioner deducted meals and entertainment expenses in

1991, 1992, and 1993, respectively, of $8,964, $6,677, and

$7,252. Respondent allowed $1,000 for each respective year.

The record reflects that petitioner deducted the costs of

personal meals she had with her fiancé under the guise of

“management meetings”. Petitioner testified that she had

barbecues or cookouts for suppliers, vendors, and employees. She

also cooked meals at home and served them to employees at the

work site. Petitioner had receipts reflecting a birthday dinner

for her fiancé where one other employee may have attended; thus,

according to petitioner, it qualified as a business-related meal.

She had multiple receipts for purchases made at local grocery

stores and fast food restaurants when she was “out of the area”.

Entertainment included baseball tickets to Brewers baseball

games for employees, theater tickets, and tickets to the

Milwaukee Zoo for her Japanese acquaintances. However, similar

to the meals expenses, petitioner has failed to follow the strict

substantiation rules of section 274(d).
 - 13 -

Petitioner failed to produce documentation or corroborative

evidence to comply with the strict substantiation requirements of

section 274(d); therefore, petitioner is not entitled to

deductions for meals and entertainment expenses in excess of the

amounts allowed by respondent for 1991, 1992, and 1993.

Petitioner did not contemporaneously annotate receipts indicating

the place, date, amount, and business purpose of the meal. At

the request of Revenue Agent Valerie Schwartz (Ms. Schwartz),

petitioner provided a list identifying the date, place, amount,

business relationship, business purpose, and resulting sales, if

any, for the meals and entertainment expenses. The list was

created in 1996 for Ms. Schwartz during petitioner’s examination.

Although petitioner claims that similar worksheets were created

for all the years in issue, only the 1992 worksheet was provided.

We question petitioner’s ability to remember such minute details

over as much as a 5-year time period for hundreds of meals and

entertainment engagements. Not only does petitioner fail to

follow the strict substantiation requirements, the Court has the

discretion to disregard testimony which we find self-serving.

See Niedringhaus v. Commissioner, supra at 212.

Respondent is sustained on this issue.

3. Gifts

Petitioner claimed a deduction for business gifts of $640,

$683, and $2,643 in 1991, 1992, and 1993, respectively.
 - 14 -

Respondent allowed $205, $142, and $25, respectively.

Petitioner’s receipts submitted during trial substantiate

the following amounts: $0 for 1991, $120.62 for 1992, and $0 for

1993. As a threshold issue, petitioner failed to substantiate

the amounts of the claimed deductions. Next, petitioner

testified at trial that some of the “business gifts” included

personal gifts to her mother. Petitioner has the burden to show

how a business gift was “ordinary and necessary” to her business

and that it was made with the reasonable expectation of a

commensurate financial return. Petitioner has not met this

burden.

The scanty documentary evidence, in conjunction with

petitioner’s own statements, does not constitute the adequate

records and substantiating documentation as required by the

statute and regulations. See Sanford v. Commissioner, 50 T.C.

823 (1968), affd. 412 F.2d 201 (2d Cir. 1969). Accordingly, we

sustain respondent’s determination with respect to this issue.

4. Car and Truck Expenses

At trial, petitioner conceded respondent’s determination

that 80 percent of petitioner’s truck expenses in 19912 were for

business purposes. For the taxable year 1991, petitioner

2
The parties agree that the arguments for 1991 apply to
1992 and 1993, and, therefore, our analysis will have the same
effect on all the years in issue.
 - 15 -

deducted $7,709 in car and truck expenses, of which only $6,648

was substantiated. Respondent allowed $5,318.40 per examination,

which is 80 percent of the amount substantiated. Petitioner

contends that she conceded 80 percent of the claimed $7,709 truck

expense, and that respondent further reduced petitioner’s truck

expense by making adjustments for commuting. Respondent argues

that local transportation expenses were included in the 80

percent and petitioner’s further arguments regarding commuting

are misplaced. We agree with respondent.

Petitioner agreed to the 80/20 division between business and

personal use of her vehicle. Only $6,648 was substantiated which

respondent used as the base for the 80-percent calculation.

Petitioner offered no evidence to support any additional

transportation expenses in excess of respondent’s allowed car and

truck expenses for the years in issue. She did not keep a daily

log or a diary of places traveled to during any of the years in

issue. While she kept a calendar or a “rough little pad of

paper, or whatever, that told me where I was going to go”, she

did not write down the distance to her regular accounts or

“regular goings to pick up supplies”. Although we find that

petitioner traveled from one job location to the next as was

needed, petitioner failed to comply with the strict requirements

of the statute.

Respondent is sustained on this issue.
 - 16 -

5. Office Expenses

Petitioner deducted office expenses of $4,829, $8,535, and

$9,308 in 1991, 1992, and 1993, respectively. Respondent allowed

$2,758, $2,195, and $1,451, respectively.

At trial, however, petitioner produced a melange of receipts

that did not substantiate her claimed office expense deductions.

Petitioner attempted to substantiate the claimed office expenses

by submitting check receipts and canceled checks drawn on

Dustbusters checking account and petitioner’s personal checking

account, and credit card statements. Of the receipts presented,

petitioner testified that she counted only items on the receipts

that were related to her office. In arguing that the expenses

were personal in nature rather than related to petitioner’s

business, respondent notes that the receipts included amounts for

union dues associated with her W-2 jobs, Audubon print books,

snacks for the office, medication, vodka and wine, kitchenware,

dance/exercise clothing, Guess brand apparel, floral

arrangements, groceries, hair accessories, blankets, pillows, and

wallpaper. In some instances, receipts were duplicated in the

same year or in subsequent years. Notations, if any, on the

checks submitted were vague. In addition, some checks were

simply made out to “cash” with no notation on the bottom that it

was for a deductible business expense.

Finally, on brief petitioner cites to “Treas. Reg.
 - 17 -

1.262(f)(2)(ii)” for the proposition that food and beverages

furnished on the taxpayer’s business premises are deductible and

not subject to the limitation on deductions. Apparently,

petitioner was referring to section 1.274-2(f)(2)(ii), Income Tax

Regs. However, this regulation does not assist petitioner’s

position as she failed to substantiate the deductions.

It is clear from the evidence submitted and the testimony

provided during trial that petitioner failed to substantiate in

any coherent manner expenditures she considered as office

expenses. On the basis of the record, we hold that petitioner is

not entitled to deduct office expenses in excess of respondent’s

allowed office expenses for the years in issue.

6. Rent - Other Expenses

Petitioner deducted rent expenses of $1,620, $4,375, and

$6,900 in 1991, 1992, and 1993, respectively. Respondent allowed

$1,700, $1,200, and $1,200, respectively. Petitioner contends

that the disallowed rental expenses associated with storage space

at her mother’s home and the Cass St. address are deductible.

Section 280A generally prohibits deductions of otherwise

allowable expenses with respect to the use of an individual

taxpayer’s home. This prohibition, however, does not apply to

space allocable within a “dwelling unit which is used on a

regular basis as a storage unit for the inventory or product

samples of the taxpayer held for use in the taxpayer’s trade or
 - 18 -

business of selling products at retail or wholesale, but only if

the dwelling unit is the sole fixed location of such trade or

business.” Sec. 280A(c)(2).

For 1992, petitioner deducted expenses for office rent which

respondent fully allowed. However, petitioner contends that she

is entitled to “home office” and storage expenses. We disagree.

We find petitioner’s testimony conflicting and confusing, and her

position unjustifiable. She testified that a portion of her home

was used during the time “when I first started” Dustbusters.

However, she also testified that she began Dustbusters in 1987

and utilized office space rented at 7856 West Appleton Avenue

since 1987.

The record also reflects that petitioner deducted monthly

rent paid to her mother and grandmother as alleged rental costs

for storage space. At trial, Ms. Clark testified that the $250

rent that petitioner sometimes paid was “to help out with

everything”. Petitioner also admitted that rental payments made

to her grandmother were for her personal residence, thus

nondeductible.

In this case, petitioner does not fit within the exception

of section 280A(c)(2) because she had a fixed place of business

at 7856 West Appleton Avenue during the same time period that she

is claiming deductions for home office expenses. The storage

areas in issue were located at petitioner’s various personal
 - 19 -

residences. The exception clearly applies in situations where

the dwelling unit is the sole fixed location of the trade or

business. Because petitioner had an office, her fixed place of

business, other than her residences, section 280A(c)(2) does not

apply. See Garvey v. Commissioner, T.C. Memo. 1982-176.

Moreover, petitioner’s equipment and supplies for her cleaning

business do not constitute inventory, as required under the

statute. See Banatwala v. Commissioner, T.C. Memo. 1992-483.

Accordingly, petitioner failed to establish that she is

entitled to deduct additional rents in excess of the amounts

respondent allowed. Respondent is sustained on this issue.

7. Utilities

Petitioner claimed utility expense deductions of $3,341,

$2,864, and $3,724 in 1991, 1992, and 1993, respectively.

Respondent allowed $1,553, $1,564, and $1,220, respectively. At

trial, petitioner agreed to 90 percent of respondent’s

adjustments. Petitioner admits that personal utility expenses

were incorrectly deducted in 1991, 1992, and 1993. However, she

continues to contend that she is entitled to 10 percent of the

disallowed utility expense deductions. It was also determined

that in 1991, yellow page advertisements charged to petitioner’s

telephone bills, were already included in petitioner’s claimed

utility expenses for that year, and no additional amount was
 - 20 -

warranted.3

Business related telephone calls were made from petitioner’s

office, her mother’s home (in 1991 and part of 1992), and the

Cass St. address from September 1992 through 1993. Petitioner

did not identify which phone calls were personal or business

related. Petitioner testified that she “just put it in the

computer. I was thinking it was kind of done in the system”.

Petitioner also deducted the electricity at the Cass St. address

for the washer and dryer and charging of equipment. Petitioner

provided copies of her home telephone bills without any

indication of which calls were personal or business related and

copies of her business phone bills with missing monthly

statements.

Petitioner further contends that water, electricity, and gas

expenses were incurred in the ordinary course of business.

Heaters kept equipment and supplies warm, water was used to mix

chemicals, and the washer and dryer were used to launder dirty

towels and clothing.

Although it is within the purview of the Court to estimate

the amount of allowable deductions where there is evidence that

deductible expenses were incurred, Cohan v. Commissioner, 39 F.2d

at 543-544, we cannot do so when there is no reliable evidence on

3
Petitioner attempted to claim the yellow page
advertisements as an additional expense for the years in issue,
in addition to the amounts previously claimed.
 - 21 -

which to make such estimations. See Vanicek v. Commissioner, 85

T.C. at 742-743. For 1991 and 1992, petitioner provided one

utility bill. For 1993, petitioner provided copies of Wisconsin

Electric, Wisconsin Gas, and Milwaukee Water Works bills for her

personal residence which we hold are nondeductible personal

expenses.

Based on the above, we find that petitioner failed to

establish that utility expense deductions in excess of the

amounts allowed by respondent were ordinary and necessary

business expenses. Respondent is sustained on this issue.

8. Donations

Petitioner deducted donations of $600 and $100 in 1991 and

1992, respectively. Respondent disallowed the deductions in full

for both years.

Petitioner testified that donations included items which she

labeled “gifts/donation” in 1991 and “promos” in 1992.

Petitioner further testified that “promos” or “promotions”

included “perks for employees” and other items as a work

incentive. Petitioner’s receipts under “promos” for 1992

included several items of jewelry, wallpaper, interior paint, an

ironing board, gourmet foods, candy, and perfume totaling

$457.90. Petitioner’s 1991 receipts totaled $104.17, which is

far from the claimed deduction of $600.

Not only has petitioner failed to substantiate specific
 - 22 -

donations pursuant to section 1.170A-13(a)(1), Income Tax Regs.,

but she also testified that the wallpaper, interior paint, and

ironing board were given to her mother, which items thus are

personal and nondeductible. Consequently, respondent’s

determination is sustained.

9. Repairs/Maintenance

Petitioner deducted $1,660 for repairs and maintenance in

1993. Of that amount, respondent allowed $197. Petitioner

testified that all of the personal checks written to Tony Lloyd,

Interior/Exterior Decorating Specialists, totaling $849, are for

remodeling her mother’s residence. Since this remodeling is

personal in nature, the expenses are not deductible. Petitioner

argues that the repairs were made in lieu of rent to her mother.

If that were the case, petitioner would have included these

amounts under storage expenses. In any event, we have already

determined that the amounts deducted as rent were for

petitioner’s habitation as opposed to storage use, and thus were

personal in nature.

Since petitioner has not provided any other evidence for

repairs or maintenance, she is not entitled to any deduction in

excess of respondent’s determination.

F. Cost of Goods Sold

1. Wages/Payroll/Outside Services/Cost of Labor

During the years in issue, petitioner used four different
 - 23 -

categories to report labor expenses.

For 1991, respondent disallowed a claimed deduction for

wages of $600 and allowed petitioner’s claimed payroll expense

deduction of $1,015 and cost of labor, as a cost of goods sold,

of $8,838 in full. As to years 1992 and 1993, respondent

allowed, in full, claimed deductions for wages of $4,583 and

$2,085, respectively. In addition to allowing petitioner’s

claimed payroll deductions for years 1992 and 1993, respondent

credited petitioner an additional $9 and $27, respectively.

Respondent, however, disallowed $169 of petitioner’s claimed cost

of labor, as a cost of goods sold, for 1992. For 1993,

respondent disallowed $62 of petitioner’s claimed outside

services expense deduction.

Reasonable compensation for services actually rendered is

deductible under section 162 as an ordinary and necessary

business expense. See sec. 162(a)(1). It is unclear why

petitioner separated payments made to employees into four

separate categories; nevertheless, we discuss them together as

they clearly refer to payments petitioner made as compensation

for services rendered.

It is respondent’s position that petitioner has duplicated

her 1991 wages expense in amounts previously allowed by

respondent under payroll and cost of labor. Petitioner offered

the testimony of Ms. Sigrist and Ms. Comeau to prove that the
 - 24 -

amounts of their compensation were not included under payroll

expense or cost of labor. Respondent argues that the amount

shown in the Form 1099 Ms. Sigrist received was already included

under cost of labor. Petitioner offered no evidence to

substantiate the 1992 cost of labor deductions.

Petitioner has the burden to substantiate the claimed labor

expenses. See Rule 142. She has failed to do so. Petitioner

submitted receipts which do not appear to concern wages, payroll,

outside services, or cost of labor categories. The few receipts

submitted do not approach the amounts claimed on petitioner’s

returns and only add to the confusion. Contrary to petitioner’s

argument, the witnesses at trial could not corroborate who worked

on which project and whether the respective witness ever received

payment for services rendered.

Respondent is sustained on this issue.

2. Cleaning Supplies/Materials and Supplies (Cost of Goods

Sold)

Respondent disallowed deductions for cleaning supplies

expenses of $949 and $3,978 for 1991 and 1993, respectively.

Respondent further disallowed materials and supplies, as a cost

of goods sold, of $1,516 and $2,875 for 1991 and 1992,

respectively. Respondent contends that petitioner claimed

amounts for personal items in addition to business supplies.

Petitioner contends that only expenses for cleaning supplies from
 - 25 -

wholesale suppliers were allowed while those from retail

merchants, e.g., Target and Walgreens, were disallowed.

While we accept petitioner’s testimony that she purchased

supplies at retail establishments for convenience, it is unclear

whether petitioner excluded personal items contemporaneously

purchased with business supplies and materials. After review of

the record, it is evident that petitioner could not substantiate

the amount of expenses which respondent allowed for the years in

issue. It is petitioner’s burden to present evidence to the

Court proving the necessity of each item in the ordinary course

of business. The Court again finds that petitioner’s receipts

are in such a disarray that the amounts respondent had previously

allowed were not discernable. Based upon the above, we find that

petitioner is not entitled to deductions or cost of goods sold in

excess of those which respondent has allowed.

G. Section 6651(a)

Respondent determined additions to tax as a result of

petitioner’s failure to file timely returns for 1991 and 1992.

Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return. The addition to tax is equal to 5

percent of the amount of the tax required to be shown on the

return if the failure to file is not for more than 1 month. See

sec. 6651(a)(1). An additional 5 percent is imposed for each

month or fraction thereof in which the failure to file continues,
 - 26 -

to a maximum of 25 percent of the tax. See id.

The addition is applicable for each year unless petitioner

establishes that her failure to file was due to reasonable cause

and not willful neglect. See id. If petitioner exercised

ordinary business care and prudence and was nonetheless unable to

file her return within the date prescribed by law, then

reasonable cause exists. See sec. 301.6651-1(c)(1), Proced. &

Admin. Regs. “Willful neglect” means a “conscious, intentional

failure or reckless indifference.” United States v. Boyle, 469

U.S. 241, 245 (1985).

Petitioner’s 1991 Federal income tax return was due on April

15, 1992. Petitioner filed a blank return with an application

for extension on June 5, 1992. Petitioner filed her 1991 and

1992 Federal income tax returns in June 1994. She contends that

the late filing of her 1992 return was a result of waiting for

the completion of the 1991 return.

Petitioner has failed to show that she exercised ordinary

business care and prudence in this case. Respondent is sustained

on this issue.

H. Section 6662(a)

The last issue for decision is whether petitioner is liable

for accuracy-related penalties pursuant to section 6662(a) for

the years in issue. Section 6662(a) imposes a penalty of 20

percent of the portion of the underpayment which is attributable
 - 27 -

to negligence or disregard of rules or regulations. See sec.

6662(b)(1). Negligence is the “‘lack of due care or failure to

do what a reasonable and ordinarily prudent person would do under

the circumstances’”. Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. 43 T.C. 168 (1964) and T.C. Memo. 1964-299).

It includes any failure by the taxpayer to keep adequate books

and records or to substantiate items properly. See sec. 1.6662-

3(b)(1), Income Tax Regs. The term “disregard” includes any

careless, reckless, or intentional disregard. Sec. 6662(c). No

penalty shall be imposed if it is shown that there was reasonable

cause for the underpayment and the taxpayer acted in good faith

with respect to the underpayment. See sec. 6664(c).

At trial, petitioner failed to establish that she acted in

good faith with respect to the underpayments during the years in

issue. Petitioner claimed excessive Schedule C expenses which

she was unable to substantiate and disregarded the requirements

of sections 162 and 274. In the Court’s opinion, neither the

receipts submitted by petitioner nor her testimony established a

business purpose for the claimed expenses. On the basis of the

record, we hold that petitioner is liable for the accuracy-

related penalties under section 6662(a) for 1991, 1992, and 1993.
 - 28 -

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.