MAXIE v. COMMISSIONER

T.C. Summary Opinion 2002-113

UNITED STATES TAX COURT

ADELL MAXIE, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1047-01S. Filed August 29, 2002.

Adell Maxie, Jr., pro se.

Lance Stodghill, 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 year at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency of $3,044 and an addition

to tax of $608.80 pursuant to section 6651(a)(1) in petitioner’s

Federal income tax for the taxable year 1997.

After a concession by respondent,1 the remaining issues for

decision are: (1) Whether petitioner failed to report a combined

total of $9,363 of gross receipts on two separate Schedules C,

Profit or Loss From Business; (2) whether petitioner is liable

for self-employment tax on the $9,363 of unreported income; and

(3) whether petitioner is entitled to Schedule C deductions in

connection with the operation of his barber shop for travel

expenses, meal and entertainment expenses, and business-related

vehicle expenses of $782, $60, and $567, respectively.

Some of the facts in this case 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 lived in Houston, Texas.

During the year at issue, petitioner owned a liquor store

and a barber shop located at 5822 and 5824 Martin Luther King

Boulevard, Houston, Texas, respectively. For the year at issue,

petitioner reported the results of both businesses on separate

Schedules C. On the liquor store Schedule C, petitioner reported

gross receipts of $53,491. On the barber shop Schedule C,

1
Respondent conceded that petitioner is not liable for
an addition to tax pursuant to sec. 6651(a)(1).
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petitioner reported gross receipts of $45,297. For the year at

issue, petitioner’s reported combined gross receipts from both

businesses totaled $98,788. Using the bank deposits method,

respondent determined petitioner’s combined gross receipts to be

$108,151. Thus, respondent determined that petitioner failed to

report $9,363 of gross receipts from petitioner’s two Schedule C

businesses.

On the barber shop Schedule C, petitioner claimed various

business expense deductions that are at issue. Petitioner

deducted $2,072 of travel expenses on the barber shop Schedule C,

of which respondent allowed only $1,290. Thus, $782 of travel

expenses remains at issue. It has been stipulated that $689.17

of the travel expenses at issue related to expenses incurred with

respect to a fraternity convention petitioner attended in

Washington, D.C. The record is void of any evidence to establish

what the remaining $92.83 of the disputed travel expenses

represents.

Petitioner claimed a business expense deduction on the

barber shop Schedule C of $421 for meal and entertainment

expenses. Respondent allowed $361 of the total claimed

deduction. Thus, $60 of the claimed meal and entertainment

expense deduction remains at issue. It was stipulated that the

$60 deduction relates to meals purchased while attending the

fraternity convention.
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Further, petitioner deducted $6,841 of vehicle expenses on

the barber shop Schedule C but failed to substantiate $567 of the

claimed amount. Thus, $567 of vehicle expenses remains at issue.

In the notice of deficiency, respondent: (1) Increased

petitioner’s gross receipts by $9,363 because respondent

determined that petitioner had unreported income; (2) increased

petitioner’s self-employment tax to reflect the increase in gross

receipts; (3) disallowed $782 of the travel expense deduction and

$60 of the meal and entertainment expense deduction because

petitioner failed to establish that the expenses were ordinary

and necessary business expenses; and (4) disallowed $567 of the

vehicle expense deduction because petitioner failed to

substantiate entitlement to the deduction.

The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to show that the determinations are incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).2

1. Schedule C--Gross Receipts

A taxpayer’s gross income generally includes “all income

from whatever source derived”. Sec. 61(a). A taxpayer is

2
Sec. 7491 does not apply in this case to place the
burden of proof on respondent because petitioner neither alleged
that sec. 7491 was applicable nor established that he fully
complied with the substantiation requirements of sec.
7491(a)(2)(A).
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required to maintain records sufficient to establish the amount

of his or her income. Sec. 6001; sec. 1.6001-1(a), (e), Income

Tax Regs. In the absence of adequate books and records, the

Commissioner may reconstruct a taxpayer’s income by any

reasonable method. See sec. 446(b); Holland v. United States,

348 U.S. 121 (1954). The bank deposits method has long been

recognized as a reasonable method to reconstruct income where the

taxpayer’s records are inaccurate or incomplete. See Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2

(6th Cir. 1977). “Though not conclusive, bank deposits are prima

facie evidence of income.” Id.

In an attempt to explain the discrepancy between the gross

receipts reported and his bank deposits for the year at issue,

petitioner testified that he transferred funds from savings

accounts and deposited funds received from loans that he

previously had made. However, petitioner presented absolutely no

evidence to corroborate his testimony. It is well settled that

we are not required to accept a taxpayer’s self-serving testimony

in the absence of corroborating evidence. Niedringhaus v.

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

We find the testimony given by petitioner to be too vague

and based too much upon conjecture to establish that the bank

deposits totaling $9,363 relate to transfers and loans. No

evidence in the record establishes that the deposits made into
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petitioner’s bank accounts were nontaxable. Furthermore, we find

that the $9,363 constitutes unreported gross receipts derived

from petitioner’s Schedule C businesses. Accordingly, we hold

that petitioner failed to report $9,363 of gross receipts from

his Schedule C businesses. Respondent is sustained on this

issue.

2. Self-Employment Tax

Respondent determined that petitioner is liable for self-

employment tax on the $9,363 of unreported income. Section 1401

imposes a tax on the self-employment income of individuals.

Self-employment income means the net earnings from self-

employment derived by an individual. Sec. 1402(b). In general,

net earnings from self-employment means the gross income derived

by an individual from any trade or business that he or she

carries on, reduced by allowable deductions attributable thereto.

Sec. 1402(a). Petitioner bears the burden of showing that

respondent’s determination is erroneous. Rule 142(a); cf. Jones

v. Commissioner, T.C. Memo. 1994-230, affd. without published

opinion 68 F.3d 460 (4th Cir. 1995); O’Rourke v. Commissioner,

T.C. Memo. 1993-603, affd. without published opinion 60 F.3d 834

(9th Cir. 1995).

Above, we found that petitioner failed to report $9,363 of

gross receipts on his Schedules C. The unreported income

increases petitioner’s net earnings subject to self-employment
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tax for the year at issue. Petitioner presented no evidence

establishing that the $9,363 of unreported income is not subject

to self-employment tax. Accordingly, we hold that petitioner is

liable for self-employment tax on the unreported income.

Respondent is sustained on this issue.

3. Schedule C--Business Expense Deductions

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving the entitlement to any

deduction claimed. 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 deductions. Sec. 6001; sec.

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

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

necessary business expenses paid or incurred during the taxable

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

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

business. Welch v. Helvering, supra at 113. Additionally, the

expenditure must be “directly connected with or pertaining to the

taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax Regs.

Pursuant to section 262(a), no deduction is allowed for personal,
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living, or family expenses.

Generally, if a claimed business expense is deductible, but

the taxpayer is unable to fully 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. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

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

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

section 274 supersedes the doctrine of Cohan v. Commissioner,

supra, 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).

Sec. 274(d). Listed property includes any passenger automobile.

Sec. 280F(d)(4)(A)(i).

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

claimed expense by adequate records or other evidence

corroborating the taxpayer’s own statement establishing the

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

if such an expense would otherwise be deductible, the deduction

may still be denied if there is insufficient substantiation to

support it. Sec. 1.274-5T(a), Temporary Income Tax Regs., supra.

A. Travel Expenses and Meal and Entertainment Expenses

On his barber shop Schedule C, petitioner claimed business
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expense deductions for (1) travel expenses of $782, and (2) meal

and entertainment expenses of $60.

In August 1997, petitioner traveled to Washington, D.C., to

attend a college fraternity convention. Petitioner incurred

expenses in relation to the convention of $689.17 for travel and

$120 for meals. Pursuant to section 274(n), only 50 percent of

meal and entertainment expenses is allowed as a deduction. Thus,

of the $120 of expenses incurred by petitioner, only $60 was

claimed as a deduction.

Petitioner testified that the expenses relating to the

fraternity convention were ordinary and necessary business

expenses because he solicited business while attending the

convention and cut the hair of members of the fraternity.

Further, petitioner testified to the many activities offered at

the convention, none of which pertain to the barber shop

business.

We believe the expenses incurred by petitioner relating to

the fraternity convention are not “directly connected with or

pertaining to” petitioner’s barber shop Schedule C business.

Sec. 1.162-1(a), Income Tax Regs. Moreover, we believe the

convention-related expenses to be personal, and, therefore, not

deductible under section 262(a). The fact that petitioner may

have derived some incidental or indirect benefit to his business

by attending the convention is not sufficient to satisfy the
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requirements of section 162(a). See Henry v. Commissioner, 36

T.C. 879, 884 (1961).

Petitioner presented absolutely no evidence, either

documentary or by testimony, to substantiate the additional

$92.83 of expenses deducted as travel expenses. Petitioner is

not entitled to a deduction for business expenses that are

completely unsubstantiated. Ronnen v. Commissioner, 90 T.C. 74,

102 (1988).

Accordingly, petitioner is not entitled to business expense

deductions on Schedule C of $782 for travel expenses and $60 for

meal and entertainment expenses. Respondent is sustained on this

issue.

B. Business Standard Mileage Rate Expense

The business standard mileage rate in lieu of operating and

fixed costs allows the taxpayer to deduct an amount determined by

multiplying the business standard mileage rate for the year at

issue by the number of miles driven for business purposes. Rev.

Proc. 96-63, 1996-2 C.B. 420. The business standard mileage rate

for 1997 was 31.5 cents per mile. Id., 1996-2 C.B. at 422.

On the barber shop Schedule C, petitioner reported 21,719

miles driven for business purposes. Petitioner claimed a

corresponding vehicle expense deduction of $6,841 for business

miles, applying the standard mileage rate. In the Stipulation of

Facts, respondent conceded that petitioner is entitled to 20,240
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business miles for a business-related vehicle expense deduction

of $6,274.3 Thus, petitioner must substantiate the difference of

$567 to claim it as a deduction. See sec. 274(d).

At trial, petitioner presented absolutely no evidence to

substantiate the business mileage reported. Petitioner testified

that he did not have a mileage log.

As stated above, section 274(d) requires strict

substantiation for deductions claimed for transportation in a

passenger car. Petitioner is required to provide adequate

records or other corroborative evidence sufficient to establish

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

Sec. 274(d). At trial, petitioner failed to provide any

corroborating evidence whatsoever to satisfy the section 274(d)

substantiation requirements.

Accordingly, petitioner is not entitled to a business

expense deduction on the barber shop Schedule C greater than the

$6,274 respondent allowed. Respondent is sustained on this

issue.

3
The deduction was determined using the 1997 standard
mileage rate of 31.5 cents per mile.
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Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered for

respondent as to the deficiency and

for petitioner as to the addition

to tax.