Court Opinion

ID: 4337313
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:17:19.394731+00
Date Added: 2024-06-11T09:28:07.796509
License: Public Domain

T.C. Summary Opinion 2008-136

                        UNITED STATES TAX COURT

                     CARLOS FRANCO, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent

        Docket No. 26462-06S.            Filed October 28, 2008.

        Carlos Franco, pro se.

        Kevin W. Coy, for respondent.

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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.     Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the years in
                               - 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 substantiated

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
                                 - 3 -

Schedule C gross receipts 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 gross

receipts for each year using the bank deposits method.1                 Their

reconstructions

include:

                      Item                           2001           2002
                                             1              1
     Total deposits                           $16,292           $39,418
                                              2              2
     Taxable deposits                           15,053           33,578
     Cash expenditures that did not
       come from deposited funds or
                                                                3
       nontaxable sources                        16,725          11,520
                                                 4              4
     Adjusted Sch. C gross receipts                31,778        45,098
     Understatement in Sch. C gross
                                                 5                  5
       receipts                                   12,678             5,165
     1
        For 2001 the RA determined that petitioner had total
     deposits of $16,172 and $120 into his Bank of America and
     Washington Mutual accounts, respectively. For 2002 the RA
     determined that petitioner had total deposits of $38,978 and
     $440 into his Bank of America and Washington Mutual
     accounts, respectively.
     2
        For 2001 the RA allowed petitioner reductions for
     nontaxable deposits of $239 for returned checks and $1,000
     for a loan payment received, determining taxable deposits of
     $14,933 and $120 into his Bank of America and Washington
     Mutual accounts, respectively. For 2002 the RA determined
     total deposits of $38,978 and $440 into his Bank of America
     and Washington Mutual accounts, respectively. The RA
     allowed petitioner reductions for nontaxable deposits of:
     (1) $50 for a returned check; (2) $981 for a Federal tax
     refund; (3) $1,700 for loan payments received; and (4) $5
     from his total deposits. The RA determined taxable deposits
     of $36,247 and $435 into his Bank of America and Washington
     Mutual accounts, respectively. At petitioner’s Appeals
     hearing, he provided a “register tape” to the AO in which he
     identified additional nontaxable deposits of $3,104 for
     2002. The AO allowed petitioner an additional $3,104

     1
         Figures have been rounded to the nearest dollar.
                                 - 4 -

        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.
        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.
        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 Schedule C 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          Respondent
                                2001    2002            allowed
                                                   2001      2002

     Depreciation                        $8,268             $3,722
     Special depreciation                10,631              7,976
     Sec. 179 expenses     3,310          6,769   3,310      6,304
     Legal & profl. servs.   169            225     169        225
     Taxes & licenses                                           89
     Other expenses:
       Safety boots          220           340       220        340
       Fuel                1,380         1,409    1,186      1,409
       “MISC”1             1,800         3,500     -0-        -0-
       “Telephone”           366           291       366        291
                                                   2          2
       “SCE”                 493           516       -0-        -0-
       Vehicle tags                         55                   55
       AAA club                             71                   71
    Deduction for bus.
                                                    2           2
      use of home                                    416       434
                                                    3       3
    Vehicle ins.                                      654    1,671
    1
     According to the RA, “[Petitioner said “MISC”] was an
    estimate of expenses he forgot to deduct elsewhere.”
    2
     Respondent represents that “SCE” is a “utility” and that the
                                      - 5 -

       RA allowed 6 percent of the “SCE” expenses in the calculation
       of petitioner’s deductions for the business use of his home
       for 2001 and 2002, even though petitioner did not claim a
       deduction for the business use of his home for either year on
       his Schedules C.
       3
        The AO determined a 90-percent business use of petitioner’s
       vehicle(s).

           The $31,778 in adjusted 2001 Schedule C gross receipts less

$6,321 in allowed Schedule C expense deductions generated a

$25,457 net profit for 2001 rather than the $11,362 net profit

that petitioner reported.          The $45,098 in adjusted 2002 Schedule

C gross receipts less $22,587 in allowed Schedule C expense

deductions generated a $22,511 net profit for 2002 rather than

the $7,769 net profit that petitioner reported.

           Other pertinent items reported by petitioner and

respondent’s adjustments thereto include:

                 Item                    Per Return       Respondent’s
                                       2001     2002       Adjustments
                                                          2001    2002

   Self-emp.       tax1              $1,605   $3,597    $1,098    $3,181
   Deduction       for self-emp.
     tax1                               803       549     1,799    1,591
   Form 1040       taxable income     6,624       393     8,704   14,093
   Form 1040       “total tax”        2,518     1,137     4,825    4,992
                                                        2
   Form 1040       interest income    5,089               2,346
   1
    The adjustments to petitioner’s self-employment taxes and his
   deductions therefor are computational and are resolved
   consistent with the Court’s decision.
   2
    Petitioner received $2,743 from “Santoro Limited” and
   reported the amount as interest income on his Schedule B,
   Interest and Ordinary Dividends, for 2001. Respondent removed
   the amount and included it in petitioner’s 2001 Schedule C
   gross receipts. For 2002 respondent did not adjust the $1,501
                                - 6 -

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 deductions

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.

                             Discussion

I.   Burden of Proof

      The Commissioner’s determinations in a notice of deficiency

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.
                               - 7 -

II.   Petitioner’s Schedule C Gross Receipts

      A taxpayer is required to maintain sufficient records to

allow for the determination of his or her correct tax liability.

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

a taxpayer fails to maintain or does not produce adequate books

and records, the Commissioner is authorized to reconstruct the

taxpayer’s income, and the reconstruction need only be reasonable

in view of all the surrounding facts and circumstances.     See sec.

446; Petzoldt v. Commissioner, supra at 686-687; Giddio v.

Commissioner, 54 T.C. 1530, 1533 (1970).    Indirect methods, such

as the bank deposits method, may be used for such purposes.

Holland v. United States, 348 U.S. 121 (1954).

      The bank deposits method of determining income assumes that

all money deposited into a taxpayer’s bank accounts during a

specific period constitutes gross income.      Price v. United

States, 335 F.2d 671, 677 (5th Cir. 1964); see also Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986) (bank deposits constitute

prima facie evidence of income).   But the Commissioner must take

into account any nontaxable source or deductible expense of which

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 deposits, as adjusted, over reported income is

considered unreported income; (4) cash expenditures that did not
                                - 8 -

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 that 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 $40,914 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 cash

received due to his medical condition [i.e., hearing and vision

problems, and it was] not fraud because he did not intend to

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.
                               - 9 -

     At trial petitioner conceded Schedule C gross receipts of

$31,173 and cash expenditures of $16,725 for 2001.    After the

parties’ concessions, the parties limited their arguments to the

disputed issues with respect to the 2002 bank deposits analysis.

The Court addresses these arguments in turn.

     Although petitioner also conceded that he paid expenses of

$16,520 in cash during 2002, he argues that the 2002 bank

deposits analysis is incorrect because his bank deposits totaled

$34,739 while he reported $39,933 in Schedule C gross receipts.

Thus, the “$5,193 [sic]” difference represents cash he received

and reported.   Therefore, the $16,520 of undeposited-cash

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 cash hoard, then only “$6,137 [sic]” remains

in dispute as undeposited-cash expenditures for 2002.

     Respondent contends that petitioner had additional amounts

of undeposited-cash expenditures above the “$5,193 [sic]” figure.

“All undeposited cash includes that amount.    We’re not saying he

didn’t report it.”

     Although petitioner told the RA that he never deposited cash

received in his lawn services business, at trial he

inconsistently asserted that he made deposits into his bank

accounts “Through checks and cash money”.   In addition, neither

petitioner’s testimony nor his 2002 bank statements establish the
                                - 10 -

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 $5,194

reduction from the $11,250 in undeposited-cash expenditures.4

     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.

     3
      This figure represents the correct amounted ($39,933
(reported Schedule C gross receipts) - $34,739 (total bank
deposits)).
     4
      The $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.
                              - 11 -

     During the initial interview on December 10, 2003,

petitioner told the RA that he had between $35 and $40 in cash on

hand for 2002.   According to the RA, petitioner changed his story

later that day, claiming that he had between $3,000 and $5,000 in

cash on hand and that he had $1,500 in cash on hand by the end of

2002.   At their next meeting, on February 19, 2004, petitioner

claimed that he definitely had $5,000 on hand at the beginning of

2002.   Petitioner knew he had $5,000 because he always had that

amount and “he didn’t take any money out of his cash hoard”

during 2001, but “this time he stated [that he did not have any

money on hand at the end of 2002]”, according to the RA.

     Petitioner also told the RA that nobody knows about his cash

hoard because “he [lived] alone and had no personal life.”    At

trial, respondent asked petitioner whether he showed his cash

hoard to anybody and whether anybody else knew about it.

Petitioner replied:   “No, no, no.   Of course not.”

     Petitioner, however, called a witness, Mr. Walton, to

corroborate his cash hoard.   Mr. Walton testified that he knew

that petitioner had a shoe box, that petitioner “might make a

withdrawal from his account and he never take it and turn it back

in the bank.   He’ll put it in his shoe box.”   Mr. Walton

testified that he knew 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 take

the purchase money out of the shoe box; (3) he knew that

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 (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 1992 and allegedly

did not spend until 2002.

     Petitioner’s testimony that he kept a cash hoard well over

the $11,250 in undeposited-cash expenditures in a shoe box over

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,

94 T.C. 654, 659 (1990).   The Court also finds improbable

petitioner’s claim that while he cashed $12,793 in checks between

1984 and 1992, he did not spend the money, and he kept it in a

shoe box for use in 2002, despite maintaining various

certificates of deposit and bank accounts.5    In addition,

petitioner has inconsistently claimed that he had cash on hand

for 2002 consisting of:    (1) $12,793 (checks cashed between 1984

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

Simply put, petitioner’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. Commissioner, T.C. Memo. 1997-471, affd.

without published opinion 208 F.3d 212 (6th Cir. 2000);Phillips

v. Commissioner, T.C. Memo. 1984-133; In re Kelesyan, 153 Bankr.

927, 929-930 (Bankr. M.D. Fla. 1993).

     On the basis of the foregoing, respondent’s determinations

of $16,725 and $11,250 in undeposited-cash expenditures for 2001

and 2002, respectively, are sustained.    Respondent’s

determinations of $31,173 and $45,098 of Schedule C gross

receipts for 2001 and 2002, respectively, are sustained.      Insofar

     5
      Aside 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 deposit worth $63,148.56 as of Jan. 3, 2003.
                                  - 14 -

as understatements to petitioner’s Schedule C gross receipts for

2001 and 2002 are proposed, respondent’s determinations are

sustained.6

III.       Petitioner’s Schedule C Expense Deductions

       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 $654 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 the

$2,345 of the claimed $6,182 in other expenses and $7,666 of the

claimed $25,668 in section 179 expenses and depreciation

deductions that respondent disallowed.       Although the AO allowed

petitioner a $1,671 expense deduction for vehicle insurance for

2002, respondent alleges that the $2,345 figure consists of $516

       6
      Respondent determined understatements of $12,678 and $5,165
for 2001 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.
                              - 15 -

for “SCE” and $3,500 for “MISC”.   It is unclear from the record

whether respondent allowed the $1,671 expense deduction as a

separate item within the other expenses category or whether it

offsets the $3,500 “MISC” expense for 2002 (i.e., only $1,829 of

the “MISC” expense remains in dispute).    The $7,666 figure

consists of:   (1) $465 of the section 179 expense deduction; (2)

$2,655 of the special depreciation allowance; and (3) $4,546 of

the depreciation deduction.

     Petitioner asserted that he had “proved them, and they’re in

[my exhibits, which I showed to the IRS]”.

     Petitioner told the RA that he had paid for the fuel in

cash.   There is no evidence in the record substantiating payments

of $194 for fuel in 2001.   Respondent’s disallowance of the $194

fuel expense deduction for 2001 is sustained.    See INDOPCO, Inc.

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

     With respect to the $1,800 and $3,500 deductions for “MISC”

expenses for 2001 and 2002, respectively, petitioner has provided

receipts substantiating payments of $46 to the franchise tax

board for 2001, $99 for a permit for 2002, which bears an

undecipherable notation, $175.50 for a building permit and

landscaping business license for 2002, and vehicle expenses of:

(1) $71 for “AAA Renewal” for 2001; (2) $63 for “DMV Renewal” for

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, which

bears the undecipherable notation, qualifies as an ordinary and

necessary business expense and that is it not a nondeductible

personal expense.       See secs. 162, 262.   Thus, he is not entitled

to a deduction for that permit.       The AO allowed petitioner

deductions of $654 and $1,671 for vehicle insurance based upon a

90-percent business use.7      Petitioner has not established that he

is entitled 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 expenses

for:       (1) $63.90 for “AAA Renewal” for 2001; (2) $56.70 for “DMV

Renewal” for 2001; and (3) $9 for the “City of Moreno Valley”

vehicle tags for 2002.       Compare Cohan v. Commissioner, 39 F.2d
7
      The RA determined business use percentages of 72 and 90
percent for petitioner’s Ford and Toyota trucks, respectively.
                              - 17 -

540, 543-544 (2d Cir. 1930), with Sanford v. Commissioner, 50
T.C. 823, 827 (1968) (pursuant to section 274(d), the Court

cannot estimate expenses with respect to certain items), affd.

per curiam 412 F.2d 201 (2d Cir. 1969).

     There is no evidence in the record substantiating payments

of $465 for tools in 2002.   Therefore, the Court finds that

petitioner is not entitled to an allowance greater than the

$6,304 that the RA allowed as section 179 expenses for 2002.

Petitioner also has not proven any infirmity with respect to

respondent’s determinations disallowing $2,655 of petitioner’s

special depreciation deduction and $4,546 of his depreciation

deduction.   Accordingly, respondent’s determinations are

sustained.

     Petitioner submitted canceled checks substantiating

telephone payments of $361.90 and $71.65 for 2001 and 2002,

respectively.   It is unclear from the record whether respondent

has already given petitioner allowances for these items or that

the items qualify as deductible business expenses.   See sec.

262(b) (charges for basic telephone service for the “1st

telephone line” at the taxpayer’s residence are treated as a

nondeductible personal expense); see also secs. 274(d),

280F(d)(4)(A)(v) (requiring strict substantiation of cell phone

expenses).   Accordingly, petitioner is not entitled to allowances
                              - 18 -

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.

Respondent also allowed a $216 depreciation deduction for

petitioner’s home in the computation of the deduction for the

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 is

entitled to an allowance greater than 6 percent of the item.8

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 Deductions

      Respondent allowed petitioner itemized deductions of $12,826

for 2001 consisting of $1,867 for real estate taxes and $10,959

      8
      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 contributions.    Respondent allowed petitioner the

$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 2001 and 2002, respectively; (2) $291 and $264 for

charitable contributions for 2001 and 2002, respectively;

(3) $2,448 and $3,110 for health insurance premiums for 2001 and

2002, respectively; and (4) medical/dental expenses of $56.69 for

2001.

     Self-employed individuals may deduct 60 percent and 70

percent of their health insurance premiums for 2001 and 2002,

respectively, and may deduct the excess thereof pursuant to

section 213.   Sec. 162(l)(1), (3).      Petitioner claimed self-

employed health insurance deductions of $1,574 and $1,991 for

2001 and 2002, respectively.    Respondent has made no adjustment

to petitioner’s claimed $1,574 self-employed health insurance

deduction for 2001, although it should have been limited to

$1,468.80 (60 percent of $2,448).     Petitioner has not proven that

he is entitled to an amount greater than the $1,574 that

respondent allowed as a self-employed health insurance deduction

for 2001, but he may deduct the $8749 excess in the amount

allowed by section 213.   Petitioner’s self-employed health

     9
      2001 substantiated health insurance premium payments of
$2,448 less the $1,574 self-employed health insurance deduction
that respondent allowed.
                               - 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 the

$99310 excess in the amount allowed by section 213.   See secs.

63(e)(1), 162(l)(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).11

     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 canceled

checks that he submitted into evidence respondent has already

     10
      2002 substantiated health insurance premium payments of
$3,110 less the allowable $2,177 self-employed health insurance
deduction.
     11
      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 exceed
$1,612.21 for 2002.
                                - 21 -

given petitioner an allowance of $241.       The Court will allow

petitioner an additional $50 deduction 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 respondent 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 is

sustained.

     To reflect the foregoing,

                                      Decision will be entered under

                                 Rule 155.

     12
      $1,969.54 (real estate taxes) + $264 (charitable
contributions) = $2,233.54.
                                 - 22 -

                               APPENDIX

     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’ concessions, and the Court’s
allowances.

       Sch. C deductions           2001             2002

       Safety boots               $220.00          $340.00
       Fuel                      1,186.00         1,409.00
       Telephone                   366.00           291.00
       Franchise tax bd.            46.00
       Licenses or permits                          175.50
       Vehicle ins.                654.00         1,671.00
       AAA                          63.90            71.00
       Vehicle tags/DMV             56.70            64.00
       Deduction for bus.
         use of home               416.00           434.00
       Legal & profl. servs.       169.00           225.00
       Tax & licenses                                89.00
       Depreciation & sec.
         179 expenses            3,310.00        18,002.00
            Total                6,487.60        22,771.50

       Sch. C profit/loss          2001             2002

       Gross receipts          $31,173.00       $45,098.00
       Deductions               -6,487.60       -22,771.50
         Net profit             24,685.40        22,326.50

       Self-emp. tax comp.         2001             2002

       Net profit sch. C       $24,685.40       $22,326.50
                                    1                1
                               x      92.35%    x      92.35%
       Net earnings              22,796.97        20,618.52
                                    2                2
                               x      15.30%   x       15.30%
       Self-emp. tax              3,487.94         3,154.64
                                    3                3
                               x      50.00%   x       50.00%
       Self-emp. tax
         deduction               1,743.97         1,577.32
                           - 23 -

    Form 1040 items                 2001      2002

Taxable interest              $2,346.00    $2,864.00
Bus. income                   24,685.40    22,326.50
Self-emp. tax deduction       -1,743.97    -1,577.32
Self-emp. ins. deduction      -1,574.00    -2,117.00
AGI                           23,713.43    21,496.18
1
   See secs. 1401(a) and (b), 1402(a)(12) (which allows as a
deduction one-half of the self-employment tax rate; thus,
92.35 percent of the Schedule C net profit is subject to
self-employment tax).
2
   See sec. 1401(a) and (b) (the rate of tax imposed upon
self-employment income is the sum of 12.4 and 2.9 percent).
3
   See sec. 164(f) (which allows as a deduction one-half of
the self-employment taxes).