Carlos Franco, Petitioner

T .

. .Summary Opinion 2008-136

UNITED STATES TAX COUR T

C RLOS FRANCO, Petitioner v . COMMISSIONER OF INTERNAL-REVENUE , Responden t Docket No . 2646-06S . Filed-October 28, 2008 .

Carlos Franco, ro se .

Kevin W . Coy , f r respondent .

DEAN, Special Trial Judge : This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code i n effect when'the petiion was filed- . Pursuant to,section(cid:127)7463(b) , the decision to be entered is not reviewable by any other court, and this opinion sha 1 not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to`the Internal evenue Code in effect for the years i n

SERVED OCT 2 8 2008

2 - issue :, and all Rule references are to the Tax Court Rules of Practice and Procedure .

Respondent determined deficiencies of $2,307 and $3,855 in petitioner's 2001 and 2002 Federal income taxes, respectively .

Respondent concedes that petitioner has substantiate d additional' nontaxable deposits of $605 for 2001 consisting of :

(1) $213 for a Federal tax refund ; (2) $8 for a vehicle license fee rebate ; (3) $165 for gifts ; and (4) $219 for a Federal tax rebate .

The issues remaining for decision are whether petitioner :

(1) Understated his 2001 and 2002 gross receipts on Schedule C, Profit or .Loss From Business ; .(2) is entitled to claim Schedule C business expense deductions of $1,833 and $10,011 for 2001 and 2002, respectively, and (3) is entitled to greater allowances for itemized deductions than respondent determined for each year .

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

The stipulation of facts and the exhibits received into evidence are incorporated herein by reference . When petitioner filed .his petition, he resided in California .

Petitioner was self-employed during 2001 and 2002, operating a lawn care service . Petitioner filed Forms 1040, U .S .

Individual Income Tax Return, and Schedules C for each year that respondent examined . On his Schedules C petitioner reported Schedule C gross rece ipts of $19,100 and $39,933 for 2001 and 2002, respectively .

Respondent's revenue agent (RA), and his Appeals officer , (AO)` reconstructed petitioner's Schedule ,C gros s receipts for- .each yea rusing the bank deposits method .'

Thei r reconstructions include :

I t em 2001 200 2 Total deposits Taxable deposits Cash expenditur e come from depo nontaxable sou Adjusted Sch . C Understatement i receipt s For 2001 the P deposits of $16, Washington Mutua determined that $440 .into his Ba accounts, respe c did no t funds,or s :tha t site d rces gross receipts n Sch . C gross 1$16,292 215,053 1$39 , 9,41 8 233,57 8 16,72S 431,778 311, 52 0 945,098 .

512, 678 55, 16 5 A determined that petitioner had tota l 172 and $120 into his Bank of. America and l accounts, respectively . For 2002 the RA etitioner had total deposits of $38,978 and nk,of America and Washington Mutua l tively .

For 2001 .the, nontaxable depos for a loan payme $14, 933 and $120 Mutual accounts, total deposits :o and Washington M allowed , petition (1) $50 for 'a re refund ; (3) $1,7 from his total d of $36,247 and $ Mutual accounts, hearing , he prov identified .addit 2002 . . The 'AO a l AA allowed petitioner reductions for ' its of $239for returned checks and $1,000 nt received, determining taxable deposits of into his Bank of America and Washington ,respectively . For 2002 the'-.RA determined f $38,978 and-$440 into his Bank, of America utual accounts,"respectively . The RA er reductions for nontaxable deposits of : turned check ; (2) $981 for a Federal tax 00 for loan payments received ;, and (4) $5 eposits . The RA determined taxable deposit s 435 into his Bank of America and Washington respectively . At pet.itioner's Appeals ided a "register tape" to the AO in which he ional nontaxable deposits of $3,104 for lowed petitioner an additional $3,10 4 'Figures have be n rounded to the'nearest dollar .

'reduction from the $36,247 in taxable deposits with respect to the Bank of America account . The AO determined that petitioner had total taxable deposits of $33,578 for 2002 .

4 $15,053 (2001 taxable deposits) + $16,725 (2001 cash expenditures) = $31,788 . $33,578 (2002 taxable . deposits) + $11,520 (2002 cash expenditures) = 45,098 .

5 . $31,778 (2001 adjusted Schedule C gross receipts) - $19,100 (2002 ScheduleC gross receipts petitioner reported) _ $12,678 . $45,098 (2002 adjusted Schedule C gross receipts) - $39,933 (2002 Schedule C gross receipts petitioner reported) = $5,165 .

Petitioner's reported Schedule C expense deductions and respondent's allowances therefor include :

Item Per return 2001 2002 Responden t allowe d 2001 200 2 Depreciation Special depreciation Sec . 179 expenses Legal & profl . se'tvs . Taxes & licenses Other expenses : Safety boots Fuel "MISCi¹ "Telephone" "SCE" Vehicle tags AAA club Deduction for bus .

3,310 .

1,380 1,800 $8,268 10,63.1 6,769 1,409 3,500 3,310 1,186 -0 366' 2-0- $3,72 2 7,97 6 6,30 4 22 5 8 9 34 0 1,40 9 29 1 2-0 - 5 5 7 1 use of. home 2416 2434 Vehicle ins . 654 11,671 'According to the RA, "[Petitioner said "MISC"] was an estimate of expenses he forgot to deduct elsewhere ."

Z'Respondent represents that "SCE" is a "utility" and that the RA allowed 6 perc of-petitioner's d for 2001 and 2002 deduction for the his Schedules C ., , 3The AO . determine vehicle(s) .

nt of the "SCE" expenses in the calculation ductio.ns'for the business use of his hom e even though petitioner did not claim a .

business use,of his home for either year o n 90-percent- busines.s-use of-peti-tioner' s The $31,778 in a Ijusted 2001 Schedule C gross,receipts les s $6,321 in allowed Sch Odule C expense deductions generated a $25,457 . net profit fo r 2001 rather than the $11,362 net profi t that petitioner repor .ed . The $45,098 in adjusted 2002 Schedule C gross receipts less $22,587 in allowed Schedule C expens e deductions generated 4'-$22,511 net profit for 2002 rather tha n the $7,769 net profi t that petitioner reported .

Other pertinent tems reported by petitioner and respondent's adjustme is thereto include :

Ite m Per Return 2001 ., Respondent's 2 .002 Adjustment s 2002 2001 .

.Self-emp . tax ' Deduction for self -emp .

$1,605 $3,597 $1,098 $3,18 1 tax ' -Form 1040 taxable Form 10,40 : "total t Form 1040 interest 803 549 1,59 1 ncome -6, 624 393 8?, 704 14, 093 x 2,518 1,137 4,825 . 4,99 2 income 22 ., 34 6 .1, 799 51,089 'The adjustments t deductions therefo consistent with t h petitioner's self-employment taxes and his are computational and are resolve d Court 's decision .

2Petitioner recei v reported the amoun Interest and Ordin the amount and inc gross -receipts . F d $2,743 from "Santoro Limited" .an d as interest income on his-Schedule B , ry Dividends, for 2001 . Respondent removed uded it in petitioner's 2001 Schedule C r 2002 respondent did not adjust the $1,5-01 that petitioner received from "Santoro Limited" and reported as' interest income . Petitioner originally argued that the bank deposits analysis was incorrect because $2,743 was included twice ; i .e' .,' in interest income and in his 2001 Schedule C gross receipts, but he abandoned this claim .

(Although petitioner did not elect to itemize his'deduction s for either year, respondent allowed petitioner $12,826 in "Schedule A itemized deductions" for 2001 instead of the lesser $4,550 standard deduction . The 2001 "Schedule A itemized deductions" consist of $1,867 for real estate taxes and $10,959 for charitable contributions . No adjustments were made to petitioner's $4,700 standard deduction for 2002 or to his "Self- employed health insurance" deductions, which he reported as $1,574 and $1,991 for 2001 and 2002, respectively .

I .

Burden of .Proo f Discussio n The Commissioner's determinations in a notice of deficienc y are presumed correct, and the taxpayer has the burden to prove that~the determinations are in error . Rule 142(a) ;' Welch v .

Helvering, 290 U .S . 111, 115 (1933) . But the burden of proof on factual issues that affect a taxpayer's tax liability may be shifted to the Commissioner if the taxpayer introduces credible evidence with respect to the, issue . See sec . 7491(a)(1) .

Petitioner has not alleged or proven that section 7491(a) applies ; therefore, the burden remains on him .

II :

. Petitioner's Sch edule C Gross' .Receipt s 7 - A- taxpayer is r e quired .to maintain sufficient records to allow . for the 'determi nation of his or her correct tax liability .

Sec . 6001 ; Petzoldt M . Commissioner , .92 T .C . 661, 686 (1989) . If.

a taxpayer fails to r aintain or does not produce adequate books and records, the 'Comm issioner is authorized to,reconstruct_th e taxpayer" s income, an d the reconstruction need only be reasonable in view of all the su rrounding facts-and circumstances . See sec .

446 ; Petzoldt v . Comnis sT Toner , supra at 686-687 ; Giddio v .

Commissioner , . 54,T C .

1530, 1.533 (2970) .'

Indirect-methods, .;such' as the bank deposits ethod, may be used .,for such purposes .

Holland v . United -States ,, 34,8 U .S . 121 (1954) ., The bank deposit s method of determining .income assumes that all money deposited i to .a taxpayer' .s bank accounts during a specific period const itutes gross income ., Price v . United States , 3 35 F .2d 671, .677 (5th . -Cir 1964) ; see .also Tokarski v .

Commissioner , 87 T'. C .

74, 77 (1986) (bank deposits constitut e prima facie evidenc e of income) . .But the Commissioner must take .

into account any nont axablesource or deductible expense of whic h he has knowledge . Price'v . United States , supra at 677 . Under the bank deposits method-: (1) Bank deposits are totaled ; (2) nonincome deposits, redeposits, or transfers are eliminated ; (3) an excess of dep o sits, as adjusted, over reported income is considered unreported .income ; (4) cash expenditures that did not come from deposited funds or nontaxable sources are added to unreported income ; and (5) deductible expenses not accounted for in the taxpayer's return are allowed .

Bacon v . Commissioner , T .C .-Memo . 2000-257, . . affd . without published opinion 275 F .3d 33 (3d Cir . 2001) .

;Petitioner told the RA tha-t he never deposited cash received in his lawn services business, only checks . Petitioner also told .the RA that he calculated his Schedule C gross receipts by adding his bank deposits to his "1099-misc [income]" . As noted by the RA, however, the $40,9 .14 sum² does not match petitioner' s reported $39,933 in Schedule C gross receipts for 2002 .

According to the RA, "he states that he forgot to report the cas h -received due to his medical condition [i .e ., hearing and vision problems, and it was] not fraud because he did not intend t o underreport his income . " The evidence shows that petitioner failed to provide adequate books and records to account for his Schedule C gross receipts . In addition, petitioner admitted to the RA that he did not report . all of his income . Therefore, the Court finds that respondent's use of an indirect method to reconstruct petitioner's Schedule C gross receipts was reasonable .

2$39,413 (total deposits)\.+ $1,501 ("1099-misc [income]") _ $40,'914 .- .

At trial petitio ier conceded; Schedule C gross receipts of $31,173 and cash expe ditures of $16, 725 for 2001 . After the parties' concessions, the parties limited their arguments to th e disputed issues with respect to the 2002 bank deposits analysis .

The Court addresses t ese arguments in turn .

Although petitio er also conceded that'he paid expenses of $16,520 in cash durin g 2002, he argues that the 2002 bank deposits analysis is incorrect because his bank deposits totaled $34,739 while he repo rted .$39,933 in Schedule C gross receipts .

.

Thus, the "$5,193 [si c]" difference represents cash he received, and reported . Theref ore, the $16,520 of undeposited-cas h expenditures that the IRS determined "never existed but rather $11,327 [sic] only ."

And after reducing the $11,327 figure by petitioner's $5,000 c ash hoard, then only "$6,137 . [sic]" remains in dispute as undepo s ited-cash expenditures for-2002 .

Respondent "conte ids that petitioner had additional amounts of undeposited-cash e penditures above the "$5,193 [sic]" figure .

"All undeposited cash includes that amount . We're not saying h e didn't report it, " Although petitio er told the RA that he never deposited cash received in his lawn services business, at trial h e inconsistently assert d that he made deposits into his ban k accounts "Through the ks and cash money" .f In addition, neither petitioner's testimon nor his 2002 bank statements establish the source of the $5,1943 in cash that he received and allegedly reported as gross income ; i .e ., whether it consists of deposited amounts, nontaxable sources, or undeposited cash . Therefore, petitioner has not proven that he is entitled to a $5,19 4 reduction from the $11,250 in undeposited-cash expenditures .'- 'Petitioner next argues that the $11,250 in undeposited-cash expenditures for 2002 should be reduced to account for the $12,793 in checks that he cashed between 1984 and 1992 and allegedly placed into a-shoe_box hidden on a shelf above the washing machine in his garage . The funds were his "personal money that [he earned and paid taxes on] at one time" .

Respondent contends that the funds "are current earnings from his lawn care business . " 'Petitioner testified that he was a "survivalist" who had saved $10 to $20 a week since he started working, and since he "hadn't used it in 25 years, [he decided to use it in 2002, and he told his customers that he would not accept cash . during 2002]" . Petitioner also testified that he did not know how much cash he had on hand for 2002 because it was not'relevant to him .

'This figure represents the correct amounted ($39,933 (reported Schedule C gross receipts) - $34,739 (total bank deposits)) .

II 9The $5,194 .for which petitioner asserts that he should get a reduction from his undeposited-cash expenditures has been taken into account in the computation of the understatement . See supra p . 4'table note 5 .

- 1 1 During th'e (cid:127)init i 1 interview on December 10, 2003 , petitioner told th e that he had between $35 and $4.0 .in cash o n hand for 2002 . Acco'r ing to the RA, .petitioner changed his .story later that . day, clai m ng, that he had between $3,0 :00 .and ~$5, 000 i n cash . on hand and . tha t he had $1,500 in cash'on .hand-by the end of 2002 . At their nex t eeting,°on February 19, 2004, petitione r claimed that,he defin tely had .$5,000 on hand at-the, beginning o f 2002 . Petitioner kne he had $5,000 . because he always had that, ' amount and "he , didn' t takeany .money out of his cash-hoard" .

.

during .2001 but "thi time , he stated [that .he. .did not have an y money on hand at th e nd of 2002]" according tot,he RA .

Petitioner also' old the .RA that nobody: knows about his cash hoard because "he [1 i ed] alone and had, no personal life .

'.'

~ .At .

trial,-respondent as k d :petitioner whether he showed his cash- hoard to anybody and, nether anybody else knew about it .

Petitioner . replied :

no, no .

Of course not . . " Petitioner, howe er, called a witness, Mr .

..Walton,, .,t o corroborate his cash board : Mr . Walton . testified that he .knew , that,-petitioner had a shoe . box, that petitioner "might make a withdrawal from'his a count and he' never take . .it and .. turn it back in the bank . He'll p t itin his shoe box ." Mr . Walton, .'

testified .that(cid:127)he kne this because {he- ., had seen petitioner 'put .

money in the shoe box and it contained "Quite a bit of~money .

12 - Just like * * * over $20,000 . Because he bought a truck out of the shoe box . " But when questioned by the Court., Mr . Walton testified that :

(1) He did not go with petitioner to purchase . the truck ; (2) he knew the purchase money came from the shoe box because petitioner did not go to the bank for it, but he did not see petitioner tak e f the purchase money out of the shoe box ; (3) he knew tha t petitioner got the purchase money out of the shoe box "Because [petitioner] told me he did" ; (4) he knew that the shoe box was in the garage "because [petitioner] had told [him about it]" ; and I(5) he had never seen the contents of the shoe box .

The Court accords little probative weight to, and views with suspicion, the testimony of Mr . Walton, petitioner's only corroborating witness . Mr . Walton's testimony was based on hearsay from petitioner . Even if the Court had determined-that Mr .' Walton's testimony was credible, his testimony would not support petitioner's inconsistent statements as to the amounts of his 'cash hoard, nor could his testimony show that the $11,250 .in undeposited-cash expenditures should be reduced by the $12,793 in checks that petitioner cashed .between 1984 and 1 .992 and allegedly did not spend until 2002 .

Petitioner's testimony that he kept a cash hoard well ove r the) $11,250 in undeposited-cash expenditures in a shoe-box ove r his washing machine for 20 some years until he decided to spend 13 - it in 2002 is at . best self-serving . See Parks v . Commissioner ,

.(1) $12,(cid:127)793 (checks cashed between 1984 .

and 1992) ; (2) $35 to $40 ; (3) $1,500 ; 'and '(4)-$3,000 to -$5, 000 .

Simply puti petitione ' .s` .cash hoard assertion is riddled with inconsistencies and implausibilities- and has not been supported by objective evidence in the record . See.

Parks v . Commissioner , supra at 659 ; Boone v . Co mm issioner, T .C :° Memo . 19,97-471, affd . ., without published op ion 208 .F .3d 212 (6th Cir, . 2000) ; Phillips V . Commissioner ; T .C . Memo . 1984-133 ; In re Kelesyan ,-153 .Bankr .!

927, 929-9 .30 (Bankr .

:D . Fla-1993) .

On the basis of he foregoing, respondent's .-determinations of $1 .6,725 and $11,2'5 in undeposited-cash expenditures for .,2001 and 2002, respectivel , are sustained . Respondent' s determinations of $31 173 and $45,098 .;.of Schedule .C gross, receipts for 2001 and 2002, respectively, are sustained . Insofar 5Asid-e from the' Bank of ^America .and Washington ..,Mutual accounts,-. petitioner . also held four certificates of deposit worth $47,320 .79 as of Dec' . 31, 2001 . Petitioner owned six . certificates of''depos't worth $63,148 .56 as of Jan . 3, 2003 .

as understatements to petitioner's, Schedule C gross receipts for 2001 and 2002 are proposed, respondent's determinations are sustained . '

III .

Petitioner's Schedule C Expense Deduction s The 2001 Schedule C . expense deduction in dispute is the $1,833 of the claimed $4,259 in other expenses that respondent disallowed . Although the AO allowed petitioner a $654 expense deduction for vehicle insurance for 2001, respondent argues that the $1,833 figure consists of $194 for fuel, $493 for "SCE", and $1,800 for "MISC" . It is unclear from the record whether respondent allowed the $65 .4 expense deduction as a separate item within the other expenses category or whether it offsets the $1,800 "MISC" expense for 2001 (i .e ., only $1,146 of,the "MISC" expense remains in-dispute) .

The 2002 Schedule C expense deductions in dispute are th e $2,345 of the claimed $6,182 in other expenses and $7,666 of the claimed $25,.668 in section 179 expenses and depreciatio n deductions that respondent disallowed . Although the AO allowed petitioner a $1,671 expense deduction for vehicle insurance for 2 .002, respondent alleges that the $2,345 figure consists of $51 6 6Respondent determined understatements of $12,678 and $5,165 forj2001 and 2002, respectively . After taking into account the parties' concessions and the Court's allowances for Schedule C expense deductions, infra , the understatements in petitioner's- Schedule C gross receipts are $11,906 .40 and $4,980 .50 for 2001 and 2002, respectively .

for "SCE" and $3,500 or "MISC" . It'is unclear from the record whether respondent al owed the $1,671 expense deduction as a , separate item withi n e other expenses category or whether i t offsets the $3,500 " M SC" expense for 2002 (i .e ., only $1,829 of the "MISC" expense re ains in dispute) . The $7,666 figur e consists ofd' (1) $46 of the section 179 expense deduction ; (2) $2,655 of the special depreciation allowance ; and .(3) '$4,546 o f the depreciation ded u tion .

Petitioner asser ed that he had "proved them., and they're in [my exhibits, which I showed . to the IRS]" .

Petitioner tol d he RA that he had paid for the fuel in cash . There is no ev dence in the record substantiating payments of $194 for fuel in 2 01 .` Respondent's disallowance of the .$19 4 fuel expense deductio for 2001 is sustained . See` INDOPCO, Inc .

v . Commissioner , 50 3 S . 79, 84 (1992) .

With- respect to e'$1,800 and $3,500 deductions for "MIS C expenses for 2001 an d 2002, respectively, petitioner has provided receipts substanti,ati g payments of $46 to the franchise ta x board for, 2001, $99 f r a permit for 2002, which bears a n .undecipherable notati $175 .50 for a building permit an d landscaping business icense for 2002, and vehicle expenses of :

(1) $71 for "AAA Ren e al"for .2001 ; (2) $63 for "DMV Renewal" fo r 2001 ; (3) $10 to the City of Moreno Valley" for vehicle tags for 16 - 2002 ; and (4 ) $ 727 .20 and $1,856 . 60 to Nationwide for automobile insurance for 2001 and 2002, respectively . .

The Court finds that petitioner is entitled to deduct the $46 that he paid to the franchise tax board in 2001 and the $175 .50 for the building permit and landscaping business license in 2002 . See secs . 162, 164 ; see also Cunningham v .

Commissioner , T .C . Memo . 1989 - 260 (and cases cited therein) .

Petitioner has not proven that the $99 permit for 2002, whic h bears the undecipherable notation, qualifies as an ordinary an d necessary business expense and that is it not a nondeductibl e personal expense . See secs . 162, 262 . Thus, he is not entitle d to adeduction for that permit . The AO allowed petitione r deductions of $654 and $1,671 for vehicle insurance based upon a 90-percent business use .' Petitioner has not established that he is e'ntit.led to a greater business use percentage or that he is entitled to allowances for insurance greater than $654 and $1,671 for'2001 and 2002, respectively . Because the AO allowed petitioner a business use percentage of 90 percent, the Court will also allow petitioner 90 percent of his vehicle expense s for :

(1) $63 .90 for "AAA Renewal" for 2001 ; (2) $56 .70 for "DM V Renewal" for 2001 ; and (3) $9 for the "City of Moreno Valley " vehicle tags for 2002 . Compare Cohan v . Commissioner , 39 F .2 d 7The RA determined business use percentages of 72 and 90 percent for petitioner's Ford and Toyota trucks, respectively .

-- 1' 7 540, 5 .43-544 (2d Cir' .

193 .0)-, . with Sanford v-. Commissioner, 50 T .C . 823, 827 (1968) (pursuant- to' section-_,'274 (d) , the -Cour t cannot estimate expen es with respect to -certain 'items)', affd .

per .curiam 4,12',F .2 .d 01, (2d Cir .'P1969) .

There is no evid nce in the record substantiating payments of $465 for tools in 2002 .4 Therefore, t h.e .Court finds that petitioner is not ent itled= to an allowance,_great .er than the $6,304 that the RA al 1-owed as' section 179 .expenses `for 200 2 Petitioner also has"n of proven any infirmity ".,with respect to respondent's determin ati .ons disallowing'$2,655,-of petitioner's special. depreciation deduction,and $4,546 of-his depreciation deduction .

. . According ly , respondent's determinations .ar e sustained ."

' Petitioner submi tted canceled checks substantiating telephone payments-of " .$361 .90 'and $71 .65 for 2Q⁰¹ and 2002,-° respectively .` It is' unclear from the record-whet.he.r respondent has-already given,.pet itioner allowances--for these items or that i the items qualify as deductible . business expenses . See sec .

262(b) (charges . for asic telephone service for the "1st .- telephone line" at t e taxpayer'_s residence are treated as a nondeductible person l expense ) see_also secs . 274 ;(d), 280F(d) (4) (A)f:(v) (re uiring .strict-substantiation of cell phone .!

expenses) . According ly, petitioner is not entitled to allowances greater than the $366 and $291 for "Telephone" that respondent allowed for 2001 and 2002, respectively .

Petitioner submitted canceled checks substantiating :

(1) $328 and $341 for "Earthquake" insurance for 2001 and 2002 , respectively ; (2) $651 and $808 for "Home" insurance policies for 2001 and 2002, . respectively ; and (3) $696 for his homeowners' association fees for each year . Respondent allowed $29 .58 and $30 .96 of the "SCE" expense for 2001 and 2002, respectively .

r Respondent also allowed a $216 depreciation deduction, for petitioner's home in the computation of the deduction for th e business use of his home for each year . Petitioner has failed to establish that respondent erred in disallowing the claimed "SCE" expense with respect to petitioner's Schedule C and treating it as an expense for the business use of his home or that he i s entitled .to an allowance greater than 6 percent of .the item . ' Petitioner also has not established that he is entitled to deductions for the business use of his home greater than the $416 and $434 allowances that respondent determined for .2001 and 2002 , respectively . Respondent's determinations are sustained .

IV .

Petitioner's Itemized Deduction s 'Respondent allowed petitioner itemized deductions of $12,826 for 2001 consisting of $1,867 for real estate .taxes and $10,95 9 'Petitioner told the RA that he paid "SCE" in cash ; thus ; he has not substantiated any payments to "SCE" for either year .

19 - for charitable, contribution's' .- Respondent allowed petitioner th e $4,700'standard deduction for,2002 .

Petitioner-has-submitted canceled checks or receipts substantiating :- (1) : $1,869 .96 and $1,969 .54 for real estate taxes for 20011 and 2 ;002, respectively ; (2) $291 .and $264-for charitable contributi ns for 2001and .2002,'respectively ; (3) $2,448 and $3,110 for health insurance premiums for 2001 and 2002, respectively ; a d°'(4) medical'/dental expenses of,$56 .69 fo r 2001 .

Self-employed in ividuals may deduct 60 percent and 70- percent of their heal--h insurance premiums for .2001 and 2002, respectively, and may deduct the excess thereof pursuant to< section 213 . . Sec . 16 (1)'(1), (3) . Petitioner claimed,self- employed health'insur nce :deductions of $1, .574'and $1,991 for 2001 and 2002,-respec ively . Respondent has made no adjustment to petitioner's claim d $1,574 self-employed health insuranc e deduction for 2001, a though it should have been limited to' $1,468 .80 (60 percent of $2,448) Petitioner has not proven tha t he is entitled to an4mount greater than the $1,57 .4 tha t respondent allowed as a self-employed .health insur`ance'deduction ' for 2001, but he may . educt the $8 .749 excess in .the amoun t allowed by section 21 . Petitioner's self=employed healt h .92001 subatantiat d health insurance premium payments of .

$2,448 less the $1,57 self-employed health insuranc-e deduction that respondent allow d .

20 - insurance deduction for 2002 is limited to $2,177 (70 percent of $3,110,) . Because petitioner only deducted $1,991, he, is entitled to deduct an additional $186 as a self-employed health insurance deduction for 2002 . . In addition, petitioner may deduct th e $99310 excess in the amount allowed by section 213 . See secs .

63(e)'(1), 162(1)(3) . In the end, however, petitioner is not entitled to deduct his section 213 medical expenses for either year because the amounts do not exceed the 7 .5-percent floor of section 213(a) and he did not elect to itemize his deductions .

See sec . 63 (e) (1) 1 1 The RA allowed $10,718 as noncash contributions for 2001 based upon "cash receipts from grocery stores and .so forth" . The AO, however ; allowed charitable contributions of $10,959 .

Petitioner's exhibit indicates that of the $291 in cancele d checks that he submitted into evidence respondent has alread y 102002 substantiated health insurance premium payments of $3,110 less the allowable $2,177 self-employed health insurance deduction .

"The sum of petitioner's sec . 213 medical expenses for 2001 .is $930 .69 ($874 (excess health insurance premiums) + $56 .69 (substantiated medical/dental expenses)) . Taking into account respondent's adjustments and the Court's findings, petitioner's adjusted gross income (AGI) for 2001 is $23,713 .43 . To exceed the 7 .5-percent floor of sec . 213, petitioner's medical/dental. expenses must exceed $1,778 .51 for 2001 .

.

The sum of petitioner's sec . 213 medical expenses for 2002 is $993 (excess health insurance premiums) . Taking into account respondent's adjustments and the Court's findings, petitioner's AGI for 2002 is $21,496 .18 . To exceed the 7 .5-percent floor of sec . 213, petitioner's medical/dental expenses must excee d $1,612 .21 for 2002 .

2 1 given petitioner an allowance of $241 . The Court will allow petitioner an additional $50 deducti .on .as a charitable contribution for . 2001- See Cohan v . Commissioner , 39-F .2d at 543-544 . The Court will also allow petitioner a $1,869 .96, deduction for real estate taxes for 2001 rather than the $1,867 figure that responden .allowed .

.

Petitioner did not elect to itemize his deductions .for 2002, and the $2 .,233 . :54 sum¹² does not exceed the $4,700 standard .deduction for 2002 . See sec . 63 . Respondent's determination i s sustained .

To reflect the f regoin,g, .

I Decision will be entered unde r Rule 155 .

12$1,969 .54 (real estate taxes) + $264 (charitable contributions) = $2,23 .54 .-

APPENDI X

The figures in this appendix are for illustrative purposes only . . Computations in accordance with Rule 155 will be necessary . The figures take into account respondent' s determinations, the parties ' allowances .

concessions, and the Court' s Sch . C deductions 2001 .

Safety boots Fuel Telephone Franchise tax bd . Licenses or permits Vehicle ins . AAA Vehicle tags/DMV Deduction for bus .

use of home Legal & profl . servs . Tax & licenses Depreciation & sec .

$220 .00 1,186 .00 366 .00 46 .0 0 654 .00 63 .90 56 .70 416 .00 169 .00 200 2 $340 .00 1,409 .0 0 291 .0 0 175 .5 0 1, 671 .0 0 71 .0 0 64 .0 0 434 .0 0 225 .0 0 89 .0 0 179 expenses Total 3,310 .00 6,4 .87 .60 18,002 . .0 0 22,771 .5 0 Sch . C profit/loss 200 1 2.00 2 Gross receipts Deduction s Net profi t $31,173 .00 -6,487 .60 24,685 .4 0 $45,098 .00 -22,771 .5 0 22,326 .5 0 Self-emp . tax comp .

200 1 200 2 Net profit sch . C Net earnings Self-emp . tax Self-emp . ta x deduction $24,685 .40 x 192 .35 % 22,796 .97 x 215 .300 3,487 .9 4 x 350 .00 % $22,326 .50 x 192 .35 0 20,618 .52 x 215 .300 3,154 .6 4 x 350 .00 % 1,743 .97 1,577 .32 - 2 3 Form 1040 ite ms 2001 200 2 Taxable interest Bus . income Self-emp . Self-emp . ins . d eduction AGI . tax de duction $ 2,346 .00 24,685 .40 -1,743 .97 -1,574 .00 23,713 .43 $2,864 .0 0 22,326 .5 0 -1, 577 .3 2 -2,117 .0 0 21,496 .1 8

a

s See sec . 164'(f) (which allows as a deduction one-half of the self-employm nt taxes) .

1. See secs . 1401(a) and (b), 1402(a)(12) (which allows . as deduction one-ha--f of the self-employment tax rate ; thus, 92 .35 percent of the Schedule C net profit is subject to self-employment ax) .
2. See sec . 1401(a) and (b) (the rate of tax imposed upon self-employment ncome is the sum of 12 .4 and 2 .9 percent .)
3. The. RA determined cash expenditures of $16,520 . The-AO reduced the $16,520 figure by the $5,000 cash hoard that petitioner at that time claimed he had on hand for use in 2002 . The AO determined cash expenditures of $11,520 .
94. T C . 654, - 659' (1991) The Court also finds improbable petitioner's claim that while he cashed $12,793 in checks between 1984 and 4992, he did not spend the', money, and he kept . it in a shoe box for use in-2 02, despite maintainingvarious certificates of deposit and bank accounts .5 In addition, petitioner has-inconsistently claimed that-he had .cash,on hand for 2002 consisting o :