                  T.C. Summary Opinion 2001-150



                     UNITED STATES TAX COURT



          JAN AND CORINNE MEJNARTOWICZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 318-00S.                Filed September 24, 2001.


     Jan and Corinne Mejnartowicz, pro se.

     John Aletta, for respondent.


     POWELL, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.1    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.




1
     Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
                              - 2 -
     Respondent determined a deficiency and a penalty for

negligence under section 6662(a) in petitioners’ 1995 Federal

income tax of $5,746 and $1,149, respectively.

     The issues are whether petitioners are entitled to

deductions on Schedule C, Profit or Loss From Business, for (1)

casual labor ($1,200), (2) cost of goods sold ($8,000),2 and (3)

insurance ($2,298), and whether petitioners are liable for the

negligence penalty under section 6662(a).   At the time the

petition was filed, petitioners resided in Stratford,

Connecticut.

     The relevant facts may be summarized as follows.   During

1995 petitioner Jan Mejnartowicz (petitioner) operated a plumbing

and heating business as a sole proprietorship.   On the Schedule C

pertaining to the plumbing and heating business petitioner

reported the following:




2
     The cost of goods sold is subtracted from gross receipts to
arrive at gross income. Such costs are technically not
deductions and are not subject to limitations under secs. 162 and
274. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987).
Nonetheless, any amount claimed as a cost of goods sold must be
substantiated, and a taxpayer must maintain records sufficient
for this purpose. Xuncax v. Commissioner, T.C. Memo. 2001-226.
                                - 3 -
            Gross receipts                          $26,864
                 Less cost of goods sold             13,569
            Gross income                             13,295

            Less expenses:
                 Car & truck                $531
                 Insurance                 2,298
                 Legal                     2,000
                 Utilities                 1,764
                 Casual labor              1,200
                 Permits                     185      7,978

            Net profit                               $5,317

Upon examination respondent disallowed the deductions for legal,

utilities, and casual labor expenses and reduced the insurance

expense by $1,687.    Respondent also reduced the amount of cost of

goods sold by $8,000.    In addition, respondent made certain

mathematical adjustments that flow from the changes in

petitioners’ adjusted gross income and are not in dispute.

Petitioners concede the adjustments for legal and utilities

expenses.

     Petitioner kept no journal or other books and records.     He

did maintain a checking account, but the canceled checks were

kept by his accountant who had moved to Florida and were

unavailable.    Petitioner did not issue any Forms 1099 or Forms W-

2, Wage and Tax Statement, with regard to the deductions claimed

for casual labor.    While petitioner could have obtained records

of his payments for insurance, he did not.
                               - 4 -
                            Discussion

1. Deductions and Cost of Goods Sold

     Deductions are a matter of legislative grace.    INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).   A taxpayer “shall keep

such permanent books of account or records, including

inventories, as are sufficient to establish the amount of gross

income, deductions, credits, or other matters required to be

shown” on a tax return.   Sec. 1.6001-1(a), Income Tax Regs.; see

also Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965).    Except

as otherwise provided in section 274,3 when the evidence shows

that a taxpayer incurred a deductible expense, but the exact

amount cannot be determined, the Court may “make as close an

approximation as it can, bearing heavily if it chooses upon the

taxpayer whose inexactitude is of his own making.”    Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).    There must,

however, be some basis upon which such an approximation can be

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

     Petitioner has the burden of substantiating his deductions.

Rule 142.   Petitioner has no records whatsoever.   His argument,

as he expresses it, is:

     Normally * * * my expenses would be two-thirds of my gross
     [receipts]. Here, my expenses were only half of what my
     gross was, and that would be the same with any plumbing and
     heating business.




3
     None of the disallowed deductions are subject to sec. 274.
                                 - 5 -
     With regard to the deductions for casual labor and

insurance, we are not satisfied that the unavailability of the

records maintained by his accountant explains his failure to

substantiate these deductions.    There are other reasonable means

that petitioner could have used to substantiate these deductions.

He could have called as witnesses the persons he employed, and he

could have obtained information from the insurance company.    We,

therefore, sustain respondent’s disallowance of these deductions.

     The remaining issue deals with the $8,000 reduction to

petitioner’s cost of goods sold.    On his Schedule C, petitioner

reported gross receipts of $26,864 and cost of goods sold of

$13,569.   The ratio between the gross receipts and cost of goods

sold is roughly 2:1.   We note that in the Internal Revenue

Service “Statistics of Income Bulletin”, Summer 1998, Vol. 18,

No. 1, at 25, total gross receipts and cost of goods sold for

plumbing sole proprietorships for 1996 were $10.2 billion and

$5.2 billion, respectively, almost the identical 2:1 ratio as

shown by petitioner.   We do not believe that there would be a

significant difference between 1995 and 1996.   Respondent’s

reduction of $8,000, therefore, would appear to be out of line,

and, using our best judgment, we believe that the cost of goods

sold would be $11,569.   See Cohan v. Commissioner, supra.
                                - 6 -
2.   Negligence

      Section 6662(a) imposes a penalty with respect “to any

portion of an underpayment of tax required to be shown on a

return” in an amount “equal to 20 percent of the portion of the

underpayment to which this section applies.”      Section 6662

applies, inter alia, to underpayments attributable to negligence

or disregard of rules or regulations.    Sec. 6662(b)(1).

“Negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   Also, “‘Negligence is a lack of due

care or the failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.’”      Freytag v.

Commissioner, 89 T.C. 849, 887 (1987) (quoting Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this

issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299), affd. 904 F.2d

1011 (5th Cir. 1990), affd. on other grounds 501 U.S. 868 (1991).

The question then is whether petitioners’ conduct meets the

reasonably prudent person standard.     See id.

      Petitioner made no attempt to keep records of his plumbing

and heating business as required.    Moreover, he claimed

deductions for legal expenses and utilities that were, by his own

admission, clearly improper.    We sustain respondent’s imposition

of the section 6662(a) penalty.
                             - 7 -
    Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decision will be entered

                                     under Rule 155.
