T.C. Memo. 1996-189
UNITED STATES TAX COURT
MARCUS WAYNE AND JUDITH CAROLINE RAMSEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16830-94. Filed April 18, 1996.
Marcus Wayne and Judith Caroline Ramsey, pro sese.
Roberta A. Duffy, for respondent.
MEMORANDUM OPINION
JACOBS, Judge: Respondent determined a $19,575 deficiency in
petitioners’ 1989 Federal income tax, and a $3,915 section 6662(a)
accuracy-related penalty for such year.
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The issues for decision are: (1) Whether petitioners are
entitled to a claimed $23,822.36 deduction for contributions
allegedly made by or on behalf of petitioner Marcus Ramsey to a
simplified employer pension-individual retirement account plan; (2)
whether petitioners are entitled to deduct business expenses for
1989 in excess of the amounts allowed by respondent; and (3)
whether petitioners are liable for the section 6662(a) accuracy-
related penalty for such year.
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and attached exhibits are
incorporated herein by this reference.
For convenience and clarity, we have combined our findings of
fact and opinion with respect to each issue. As used herein, the
term “petitioner” refers to Marcus Wayne Ramsey; “petitioners”
collectively refers to Marcus Wayne and Judith Caroline Ramsey.
All section references are to the Internal Revenue Code for the
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
General Findings
At the time they filed their petition, petitioners, husband
and wife, resided in Poway, California. They filed a joint Federal
income tax return, Form 1040, for 1989, dated August 14, 1990.
Subsequent to filing the petition in this case, petitioners filed
an amended 1989 return, Form 1040X, dated April 11, 1995, which
respondent accepted. The amended return restated petitioner’s wage
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income and Schedule A employee business expenses as Schedule C
items.
Issue 1. Retirement Plan Contributions
The first issue for decision is whether petitioners are
entitled to a deduction for contributions allegedly made by or on
behalf of petitioner to a retirement plan.
Cal-American
Petitioner was involved in the formation of Cal-American
Insurance Company (Cal-American), a property and casualty insurance
company, and was its president from September 1984 to March 1989.
Prior to Cal-American’s formation, petitioner was the deputy
insurance commissioner for the State of California. Cal-American
was acquired in 1987 by Westech Insurance Network, Inc. (Westech),
which also owned Bancsure Insurance Services, Inc. (Bancsure).
Although president of Cal-American, in actuality petitioner
was an employee of Westech. And, from the time Cal-American was
acquired by Westech until March 1989, petitioner’s salary as well
as reimbursement for his expenses were paid by Bancsure, which
issued a Form 1099-Misc. and Form W-2 to petitioner for 1989. The
Form 1099-Misc. reflected nonemployee compensation in the amount of
$32,422.56. The Form W-2 reflected wages paid to petitioner in the
amount of $62,500. The $62,500 was composed of salary payments for
January and February, plus a severance payment.
Arrowhead
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Following termination as president of Cal-American, petitioner
provided consulting services to Arrowhead General Insurance Agency
(Arrowhead). Arrowhead issued petitioner a 1989 Form W-2,
reflecting $74,503.25 in wages and $8,041 in Federal and $3,956.31
in State income taxes withheld.
Individual Retirement Account
In February 1989, an individual retirement account, account
No. 063-19555-6, was established on petitioner’s behalf at Security
Pacific National Bank. The account was classified as a “SEP”, and
Cal-American was the named employer. Petitioner deposited $11,250
into the account at that time. Petitioners claim that petitioner
received the $11,250 from Westech, in addition to his wage and
severance payments. Petitioners did not include the $11,250 in
income for 1989.
On their 1989 tax return, petitioners claimed a $23,822.36
deduction for payments made to a “self-employed SEP”, which
respondent disallowed. The record does not indicate how
petitioners determined the $23,822.36.
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Discussion
A Simplified Employee Pension (SEP) plan is described in
section 408(k).1 A SEP is a plan pursuant to which an employer
1
SEC. 408(k) states in pertinent part:
(k) Simplified Employee Pension Defined.--
(1) In general.--For purposes of this title,
the term “simplified employee pension” means
an individual retirement account or
individual retirement annuity--
(A) with respect to which the
requirements of paragraphs (2),
(3), (4), and (5) of this
subsection are met, and
(B) if such account or annuity is
part of a top-heavy plan, with
respect to which the requirements
of section 416(c)(2) are met.
(2) Participation requirements.--This
paragraph is satisfied with respect to a
simplified employee pension for a year only
if for such year the employer contributes to
the simplified employee pension of each
employee who--
(A) has attained age 21,
(B) has performed service for the
employer during at least 3 of the
immediately preceding 5 years, and
(C) received at least $300 in
compensation (within the meaning of
section 414(q)(7)) from the
employer for the year.
* * * * * * *
(3) Contributions may not discriminate in
(continued...)
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makes direct contributions to its employees’ individual retirement
1
(...continued)
favor of the highly compensated, etc.--
(A) In general.--The requirements
of this paragraph are met with
respect to a simplified employee
pension for a year if for such year
the contributions made by the
employer to simplified employee
pensions for his employees do not
discriminate in favor of any highly
compensated employee (within the
meaning of section 414(q)).
* * * * * * *
(4) Withdrawals must be permitted.--A
simplified employee pension meets the
requirements of this paragraph only if--
(A) employer contributions thereto
are not conditioned on the
retention in such pension of any
portion of the amount contributed,
and
(B) there is no prohibition imposed
by the employer on withdrawals from
the simplified employee pension.
(5) Contributions must be made under written
allocation formula.--The requirements of this
paragraph are met with respect to a
simplified employee pension only if employer
contributions to such pension are determined
under a definite written allocation formula
which specifies--
(A) the requirements which an
employee must satisfy to share in
an allocation, and
(B) the manner in which the amount
allocated is computed.
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accounts or individual retirement annuities as defined under
section 408(a) and (b). Self-employed individuals or sole
proprietors are treated as their own employers under a SEP plan.
See secs. 401(c)(4), 408(k)(7).
To prevail, as a threshold matter, petitioners must prove that
there was a plan that qualified as a SEP under section 408(k)
during 1989, and that such plan was established by Westech or
another employer. To do so, petitioners rely on petitioner’s
employment agreement with Westech, pursuant to which Westech was
obligated to establish a SEP/IRA for petitioner’s benefit and
contribute thereto an amount equal to 15 percent of petitioner’s
base salary.2
The only documents petitioners introduced to substantiate the
SEP deduction under scrutiny were petitioner’s employment agreement
with Westech and a document showing that $11,250 was deposited into
the Security Pacific National Bank account. Respondent argues that
these documents, by themselves, do not establish that a qualified
SEP was established. We agree with respondent.
Although petitioners have shown that $11,250 was deposited
into a Security Pacific National Bank account during 1989,
petitioners have not shown that Westech or any other employer
2
Under the employment agreement petitioner was to
receive a base salary of $75,000 per year. The amount that
petitioner deposited into Security Pacific National Bank account
No. 063-19555-6 in February 1989 equals 15 percent of
petitioner’s base salary (15% x $75,000 = $11,250).
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established a SEP for petitioner’s benefit, as required by section
408(k). Even, however, were we to assume that there was an
employer-established SEP for petitioner’s benefit, petitioners have
failed to show that Westech or any other employer of petitioner
made the required qualifying contribution to such a SEP. Indeed,
the record indicates that the $11,250 deposit was made by
petitioner, and not by Westech or another employer of petitioner.
Further, the record does not enable us to trace the source of the
$11,250 deposit to the $62,500 or any other employment payment
petitioner received from Westech.3 See sec. 408(l). And finally,
the Forms W-2 attached to petitioners’ 1989 Form 1040 fail to
reflect any amount contributed by Westech to a SEP on petitioner’s
behalf.
Petitioners allege that not only was petitioner employed as
president of Cal-American during the first quarter of 1989, but
also for the remainder of 1989 he was self-employed as an insurance
consultant. As noted previously, self-employed individuals or sole
proprietors are treated as their own employers under a SEP plan.
See secs. 401(c)(4), 408(k)(7). However, petitioners have failed
to prove that petitioner was self-employed at any time during 1989.
Indeed, the record supports a contrary conclusion.
3
A letter from Bancsure to petitioner dated Mar. 31,
1989, refers to a total severance payment of $61,812.50, of which
$6,812.50 represented expense reimbursement and pension payments.
The letter makes no allocation of the $6,812.50 as between
expense reimbursement and pension payments.
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Despite petitioners’ claim that petitioner provided consulting
services to Arrowhead in 1989 as an independent contractor,
Arrowhead issued petitioner a Form W-2 (rather than a Form 1099)
for all payments it made to him in 1989; it also withheld State and
Federal income taxes from these payments. Moreover, petitioners
initially claimed on Schedule A attached to their 1989 tax return
all of petitioner’s business expenses as employee business
expenses. And finally, petitioner did not pay self-employment
taxes on the income he received from Arrowhead. The record thus
supports a finding that petitioner was an employee of Arrowhead,
not an independent contractor. The only evidence to support
petitioners’ independent contractor allegation is petitioner’s
self-serving testimony, which we do not believe.
To summarize, petitioners did not meet their burden of proof
that an employer-qualifying-SEP was established at any time by or
on behalf of petitioner, nor did they prove that an employer of
petitioner made a qualifying SEP contribution on petitioner’s
behalf. Consequently, petitioners are not entitled to the claimed
deduction for a SEP contribution.
Issue 2. Business Expenses
The second issue for decision is whether petitioners are
entitled to business expense deductions in excess of the amounts
allowed by respondent.
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Background
Petitioners have five daughters, three of whom lived with them
during 1989. Petitioners resided at 28316 Gitano, Mission Viejo,
California (Mission Viejo residence), until August 1989, when they
sold their Mission Viejo residence and moved to 14026 Donart Drive,
Poway, California (Poway residence).
The Mission Viejo residence contained 2,100 square feet.
Petitioner claimed he used an enclosed loft area in this residence
as an office. This room was no larger than 144 square feet.
Petitioners’ Poway residence measured 2,360 square feet.
Petitioners remodeled and improved the Poway residence by: Framing
and plastering the basement, building a patio cover, building a
closet in the bedroom of one of their daughters, placing stained-
glass windows in the living room and foyer, building a pad for
their travel trailer, installing an intercom system, installing
blinds throughout the house, installing a dehumidifier, and
installing rain gutters.
Petitioner claims he used the basement of the Poway residence
as an office; but he testified that when visitors came to the Poway
residence for business purposes, he would meet with them in the
living room, the kitchen, or the family area, as opposed to meeting
them in his “basement office”.
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Petitioners determined that 9.53 percent of the Mission Viejo
and Poway residences was used for business purposes in 1989.
During the year in issue, petitioners owned at least 4 cars:
A 1987 Suzuki Samurai, a 1987 Cadillac Fleetwood, a 1987 Ford
Aerostar, and a 1984 Dodge Colt. Petitioner claims he used the
Cadillac 82 percent of the time for business and that the other
automobiles were used for personal use. Petitioners also owned a
1987 Nomad Travel Trailer (a recreational vehicle). The travel
trailer was stored at the Laguna Hills Golf Range and was not used
for business purposes.
Pursuant to petitioner’s employment agreement with Westech,
Westech was required to provide petitioner with either a $250,000
life insurance policy or to reimburse him for the cost of keeping
an existing policy in force. Westech was also required to
reimburse petitioner for his employee business expenses,4 including
office supplies, telephone, dues, travel and entertainment, and
automobile expenses of $1,000 per month. Arrowhead also reimbursed
petitioner for his employee business expenses.
4
Westech reimbursed petitioner for at least $4,266.41 of
the business expenses he incurred in 1989.
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Petitioners’ 1989 Forms 1040 and 1040X
Petitioners claimed a $51,363.965 deduction for unreimbursed
employee business expenses on Schedule A and Form 2106 (Employee
Business Expenses) attached to their 1989 Form 1040. The deduction
consisted of the following:
Vehicle expenses $15,987.84
Parking fees 39.00
Travel expense 7,597.64
Business expenses 23,230.95
Meals and entertainment 5,635.66
Less 20 percent of meals and
entertainment (1,127.13)
Total $51,363.966
In the notice of deficiency, respondent allowed $8,096 of the
claimed vehicle expenses and $39 for parking fees. Because Westech
reimbursed petitioner for some of these expenses, respondent
reduced the otherwise allowable deduction by $3,000. Respondent
disallowed the remainder of the claimed employee business expenses
for lack of substantiation.
Subsequent to filing their petition, petitioners filed an
amended return (Form 1040X) for 1989 and recharacterized their
5
Petitioners claimed miscellaneous expenses totaling
$53,490.34 on Schedule A attached to their 1989 Form 1040. This
amount was composed of $2,126.38 in claimed investment expenses
(which petitioners have conceded) and the $51,363.96 in employee
business expenses addressed below. After applying the 2 percent
of adjusted gross income limitation, petitioners’ deduction for
miscellaneous expenses totaled $50,783.03.
6
The parties stipulated that Westech reimbursed
petitioner for at least $4,266.41 of his 1989 business expenses.
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previously claimed Schedule A unreimbursed employee business
expenses as Schedule C business expenses associated with
petitioner’s services as an “independent contractor”. Petitioners
also increased the amount of the deduction from $51,363.96 to
$57,348. The expenses claimed on Schedule C were:
Advertising $513
Bad debt 10,000
Car operating expenses 6,201
Depreciation (car) 2,850
Depreciation (house) 10,300
Employee benefits (life 1,424
insurance)
Interest (car) 1,660
Office expense 4,046
Supplies 9,023
Travel 7,465
Meals/entertainment 4,832
(less 20 percent of meals and
entertainment) (966)
Total $57,3487
Discussion
Deductions are a matter of legislative grace. New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers bear the
burden of establishing that they are entitled to the claimed
deductions. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114
(1933). This includes the burden of substantiating the amount and
purpose of the item claimed. Sec. 6001; Hradesky v. Commissioner,
65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.
7
The parties stipulated that petitioners are not
entitled to the $10,000 bad debt deduction.
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1976); sec. 1.6001-1(a), Income Tax Regs. If claimed deductions
are not adequately substantiated, we may estimate them, provided we
are convinced that the taxpayer has incurred such expenses and we
have a basis upon which to make an estimate. Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930); Vanicek v. Commissioner,
85 T.C. 731, 743 (1985).
Pursuant to section 162(a), a taxpayer may deduct all
ordinary and necessary expenses paid or incurred during the taxable
year in carrying on a trade or business. In general, an expense is
ordinary if it is considered “normal, usual, or customary” in the
context of the particular business out of which it arose. Deputy
v. duPont, 308 U.S. 488, 495-496 (1940). The term “ordinary” is
also used to distinguish currently deductible items from capital
expenditures. Commissioner v. Tellier, 383 U.S. 687, 689-690
(1966). An expense is necessary if it is appropriate and helpful
to the operation of the taxpayer’s trade or business. Carbine v.
Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th
Cir. 1985); Heineman v. Commissioner, 82 T.C. 538, 543 (1984).
Only the portion of an expense that is reasonable in amount is
deductible under section 162. United States v. Haskel Engineering
& Supply Co., 380 F.2d 786, 788-789 (9th Cir. 1967).
Pursuant to section 262(a), personal, living, or family
expenses may not be deducted, except as otherwise expressly
provided in the Code. Furthermore, no deduction is allowed if an
employee is reimbursed for his expenses and does not include such
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reimbursement in his gross income. See sec. 1.162-17(b), Income
Tax Regs.
At trial, petitioners produced receipts and checks that they
claim represent the expenses they incurred in the course of
petitioner’s business. Respondent argues that the claimed expenses
are neither ordinary nor necessary. For the reasons discussed
below, we agree with respondent.
The record clearly indicates that petitioners attempted to
claim as business expenses those that were personal in nature.
Furthermore, the evidence shows that a portion of the claimed
business expenses were reimbursed either by Westech or Arrowhead.
We hereafter discuss separately each of petitioners’ claimed
business expenses.
1. Advertising
Three of petitioners’ daughters played recreational softball
and soccer. Petitioners deducted $513 in costs associated with
their daughters’ participation in softball and soccer as an
advertising expense. They claim that they sponsored the teams and
in return received advertising space in the team pamphlet.
Petitioners admit that the payment for the claimed expense was
in reality a contribution to the league in which their daughters’
teams competed. We find that this payment was a personal expense,
not a business expense. Petitioners are not entitled to the
claimed 1989 advertising expense.
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2. Car Expenses
a. Operating Costs
Petitioners deducted $6,2018 as automobile operating expenses.
Although petitioners provided numerous receipts to substantiate
this deduction, the receipts do not connect the claimed expenses to
the use of the Cadillac, the only car petitioner used for business
purposes. Moreover, some of the claimed expenses are clearly not
related to the use of any automobile. Having reviewed and
considered petitioners’ documentation, we hold that petitioners are
not entitled to a deduction for any of the claimed $6,201
automobile expenses.
b. Interest
Petitioners deducted $1,660 as an interest expense. They
presented evidence that they incurred this expense with regard to
the Cadillac. Because the parties have stipulated that petitioner
used the Cadillac 82 percent of the time for business use, we allow
8
The claimed operating expenses all related to the
Cadillac and were composed of the following:
Insurance $849.54
Operating costs 3,818.13
Repairs 1,310.08
Visa and Discover charges 1,584.68
Total $7,562.43
Times 82 percent business use = $6,201.19
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a deduction for interest expense in the amount of $1,361 (82
percent x $1,660), rather than the amount petitioners claimed.
c. Depreciation
Petitioners claimed a $2,850 depreciation deduction for the
Cadillac. In the notice of deficiency, respondent allowed an
amount in excess of this figure.
3. Home Office Expenses
Petitioners claimed numerous household expenses as part of
their claimed home office deduction. Included within this claimed
deduction are the following:
Depreciation
Direct capital improvements $9,135.03
Indirect capital improvements 1,164.56
Office expenses
Telephone (Mission Viejo) 467.45
Telephone (Poway) 503.21
Cellular telephone
(account 0438631) 1,138.88
(account 1019538) 471.12
Home insurance
(9.53 percent of $525.33)
(Mission Viejo) 25.59
(Poway) 24.47
Home operating costs
(9.53 percent of $14,854.86) 1,415.67
Section 280A denies deductions with respect to the use of a
dwelling unit used by the taxpayer as a residence during the
taxable year. Section 280A(c), however, permits the deduction of
expenses allocable to a portion of the dwelling unit that is used
exclusively and on a regular basis as “the principal place of
business” for any trade or business of the taxpayer. Sec.
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280A(c)(1)(A). In the case of an employee, the exclusive use of a
portion of the dwelling unit must be for the convenience of the
employer. Sec. 280A(c)(1). The determination as to whether a
dwelling unit is the principal place of business of a taxpayer
depends on the particular facts of each case. Commissioner v.
Soliman, 506 U.S. 168, 174-175 (1993).
The facts in this case clearly reveal that petitioners are not
entitled to any home office expense deduction for 1989.
Petitioners have failed to prove that during 1989 petitioner used
his claimed home office exclusively and on a regular basis as his
principal place of business, or as a place of business for meeting
with clients or customers in the normal course of his business.
Nor have petitioners satisfied the convience-of-the-employer
requirement of section 280A(c)(1) for the period during which
petitioner was an employee.
a. Depreciation (Houses)
Petitioners determined that 9.53 percent of their Mission
Viejo and Poway residences was used for business purposes in 1989.
They claimed a $9,135.03 depreciation deduction for direct capital
improvements to their Poway residence. This deduction includes
expenses associated with remodeling the basement for use as
petitioner’s business office.
Petitioners also deducted $1,164.56 (9.53 percent x
$12,219.94) as indirect capital improvements to their Poway
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residence. The expenses for which a deduction was claimed included:
Stained glass windows in the living room and foyer, a closet in the
bedroom of one of their daughters, a trailer pad for petitioners’
recreational vehicle, miscellaneous carpentry work, a dehumidifier,
an intercom system, and rain gutters.
Petitioners claimed depreciation based on a percentage of all
repairs or improvements to both their Mission Viejo and Poway
residences, as well as their day-to-day costs of maintaining each
residence (such as the costs for their housekeeper, gardener, cable
television, dishwasher repair, plumbing, etc.), whether business
related or not.
As previously stated, petitioners have not met the tests of
section 280A(c)(1); thus they are not entitled to the claimed
depreciation deduction.
b. Telephone Expenses
Petitioners claimed a deduction for $2,581 of telephone
expenses (both for regular and cellular telephones). They had a
second telephone line installed at both their Mission Viejo and
Poway residences.
At first, petitioners argued that these telephone lines were
used exclusively for business purposes. They later admitted that
although they had deducted 100 percent of these expenses, personal
calls were also made from these telephones. Petitioners were
unable to approximate the percentage of business use.
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With regard to the cellular telephone, petitioners failed to
provide evidence that the phone was used solely for business
purposes, and they were unable to estimate the percentage of
business use.
Petitioners are not entitled to any of their claimed $2,581
telephone expense deduction.
c. Home Insurance and Operating Costs
Petitioners deducted 9.53 percent (amounting to $509) of the
cost of insuring both their residences, as well as $1,415.67 for
home office operating costs (9.53 percent x $14,854.86). The home
office operating costs consist of the following: Petitioners’
gardener, petitioners’ housekeeper, storage for their recreational
vehicle at the local golf range, membership fees for a recreational
vehicle club, home appliance and fixture repairs, plumbing repairs,
lawn mower repairs, utilities, garbage, and water expenses, cable
television expenses, homeowners’ association fees, charges for the
installation of a security system as well as the monthly charges
associated therewith, playground equipment for their backyard, and
miscellaneous home maintenance costs.
None of these expenses was shown to be deductible by
petitioners under section 280A or any other provision of the Code;
rather, these costs appear to be personal in nature. Consequently,
petitioners are not entitled to deduct these expenses.
9
Their deduction was mistakenly based on a calculation
of 382 days, rather than 365 days.
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4. Office Supplies
Petitioners claimed a $9,023 deduction for office supplies.
While they provided copies of numerous receipts, checks, and charge
card billing statements to support their claimed deduction,
petitioners failed to show that the expenses were ordinary and
necessary to the conduct of petitioner’s business or the
reasonableness of these expenses. Again, the record reveals that
petitioners attempted to deduct personal expenses as business
expenses. This is not permitted; the claimed deductions are not
allowable.
5. Employee Benefits
Petitioners claimed a $1,424 employee benefit program expense.
Such expense related to petitioner’s life insurance policies. This
expense was not shown to be a properly allowable business expense.
6. Travel/Meal and Entertainment Expenses
Petitioners claimed $7,465 in travel expenses and $4,832 in
meal and entertainment expenses.
Section 274(d) requires that a taxpayer substantiate by
adequate records or by sufficient evidence corroborating his own
statement expenses claimed for travel and entertainment by showing
(1) the amount of the expense, (2) the time and place of travel or
entertainment, (3) the business purpose of the travel or
entertainment, and (4) the business relationship to the taxpayer of
each person entertained. These four elements must be established
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for each separate expenditure. Sec. 1.274-5(c)(1), Income Tax
Regs.
Petitioners have failed to produce any of the requisite
detailed substantiation. They have failed to present evidence as
to the nature and business purpose of the claimed expenses. We
therefore disallow petitioners’ 1989 travel, meal, and
entertainment expenses in full.
Issue 3. Accuracy-Related Penalty
The final issue for decision is whether petitioners are liable
for the section 6662(a) accuracy-related penalty for negligence or
substantial understatement of income tax for 1989. Section 6662
imposes an addition to tax equal to 20 percent of the portion of
the underpayment that is attributable to (1) negligence or
disregard of rules or regulations, or (2) substantial
understatement of income tax. Sec. 6662(a) and (b)(1) and (2).
“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). Negligence is defined as the lack of due
care or the failure to do what a reasonable and ordinarily prudent
person would do under the circumstances. Marcello v. Commissioner,
380 F.2d 499, 506-507 (5th Cir. 1967), affg. in part and remanding
in part 43 T.C. 168 (1964); Neely v. Commissioner, 85 T.C. 934, 947
(1985).
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There is a substantial understatement of income tax if the
amount of the understatement for the taxable year exceeds the
greater of (1) 10 percent of the amount required to be shown on the
tax return or (2) $5,000. Sec. 6662(d)(1)(A). The amount of the
understatement is reduced, however, if there was substantial
authority for the taxpayer’s treatment of the item. Sec.
6662(d)(2)(B). In order to satisfy the substantial authority
standard, petitioners must show that the weight of authorities
supporting their position is substantial in relation to those
supporting a contrary position. Antonides v. Commissioner, 91 T.C.
686, 702 (1988), affd. 893 F.2d 656 (4th Cir. 1990).
Petitioners have the burden of proving that respondent’s
determination of the accuracy-related penalty is in error. Rule
142(a). Petitioners have failed to provide any evidence to show
that they were not negligent (indeed the record reveals otherwise),
and they have not pointed to any authorities to support their
position and bring them within the exception to the definition of
substantial understatement. Thus, we sustain respondent’s
determination with regard to this issue.
To reflect the foregoing,
Decision will be entered
under Rule 155.