OGU v. COMMISSIONER

T.C. Summary Opinion 2004-87

UNITED STATES TAX COURT

TOBIAS G. OGU, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7676-03S. Filed June 30, 2004.

Tobias G. Ogu, pro se.

David E. Whitcomb, for respondent.

ARMEN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1 The decision to

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

should not be cited as authority.

1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1999
and 2000, the taxable years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure. All monetary
amounts are rounded to the nearest dollar.
 - 2 -

Respondent determined deficiencies in petitioner’s Federal

income taxes and accuracy-related penalties for 1999 and 2000 as

follows:

Accuracy-Related Penalty
Year Deficiency Section 6662(a)
1999 $26,424 $5,285
2000 23,569 4,714

After concessions by respondent,2 the issues for decision by

the Court are as follows: (1) Whether petitioner is entitled to

various Schedule C deductions in 1999 and 2000; (2) whether

petitioner is entitled to head-of-household filing status in 1999

and 2000; (3) whether petitioner is entitled to earned income

credits in 1999 and 2000; (4) whether petitioner received

proceeds from the sale of stock in 2000; and (5) whether

petitioner is liable for the accuracy-related penalties under

section 6662(a) for 1999 and 2000.

In addition, there are two computational matters, the

resolution of which is solely dependent on our disposition of the

disputed issue involving petitioner’s Schedules C.3

2
At trial, respondent conceded: (1) For 1999 and 2000,
petitioner is entitled to claim his son as a dependent; (2) for
1999, petitioner is entitled to a bad debt deduction on Schedule
C in the amount of $7,580; and (3) for 2000, petitioner is
entitled to the cost of goods sold and the deduction for “other
expenses--rent” as claimed on his Schedule C.
3
The computational matters, each of which involves both of
the taxable years in issue, are: (1) The amount of self-
employment tax under sec. 1401; and (2) the amount of the self-
(continued...)
 - 3 -

I. Background

Some of the facts have been stipulated, and they are so

found. At the time that the petition was filed, petitioner

resided in Houston, Texas.

A. Petitioner’s Occupation

Petitioner filed a Form 1040, U.S. Individual Income Tax

Return, for 1999. At the bottom of page 2 of the Form 1040,

petitioner listed his occupation as “consultant” and his firm as

Americana Business Consultants.

Petitioner filed a Form 1040, U.S. Individual Income Tax

Return, for 2000. At the bottom of page 2 of the Form 1040,

petitioner listed his occupation as “accountant” and his firm as

Creative Accountants.

At trial, petitioner testified that he has a college degree

in business administration and that he regards himself as an

accountant both by education and profession.

B. Petitioner’s Schedules C

Petitioner attached a Schedule C, Profit or Loss From

Business (Sole Proprietorship), to each of his returns for 1999

and 2000. On each Schedule C, petitioner identified his business

name as Americana Business Consultants, his principal business or

3
(...continued)
employment tax deduction under sec. 164(f).
 - 4 -

profession as computer and software, and his business activity

code as 443120, signifying a computer and software store.4

On his Schedule C for 1999, petitioner claimed various

deductions. As relevant to the issues for decision, those

deductions were as follows:

Other/Depreciation $15,743
Other/EDI fee, advertising,
telephone, etc. 9,113
Other/Overseas expenses 24,720
Other/Trade mission 11,900

On his Schedule C for 2000, petitioner claimed various

deductions. As relevant to the issues for decision, those

deductions were as follows:

Depreciation $4,157
Legal/Professional 3,270
Other/Used file cabinets,
chairs, and tables 7,840
Other/Overseas rent 3,900
Other/Overseas expenses 7,870
Other/Overseas wages 16,000
Other/Overseas office 1,680
Other/Trade mission 6,975

Petitioner did not attach to either of his returns for 1999

or 2000 a Form 4562, Depreciation and Amortization (Including

Information on Listed Property), or other depreciation schedule.

4
At trial, petitioner testified that Creative Accountants,
see supra p. 3, was a “dba” of Americana Business Consultants.
According to petitioner, “we divided our business for people to
identify what kind of business we are doing”.
 - 5 -

Similarly, petitioner did not attach to either of his returns an

election to expense property under section 179.5

C. Petitioner’s “Trade Missions” to Nigeria

On his Schedule C for 1999, petitioner claimed a deduction

for “trade mission” in the amount of $11,900. In this regard,

petitioner claims to have gone to Nigeria on a “trade mission”

from December 22, 1999, to January 7, 2000, and to have incurred

the following “general expenses”:

Item Amount
Air ticket $1,620
Excess luggage 875
Sealing tape 5
Yellow Cab taxi 65
ABC Transport to Owerri 150
Domino Paramount Hotel--3 days 225
Taxi to tourist guest house 45
Tourist guest house–-7 days 665
Hotel conference hall 570
Banners and signs 455
Publications and Supplies 1,650
Car rental with chauffeur--8 days 540
Gas/petrol 490
Radio advertisement 500
Lunch for the guests 1,950
Domino Paramount Hotel--4 days 300
Messengers--hired 5 people 750
Meal and entertainment 1,045
Total Expenses 11,900

The record does not include an itinerary, passenger receipt,

boarding passes, credit card receipt, or other documentary

evidence demonstrating that an airline ticket was purchased or,

5
A taxpayer wishing to expense property would typically
make the election using Part I, Election To Expense Certain
Tangible Property (Section 179), of Form 4562, Depreciation and
Amortization (Including Information on Listed Property).
 - 6 -

if one was, the cost thereof or the flight itinerary. Regarding

the other enumerated expenses, petitioner claims to have paid in

cash; he also claims that in Nigeria hotels, restaurants, and

other purveyors of goods and services do not provide receipts.6

On his Schedule C for 2000, petitioner claimed a deduction

for “trade mission” in the amount of $6,975. In this regard,

petitioner claims to have gone to Nigeria on another “trade

mission” from December 25, 2000, to January 13, 2001. The record

does not include any schedule of expenses that petitioner claims

to have incurred. The record does include a flight itinerary

issued by a travel agency in Houston calling for the payment of

$1,930 and a passenger receipt showing a fare of “BULK” and tax

of $88.73. No other documentation exists in the record;

petitioner again claims to have paid his expenses in Nigeria in

cash.

At trial, petitioner testified that he went to Nigeria on

“trade missions” during the holiday season not because his family

was there (see infra I.D., note 8) but because:

In Nigeria business is mostly done during December
time. Done during December time, because at that time
you have gifts to give to people. They’re happy. So
this is the only time they can talk to you.

6
According to petitioner, “Everything in Nigeria is cash”
and “there is nothing like a receipt.”
 - 7 -

D. Petitioner’s Nigerian Corporation

The record in this case includes a document purporting to be

the Articles of Association of Americana Business Consultants

(Nigeria) Limited, a Nigerian corporation incorporated on January

19, 2000.7 This document identifies petitioner as holding

500,000, or one-half, of the 1 million shares of the corporation,

and five of petitioner’s relatives as each holding 100,000

shares. Listed among the five relatives is Chinedu N. Ogu,

petitioner’s son, whose position in the corporation is identified

as “Director-Business Strategist”.8 Petitioner’s position in the

corporation is identified as “Chairman/Chief Executive officer”.

At trial, petitioner testified that “they told me that for

them to deal with me, that I must come here and incorporate by

Nigerian law” and:

they will not allow you to do business in Nigeria, if
it is overseas dominated. You must show that the
citizens own the business. Citizens that reside over
there, they live over there. Nigerians own the
business.

7
Although Americana Business Consultants (Nigeria)
Limited was purportedly incorporated on Jan. 19, 2000,
petitioner’s “Financial Statement” for the calendar year 1999
lists a “general administrative expense” of $29 as having been
incurred in August 1999 for “Articles of Association--ABC Nig
Ltd”.
8
Petitioner’s son, Chinedu N. Ogu, was born in 1986 and
therefore turned 13 in 1999. See infra p. 10. The other four
relatives are petitioner’s mother, two brothers, and sister, all
of whom live in Nigeria.
 - 8 -

E. Petitioner’s “Overseas Expenses” in Nigeria

On Part V of his Schedule C for 1999, petitioner claimed

under the category of “Other Expenses” a deduction for overseas

expenses in the amount of $24,720. Petitioner did not break this

amount into constituent parts, but he did describe the total as

“overseas commission, shipping, office supplies, etc”.

On Part V of his Schedule C for 2000, petitioner claimed

under the category of “Other Expenses” deductions for overseas

expenses as follows:

Deduction Amount
Overseas rent $3,900
Overseas expenses 7,870
Overseas wages 16,000
Overseas office 1,680

The deductions for “overseas expenses” in 1999 and 2000

appear to relate to Americana Business Consultants (Nigeria)

Limited.

F. Petitioner’s Involvement in State Court Litigation

In September 1999, an individual by the name of Francis

Iheanacho (Mr. Iheanacho) commenced a civil action (Cause No.

1999-47585) in the District Court of Harris County (Houston),

Texas, against petitioner for libel and intentional infliction of

emotional distress. Mr. Iheanacho named petitioner both

individually and as agent and officer of Mbaise Cultural Union,

Inc., an organization described by petitioner as “a Houston based
 - 9 -

charity non-profit tax-exempt organization”.9 Mr. Iheanacho also

named Mbaise Cultural Union as a defendant on the basis of

respondeat superior.

In his complaint, Mr. Iheanacho alleged that petitioner

published defamatory statements suggesting, inter alia, that Mr.

Iheanacho “was guilty of criminal activity; theft, welfare fraud,

misuse of official information, attempt[ed] aggravated assault,

and professional impropriety.” Mr. Iheanacho further alleged

that petitioner published such statements in letters on

petitioner’s personal stationery sent to the Texas Department of

Human Services and in a “Dear brothers and sisters” letter sent

to members of Mbaise Cultural Union.10

9
It would appear that petitioner and Mr. Iheanacho were
both members of, or otherwise associated with, Mbaise Cultural
Union.
10
Mr. Iheanacho appended to his complaint as exhibits
three of petitioner’s letters. One of petitioner’s letters was
captioned “Use of Deadly Force Authored By Francis Iheanacho”,
the salutation and opening paragraph of which read as follows:

Dear Brothers and sisters:

I write to inform you that on May 31, 1998, after
Mbaise Cultural Union meeting, Francis Iheanacho drove
his small pleasure car with reckless abandon with the
intention to run over Ezeji T. Ogu [petitioner]. This
incident was witnessed by at least five Mbaise people.
What prompted Francis Iheanacho to use deadly force
against harmless and innocent Ezeji? This is a
question only Francis Iheanacho can answer. This
incident has added another chapter to Francis
Iheanacho’s pattern of deception and uncivilized
behavior in Mbaise Cultural Union.
 - 10 -

In November 2000, Mbaise Cultural Union commenced a civil

action (Cause No. 2000-57938) in the District Court of Harris

County (Houston), Texas, against petitioner and another

individual. In its complaint, Mbaise Cultural Union described

petitioner as “a self appointed public relations officer” and

alleged, inter alia, that petitioner “failed to use his best

efforts to achieve the corporate and business purposes of MBAISE

CULTURAL UNION.”

In March 2000, petitioner commenced a civil action (Cause

No. 2000-15808) in the District Court of Harris County (Houston),

Texas, against Dr. Tim Oparaji. The record in the present case

contains no information regarding the nature of Cause No. 2000-

15808.

On his Schedule C for 1999, petitioner did not claim any

deduction for legal and professional services. In contrast, on

his Schedule C for 2000, petitioner claimed a deduction for legal

and professional services in the amount of $3,270.

G. Petitioner’s Immediate Family

During 1999 and 2000, petitioner was unmarried. However, he

was formerly married to Sharon J. Carter (Ms. Carter) and had two

children with her, a son, Chinedu N. Ogu (Chinedu), who was born
 - 11 -

on September 21, 1986, and a daughter, Sarah C. Ogu, who was born

on August 8, 1990.11

Petitioner and Ms. Carter were divorced in December 1996 by

the District Court of Harris County (Houston), Texas. In its

Final Decree of Divorce, the District Court appointed petitioner

and Ms. Carter as Joint Managing Conservators of their offspring.

Although both petitioner and Ms. Carter were granted “the right

to have physical possession of the child”, only Ms. Carter was

granted the right “to establish the legal residence of the

child”. Petitioner was also ordered to pay child support on a

semimonthly basis.

During each of the taxable years in issue, Chinedu lived

with his mother for more than half of the year.

H. Petitioner’s Reported Tax Liabilities and Earned Income
Credits

On his Form 1040 for 1999, petitioner reported “0.00” tax on

line 40 and self-employment tax of $1,213 on line 50, for a total

reported tax liability of $1,213. Petitioner then claimed an

earned income credit of $2,312 and, ultimately, a refund of

$1,099 (i.e., $2,312 less $1,213).

On his Form 1040 for 2000, petitioner reported “0.00” tax on

line 40 and self-employment tax of $1,762 on line 52, for a total

reported tax liability of $1,762. Petitioner then claimed an

11
Petitioner’s daughter is not involved in any of the
issues in this case.
 - 12 -

earned income credit of $2,353 and, ultimately, a refund of $591

(i.e., $2,353 less $1,762).

In support of his claims of the earned income credit for

1999 and 2000, petitioner attached to his return for each of

those years a Schedule EIC, Earned Income Credit/Qualifying Child

Information. On each Schedule EIC, petitioner claimed his son,

Chinedu N. Ogu, as a qualifying child and represented that

Chinedu lived with him for the entire year.

I. Respondent’s Notice of Deficiency

For 1999, and as relevant to the issues for decision,

respondent disallowed the following deductions claimed by

petitioner as “other expenses” on Part V of his Schedule C:

Deduction Amount Claimed Amount Allowed Amount Disallowed
Depreciation $15,743 --- $15,743
EDI fee, advertising,
telephone, etc. 9,113 $1,489 7,624
Trade mission 11,900 --- 11,900
Overseas expenses 24,720 --- 24,720

For 2000, and as relevant to the issues for decision,

respondent disallowed the following deductions claimed by

petitioner as “expenses” on Part II or as “other expenses” on

Part V of his Schedule C:
 - 13 -
Deduction Amount Claimed Amount Allowed Amount Disallowed
Depreciation $4,157 --- $4,157
Legal/Professional 3,270 --- 3,270
Other/Used file cabinets,
chairs, and tables 7,840 --- 7,840
Trade mission 6,975 --- 6,975
Overseas rent 3,900 --- 3,900
Overseas expenses 7,870 --- 7,870
Overseas wages 16,000 --- 16,000
Overseas office 1,680 --- 1,680

For 1999 and 2000, respondent also changed petitioner’s

filing status from head of household to single and disallowed the

earned income credit. For 2000, respondent determined that

petitioner received, but failed to report, proceeds of $42 from

the sale of stock. Finally, respondent determined that

petitioner is liable for the accuracy-related penalty under

section 6662(a) for 1999 and 2000.

II. Discussion

A. Burden of Proof

Historically, and as a general rule, the Commissioner’s

determinations are presumed correct, and the taxpayer bears the

burden of proving that those determinations are erroneous. Rule

142(a). This principle was established by the United States

Supreme Court as early as 1933 and was reaffirmed by the Supreme

Court as recently as 1992. See INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115

(1933).

However, the foregoing rule is subject to the provisions of

section 7491, which was enacted as part of the Internal Revenue

Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
 - 14 -

sec. 3001(c), 112 Stat. 727. By virtue of section 7491(a), the

burden of proof may, under certain circumstances, be shifted to

the Commissioner.

In the present case, section 7491(a) does not operate to

place the burden of proof on respondent because: (1) Petitioner

did not allege, much less demonstrate, that section 7491 is

applicable; (2) petitioner did not introduce credible evidence

with respect to any factual issue relevant to ascertaining his

liability; (3) petitioner did not comply with the requirements

under the Internal Revenue Code to substantiate his deductions;

and (4) petitioner did not maintain all records required under

the Internal Revenue Code. See Higbee v. Commissioner, 116 T.C.

438 (2001). In addition, it is open to question whether

petitioner cooperated, within the meaning of section

7491(a)(2)(B), with respondent’s agents.

In view of the foregoing, we proceed with our analysis on

the basis that petitioner bears the burden of proving that

respondent’s deficiency determinations are erroneous.

B. Issue 1. Schedule C Deductions

1. General Principles

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he or she is entitled

to any deduction claimed. Rule 142(a); Deputy v. du Pont, 308

U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934); see INDOPCO, Inc. v. Commissioner, supra; Welch

v. Helvering, supra. This includes the burden of substantiation.
 - 15 -

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976).

In addition, the Court is not bound to accept as gospel the

unverified and undocumented testimony of a taxpayer. Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Hradesky v. Commissioner,

supra. Even when a taxpayer’s testimony is uncontroverted, we

are not required to accept it if it is improbable, unreasonable,

or questionable. Lovell & Hart, Inc. v. Commissioner, 456 F.2d

145, 148 (6th Cir. 1972), affg. T.C. Memo. 1970-335; MacGuire v.

Commissioner, 450 F.2d 1239, 1244 (5th Cir. 1971), affg. T.C.

Memo. 1970-89; Niedringhaus v. Commissioner, 99 T.C. 202, 212

(1992).12

We also observe that section 6001 and the regulations

promulgated thereunder require taxpayers to maintain records

sufficient to permit verification of income and expenses. See

sec. 1.6001-1(a), Income Tax Regs. As a general rule, if, in the

absence of such records, a taxpayer provides sufficient evidence

that the taxpayer has incurred a deductible expense, but the

taxpayer is unable to adequately substantiate the amount of the

deduction to which he or she is otherwise entitled, the Court may

estimate the amount of such expense and allow the deduction to

12
See also Diaz v. Commissioner, 58 T.C. 560, 564 (1972)
(describing “the ultimate task of a trier of the facts--the
distillation of truth from falsehood which is the daily grist of
judicial life”); Kropp v. Commissioner, T.C. Memo. 2000-148 (“As
a trier of fact, it is our duty to listen to the testimony,
observe the demeanor of the witnesses, weigh the evidence, and
determine what we believe.”).
 - 16 -

that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930). However, in order for the Court to estimate the

amount of an expense, we must have some basis upon which an

estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 743

(1985). Without such a basis, any allowance would amount to

unguided largesse. Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).

In the case of certain expenses, section 274(d) overrides

the so-called Cohan doctrine. Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985). Specifically, section 274(d) provides that no

deduction is allowable either for travel, including meals while

away from home, or with respect to listed property as defined in

section 280F(d)(4), unless the deduction is substantiated in

accordance with the strict substantiation requirements of section

274(d) and the regulations promulgated thereunder. Included in

the definition of listed property in section 280F(d)(4) is any

passenger automobile, any computer or peripheral equipment, and

any cellular telephone or other similar telecommunications

equipment. Sec. 280F(d)(4)(A)(i), (iv), (v).

Thus, under section 274(d), no deduction is allowable for

expenses incurred either for travel or in respect of listed

property such as a passenger automobile, a computer or peripheral

equipment, or a cellular telephone or other similar

telecommunications equipment, on the basis of any approximation
 - 17 -

or the unsupported testimony of the taxpayer. E.g., Golden v.

Commissioner, T.C. Memo. 1993-602. In other words, in the

absence of adequate records or sufficient evidence corroborating

the taxpayer’s own statement, any deduction that is subject to

the stringent substantiation requirements of section 274(d) is

proscribed. These stringent substantiation requirements are

designed to encourage taxpayers to maintain records, together

with documentary evidence substantiating each element of the

expense to be deducted. Sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

In addition to the strict substantiation requirements of

section 274(d), a deduction for foreign travel is subject to the

allocation requirements of section 274(c). E.g., Shackelford v.

Commissioner, T.C. Memo. 1995-484; Hilton v. Commissioner, T.C.

Memo. 1990-11. Thus, section 274(c) generally requires the

proration of foreign travel expenses between business and

nonbusiness expenses.

With the foregoing general principles in mind, we turn now

to the specific Schedule C deductions in issue.

2. Depreciation, Office Furnishings, EDI Fee, etc.

On his Schedule C for 1999, petitioner claimed a deduction

for “EDI fee, advertising, telephone, etc.” in the amount of

$9,113; of this amount, respondent allowed $1,489 and disallowed

the balance. On his Schedule C for 2000, petitioner claimed a

deduction for used file cabinets, chairs, and tables in the
 - 18 -

amount of $7,840; respondent disallowed the deduction in its

entirety. Finally, on his Schedules C for 1999 and 2000,

petitioner claimed depreciation deductions in the amounts of

$15,743 and $4,157, respectively; respondent disallowed these

deductions in their entirety.

Insofar as the deduction for “EDI fee, advertising,

telephone, etc.” is concerned, there is nothing in the record

that would permit us to allow any amount greater than that

already allowed by respondent in the notice of deficiency. See

Williams v. United States, supra at 560.

Insofar as the used file cabinets, chairs, and tables are

concerned, the cost of such office furnishings is generally

chargeable to capital account and then recovered through an

annual allowance for depreciation. See secs. 167 and 168.

However, such cost may be expensed pursuant to section 179 if the

requirements of that section are satisfied. However, such cost

may not be expensed in the absence of an election. Sec. 179(c);

Visin v. Commissioner, T.C. Memo. 2003-246; sec. 1.179-5, Income

Tax Regs.

In the present case, petitioner failed to make any election

under section 179.13 That being the case, petitioner may not

13
The election would typically be made using Part I
“Election To Expense Certain Tangible Property (Section 179)” of
Form 4562. Petitioner did not attach Form 4562 to his return,
nor did he otherwise make an election under sec. 179.
 - 19 -

expense the cost of used file cabinets, chairs, and tables. Nor

is petitioner entitled to any depreciation allowance for such

property. Petitioner failed to prove (e.g., by producing a bill

of sale) that he acquired any such property; assuming that he

did, petitioner failed to prove (e.g., by producing a canceled

check or credit card receipt or statement) its cost.

Finally, we consider the depreciation deductions claimed by

petitioner on his Schedules C for 1999 and 2000 in the amounts of

$15,743 and $4,157, respectively. Here our analysis is hampered

by the fact that the record does not include a depreciation

schedule for either of the years in issue.14 Nevertheless, we

understand that depreciation was claimed principally in respect

of one or two automobiles and several pieces of computer

equipment.

As we understand it, petitioner claims depreciation on a

“brand new” 1999 Toyota Camry that he acquired in May 2000,

allegedly for $22,500.15 Although the record includes a “Bill of

Sale” dated May 2, 2000, there is a reference on petitioner’s

“Balance Sheet” for the calendar year 1999 to “Automobile--1999

14
Although the record includes a “Depreciation Worksheet”
for 1997, it would appear that the property listed therein would
have been fully depreciated before 1999.
15
The Texas Certificate of Title describes the Camry as
“rebuilt salvage” and as having 19,840 miles on the odometer at
the time that the title was transferred to petitioner.
At trial, petitioner testified that “I was offered $70,000”
for the car.
 - 20 -

Camery [sic] (New) $19,850.00”. There is a prior entry on that

same “Balance Sheet” for an unidentified automobile, as follows:

Automobile 1,500
Accumulated Depreciation 1,000 500

Petitioner contends that he used the 1999 Toyota Camry

“almost 100 percent” of the time (“well, maybe 90 percent” of the

time) for business, and that he used a second “old car”

automobile for personal purposes (e.g., to transport his son

during visitations). However, petitioner failed to support such

contention; indeed, petitioner failed to produce (and as we

understand, failed to maintain) records required by section

274(d) related to the use of any automobile. As previously

discussed, such records are essential for any deduction claimed

in respect of listed property such as a passenger automobile.

Similarly, petitioner failed to produce (and as we

understand, failed to maintain) records required by section

274(d) related to the use of any computer or peripheral

equipment. Again, such records are essential for any deduction

claimed in respect of listed property such as a computer or

peripheral equipment.

Finally, petitioner should understand: The fact that a

taxpayer claims a deduction on an income tax return is not

sufficient to substantiate the deduction claimed on that return.

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v.
 - 21 -

Commissioner, 62 T.C. 834, 837 (1974). Rather, a tax return is

merely a statement of the taxpayer’s claim; the return is not

presumed to be correct. Wilkinson v. Commissioner, supra at 639;

Roberts v. Commissioner, supra at 837; see also Seaboard

Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957) (a

taxpayer’s income tax return is a self-serving declaration that

may not be accepted as proof of the deduction or exclusion

claimed by the taxpayer); Halle v. Commissioner, 7 T.C. 245

(1946) (a taxpayer’s return is not self-proving as to the truth

of its contents), affd. 175 F.2d 500 (2d Cir. 1949); Swayne

Lumber Co. v. Commissioner, 25 B.T.A. 335, 339-340 (1932) (an

entry on a tax return is not evidence that an expenditure was

actually made). Much the same may be said about a taxpayer’s

bookkeeping entries and self-generated financial statements. See

Doyle v. Mitchell Bros. Co., 247 U.S. 179 (1918); Geiger v.

Commissioner, 440 F.2d 688, 669 (9th Cir. 1971), affg. per curiam

T.C. Memo. 1969-159.

In view of the foregoing, we hold for respondent on this

issue.
 - 22 -

3. “Trade Missions”, Overseas Expenses

On his Schedules C for 1999 and 2000, petitioner claimed

deductions for “trade missions” in the amounts of $11,900 and

$6,975, respectively. Also on his Schedules C for 1999 and 2000,

petitioner claimed various overseas expenses in the aggregate

amounts of $24,720 and $29,450, respectively.16

To the extent that the strict substantiation rules of

section 274(d) apply, petitioner has not adequately substantiated

any of the foregoing deductions. See sec. 274(d); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985); see also sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

To the extent that the strict substantiation rules of

section 274(d) would not preclude us from estimating an

appropriate allowance, any such estimate would be unfounded. See

Williams v. United States, 245 F.2d at 560.

In addition to the foregoing, we are not convinced that the

amounts claimed are even deductible, apart from their lack of

substantiation. In this regard, the record demonstrates that

shortly after petitioner returned from his first “trade mission”

(December 22, 1999, to January 7, 2000), Americana Business

Consultants (Nigeria) Limited, a Nigerian corporation, was

incorporated. At trial, petitioner testified that he was obliged

16
For 2000, the aggregate amount consists of rent of
$3,900, wages of $16,000, office expenses of $1,680, and other
expenses of $7,870.
 - 23 -

to do business in Nigeria in corporate form. The law is clear

that as a general rule, a taxpayer may not deduct the expenses of

another taxpayer. Deputy v. du Pont, 308 U.S. 488 (1940); Hewett

v. Commissioner, 47 T.C. 483 (1967); see Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943) (the business of a

corporation is separate and distinct from the business of its

shareholders); Crook v. Commissioner, 80 T.C. 27, 33 (1983)

(same), affd. without published opinion 747 F.2d 1463 (5th Cir.

1984). Under this rule, a shareholder, even a majority or sole

shareholder, may not deduct payments made by the shareholder of

the corporation’s expenses. E.g., Rink v. Commissioner, 51 T.C.

746, 751 (1969). Although there is a narrow and limited

exception to this rule, see Lohrke v. Commissioner, 48 T.C. 679,

684-685 (1967), petitioner did not demonstrate that the exception

to the general rule should apply in his case, see Capital Video

Corp. v. Commissioner, 311 F.3d 458, 464 (1st Cir. 2002), affg.

T.C. Memo. 2002-40.

In view of the foregoing, we hold for respondent on this

issue.

4. Legal/Professional Expenses
On his Schedule C for 2000, petitioner claimed a deduction

for legal and professional services in the amount of $3,270.17

At trial, respondent conceded that petitioner substantiated the

17
Petitioner did not claim any deduction for legal or
professional expenses on his Schedule C for 1999.
 - 24 -

payment of legal expenses of $2,746; nevertheless, respondent

continued to maintain that no portion of this amount is

deductible. For his part, petitioner admitted that the deduction

related to expenses incurred in connection with the State court

litigation involving Mbaise Cultural Union (Cause No. 1999-47585

and Cause No. 2000-15808). See supra I.F.

Whether legal expenses are deductible as business expenses

pursuant to section 162(a) or are nondeductible pursuant to

section 262(a) depends on the origin and character of the claim

for which the expenses were incurred and whether the claim bears

a sufficient nexus to the taxpayer’s business activities. See

United States v. Gilmore, 372 U.S. 39 (1963). As the Supreme

Court stated: “the origin and character of the claim with respect

to which an expense was incurred, rather than its potential

consequences upon the fortunes of the taxpayer, is the

controlling basic test”. Id. at 49. In other words, “Litigation

expenses are deductible if the suit against the taxpayer ‘arises

in connection with’ or ‘proximately results from’ the taxpayer’s

business or profit-seeking activity.” O’Malley v. Commissioner,

91 T.C. 352, 362 (1988) (quoting United States v. Gilmore, supra

at 48). Thus, in order for petitioner’s legal expenses to be

deductible on his Schedule C for 2000, the origin of those legal

expenses must have been rooted in Americana Business Consultants,

his Schedule C business.

Having carefully read the complaint filed at Cause No. 1999-

47585 and the complaint filed at Cause No. 2000-15808, we are
 - 25 -

unable to discern any nexus, much less a sufficient nexus,

between those civil actions and petitioner’s business activities

as proprietor of Americana Business Consultants.

In the petition filed at Cause No. 1999-47585, the

plaintiff, Mr. Iheanacho, alleged that petitioner published

defamatory statements and intentionally inflicted emotional

distress. The facts alleged concerning such matters do not

implicate petitioner’s business activities. Noteworthy is the

fact that Mr. Iheanacho alleged that petitioner published

defamatory statements in letters on petitioner’s personal

stationery, which did not even reflect petitioner’s business

address.

In the petition filed at Cause No. 2000-15808, the

plaintiff, Mbaise Cultural Union, alleged that petitioner, “a

self appointed public relations officer” of the plaintiff,

“failed to use his best efforts to achieve the corporate and

business purposes of MBAISE CULTURAL UNION.” However, there is

nothing on petitioner’s returns for 1999 and 2000, or otherwise

in the record, to suggest that petitioner’s relationship with the

plaintiff was other than purely social and/or cultural.

In addition, at trial, petitioner introduced no evidence,

testimonial or documentary, demonstrating a sufficient nexus

between the State court litigation and his business activities.

Any suggestion that petitioner’s involvement with Mbaise Cultural

Union was for the purpose of developing a pool of potential
 - 26 -

clients for his computer and software business is too tenuous to

be persuasive.

In view of the foregoing, we hold for respondent on this

issue.

C. Issue 2. Filing Status

On each of his returns for 1999 and 2000, petitioner listed

his filing status as head of household. In the notice of

deficiency, respondent changed petitioner’s filing status to

single.

As relevant herein, section 2(b)(1)(A)(i) provides that a

taxpayer shall be considered a head of a household if, and only

if, the taxpayer maintains as his home a household which

constitutes for more than half of the taxable year the principal

place of abode, as a member of such household, of a son of the

taxpayer.

During each of the taxable years in issue, petitioner’s son

Chinedu N. Ogu lived with his mother for more than half of the

year.18 This living arrangement was consistent with the divorce

decree granting petitioner’s former spouse the right “to

establish the legal residence of the child”. Accordingly,

18
At trial, the following colloquy between the Court and
petitioner occurred:

THE COURT: All right. Did we understand you to
say that most of the time he stays with the mother?

PETITIONER: Yes. Most of the time he stays with
the mother. Sometimes he stays with me.
 - 27 -

petitioner does not qualify for head of household filing status.

Id. Respondent’s determination is therefore sustained.

D. Issue 3. Earned Income Credit

On each of his returns for 1999 and 2000, petitioner claimed

an earned income credit identifying his son Chinedu N. Ogu as a

qualifying child. In the notice of deficiency, respondent

disallowed the earned income credit for both years. Respondent

based the disallowance on the lack of a qualifying child and on

the fact that petitioner’s income exceeded the maximum amount

allowable to claim an earned income credit without regard to a

qualifying child.

In the case of an eligible individual, section 32(a) allows

an earned income credit against the individual’s income tax

liability. As relevant in the first instance, an “eligible

individual” is defined as an individual who has a “qualifying

child” for the taxable year. Sec. 32(c)(1)(A)(i).

As required by section 32(c)(3)(A)(ii), and as relevant

herein, a “qualifying child” is the taxpayer’s son who has the

same principal place of abode as the taxpayer for more than half

of the taxable year.

During each of the taxable years in issue, petitioner’s son

lived with his mother for more than half of the year. See supra

note 18. As stated above, this living arrangement was consistent

with the divorce decree granting petitioner’s former spouse the
 - 28 -

right “to establish the legal residence of the child”.

Accordingly, Chinedu is not a “qualifying child” of petitioner.

An individual who does not have a “qualifying child” may

also be an “eligible individual” and thereby qualify for an

earned income credit. Sec. 32(c)(1)(A)(ii). However, to qualify

for 1999, the individual’s earned income and modified adjusted

gross income must both be less than $10,200; for 2000, less than

$10,380.

In view of our disposition of the Schedule C issues for 1999

and 2000, it would appear virtually certain that petitioner’s

earned income and modified adjusted gross income for each of

those years exceed the maximum amount allowable to claim an

earned income credit without regard to a “qualifying child”.

However, the parties should confirm this matter as part of their

computation for entry of decision under Rule 155.

E. Issue 4. Proceeds From the Sale of Stock

In the notice of deficiency, respondent determined that

petitioner received proceeds of $42 from the sale of stock in

2000.

Petitioner did not address this issue at trial; accordingly,

we consider it to have been abandoned by him. See, e.g., Watson

v. Commissioner, T.C. Memo. 2001-213. Respondent’s determination

is therefore sustained.
 - 29 -

F. Issue 5. Accuracy-Related Penalty

As applicable herein, section 6662(a) imposes a 20-percent

accuracy-related penalty on any underpayment of tax attributable

to either (1) negligence or disregard of rules or regulations, or

(2) any substantial understatement of income tax. The term

“negligence” includes any failure to make a reasonable attempt to

comply with the Internal Revenue Code, and the term “disregard”

includes any careless, reckless, or intentional disregard. Sec.

6662(c). An understatement of income tax is “substantial” if it

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

on the return or $5,000. Sec. 6662(d)(1)(A). As relevant

herein, an “understatement” is defined as the excess of the tax

required to be shown on the return over the tax actually shown on

the return. Sec. 6662(d)(2)(A).

By virtue of section 7491(c), the Commissioner has the

burden of production with respect to the liability of any

individual for any penalty. “[F]or the Commissioner to meet his

burden of production, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty.” Higbee v. Commissioner, 116 T.C. at 446.

Once the Commissioner meets the burden of production, the

taxpayer must come forward with persuasive evidence that the

Commissioner’s determination is incorrect. Id. Typically, the

taxpayer would be obliged to prove that he or she acted with
 - 30 -

reasonable cause and in good faith. Sec. 6664(c)(1); see Higbee

v. Commissioner, supra at 448-449; sec. 1.6664-4(b)(1), Income

Tax Regs.

This Court has held that the Commissioner may satisfy his

burden of production for the accuracy-related penalty based on

negligence by showing that the taxpayer failed to keep adequate

books and records or to properly substantiate items in question.

E.g., Higbee v. Commissioner, supra at 449. This Court has also

held that the Commissioner may satisfy his burden of production

for the accuracy-related penalty based on substantial

understatement of income tax by showing that the understatement

on the taxpayer’s return satisfies the definition of

“substantial”. E.g., Janis v. Commissioner, T.C. Memo. 2004-117.

Given the minimal amount of tax reported by petitioner on

his returns as compared with: (1) The magnitude of the

adjustments made by respondent in the notice of deficiency, (2)

the relatively modest concessions made by respondent at trial,

and (3) our holdings herein on the substantive issues for

decision, it would appear virtually certain that there are

substantial understatements of income tax for 1999 and 2000.

However, even if we were to leave that matter to the parties as

part of their computation for entry of decision under Rule 155,

we would hold that respondent satisfied his burden of production

by showing that petitioner failed to maintain complete and
 - 31 -

adequate books and records and to properly substantiate the items

in question. E.g., Kikalos v. Commissioner, T.C. Memo. 2004-82.

We also hold that petitioner failed to satisfy his burden of

proof by demonstrating that he acted with reasonable cause and in

good faith. In part, we are led to this conclusion by the fact

that petitioner represents himself to be an accountant having his

own accounting firm, Creative Accountants, which prepares tax

returns. As an accountant, petitioner knows, or should know,

that one cannot ignore the strict substantiation requirements of

section 274(d) or the more general recordkeeping requirements of

section 6001. As an accountant, petitioner also knows, or should

know that: A taxpayer cannot generally deduct the expenses of

another taxpayer; a taxpayer cannot deduct legal expenses if such

expenses are essentially personal in nature; head-of-household

filing status may not be claimed if the taxpayer does not

maintain as his home a household which constitutes for more than

half of the taxable year the principal place of abode, as a

member of such household, of a son of the taxpayer; and, for

purposes of the earned income credit, a taxpayer’s son is not a

“qualifying child” unless the son has the same principal place of

abode as the taxpayer for more than half of the taxable year.

In view of the foregoing, we hold for respondent on this

issue.
 - 32 -

G. Conclusion

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect our disposition of the disputed issues, as well

as respondent’s concessions, see supra note 2,

Decision will be

entered under Rule 155.