1 Consolidated herewith are the following cases: Miriam

Villarreal, docket No. 20658-97, and Juan Villarreal, docket No.

20659-97. 

2 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

(continued...)

T.C. Memo. 1998-420

UNITED STATES TAX COURT

JUAN M. AND MIRIAM J. VILLARREAL, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10897-97, 20658-97, Filed November 19, 1998. 

 20659-97.

Lorenzo Wilson Tijerina, for petitioners.

Franklin R. Hise, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOLDBERG, Special Trial Judge: These consolidated cases

were heard pursuant to the provisions of section 7443A and Rules

180, 181, and 182.2 In docket No. 10897-97, respondent
- 2 -

2(...continued)

all Rule references are to the Tax Court Rules of Practice and

Procedure.

3 Petitioners reported a $10,000 capital gain on Schedule D of

Form 1040 for the 1994 tax year, but failed to carry that amount

over to line 13 of their 1994 tax return. Though petitioners

initially contended that the $10,000 amount was a tax-free return

of capital, petitioners now concede that the $10,000 amount

should be treated as long-term capital gain for the 1994 tax

year. 

determined a deficiency in petitioners' joint Federal income tax

for the 1994 tax year in the amount of $6,007. In separate

notices of deficiency mailed to petitioners Juan M. Villarreal

and Miriam J. Villarreal, respondent determined that each of them

is liable for a deficiency and addition to tax under section

6651(a)(1) for the 1995 tax year in the amounts of $4,695 and

$1,173.75, respectively.

Petitioner Juan M. Villarreal filed a petition for

redetermination for the 1995 taxable year at docket No. 20659-97

and petitioner Miriam J. Villarreal filed a petition for

redetermination for the 1995 taxable year at docket No. 20658-97. 

Petitioners are husband and wife. References to petitioner are

to Juan M. Villarreal and references to petitioner wife are to

Miriam J. Villarreal.

After concessions,3 the issues for decision are: (1)

Whether petitioners are entitled to claim Schedule C expense

deductions in the amount of $22,400 for the 1994 year; (2)

whether each petitioner failed to report his or her separate
- 3 -

share of taxable community property income for the 1995 taxable

year and the correct amount of such income; (3) whether each

petitioner is liable for self-employment tax for the 1995 tax

year; and (4) whether each petitioner is liable for the addition

to tax under section 6651(a)(1) for failure to timely file a

Federal income tax return for the 1995 tax year.

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioners resided in San Antonio, Texas.

FINDINGS OF FACT

In 1994, petitioner worked for Alamo Body and Paint (Alamo)

in San Antonio. In late 1994, petitioner quit his job at Alamo

and decided to open a restaurant called Villa Cabana. 

Petitioners signed a 3-year lease for commercial space in

San Antonio, bought equipment, and stocked the restaurant with

food and supplies. Petitioners also attended courses in food

handling and arranged for business and health department

licensing. After some initial difficulty with a natural gas

leak, Villa Cabana opened for business on December 23, 1994. 

Beginning in 1995, petitioners hired additional people to

work in the restaurant, but the record is not clear as to the

type of work performed by the additional help. Petitioner worked

as the restaurant cook and petitioner wife waited tables.

Petitioner also purchased supplies for the restaurant. 
- 4 -

Petitioners operated the restaurant until their lease expired in

1997.

The law and accounting firm of Lorenzo Wilson Tijerina (Mr.

Tijerina) maintained Villa Cabana's financial records and

prepared petitioners' 1994 Federal income tax return. Mr.

Tijerina's firm kept Villa Cabana's financial records and

canceled checks for the 1994 and 1995 tax years, but misplaced

the canceled checks during an office move. Mr. Tijerina's firm

was unable to locate the canceled checks in time for trial. 

In the notice of deficiency for the 1994 tax year,

respondent disallowed petitioners' claimed Schedule C business

expense deductions in the amount of $22,400. Petitioners did not

file a 1995 Federal income tax return. Accordingly, in separate

notices of deficiency, respondent determined, using Bureau of

Labor Statistics (BLS) data, that petitioners, who resided in a

community property State, were each taxable on income of $19,775,

as well as community property interest income of $55 for the 1995

tax year which they failed to report.

At trial, petitioner conceded that they earned gross income

in the amount of $83,083.90 from the operation of the Villa

Cabana restaurant in the 1995 tax year. 

OPINION 

1. Schedule C Expense Deductions for the 1994 Tax Year

Section 162(a) allows a taxpayer to deduct "all the ordinary

and necessary expenses paid or incurred * * * in carrying on any
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trade or business". Deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving that he is

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

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

Taxpayers must substantiate any deductions claimed and bear

the burden of substantiation. Hradesky v. Commissioner, 65 T.C.

87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). 

Taxpayers are required to maintain adequate records sufficient to

enable the Commissioner to determine the taxpayer's correct tax

liability. Sec. 6001; Meneguzzo v. Commissioner, 43 T.C. 824,

831-832 (1965); sec. 1.6001-1(a), Income Tax Regs. 

A taxpayer's inability to produce records does not relieve

the taxpayer of the burden of proof. See Estate of Mason v.

Commissioner, 64 T.C. 651 (1975), affd. 566 F.2d 2 (6th Cir.

1977). 

At trial, petitioners submitted transaction reports prepared

for petitioners by Mr. Tijerina's firm for the 1994 and 1995 tax

years. Petitioners also submitted bank records for a 1-year

period beginning on December 31, 1994, and ending on December 7,

1995. Mr. Tijerina's firm used the 1994 transaction report to

prepare petitioners' 1994 Federal income tax return. As

previously stated, canceled checks which could have substantiated

petitioners' 1994 and 1995 business expenses were lost by Mr.

Tijerina's firm when that firm moved offices.
- 6 -

When a taxpayer's records are lost or destroyed through

circumstances beyond his control, he is entitled to substantiate

deductions by reconstructing his expenditures through other

credible evidence. Malinowski v. Commissioner, 71 T.C. 1120,

1125 (1979). This Court is not bound to accept unverified,

undocumented testimony of a taxpayer. Hradesky v. Commissioner,

supra at 90.

The transaction records prepared by Mr. Tijerina's firm

listed most expenditures by category and check number, but

certain check numbers were repeated in different columns in the

transaction records for purported business expenses incurred by

petitioner at several different locations on different days. The

check numbers listed in the transaction reports did not match

check numbers listed in petitioners' bank records, which were

apparently from petitioners' personal account.

Additionally, amounts listed as expenses on petitioners'

1994 transaction record did not match petitioners' claimed

Schedule C expense deductions for the 1994 tax year. The

transaction record itself also miscategorized some of

petitioners' expenses for the 1994 tax year.

At trial, petitioner offered no testimony that petitioners

contacted utility companies, food suppliers, insurance offices,

or their former landlords for copies of receipts or other records

in an effort to substantiate deductions for the 1994 tax year.
- 7 -

If the item is deductible, but the taxpayer is unable to

substantiate it, the Court should make as close an approximation

as it can. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930). The estimate, however, must have a reasonable evidentiary

basis. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). In

making an estimate, the Court may bear heavily upon the taxpayer,

whose inexactitude is of his own making. Cohan v. Commissioner,

supra at 543-544.

Accordingly, this Court will make as close an approximation

as we can where a reasonable evidentiary basis exists.

a. Advertising Expenses

Petitioners claimed Schedule C advertising expense

deductions in the amount of $1,859 on their 1994 Federal income

tax return. Petitioners incurred this expense in purchasing an

18-foot neon sign which was apparently attached to the outside of

Villa Cabana.

Under section 263, any amount paid for capital expenditures

may not be currently deducted. Commissioner v. Idaho Power Co.,

418 U.S. 1, 16 (1974). Capital expenditures include fixtures and

similar property having a useful life substantially beyond the

taxable year. Sec. 1.263(a)-2(a), Income Tax Regs. Signs with a

useful life of more than 1 year must be capitalized. See Alabama

Coca-Cola Bottling Co. v. Commissioner, T.C. Memo. 1969-123.

Though petitioners claimed the $1,859 amount as an

advertising expense deduction on Schedule C of their 1994 Federal
- 8 -

income tax return, petitioners' counsel conceded at trial that

the expense was miscategorized and did not qualify as an

advertising expense deduction. 

On the basis of the record, we find that petitioners

expended $1,859 for a sign and hold that petitioners must

capitalize the cost of the sign as a capital expenditure and not

as a Schedule C advertising expense deduction for the 1994 tax

year.

b. Equipment

Petitioners reported equipment costs of $10,000 on Form 4562

for the 1994 tax year and elected to expense that amount under

section 179. Petitioners also claimed depreciation deductions in

the amount of $884 on 3-year property with a depreciation basis

of $2,652. In total, petitioners claimed depreciation and

section 179 expense deductions in the amount of $10,884 for the

1994 tax year. 

Petitioners did not claim the $10,884 amount on Schedule C,

line 13, which lists depreciation and section 179 expense

deductions, but did report a $10,884 amount on Schedule C, line

10 entitled: "Car and truck expenses". It is unclear whether

petitioners mistakenly reported the $10,884 amount on the wrong

line of their Schedule C, or whether petitioners are claiming an

additional $10,884 in car and truck expense deductions for the

1994 tax year. Petitioners' car and truck expenses are discussed

in c., infra p. 10. 
- 9 -

Section 179 permits a taxpayer to make an election to

expense the cost of section 179 property. Sec. 179(a). The

amount allowed a taxpayer as a deduction under section 179 can

not exceed the aggregate amount of taxable income of the taxpayer

for such taxable year which is derived from the active conduct by

the taxpayer of any trade or business during such taxable year. 

Sec. 179(b)(3)(A). A taxpayer may carry over a deduction

disallowed under section 179(b)(3)(A) to another taxable year. 

Sec. 179(b)(3)(B).

Petitioners' 1994 transaction report expense amounts do not

match the amounts reported on petitioners' 1994 Federal income

tax return even though both documents were prepared by Mr.

Tijerina's firm. Petitioner, using his 1994 transaction report,

testified that petitioners purchased refurbished stoves and other

equipment in 1994 for Villa Cabana at a total cost of $6,000.04.

Once again, we note the absence in the record of any

testimony or other evidence which would indicate that petitioners

attempted to substantiate their claimed deductions by contacting

the vendor from which they purchased the restaurant equipment. 

Petitioners testified that they bought the equipment used, but

the record does not indicate the condition of the equipment. 

Petitioners have failed to offer any reasonable evidentiary basis

by which this Court could make a close approximation or estimate

of petitioners' claimed deductions.
- 10 -

In this instance, any attempt on the part of this Court to

estimate petitioners' depreciation or section 179 deductions, or

petitioners' basis in any equipment they may have purchased,

would amount to little more than guesswork. Therefore, we hold

that petitioners are not entitled to such deductions because they

have failed to substantiate the underlying cost of the assets on

which the deductions are claimed. 

c. Car and Truck Expenses

Though petitioners claimed car and truck expense deductions

in the amount of $10,884 on Schedule C of their 1994 Federal

income tax return, they did not list car and truck expenses on

their 1994 transaction report.

Petitioner testified that he shopped for restaurant supplies

and produce but did not present any substantiating evidence

regarding the business use of petitioners' vehicle. Much of

petitioner's shopping took place at stores within the same

shopping center as Villa Cabana, and we have no evidence as to

petitioners' vehicle use, mileage, or even the method petitioners

used in arriving at the $10,884 amount. 

Indeed, the car and truck expense deduction amount claimed

by petitioners may be a mistaken entry, since petitioners claimed

depreciation and section 179 expense deductions in the amount of

$10,884 on Form 4562, but did not report that amount on Schedule

C, line 13.
- 11 -

On the basis of the record, we find that there is no

credible evidence supporting petitioners' claimed car and truck

expense deductions. We hold that petitioners are not entitled to

claim car and truck expense deductions in the amount of $10,884

for the 1994 tax year. 

d. Rent, Utility, and Telephone Expenses

Petitioners claimed "other expense" deductions in the amount

of $4,463 on Schedule C of their 1994 Federal income tax return. 

Petitioners' "other expense" deductions included the following

amounts:

 Rent expense $3,510

 Electricity deposit 800

 Telephone deposit 60

 Credit card fees 93

 Total 4,463

Petitioners’ claimed rent expense deductions for the 1994

tax year also included a payment in the amount of $1,755 for the

last month's rent. Petitioners did not close Villa Cabana until

1997. At the time of trial, petitioner was using the rent

deposit from the restaurant to pay his 1998 personal living

expenses.

Petitioners also claimed deductions for telephone and

utility deposits made during the 1994 tax year. These deposits

would presumably be refunded to petitioners when petitioners

later canceled utility and telephone service to Villa Cabana in

1997.
- 12 -

Petitioners additionally claimed utility expense deductions

in the amount of $142 on line 25 of their 1994 Schedule C. This

amount represented utilities actually used by petitioners at

Villa Cabana. 

At trial, petitioner did not offer any testimony which would

indicate any attempt to substantiate petitioners' "other expense"

deductions for the 1994 tax year by contacting petitioners'

former utility, telephone, or credit card companies. 

We do, however, find petitioner's testimony credible that

petitioners paid $1,755 a month in rent for commercial space in

San Antonio. We hold that petitioners are entitled to deduct

"other expenses" in the amount of $1,755 for rent expenses

incurred for December of the 1994 tax year. Petitioners are not

entitled to deduct the $1,755 deposit for the last month's rent. 

We also find that petitioners incurred utility expenses for

December in the amount of $142 as reported by petitioners on

Schedule C of their 1994 Federal income tax return. Petitioners

cannot deduct utility or telephone deposits made during the 1994

tax year.

e. Insurance

Petitioners contend that they carried a business liability

policy for the years at issue. Though petitioners' 1994

transaction reports list insurance expenses of $479, petitioners

did not claim any deduction for insurance expenses on their 1994
- 13 -

Schedule C. Petitioners' 1995 transaction report lists monthly

insurance payments in the amount of $113.36. 

On the basis of the record, we are satisfied that

petitioners paid regular monthly premiums for business liability

insurance. Accordingly, we hold that petitioners are entitled to

a deduction in the amount of $113.36 for the 1994 tax year

representing expenses incurred for business insurance for the

month of December 1994.

f. Food, Restaurant Supplies, and Soda Purchases

Though petitioners' 1994 transaction report lists expenses

for food, restaurant supplies, and soda in the amount of

$4,565.74, petitioners did not claim expense deductions for food,

restaurant supplies, or soda purchases on their 1994 Schedule C. 

Petitioners did not purchase food and cleaning supplies from

just one vendor. In order to get the lowest price, or for

convenience if the store was in the same shopping mall as Villa

Cabana, petitioners would purchase restaurant items at different

stores. Petitioners' 1994 transaction report indicates, however,

that petitioners purchased soda from only one commercial

restaurant supply vendor. Once again, the record does not

indicate that petitioners made any attempt to contact vendors in

order to substantiate food, restaurant supplies, or soda expenses

for 1994.

Though petitioners' 1994 transaction report lists expenses

for food, restaurant supplies, and soda in the amount of
- 14 -

$4,565.74, petitioner testified that business was "real slow" and

that petitioners only earned approximately $350 in the 1 week

that petitioners were open for business in the 1994 tax year. 

Petitioners did not calculate cost of goods sold or keep an

inventory for the 1994 tax year. Other than testifying that the

restaurant earned $350 for the last week of December, petitioner

did not know how much food, soda, or restaurant supply costs were

actually incurred in the 1994 tax year. In 1995, petitioners

continued to use food, restaurant supplies, and soda that was not

sold or consumed in the 1994 tax year. 

On the basis of the record, we find that petitioners

incurred food, restaurant supplies, and soda expenses in the

amount of $556 for the 1994 tax year.

g. Repair and Maintenance Expenses

Petitioners claimed repair and maintenance expense

deductions in the amount of $5,797 on Schedule C of their 1994

Federal income tax return. These deductions represented costs

incurred by petitioners for repair of used equipment purchased

from equipment vendors, and the installation and repair of

plumbing fixtures. 

Petitioner could not recall why some of the labor was

performed, and there is nothing in the record to indicate that

petitioners made any attempt to contact service people to

substantiate petitioners' claimed deductions. Furthermore, some

of petitioners' claimed repair and maintenance expenses appear to
- 15 -

be startup expenditures which would not be currently deductible

under section 195. Petitioners have failed to offer any

reasonable evidentiary basis by which this Court could make a

close approximation or estimate of petitioners' claimed

deductions. 

We find that any attempt on the part of this Court to

estimate petitioners' repair and maintenance expense deductions

would amount to little more than guesswork because petitioners

have not provided credible evidence supporting petitioners'

claimed repair and maintenance expense deductions. Therefore, we

hold that petitioners are not entitled to claim repair and

maintenance expense deductions in the amount of $5,797 for the

1994 tax year. 

h. Legal and Professional Services

Petitioners claimed legal and professional services expense

deductions in the amount of $806 on Schedule C of their 1994

Federal income tax return. It appears from the record that most,

if not all, of petitioners' claimed legal and professional

services expense deductions represented expenses for legal and

accounting work performed by Mr. Tijerina's firm.

Despite the fact that petitioners were represented by the

same accounting and legal firm at trial as they were for the time

petitioners operated Villa Cabana, neither counsel for

petitioners nor petitioners themselves produced any
- 16 -

substantiation for these expenses other than the transaction

reports prepared by Mr. Tijerina's firm. 

If petitioners incurred legal and professional services

expenses from other firms, the record does not show that

petitioners attempted to contact the providers of such services

in an attempt to substantiate petitioners' deductions.

We find that this Court does not have a reasonable

evidentiary basis by which to estimate petitioners' claimed legal

and professional services expense deductions. We therefore hold

that petitioners are not entitled to claim any legal and

professional services expense deductions for the 1994 tax year.

i. Tax and Licenses

Petitioners claimed tax and license expense deductions in

the amount of $305 on Schedule C of their 1994 Federal income tax

return. Most of these expenses would have been recorded by

Government departments or agencies, and yet the record does not

show that petitioners attempted to contact any of the agencies

involved in an attempt to substantiate petitioners' claimed

deductions.

On the basis of the record, we find that petitioner has

failed to provide a reasonable evidentiary basis to substantiate

their tax and license expense deductions. Accordingly, we hold

that petitioners are not entitled to claim tax and license

expense deductions for the 1994 tax year.
- 17 -

j. Travel, Meal, and Entertainment Expenses

Petitioners claimed travel, meal, and entertainment expense

deductions in the amount of $6, subject to a 50 percent

limitation on Schedule C of their 1994 Federal income tax return. 

Petitioners have not substantiated or explained this expense

deduction and have not shown that this expense was incurred in

carrying on a trade or business as required by section 162.

We find that petitioners have not complied with the

requirements of section 162 and hold that petitioners are not

entitled to claim meals and entertainment expense deductions for

the 1994 tax year.

2. Petitioners' 1995 Income

As previously found, petitioners failed to file a Federal

income tax return for the 1995 tax year. Using BLS data,

respondent determined that petitioners each earned income of

$19,775, as well as community interest income of $55 for the 1995

tax year.

At trial, petitioner admitted that for 1995 the restaurant

generated gross income in the amount of $83,083.90. Based on

petitioner's admission, we find that the $83,083.90 amount is a

more accurate measure of gross income than respondent's use of

BLS data, and, therefore, we find that petitioners earned total

gross income in the amount of $83,083.90 from the restaurant for

the 1995 tax year. 
- 18 -

Petitioners contend that they are entitled to claim Schedule

C business expense deductions in the amount of $78,573.34. 

Petitioners have not presented any substantiation for their

1995 business expense deductions other than their 1995 business

transaction report prepared by Mr. Tijerina's firm. However, we

acknowledge that petitioners operated the restaurant, and,

therefore, must have incurred deductible business expenses. 

Applying the Cohan rule discussed above, this Court will

make as close an approximation as we can in order to estimate

petitioners' business expense deductions for the 1995 tax year. 

In doing so, we once again stress that petitioners have made no

effort to reconstruct their business expense deductions by

contacting vendors who conducted business with Villa Cabana in

the 1995 tax year.

We find that petitioners incurred the following deductible

business expenses for the 1995 tax year:

 Rent $22,815

 Sales tax 1,432

 Advertising 700

 Food, restaurant supplies, and soda 7,674

 Insurance 1,173

 Linen service 169

 Office expenses 158

 Contract labor 3,495

 Utilities 1,825

 Total 39,441

Though petitioners claim business expenses in excess of that

amount, we find that petitioners were unable to present any

credible evidence to substantiate any amounts except the
- 19 -

deductions stated above. We hold that petitioners are entitled

to claim Schedule C business expense deductions in the amount of

$39,441 for the 1995 tax year.

3. Self-Employment Tax

Section 1401 imposes a tax on the self-employment income of

every individual. The tax is a combination of the old-age,

survivors, and disability insurance tax, and the hospital

insurance tax. Sec. 1401(a) and (b). The self-employment tax is

similar to the tax employers are required to pay and withhold

from the wages of their employees under the Federal Insurance

Contribution Act (FICA tax). Both the self-employment tax and

the FICA tax provide individuals with coverage for Social

Security retirement benefits and hospital insurance benefits.

Section 1402(a) provides that, for purposes of the selfemployment tax, the term "net earnings from self-employment"

includes the gross income derived by an individual from any trade

or business carried on by the individual, less the deductions

allowed that are attributable to the trade or business. Section

1402(c) provides that the term "trade or business", when used

with reference to net earnings from self-employment, has the same

meaning as when used in section 162, with certain exceptions that

are not relevant to the instant case.

On the basis of the record, we find that petitioners were

self-employed for the 1995 tax year and hold that petitioners are
- 20 -

liable for self-employment tax under section 1401 for the 1995

tax year. Respondent is sustained on this issue.

4. Additions to Taxes

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

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

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

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

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

fraction thereof in which the failure to file continues, to a

maximum of 25 percent of the tax. Id.

The addition is applicable unless a taxpayer establishes

that the failure to file was due to reasonable cause and not

willful neglect. Id. If a taxpayer exercised ordinary business

care and prudence and was nonetheless unable to file the return

within the date prescribed by law, then reasonable cause exists. 

Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. "Willful neglect"

means a "conscious, intentional failure or reckless

indifference." United States v. Boyle, 469 U.S. 241, 245 (1985).

When an expert provides erroneous advice on a matter of tax

law, such as whether a tax liability exists, it may be reasonable

for a taxpayer to rely on that advice. United States v. Boyle,

Id. at 250-251.

Petitioner did not offer any testimony or other evidence

which indicated that petitioners' failure to file a return for
- 21 -

4 If, under a Rule 155 computation, the recomputed

deficiencies are in excess of those set forth in the notices of

deficiency for the 1995 tax year, respondent is limited to the

deficiencies set forth in the separate notices of deficiency

because respondent failed to plead any increased deficiencies.

the 1995 tax year was due to erroneous expert advice. We note

that at the time of trial, petitioners had not yet filed a return

for the 1995 or 1996 tax year. When asked about his failure to

file a return for the 1996 tax year, petitioner testified that

though he knew he had the liability to file a return, he had not,

and did not have a reason for his failure to file. 

We find that petitioners did not exercise ordinary business

care and prudence and that petitioners' failure to file was due

to willful neglect. We therefore hold that petitioners are

liable for additions to taxes under section 6651(a)(1). 

Respondent is sustained on this issue.

To reflect the foregoing,

Decisions will be entered

under Rule 155.

4