WHITEHEAD v. COMMISSIONER

T.C. Memo. 2001-317

UNITED STATES TAX COURT

HERBERT L. WHITEHEAD AND JENNIFER L. WHITEHEAD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6271-00. Filed December 20, 2001.

J. Patrick Quinn, for petitioners.

Julie L. Payne, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined the following defi-

ciencies in, and accuracy-related penalties under section

6662(a)1 on, petitioners’ Federal income tax:

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

Year Deficiency Accuracy-Related Penalty
1
1996 $15,672 $3,134.40
1
1997 15,832 3,166.40
1
The deficiency determined by respondent for each year included a
deficiency of $120 in Federal excise tax under sec. 4973(a).

The issues remaining for decision2 are:

(1) Do payments during each year at issue by Burien Nissan,

Inc. (Burien Nissan), to Kenneth Stanford (Mr. Stanford) consti-

tute constructive dividends to petitioner Herbert L. Whitehead

(Mr. Whitehead) for each such year? We hold that they do.

(2) Should the determinations in the notice of deficiency

(notice) to increase petitioners’ income for each year at issue

with respect to their respective uses of certain Burien Nissan

automobiles during each such year be sustained? We hold that

they should.

(3) Are petitioners entitled to a deduction for each year

at issue for mortgage interest and property taxes relating to

certain real property located in Kirkland, Washington? We hold

that they are not.

(4) Are petitioners entitled to a deduction for 1996 for

certain contributions to an individual retirement account (IRA)

in the name of petitioner Jennifer L. Whitehead (Ms. Whitehead)

in excess of the amount conceded by respondent? We hold that

2
Certain computational issues for the years at issue also
remain, resolution of which flows automatically from our resolu-
tion of the issues that we address herein.
 - 3 -

they are not.

(5) Are petitioners liable for each year at issue for the

excise tax under section 4973(a) for excess IRA contributions?

We hold that Ms. Whitehead is.

(6) Are petitioners liable for each year at issue for the

accuracy-related penalty under section 6662(a)? We hold that

they are.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found

except as stated herein.

Petitioners, who at all relevant times were husband and

wife, resided in Sumner, Washington, at the time the petition was

filed.

Petitioners have three children, who were born in April

1993, June 1996, and July 2000, respectively.

Burien Nissan

At all relevant times, Burien Nissan, a corporation orga-

nized in the State of Washington, operated an automobile dealer-

ship located in Burien, Washington. At least during the years at

issue, Mr. Whitehead was president of Burien Nissan. During each

year at issue, Burien Nissan had current earnings and profits of

at least $24,000.
 - 4 -

Ownership of Burien Nissan Stock

As of May 24, 1990, Burien Nissan had 120,000 shares of

common stock (Burien Nissan stock) issued and outstanding. As of

that date, Donald Johnston (Mr. Johnston) and Jacque Johnston

(Jacque Johnston) owned 96,000 shares of that stock (the Johnston

shares),3 and Gary McLaughlin (Mr. McLaughlin) owned 24,000

shares of that stock (the McLaughlin shares).

On May 25, 1990, Mr. Johnston, Jacque Johnston, and Mr.

McLaughlin entered into a stock purchase agreement (May 25, 1990

stock purchase agreement) with Mr. Stanford, Mr. Whitehead,

Patrick Watson (Mr. Watson), Gerald Buchner (Mr. Buchner), and

Burien Nissan. Mr. McLaughlin, as executive manager of Burien

Nissan,4 signed that agreement on its behalf.

Pursuant to the May 25, 1990 stock purchase agreement, Mr.

Johnston and Jacque Johnston agreed to sell 34,800 of the

Johnston shares to Mr. Stanford, Mr. Whitehead, Mr. Watson, and

Mr. Buchner (the buyers) for $121,326.53, Mr. McLaughlin agreed

3
The parties stipulated that Mr. Johnston owned 96,000
shares of Burien Nissan stock as of May 24, 1990. That stipula-
tion is clearly contrary to the facts that we have found are
established by the record, and we shall disregard it. See Cal-
Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). The
record establishes, and we have found, that both Mr. Johnston and
Jacque Johnston owned 96,000 shares of Burien Nissan stock as of
May 24, 1990.
4
The record does not disclose the duties and the responsi-
bilities of the executive manager of Burien Nissan at all rele-
vant times.
 - 5 -

to sell all of the McLaughlin shares (i.e., 24,000 shares) to the

buyers for $83,673.47, and the buyers purchased those 58,800

shares of Burien Nissan stock as follows:

Number of
Buyer Shares Purchased
Mr. Stanford 35,280
Mr. Whitehead 11,760
Mr. Watson 5,880
Mr. Buchner 5,880

Pursuant to the May 25, 1990 stock purchase agreement, as of May

25, 1990, the individuals shown below owned the following number

of shares of Burien Nissan stock, evidenced by the following

Burien Nissan stock certificates,5 which represented the percent-

age of stock ownership in that company indicated below:

Number of Stock Percentage
Stockholder Shares Owned Certificate Number Ownership
Mr. Johnston and
Jacque Johnston1 61,200 8 51.0
Mr. Stanford 35,280 4 29.4
Mr. Whitehead 11,760 5 9.8
Mr. Watson 5,880 6 4.9
Mr. Buchner 5,880 7 4.9
1
The parties stipulated that Mr. Johnston owned 61,200 shares of Burien
Nissan stock as of May 25, 1990. That stipulation is clearly contrary to the
facts that we have found are established by the record, and we shall disregard
it. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). The
record establishes, and we have found, that both Mr. Johnston and Jacque
Johnston owned 61,200 shares of Burien Nissan stock as of May 25, 1990.

(We shall refer to any individual who owned Burien Nissan stock

5
Although the purchase and sale of Burien Nissan stock
pursuant to the May 25, 1990 stock purchase agreement was ef-
fected as of May 25, 1990, it was not until Aug. 31, 1990, that
Burien Nissan issued the stock certificates evidencing such stock
ownership as of May 25, 1990.
 - 6 -

as of May 25, 1990, or at any other time as stockholder.)

Pursuant to the May 25, 1990 stock purchase agreement,

Burien Nissan acquired an option to purchase over a 30-month

period that began in June 1990 the 61,200 Johnston shares (the

61,200 remaining Johnston shares) that Mr. Johnston and Jacque

Johnston continued to own after that agreement was effected. The

purchase price for the 61,200 remaining Johnston shares under

that option was $215,000. The May 25, 1990 stock purchase

agreement required the stock certificate evidencing the 61,200

remaining Johnston shares of Burien Nissan stock to bear a legend

(legend) indicating that those 61,200 shares were subject to

Burien Nissan’s option to purchase set forth in that agreement.

The May 25, 1990 stock purchase agreement provided that none

of the individuals who acquired Burien Nissan stock pursuant to

that agreement (i.e., Mr. Stanford, Mr. Whitehead, Mr. Watson,

and Mr. Buchner) was to “sell, assign, transfer, exchange, or

otherwise dispose of, or grant any option with respect to” any of

the Burien Nissan stock owned by him without the prior written

consent of Mr. Johnston and Jacque Johnston. That agreement

required the stock certificates evidencing the Burien Nissan

stock owned by Mr. Stanford, Mr. Whitehead, Mr. Watson, and Mr.

Buchner, respectively, to bear a legend indicating that the sale

or other disposition, or the granting of an option with respect

to, such stock required the prior written consent of Mr. Johnston
 - 7 -

and Jacque Johnston as set forth in that agreement.

Attached to and made part of the May 25, 1990 stock purchase

agreement were an employment agreement between Burien Nissan and

Mr. Stanford pursuant to which Burien Nissan agreed to employ Mr.

Stanford as its president and an employment agreement between

Burien Nissan and Mr. Whitehead pursuant to which Burien Nissan

agreed to employ Mr. Whitehead as its general sales manager. The

employment agreement between Burien Nissan and Mr. Stanford

provided, inter alia, certain benefits to Mr. Stanford as presi-

dent of that company, including unrestricted access to two Burien

Nissan automobiles for Mr. Stanford’s personal use.

On September 1, 1990, Burien Nissan and the stockholders6

entered into an agreement (September 1, 1990 stockholders’

agreement), the stated purpose of which was as follows:

The Shareholders desire to promote their mutual
interests and the interests of the Corporation [Burien
Nissan] by imposing certain restrictions and obliga-
tions on each other, on the Shares which they presently
own, and on any additional shares which they or their
successors or transferees may hereafter acquire or
which the Corporation may hereafter issue. * * *

The September 1, 1990 stockholders’ agreement set forth, inter

alia, certain restrictions on the disposition (i.e., sale,

transfer, pledge, encumbrance, or disposal by operation of law or

otherwise) of Burien Nissan stock held by each of the minority

6
The number of shares and the percentage ownership of Burien
Nissan stock owned by each stockholder did not change between May
25, 1990, and Sept. 1, 1990.
 - 8 -

stockholders (i.e., Mr. Stanford, Mr. Whitehead, Mr. Watson, and

Mr. Buchner).7

With respect to any disposition of Burien Nissan stock by

any minority stockholder, the September 1, 1990 stockholders’

agreement incorporated by reference the provision in the May 25,

1990 stock purchase agreement which stated that no minority

stockholder was to “sell, assign, transfer, exchange, or other-

wise dispose of, or grant any option with respect to” any Burien

Nissan stock owned by him without the prior written consent of

Mr. Johnston and Jacque Johnston.

With respect to any disposition of Burien Nissan stock by a

minority stockholder to a third party, in addition to the forego-

ing restriction requiring the prior written consent of Mr.

Johnston and Jacque Johnston, the September 1, 1990 stockholders’

agreement did not permit any minority stockholder to sell less

than all of his Burien Nissan stock to a third party. That

agreement permitted a minority stockholder to sell all of his

7
The September 1, 1990 stockholders’ agreement also set
forth certain restrictions on the transfer by Mr. Johnston and
Jacque Johnston of the 61,200 remaining Johnston shares of Burien
Nissan stock. That agreement precluded Mr. Johnston and Jacque
Johnston from voluntarily transferring any of the 61,200 remain-
ing Johnston shares unless any such transfer was: (1) To a
member or members of their immediate family for estate planning
purposes or (2) with the prior written consent of Mr. Stanford.
The September 1, 1990 stockholders’ agreement further provided
that any transfer by Mr. Johnston and Jacque Johnston of the
61,200 remaining Johnston shares was to be subject to Burien
Nissan’s option to purchase those shares as set forth in the May
25, 1990 stock purchase agreement.
 - 9 -

Burien Nissan stock to a third party only if he first offered

such stock to the other minority stockholders, who had a right of

first refusal to purchase such stock in proportion to their stock

ownership in Burien Nissan.

In the event of a violation of any of the foregoing restric-

tions on the disposition of Burien Nissan stock, the September 1,

1990 stockholders’ agreement provided:

Any attempt to transfer Shares in violation of this
Agreement, or any involuntary or other purported trans-
fer other than as provided in this Agreement, shall be
void. If any Shares or transfer documents are pre-
sented to the Corporation to effect such attempted
transfer, the Shareholder who owns such Shares shall
immediately be deemed to be Terminated * * * and such
Termination shall trigger the purchase rights of the
other Shareholder[s] set forth in Section 3. * * *

The purchase rights set forth in Section 3 of the September

1, 1990 stockholders’ agreement that were triggered upon a

violation by a minority stockholder of any of the restrictions

set forth in that agreement regarding the disposition by a

minority stockholder of such stockholder’s Burien Nissan stock

were that Burien Nissan, the other minority stockholders, and Mr.

Johnston and Jacque Johnston, in that order, had a right of first

refusal to purchase all of the stock of a terminated minority

stockholder.

The September 1, 1990 stockholders’ agreement further

required that the restrictions set forth in that agreement be

reflected in an endorsement (endorsement) to appear on all Burien
 - 10 -

Nissan stock certificates. That endorsement stated:

The shares of stock represented by this certificate are
subject to the terms of a Shareholders’ Agreement dated
as of September 1, 1990, which restricts or limits
their transfer and limits the rights of the share-
holder. A copy of the Agreement is on file at the
office of the registered agent of the Corporation.

Burien Nissan experienced financial difficulties during 1990

and early 1991. On a date during 1991 not disclosed by the

record, Mr. Stanford accepted an offer to manage a large automo-

bile dealership in Hawaii. On September 13, 1991, Mr. Whitehead

and Mr. Stanford entered into a stock purchase agreement (Septem-

ber 13, 1991 Whitehead/Stanford stock purchase agreement),

pursuant to which Mr. Whitehead purchased on that date for

$178,000 all 35,280 shares of Mr. Stanford’s Burien Nissan stock.

That agreement provided that Mr. Whitehead was to pay the pur-

chase price of $178,000 by delivering to Mr. Stanford a nonnego-

tiable promissory note.

In the September 13, 1991 Whitehead/Stanford stock purchase

agreement, Mr. Stanford represented and warranted to Mr. White-

head the following:

a. Stanford is the owner and registered
holder of the Stanford Shares and holds the Stanford
Shares free and clear of all liens, claims or encum-
brances and subject to no options, warrants, contracts
or agreements of any kind other than * * * [the May 25,
1990 stock purchase agreement] and * * * [the September
1, 1990 stockholders’ agreement].

b. Neither the execution and delivery of
the Agreement by Stanford nor the consummation of the
transactions contemplated herein, nor compliance with
 - 11 -

the terms and provisions hereof, will result in the
creation or imposition of any lien, charge or encum-
brance upon any of the Stanford Shares, or conflict in
any way with the provisions of, or constitute a default
under, or require the consent of any other party to,
any loan agreement, indenture, mortgage, deed of trust,
agreement, or other instrument to which Stanford or the
Company is a party or by which it may be bound.

c. Neither the execution of this Agreement
nor consummation of the sale of the Stanford Shares
requires the approval or consent of any governmental
authority having any jurisdiction over the Company’s
business or of any party to any agreement with the
Company or Stanford, other than such consents as have
been previously obtained.

On September 13, 1991, Mr. Whitehead signed a promissory

note (promissory note), pursuant to which he agreed to pay Mr.

Stanford the principal amount of $178,000, plus interest in

accordance with that note, in exchange for Mr. Stanford’s 35,280

shares of Burien Nissan stock. The promissory note provided that

no principal payments were to be made under the note until the

so-called option closing date, which was the date on which Burien

Nissan completed its purchase pursuant to the option set forth in

the May 25, 1990 stock purchase agreement of the 61,200 remaining

Johnston shares of Burien Nissan stock. The promissory note

further provided: (1) On a date that was three years after the

option closing date, interest on the unpaid principal balance of

the note was to begin to accrue, and (2) on a date that was eight

years after the option closing date, the entire principal balance

under the note was due and payable in full.

On a date not disclosed by the record, the sale on September
 - 12 -

13, 1991, of Mr. Stanford’s 35,280 shares of Burien Nissan stock

to Mr. Whitehead was recorded in Burien Nissan’s stock register.

On September 13, 1991, Burien Nissan issued stock certificate 9

in the name of Mr. Whitehead, which evidenced his ownership of

the 35,280 shares of Burien Nissan stock that he purchased from

Mr. Stanford on that date.

On December 13, 1993, Burien Nissan, Mr. Johnston, Mr.

McLaughlin, Mr. Whitehead, and Mr. Watson signed an addendum to

the May 25, 1990 stock purchase agreement (addendum to the May

25, 1990 stock purchase agreement). Mr. Whitehead, as president

of Burien Nissan, signed that addendum on its behalf.

The addendum to the May 25, 1990 stock purchase agreement

was executed “for the purpose of ratifying prior acts of the

Shareholders and to approve the taking of certain acts in the

future.” That addendum provided, inter alia:

1.1 Stanford has abandoned and assigned the
entirety of his interest to Whitehead.

1.2 The stock held by Buchner in the amount
of 5,880 shares shall be redeemed by the Company
[Burien Nissan] for Thirty thousand DOLLARS
($30,000).[1]

1.3 The net result of the above changes in
stock ownership is the following:
 - 13 -

SHAREHOLDER SHARES
Don Johnston[2] 61,200
Herbert Whitehead 47,040
Patrick Watson 5,880
--------
Total 114,120
========
1
At a time not disclosed by the record, Mr. Buchner was involved in an
employment dispute with Burien Nissan. That dispute was resolved on or about
Jan. 10, 1994. Pursuant to the resolution of the employment dispute between
Mr. Buchner and Burien Nissan, on or about Jan. 12, 1994, Burien Nissan
redeemed Mr. Buchner’s 5,880 shares of Burien Nissan stock for $10,217.
2
Although not altogether clear from the record, it appears that Jacque
Johnston’s ownership interest in the 61,200 remaining Johnston shares was
transferred to Mr. Johnston on a date not disclosed by the record.

The addendum to the May 25, 1990 stock purchase agreement

further provided, inter alia, that Burien Nissan was to redeem

the 61,200 remaining Johnston shares for $434,677 and that Burien

Nissan was to make that payment, as well as certain other pay-

ments, on January 3, 1994. Pursuant to that addendum, on January

12, 1994, Burien Nissan canceled Mr. Buchner’s 5,880 shares of

stock as well as the 61,200 remaining Johnston shares.

As a result of the addendum to the May 25, 1990 stock

purchase agreement, as of January 12, 1994, the ownership of

Burien Nissan stock was as follows:

Stockholder Number of Shares Owned
Mr. Whitehead 47,040
Mr. Watson 5,880

On April 11, 1995, Burien Nissan began making monthly

payments to Mr. Stanford in the amount of $2,000, which monthly

payments continued until at least September 1999.
 - 14 -

On October 15, 1995, Burien Nissan canceled the 35,280

shares of Mr. Whitehead’s stock that Mr. Whitehead had purchased

from Mr. Stanford on September 13, 1991. Thereafter, Mr. White-

head owned 11,760 shares of Burien Nissan stock.

On March 10, 1996, Burien Nissan and Mr. Whitehead entered

into an agreement entitled “ASSIGNMENT AND ASSUMPTION OF AGREE-

MENT AND PROMISSORY NOTE” (assignment and assumption agreement).

Mr. Whitehead signed the assignment and assumption agreement as

president of Burien Nissan on its behalf as the assignee and in

his individual capacity as the assignor. Mr. Stanford consented

to and signed the assignment and assumption agreement. The

assignment and assumption agreement acknowledged (1) the purchase

on September 13, 1991, by Mr. Whitehead of all of Mr. Stanford’s

Burien Nissan stock pursuant to the September 13, 1991 White-

head/Stanford stock purchase agreement and (2) Mr. Whitehead as

the sole stockholder of Burien Nissan.8

The assignment and assumption agreement provided, inter

alia, the following:

8
It is not clear from the record when Mr. Watson ceased to
own his 5,880 shares of Burien Nissan stock and Mr. Whitehead
became the sole stockholder of Burien Nissan. Form 1120, U.S.
Corporation Income Tax Return (Form 1120), that Burien Nissan
filed for each of its tax years 1994 through 1997 showed Mr.
Whitehead as the sole stockholder of Burien Nissan. Mr. White-
head signed as president of Burien Nissan and under penalties of
perjury at least Form 1120 that Burien Nissan filed for each of
its tax years 1994 through 1996. It appears that Mr. Whitehead
was the sole stockholder of Burien Nissan at least as of the end
of 1994 and at all relevant times thereafter.
 - 15 -

RECITALS

A. Whitehead owns or controls one hundred per-
cent (100%) of all the issued and outstanding stock of
the corporation.

B. Whitehead acquired his stock in the corpora-
tion at various times and by various agreements, in-
cluding that [1991 Whitehead/Stanford] Stock Purchase
Agreement, with attached promissory note (hereinafter
referred to as the “Agreement”) entered into with
Kenneth R. Stanford (hereinafter referred to as “Stan-
ford”) on September 13, 1991. * * *

C. The terms of the Agreement are incorporated
herein by reference as though fully set forth.

D. Whitehead wishes to assign his rights and
responsibilities, as well as the benefits and burdens
of the Agreement to the corporation.

E. The corporation wishes to acquire the rights
and responsibilities, as well as the burdens and bene-
fits of the Agreement from Whitehead by means of this
Assignment.

F. Stanford is willing to consent to this As-
signment.

NOW, THEREFORE, in consideration of the mutual
representations, covenants and agreements contained
herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowl-
edged, the corporation and Whitehead hereby agree as
follows:

I.

Assignment and Assumptions

1.1 Assignment of Rights. Whitehead hereby
sells, assigns, and conveys to the corporation, and the
corporation hereby purchases and assumes from Whitehead
all of Whitehead’s right, title and interest in the
Agreement under the terms of the Agreement.

1.2 Assumption of Liabilities. Also in consider-
ation for the transfer of the Agreement, the corpora-
 - 16 -

tion agrees to assume from the date of the execution of
this Assignment forward Whitehead’s obligations and
liabilities under the terms of the Agreement.

1.3 Closing. All actions, transfers, conveyances
and indemnities called for herein shall be effective as
of the date hereinabove first written [March 10, 1996].

* * * * * * *

III.

Representations and Warranties of Whitehead

3.1 Good Title. Whitehead represents and war-
rants to the corporation that there are no claims,
liens or encumbrances which can lawfully be made
against Whitehead with respect to the Agreement.

3.2 No Breach. Whitehead represents and warrants
that the execution, delivery and performance by it of
the terms and provisions of the Agreement and this
Assignment will not conflict with or result in the
breach of any terms, conditions or provisions of the
Agreement.

3.3 Consent. Whitehead represents and warrants
that, as evidenced by Sanford’s signature herein below,
Whitehead has obtained the consent of Stanford, a party
to the Agreement.

3.4 Guarantee. Whitehead agrees to guarantee
that the corporation will perform under the terms of
the Agreement, and indemnifies Stanford against default
by the corporation under the terms of the Agreement.

On March 10, 1996, Mr. Whitehead, as president of Burien

Nissan, signed a document on its behalf that was entitled “ACTION

BY BOARD OF DIRECTORS OF BURIEN NISSAN, INC. BY UNANIMOUS WRITTEN

CONSENT”. Pursuant to that document, the Board of Directors of

Burien Nissan (which that document stated consisted only of Mr.

Whitehead) consented to the assignment and assumption agreement.
 - 17 -

At no time did Mr. Whitehead make any payments to Mr.

Stanford on the promissory note that Mr. Whitehead signed on

September 13, 1991, in exchange for Mr. Whitehead’s purchase of

all of Mr. Stanford’s Burien Nissan stock. As discussed above,

Burien Nissan continued to make monthly payments of $2,000 to Mr.

Stanford from April 1995 until at least September 1999. Neither

Mr. Whitehead nor Burien Nissan expected Mr. Whitehead to repay

those amounts to Burien Nissan.

A document dated May 31, 1996, entitled “Burien Nissan, Inc.

Adjusting Journal Entries for the period ended December 31,

1995",9 showed, inter alia, the following entries (AJE 15 en-

tries) under the heading “AJE 15":

Account # Account Name/Description Debits Credits
3440 Note Payable-Ken Stanford 178,000
3910 Retained Earnings 178,000
To record note payable on
capital stock redeemed

Petitioners’ Respective Uses of
Certain Burien Nissan Automobiles

During the years at issue, neither Mr. Whitehead nor Ms.

Whitehead owned an automobile. During each of those years, each

petitioner had the use of, and did use, certain automobiles owned

by Burien Nissan (Burien Nissan automobiles). During the years

at issue, petitioners did not pay Burien Nissan for their respec-

tive uses of certain Burien Nissan automobiles.

9
The record does not disclose who prepared that document.
 - 18 -

The specific Burien Nissan automobiles that each petitioner

used during the years at issue varied throughout those years.

Neither petitioners nor Burien Nissan maintained records showing

which Burien Nissan automobiles each petitioner used during those

years. During the years at issue, Burien Nissan paid part of the

fuel and maintenance costs for those Burien Nissan automobiles,

and petitioners paid part of those costs.

Mr. Whitehead selected the specific Burien Nissan automo-

biles that Ms. Whitehead and he, respectively, used during the

years at issue. The average value of the new Burien Nissan

automobiles that Ms. Whitehead used during 1996 was $24,000. The

average value of the new and used Burien Nissan automobiles that

Mr. Whitehead used during 1996 was $18,000.

Neither petitioners nor anyone else prepared or maintained

any document that purported to show either the amount or the

purpose of Ms. Whitehead’s use of certain Burien Nissan automo-

biles during the years at issue.

Mortgage Interest and Property Taxes

During the years at issue, petitioners owned and resided on

real property located at 2419 199th Avenue Court East, Sumner,

Washington (Sumner property). During those years, Home Servicing

of America (Home Servicing) held a mortgage loan on that prop-

erty. During the years at issue, petitioners paid Home Servicing

the following amounts for mortgage interest and property taxes
 - 19 -

with respect to the Sumner property:

Year Mortgage Interest Property Taxes
1996 $28,070.66 $5,302.88
1997 27,651.00 5,584.00

Prior to February 1994, Essie Whitehead, who is Mr. White-

head’s mother, owned and resided on real property located at

12619 Juanita Drive Northeast, Kirkland, Washington (Kirkland

property). In February 1994, Essie Whitehead, who continued to

reside at the Kirkland property, and Mr. Whitehead refinanced the

mortgage loan on the Kirkland property and secured that refinanc-

ing by that property.10

During the years at issue, Colonial Mortgage Co. (Colonial

Mortgage) held the mortgage loan on the Kirkland property.

During those years, Essie Whitehead and Mr. Whitehead were

jointly liable on that mortgage loan. Sometime during the first

week of each month throughout the years at issue, Essie Whitehead

made the monthly mortgage loan payment on the Kirkland property,

which included payment of mortgage interest and property taxes,

from checks that she drew on her own checking account.

10
The parties stipulated that in February 1994 Essie White-
head and both Mr. Whitehead and Ms. Whitehead refinanced the
mortgage loan on the Kirkland property. That stipulation is
clearly contrary to the facts that we have found are established
by the record, and we shall disregard it. See Cal-Maine Foods,
Inc. v. Commissioner, 93 T.C. at 195. The record establishes,
and we have found, that in February 1994 Essie Whitehead and Mr.
Whitehead, and not Ms. Whitehead, refinanced the mortgage loan on
the Kirkland property.
 - 20 -

On a date not disclosed by the record, Colonial Mortgage

issued Form 1098, Mortgage Interest Statement (Form 1098), for

1996, to Essie Whitehead and Mr. Whitehead. The address for them

shown on that form was the Kirkland property address. During

1996, mortgage interest and property taxes of $7,951.34 and

$1,821.35, respectively, were paid with respect to the Kirkland

property.11

During each month throughout 1996, except January, Ms.

Whitehead signed and issued a check payable to Essie Whitehead

that was drawn on petitioners’ joint checking account with

SeaFirst bank (petitioners’ joint checking account). The total

amount of those 11 checks was $6,600. None of those checks bore

a notation as to their purpose. Essie Whitehead negotiated each

of those checks.

During each month throughout 1997, except May, June, and

November, Ms. Whitehead signed and issued a check payable to

Essie Whitehead that was drawn on petitioners’ joint checking

account. In addition to the check so issued to Essie Whitehead

during each of the months March and October 1997, Ms. Whitehead

11
The parties stipulated that during 1997 petitioners paid
mortgage interest and property taxes of $27,651 and $5,584,
respectively, with respect to the Kirkland property. That
stipulation is clearly contrary to the facts that we have found
are established by the record, and we shall disregard it. See
Cal-Maine Foods, Inc. v. Commissioner, supra. The record estab-
lishes, and we have found, that during 1997 petitioners paid
mortgage interest and property taxes of $27,651 and $5,584,
respectively, with respect to the Sumner property.
 - 21 -

signed and issued to her an additional check for each of those

months that was drawn on petitioners’ joint checking account.

The total amount of the 11 checks that Ms. Whitehead issued to

Essie Whitehead during 1997 was $6,622. None of those checks

bore a notation as to their purpose. Essie Whitehead negotiated

each of those checks.

Petitioners’ IRA Contributions

During each of the years at issue, petitioners contributed

$2,000 to an IRA in the name of Mr. Whitehead and $2,000 to an

IRA in the name of Ms. Whitehead. During those years, petition-

ers did not withdraw any funds from any IRA.

Petitioners’ Federal Income Tax Returns

Petitioners jointly filed Form 1040, U.S. Individual Income

Tax Return (joint return), for each of the years at issue.

Norman Smith (Mr. Smith), petitioners’ accountant, signed each of

those returns as return preparer. In petitioners’ joint return

for each of the years at issue, petitioners reported Mr. White-

head’s occupation as “Executive” and Ms. Whitehead’s occupation

as “Hshld. Executive”.

In petitioners’ 1996 joint return, petitioners reported,

inter alia, wage income attributable to Mr. Whitehead of

$109,72212 and “Other income” of $8,975.13

12
Petitioners attached to petitioners’ 1996 joint return
Form W-2, Wage and Tax Statement (Form W-2), for 1996 for Mr.
(continued...)
 - 22 -

Petitioners’ 1996 joint return included Schedule A, Itemized

Deductions (Schedule A). In that schedule, petitioners claimed,

inter alia, the following deductions: (1) $7,124 for real estate

taxes, (2) $36,022 for mortgage interest,14 and (3) $79 for

points not reported in Form 1098.15

Petitioners’ 1996 joint return also included Schedule SE.

In that schedule, petitioners reported self-employment income

attributable to Ms. Whitehead of $6,600.

In petitioners’ 1996 joint return, petitioners claimed,

12
(...continued)
Whitehead (Mr. Whitehead’s 1996 Form W-2). That form showed
“BURIEN NISSAN ADMINISTRATION” as employer and Mr. Whitehead as
employee. Mr. Whitehead’s 1996 Form W-2 showed, inter alia,
“Wages, tips, other compensation” in the amount of $109,721.77.
That form indicated that that amount included a benefit of $1,800
that was identified in that form as “EPV”. Although not alto-
gether clear, we believe “EPV” stands for “employer provided
vehicle”.
13
Petitioners included in petitioners’ 1996 joint return a
statement in which petitioners provided certain information with
respect to the “Other income” reported in that joint return. In
that statement, petitioners listed the following items as “Other
income”: (1) Income of $1,625 from Bulldog Alarms, (2) income of
$6,600 from Burien Nissan as shown in Schedule SE, Self-Employ-
ment Tax (Schedule SE), that petitioners included in their 1996
joint return, and (3) income of $750 from Burien Nissan.
14
Petitioners’ 1996 joint return included a statement in
which petitioners reported that $28,071 of the total mortgage
interest deduction that they claimed was attributable to Home
Servicing and $7,951 of that deduction was attributable to
Colonial Mortgage.
15
The $79 deduction claimed for points not reported in Form
1098 represented petitioners’ amortization of points that they
claim they paid with respect to the refinancing of the Kirkland
property in February 1994.
 - 23 -

inter alia, deductions for the respective $2,000 contributions

made to Mr. Whitehead’s IRA and to Ms. Whitehead’s IRA.

In petitioners’ 1997 joint return, petitioners reported,

inter alia, wage income attributable to Mr. Whitehead of

$120,53716 and other income described as “Personal use of company

vehicle” of $6,600 as shown in Schedule SE that petitioners

included in their 1997 joint return.

Petitioners’ 1997 joint return included Schedule A. In that

schedule, petitioners claimed, inter alia, the following deduc-

tions: (1) $7,422 for real estate taxes, (2) $35,504 for mort-

gage interest, and (3) $79 for points not reported in Form

1098.17

Petitioners’ 1997 joint return also included Schedule SE.

In that schedule, petitioners reported self-employment income

attributable to Mr. Whitehead of $6,600. Petitioners’ 1997 joint

return included a statement in which petitioners described that

16
Petitioners attached to petitioners’ 1997 joint return
Form W-2 for 1997 for Mr. Whitehead (Mr. Whitehead’s 1997 Form W-
2). That form showed “BURIEN NISSAN ADMINISTRATION” as employer
and Mr. Whitehead as employee. Mr. Whitehead’s 1997 Form W-2
showed, inter alia, “Wages, tips, other compensation” in the
amount of $120,537.03. That form indicated that that amount
included a benefit of $1,800 that was identified in that form as
“EPV”. As discussed supra note 12, we believe “EPV” stands for
“employer provided vehicle”.
17
The $79 deduction claimed for points not reported in Form
1098 represented petitioners’ amortization of points that they
claim they paid with respect to the refinancing of the Kirkland
property in February 1994.
 - 24 -

income as income from “Personal use of company vehicle”.

In petitioners’ 1997 joint return, petitioners claimed,

inter alia, deductions for the respective $2,000 contributions

made to Mr. Whitehead’s IRA and to Ms. Whitehead’s IRA.

Notice of Deficiency

In the notice issued to petitioners for the years at issue,

respondent determined, inter alia, to increase petitioners’

taxable income for each year at issue by $24,000. Respondent

made those determinations because respondent determined that Mr.

Whitehead received from Burien Nissan constructive dividends of

$24,000 during each such year.

Respondent further determined to increase petitioners’

taxable income for each year at issue in an amount equal to the

aggregate value of petitioners’ respective uses of certain Burien

Nissan automobiles.18 Respondent made those determinations

18
Respondent determined that the aggregate value of peti-
tioners’ respective uses of certain Burien Nissan automobiles
during each year at issue was $15,000. With respect to petition-
ers’ tax year 1996, respondent credited petitioners for the
following items of income reported in their 1996 joint return:
(1) $1,800 of wage income identified as “EPV” in Mr. Whitehead’s
1996 Form W-2, (2) $750 of other income from Burien Nissan, and
(3) $6,600 of alleged self-employment income from Burien Nissan,
which respondent determined was not self-employment income.
Respondent’s crediting of the foregoing items of income reported
in petitioners’ 1996 joint return resulted in a determination in
the notice to increase petitioners’ taxable income for 1996 in
the net amount of $5,850. With respect to petitioners’ tax year
1997, respondent credited petitioners for the following items of
income reported in their 1997 joint return: (1) $1,800 of wage
income identified as “EPV” in Mr. Whitehead’s 1997 Form W-2 and
(continued...)
 - 25 -

because respondent determined that petitioners did not provide

adequate records or other documentation to substantiate any

business use of certain Burien Nissan automobiles during each

such year. In this connection, respondent also determined that

petitioners did not have any self-employment income during each

of the years at issue. Respondent made those determinations

because respondent determined that the aggregate value of peti-

tioners’ respective uses of certain Burien Nissan automobiles

during each of those years must be reported as employee income

attributable to Mr. Whitehead and that no part of that value may

be reported, as petitioners had claimed in their joint return for

each of the years at issue, as self-employment income attribut-

able to Ms. Whitehead for 1996 and to Mr. Whitehead for 1997.

Respondent also determined to disallow the deductions

claimed by petitioners for each of the years at issue for mort-

gage interest and property taxes in excess of the amounts de-

ducted by them with respect to the Sumner property. Respondent

further determined to disallow the deduction claimed by petition-

ers for each of the years at issue for points not reported in

Form 1098.

18
(...continued)
(2) $6,600 of alleged self-employment income from “Personal use
of company vehicle”, which respondent determined was not self-
employment income. Respondent’s crediting of the foregoing items
of income reported in petitioners’ 1997 joint return resulted in
a determination in the notice to increase petitioners’ taxable
income for 1997 in the net amount of $6,600.
 - 26 -

Respondent also determined to disallow the deduction that

petitioners claimed in their 1996 joint return for the $2,000

contribution made to Ms. Whitehead’s IRA during that year.

Respondent made that determination because respondent determined

that Ms. Whitehead did not receive any compensation during 1996.

Respondent further determined that petitioners are liable for

each of the years at issue for an excise tax of $120 under

section 4973(a) for excess IRA contributions.

Respondent also determined that petitioners are liable for

each of the years at issue for the accuracy-related penalty under

section 6662(a).

OPINION

Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.19 See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). With respect to the deduc-

19
With respect to court proceedings arising in connection
with examinations commencing after July 22, 1998, under sec.
7491(a) the burden of proof shifts to respondent in specified
circumstances. Internal Revenue Service Restructuring and Reform
Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. The
record in this case does not establish the date on which the
examination of petitioners’ taxable years at issue began, and
neither party contends that sec. 7491(a) applies here.

With respect to court proceedings arising in connection with
examinations commencing after July 22, 1998, under sec. 7491(c)
respondent bears the burden of production with respect to any
individual’s liability for any penalty or addition to tax. Id.
As noted above, the record in this case does not establish the
date on which the examination of petitioners’ taxable years at
issue began. Moreover, neither party contends that sec. 7491(c)
applies here.
 - 27 -

tions claimed by petitioners, deductions are strictly a matter of

legislative grace, and petitioners bear the burden of proving

that they are entitled to any deductions claimed. INDOPCO, Inc.

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

The Court’s Evaluation of Evidence in
the Record on Which Petitioners Rely

Petitioners rely on certain testimonial and documentary

evidence to support their positions with respect to the various

issues in this case.

Testimonial Evidence

At trial, petitioners called themselves, Mr. Smith, and

Essie Whitehead as witnesses. With respect to the testimony of

petitioners, based on our observation of each petitioner at

trial, including our observation of each petitioner’s demeanor,

we did not find either of them to be credible. We also found Mr.

Whitehead’s testimony to be conclusory and/or uncorroborated by

reliable evidence in certain material respects. While we found

Ms. Whitehead’s testimony to be specific in certain respects, we

found her testimony about certain material matters to be general,

vague, and/or conclusory.

With respect to Mr. Smith’s testimony,20 based on our obser-

20
Although petitioners do not explicitly rely on brief on
the testimony of Mr. Smith, the individual who prepared petition-
ers’ joint returns for the years at issue, at trial they relied
on his testimony to support their respective positions with
respect to certain of the issues in this case.
 - 28 -

vation of Mr. Smith at trial, including our observation of his

demeanor, we did not find him to be credible. We also found his

testimony to be conclusory in certain material respects and

irrelevant in certain other material respects.

With respect to the testimony of Essie Whitehead, we found

her testimony to be inconsistent with certain of the parties’

stipulations of fact in this case.

Documentary Evidence

The record contains a number of documents on which petition-

ers rely to establish their positions with respect to the issues

that remain in this case. With respect to the constructive

dividend issue, petitioners rely on, inter alia, copies of three

Burien Nissan stock certificates, i.e., stock certificates 4, 6,

and 9, which we found to be incomplete and questionable in

certain material respects. We found those copies to be incom-

plete in that there was no legend and no endorsement on the back

side of each of them, as required by the May 25, 1990 stock

purchase agreement and the September 1, 1990 stockholders’

agreement, respectively. We found the copies of the three Burien

Nissan stock certificates in question to be questionable in that

the back side of the copy of stock certificate 9 was completely

blank,21 and the back side of each of the two copies of stock

21
It appears that the back side of stock certificate 9 may
not have been copied.
 - 29 -

certificates 4 and 6 reflected purported assignments of the stock

to which each such certificate pertained that contained what we

consider on the record before us to be significant irregulari-

ties.22 We shall not rely on the copies of Burien Nissan stock

certificates 4, 6, and 9 that we found to be incomplete and

questionable in certain material respects.

With respect to the constructive dividend issue, petitioners

also rely on, inter alia, the following AJE 15 entries in a

document entitled “Burien Nissan, Inc. Adjusting Journal Entries

for the period ended December 31, 1995":

Account # Account Name/Description Debits Credits
3440 Note Payable-Ken Stanford 178,000
3910 Retained Earnings 178,000
To record note payable on
capital stock redeemed

Petitioners rely on the foregoing AJE 15 entries to show that

Burien Nissan redeemed Mr. Stanford’s stock in 1995.23 We are

not persuaded by the AJE 15 entries that Burien Nissan redeemed

Mr. Stanford’s stock in 1995, or at any other time. We have

found that Mr. Whitehead purchased all of Mr. Stanford’s Burien

Nissan stock on September 13, 1991, pursuant to the September 13,

22
By way of illustration, each purported assignment that
appeared on the back side of each of the two copies of stock
certificates 4 and 6 contained (1) no signature in the space
provided for a witness to sign and (2) a date that we found to be
inconsistent with credible evidence in the record.
23
Petitioners do not contend that Burien Nissan redeemed any
stock from Mr. Whitehead in 1995.
 - 30 -

1991 Whitehead/Stanford stock purchase agreement. We find on the

record before us that Mr. Stanford owned no Burien Nissan stock

after September 13, 1991, and that Burien Nissan could not have

redeemed any stock from Mr. Stanford in 1995. We shall not rely

on the AJE 15 entries to support petitioners’ position that

Burien Nissan redeemed Mr. Stanford’s Burien Nissan stock in

1995.

With respect to the issue of Mr. Whitehead’s use of certain

Burien Nissan automobiles during the years at issue, petitioners

rely on, inter alia, a document entitled “AUTOMOBILE MILEAGE AND

EXPENSE LOG” (purported mileage log). Petitioners contend that

Mr. Whitehead maintained that purported mileage log during

January, February, and March 1996 in order to determine what

portion of his use of certain Burien Nissan automobiles during

the years at issue constituted a business use of those automo-

biles. Based upon our examination of the purported mileage log,

we found it to be questionable. That purported log contained

different handwriting and certain numerical entries which ap-

peared to have been altered.24 We shall not rely on the pur-

ported mileage log.

Burien Nissan’s Payments to Mr. Stanford

Respondent determined to increase petitioners’ taxable

24
We also found certain numerical entries contained in the
purported mileage log to be illegible.
 - 31 -

income for each year at issue by $24,000. Respondent made those

determinations because respondent determined that Mr. Whitehead

received from Burien Nissan constructive dividends of $24,000

during each such year. With respect to those determinations,

respondent contends that under cases such as Yelencsics v.

Commissioner, 74 T.C. 1513 (1980), Burien Nissan’s $2,000 monthly

payments to Mr. Stanford during the years at issue constitute

constructive dividends to Mr. Whitehead for those years. That is

because, according to respondent, by making those payments Burien

Nissan relieved Mr. Whitehead of his obligations under the

promissory note that he issued to Mr. Stanford on September 13,

1991. Petitioners contend that the September 13, 1991 Whitehead/

Stanford stock purchase agreement pursuant to which Mr. Whitehead

purchased Mr. Stanford’s Burien Nissan stock was void or voidable

because of the restrictions placed on the transfer of such stock

pursuant to the September 1, 1990 stockholders’ agreement.

Consequently, according to petitioners, Mr. Whitehead did not

purchase Mr. Stanford’s Burien Nissan stock, and Burien Nissan’s

payments to Mr. Stanford during the years at issue represented

payments to Mr. Stanford in redemption of his Burien Nissan

stock.

Both the May 25, 1990 stock purchase agreement25 and the

25
Although petitioners do not rely on the May 25, 1990 stock
purchase agreement, that agreement required the prior written
(continued...)
 - 32 -

September 1, 1990 stockholders’ agreement placed certain restric-

tions on the transfer of Burien Nissan stock. Under the terms of

those agreements, the only restriction that applied to the sale

of all of the shares of one minority stockholder to another

stockholder was the restriction that required the selling minor-

ity stockholder to obtain the prior written consent of Mr.

Johnston and Jacque Johnston.26 Pursuant to the terms of the

September 13, 1991 Whitehead/Stanford stock purchase agreement,

certain consents had been obtained prior to the execution of that

agreement, and that agreement did not require any other consents

to be obtained.

On the record before us, we find that petitioners have

failed to show that the “consents * * * previously obtained”

referenced in the September 13, 1991 Whitehead/Stanford stock

purchase agreement were not the consents of Mr. Johnston and

Jacque Johnston. On that record, we further find that petition-

ers have failed to show that the sale of Mr. Stanford’s Burien

Nissan stock to Mr. Whitehead pursuant to the September 13, 1991

25
(...continued)
consent of Mr. Johnston and Jacque Johnston to any transfer of
Burien Nissan stock by a minority stockholder. The foregoing
restriction in the May 25, 1990 stock purchase agreement was
incorporated by reference into the September 1, 1990 stockhold-
ers’ agreement.
26
The September 1, 1990 stockholders’ agreement placed
additional restrictions on the sale of Burien Nissan stock by a
minority stockholder to a third party.
 - 33 -

Whitehead/Stanford stock purchase agreement was effected without

the prior written consent of Mr. Johnston and Jacque Johnston,

which, under the May 25, 1990 stock purchase agreement and the

September 1, 1990 stockholders’ agreement, was the only restric-

tion to which that sale was subject.27 Based on our examination

of the entire record before us, we find that petitioners have

failed to establish that the September 13, 1991 Whitehead/

Stanford stock purchase agreement was void or voidable.28

We have rejected the only argument that petitioners advance

(i.e., that the September 13, 1991 Whitehead/Stanford stock

purchase agreement was void or voidable) to establish error in

the determinations of respondent that Mr. Whitehead received

constructive dividends totaling $24,000 during each year at issue

27
The May 25, 1990 stock purchase agreement and the Septem-
ber 1, 1990 stockholders’ agreement provided that the only
restriction that applied to the sale of all of the shares of one
minority stockholder to another stockholder was the restriction
that required the selling minority stockholder to obtain the
prior written consent of Mr. Johnston and Jacque Johnston.
Petitioners have pointed to no other restriction that would apply
to the sale by Mr. Stanford to Mr. Whitehead of Mr. Stanford’s
Burien Nissan stock that was effected by the September 13, 1991
Whitehead/Stanford stock purchase agreement, and we have found
none.
28
Assuming arguendo that petitioners had established that
the September 13, 1991 Whitehead/Stanford stock purchase agree-
ment was void or voidable, on the record before us, we find that
Mr. Whitehead’s Sept. 13, 1991 purchase of Mr. Stanford’s shares
of Burien Nissan stock was recognized and ratified by Burien
Nissan, Mr. Johnston, Mr. McLaughlin, Mr. Whitehead, and Mr.
Watson pursuant to the addendum to the May 25, 1990 stock pur-
chase agreement that was executed on Dec. 13, 1993.
 - 34 -

as a result of Burien Nissan’s payments to Mr. Stanford during

each such year. On the instant record, we sustain those determi-

nations.

Petitioners’ Respective Uses of Certain Burien Nissan Automobiles

Respondent determined to increase petitioners’ taxable

income for 1996 and 1997 in the net amounts of $5,850 and $6,600,

respectively, as a result of petitioners’ respective uses during

those years of certain Burien Nissan automobiles. Respondent

made those determinations because respondent determined that

petitioners did not provide adequate records or other documenta-

tion to substantiate any business use of those automobiles during

each year at issue. Respondent further determined that petition-

ers’ respective uses of certain Burien Nissan automobiles during

the years at issue resulted in employee income attributable to

Mr. Whitehead for those years and did not result in self-employ-

ment income attributable to Ms. Whitehead for 1996 or to Mr.

Whitehead for 1997.29 Petitioners advance a number of conten-

tions with respect to respondent’s determinations regarding their

29
The parties agree that petitioners reported the value of
their respective uses of certain Burien Nissan automobiles in
petitioners’ 1996 joint return as follows: Wage income of $1,800
attributable to Mr. Whitehead, “Other income” of $750, and “Other
income” of $6,600 attributable to Ms. Whitehead and subject to
self-employment tax. The parties further agree that petitioners
reported the value of their respective uses of certain Burien
Nissan automobiles in petitioners’ 1997 joint return as follows:
Wage income attributable to Mr. Whitehead of $1,800 and “Other
income” of $6,600 attributable to Mr. Whitehead and subject to
self-employment tax.
 - 35 -

respective uses of certain Burien Nissan automobiles during the

years at issue.30 Before turning to each of those contentions,

we shall summarize the pertinent law.

In general, gross income includes compensation for services.

Sec. 61(a)(1). When services are paid for in property or in

exchange for other services, the fair market value of such

property or other services must be included in income as compen-

30
In petitioners’ answering brief, petitioners contend that
respondent takes a new position on brief with respect to both
petitioners’ respective uses of certain Burien Nissan automobiles
during the years at issue and the value of such uses (respon-
dent’s position on brief). With respect to respondent’s position
on brief regarding petitioners’ respective uses of certain Burien
Nissan automobiles during the years at issue, petitioners con-
tend: “In its Brief, respondent now takes the completely new
position that none of the use of the vehicles used by the peti-
tioners was business related.” We disagree. Respondent’s
position on brief regarding petitioners’ respective uses of
certain Burien Nissan automobiles during the years at issue is
the same as respondent’s position in the notice, i.e.,
(1) petitioners did not provide adequate records or other docu-
mentation to substantiate any business use of those automobiles
during those years; and (2) petitioners did not show that Ms.
Whitehead’s use of certain Burien Nissan automobiles during the
years at issue constituted compensation to her by Burien Nissan
for certain services that she performed during those years. With
respect to respondent’s position on brief regarding the value of
petitioners’ respective uses of certain Burien Nissan automobiles
during the years at issue, petitioners contend: “Respondent then
proceeds to use some assumptions to compute what it feels should
be taxable income to the petitioners.” Respondent’s position on
brief regarding the value of petitioners’ respective uses of
certain Burien Nissan automobiles during the years at issue is
the same as respondent’s position in the notice, i.e., the
aggregate value of petitioners’ respective uses of those automo-
biles during each year at issue was $15,000. See supra note 18.
On the record before us, we find that respondent’s position on
brief does not differ from respondent’s determinations in the
notice or respondent’s position at trial. We find on that record
that respondent’s position on brief is not a new position.
 - 36 -

sation. Sec. 1.61-2(d)(1), Income Tax Regs. Such property or

other services may take the form of fringe benefits, which

include, inter alia, employer-provided automobiles. Sec. 1.61-

21(a)(1), Income Tax Regs. In the case of compensation paid in

the form of a fringe benefit, an employee31 must include in gross

income the amount by which the fair market value of the fringe

benefit exceeds the sum of the amount, if any, paid for the

benefit and the amount, if any, specifically excluded from gross

income by, inter alia, section 132. Sec. 1.61-21(b)(1), Income

Tax Regs.

Petitioners’ Position With Respect to Mr. Whitehead’s Use of
Certain Burien Nissan Automobiles During the Years at Issue

Petitioners contend that, in calculating the value of Mr.

Whitehead’s use of certain Burien Nissan automobiles during the

31
The person to whom a fringe benefit is taxable may not be
an employee of the provider of the fringe benefit, but may be,
for example, a director or an independent contractor. Sec. 1.61-
21(a)(4)(ii), Income Tax Regs. The regulations define the term
“employee” to include any person performing services in connec-
tion with which a fringe benefit is furnished, id., and define
the term “employer” to include any provider of a fringe benefit
in connection with payment for the performance of services, sec.
1.61-21(a)(5), Income Tax Regs.

In addition, the person to whom a fringe benefit is taxable
is the person performing the services in connection with which
the fringe benefit is furnished, regardless of whether that
person is the person who actually receives the fringe benefit.
Sec. 1.61-21(a)(4)(i), Income Tax Regs. For example, if an
employer provides an automobile to an employee’s spouse in
connection with the performance of services by the employee, that
fringe benefit is taxable to the employee. Id. The automobile
is considered to be available to the employee, and the use by the
employee’s spouse is considered to be use by the employee. Id.
 - 37 -

years at issue, they are entitled to exclude 50 percent of that

value as a so-called working condition fringe under section

132(a)(3). That is because, according to petitioners, 50 percent

of Mr. Whitehead’s use of certain Burien Nissan automobiles

during those years constituted a business use of those automo-

biles.

For purposes of section 132, the term “working condition

fringe” means any property or services provided to an employee to

the extent that, if the employee paid for such property or

services, such payment would be allowable as a deduction under

section 162 or section 167. Sec. 132(d). Section 162 generally

allows a deduction for ordinary and necessary expenses paid or

incurred during the taxable year in carrying on a trade or

business. Sec. 162(a). Section 167 allows a deduction for a

reasonable allowance for the exhaustion, wear and tear, and

obsolescence of property used in a trade or business or held for

the production of income. Sec. 167(a). A particular payment

otherwise allowable as a deduction under section 162 or section

167 is not allowable unless any applicable substantiation re-

quirements of section 274 are satisfied. Sec. 1.132-5(a)(1)(ii),

Income Tax Regs.

In the case of a taxpayer’s use of an employer-provided

vehicle, in order to exclude from gross income as a working

condition fringe under section 132(a)(3) any portion of the fair
 - 38 -

market value of that use a taxpayer must: (1) Show that any

payment for such use would be allowable as a deduction under

section 162 or section 167 and (2) satisfy the substantiation

requirements of section 274(d) and the regulations thereunder by

adequate records (adequate records requirement) or by sufficient

evidence corroborating their own statements (sufficient evidence

requirement). See sec. 274(d)(4); sec. 1.274-5T(c)(1),

(e)(1)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017, 46026

(Nov. 6, 1985); sec. 1.132-5(a)(1)(ii), Income Tax Regs.32

In order to meet the adequate records requirement, a tax-

payer must maintain an account book, diary, log, or similar

record, made at or near the time of the expenditure or use, which

32
Sec. 274(d) provides in pertinent part:

SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC.,
EXPENSES.

(d) Substantiation Required.--No deduction or credit
shall be allowed--

* * * * * * *

(4) with respect to any listed property (as de-
fined in section 280F(d)(4)),

unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer’s
own statement (A) the amount of such expense or other
item, (B) the time and place of the * * * use of the
facility or property * * *, (C) the business purpose of
the expense or other item * * *.

The term “listed property” is defined in section 280F(d)(4) to
include passenger automobiles. Sec. 280F(d)(4)(A)(i).
 - 39 -

includes a written statement of business purpose (unless such

business purpose is evident from the surrounding facts and

circumstances) and sufficient information as to each element of

every business use. Sec. 1.274-5T(c)(2)(i) and (ii), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

As pertinent here, section 1.274-5T(c)(3)(ii), Temporary

Income Tax Regs., 50 Fed. Reg. 46021 (Nov. 6, 1985), entitled

“Sampling”, provides a method of substantiation that a taxpayer

may use if the taxpayer does not maintain an adequate record

within the meaning of section 274(d) and the regulations thereun-

der for the entire taxable year. That section provides that

generally a taxpayer may meet the sufficient evidence requirement

under section 274(d) and the regulations thereunder by maintain-

ing an adequate record for a portion or portions of a taxable

year and using that record to substantiate the business use of

listed property for all of that year. However, the taxpayer must

demonstrate by other evidence that the use for the portion or

portions of the taxable year for which the adequate record is

maintained is representative of the use for the taxable year

(sampling method of substantiation). Sec. 1.274-5T(c)(3)(ii)(A),

Temporary Income Tax Regs., 50 Fed. Reg. 46021 (Nov. 6, 1985).

The sampling method of substantiation may not be used to substan-

tiate the business use of an employer-provided automobile that is

made available for use by more than one employee for all or a
 - 40 -

portion of a taxable year. Sec. 1.274-5T(c)(3)(ii)(B), Temporary

Income Tax Regs., 50 Fed. Reg. 46021 (Nov. 6, 1985).

Having set forth the pertinent law, we turn to whether,

without regard to the requirements of section 274(d) and the

regulations thereunder, petitioners have shown that any payment

by them for Mr. Whitehead’s use of certain Burien Nissan automo-

biles during the years at issue would be allowable as a deduction

under section 162 or section 167. Petitioners make no arguments

or contentions with respect to that question. On the record

before us, we find that petitioners have failed to show that,

without regard to the requirements of section 274(d) and the

regulations thereunder, any such payment would be allowable as a

deduction under either of those sections.

Assuming arguendo that petitioners had shown that, without

regard to section 274(d) and the regulations thereunder, any

payment by them for Mr. Whitehead’s use of certain Burien Nissan

automobiles during the years at issue would be allowable as a

deduction under section 162 or section 167, see sec. 132(d),

petitioners must nonetheless establish that they have satisfied

the substantiation requirements of section 274(d) and the regula-

tions thereunder. Petitioners have attempted to meet those

substantiation requirements through the sampling method of

substantiation. On the record before us, we find that petition-

ers have failed to show that they are entitled to use the sam-
 - 41 -

pling method of substantiation. That is because, on the record

before us, we find that petitioners have failed to show that the

Burien Nissan automobiles that each of them used during each year

at issue were not made available for use by more than one Burien

Nissan employee for all or a portion of each such year. See sec.

1.274-5T(c)(3)(ii)(B), Temporary Income Tax Regs., 50 Fed. Reg.

46021 (Nov. 6, 1985).

Assuming arguendo that petitioners had shown (1) that,

without regard to section 274(d) and the regulations thereunder,

any payment by them for Mr. Whitehead’s use of certain Burien

Nissan automobiles would be allowable as a deduction under

section 162 or section 167 and (2) that they are entitled to use

the sampling method of substantiation, we must consider whether

petitioners have met the requirements of that method. In support

of petitioners’ contention that 50 percent of Mr. Whitehead’s use

of certain Burien Nissan automobiles during the years at issue

constituted a business use, petitioners rely on the purported

mileage log that petitioners claim Mr. Whitehead maintained

during January through March 1996 (test period). We have found

that purported log to be questionable and not reliable.33 In

33
Assuming arguendo that we had relied on the purported
mileage log, on the record before us, we find that that purported
log does not meet the adequate records requirement under sec.
1.274-5T(c)(2)(i) and (ii), Temporary Income Tax Regs., 50 Fed.
Reg. 46017 (Nov. 6, 1985). We find on the record before us that
the purported mileage log did not contain a written statement of
(continued...)
 - 42 -

support of petitioners’ contention that Mr. Whitehead’s use of

certain Burien Nissan automobiles during the test period was

representative of Mr. Whitehead’s use of those automobiles

throughout the years at issue, petitioners rely on Mr. White-

head’s self-serving testimony. Based on the Court’s evaluation

of Mr. Whitehead’s testimony, we are not required to, and we

shall not, rely on his testimony regarding his use of certain

Burien Nissan automobiles during the years at issue. See Lerch

v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989), affg.

T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688, 689-

690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159;

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).34 On the record

before us, we find that petitioners have failed to meet the

requirements of the sampling method of substantiation. On that

record, we further find that petitioners have failed otherwise to

33
(...continued)
the business purpose of any miles allegedly driven by Mr. White-
head during the test period. We further find on that record that
petitioners have failed to show that the alleged business purpose
of any miles allegedly driven by Mr. Whitehead during the test
period is evident from the surrounding facts and circumstances.
In this connection, no credible evidence in the record estab-
lishes the facts and circumstances during the years at issue
surrounding Mr. Whitehead’s claimed business uses of certain
Burien Nissan automobiles during those years.
34
The principle that we are not required to rely on testi-
mony, even if uncontradicted, that we find to be, inter alia, not
credible, questionable, unreasonable, general, and/or vague is so
well established that hereinafter we shall not cite the case law
supporting that principle.
 - 43 -

meet the substantiation requirements under section 274(d) and the

regulations thereunder by introducing either adequate records or

sufficient evidence corroborating Mr. Whitehead’s own statements

with respect to his business use of certain Burien Nissan automo-

biles during the years at issue.

On the record before us, we find that petitioners have

failed to establish that any portion of Mr. Whitehead’s use of

certain Burien Nissan automobiles during the years at issue

constituted a business use, the fair market value of which is

excludable from gross income as a working condition fringe under

section 132(a)(3). We further find on that record that the

entire fair market value of Mr. Whitehead’s use of certain Burien

Nissan automobiles during the years at issue is includible in

petitioners’ income for those years as wages to Mr. Whitehead.

Having so found, we turn now to the parties’ dispute over

the fair market value of Mr. Whitehead’s use of certain Burien

Nissan automobiles during the years at issue. With respect to

employer-provided automobiles, unless the taxpayer applies one of

the special valuation rules set forth in section 1.61-21(d), (e),

and (f), Income Tax Regs.,35 the fair market value of an

35
On brief, petitioners claim that they applied one of the
special valuation rules, namely, the automobile lease valuation
rule under sec. 1.61-21(d), Income Tax Regs., to calculate the
value of petitioners’ respective uses of certain Burien Nissan
automobiles during the years at issue. We are not convinced from
the calculation that petitioners present on brief that they did
(continued...)
 - 44 -

employer-provided automobile generally is equal to the amount

that an individual would have to pay in an arm’s-length transac-

tion to lease the same or comparable automobile on the same or

comparable conditions in the geographic area in which the automo-

bile is available for use. Sec. 1.61-21(b)(4)(i), Income Tax

Regs.

On the record before us, we find that petitioners have

failed to establish that the fair market value of Mr. Whitehead’s

use of certain Burien Nissan automobiles during the years at

issue is equal to the value that they reported for such use in

their joint return for each of those years.

Petitioners’ Position With Respect to Ms. Whitehead’s Use of
Certain Burien Nissan Automobiles During the Years at Issue

With respect to the parties’ dispute as to whether any

portion of petitioners’ respective uses of certain Burien Nissan

automobiles during the years at issue constituted a business use

of such automobiles, petitioners appear to contend that only Mr.

Whitehead, and not Ms. Whitehead, had any business use of certain

Burien Nissan automobiles during those years.36 The parties’

35
(...continued)
in fact use that special valuation rule. In any event, on the
record before us, we find that petitioners have failed to show
that they are entitled to use the automobile lease valuation rule
to calculate the value of their respective uses of certain Burien
Nissan automobiles during the years at issue. See sec. 1.61-
21(c)(2)(ii), Income Tax Regs.
36
On brief, petitioners contend that they could have estab-
(continued...)
 - 45 -

disputes with respect to Ms. Whitehead’s use of certain Burien

Nissan automobiles during the years at issue are whether:

(1) Ms. Whitehead performed services for Burien Nissan during the

years at issue for which she was compensated by her personal use

of certain Burien Nissan automobiles during those years; (2) in

the performance of such services, Ms. Whitehead worked at least

120 hours during each year at issue; and (3) for 1996, petition-

ers correctly reported the value of Ms. Whitehead’s services in

their joint return for that year as self-employment income in the

amount of $6,600.37

36
(...continued)
lished through their testimony at trial that, at least during
1996, Ms. Whitehead “used her vehicle for business purposes and
no adjustment was made for such use or for fuel purchased by
petitioner[s] from personal funds.” However, petitioners indi-
cate on brief that they will adhere to the “conservative ap-
proach” that they claim they took in their joint return for each
of the years at issue, in which they reported income from their
respective claimed personal uses of certain Burien Nissan automo-
biles during those years. That “conservative approach” was based
on the alleged business use of certain Burien Nissan automobiles
by Mr. Whitehead only, and not by Ms. Whitehead.

Assuming arguendo that petitioners had not adhered to the
“conservative approach” that they claim they took in their joint
return for each of the years at issue and that petitioners are
contending that any portion of Ms. Whitehead’s use of certain
Burien Nissan automobiles during the years at issue constituted a
business use of such automobiles, on the record before us, we
find that petitioners have failed to show that any portion of her
use of such automobiles during those years constituted a business
use of such automobiles.
37
Petitioners allege as facts that, for each year at issue,
Ms. Whitehead performed services for Burien Nissan, she was
compensated for such services through her personal use of certain
(continued...)
 - 46 -

With respect to the parties’ dispute as to whether Ms.

Whitehead performed services for Burien Nissan during the years

at issue, petitioners contend that those services included

“performing administrative tasks, functioning as corporate

Secretary, assisting with the transporting of vehicles when sales

promotions were conducted away from the dealership site and

coordinating employee functions at two or more major events

during the operating year.”38 In support of petitioners’ conten-

tion that Ms. Whitehead performed those services for Burien

Nissan during the years at issue, petitioners rely on their self-

serving testimony. We are not required to, and we shall not,

rely on Mr. Whitehead’s testimony. Based on the Court’s evalua-

tion of Ms. Whitehead’s testimony, we are not required to, and we

shall not, rely on her testimony to establish that she performed

37
(...continued)
Burien Nissan automobiles, and that use had a value of $6,600.
Nevertheless, petitioners contend that that $6,600 constitutes
self-employment income attributable to Ms. Whitehead for 1996 and
to Mr. Whitehead for 1997. It is not altogether clear why
petitioners are claiming inconsistent treatment of the value of
Ms. Whitehead’s alleged services and use of certain Burien Nissan
automobiles for each year at issue. However, as discussed below,
we believe that the reason for such inconsistent treatment is
that, in order to be entitled to a deduction for the entire
$2,000 contribution to her IRA for 1996, Ms. Whitehead would have
to have received compensation for that year of at least $2,000.
In contrast, due to a change in the law, she would not have to
have received any compensation in order to be entitled to a
deduction for the entire $2,000 contribution to her IRA for 1997.
38
Petitioners concede that Ms. Whitehead did not have any
written agreement with respect to any services that petitioners
claim she performed for Burien Nissan during the years at issue.
 - 47 -

services for Burien Nissan during the years at issue. On the

record before us, we find that petitioners have failed to show

that Ms. Whitehead performed any services for Burien Nissan

during the years at issue.39

Assuming arguendo that petitioners had shown that Ms.

Whitehead performed any services for Burien Nissan during the

years at issue, we find on the record before us that petitioners

have failed to show that Burien Nissan intended to, or did in

39
Ms. Whitehead testified at length about her involvement in
planning and carrying out plans for two Burien Nissan employee
functions (alleged employee functions) during each year at issue.
We are not required to, and we shall not, rely on Ms. Whitehead’s
testimony. Moreover, petitioners did not introduce into the
record any credible corroborating evidence that establishes that
such alleged functions took place and that Ms. Whitehead per-
formed any services with respect to such alleged functions. We
infer from petitioners’ failure to proffer any such credible
corroborating evidence that any such evidence does not exist and
that, if any such evidence does exist, it would not have substan-
tiated petitioners’ position with respect to the alleged services
provided to Burien Nissan by Ms. Whitehead during the years at
issue. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.
1158, 1164-1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). In
this connection, we note that in Form 1120 that Burien Nissan
filed for each of the years at issue it did not claim deductions
in amounts large enough to cover the several thousand dollars
that Ms. Whitehead testified it spent each year on the alleged
employee functions. Assuming arguendo that petitioners had
established that Burien Nissan held the alleged employee func-
tions during each year at issue and that Ms. Whitehead performed
some services with respect to the planning and the carrying out
of plans for such functions, on the record before us, we find
that petitioners have failed to show that Burien Nissan intended
to, or did in fact, compensate Ms. Whitehead for such services.
In this connection, Ms. Whitehead could have performed some
services for Burien Nissan relating to certain alleged employee
functions gratuitously upon the request of her husband, who was
its president and sole stockholder during the years at issue.
 - 48 -

fact, compensate her for any such services.40

On the record before us, we find that petitioners have

failed to show that Burien Nissan permitted Ms. Whitehead to use

certain Burien Nissan automobiles in order to compensate her for

any services that she performed and not to compensate Mr. White-

head for the services that he performed for Burien Nissan. We

find on that record that the fair market value of Ms. Whitehead’s

use of certain Burien Nissan automobiles during the years at

issue constitutes a fringe benefit provided by Burien Nissan to

Mr. Whitehead and is includible in petitioners’ income for those

years as wages to Mr. Whitehead. See sec. 1.61-21(a)(4)(i),

Income Tax Regs. On the record before us, we further find that

petitioners have failed to establish that the fair market value

of Ms. Whitehead’s use of certain Burien Nissan automobiles

during the years at issue is equal to the value that they re-

ported for such use in their joint return for each of those

years.

Based on our examination of the entire record before us, we

find that petitioners have failed to carry their burden of

establishing error in the determinations of respondent to include

in petitioners’ taxable income for 1996 and 1997 the net amounts

of $5,850 and $6,600, respectively, as a result of petitioners’

40
As discussed supra note 39, Ms. Whitehead could have
performed certain services for Burien Nissan gratuitously upon
the request of her husband.
 - 49 -

respective uses during those years of certain Burien Nissan

automobiles.41 On that record, we sustain those determinations.

Petitioners’ Claimed Deductions for
Certain Mortgage Interest and Property Taxes

Respondent determined to disallow any deductions for mort-

gage interest and property taxes claimed by petitioners for each

year at issue in excess of the deductions claimed by them for

each such year for mortgage interest and property taxes paid with

respect to the Sumner property.42

The parties agree that the mortgage interest and property

taxes at issue are attributable to the debt that Mr. Whitehead

and Essie Whitehead incurred when they refinanced the Kirkland

property in February 1994. The parties’ disputes are whether Mr.

Whitehead paid any portion of the disallowed mortgage interest

and property taxes and, if he did pay a portion of the mortgage

interest at issue, whether that interest constitutes qualified

41
We note that, when Mr. Stanford was president of Burien
Nissan, his employment agreement provided that he was entitled to
unrestricted access to two Burien Nissan automobiles for his
personal use. Mr. Whitehead could have received the same benefit
when he became president of Burien Nissan.
42
Respondent also determined to disallow the deduction for
points not reported in Form 1098 that petitioners claimed with
respect to the Kirkland property for each year at issue. Peti-
tioners make no argument on brief with respect to their entitle-
ment to the deduction that they claimed for each year at issue
for those points. We conclude that petitioners have abandoned
contesting respondent’s determinations disallowing the deductions
claimed for those points. See Rybak v. Commissioner, 91 T.C.
524, 566 n.19 (1988).
 - 50 -

residence interest under section 163(h)(3). Before turning to

the contentions of the parties, we shall summarize the pertinent

law.

Section 163(a) generally allows a deduction for all interest

paid or accrued during the taxable year on indebtedness. In the

case of a taxpayer other than a corporation, section 163(h)

generally disallows any deduction for “personal interest”. The

term “personal interest” is defined to mean any interest allow-

able as a deduction under chapter 1 of the Code other than, inter

alia, any qualified residence interest. Sec. 163(h)(2)(D). The

term “qualified residence interest” means any interest which is

paid or accrued during the taxable year on, inter alia, acquisi-

tion indebtedness. Sec. 163(h)(3)(A). The term “acquisition

indebtedness” is defined to mean any indebtedness which is

incurred in acquiring, constructing, or substantially improving

any qualified residence of the taxpayer and which is secured by

such residence. Sec. 163(h)(3)(B)(i). The term “acquisition

indebtedness” also includes any indebtedness secured by any

qualified residence of the taxpayer resulting from the refinanc-

ing of acquisition indebtedness, but only to the extent that the

amount of the indebtedness resulting from such refinancing does

not exceed the amount of the refinanced indebtedness. Id.

Section 164 allows a deduction for certain taxes, including

real property taxes, paid or accrued during the taxable year.
 - 51 -

Sec. 164(a)(1).

In the case of a mortgage loan for which the taxpayer is

jointly liable with another person, a deduction for mortgage

interest and property taxes is allowable to the persons or person

who pays such interest and taxes out of his or her own funds in

proportion to such payment. See Higgins v. Commissioner, 16 T.C.

140, 142-144 (1951); Jolson v. Commissioner, 3 T.C. 1184, 1186-

1187 (1944).43

It is petitioners’ position that they are entitled to a

deduction for each year at issue in the amount of $7,200 for

mortgage interest and property taxes paid by Mr. Whitehead with

respect to the Kirkland property.44 That is because, according

to petitioners, during each of those years Mr. Whitehead paid

43
See also Blackburn v. Commissioner, T.C. Memo. 1979-266,
affd. per curiam 681 F.2d 461 (6th Cir. 1982).
44
Petitioners claimed in their joint return for 1996 and
1997 deductions for mortgage interest and property taxes in
excess of the amounts paid for those years with respect to the
Sumner property. The respective amounts claimed as deductions in
their returns that did not pertain to the Sumner property were
$9,772.46 and $9,691. Respondent disallowed those respective
amounts of deductions for those years. Petitioners claim on
brief that they are entitled to only $7,200 of those disallowed
amounts for mortgage interest and property taxes for each year at
issue. We conclude that, of the total mortgage interest and
property tax deduction disallowed by respondent for each year at
issue, petitioners have abandoned claiming that they are entitled
for each such year to a deduction for mortgage interest and
property taxes in excess of $7,200. See Rybak v. Commissioner,
supra.
 - 52 -

Essie Whitehead $600 per month,45 and Essie Whitehead used those

payments, along with her own funds, to make the monthly mortgage

loan payment (which included payment of mortgage interest and

property taxes) on the Kirkland property. (Hereinafter, all

references to the monthly mortgage loan payment on the Kirkland

property includes payment of mortgage interest and property

taxes.)

To support their position, petitioners rely on Mr. White-

head’s self-serving testimony and the testimony of his mother,

Essie Whitehead. We are not required to, and we shall not, rely

on Mr. Whitehead’s testimony. As for the testimony of Essie

Whitehead, at trial she indicated that at least during the years

at issue Mr. Whitehead and she had a general arrangement between

them (purported general arrangement) pursuant to which Mr.

Whitehead was to, and did in fact, contribute $600 per month

toward the monthly mortgage loan payment on the Kirkland prop-

erty. The parties stipulated, and we have found, that Mr.

Whitehead did not in fact pay Essie Whitehead $600 every month

45
The parties stipulated that Mr. Whitehead paid Essie
Whitehead a total of $6,600 for 1996 and $6,622 for 1997. On the
record before us, we find that petitioners have failed to show
that Mr. Whitehead paid Essie Whitehead any amount greater than
those stipulated amounts. On that record, we reject petitioners’
claim that Mr. Whitehead paid Essie Whitehead $600 per month, or
a total of $7,200, during each year at issue.
 - 53 -

during the years at issue.46 The record belies Essie Whitehead’s

testimony that she had the purported general arrangement with Mr.

Whitehead during the years at issue that she described and that

Mr. Whitehead acted in accordance with any such purported general

arrangement.

On the record before us, we find that petitioners have

failed to show that Mr. Whitehead paid funds to Essie Whitehead

during the years at issue subject to the requirement that she use

those funds solely to make the monthly mortgage payment on the

Kirkland property and not for any use she desired. On that

record, we further find that petitioners have failed to show that

Essie Whitehead used any portion of the amounts that Mr. White-

head paid to her during the years at issue to make the monthly

mortgage loan payment on the Kirkland property.47

Based on our examination of the entire record before us, we

find that petitioners have failed to establish that they are

entitled to a deduction for each year at issue for any mortgage

interest and property taxes relating to the Kirkland property.

Petitioners’ Claimed IRA Deduction

Respondent determined to disallow the deduction that peti-

46
Mr. Whitehead made no payments to Essie Whitehead in
January 1996, May 1997, June 1997, and November 1997.
47
In light of our findings, we shall not address respon-
dent’s contention with respect to whether the mortgage interest
at issue constitutes qualified residence interest under sec.
163(h)(3).
 - 54 -

tioners claimed in their 1996 joint return for the $2,000 contri-

bution made to Ms. Whitehead’s IRA during that year. Respondent

made that determination because respondent determined that Ms.

Whitehead did not receive any compensation during 1996. On

brief, respondent concedes that, pursuant to section 219(c) as in

effect for petitioners’ tax year 1996, petitioners are entitled

to a deduction of $250 with respect to contributions of $2,000

that were made to Ms. Whitehead’s IRA during that year.

It is petitioners’ position that they are entitled to a

deduction for 1996 for contributions made to Ms. Whitehead’s IRA

in the amount that they claimed in their joint return for that

year, i.e., $2,000. In support of their position, petitioners

contend, as they do with respect to the respective values of

petitioners’ respective uses of certain Burien Nissan automobiles

during the years at issue, that Ms. Whitehead performed at least

120 hours of services for Burien Nissan during 1996 for which

Burien Nissan compensated her by permitting her to use certain

Burien Nissan automobiles, the value of which was $6,600.48

Section 219 generally allows a deduction for contributions

48
On brief, petitioners also contend that, valuing at $17
per hour the 120 hours of services that they contend Ms. White-
head performed for Burien Nissan during 1996, her compensation
for those services would have been $2,040, which is an amount
substantially less than the value ($6,600) that petitioners
claimed in their 1996 joint return. Assuming arguendo that Ms.
Whitehead had worked 120 hours for Burien Nissan during 1996, the
value of her services would have to have been $55 per hour in
order for her to have received compensation of $6,600.
 - 55 -

by or on behalf of individuals during the taxable year to, inter

alia, an IRA. Sec. 219(a), (e); sec. 1.219-1(a), Income Tax

Regs. Such a deduction is limited to the lesser of $2,000 or the

amount of compensation includible in such individual’s gross

income for such taxable year. Sec. 219(b)(1). As pertinent

here, under section 219(c) as in effect for petitioners’ taxable

year 1996, in the case of married couples filing jointly where

one spouse receives compensation and the other spouse (non-

receiving spouse) does not, the amount allowable as a deduction

for contributions to the nonreceiving spouse’s IRA shall not

exceed $250.49

We have found that petitioners failed to show that Ms.

Whitehead performed any services for Burien Nissan during 1996

for which Burien Nissan intended to, or did in fact, compensate

49
As pertinent here, under sec. 219(c) as in effect for
petitioners’ taxable year 1997, in the case of married couples
filing jointly where one spouse (lesser-receiving spouse) re-
ceives less compensation than the other spouse, the amount
allowable as a deduction for contributions to the lesser-receiv-
ing spouse’s IRA shall not exceed $2,000. See Small Business Job
Protection Act of 1996, Pub. L. 104-188, sec. 1427(a), 110 Stat.
1802. Under sec. 219(c) as in effect for petitioners’ taxable
year 1997, petitioners are entitled to deduct the $2,000 contrib-
uted to Ms. Whitehead’s IRA regardless of whether she received
any compensation during that year. We believe that the provi-
sions of sec. 219(c) as in effect for each of petitioners’
taxable years 1996 and 1997 prompted petitioners to attribute to
Ms. Whitehead the claimed $6,600 of self-employment income that
they reported in their 1996 joint return and, inconsistently, to
attribute to Mr. Whitehead the claimed $6,600 of self-employment
income that they reported in their 1997 joint return. See supra
note 37.
 - 56 -

her, let alone at the hourly rate of $17 or $55, see discussion

supra note 48. On the record before us, we further find that

petitioners have failed to show that Ms. Whitehead received any

compensation from Burien Nissan during 1996, let alone the $6,600

of compensation that they reported for that year.

Based on our examination of the entire record before us, we

find that petitioners have failed to establish that they are

entitled to a deduction for 1996 for contributions made to Ms.

Whitehead’s IRA for that year in excess of the $250 conceded by

respondent.

Excise Tax Under Section 4973(a)

Respondent determined that petitioners are liable for each

year at issue for an excise tax of $120 under section 4973(a).

On brief, respondent concedes a portion of that amount and

contends that petitioners are liable for each year at issue for

an excise tax of $105 under section 4973(a).50

Section 4973(a) imposes an excise tax in an amount equal to

6 percent of the excess contributions to, inter alia, an IRA.

Sec. 4973(a)(1). As pertinent here, the term “excess contribu-

tions” is defined to mean (1) the excess of the amount contrib-

uted for the taxable year to the IRA over the amount allowable as

50
Respondent’s concession with respect to petitioners’
liability for each year at issue for the excise tax under sec.
4973(a) is as a result of respondent’s concession that petition-
ers are entitled to a deduction of $250 for 1996 with respect to
the contributions made to Ms. Whitehead’s IRA.
 - 57 -

a deduction under section 219 for such contributions, sec.

4973(b)(1), and (2) the amount determined under section 4973(b)

for the preceding taxable year, sec. 4973(b)(2). The individual

to whose IRA the excess contributions are made is liable for the

excise tax under section 4973(a). Sec. 4973(a).

Petitioners contributed $2,000 to Ms. Whitehead’s IRA during

1996. We have found that petitioners failed to establish that

they are entitled under section 219 to a deduction for 1996 in

excess of the $250 conceded by respondent. We find on the

instant record that the excess contributions under section

4973(b) to Ms. Whitehead’s IRA for 1996 are $1,750 (i.e., the

excess of the $2,000 contributed to Ms. Whitehead’s IRA over the

$250 conceded by respondent). We further find on that record

that the excess contributions under section 4973(b) to Ms.

Whitehead’s IRA for 1997 are $1,750 (i.e., the amount determined

under section 4973(b) for 1996).

Based on our examination of the entire record before us, we

find that Ms. Whitehead is liable for each year at issue for an

excise tax of $105 under section 4973(a).51

51
In the notice, respondent imposed the excise tax under
sec. 4973(a) on petitioners. It is not clear under sec. 4973(a)
that Mr. Whitehead is liable for such tax. Any question as to
his liability is to be resolved in the proceedings in this case
under Rule 155. See sec. 4973(a) (last sentence); Johnson v.
Commissioner, 74 T.C. 1057, 1062 (1980), affd. 661 F.2d 53 (5th
Cir. 1981); Guest v. Commissioner, 72 T.C. 768, 779-780 (1979).
 - 58 -

Accuracy-Related Penalty Under Section 6662(a)

Respondent determined that petitioners are liable for each

year at issue for the accuracy-related penalty under section

6662(a) because of: (1) A substantial understatement of income

tax under section 6662(b)(2) and (2) alternatively, negligence

under section 6662(b)(1).

Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax resulting from, inter alia,

a substantial understatement of income tax, sec. 6662(b)(2), or

negligence or disregard of rules or regulations, sec. 6662(b)(1).

For purposes of section 6662(a), an understatement is equal to

the excess of the amount of tax required to be shown in the tax

return over the amount of tax shown in the tax return, sec.

6662(d)(2)(A), and is substantial in the case of an individual if

it exceeds the greater of 10 percent of the tax required to be

shown or $5,000, sec. 6662(d)(1)(A). For purposes of section

6662(a), the term “negligence” includes any failure to make a

reasonable attempt to comply with the Code, and the term “disre-

gard” includes any careless, reckless, or intentional disregard.

Sec. 6662(c). Negligence has also been defined as a lack of due

care or failure to do what a reasonable person would do under the

circumstances. Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th

Cir. 1992), affg. T.C. Memo. 1991-179; Antonides v. Commissioner,

91 T.C. 686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).
 - 59 -

The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion. Sec. 6664(c)(1). The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess his or her

proper tax liability, the knowledge and experience of the tax-

payer, and the reliance on the advice of a professional, such as

an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Reliance

on the advice of a professional, such as an accountant, does not

necessarily demonstrate reasonable cause and good faith unless,

under all the circumstances, such reliance was reasonable and the

taxpayer acted in good faith. Id. In the case of claimed

reliance on the accountant who prepared the taxpayer’s tax

return, the taxpayer must establish that correct information was

provided to the accountant and that the item incorrectly omitted,
claimed, or reported in the return was the result of the accoun-

tant’s error. Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173

(1978).

On brief, petitioners contend that they had a reasonable

basis for the positions that they took in their joint return for

each of the years at issue, that they did not intentionally

disregard any Code provisions in preparing each such return, that

respondent determined to impose the accuracy-related penalty in
 - 60 -

order “to intimidate the taxpayers from properly asserting their

positions with regard to their tax liability”, and that the

issues remaining for decision in this case “represent a legiti-

mate difference of opinion at worst and thus do not provide a

basis for the negligence penalty”.

Except for their conclusory statements on brief, petitioners

point to no facts and advance no arguments in support of their

contentions that (1) they had a reasonable basis for the posi-

tions that they took in their joint return for each of the years

at issue, (2) they did not intentionally disregard any Code

provisions in preparing each such return, (3) respondent deter-

mined to impose the accuracy-related penalty under section

6662(a) in order to intimidate petitioners, and (4) the issues

remaining for decision in this case merely represent legitimate,

substantive differences of opinion between petitioners and

respondent.52

On the record before us, we find that, in the event the

computations under Rule 155 establish that there is an under-

52
Although not altogether clear, petitioners may be claiming
reliance on the accountant who prepared their joint return for
each of the years at issue to support certain of their conten-
tions with respect to the accuracy-related penalty under sec.
6662(a). On the record before us, we find that petitioners have
failed to show (1) that any such reliance was reasonable and that
they acted in good faith, see sec. 1.6664-4(b)(1), Income Tax
Regs., and (2) that they provided correct information to that
accountant and that any item incorrectly omitted, claimed, or
reported in those joint returns was the result of that accoun-
tant’s error, see Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173
(1978).
 - 61 -

statement of tax for each year at issue as a result of our

holdings in this case that exceeds the greater of 10 percent of

the tax required to be shown in petitioners’ joint return for

each such year or $5,000, see sec. 6662(d)(1)(A), petitioners

have failed to show that there is no substantial understatement

of tax under section 6662(b)(2) and (d). On that record, we

further find that petitioners have failed to show that they were

not negligent and did not disregard rules or regulations within

the meaning of section 6662(b)(1), or otherwise did what a

reasonable person would do, with respect to any portion of the

underpayment for each year at issue. On the record before us, we

also find that petitioners have failed to show that they acted

with reasonable cause and in good faith with respect to any

portion of the underpayment for each such year. See sec.

6664(c).

Based on our examination of the entire record before us, we

find that petitioners have failed to establish error in respon-

dent’s determinations that they are liable for each year at issue

for the accuracy-related penalty under section 6662(a).

We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit and/or irrelevant.

To reflect the foregoing, the concessions of respondent, and

the matters abandoned by petitioners,

Decision will be entered under

Rule 155.