Hintze v. Commissioner

T.C. Memo. 2001-70

UNITED STATES TAX COURT

KARAN M. HINTZE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13537-98. Filed March 22, 2001.

Karan M. Hintze, pro se.

James Gehres, for respondent.

MEMORANDUM OPINION

VASQUEZ, Judge: Respondent determined the following

deficiencies, additions to tax, and penalties in petitioner’s

1992 and 1994 Federal income taxes:

Addition to Tax Penalty
Year Deficiency Sec. 6651(a) Sec. 6662(a)
1992 $4,059 $1,015 $812
1994 16,984 849 3,397
 - 2 -

The first set of issues in this case concerns whether

petitioner realized gross receipts from her sole proprietorship

in excess of that reported on her returns. The second set of

issues deals with whether petitioner is entitled to various

deductions for business expenses which petitioner claimed on

Schedule C, Profit or Loss From Business, for the years in issue.

Finally, we must decide whether petitioner is liable for the

additions to tax and penalties determined by respondent.

Unless otherwise indicated, all section references are to

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

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

Procedure.

Background

At the time the petition was filed in this case, petitioner

resided in or near Ketchum, Idaho. During the years at issue,

petitioner operated a sole proprietorship through which she

provided cosmetology services. Petitioner performed this work

out of her condominium apartment as well as at the homes of her

clients.

In addition to providing services as a cosmetologist,

petitioner developed a new line of business in the field of

micropigmentation. As explained by petitioner, micropigmentation

involves the changing of human body colors through the use of

certain injected dyes. Micropigmentation is used not only in the
 - 3 -

cosmetology field but also in the medical field as a component of

reconstructive plastic surgery. In her capacity as a paramedical

aesthetician, petitioner provided micropigmentation services in

beauty spas and doctors’ offices. Petitioner also trained others

in the micropigmentation process and distributed the necessary

equipment. In order to attract a market for her training

courses, petitioner conducted introductory seminars on

micropigmentation at a number of locations.

After concessions,1 the following items remain in dispute

with respect to petitioner’s 1992 tax year:

Reported by Determined by Amount in
Item Petitioner Respondent Dispute
Gross receipts $17,177 $30,615 $13,438
Home office expense 3,216 -0- 3,216

1
Petitioner concedes respondent’s determination as to the
amount of the deduction for car and truck expenses, while
respondent concedes petitioner’s deduction for traveling
expenses.
 - 4 -

Similarly, after concessions,2 the following items remain in

dispute with respect to petitioner’s 1994 tax year:

Reported by Determined by Amount in
Item Petitioner Respondent Dispute
Gross receipts $44,126 $52,259 $8,133
Home office expense 1,230 -0- 1,230
Traveling expense 8,531 347 8,184
Meal expense1 280 -0- 280
Laundry expense 596 260 336

1
Figures are net of the 50-percent reduction required by sec.
274(n).

For convenience, we shall combine our findings of fact and

opinion with respect to each disputed item.

Discussion

A. Gross Income

Petitioner reported gross receipts from her sole

proprietorship on Schedule C of $17,177 and $44,126 for tax years

2
Petitioner concedes respondent’s determination as to the
amount of the deduction for car and truck expenses. Petitioner
also concedes respondent’s determination as to the amount of the
deduction for supplies expense. With respect to the deductions
for advertising and telephone expenses, petitioner appears to
concede respondent’s determination by incorporating the figures
determined by respondent into her posttrial brief. To the extent
these items are not conceded, we sustain respondent’s
determination with respect to these items as petitioner failed to
introduce evidence to the contrary. See Rules 142(a), 149(b);
Pearson v. Commissioner, T.C. Memo. 2000-160.

Respondent concedes the deductions claimed by petitioner for
interest expense and rent expense. Respondent also concedes that
petitioner is entitled to $347 of the $8,531 deduction for
traveling expenses claimed by petitioner.

Finally, the parties have stipulated that petitioner
recognized $8,104 in capital gain upon the sale of her principal
residence.
 - 5 -

1992 and 1994, respectively. Petitioner did not maintain records

to support these figures. After reviewing the deposits which

petitioner made to her bank accounts during the years in issue,

respondent determined that petitioner received gross income from

her business in excess of that which she reported on her return.

Each taxpayer is required to maintain adequate records of

income. See sec. 6001. In the absence of adequate books and

records, the Commissioner may reconstruct a taxpayer’s income by

any reasonable method. See sec. 446(b); Harper v. Commissioner,

54 T.C. 1121, 1129 (1970). The bank deposits method is an

accepted method of income reconstruction when a taxpayer has

inadequate books and records. See DiLeo v. Commissioner, 96 T.C.

858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Parks v.

Commissioner, 94 T.C. 654, 658 (1990). The bank deposits method

assumes that all money deposited into a taxpayer’s bank account

during a given period constitutes taxable income, although the

Commissioner must take into account any nontaxable source or

deductible expense of which he has knowledge. See Clayton v.

Commissioner, 102 T.C. 632, 645-646 (1994); DiLeo v.

Commissioner, supra at 868. The taxpayer has the burden of

proving that the bank deposits came from a nontaxable source.

See Rule 142(a); Clayton v. Commissioner, supra at 645; Estate of

Mason v. Commissioner, 64 T.C. 651, 657 (1975), affd. 566 F.2d 2

(6th Cir. 1977).
 - 6 -

During the years at issue, petitioner maintained two

accounts at Seafirst Bank. Account No. 90708355 consisted of a

checking account (checking account 355) and a savings account

(savings account 355). Similarly, account No. 907163317

consisted of a checking account (checking account 317) and a

savings account (savings account 317). The manner in which

respondent used these accounts to reconstruct petitioner’s gross

income is set out below.

1. Adjustments for 1992 Tax Year

Respondent determined that the deposits to petitioner’s

savings accounts represented nontaxable income. Accordingly, in

reconstructing petitioner’s gross income for tax year 1992,

respondent considered only the deposits to checking account 355

and checking account 317. The deposits to checking account 355

during 1992 totaled $39,091.52, and the deposits to checking

account 317 totaled $2,800.64.3 From the gross receipts of

$41,892.16, respondent subtracted $8,775.54 on account of

deposits representing transfers from petitioner’s other bank

accounts. Respondent subtracted an additional $2,502 for

deposits representing nontaxable gifts from petitioner’s parents.

With total subtractions from gross receipts of $11,277.54,

respondent determined that petitioner recognized gross income of

3
The totals of the deposits to checking accounts 355 and
317 are those determined by respondent. Petitioner does not
contest these figures; instead, she uses them as the starting
point for her own gross income analysis.
 - 7 -

$30,614.62. This figure is $13,437.62 more than that reported by

petitioner on her return.

Petitioner objects to respondent’s reconstruction of her

gross income on the basis that respondent failed to account for

additional deposits of nontaxable income. First, petitioner

contends that respondent failed to subtract from the total gross

receipts figure the proceeds of a $5,000 car loan, as well as an

additional $5,000 representing the proceeds of a loan from a

friend. Respondent concedes that these amounts do not constitute

taxable income. Nonetheless, respondent does not reduce gross

receipts by these amounts because the proceeds of the two loans

were initially deposited to savings account 355 (a fact confirmed

by the bank statements introduced into evidence by petitioner).

Since the beginning gross receipts figure included only deposits

to petitioner’s checking accounts, there is no reason to reduce

that figure on account of deposits of nontaxable income to

petitioner’s savings accounts. To the extent the loan proceeds

were transferred to petitioner’s checking accounts, they were

considered by respondent through the reduction for interaccount

transfers. We agree with respondent that the gross receipts

figure which respondent determined should not be reduced by the

$10,000 in loan proceeds.

Second, petitioner contends that the gross receipts figure

should be reduced by $3,002.07 on account of nontaxable gifts
 - 8 -

from her parents, as opposed to the $2,502 allowed by respondent.

Petitioner produced what appears to be a financial spreadsheet

pertaining to her parents which reflects total distributions to

or for the benefit of petitioner during 1992 of $3,002.07. Of

the $500.07 of such expenditures which respondent determined did

not warrant a reduction from gross receipts, $323.07 was paid to

third parties on petitioner’s behalf. As those amounts were not

deposited to petitioner’s checking accounts, they do not support

a reduction from the gross receipts figure determined by

respondent. The remaining $177 in dispute consists of a

purported distribution of $27 to petitioner on October 19, 1992,

as well as a purported $150 distribution to petitioner on

November 26, 1992. Petitioner, however, failed to establish that

these amounts were deposited to her checking accounts.

Accordingly, petitioner is not entitled to a reduction from gross

receipts by reason of nontaxable transfers from her parents in

excess of the $2,502 allowed by respondent.

Third, petitioner contends that the reduction from gross

receipts on account of interaccount transfers should be

$10,735.54 as opposed to the $8,775.54 reduction allowed by

respondent for such purpose. Petitioner introduced into evidence

bank statements indicating that $10,035.54 in transfers were made
 - 9 -

from savings account 355 to checking account 355 during 1992.4

Given that respondent conceded that all deposits to savings

account 355 represent nontaxable income, petitioner is entitled

to an additional $1,260 reduction to the gross receipts figure

determined by respondent.

In summary, respondent’s determination that petitioner

received failed to report $13,437.62 of gross income during 1992

is sustained to the extent of $12,177.62.

2. Adjustments for 1994 Tax Year

Similar to his calculations for the 1992 tax year,

respondent’s reconstruction of petitioner’s gross income for 1994

was limited to the deposits made to petitioner’s checking

accounts. Respondent determined that petitioner made $40,221.57

in deposits to checking account 355 and $53,026.68 in deposits to

checking account 317 during 1994.5 From the $93,248.25 in gross

receipts, respondent subtracted $40,988.94 for deposits

identified as representing receipts of nontaxable income.

Respondent therefore determined that petitioner recognized gross

income from her business of $52,259.31 as opposed to $44,126

reported by petitioner.

4
We cannot account for the $700 discrepancy between what
petitioner claims should be the reduction from gross receipts for
interaccount transfers and the amount of such transfers reflected
on the bank statements.
5
As explained supra note 3, petitioner does not challenge
the calculation of total deposits.
 - 10 -

Petitioner does not contend that the deposits of nontaxable

income into her checking accounts exceeded the $40,988.94 allowed

by respondent. Accordingly, respondent’s determination that

petitioner failed to report $8,133.31 of gross income from her

business during 1994 is sustained.

B. Business Deductions

Ordinarily, a taxpayer is permitted to deduct the ordinary

and necessary expenses that she pays or incurs during the

taxpayer year in carrying on a trade or business. See sec.

162(a). A taxpayer, however, is required to maintain records

sufficient to establish the amounts of her deductions. See sec.

6001; sec. 1.6001-1(a), Income Tax Regs.

When a taxpayer establishes that she paid or incurred a

deductible expense but does not establish the amount of the

deduction, we may estimate the amount allowable in certain

circumstances. See Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930). There must be sufficient evidence in the record,

however, to permit us to conclude that a deductible expense was

paid or incurred in at least the amount allowed. See Williams v.

United States, 245 F.2d 559, 560 (5th Cir. 1957). In estimating

the amount allowable, we bear heavily upon the taxpayer whose

inexactitude is of her own making. See Cohan v. Commissioner,

supra at 544.

In addition to satisfying the criteria for deductibility

under section 162, certain categories of expenses must also
 - 11 -

satisfy the strict substantiation requirements of section 274(d)

in order for a deduction to be allowed. The expenses to which

section 274(d) applies include, among other things, traveling

expenses (which include expenses for meals and lodging while away

from home), and entertainment expenses. See sec. 274(d)(1) and

(2). We may not use the Cohan doctrine to estimate expenses

covered by section 274(d). See Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).

1. Traveling Expenses

On her return, petitioner claimed a deduction for traveling

expenses of $8,531 for tax year 1994. Of this amount, respondent

concedes a deduction of $347 for expenses incurred by petitioner

for parking. At trial, petitioner introduced copies of receipts

and other documentation in support of her contention that she

incurred traveling expenses of $9,003.69.

Traveling expenses are subject to the substantiation

requirements of section 274(d). See sec. 274(d)(1). No

deduction is allowed for expenses incurred for travel away from

the taxpayer’s home (including meals and lodging) unless the

taxpayer substantiates, by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement, each of the

following elements: (1) The amount of each separate expenditure;
 - 12 -

(2) the dates of departure and return and the number of days

spent on business; (3) the place of destination by name of city

or town; and (4) the business reason or expected business benefit

from the travel. See sec. 274(d); sec. 1.274-5T(b)(2), Temporary

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

a. Expenses Not Subject to Section 274

As a preliminary matter, we note that a number of the

expenses included by petitioner under the category of traveling

expenses do not constitute traveling expenses for purposes of

section 274(d). The most significant of these items are the

expenses which petitioner incurred for renting the hotel

conference rooms in which to conduct her seminars.6 The expenses

which we find are not subject to the substantiation requirements

of section 274(d) total $1,711.99 and are enumerated in appendix

A.7 Petitioner is entitled to a deduction for such amounts.

b. Domestic Travel

With respect to deductions claimed for traveling expenses

within the United States, we find that petitioner has satisfied

the substantiation requirements of section 274(d) with respect to

6
Petitioner charged a substantial fee for attending the
seminars. We do not view the direct costs of conducting the
seminars as constituting a traveling expense under sec. 274(d)(1)
or an item generally considered to constitute entertainment under
sec. 274(d)(2). See sec. 1.274-2(b)(1), Income Tax Regs.
7
These expenses are in addition to the $347 of parking
expenses conceded by respondent.
 - 13 -

expenses totaling $1,710.93. These expenses are enumerated in

appendix B.

c. Foreign Travel

Most of the deduction claimed by petitioner for traveling

expenses pertains to expenses incurred for travel overseas.

During the summer of 1994, petitioner conducted two seminars in

Denmark to promote her micropigmentation instruction courses.

The first was held at a hotel in Copenhagen, Denmark, on August

29, and the second was held in Alborg, Denmark, on August 31.

Petitioner embarked on her trip to Denmark on August 25, and she

returned on September 4. In order to conduct preliminary work

for the seminars and to establish contacts, petitioner traveled

to Denmark in May of 1994.

With respect to the traveling expenses incurred by

petitioner during her trips to Denmark, we find that petitioner

has satisfied the heightened substantiation requirements of

section 274(d) with respect to those expenses enumerated in

appendix C. These expenses total $3,505.32.

Among the expenses which we find petitioner did not

substantiate under section 274(d) are the airfare and other

expenses attributable to Rick Schultsmeier. Petitioner testified

that Mr. Schultsmeier accompanied her on the trip to assist her

in transporting the equipment and materials which petitioner

needed to conduct her seminars. Mr. Schultsmeier, however, was
 - 14 -

not an employee of petitioner. Accordingly, no deduction

attributable to expenses incurred on his behalf is allowed. See

sec. 274(m)(3)(A); sec. 1.274-2(g), Income Tax Regs.

While petitioner has satisfied the substantiation

requirements of section 274(d) with respect to a number of her

foreign traveling expenses, section 274(c) must also be addressed

given that these expenses relate to travel outside the United

States. Section 274(c)(1) provides that no deduction (otherwise

allowable under section 162) shall be allowed for that portion of

the expenses attributable to travel outside the United States

which, under regulations prescribed by the Secretary, is not

allocable to the taxpayer’s trade or business. See also sec.

1.274-4(a), Income Tax Regs. The provisions of section 274(c)(1)

are applicable only if (a) the travel outside the United States

exceeds 1 week and (b) the portion of the time of such travel

which is not attributable to the pursuit of the taxpayer’s trade

or business is 25 percent or more of the total time of such

travel. See sec. 274(c)(2); sec. 1.274-4(b), Income Tax Regs.

The record reflects that petitioner’s travel to Denmark in

May of 1994 spanned a 6-day period from May 18 to May 23. We

therefore find that petitioner’s travel overseas during this

period did not exceed 1 week. As the exception under section

274(c)(2)(A) applies, section 274(c)(1) does not impose an

additional restriction on petitioner’s ability to deduct
 - 15 -

traveling expenses relating to her trip to Denmark in May of

1994. Petitioner is therefore allowed a deduction for items 1

through 4 on appendix C, which total $363.87.8

With respect to her second trip to Denmark in 1994,

petitioner left from Seattle, Washington, on August 25 and

returned on September 4. Her trip thus spanned 11 days. Since

the trip exceeded the 7-day threshold set forth in section

274(c)(2)(A),9 we must determine whether the portion of the time

not allocable to petitioner’s trade or business constituted 25

percent or more of the total time of her trip.

The regulations specify that the total time traveling

outside the United States shall be allocated on a day-by-day

basis between days of business activity and days of nonbusiness

activity. See sec. 1.274-4(d)(2), Income Tax Regs. We therefore

must allocate each of the 11 days which petitioner spent on the

trip between these categories.10 The 2 days which petitioner

spent traveling to and returning from Denmark are considered

8
We note that petitioner did not introduce evidence as to
the cost of her travel to and from Denmark with respect to this
first trip, nor did she claim a deduction therefor.
9
In analyzing whether the travel time exceeded the 7-day
threshold provided in sec. 274(c)(2)(A), the day of departure is
not considered. See sec. 1.274-4(c), Income Tax Regs. Thus, for
purposes of sec. 274(c)(2)(A), petitioner’s trip lasted 10 days.
10
For purpose of analyzing the 25-percent test under sec.
274(c)(2)(B), the day of departure is included in the
calculation. See sec. 1.274-4(c), Income Tax Regs.
 - 16 -

business days. See sec. 1.274-4(d)(2)(i), Income Tax Regs. In

addition, any day during which the principal activity was the

pursuit of petitioner’s trade or business constitutes a business

day. See sec. 1.274-4(d)(2)(iii), Income Tax Regs. The business

activities in which petitioner engaged while in Denmark included

not only preparing for and conducting the seminars, but also

training the individuals who sought petitioner’s instruction

courses. One of petitioner’s clients testified that a typical

training session following a seminar took anywhere from 3 to 5

days.11 Accordingly, in addition to the 2 days which petitioner

spent preparing for and conducting the seminars, we find that

petitioner spent at least an additional 5 days training clients

whom she obtained through the two seminars and through her

efforts during her prior trip to Denmark in May. As at least 9

days of petitioner’s 11-day trip were devoted to the pursuit of

petitioner’s trade or business, the exception provided by section

274(c)(2)(B) applies. Section 274(c)(1) therefore does not

impose an additional limitation on the deductibility of

petitioner’s traveling expenses relating to her second trip to

Denmark during 1994. Accordingly, petitioner is entitled to a

deduction for items 5 through 30 in appendix C, which total

$3,141.45.

11
This testimony was provided by Beverly Violette, an
individual who took a micropigmentation instruction course from
petitioner in 1995. We find her testimony probative of the
general nature of the instructional courses which petitioner
offered during the prior year.
 - 17 -

d. Conclusion as to Traveling Expenses

To summarize our findings above, petitioner is entitled to a

deduction of $1,710.93 for domestic traveling expenses and a

deduction of $3,505.32 for foreign traveling expenses.

Furthermore, petitioner is entitled to a deduction of $1,711.99

for expenses which she improperly characterized as traveling

expenses. Adding the $347 deduction for parking expenses

conceded by respondent brings the total deductions to which

petitioner is entitled in respect of the expenses discussed above

to $7,275.24.

2. Meal and Entertainment Expenses

On her tax return for 1994, petitioner reported meal and

entertainment expenses of $560. Pursuant to the limitation

contained in section 274(n), she claimed a deduction for 50

percent of such expenses. Respondent determined petitioner was

not entitled to a deduction for her meal and entertainment

expenses on the ground that petitioner had failed to meet the

substantiation requirements of section 274(d).

Meal and entertaining expenses are subject to the

substantiation requirements of section 274(d). See sec.

274(d)(2). No deduction is allowed for such expenses unless the

taxpayer substantiates by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement each of the

following elements: (1) The amount of each separate expenditure;
 - 18 -

(2) the date of entertainment; (3) the name, if any, address, or

location of the entertainment; (4) the business reason for the

entertainment or the nature of the business benefit derived or

expected to be derived as a result of the entertainment and the

nature of the business discussion or activity; and (5) the

occupation or other information relating to the person or persons

entertained, including the name, title, or other designation,

sufficient to establish the business relationship to the

taxpayer. See sec. 274(d); sec. 1.274-5T(b)(3), Temporary Income

Tax Regs., 50 Fed. Reg. 46015 (Nov. 6, 1985).

At trial, petitioner produced 29 receipts containing various

notations which she contends substantiate business meal expenses

in the amount of $1,600.13. Two of the receipts, totaling $500,

represent expenses for food which petitioner provided at her

seminars in Denmark. We addressed those expenses in our

discussion of petitioner’s traveling expenses and shall not

consider them here.12 With respect to the remainder of

petitioner’s receipts, most of them contain only a notation

identifying the individual or individuals entertained as “client”

or “clients”. With respect to these expenses, petitioner has

failed to provide adequate information relating to the person or

persons entertained sufficient to establish the business

12
Petitioner was allowed a deduction for these expenses on
the ground that they were not subject to sec. 274(d). They are
included as items 4 and 5 in appendix A.
 - 19 -

relationship to petitioner. See sec. 1.274-5T(b)(3)(v),

Temporary Income Tax Regs., supra. Because petitioner has failed

to substantiate these deductions pursuant to section 274(d), no

deduction is allowed on their account.

With respect to a number of other meal expenses, however,

petitioner provided information, including the name of the

individual entertained, sufficient to establish the business

relationship to petitioner. Through her testimony, petitioner

identified these individuals as either plastic surgeons or

representatives of beauty spas who contracted with petitioner for

her micropigmentation services. We find that petitioner has

satisfied the substantiation requirements of section 274(d) with

respect to these particular expenses, which are enumerated in

appendix D and which total $315.41. After application of the 50-

percent limitation contained in section 274(n), petitioner is

entitled to a deduction for meal and entertainment expenses of

$157.71.

3. Home Office Expense

Petitioner claimed deductions of $3,216 and $1,230 for

business use of her home during tax years 1992 and 1994,

respectively. Respondent disallowed these deductions in their

entirety.

As a general rule, an individual taxpayer is not allowed a

deduction with respect to expenses attributable to a dwelling

unit which the taxpayer uses as a residence. See sec. 280A(a).
 - 20 -

Section 280A(c)(1) provides an exception to this general rule for

any item allocable to a portion of the dwelling unit which is

exclusively used by the taxpayer on a regular basis as the

principal place of business for a trade or business of the

taxpayer. A taxpayer "exclusively" uses a portion of his

dwelling in a trade or business if and only if the portion in

question is not at any time during the taxable year used for

nonbusiness purposes. See Hefti v. Commissioner, T.C. Memo.

1993-128.

During the years at issue, petitioner resided in a one-

bedroom one-bathroom13 condominium containing 850 square feet of

living space. Petitioner designated 500 square feet of her

condominium as having been used for business purposes. The space

so designated includes her entire living room and dining room,

her entire bathroom, and the portion of the kitchen containing

the sink. While petitioner contends that she used this portion

of her condominium for business purposes, she does not contend

that such business use was exclusive. In any event, we would

find any claim of exclusive business use implausible.

Accordingly, we sustain respondent’s disallowance of the

deductions claimed by petitioner for business use of her home.

13
Petitioner testified that she added a second bathroom in
the closet of her bedroom. Petitioner, however, did not
introduce evidence of any such remodeling.
 - 21 -

4. Laundry Expense

With respect to her 1994 tax year, petitioner deducted $596

for professional laundry expense on her Schedule C. Respondent

determined that petitioner was entitled to a deduction of $260

for such expense. Petitioner did not introduce evidence

supporting a deduction in excess of that determined by

respondent. Accordingly, respondent’s determination in this

regard is sustained.

C. Additions to Tax and Penalties

1. Section 6651(a)

Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return. The addition equals 5 percent of the

amount of tax required to be shown on the return for each month

the return is late, not to exceed 25 percent in the aggregate.

The addition to tax under section 6651(a)(1) is imposed unless

the taxpayer establishes that such failure “is due to reasonable

cause and not due to willful neglect”.

Petitioner failed to timely file her 1992 and 1994 tax

returns. She contends that such failure is excusable on the

ground that she believed that she had a zero tax liability for

each year. Reasonable cause for delinquent filing exists if the

taxpayer demonstrates that she exercised ordinary business care

and prudence and nonetheless was unable to file the return within

the prescribed period. See United States v. Boyle, 469 U.S. 241,
 - 22 -

246 (1985). Petitioner’s belief that she did not owe any tax

does not satisfy the reasonable cause standard under section

6651(a)(1). See Klyce v. Commissioner, T.C. Memo. 1999-198;

Presnick v. Commissioner, T.C. Memo. 1997-398; Krieger v.

Commissioner, T.C. Memo. 1993-347. Petitioner advanced no other

reasons why her returns for 1992 and 1994 were not timely filed.

Respondent is therefore sustained on the additions to tax under

section 6651(a)(1).

2. Negligence Penalty

Section 6662(a) imposes an accuracy-related penalty in the

amount of 20 percent of the portion of the underpayment of tax

attributable to negligence or disregard of rules or regulations.

See sec. 6662(b)(1). Negligence is any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs. Moreover, negligence has been described as the failure to

exercise due care or the failure to do what a reasonable and

prudent person would do under the circumstances. See Neely v.

Commissioner, 85 T.C. 934, 947 (1985). Disregard includes any

careless, reckless, or intentional disregard of rules or

regulations. See sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax

Regs. Once the Commissioner has determined an accuracy-related

penalty pursuant to section 6662(b)(1), the taxpayer bears the

burden of proof as to such issue. See Bixby v. Commissioner, 58

T.C. 757, 791 (1972).
 - 23 -

With respect to the meal and entertainment expenses at issue

for the 1994 taxable year, we note that petitioner maintained

detailed records of the expenses for which she claimed a

deduction. While we have determined that petitioner failed to

satisfy the substantiation requirements under section 274 with

respect to some of these expenses, this determination does not

require a finding that petitioner has been negligent or in

intentional disregard of respondent’s rules and regulations. See

Robinson v. Commissioner, 51 T.C. 520, 542 (1968), affd. (but

vacated and remanded for recomputation of deficiency) 422 F.2d

873 (9th Cir. 1970); Silverton v. Commissioner, T.C. Memo. 1977-

198. The records which petitioner offered to substantiate her

meal and entertainment expenses were not so inadequate as to

constitute a failure of due care on her part. We therefore hold

that petitioner is not liable for the accuracy-related penalty

under section 6662(a) with respect to the portion of the

underpayment attributable to the disallowed meal and

entertainment expense deductions. With respect to the remaining

portion of petitioner’s underpayment for 1994 and the entire

portion of petitioner’s underpayment for 1992, respondent’s

determination of the accuracy-related penalty is sustained.

To reflect the foregoing,

Decision will be entered

under Rule 155.
 - 24 -

APPENDIX A

Expense Not Subject to Section 274(d)

Item Date Description Amount
1 4/19/94 Bergman Luggage –- converter for $17.85

booth
2 8/5/94 Bartell Drug —- certificate holder 5.40
3 8/29/94 Conference photos 2.75
4 8/29/94 Hotel D’Angleterre 1,153.26
5 9/1/94 Scheelsminde Hotel 250.95
6 9/4/94 SAS –- extra charge 2 crates 252.60
7 9/6/94 Containers for equipment 29.18
 - 25 -

APPENDIX B

Traveling Expenses
For Travel Within the United States

Item Date Payee Amount
1 2/14/94 Airport Motor Inn $43.29
2 2/14/94 Morris Air 161.00
3 6/18/94 Billy Morales #1 29.94
4 6/23/94 Morris Air 141.00
5 7/21/94 Lift Tower Lodge 212.55
6 10/6/94 Southwest Airlines 124.00
7 10/1/94 Cutter’s Bayhouse 18 36.81
8 9/21/94 Nendels Inn 101.34
9 11/21/9 Alaska Airlines 150.00

4
10 11/21/9 Shuttle Express 18.00

4
11 12/29/9 Radisson Sun Valley Resort 351.00

4
12 12/16/9 Northwest Airlines 342.00

4
 - 26 -

APPENDIX C

Traveling Expenses
For Travel Outside the United States

Item Date Description/Payee Amount
1 5/18/94 DSB –- Danish State Railways $150.00
2 5/18/94 Cab Inn Scandinavia 134.68
3 5/18/94 Cab Inn Scandinavia 59.19
4 5/23/94 DSB – Danish State Railways 20.00
5 8/25 Scandinavian Airlines 1,259.55
6 8/25 Taxi1 10.00
7 8/25 Taxi1 32.00
8 8/25 Taxi1 14.00
9 8/26 Taxi1 11.00
10 8/26 Taxi1 7.00
11 8/27 Taxi1 9.00
12 8/28 Taxi1 12.00
13 8/29 Taxi1 10.00
14 8/29 Taxi1 9.00
15 8/29 Taxi1 14.00
16 8/29 Taxi1 8.00
17 8/30 Hotel Triton 733.49
18 8/30 Taxi1 30.00
19 8/30 Taxi1 27.00
20 8/30 Taxi1 22.00
21 8/31 Taxi1 12.00
22 9/1 Scheelsminde Hotel 282.16
23 9/1 Taxi1 22.00
24 9/1 Taxi1 60.00
25 9/2 Taxi1 9.00
26 9/2 Taxi1 10.00
27 9/3 Taxi1 12.00
28 9/4 Taxi1 22.00
29 9/4 Classy-One Limousines 41.00
30 9/4 Hotel Danmark 463.25
1
The documentation provided by petitioner shows the taxi fares expressed
in Danish Kroners. We are satisfied that petitioner has provided a reasonable
conversion of the amounts to U.S. dollars.
 - 27 -

APPENDIX D

Meal and Entertainment Expenses

Item Date Payee Amount
1 3/30/94 Bamboo Garden $22.10
2 4/11/94 Au Mexicana 37.44
3 6/27/94 Olive Garden 28.68
4 7/19/94 The Kneadery Restaurant 12.38
5 7/21/94 Mango Restaurant 30.18
6 9/3/94 Rosie McGee’s 80.00
7 9/23/94 Confucius Restaurant 17.39
8 9/21/94 Peg Leg Annie’s 29.30
9 9/4/94 Bamboo Garden 26.13
10 10/1/94 Cutter’s Bistro 31.81