Zeidler v. Commissioner

T.C. Memo. 1996-157

UNITED STATES TAX COURT

GERALD L. AND JOY M. ZEIDLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 1587-95, 4121-95. Filed March 27, 1996.

Gerald L. and Joy M. Zeidler, pro se.

James M. Klein, for respondent.

MEMORANDUM OPINION

COUVILLION, Special Trial Judge: These consolidated cases

were heard pursuant to section 7443A(b)(3)1 and Rules 180, 181,

and 182.

1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
 - 2 -

Respondent determined the following deficiencies in

petitioners' Federal income taxes, additions to tax, and

penalties:

Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1990 $4,383 $202 $ 877
1991 5,481 91 1,096
1992 1,964 58 393

After concessions by respondent,2 the issues for decision

are: (1) Whether petitioners are entitled to charitable

contribution deductions, under section 170(a) for each of the

years in question, for contributions to a local singing group;

(2) whether petitioners are entitled to educational expense

deductions, under section 162(a) for each of the years in

question; (3) whether petitioners are precluded, under section

280A for each of the years in question, from deduction of losses

incurred from rental properties; (4) in the event section 280A is

not applicable to petitioners' rental properties, whether

petitioners have substantiated certain expenses; (5) in the event

section 280A is not applicable to petitioners' rental properties,

2
At trial, respondent conceded the addition to tax under sec.
6651(a)(1) for 1991. Respondent, at trial, made several other
concessions, principally with respect to the substantiation of
various expenses that were disallowed in the notices of
deficiency. Those concessions are noted in the body of the
opinion. A Rule 155 computation will be necessary in these
cases.
 - 3 -

whether petitioners have established basis under section 167(c)

as to one of the rental properties for purposes of determining

the allowable depreciation deduction for each of the years at

issue; (6) whether section 280F(d)(4) precludes petitioners from

claiming depreciation on a computer and peripheral equipment

located in their home that was used in petitioners' trade or

business activity and in petitioners' rental activity;

(7) whether petitioners are entitled to a deduction, under

section 162(a), for travel expenses attributable to petitioner

Joy M. Zeidler (Mrs. Zeidler), who accompanied her husband,

petitioner Gerald L. Zeidler (Mr. Zeidler), on two business

trips; and (8) whether petitioners are liable for the additions

to tax under section 6651(a)(1) and penalties under section

6662(a).

Some of the facts have been stipulated, and those facts,

with the annexed exhibits, are so found and are incorporated

herein by reference. Petitioners, husband and wife, were legal

residents of Greendale, Wisconsin, at the time their petitions

were filed.

During the 3 years at issue, Mr. Zeidler was employed as a

production manager at Ladish Co., Inc. (Ladish), at Cudahy,

Wisconsin. Ladish was in the foundry business, forging iron and

steel products. Mr. Zeidler held college degrees in electrical

and chemical engineering. Mrs. Zeidler was also employed at
 - 4 -

Ladish during the years at issue until June 1992 as a

stenographer. She was classified by her employer as a Steno III,

having progressed from Steno I and Steno II. Her work was

entirely administrative, and, at some point, in addition to her

work as stenographer, she became manager of the company store

that stocked gifts and other paraphernalia bearing the Ladish

logo. Mrs. Zeidler's employment with Ladish terminated in June

1992 after 18 years of service. She was terminated because of

adverse business and economic conditions facing Ladish. For

several years prior to 1992, Ladish had been faced with such

problems and had, over the years, laid off or terminated

employees, beginning with employees having less seniority.

On their Federal income tax returns for 1990, 1991, and

1992, petitioners claimed charitable contribution deductions of

$141, $211, and $143, respectively, for contributions to an

organization in Greendale, Wisconsin, known as the Cantare

Chorale singers (the organization).3 The organization at one

3
The charitable contribution adjustments in the notices of
deficiency were $183, $418, and $143, respectively, for 1990,
1991, and 1992. At trial, the parties advised the Court that the
adjustments in the notices of deficiency involved other charities
as well as the contributions to the Cantare Chorale singers but
that the parties had reached a basis for settlement of the
adjustments involving the other charities. The deductions to the
Cantare Chorale singers represented the only remaining issue for
trial, those amounts being $141, $211, and $143, respectively,
for the 3 years at issue. The Court further notes that, in the
stipulation of facts filed with the Court, the charitable
contribution adjustment relating to the Cantare Chorale singers
(continued...)
 - 5 -

time in the past had applied with the Internal Revenue Service

(IRS) for recognition as a tax-exempt organization under section

501(c)(3); however, no determination was ever made by the IRS

that the organization was a qualified organization under section

501(c)(3). The parties stipulated that the organization was not

listed as a tax-exempt nonprofit organization on the U.S.

Department of Treasury Cumulative List of organizations pursuant

to section 501(c). The organization never pursued its

application for recognition as an organization exempt under

section 501(c)(3). In the notices of deficiency, respondent

disallowed the contributions for the 3 years.

At the time of trial, the organization had been in existence

approximately 15 years. It was made up of volunteer singers,

numbering approximately 45, from Greendale, Wisconsin, and its

environs who were interested in furthering the enjoyment of music

in the community and who, in general, "loved to sing". The

organization had two public performances each year, one in the

spring and one near Christmas. Mrs. Zeidler was secretary of the

organization and also served on its executive board, having

3
(...continued)
for 1992 is stated to be $193. At trial, counsel for respondent
acknowledged that amount to be in error and that the correct
amount was $143. Respondent agrees that the amounts at issue for
the 3 years were in fact paid by petitioners and that
disallowance of the deduction was based solely on respondent's
determination that the organization was not an exempt charitable
organization under sec. 501(c)(3).
 - 6 -

served in those positions 6 or 7 years. In her capacity as an

officer, Mrs. Zeidler was familiar with the operational and

financial aspects of the organization. For all of the

performances, the organization sold tickets, and proceeds were

used to defray the expenses of putting on the performances. Any

excess monies were carried over to assist in defraying the

expenses of subsequent performances, which included the purchase

of music, supplies, robes, tuxedos, and dresses for the chorale

performances. Financial records of the organization were

submitted into evidence from five performances during the years

in question. For the five performances, the organization had

gross receipts of $10,872.84 and expenses of $9,101.88. The

expenses, which were itemized, do not indicate that the

organization's funds were used for the benefit of any private

individual, and the Court so finds. The sources of funds to the

organization were identified as "ticket receipts", "patron

money", and "door sales". The distinctions between these

categories of receipts were not explained at trial. At no time

during its existence did the organization's gross receipts in any

given year exceed $5,000.

With respect to this issue, and all other issues in these

cases, certain general rules are applicable, one of which is that

respondent's determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving
 - 7 -

that the determinations are in error. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a

matter of legislative grace, and the taxpayer must be able to

point to an applicable statute to show that a claimed deduction

comes within its terms. Interstate Transit Lines v.

Commissioner, 319 U.S. 590 (1943).

Section 170(a) allows as a deduction, subject to the

percentage limitations of section 170(b), any charitable

contribution as defined in section 170(c). Section 170(c)

provides, in part, that the term "charitable contribution" means

a contribution to or for the use of "a corporation, trust, or

community chest, fund, or foundation * * * organized and operated

exclusively for religious, charitable, scientific, literary, or

educational purposes * * * no part of the net earnings of which

inures to the benefit of any private shareholder or individual."

Petitioners have not satisfied their burden of establishing

that the Cantare Chorale singers was an organization exempt under

section 501(c), such that contributions thereto would be

deductible under section 170(a).

Section 1.501(c)(3)-1(b)(1), Income Tax Regs., provides

generally that an organization is organized exclusively for one

or more exempt purposes only if the "articles of organization"

(a) limit the purposes of such organization to one or more exempt

purposes, and (b) do not expressly empower the organization to
 - 8 -

engage, otherwise than as an insubstantial part of its

activities, in activities that in themselves are not in

furtherance of one or more exempt purposes. Section 1.501(c)(3)-

1(b)(2), Income Tax Regs., states that "articles of organization"

or "articles" includes the trust instrument, the corporate

charter, the articles of association, or any other written

instrument by which an organization is created.

Petitioners presented no organizational documents to

evidence the existence of the Cantare Chorale singers or to

evidence that it was organized for one or more exempt purposes

under section 501(c)(3). Nor was the Court provided with any

other admissible documents or evidence that would set out the

organization's purposes so as to meet the organizational test.

The Court holds that petitioners have not sustained their burden

of proving that the organization was exempt for purposes of
 - 9 -

section 501(c)(3).4 Respondent, therefore, is sustained on this

issue.

Petitioners claimed on their Federal income tax returns, as

Schedule A, Itemized Deductions, educational expenses of $6,077,

$12,436, and $4,855, respectively, for 1990, 1991, and 1992,

prior to deduction of the 2-percent floor on miscellaneous

itemized deductions under section 67(a). These expenses were

incurred by Mrs. Zeidler as a student pursuing weekend college

courses at Alverno College, a women's liberal arts college at

Milwaukee, Wisconsin. In the notices of deficiency, respondent

disallowed the amounts claimed on the ground that the educational

expenses qualified Mrs. Zeidler for a new trade or business, and,

therefore, the expenses were not deductible under section 1.162-

5(b)(3), Income Tax Regs.

4
Petitioners contend that the organization was not required
to apply for recognition of sec. 501(c)(3) status because the
gross receipts of the organization for each of its taxable years
never exceeded $5,000 per year. Sec. 508(a) provides generally
that any organization organized after Oct. 9, 1969, shall not be
treated as an organization described in sec. 501(c)(3), unless
the organization has given notice to the Secretary that it is
applying for recognition. Sec. 508(c)(3) exempts from this
notice requirement any organization that is not a private
foundation, and the gross receipts of which in each taxable year
are normally not more than $5,000. The mere fact that the
Cantare Chorale singers was not required to give notice that it
was applying for recognition as a tax-exempt organization does
not, in and of itself, establish that the organization was
organized and operated exclusively for a charitable purpose,
unless the organization, in fact, establishes that it was so
organized and operated exclusively for an exempt purpose. Sec.
1.501(c)(3)-1(b), Income Tax Regs.
 - 10 -

As noted above, Mrs. Zeidler possessed a high school diploma

when she commenced her employment with Ladish. As a Steno III at

Ladish, her duties were essentially the same as those of Steno I

and Steno II, from which she had progressed. The curriculum Mrs.

Zeidler pursued at Alverno College was toward a Bachelor of

Science degree in professional communications with a minor in

business management. Mrs. Zeidler graduated with such a degree

on May 16, 1992.

Petitioners contend that the sole purpose in Mrs. Zeidler's

advanced education was to improve her skills in the work she was

doing with Ladish. She pursued the education because she

recognized several years earlier that Ladish would ultimately be

adversely affected by economic and business conditions that would

require permanent layoffs of employees. By having advanced

educational training in her field, Mrs. Zeidler felt that she

would not be laid off, or, at least, her employment would be

prolonged. Although Mrs. Zeidler was permanently laid off in

June 1992, she is satisfied that, because of her advanced

educational training, her employment with Ladish continued at

least 6 or 7 years longer that if she had not earned her degree.

Because of her advanced education, Mrs. Zeidler was "held out of

seniority", in that other employees having seniority over her

were laid off. Petitioners argue that Mrs. Zeidler's advanced

education did not qualify her for a new trade or business
 - 11 -

because, during the entire period she pursued her advanced

education and thereafter, she continued doing the same work.

After she was laid off by Ladish, she applied with 30 to 35

employers and was unsuccessful in finding employment, either as a

stenographer or in any other position commensurate with her

advanced educational training. Petitioners argue that Mrs.

Zeidler never intended to pursue a new trade or business and

always expected to remain in the same position with her employer.

Section 162 and the regulations thereunder generally allow a

deduction for ordinary and necessary business expenses, including

expenses of education, which (1) maintain or improve skills

required by an individual in his employment or other trade or

business, or (2) meet the express requirements of the

individual's employer, or the requirements of applicable law or

regulations, imposed as a condition to the retention by the

individual of an established employment relationship, status, or

rate of compensation. Sec. 1.162-5(a), Income Tax Regs.

However, section 1.162-5(b), Income Tax Regs., describes certain

educational expenditures that are not deductible as ordinary and

necessary business expenses even though the education may

maintain or improve skills required by the individual in his

employment or may meet the express requirements of the

individual's employer or of applicable law or regulations. As

applicable here, such expenditures include those "made by an
 - 12 -

individual for education which is part of a program of study

being pursued by him which will lead to qualifying him in a new

trade or business." Sec. 1.162-5(b)(3), Income Tax Regs.

Under section 1.162-5(b)(3), Income Tax Regs., if a taxpayer

is pursuing a course of educational study that qualifies the

taxpayer for a new trade or business, the expenditures are not

deductible whether the studies are required by the employer,

whether the taxpayer does not intend to enter a new field or

endeavor, and even though the taxpayer's duties are not

significantly different after the education from what they had

been before the education. Robinson v. Commissioner, 78 T.C.

550, 556-557 (1982); Bodley v. Commissioner, 56 T.C. 1357, 1360

(1971); Schwerm v. Commissioner, T.C. Memo. 1986-16.

The question of whether an educational expenditure qualifies

a taxpayer for a new trade or business requires a "commonsense

approach". Reisinger v. Commissioner, 71 T.C. 568, 574 (1979).

"If the education qualifies the taxpayer to perform significantly

different tasks and activities than he or she could perform prior

to the education, then the education qualifies him or her for a

new trade or business." Browne v. Commissioner, 73 T.C. 723, 726

(1980) (citing Diaz v. Commissioner, 70 T.C. 1067, 1074 (1978),

affd. without published opinion 607 F.2d 995 (2d Cir. 1979));

Glenn v. Commissioner, 62 T.C. 270, 275 (1974). The taxpayer's

subjective purpose in pursuing the education is irrelevant, and
 - 13 -

the question of deductibility is not satisfied by a showing that

the taxpayer did not in fact carry on a new trade or business.

Burnstein v. Commissioner, 66 T.C. 492, 495 (1976). The fact

that Mrs. Zeidler sought employment unsuccessfully after she

obtained her degree does not mean that she had not qualified for

a new trade or business. The unfortunate reality is that she was

unable to find new employment with her degree because of the same

adverse economic conditions that caused her layoff as a

stenographer.

Petitioners have not satisfied the Court that, with a

bachelor's degree, Mrs. Zeidler was not qualified to engage in an

occupation requiring no greater skills than those required by the

Steno III position she had with Ladish. One of the documents

introduced into evidence consisted of an evaluation of Mrs.

Zeidler by Alverno College upon her attainment of the degree in

professional communication. That evaluation stated:

Joy Zeidler has demonstrated the abilities which
characterize an Alverno College graduate with a major in
professional communication and a support area in business
and management. In professional communication they include
the ability to adapt messages for a variety of purposes and
audiences, to effectively use oral, written, and media
modes, to interact effectively with others, and to apply
communication theory across a variety of contexts. In
business and management these include the ability to take
the initiative in identifying and solving problems or
opportunities for growth or improvement in organizational
settings, to accurately use and communicate the application
of concepts and frameworks from business functional areas to
problem situations, and to interact effectively in group or
organizational contexts.
 - 14 -

In Malek v. Commissioner, T.C. Memo. 1985-428, this Court

held that the taxpayer, who was employed in an administrative

position with duties very similar to those of Mrs. Zeidler with

Ladish, and who obtained a Bachelor of Science degree from

Alverno College in professional communications, had, by virtue of

the educational courses, qualified for a new trade or business.

The Court holds, therefore, that the educational expenses

incurred by petitioners in the instant cases qualified Mrs.

Zeidler for a new trade or business. Respondent, accordingly, is

sustained on this issue.

On their Federal income tax returns for 1990 and 1991,

petitioners reported on Schedule E, Supplemental Income and Loss,

gross receipts and expenses relating to two residential real

estate properties owned by petitioners. For 1992, petitioners

conveyed one of the properties to a corporation wholly owned by

them, JMZ Management, Inc. The corporation qualified as an S

corporation under section 1361, and the loss sustained by that

corporation was reported by petitioners on their 1992 individual

tax return.

In the notices of deficiency, respondent disallowed expenses

attributable to one of the rental properties for the 3 years in

question under section 280A(a) for the reason that petitioners

had used the questioned property for personal purposes during

each of the 3 years in question for periods in excess of those
 - 15 -

proscribed by section 280A(d)(1), and, therefore, section 280A(a)

applied. Alternatively, respondent disallowed some of the

expenses claimed as to both properties for lack of

substantiation. The amounts disallowed were $4,876, $4,400, and

$3,567, respectively, for 1990, 1991, and 1992.5

Section 280A(a) provides generally that, in the case of an

individual or an S corporation, no deduction otherwise allowable

shall be allowed with respect to the use of a dwelling unit that

is used by the taxpayer during the taxable year as a residence,

except as otherwise provided in section 280A. Section 280A(d)(1)

provides generally that a taxpayer is considered as using a

dwelling unit as a residence if the taxpayer uses the unit for

personal purposes during the taxable year for the greater of 14

days or 10 percent of the number of days the unit is rented at a

fair rental. In such circumstances, where a unit is put to a

rental use and is also used by the taxpayer as a residence, the

deduction of expenses attributable to the dwelling unit is

limited to the gross rental income derived from the property.

Sec. 280A(c)(5).

5
The amounts disallowed for 1990 and 1991 do not include the
depreciation claimed on the rental unit as to which respondent
applies sec. 280A. The notices of deficiency for these 2 years
include a separate adjustment disallowing the depreciation
claimed on this property for the additional reason that
petitioners had no depreciable basis in the property. That same
issue carries over to 1992 in respondent's disallowance of the S
corporation loss. The depreciation adjustment, therefore, is
addressed as a separate issue.
 - 16 -

Based on the evidence presented at trial, the Court is

satisfied that petitioners did not use the questioned property as

a residence for each of the years at issue for periods that would

exceed the time periods set out in section 280A(d)(1). Although

petitioners made several visits to the property during the years

in question and, on one or two occasions used the property as a

residence well under the 14-day/10 percent standard, the visits

to the property were essentially for maintenance. The Court,

therefore, sustains petitioners on this issue, that section

280A(c)(5) does not preclude petitioners from claiming losses

from this property in excess of the rentals therefrom.

Respondent's alternative adjustment to petitioners'

deductions from rental activities relates to the 1991 tax year on

the same property discussed above, as to which $313 expenses for

supplies, $596 for meals, and $1,059 for automobile travel were

disallowed for lack of substantiation. On this record, the Court

sustains respondent as to the three items. Petitioners presented

no proof, such as bills, receipts, or canceled checks, to

establish that they incurred the $313 expense for supplies. As

to the automobile and meal expenses, records for these expenses

were also not produced. Section 162(a) allows a deduction for

all ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business, including,

under section 162(a)(2), "traveling expenses (including amounts
 - 17 -

expended for meals and lodging* * *) while away from home in the

pursuit of a trade or business". Section 274(d) provides further

that, to substantiate such expenses, the taxpayer must maintain

adequate records that include maintaining an "account book,

diary, log, statement of expense, trip sheet, or similar record

* * * and documentary evidence * * * which, in combination, are

sufficient to establish each element of an expenditure". Sec.

1.274-5(c)(2)(i), Income Tax Regs.6 The substantiation

requirements of section 274(d) apply to automobile expenses by

virtue of section 280F(d)(4) and to expenses connected with other

classes of property referred to as "listed property" and defined

in section 280F(d)(4). Section 280F(d)(4)(A)(i) and (ii)

includes any passenger automobile or any other property used as a

means of transportation. Petitioners did not maintain the

records required by section 274(d) to substantiate their meals

and automobile expenses. Respondent, therefore, is sustained on

this issue.

As noted earlier, petitioners owned two residential rental

properties as to which they reported their income and expenses on

Schedule E of their returns. One of the properties was a single

family home located at Sister Bay, Wisconsin, a popular resort

and vacation area located 90 miles north of Milwaukee, Wisconsin.

6
Under sec. 274(d)(1), the substantiation requirements for
traveling expenses are applicable to expenses under sec. 162, as
well as expenses under sec. 212.
 - 18 -

Petitioners claimed straight-line depreciation deductions on this

property (the Sister Bay property) of $1,920 for each of the

years 1990 and 1991. In the notices of deficiency, respondent

disallowed the entire amounts claimed for the reason that

petitioners had not established their cost or basis for the

property.7

Petitioners acquired the Sister Bay property in two stages--

an undivided one-half interest in 1988 and the other one-half

interest in 1989. They submitted in evidence two quitclaim deeds

to substantiate their acquisition of these undivided interests.

The deeds, however, make no recitation of the consideration paid

for the property. The property was acquired from Mrs. Zeidler's

parents, and petitioners contend they paid $70,400 for the

property. Petitioners calculated their depreciation for 1990 and

1991 based on $52,800 as the cost of the house and improvements,

with a useful life of 27.5 years.

Petitioners contend the $70,400 cost of the property was

paid by them, as follows:

$18,400 in satisfaction of a prior loan by Mrs. Zeidler to her parents
40,000 in cash that petitioners received over a period of 2 years as gifts
from Mr. Zeidler's parents
8,000 approximately the amount petitioners paid in cash from their own
funds
4,000 approximately an amount owing by Mrs. Zeidler's parents to
petitioners for work Mr. Zeidler performed on the retirement
home of Mrs. Zeidler's parents in North Carolina
$70,400 TOTAL

7
This is the issue referred to in supra note 5.
 - 19 -

Petitioners offered at trial, to establish payment of the

above amounts, three checks totaling $4,702. However, all three

checks bear notations that all or portions of the checks are for

taxes. No credible documentary evidence was presented that would

satisfy the Court that petitioners paid any amounts to acquire

the property. The court is satisfied, however, that petitioners

have record title to the property; that the property was held for

residential rental purposes; and that petitioners have been

reporting the income and expenses for this property for Federal

income tax purposes. When certain claimed expenses are not

adequately substantiated, but the Court is satisfied from the

record that expenses were in fact incurred by the taxpayer, and a

basis upon which an estimate of the expenses can be made, this

Court may determine and allow the taxpayer a deduction for the

expense claimed. Cohan v. Commissioner, 39 F.2d 540, 544 (2d

Cir. 1930). The Court, accordingly, estimates that petitioners

paid $8,250 for the house and improvements and, assuming a useful

life of 27.5 years (which respondent does not dispute), allows

petitioners a depreciation deduction of $300 for each of the

years at issue.8

8
For 1992, the rental activity of the Sister Bay property was
reported by JMZ Management, Inc., a corporation owned by
petitioners, an S corporation under section 1361. On their 1992
Federal income tax return, petitioners reported a loss of $3,567
from JMZ Management, Inc., which included a depreciation
deduction of $1,920 claimed by JMZ Management, Inc., on Form
(continued...)
 - 20 -

On their Federal income tax returns for 1990 and 1991,

petitioners claimed, on Schedule C of their returns, Profit or

Loss From Business, depreciation deductions of $2,751 and $1,800,

respectively, on a computer that was located in petitioners'

home. Petitioners contend the computer was used 80 percent in

connection with a financial services activity that Mr. Zeidler

conducted out of their home, and for which petitioners reported

their income and expenses on Schedule C of their returns.

Petitioners contend that the computer was used 20 percent in

connection with two residential rental properties petitioners

owned, and as to which petitioners reported their income and

expenses on Schedule E of their returns, Supplemental Income and

Loss (From rents, royalties, partnerships, estates, trusts,

REMICs, etc.). In the notices of deficiency, respondent

disallowed the depreciation deductions claimed with respect to

the computer for both years. Respondent contends that the

claimed deductions were not substantiated pursuant to section

274(d)(4). On their income tax returns for 1990 and 1991,

petitioners also claimed deductions on Schedule C of their

returns for expenses relating to the office in their home that

8
(...continued)
1120S, U.S. Income Tax Return For An S Corporation, filed by JMZ
Management, Inc., for 1992. Respondent disallowed the loss of
$3,567 reported by petitioners. Petitioners are entitled to a
$300 depreciation deduction for 1992 for the Sister Bay property
for the reasons discussed above.
 - 21 -

was used in connection with their trade or business and in

connection with their investment property. In the notices of

deficiency, respondent disallowed the home office deductions for

1990 and 1991 on the ground that the office was not used

exclusively for business under section 280A. At trial, however,

respondent conceded the adjustments relating to petitioners' home

office expenses, and further conceded petitioners were entitled

to home office deductions based on 120 square feet of space

rather than 110 square feet claimed by petitioners on their

returns.

Section 274(d) provides that no deduction shall be allowed

with respect to "listed property" as defined in section

280F(d)(4), unless the taxpayer substantiates by adequate records

or corroborative evidence (A) the amount of the expense, (B) the

time and place of use, (C) the business purpose, and (D) the

business relationship of the taxpayer to the persons using listed

property. Sec. 274(d)(4). Petitioners did not maintain such

records with respect to their computer.

The term "listed property" under section 280F(d)(4) includes

any computer or peripheral equipment. Sec. 280F(d)(4)(A)(iii).

However, section 280F(d)(4)(B) provides generally that the term

"listed property" shall not include any computer or peripheral

equipment used exclusively at a regular business establishment,

and any portion of a dwelling unit shall be treated as a regular
 - 22 -

business establishment if the requirements of section 280A(c)(1)

are met. Section 280A(c)(1), in turn, allows deductions

allocable to the portion of a dwelling unit that is exclusively

used on a regular basis as the principal place of business for

any trade or business of the taxpayer. As noted above,

respondent at trial conceded petitioners' entitlement to a home

office deduction for the portion of their dwelling used in

connection with their trade or business and rental properties.

With this concession, it follows that petitioners' computer is

excepted from the definition of "listed property" under section

280F(d)(4)(B); thus, the strict substantiation requirements of

section 274(d) are not applicable. Petitioners substantiated

their purchase of the equipment, and the Court is satisfied that

the computer was used for business and investment purposes.

Petitioners, therefore, are entitled to depreciation deductions

on their computer for the 2 years at issue.

The trade or business activity of petitioners previously

referred to was conducted by Mr. Zeidler under the trade name of

GLZ Financial Services. He provided consulting and estate

planning services and was also licensed to sell insurance.

Petitioners reported their income and expenses from this activity

on Schedule C, Profit or Loss From Business, of their returns.

In the notices of deficiency, respondent disallowed several of

the expenses claimed by petitioners for each of the years in
 - 23 -

question. At trial, counsel for respondent advised the Court

that petitioners had established their entitlement to deductions

for all the disallowed expenses, except for the following

expenses for the 1990 tax year:9

$930 -- Supplies
162 -- Meals
299 -- Other expenses
909 -- Travel

The Court sustains respondent on each of these items.

Petitioners did not sustain their burden of establishing their

entitlement to a deduction for these expenses. The meals and

travel expenses were additionally subject to the substantiation

requirements of section 274(d), discussed earlier in this

opinion, and petitioners' records as to the meals did not comport

with the record keeping requirements of section 274(d). The $909

travel expense item, however, was disallowed by respondent for a

different reason: the expense related to that portion of Mrs.

Zeidler's travel with Mr. Zeidler on two trips during 1990. One

trip was to North Carolina, and the other trip was to Birmingham,

Alabama. Respondent allowed a deduction for that portion of the

trips allocable to Mr. Zeidler but denied the portion allocable

to Mrs. Zeidler on the ground that the trips, as to her, were not

9
Depreciation of the computer for the 3 years was also one of
the Schedule C expenses disallowed that respondent did not
concede but that issue has been considered by the Court above.
 - 24 -

related to Mr. Zeidler's trade or business activity. The Court

agrees with respondent. Petitioners did not establish that Mrs.

Zeidler's accompaniment of her husband on these trips was in any

way related to or contributed to Mr. Zeidler's business. The

trip to North Carolina was during the Christmas season and

included a visit to Mrs. Zeidler's parents. There was no showing

that Mrs. Zeidler participated in any activity related to Mr.

Zeidler's trade or business. Petitioners failed to show any

business purpose for Mrs. Zeidler on the Birmingham, Alabama,

trip. The $909 expense is considered a personal expense and is

not deductible under section 262. Respondent, therefore, is

sustained on this issue.

Petitioners' 1990 income tax return was signed on

November 4, 1991, and was received by the IRS on November 8,

1991. Petitioners had obtained an automatic extension that

extended the filing period for their 1990 return to August 15,

1991. Petitioners signed their 1992 return on August 12, 1993;

however, respondent alleged on brief that the envelope in which

petitioners mailed their return to the IRS bore a postmark date

of August 24, 1993, and was received by the IRS on August 28,

1993. Petitioners also obtained an automatic extension to file

their 1992 return on or before August 15, 1993. Respondent

determined the addition to tax under section 6651(a)(1) for both

years. At trial, petitioners presented no evidence on this issue
 - 25 -

to prove that either return was mailed or filed on time.

Respondent, therefore, is sustained on these additions to tax.

Respondent determined the penalty under section 6662(a) for

negligence or disregard of rules or regulations for the 3 years

in question. Section 6662(a) provides that, if it is applicable

to any portion of an underpayment in taxes, there shall be added

to the tax an amount equal to 20 percent of the portion of the

underpayment to which section 6662 applies. The penalty is

applicable to any underpayment attributable to negligence or

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

"negligence" includes any failure to make a reasonable attempt to

comply with the provisions of the IRS laws, and the term

"disregard" includes any careless, reckless, or intentional

disregard of rules or regulations. Negligence is the lack of due

care or failure to do what a reasonable and ordinarily prudent

person would do under the circumstances. Neely v. Commissioner,

85 T.C. 934, 947 (1985). Under section 6664(c), no penalty shall

be imposed under section 6662(a) with respect to any portion of

an 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.

On this record, the Court holds that petitioners are liable

for the penalty under section 6662(a). Petitioners claimed

deductions for educational expenses on facts that were very
 - 26 -

similar to the facts of Malek v. Commissioner, T.C. Memo. 1985-

428, wherein this Court held such expenses were not deductible.

Petitioners did not maintain books and records as required by

section 6001 to substantiate other deductions and, in particular,

expenses subject to section 274(d). Petitioners claimed

depreciation on an asset although petitioners had scant evidence

as to its basis. Finally, one of the expenses claimed as a

business expense was found to be for the personal enjoyment of

Mrs. Zeidler. On this record, the Court sustains respondent on

the penalty under section 6662(a).

Decisions will be entered

under Rule 155.