T.C. Memo. 1999-141

UNITED STATES TAX COURT

MARIAN WILSON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12687-97. Filed April 29, 1999.

Marian Wilson, pro se.

Usha Ravi, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

 GOLDBERG, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182. Unless otherwise indicated, all section references are to

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

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

Procedure.
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Respondent determined deficiencies in petitioner's Federal

income taxes and accuracy-related penalties for the taxable years

in the amounts set forth below:

 Penalty

 Year Deficiency Sec. 6662(a)

 1991 $2,967 $593 

 1992 4,563 913 

 1993 4,524 905 

After concessions, the remaining issues for decision are:

(1) Petitioner's bases in Special Occasions, a partnership, for

the 1992 and 1993 tax years; (2) petitioner's bases in Special O,

Inc., an S corporation, for the 1991, 1992, and 1993 tax years;

(3) whether Special O, Inc., is entitled to claim travel expenses

for the 1991, 1992, and 1993 tax years; (4) whether Special O,

Inc., is entitled to expense certain depreciable business assets

pursuant to section 179 for 1993; and (5) whether petitioner is

liable for accuracy-related penalties pursuant to section 6662(a)

for the 1991, 1992, and 1993 tax years.

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, petitioner resided in Oakland, California. 
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1 Special Occasions had four partners during the years at

issue, all of them sisters. Petitioner, Barbara Wilson, and

Linda Klyce each owned 32 percent of Special Occasions; another

sister, Faye Oatis, owned 4 percent. 

2 The other shareholders included Barbara Wilson and Linda

Klyce, who each held a one-third interest. Petitioner was the

president of Special O, Barbara Wilson was the vice president,

and Linda Klyce was the secretary and treasurer. Faye Oatis was

neither a shareholder nor an officer of Special O during the

years in issue. 

FINDINGS OF FACT

During the years at issue, petitioner was a general partner

with a 32-percent interest in Special Occasions, a partnership.1

Petitioner and her sisters formed Special Occasions in 1983 for

the purpose of manufacturing and selling women's large-size

garments through their boutique in Oakland, California. 

Petitioner also owned a one-third interest in Special O,

Inc. (Special O), an S corporation.2 Special O was incorporated

in 1990 to sell women's large-size garments through the Oakland

boutique, in effect dividing manufacturing and sales

responsibilities between Special Occasions and Special O. 

Special Occasions and Special O were located in the same building

with the boutique and shared offices. Special O's inventory

included both garments produced by Special Occasions and garments

purchased from outside suppliers.

Petitioner also owned a one-third interest in Klyce Day Care

(Klyce), a partnership which, as its name suggests, engaged in
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3 Petitioner, Barbara Wilson, and Linda Klyce each owned onethird of Klyce.

the business of child care.3 Additionally, petitioner's sister

Linda Klyce ran a catering business named Sweets-N-Things

(Sweets), a sole proprietorship. 

Special Occasions began to lose money in 1990. In order to

keep Special Occasions operating, the partners sought business

loans from local banks and the Small Business Administration. 

The partners were ultimately unsuccessful in obtaining loans. 

Petitioner therefore began making cash advances and writing

checks against her credit card accounts in order to finance the

daily operations of Special Occasions. During this time,

petitioner also made cash advances against her credit card

accounts and then lent the money to Special O. Petitioner's

contributions to Special O were purportedly memorialized in

promissory notes signed by Linda Klyce and Barbara Wilson in

their capacity as officers of Special O.

Petitioner made her car, a 1986 Mercury, available to

Special Occasions and Special O for business purposes. Other

businesses, such as Klyce and Sweets, also used petitioner's car. 

Additionally, petitioner, her sisters, and petitioner's niece all

used petitioner's car for personal purposes.
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4 Though petitioner reported 1991 losses from Special O in the

amount of $6,875 on her Federal income tax return, the parties

stipulated 1991 losses from Special O in the amount of $6,895.

The Oakland boutique closed its doors in 1994. Another

boutique, which Special Occasions had opened in Baton Rouge,

Louisiana, in 1994, closed in 1997.

At the time of trial, petitioner was employed by the

Internal Revenue Service (IRS) as an acting Appeals officer. 

Petitioner has been employed by the IRS since 1974 and has worked 

at different times as a tax auditor, revenue agent, and technical

analyst.

Petitioner was told by her supervisors at the IRS that she

could not maintain the books and records of Special Occasions,

Special O, or Klyce "as a condition of [her] employment with the

IRS". The books and records of Special Occasions, Special O, and

Klyce were maintained by Linda Klyce. Although petitioner did

not maintain the books and records of either Special Occasions or

Special O, petitioner wrote most of the checks drawn from Special

Occasions and Special O's shared checking account at Wells Fargo

Bank. 

Petitioner reported nonpassive losses from Special O on

Schedules E of her Federal income tax returns in the amounts of

$6,875,4 $8,345, and $13,777 for the 1991, 1992, and 1993 tax

years, respectively. Petitioner also reported nonpassive losses
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5 Though reported, petitioner concedes that she is not

entitled to claim a nonpassive loss from Special Occasions in the

amount of $2,950 for the 1991 tax year.

6 Though petitioner reported 1993 losses from Special

Occasions in the amount of $2,689 on her Federal income tax

return, the parties stipulated 1993 losses from Special Occasions

in the amount of $2,699.

from Special Occasions on Schedules E in the amounts of $2,950,5

$5,600, and $2,6896 for the 1991, 1992, and 1993 tax years,

respectively. Special Occasions did not file a U.S. Partnership

Return of Income, Form 1065, for the 1991 tax year.

In a notice of deficiency dated March 14, 1997, respondent

disallowed petitioner's claimed Schedule E losses for the 1991,

1992, and 1993 tax years because petitioner did not provide any

documentation to establish her bases in Special Occasions and

Special O for the years in issue.

OPINION

1. Petitioner's Basis in Special Occasions

As a preliminary matter, this Court notes that the business

accounting books and records purportedly maintained by Special

Occasions and Special O, such as they are, are not reliable. 

Furthermore, petitioner's own books and records were poorly

maintained and are incomplete. In response to the disorganized

and sparse records offered by petitioner in this case, respondent

has submitted alternative bases calculations for petitioner's

business interests in both Special Occasions and Special O. 
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The determination of a partner's basis in his or her

partnership interest must be made before a partner can deduct his

or her share of partnership losses because losses cannot reduce a

partner's basis below zero. Generally, a taxpayer's basis in a

partnership includes the taxpayer's capital contributions and her

share of partnership income and liabilities, less distributions

and her share of partnership losses. See secs. 705, 752. A

partner's distributive share of partnership loss is allowed as a

deduction only to the extent of that partner's adjusted basis of

the partnership interest at the end of the tax year in which such

loss occurs. See sec. 704(d). 

Automobile Expenses

During the years at issue, petitioner claimed automobile

expenses arising from automobile use on behalf of both Special

Occasions and Special O. Petitioner contends that she is

entitled to deduct automobile expenses incurred during the years

in issue. Alternatively, petitioner contends that her expenses,

if not deductible, should be included in her claimed bases for

Special Occasions and Special O.

Deductions are a matter of legislative grace, and a taxpayer

must be able to show that the deduction sought comes within the

express provisions of the statute. See New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934). 
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Section 162(a) allows a taxpayer to deduct all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business. No deduction is

allowed for personal, living, or family expenses. See sec. 262. 

A taxpayer must substantiate any deductions claimed and bear

the burden of substantiation. See 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. See Meneguzzo v. Commissioner, 43 T.C.

824, 831-832 (1965). Generally, if a claimed business expense is

deductible, but the taxpayer is unable to substantiate it, the

Court is permitted to make as close an approximation as it can. 

See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). That

estimate, however, must have a reasonable evidentiary basis. See

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

In addition to the requirements of section 162, section

274(d) requires strict substantiation of certain expenses

including those incurred with respect to any listed property as

defined in section 280F(d)(4), which includes any passenger

automobile. A taxpayer is required to substantiate expenses for

listed property by establishing the amount, time, place, and

business purpose of the expense. See sec. 274(d). This section

supersedes the doctrine in Cohan v. Commissioner, supra. See
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sec. 1.274-5T(a)(4), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985). 

In order for petitioner to claim automobile expense

deductions through either Special Occasions or Special O, those

expenses must have actually been paid or incurred by either

Special Occasions or Special O pursuant to section 162(a). 

However, there is no evidence in the record to indicate that

either Special Occasions or Special O incurred automobile

expenses by reimbursing petitioner for any automobile expenses

incurred on their behalf. Additionally, even if petitioner was

able to establish that Special Occasions or Special O incurred

such expenses, such expenses must be substantiated pursuant to

section 274(d). Even if such an expense would otherwise be

deductible, the deduction may still be denied if there is

insufficient substantiation to support it. See sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). 

Neither Special Occasions, Special O, nor petitioner kept

adequate records of claimed automobile expenses.

In the alternative, petitioner contends that if she is not

entitled to deduct her claimed automobile expenses, she is

entitled to include such claimed expenses in her bases in Special

Occasions and Special O. In any event, the only evidence

presented in support of petitioner's claimed expenses is the

unverified testimony of petitioner, which without supporting
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7 Additionally, petitioner failed to establish what percentage

of business use reflects use of the automobile on behalf of

Special Occasions, Special O, Klyce, or Sweets.

documentation is insufficient to substantiate the claimed

expenses. See Hradesky v. Commissioner, supra at 90.

Petitioner testified that she and her sisters used

petitioner's automobile for both Special Occasions and Special O.

In addition, petitioner admitted that she also used her

automobile on behalf of other businesses, as well as for personal

use. Petitioner failed to establish the percentage of personal

automobile use versus business automobile use.7 Under such

circumstances, any attempt on the part of this Court to estimate

petitioner's purported automobile expenses would amount to little

more than guesswork.

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

failed to establish that either Special Occasions or Special O

incurred any deductible automobile expenses for the years in

issue. Additionally, we find that petitioner has failed to

establish any amount of automobile expenses for the years in

issue and is therefore not entitled to treat such purported

expenses as capital contributions.

The parties stipulated that petitioner had a zero basis in

Special Occasions as of January 1, 1992. Because Special

Occasions did not maintain written records which were accurate

enough to determine petitioner's bases for the 1991, 1992, and
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8 This amount was computed using claimed purchases in the

amount of $1,806.96 and claimed auto expenses in the amount of

$3,602.05.

9 This amount was computed using claimed purchases in the

amount of $1,505.84 and claimed auto expenses in the amount of

$3,922.54.

10 This amount was computed using claimed purchases in the

amount of $2,022.97 and claimed auto expenses in the amount of

$1,260.40.

11 This amount was computed using claimed purchases in the

amount of $1,636.93 and claimed auto expenses in the amount of

$1,372.89.

1993 tax years, petitioner claimed several different bases in

Special Occasions for the years in issue. At trial, petitioner

contended her bases in Special Occasions for the 1992 and 1993

tax years were $5,4098 and $5,429,9 respectively. After trial,

petitioner contended her bases in Special Occasions for the 1992

and 1993 tax years were $3,28310 and $3,010,11 respectively.

 To support her contentions, petitioner submitted a computergenerated list of amounts petitioner purportedly borrowed from

her credit card accounts and contributed to Special Occasions. 

Petitioner's list also included expenses incurred on behalf of

Special Occasions drawn from petitioner's personal checking

account. 

We do not find petitioner's list to be credible, and we

therefore do not accept petitioner's calculations. Petitioner's

list is not based on any written business records kept by Special

Occasions and is not complete. Additionally, the record
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12 This amount does not include any carryover basis petitioner

may have from the 1992 tax year. 

indicates that petitioner did not include distributions

apparently received from Special Occasions in calculating her

basis adjustments for the 1992 and 1993 tax years.

It is well established that we are not required to accept

self-serving testimony in the absence of corroborating evidence. 

See Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992). 

Petitioner has failed to establish her basis in Special Occasions

for the years in issue. We find that respondent has provided a

more credible basis computation for Special Occasions, and,

therefore, we adopt respondent's calculations. In reviewing

respondent's calculations we have found them to be very generous. 

Accordingly, we find that petitioner has a basis in Special

Occasions in the amounts of $1,522 and $51012 for the 1992 and

1993 tax years, respectively. Respondent is sustained on this

issue.

2. Petitioner's Basis in Special O

A shareholder's basis in an S corporation generally includes

her capital contributions and her share of corporation income and

liabilities, less certain distributions and her share of

corporation losses. See sec. 1367(a). A shareholder's aggregate

amount of losses and deductions shall not exceed the sum of (1)

the adjusted basis of the shareholder's stock in the corporation;
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and (2) the shareholder's adjusted basis in the corporation's

indebtedness to the shareholder. See sec. 1366(d)(1). 

Disallowed losses carry forward to the succeeding taxable year. 

See sec. 1366(d)(2). 

At trial, petitioner computed her bases in Special O in the

amounts of $5,180, $7,714, and $11,656 for the 1991, 1992, and

1993 tax years, respectively. After trial, petitioner computed

her bases in Special O in the amounts of $10,226, $10,715, and

$14,504 for the 1991, 1992, and 1993 tax years, respectively. 

Although petitioner submitted copies of promissory notes to

substantiate her claimed loans to Special O, we are not satisfied

that all of Special O's distributions have been accounted for or

that petitioner's records adequately reflect petitioner's bases

in Special O. Neither petitioner nor Special O kept written

records which reflected petitioner's bases for the years at

issue; i.e., a record which established petitioner's

contributions to Special O and any distributions made by Special

O to petitioner for the years in issue. Another difficulty this

Court has in reconstructing petitioner's bases in Special O is

that funds for both Special Occasions and Special O were

commingled in a single checking account, and several of

petitioner's credit card accounts were apparently used on behalf

of Special O with petitioner's other partners signing
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13 Faye Oatis was not an employee or shareholder of Special O

during the years at issue.

petitioner's name. Ultimately, petitioner has failed to

establish the reliability of her records.

Because of the inaccuracy and confusion surrounding the

records of petitioner, we adopt respondent's calculations for

petitioner's bases in Special O for the years in issue. This

Court finds respondent's calculations to be more credible than

petitioner's unsubstantiated assertions. Again, we find

respondent's calculations to be very generous. 

Accordingly, we hold that petitioner is entitled to claim a

bases in Special O of $4,966, $3,117, and $6,566 for the 1991,

1992, and 1993 tax years, respectively. Respondent is sustained

on this issue.

3. Travel Expenses

Petitioner contends that Special O is entitled to claim

travel expense deductions in the amount of $740.81, $2,497, and

$1,529 for the 1991, 1992, and 1993 tax years, respectively. 

These amounts represent travel expenses allegedly incurred by

petitioner and her sisters on behalf of Special O. In 1991,

petitioner contends that Faye Oatis13 and Linda Klyce traveled to

San Diego and Tijuana, Mexico, allegedly to find a cheap fabric

supply source. In 1992, petitioner contends that petitioner,

Faye Oatis, and Linda Klyce traveled to Baton Rouge, New Orleans,
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and Los Angeles. In 1993, petitioner contends that Faye Oatis

and Linda Klyce traveled to San Diego and Yuma.

Petitioner has stipulated that Special O's claimed travel

expenses for the years at issue were paid from the personal funds

of petitioner or her sisters. Petitioner has failed to establish

that any of the claimed travel expenses were reimbursed by

Special O. A corporation is not entitled to deduct unreimbursed

shareholder expenses. See Lang Chevrolet Co. v. Commissioner,

T.C. Memo. 1967-212.

Additionally, both Special O and petitioner have failed to

provide this Court with either adequate records or sufficient

evidence corroborating the claimed travel deductions. Taxpayers

must substantiate any deductions claimed. See Hradesky v.

Commissioner, 65 T.C. at 90. 

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

and necessary expenses paid or incurred * * * in carrying on any

trade or business". Section 274(d) requires strict

substantiation of certain expenses including those incurred with

respect to meals, travel, and entertainment.

We hold that Special O is not entitled to claim travel

expenses in the amounts of $740.81, $2,497, and $1,529 for the

1991, 1992, and 1993 tax years, respectively. Respondent is

sustained on this issue.
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4. Election To Expense Certain Depreciable Business Assets

Pursuant to Section 179

On its 1993 Form 1120S, U.S. Income Tax Return for an S

Corporation, Special O elected to expense $10,570 pursuant to

section 179. The business assets in question consisted of

computer equipment. During the 1993 tax year, Special O reported

an ordinary loss from trade or business activities in the amount

of $40,791. Special O did not claim depreciation for any assets

placed in service during the 1993 tax year. 

Section 179 allows a taxpayer to make an election to expense

up to $17,500 of the cost, or portion thereof, of section 179

property for the taxable year in which the property is placed in

service. The election, once made, is irrevocable unless the

revocation is consented to by the Commissioner. See sec. 1.179-

5, Income Tax Regs. Additionally, the amount allowed a taxpayer

as a deduction under section 179 cannot exceed the aggregate

amount of taxable income of the taxpayer for such taxable year

which is derived from the active conduct of any trade or business

during such taxable year. See sec. 179(b)(3)(A). A taxpayer may

carry over a deduction disallowed under section 179(b)(3)(A) to

another taxable year. See sec. 179(b)(3)(B).

We find that Special O is not entitled to a section 179

deduction for the 1993 tax year. Special O had no taxable income

for the tax year in issue and so would not be able to avail

itself of the benefit of a section 179 expense deduction. Since
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Special O elected to expense its equipment for the 1993 tax year,

it may not now withdraw that election and attempt to depreciate

the same equipment for 1993 without consent of the Commissioner.

We find that petitioner is not entitled to deduct section

179 expenses for the 1993 tax year. Respondent is sustained on

this issue.

5. Section 6662(a) Penalty

Finally, we must decide whether petitioner is liable for an

accuracy-related penalty for the 1991, 1992, and 1993 tax years.

Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the portion of any underpayment of tax that is due

to negligence or disregard of rules or regulations. Under

section 6662(c), negligence is any failure to make a reasonable

attempt to comply with the provisions of the Code, and the term

"disregard" includes any careless, reckless, or intentional

disregard. Negligence includes the failure to exercise the due

care of a reasonable and ordinarily prudent person under the

circumstances. See Neely v. Commissioner, 85 T.C. 934, 947

(1985). No penalty will be imposed on any portion of the

underpayment if it is shown that there was reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion. See sec. 6664(c). The most important

factor is the extent of the taxpayer's effort to assess his or
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her proper tax liability. See Tippin v. Commissioner, 104 T.C.

518, 533-34 (1995); sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioner contends that she based the information contained

in her Federal income tax returns for the years in issue on

information provided by Special Occasions and Special O and that

she therefore made a good faith effort to comply with the

provisions of the Code. We disagree. 

Petitioner possessed tax expertise because of her profession

and knowledge of the financial condition of Special Occasions and

Special O. Petitioner wrote most of the checks drawn on the

single bank account maintained by both Special Occasions and

Special O. Furthermore, petitioner failed to maintain adequate

books and records from which her claims to deductions and losses

could be determined or substantiated. 

We find that petitioner is liable for an accuracy-related

penalty pursuant to section 6662(a) for the 1991, 1992, and 1993

tax years. Respondent is sustained on this issue.

To reflect the foregoing,

Decision will be entered

under Rule 155.