1 All 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, unless otherwise

indicated.

T.C. Memo. 1997-16

UNITED STATES TAX COURT

LESLIE S. HIRAHARA, Petitioner v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23603-94. Filed January 8, 1997.

Leslie S. Hirahara, pro se.

Jonathan J. Ono, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Judge: Respondent determined a deficiency in

petitioner's 1991 Federal income tax in the amount of $76,076,

and a penalty under section 6662(a)1 in the amount of $13,953.
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2 The parties' stipulation of facts and exhibits are

incorporated by this reference.

After concessions, the issues remaining for our

consideration are: (1) Whether petitioner is entitled to claim

an interest expense deduction for his sole proprietorship

activity reported on Schedule C of his 1991 Federal income tax

return; (2) whether petitioner is entitled to claim depreciation

for certain items purchased in 1991; (3) whether petitioner is

entitled to claim a deduction for travel expenses for 1991; (4)

whether petitioner is entitled to claim a deduction for legal and

professional services for 1991; (5) whether petitioner is

entitled to claim a deduction for rent paid in 1991; (6) whether

petitioner understated his capital gain on Schedule D of his 1991

Federal income tax return; (7) whether petitioner is entitled to

an increase in his itemized deductions for the 1991 taxable year;

and (8) whether petitioner is liable for an accuracy-related

penalty pursuant to section 6662(a) for the 1991 taxable year. 

FINDINGS OF FACT2

Petitioner, Leslie S. Hirahara, resided in Honolulu, Hawaii,

at the time the petition in this case was filed. He possesses a

master's degree in business administration in finance. 

Petitioner, at various times, has been engaged in multiple

business activities. These enterprises encompassed occupations

such as a general contractor, flight instructor, county
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commissioner, and realtor. For the year at issue, petitioner was

self-employed and performed business as "Les Hirahara Realty". 

He reported his income and expenses from this work as a sole

proprietorship on Schedule C of his 1991 Federal income tax

return.

With respect to his activities as a realtor, petitioner

reported income and claimed certain expenses on Schedule C of his

1991 Federal income tax return that, in turn, were adjusted by

respondent in her notice of deficiency:

Amount Amount Amount

Expenses Claimed Allowed Disallowed

Interest $36,051 -0- $36,051 

Depreciation 21,029 $12,142 8,887 

Travel 19,027 -0- 19,027 

Legal/professional 101,557 -0- 101,557 

Rent 10,365 -0- 10,365 

Petitioner claimed a deduction for depreciation on Schedule

C of his 1991 Federal income tax return related to the following

assets that were placed in service with petitioner's real estate

business in 1991:

Description Claimed Cost Claimed Depreciation

Equipment $31,620 $1,581 

Office equipment 1,061 265 

Computer equipment 5,511 1,929

Office equipment 1,800 450

Computer equipment 736 258

Office equipment 244 44

Computer equipment 5,214 1,304

Office furniture 475 85

Office equipment 1,110 119

Copier 3,849 192

Toyota van 23,709 2,660 

Total: 75,329 8,887

Respondent disallowed the $8,887 claimed depreciation deduction. 
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3 "Lis pendens" is a notice filed on public records for the

purpose of warning all persons that the title to certain property

is in litigation, and that they are in danger of being bound by

an adverse judgment. The notice is for the purpose of preserving

rights pending litigation. Black's Law Dictionary 932 (6th ed.

1990). 

In petitioner's Schedule D in his 1991 Federal income tax

return, he reported as short-term capital gain:

Date Date Sales Cost Gain

Item Acquired Sold Price or Basis (or Loss)

Land 7/01/90 1/19/91 $4,000,000 $3,175,000 $825,000

Subsequently, petitioner reported the capital gain under the

installment method by filing an amended return. 

In respondent's notice of deficiency, petitioner's election

of the installment method to report the capital gain recognized

on the sale of real property was not recognized. In addition,

respondent reduced the amount of gain reported from $825,000 to

$727,031. 

In connection with the sale of the above land, petitioner

became entangled in a lawsuit. Petitioner was a partner in a

partnership, Moomuku Country Club (Moomuku). The partnership

received $200,000 from a Japanese entity, Utsunomiya, in

connection with the same parcel of land. A dispute arose between

the parties regarding the purpose of Utsunomiya's $200,000

deposit. Utsunomiya filed suit, and also filed a "lis pendens"

on the property.3 Thereafter, in January 1991, Moomuku sold the

parcel of land to another Japanese entity, Japanese Grand Prix
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(JGP). JGP eventually intervened in the lawsuit between

Utsunomiya and Moomuku and filed a motion to expunge Utsunomiya's

"lis pendens" from the property. JGP also cross filed against

Moomuku and petitioner, alleging the "lis pendens" attached to

the land was contrary to promises, warranties and representations

made at the time of sale.

During the year at issue, petitioner was also engaged in

another lawsuit. This particular action was related to his

position as a general contractor. It appears that the second

lawsuit concerned an alleged breach of contract with respect to

petitioner's general contracting activity. 

In the process of defending himself, petitioner retained

various attorneys for representation in the lawsuits.

In addition to disallowing petitioner's claimed Schedule C

expense deduction for legal and professional fees in the amount

of $101,557, respondent, in the notice of deficiency,

recharacterized this expense as a miscellaneous itemized

deduction under Schedule A. Respondent determined that the legal

expenses were not incurred in connection with petitioner's trade

or business.

Respondent also determined that petitioner received payments

during 1991 related to the sale of stocks and bonds that were not

reflected as capital gains or losses in his 1991 return. 

Overall, respondent, in the statutory notice of deficiency,

determined that the expenses underlying the denied deductions
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were either personal in nature or inadequately substantiated.

At trial, in an attempt to substantiate his claimed

deductions, petitioner provided copies of canceled checks, drawn

on his personal account. Petitioner, however, failed to indicate

the precise nature of the expenses underlying many of the checks. 

Thus, it was necessary for this Court to examine individually and

question petitioner regarding the item purchased by each

particular check.

OPINION

1. Schedule C Deductions

The issue here is whether petitioner may properly claim the

deductions in question. Deductions are a matter of legislative

grace, and petitioner bears the burden of proving entitlement to

any claimed deductions. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). 

Generally, section 162(a) allows a deduction for "ordinary

and necessary" expenses incurred while carrying on a trade or

business. Respondent does not appear to question that

petitioner's real estate activities constitute a "trade or

business". Respondent, however, contends that petitioner has

failed to prove that the deductions claimed are "ordinary and

necessary" expenses arising from petitioner's real estate

activities. An ordinary and necessary expense is one which is

appropriate and helpful to the taxpayer's business and which

results from an activity which is a common and accepted practice. 
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Boser v. Commissioner, 77 T.C. 1124, 1132 (1981). In this

regard, a taxpayer must keep sufficient records to establish the

amount of the deductions or other matters required to be shown on

the taxpayer's return. See sec. 1.6001-1(a), Income Tax Regs.

In the event taxpayers establish that they have incurred

trade or business expenses, but are unable to substantiate the

precise amount of the expenses, we may estimate the amount of the

deductible expenses. Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930). However, we cannot estimate deductible expenses

unless the taxpayer presents evidence adequate to provide some

rational basis upon which estimates may be made. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).

A. Interest Expense Deduction

Petitioner claimed an interest expense deduction in the

amount of $36,051 on Schedule C of his 1991 Federal income tax

return. Respondent disallowed the claimed deduction in its

entirety. At trial, petitioner stated that the deduction is

composed of payments made by petitioner to a corporation and an

individual, respectively, in 1991: Nuuanu Streamside, Inc., and

Steven Hirahara. Petitioner provided documentation in the form

of two checks he issued to these payees.

On September 30, 1991, petitioner paid $185,000 through

business check No. 1926 to an entity denominated Nuuanu

Streamside, Inc. The check was from "Les Hirahara - Realtor". 

The memo portion of this check states that it is for the payment
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of principal and interest. The signature on the check is

illegible. Stamped on the face of petitioner's check is the

notation, dated October 2, 1991, that the check was returned due

to "Endorsement Irregular/ ENDORSEMENT MISSING".

On December 27, 1991, through business check No. 1983,

petitioner paid $1,000 to the order of Steven Hirahara. The

check was from "Les Hirahara - Realtor". The memo portion of

this check states that it is for the payment of interest. 

The evidence offered is insufficient to show petitioner's

entitlement to the interest deduction. The payment to Nuuanu

Streamside, Inc., was not made because the check was returned due

to an irregularity. The only evidence pertaining to the interest

deduction is petitioner's unsubstantiated testimony. He did not

proffer the testimony of a representative from Nuuanu Streamside,

Inc., nor his brother's testimony (Steven Hirahara) in an attempt

to corroborate petitioner's stated reasons for the payments. 

Moreover, petitioner did not document the purported loan

amounts, the amounts of interest payable, or the terms of

payment. The notations on the submitted checks are insufficient. 

Petitioner's failure to provide corroborative evidence presumably

in his control weighs against him. Tokarski v. Commissioner, 87

T.C. 74 (1986). 

Respondent is sustained on this issue. 

B. Depreciation Expense Deduction

Petitioner claimed a deduction for depreciation on Schedule

C of his 1991 income tax return with respect to assets that were
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placed in service in 1991. Respondent concedes petitioner’s cost

basis in some of the equipment, but contends that petitioner has

not demonstrated a nexus between the purchases and petitioner's

business use. 

Petitioner placed on the record certain checks he issued in

1991 to certain payees as follows: 

 Payee Amount Entry

Sears, Roebuck and Co. $1,800.00 Office equipment

Mr. Software 736.00 Office equipment

Shirokiya 244.14 Office phone

Mr. Software 4,572.00 Computer soft

Ushijima 475.00 [Blank]

Mr. Software 641.93 [Blank]

American Express 752.09 3728-126520-01007

University Copy

 Systems of Hawaii 3,849.08 Sales No. 0CSA08

Shirokiya 1,060.68 [Blank]

Sears, Roebuck and Co. 1,110.35 8-93667 73315 6

Thomason Toyota 23,038.50 Auto

Matson Navigation Co. 670.60 Shipment No. MNCHF4933 

Petitioner also supplied a price quotation issued by Pacific

Machinery to him on December 18, 1991. 

At trial, petitioner introduced canceled checks,

attributable to a variety of expenditures, related to his real

estate proprietorship. Many of these expenditures are business

related. Petitioner purchased software and computers in

connection with his real estate business from Mr. Software. He

utilized the computers for word processing and accounting

functions, as well as to call on a database of listings on

properties. Petitioner purchased a recording telephone with two

lines from Shirokiya for $244.14. He also acquired a fax machine

from University Copy Systems of Hawaii for $3,849.08. These

items were utilized in his real estate business office. Hence,
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we allow depreciation with respect to these particular items in

question. 

Petitioner purchased a Toyota Previa van for his company for

$23,038.50 from Thomason Toyota. He bought the van in Oregon. 

He also expended $670.60 to ship the van to Hawaii from the

mainland. Petitioner stated that the van was strictly utilized

for business purposes. Ultimately, however, petitioner did not

meet the standard required by section 274 to show the vehicle's

business usage. See sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). With respect to the

remaining expenditures, petitioner's testimony was vague and

self-serving. For example, according to petitioner's testimony,

and the canceled checks submitted for the record, he purchased

various pieces of office equipment in 1991. However, petitioner

has failed to substantiate the extent to which office equipment,

such as chairs from Ushijima, was used in his trade or business. 

Petitioner was also unable to recollect the reasons for the

amounts paid to Sears, Shirokiya, and American Express. As

petitioner has failed to specify the business purpose of these

particular expenses, we sustain respondent's determination

disallowing these deductions. 

C. Travel Expense Deduction

Petitioner claimed a travel expense deduction in the amount

of $19,027 on Schedule C of his 1991 Federal income tax return. 

Respondent disallowed this deduction in its entirety in the

statutory notice of deficiency.
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As noted, to be entitled to a deduction under section

162(a)(2), petitioner must prove the expenses were: (1) Ordinary

or "normal, usual or customary", Deputy v. du Pont 308 U.S. 488,

495 (1940); (2) were necessary or "appropriate and helpful",

Welch v. Helvering, 290 U.S. 111, 113 (1933); and (3) bore a

reasonable and proximate relationship to the trade or business of

the taxpayer, Kinney v. Commissioner, 66 T.C. 122, 126 (1976);

Keating v. Commissioner, T.C. Memo. 1995-101; Hosbein v.

Commissioner, T.C. Memo. 1985-373. In addition, under section

274(d), petitioner must substantiate with adequate records or by

sufficient evidence corroborating his statement: (i) The amount

of such expense, (ii) the time, (iii) place, and (iv) the

business purpose of the expense. Sec. 1.274-5(b)(2), Income Tax

Regs. It is not enough to establish one of the elements, for

example, that a particular trip was business related; rather, all

of the elements must be established. Sec. 274(d). The

requirements are not subject to our discretion and, hence, we are

unable to estimate a taxpayer's expenses because section 274(d)

is intended to supersede Cohan v. Commissioner, 39 F.2d 540(2d

Cir. 1930); Keating v. Commissioner, supra; Jeffers v.

Commissioner, T.C. Memo. 1986-285; sec. 1.274-5(a)(3), Income Tax

Regs. 

Petitioner testified that he traveled in connection with his

real estate business. Petitioner contends that he investigated

various golf courses for possible purchase. In that regard,

petitioner traveled several times a year. Petitioner was unable
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to independently corroborate his testimony. Petitioner proffered

canceled checks in connection with the travel expenses totaling

$18,475.86. However, checks alone do not meet the stringent

substantiation requirements of section 274(d). See also sec.

1.274-5(c)(2)(iii), Income Tax Regs. There were no receipts,

vouchers, itineraries, diaries, logs, and calendars made by

petitioner in connection with the alleged travel expenses. 

Moreover, petitioner was unable to demonstrate that the travel

expenses bore a reasonable and proximate relationship to the

trade or business of his real estate proprietorship. See sec.

162(a).

Accordingly, we sustain respondent's determinations with

respect to these travel expenses. 

D. Legal and Professional Service Expense Deduction

Petitioner claimed a deduction for legal and professional

expenses in the amount of $101,557.00 on Schedule C of his

Federal income tax return. Respondent disallowed the claimed

deduction on Schedule C and recharacterized it as a miscellaneous

itemized deduction under Schedule A. 

The record concerning the legal fees consists mostly of

photocopies of checks to various attorneys, as well as

petitioner's own summary sheet of the legal expenses incurred.

Petitioner estimated that $80,000 of the legal fees was expended

in connection with the lawsuit concerning the general contracting

activity.
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Petitioner’s failure to keep more accurate records or

produce more convincing evidence lessens the probative quality of

his contentions. Based on the record before us, we hold that

$25,000 of the legal expense may be claimed on Schedule C and the 

remainder on Schedule A.

E. Rental Expenses Deduction

 Respondent has conceded that petitioner is entitled to the

rental expense deduction in the amount of $10,365, claimed on the

Schedule C of his 1991 Federal income tax return. 

2. Schedule D Capital Gain Adjustments

On Schedule D of his 1991 Federal income tax return,

petitioner reported a short-term capital gain in the amount of

$825,000 in connection with the sale of real property. 

Subsequently, petitioner elected to report this gain under the

installment method by filing an amended return. Respondent, in

turn, adjusted petitioner's income tax liability to reflect the

installment sale. Respondent then disallowed petitioner's

installment method election and determined that the full amount

of the gain realized from the real property sale should be

recognized in 1991.

Additionally, respondent adjusted petitioner's Schedule D to

reflect unreported capital gains from the sale of stocks in the

amount of $39,393. Petitioner's return failed to incorporate

information with respect to the stock sales. At trial,

petitioner presented documentation substantiating his basis in

the stocks sold in 1991. Respondent conceded that, instead of
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$39,393 in capital gains, petitioner was entitled to a short-term

capital loss in the amount of $2,090.

With respect to the capital gains derived from the sale of

real property in 1991, respondent contends that petitioner

effectively elected out of the installment method by reporting

the full amount of his gain on his timely filed 1991 Federal

income tax return. Petitioner, on the other hand, argues that he

received payment after the close of the taxable year in which the

disposition of the real property occurred.

Petitioner evidently contends that $250,000 of the real

estate proceeds were deposited with the local courts in Hawaii

pending resolution of the Moomuku lawsuit. In that regard, he

was also forced to take a note for $600,000. This event caused

petitioner to file an amended tax return. On the other hand,

respondent argues that petitioner was liable for the full amount

originally reported in 1991. Petitioner presented no

documentation such as affidavits or receipts to demonstrate that

a portion of the proceeds was deposited with the local courts. 

He also did not present any evidence regarding the alleged note. 

His testimony on this particular subject was disjointed. There

was no testimony by other witnesses. Hence, petitioner has not

persuaded us that the proceeds were not under his dominion and

control.

Section 453 provides that income from an installment sale is

accounted for under the installment method. Bolton v.

Commissioner, 92 T.C. 303, 305 (1989). An installment sale is
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defined as a disposition of property where at least one payment

is to be received after the close of the taxable year in which

the disposition occurs. Sec. 453(b)(1). Income from an

installment sale is to be taken into account using the

installment method, unless a taxpayer elects not to have the

method apply. Sec. 453(a), (d). Generally, the election not to

report a disposition of property on the installment method is

made by the due date of the taxpayer's return for the year in

which the disposition occurs, and in the manner prescribed by the

appropriate tax forms for that return. See Bolton v.

Commissioner, supra; see also sec. 15A.453-1(d)(3), Temporary

Income Tax Regs., 46 Fed. Reg. 10718 (Feb. 4, 1981). 

Specifically, a taxpayer who reports an amount realized equal to

the selling price including the full face amount of any

installment obligation on the tax return filed for the taxable

year in which the installment sale occurs will be considered to

have made an effective election. Sec. 15A.453-1(d)(3)(i),

Temporary Income Tax Regs., supra. Generally such an election is

irrevocable and may only be revoked with respondent's permission. 

Sec. 15A.453-1(d)(4), Temporary Income Tax Regs., supra. 

Petitioner filed his 1991 Federal income tax return and

reported the full amount of the gain realized from the real

property sale. Petitioner has not shown that respondent

consented to a revocation of his effective election out of the

installment method. Accordingly, respondent is sustained on this

issue.
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3. Schedule A Itemized Deductions

Respondent concedes that petitioner's legal and professional

expenses incurred in connection with Moomuku and petitioner's

general contracting activity, to the extent not deductible on

Schedule C, are allowable as miscellaneous itemized deductions,

subject to a 2-percent adjusted gross income floor for 1991. As

discussed, petitioner's expenses are not fully allowable as

Schedule C deductions.

4. Accuracy-Related Penalty

The notice of deficiency contains a misstatement of the

penalty as section 6651(a)(1) for 1991. Respondent, in a attempt

to correct this error, asserted in the answer that petitioner is

liable for an accuracy-related penalty under section 6662(a). 

See Rule 36. Petitioner does not contend that the notice of

deficiency is invalid. Generally, an error on a notice of

deficiency does not render the notice defective. Campbell v.

Commissioner, 90 T.C. 110 (1988). We find petitioner is liable

for an accuracy-related penalty under section 6662(a) based on a

preponderance of the evidence in the record. Accordingly, any

debate about the burden of proof on this matter becomes academic. 

The accuracy-related penalty is equal to 20 percent of any

portion of an underpayment attributable to a taxpayer's

negligence or disregard of rules or regulations. Sec. 6662(a)

and (b)(1). The term "negligence" includes any failure to do

what a reasonable and ordinarily prudent person would do under

the same circumstances. Neely v. Commissioner, 85 T.C. 934, 947
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(1985). The term "disregard" includes any careless, reckless, or

intentional disregard. Sec. 6662(c). The penalty does not apply

to any portion of an underpayment for which there was reasonable

cause and with respect to which the taxpayer acted in good faith. 

Sec. 6664(c).

Petitioner testified that he is entitled to the deductions

in question; however, his position is not reasonable under the

circumstances. He failed to provide sufficient evidence

regarding a significant portion of his expenses. Petitioner did

not have adequate records and this required our review of each

expense incurred and canceled checks presented at the trial. 

To reflect the foregoing,

Decision will be entered

under Rule 155.