Lebloch v. Comm'r

T.C. Memo. 2007-145

UNITED STATES TAX COURT

JAMES G. LEBLOCH AND CATHY MICHELSEN LEBLOCH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2724-05. Filed June 11, 2007.

James G. LeBloch, for petitioners.

Michael W. Berwind, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioners petitioned the Court to

redetermine respondent’s determinations with respect to their

1997, 1998, and 1999 Federal income taxes. Respondent determined
 -2-

the following deficiencies and section 6662(a) accuracy-related

penalties for those years:1

Year Deficiency Accuracy-Related Penalty

1997 $36,478 $7,288.00
1998 18,103 3,620.60
1999 29,666 5,933.20

The deficiencies and accuracy-related penalties are primarily

attributable to respondent’s determination of unreported income

(by way of bank deposits analyses) and to respondent’s

disallowance of self-employment expenses (for lack of

substantiation). Following concessions,2 we decide the following

issues as to each subject year:

1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code. Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Petitioners’ petition contains no allegation of error as
to the accuracy-related penalties included in the notices of
deficiency. Nor does petitioners’ posttrial opening brief set
forth any argument as to the accuracy-related penalties (or list
that matter as an issue requiring decision). We consider
petitioners to have conceded their liability for the accuracy-
related penalties. See Rule 34(b)(4); Funk v. Commissioner,
123 T.C. 213, 215 (2004); see also Palahnuk v. Commissioner,
127 T.C. 118, 120 n.2 (2006); Harbor Cove Marina Partners Pship.
v. Commissioner, 123 T.C. 64, 66 (2004); cf. Swain v.
Commissioner, 118 T.C. 358 (2002) (the Commissioner’s burden of
production under sec. 7491(c) does not apply where the taxpayer
concedes liability for an accuracy-related penalty by failing to
assign error to the Commissioner’s determination of the
accuracy-related penalty). We also consider petitioners to have
conceded all other determinations set forth in the notices of
deficiency that petitioners did not adequately pursue in their
posttrial opening brief. See Palahnuk v. Commissioner, supra at
120 n.2; Harbor Cove Marina Partners Pship. v. Commissioner,
supra at 66.
 -3-

1. Whether petitioners underreported their income. We hold

they did in the amounts set forth herein.

2. Whether petitioners may deduct the disputed expenses.

We hold they may not.

FINDINGS OF FACT

A. Preface

Some facts were stipulated or contained in the exhibits

submitted therewith. We find the facts accordingly. Petitioners

were husband and wife from December 31, 1997, through the end of

the subject years, and they filed joint Federal income tax

returns for those years. When their petition was filed, they

resided in a 3-bedroom house (residence) in Laguna Beach,

California. Petitioners purchased the residence for $563,000,

each of them paying half of the downpayment, and the interior of

the residence measured approximately 2,200 square feet. That

square footage does not include a 2-car garage that measured

approximately 400 square feet.3 At the time of trial,

petitioners were divorced, and petitioner Cathy Michelsen LeBloch

(Michelsen) lived in or around Brisbane, Australia.

With respect to their household bills and other finances,

petitioners had an arrangement that they pay equally all common

expenses (e.g., mortgage, property taxes, utilities) and that the

3
The record does not establish whether the garage was
attached to the residence.
 -4-

spouse benefiting from any other expense pay that expense.

Petitioners maintained separate financial accounts and did not

own any financial account jointly. When one of them paid a

common expense in full, or paid an expense of the other, the

other one typically wrote contemporaneously a check to the payee

for half of the expense (in the case of a common expense) or for

the full expense.

B. LeBloch

James G. LeBloch (LeBloch) received a law degree from the

University of Illinois in 1972 and a graduate law degree in

taxation from New York University in 1978. He worked for General

Motors Corp. from about 1972 through 1980, except for

approximately 9 months when he was earning his graduate law

degree. He worked as tax counsel for Monsanto Corp. from about

1980 through 1988 and as a chief financial officer for Seagate

Technology from 1988 through 1990. He worked from 1990 through

1999 as a senior attorney in respondent’s Office of Chief Counsel

in Los Angeles, California. He has worked in private practice as

a tax attorney since 2000.

C. Nature’s Touch

Michelsen formed and operated three retail gift shops known

as Nature’s Touch. From January 1 through November 23, 1997, she

operated two of the shops as a sole proprietor; she operated the

third shop as a sole proprietor from its opening on November 1,
 -5-

1997, through November 23, 1997. After November 23, 1997, she

operated the three shops as an officer and director of her wholly

owned corporation, NT, Inc. (NT). Michelsen formed NT in

November 1997, and she has always been its sole officer, sole

director, and sole shareholder.

Michelsen opened one of the three Nature’s Touch shops in

San Juan Capistrano, California, in June 1993. Nineteen months

later, she opened the second shop in Palm Desert, California.

The Palm Desert shop did not do well financially, and Michelsen

moved the business of that shop to Palm Springs, California, in

May 1997. Michelsen’s lease of the vacated premises had not yet

expired at the time of the move, and she sublet those premises in

exchange for $3,000. On November 1, 1997, Michelsen opened the

third Nature’s Touch shop in Carlsbad, California. The

approximate sizes of the shops in San Juan Capistrano, Palm

Springs, and Carlsbad were 1,300, 1,700, and 1,500 square feet,

respectively.

The Nature’s Touch shops sold mostly 300 to 500 different

gift items (e.g., fountains, garden supplies, stationery, books).

Michelsen purchased those items from approximately 130 different

vendors and displayed most of the items throughout the shops in

wooden display cubes built by her and LeBloch, or on wall and

ceiling hangers built by LeBloch. LeBloch helped Michelsen

prepare each shop for its opening, and he helped her maintain the
 -6-

shops by performing a variety of handyman services. LeBloch also

advised Michelsen (initially in her capacity as a sole proprietor

and later in her capacity as an officer and director of NT) on

financial and legal matters related to the shops, as well as on

items to purchase as inventory for the shops. LeBloch routinely

paid expenses for the shops out of his personal finances, and he

contemporaneously requested and obtained from the shops

reimbursement for those payments through his submission to

Michelsen of written reports that listed the specific expenses

that he paid on behalf of the shops, accompanied by any related

receipt. During the subject years, LeBloch did not receive any

compensation for services that he performed for or on behalf of

the shops.

Each Nature’s Touch shop had a manager and three or four

other year round employees.4 The general duties of the managers,

with respect to the shops they managed, was to monitor the shop’s

inventory and report to Michelsen the need or desire for any

additional inventory; to oversee and schedule employees; to keep

the shop clean and orderly; and to prepare the shop’s receipts

for weekly deposit in the bank. Michelsen’s main role in the

shops was to oversee the work of the managers by speaking to them

telephonically, usually once a day while they were at the shops

4
The number of employees at each shop increased
approximately threefold during the seasonal 2-month period
beginning on November 1.
 -7-

and she was at the residence, about the status of the shops

including whether any manager needed or desired any specific

piece (or pieces) of inventory that Michelsen had at the

residence. Michelsen purchased inventory for all of the shops,

usually by calling the vendors and having most (if not all) of

the merchandise shipped directly to the shops.5 She aimed to

coordinate a somewhat even distribution of inventory between the

shops, and, when she visited the shops (usually on a weekly

basis), she transported inventory (in her car) from the residence

to the shops or from one shop to another. Michelsen also

prepared and monitored the budget for the shops, and she

generally deposited the shops’ weekly receipts into the bank.

For the most part in 1997, Michelsen also toured a few locations

in Southern California in search of a place to move the second

Nature’s Touch store and a place to open the third Nature’s Touch

shops.

Inventory was displayed at the shops or, to a lesser extent,

stored at the residence in either the garage or in the guest

bedroom closet (approximately 56 square feet in size), or at the

5
Michelsen also once or twice a year purchased inventory at
retailer-only gift shows. There, petitioners (and sometimes one
or more employees of Nature’s Touch) viewed various merchandise
displayed by manufacturers (usually on tables) and ordered
products for sale at the Nature’s Touch stores.
 -8-

shops.6 (The record does not establish the specific pieces or

amount of inventory that was stored at any of these places.)

Petitioners did not park automobiles in the garage, but they used

the garage to store items of inventory and for personal purposes

such as storing shovels, rakes, and tools unrelated to the shops.

Michelsen used another bedroom (approximately 225 square feet in

size) in the residence as an office where she performed some of

her work related to the shops. This bedroom was set up by

petitioners as an office, and it was not used for any other

purpose (e.g., it did not have any bedroom furniture). The

office had a computer which Michelsen used mainly for budgeting

and accounting purposes related to the shops; Michelsen did not

record the income and expenses of the Nature’s Touch shops on

paper (e.g., in a ledger) but recorded the information solely on

a program on the computer. The office also had a facsimile

machine and a telephone with two lines, the second line generally

devoted to the facsimile machine.

During 1997, the Nature’s Touch shops experienced dire

cashflow problems that required an immediate borrowing of cash.

On four occasions during that year, Michelsen informed LeBloch

that she needed cash to alleviate a cashflow problem of the

shops, and she asked LeBloch to lend her the necessary cash. On

6
Michelsen also kept in the guest bedroom closet “old
tapes” and “old credit card records”.
 -9-

May 29, 1997, as a result of Michelsen’s moving the shop to Palm

Springs, LeBloch lent Michelsen $5,000 to use in the business.

On each of the days October 6 and 17 and November 24, 1997, as a

result of Michelsen’s opening of the shop in Carlsbad, LeBloch

lent Michelsen another $10,000. Each loan in 1997 was informal;

the parties thereto (at the time living together as significant

others) understood that Michelsen would repay the loans without

interest in the near future when the shops’ cashflow allowed her

to do so. Michelsen used all $35,000 of the loan proceeds

($5,000 + $10,000 + $10,000 + $10,000) for the benefit of the

Nature’s Touch shops. On December 30, 1997, Michelsen repaid the

entire $35,000.

The Nature’s Touch shops experienced additional cashflow

problems in 1998 that required the borrowing of money. On five

occasions during that year, Michelsen informed LeBloch that NT

needed cash to alleviate a cashflow problem of the shops, and she

asked LeBloch to lend NT the necessary cash. In or around

December 1997, Michelsen (on behalf of NT) had purchased a lot of

inventory for the holiday season, and Michelsen realized in

January 1998, when the bills were coming due on these purchases,

that she would need additional money for the business. Michelsen

(on behalf of NT) was also entering into a permanent lease for

the shop in Carlsbad, and she needed money to pay the first and

last months’ rent for those premises as well as an accompanying
 -10-

security deposit. She also needed money to buy inventory for the

newly opened shop in Carlsbad, as well as to pay for display

units and fixtures such as counters, shelving, and special

lighting. On the respective days January 6 and 9, 1998, LeBloch

lent Michelsen $20,000 and $10,000 for use in the business of NT.

On each of the days January 14 and February 2 and 6, 1998,

LeBloch lent $10,000 directly to NT. Each of these five loans

was informal, the principals thereto (husband and wife)

understanding that Michelsen (with respect to the first two

loans) and NT (with respect to the last three loans) would repay

the loans without interest in the near future when the shops’

cashflow allowed her or it to do so. Of the $60,000 in loans

made in 1998 ($20,000 + $10,000 + $10,000 + $10,000 + $10,000),

$15,000 was repaid to LeBloch in 1998 ($10,000 on April 8, 1998,

and $5,000 on May 8, 1998) and $20,000 was repaid to LeBloch in

1999 ($10,000 on January 19, 1999, and $10,000 on May 8, 1999).

Michelsen (or NT) used all of the $60,000 in loan proceeds in the

business of the Nature’s Touch shops, and as of the time of

trial, all of the $60,000 had been repaid.

During 1999, petitioners traveled to Australia and Tahiti.

Petitioners flew from Los Angeles, California, to Sydney,

Australia, on September 16, 1999. They stayed in Sydney for 3

nights and then rented a car and drove to Brisbane. On October

1, 1999, they flew from Brisbane to Papeete, Tahiti. They stayed
 -11-

in Papeete for 8 nights and returned to Los Angeles on October 8,

1999. During those travels, Michelsen attended a gift trade fair

in Sydney where she found a single product that she ended up

selling at the Nature’s Touch shops. She also in or around

Brisbane purchased some other items which she displayed for sale

in the Nature’s Touch shops. Petitioners incurred $12,847.26 of

expenses for the trip to Australia and considered $4,129 of that

amount to be a business-related travel expense (as discussed

further below). Petitioners did not consider or report any of

their expenses related to Tahiti as business related.

D. 1997, 1998, and 1999 Schedules C

1. 1997

For 1997 Federal income tax purposes, Michelsen reported the

income and expenses of the Nature’s Touch shops on a 1997

Schedule C, Profit or Loss From Business, filed as part of their

return. The schedule reported on the basis of an accrual method

of accounting that the shops, for 1997, had gross receipts of

$501,574, costs of goods sold of $289,647, and total expenses of

$239,745, resulting in a net loss of $27,818.7 The schedule was

accompanied by a 1997 Form 8829, Expenses For Business Use of

Your Home, reporting home operating expenses of $2,367 and home

7
According to the 1997 Schedule C, the inventory of the
shops was $98,107 at the beginning of the year and $289,647 at
the end of the year.
 -12-

depreciation of $2,388. The Form 8829 itemized the home

operating expenses as follows:

Direct expenses:
Repairs and maintenance $11
Utilities 989
Indirect expenses:
Insurance 683
Repairs and maintenance 1,999
Utilities 2,743
Total 5,425
Business-use percentage .252 1,367
Total 2,367

Petitioners did not deduct for 1997 any of either the reported

home operating expenses or the reported home depreciation but

deducted all of those amounts for 1998 as a carryover to that

year. Petitioners claimed on the 1997 Form 8829 that 25.2

percent of the residence was used exclusively for business

purposes; they stated on the form that they ascertained that

percentage by dividing the “Area used regularly and exclusively

for business * * * or for storage of inventory” (reported as 630

square feet) by the “Total area of home” (reported as 2,500

square feet).8 The 1997 Schedule C itemized the total expenses

of $239,745 as follows:

Advertising $2,339
Car and truck 4,161
Depreciation 1,675
Insurance (other than health) 5,843
Legal and professional services 475
Rent or lease:
Other business property 76,898

8
The record does not reveal how petitioners ascertained
either square footage.
 -13-

Supplies 17,560
Travel 12,365
Meals and entertainment
(after 50-percent reduction) 1,588
Utilities 10,921
Wages 87,201
Other expenses1 18,719
Total 239,745
1
The 1997 Schedule C did not identify any of
these “other expenses”.

2. 1998

For 1998 Federal income tax purposes, petitioners did not

report the income and expenses of the Nature’s Touch shops on

their personal income tax return. Their 1998 personal return

included a 1998 Schedule C that reported the income and expenses

of Michelsen as “Board Chairman of NT”. The schedule reported on

the basis of the cash receipts and disbursements method of

accounting that the reported business had a net profit of $23,193

for 1998, resulting from gross receipts of $36,808, total

expenses of $4,137, and home business expenses of $9,478. The

schedule was accompanied by a 1998 Form 8829 reporting that 25.2

percent of the residence (630/2500) was used exclusively for

business purposes and that the $9,478 of home business expenses

consisted of operating expenses of $4,702 (inclusive of the

$2,367 carryover from 1997) and depreciation of $4,776 (inclusive

of the $2,388 carryover from 1997). The Form 8829 itemized the

home business expenses as follows:
 -14-

Operating expenses:
Direct expenses:
Utilities $951
Indirect expenses:
Insurance 844
Repairs and maintenance 1,802
Utilities 2,846
Total 5,492
Business-use percentage .252 1,382
Carryover from 1997 2,367
1
Total 4,702
Depreciation:
Current depreciation 2,388
Depreciation carryover
from 1997 2,388
Total 4,776
Total 9,478
1
We note petitioners’ $2 adding mistake.

The 1998 Schedule C itemized the total expenses of $4,137 as

follows:

Supplies $835
Meals and entertainment
(after 50-percent reduction) 3,302
Total 4,137

3. 1999

For 1999 Federal income tax purposes, petitioners did not

report the income and expenses of the Nature’s Touch shops on

their personal income tax return. Their 1999 personal return

included a 1999 Schedule C that reported the income and expenses

of Michelsen as “Corporate Director/Consultant”.9 The schedule

reported on the basis of an accrual method of accounting that the

9
Although the 1999 Schedule C lists the “Name of
proprietor” as “James and Cathy LeBloch”, the return clarifies on
Schedule SE, Self-Employment Tax, that the income reported on the
Schedule C is that of Michelsen only.
 -15-

reported business had a net profit of $14,029 for 1999, resulting

from gross receipts of $37,677, total expenses of $18,206, and

home business expenses of $5,442. The schedule was accompanied

by a 1999 Form 8829 reporting that 25.2 percent of the residence

(630/2500) was used exclusively for business purposes and that

the $5,442 of home business expenses consisted of operating

expenses of $3,054 and depreciation of $2,388. The Form 8829

itemized the home business expenses as follows:

Operating expenses:
Direct expenses:
Utilities $1,359
Other expenses 264
Indirect expenses:
Insurance 692
Repairs and maintenance 2,132
Utilities 2,840
Total 5,664
Business-use percentage .252 1,427
1
Total 3,054
Current depreciation 2,388
Total 5,442
1
We note petitioners’ $4 adding mistake.

The 1999 Schedule C itemized the total expenses of $18,206 as

follows:

Depreciation $1,175
Legal and professional services 556
Office expense 246
Rent or lease:
Vehicles, machinery, and equipment 7,476
Travel 4,129
Meals and entertainment
(after 50-percent reduction) 1,374
Other expenses1 3,250
Total 18,206
 -16-
1
The 1999 Schedule C did not identify any of
these “other expenses”.

E. Amended Returns

On their 1998 Federal income tax return, petitioners

reported adjusted gross income of $73,361. The $73,361 consisted

of the following reported items and amounts:

LeBloch’s wages from IRS $71,091
Interest 1,004
Schedule C net profit 23,193
IRA deduction (2,000)
One-half of self-employment tax (1,639)
Alimony paid (18,288)
Adjusted gross income 73,361

On their 1999 Federal income tax return, petitioners reported

adjusted gross income of $104,971. The $104,971 consisted of the

following reported items and amounts:

LeBloch’s wages from IRS $72,130
Michelsen’s wages from NT 31,000
Interest and ordinary dividends 84
Taxable refunds 90
Schedule C net profit 14,029
Capital gain 53
One-half of self-employment tax (991)
Alimony paid (11,424)
Adjusted gross income 104,971

On or about April 14, 2002, after the Commissioner had begun

his audit of the subject years and had proposed his adjustments

increasing petitioners’ taxable income to reflect the unreported

income ascertained under the bank account analyses, petitioners

filed an amended 1998 Federal income tax return claiming without

further explanation that $21,554 reported as compensation

received from NT during 1998 was really a loan repayment. At the
 -17-

same time, petitioners also filed an amended 1999 Federal income

tax return claiming without further explanation that $13,038

reported as compensation received from NT during 1999 was really

a loan repayment. Each of these amended returns claimed a refund

resulting from the claimed recharacterization of the originally

reported compensation as loan repayments. Respondent did not

grant either of those claims for refund.

F. Petitioners’ Financial Accounts

1. Overview

Throughout the subject years, petitioners had 13 bank or

investment accounts (collectively, financial accounts). Nine of

the financial accounts were in the name of LeBloch. The

remaining four financial accounts were in the name of Michelsen.

2. LeBloch’s Accounts

LeBloch had three financial accounts at the LAIRE Federal

Credit Union (LAIRE). The first account, a primary savings

account (LAIRE 00), was open from January 1, 1997, through

February 12, 1999. The second account, a checking account (LAIRE

50), was open during all of 1997 and 1998. The third account, a

secondary savings account (LAIRE 01), was open from June 19

through December 31, 1998.

LeBloch had three financial accounts at the Postal & Federal

Employees Credit Union (PFE). Each of these accounts was open

from September 24, 1998, through December 31, 1999. These
 -18-

accounts were a primary share account (PFE S1), a subshare

account (PFE S2), and a reality checking account (PFE S18).

LeBloch’s last three financial accounts were brokerage

accounts. One brokerage account was a Merrill Lynch investment

account (Merrill Lynch account), which was open throughout the

subject years. Another brokerage account was a Paine Webber

investment account (Paine Webber account), which was open during

all of 1997. The last brokerage account was a second account at

Paine Webber; this account was open during all of 1999.

3. Michelsen’s Accounts

Michelsen’s four accounts were all at Bank of America (BA).

The first account, a business checking account (BA 1225), was

open from January 1 through April 18, 1997. The second account,

another business checking account (BA 9606), was open from April

18 through December 31, 1997. These two accounts were the

checking accounts for the Nature’s Touch shops when operated

through Michelsen’s sole proprietorship; afterwards, BA 9606 was

the corporate bank account for NT. The balance in BA 1225 was

transferred to BA 9606 on April 18, 1997.

Michelsen’s third account, a checking account (BA 7417), was

open from January 1 through April 22, 1997. Her fourth account,

another checking account (BA 9605), was open from April 22, 1997,

through December 31, 1999. The balance in BA 7417 was

transferred to BA 9605 on April 22, 1997.
 -19-

G. Notices of Deficiency

1. Overview

On November 9, 2004, respondent issued to petitioners a

notice of deficiency for 1997 and a notice of deficiency for 1998

and 1999. The notices of deficiency determined the following

adjustments to amounts reported on petitioners’ Federal income

tax returns for 1997, 1998, and 1999:

1997 1998 1999

Unreported rental income $3,000 -0- -0-
Unreported interest income 2,331 -0- $115
Unreported capital gains income -0- $155 -0-
Unreported Schedule C income 63,852 36,368 49,368
Total unreported income 69,183 36,523 49,483
Self-employment tax deduction (4,614) (3,531) (4,676)
Disallowed itemized deductions 1,795 -0- 1,424
Disallowed alimony expense 2,436 1,488 624
Disallowed Schedule C expenses 29,276 13,615 23,648
Total increases to income 98,076 48,095 70,503

The notices of deficiency itemized the disallowed Schedule C

expenses as follows:

Insurance $1,392 -0- -0-
Meals and entertainment 1,588 $3,302 $1,374
Supplies 1,508 835 -0-
Travel 9,737 -0- 4,129
Business use of home -0- 9,478 5,442
Rent or lease expense -0- -0- 7,476
Office expense -0- -0- 246
Legal and professional -0- -0- 556
Depreciation -0- -0- 1,175
Other expenses 15,051 -0- 3,250
Total 29,276 13,615 23,648

2. Respondent’s Bank Deposits Analyses

Respondent determined the amounts of unreported income

listed in the notices of deficiency by performing bank deposits
 -20-

analyses. The total deposits (including interest credited to

accounts) into petitioners’ financial accounts were as follows:

1997 1998 1999

LAIRE 00 $130,271 $15,906 $254
LAIRE 50 163,012 134,724 -0-
LAIRE 01 -0- 5,130 -0-
PFE S1 -0- 15,038 12,086
PFE S2 -0- 5,150 10,048
PFE S18 -0- 34,738 95,043
Paine Webber account 31,111 -0- -0-
Merrill Lynch account 77,045 -0- 10,000
BA 9605 65,970 59,680 64,145
BA 7417 25,977 -0- -0-
BA 1225 226,146 -0- -0-
BA 9606 367,522 -0- -0-
Total 1,087,054 270,366 191,576

As to those deposits, respondent’s bank deposits analyses

characterized the following amounts as nontaxable:

1997 1998 1999

Interaccount transfers $293,008 $129,112 $40,702
Loan receipts 22,600 -0- -0-
VISA advances 21,750 4,500 3,200
Sales tax remittances
(Jan. to Sept. 1997) 32,255 -0- -0-
Returned deposits 1,387 -0- -0-
Wedding gift -0- 5,000 -0-
Total 371,000 138,612 43,902

Respondent’s bank deposits analyses determined that the following

deposits were reported on the subject Federal income tax returns:

1997 1998 1999

Wages (less withholdings) $56,643 $54,305 $79,309
Interest 3,866 1,004 49
Dividends -0- -0- 35
Schedule C gross receipts 501,574 36,808 37,677
Schedule D sales 86,487 -0- -0-
Total 648,570 92,117 117,070
 -21-

Respondent’s bank deposits analyses concluded that petitioners

had unexplained bank deposits as follows:

1997 1998 1999

Total deposits $1,087,054 $270,366 $191,576
Nontaxable items (371,000) (138,612) (43,902)
Reported amounts (648,570) (92,117) (117,070)
1
Unexplained deposits 67,484 39,637 30,604
1
The parties do not explain the difference
between the amounts of unexplained deposits and the
amounts of the total unreported income set forth in the
notices of deficiency.

OPINION

A. Burden of Proof

Section 7491(a) was added to the Internal Revenue Code by

the Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727, effective for

court proceedings arising from examinations commencing after

July 22, 1998. While the burden of proof in this Court is

usually on a petitioning taxpayer, see Rule 142(a)(1), section

7491(a)(1) provides that the burden of proof on certain issues

affecting the liability of a taxpayer for tax shifts to the

Commissioner in specified circumstances. We hold that section

7491(a) does not apply to either issue before us because, we

find, petitioners have not proven that they complied with the

requirements of section 7491(a)(2)(B) to cooperate fully with

respondent’s reasonable requests for witnesses, information,

documents, meetings, and interviews. See also Weaver v.
 -22-

Commissioner, 121 T.C. 273, 275 (2003). In fact, we find from

the record that petitioners did not cooperate with such

reasonable requests by respondent during the course of the audit.

We hold that petitioners bear the burden of proof.

B. Unreported Income

Gross income includes all income from whatever source

derived, sec. 61(a), and taxpayers are required to keep books and

records sufficient to establish their Federal income tax

liability, see sec. 6001; see also sec. 1.6001-1(b), Income Tax

Regs. Where taxpayers have not maintained adequate business

records to establish such liability, the Commissioner may

reconstruct income by any method that the Commissioner believes

reflects income clearly. See sec. 446(b); Parks v. Commissioner,

94 T.C. 654, 658 (1990). The Commissioner’s method need not be

exact; however, it must be reasonable. See Holland v. United

States, 348 U.S. 121 (1954).

The bank deposits method for computing unreported income has

long been sanctioned by the judiciary. See Factor v.

Commissioner, 281 F.2d 100, 116 (9th Cir. 1960), affg. T.C. Memo.

1958-94; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd.

959 F.2d 16 (2d Cir. 1992). Bank deposits are prima facie

evidence of income. See Tokarski v. Commissioner, 87 T.C. 74, 77

(1986). Where an individual taxpayer has failed to maintain

adequate records as to the amount and source of his or her income
 -23-

and the Commissioner has determined that the deposits are income,

the burden is on the taxpayer to show that the Commissioner’s

determination is incorrect.

Petitioners argue that respondent’s use of the bank deposits

analyses was unjustified because, they state, they kept adequate

records establishing their income. We disagree. While

petitioners may have used a computer program to memorialize their

income and expenses, we are unable to find from credible evidence

in the record that petitioners ever gave to respondent, before

issuance of the notices of deficiency, adequate records to

support their reported income for any subject year. On the basis

of the record at hand, we hold that respondent’s use of the bank

deposits analyses was proper.

Petitioners argue alternatively that respondent misapplied

the bank deposits analyses in that, they argue, respondent failed

to recognize that most of the disputed deposits arose from

nontaxable sources. Petitioners argue that respondent’s bank

deposits analyses should be adjusted as follows:
1997

Petitioners’
As Additional As
Determined Adjustments Adjusted

Total deposits (including interest) $1,087,054 -0- $1,087,054.00
Less adjustments:
Interaccount transfers 293,008 $15,599.29 308,607.29
Loan receipts 22,600 -0- 22,600.00
Loan repayments -0- 35,000.00 35,000.00
VISA advances 21,750 2,500.00 24,250.00
Sales tax remittances 32,255 3,800.00 36,055.00
Returned deposits 1,387 -0- 1,387.00
Expense report reimbursement -0- 6,414.04 6,414.04
Total 371,000 63,313.33 434,313.33
 -24-
Less reported income:
Wages 56,643 5,290.20 61,933.20
Interest 3,866 1,808.00 5,674.00
Schedule C gross receipts 501,574 -0- 501,574.00
Schedule D sales 86,487 -0- 86,487.00

Total 648,570 7,098.20 655,668.20
Unexplained deposits 67,484 (70,111.53)
(2,927.53)

1998

Petitioners’
As Additional As
Determined Adjustments Adjusted

Total deposits (including interest) $270,366 -0- $270,366.00
Less adjustments:
Interaccount transfers 129,112 $7,578.00 136,690.00
Loan repayments -0- 15,000.00 15,000.00
VISA advances 4,500 -0- 4,500.00
Gifts 5,000 -0- 5,000.00
Total 138,612 22,578.00 161,190.00
Less reported income:
Wages 54,305 8,424.15 62,729.15
Interest 1,004 -0- 1,004.00
Schedule C gross receipts 36,808 -0- 36,808.00

Total 92,117 8,424.15 100,541.15
Unexplained deposits 39,637 (31,002.15) 8,634.85

1999

Petitioners’
As Additional As
Determined Adjustments Adjusted

Total deposits (including interest) $191,576 -0- $191,576.00
Less adjustments:
Interaccount transfers 40,702 $4,002.50 44,704.50
Loan repayments -0- 20,000.00 20,000.00
VISA advances 3,200 -0- 3,200.00
Total 43,902 24,002.50 67,904.50
Less reported income:
Wages 79,309 8,576.32 87,885.32
Interest 49 -0- 49.00
Dividend 35 -0- 35.00
Schedule C gross receipts 37,677 -0- 37,677.00

Total 117,070 8,576.32 125,646.32
Unexplained deposits 30,604 (32,578.82)
(1,974.82)

We agree with petitioners to a large extent. We discuss their

requested additional adjustments seriatim.

1. Interaccount Transfers

Petitioners argue that respondent’s bank deposits analyses

for the respective years must be adjusted to reflect $15,599.29,

$7,578, and $4,002.50 of nontaxable transfers of funds between
 -25-

their accounts. Following respondent’s concession in brief that

the record at hand supports adjusting the amounts shown in the

bank deposits analyses to reflect additional nontaxable transfers

of funds between accounts, the disputed items in this category

are as follows:

1997

December 18, 1997, deposit of
previously withdrawn funds $1,900.00
May 23, 1997, check drawn on
LAIRE 50 and payable to
Michelsen 400.00
July 3, 1997, check drawn on
LAIRE 50 and payable to
Michelsen 393.00
September 17, 1997, check drawn
on LAIRE 50 and payable to
Michelsen 240.00
November 20, 1997, check drawn
on Paine Webber account and
payable to Michelsen 430.00
Business deposit mistakenly
deposited into Michelsen’s
personal account;
contemporaneously transferred
to business account $5,978.83
9,341.83

1998

Check from LeBloch account
at LAIRE to Michelsen for
her payment of his personal
expenses $745.00

1999
Check from NT to Michelsen in
reimbursement of her payment
of an expense of NT $660.50
 -26-

We agree with petitioner that all of these disputed items

are nontaxable to them and should be reflected as such. The

largest amount, $5,978.83, reflects a business deposit that was

mistakenly deposited into Michelsen’s personal account and then

contemporaneously transferred to the business account when

Michelsen discovered the mistake. The next largest amount,

$1,900, reflects funds that were withdrawn by LeBloch and then

redeposited into his account. The $660.50 deposit reflects a

reimbursement that NT made to Michelsen. The remaining five

amounts are simply transfers of cash from LeBloch to Michelsen.

2. Loan Repayments

Petitioners argue that respondent’s bank deposits analyses

for the respective years must be adjusted further to reflect

$35,000, $15,000, and $20,000 of nontaxable loan repayments

deposited into one of LeBloch’s financial accounts. We agree.

Case law establishes a two-part test for determining whether a

transfer of money qualifies as debt. First, repayment of the

transferred funds cannot be contingent upon a future event.

Second, the transfer must be made with a reasonable expectation,

belief, and intent that it be repaid. See Zimmerman v. United

States, 318 F.2d 611 (9th Cir. 1963); Estate of Trompeter v.

Commissioner, T.C. Memo. 1998-35. Whether a transfer is made

with the requisite expectation, belief, and intent is factual.

See John Kelley Co. v. Commissioner, 326 U.S. 521 (1946).
 -27-

Our agreement with petitioners that LeBloch’s transfers of

money to Michelsen and NT were loans flows from our findings of

fact that petitioners regularly advanced funds to each other

without formal documentation and without formal terms, that the

transfers in question were made with the expectation, belief, and

intent that they be repaid, that the transfers in question were

made incident to the transferee’s need for operating funds, and

that the transfers in question were repaid by the transferee

shortly after receipt.10 LeBloch lent $95,000 for use (and that

was used) in the business of the Nature’s Touch shops, and, of

that amount, $35,000 was repaid in 1997, $15,000 was repaid in

1998, $20,000 was repaid in 1999, and $25,000 was repaid after

1999. In addition, petitioners had an informal understanding

that either of them would advance funds to the other without

formal terms and that the one for whose benefit the funds were

advanced would repay them. In fact, as to LeBloch, it was not

uncommon for him regularly to pay a common expense in full and

then contemporaneously receive reimbursement from Michelsen for

her share of that expense. Nor was it uncommon for LeBloch

regularly to pay out of his personal funds expenses of a Nature’s

Touch shop and then seek and obtain reimbursement from the shops

10
Because respondent makes no assertion that LeBloch’s
transfers were contributions of equity rather than loans, we do
not consider that question. See Metrocorp, Inc. v. Commissioner,
116 T.C. 211, 217 (2001).
 -28-

for that payment. We also note that petitioners never

intermingled their funds in a joint account, but kept their

financial accounts separate, and that petitioners’ relationship

throughout the subject years was one in which they each

understood that they were responsible for the payment of their

share of the expenses. We hold for petitioners on this item.11

3. VISA advances

Petitioners argue that they are entitled for 1997 to an

adjustment of $2,500 for VISA advances. Respondent concedes that

this $2,500 is not taxable income to petitioners, and we so hold.

4. Sales Tax Remittances

Petitioners argue that they are entitled for 1997 to an

adjustment of $3,800 for sales tax remittances for October and

November 1997. We agree. Michelsen operated the Nature’s Touch

shops as a sole proprietorship from January 1 through

November 23, 1997, and she (as a conduit) collected sales tax on

the sales made at the shops during that time. She deposited the

collected sales tax into the shops’ business account and later

remitted that tax to the State of California. Respondent’s bank

deposits analysis for 1997 made an adjustment for sales tax

11
Whereas we understand petitioners to request that we also
hold that other amounts reported as compensation from NT were
actually loan repayments, we decline to do so. Michelsen was the
sole reported recipient of compensation from NT, and petitioners
make no assertion in this proceeding that Michelsen lent money to
NT.
 -29-

remittances only through September 1997. On the basis of our

review of the record, we find that on November 24, 1997, $3,800

in sales tax was remitted to the State of California on behalf of

the Nature’s Touch shops and conclude that petitioners are

entitled to their requested $3,800 adjustment.

5. Expense Report

Petitioners argue that they are entitled for 1997 to an

adjustment of $6,414.04 for expenses report reimbursement. In

support thereof, petitioners point the Court to a December 29,

1997, check drawn on the NT account payable to LeBloch in the

amount of $41,667. The check states on its face that it is

“Payment for Loan”, and LeBloch deposited the check into his

regular savings account at LAIRE. Petitioners point out that

$35,000 of the check was the loan repayment discussed herein and

argue that the balance ($252.96), after taking into account the

$6,414.04, was for reimbursement of LeBloch’s payment of

Michelsen’s share of a personal utility expense. We agree with

petitioners (in that we find) that the $6,414.04 was paid to

LeBloch as reimbursement of expenses that he paid on behalf of NT

and allow the requested adjustment.

6. Wages

Petitioners argue that they are entitled for the respective

years to adjustments of $5,290.20, $8,424.15, and $8,576.32 for

wages. As petitioners see it, their wages for each year should
 -30-

have been calculated by using the amounts shown on the Forms W-2,

Wage and Tax Statement; in other words, the amount for each year

that equals their reported gross wages less the sum of the

reported amounts withheld for Federal income tax, Social Security

tax, and Medicare tax. We conclude differently. The bank

deposits analyses correctly reflect only the portion of his wages

that was deposited into his account (i.e., in addition to the

reported amounts of tax withheld, LeBloch apparently had other

amounts taken out of his gross wages before those wages were

deposited into his account). Those amounts are different from

the amounts referenced by petitioners.

C. Home Office Deduction for Each Subject Year

Petitioners are generally precluded from deducting expenses

incurred in connection with the business use of the residence.

See sec. 280A. Pursuant to section 280A(c)(1), however,

petitioners may deduct expenses allocable to a portion of the

residence if that portion was exclusively used on a regular basis

(1) as a principal place of business, (2) as the place for

meeting with customers, clients, or patients in the normal course

of business, or (3) in the case of an unattached separate

structure, in connection with the business.12 See also

12
Sec. 280A(a) also does not apply to items allocable to
space withing a dwelling unit that is used on a regular basis for
the storage of inventory held for use in the taxpayer’s trade or
business of selling products at retail provided the dwelling unit
(continued...)
 -31-

Commissioner v. Soliman, 506 U.S. 168 (1993); Browning v.

Commissioner, 890 F.2d 1084, 1087-1088 (9th Cir. 1989), affg.

T.C. Memo. 1988-293; Cao v. Commissioner, T.C. Memo. 1994-60,

affd. without published opinion 78 F.3d 594 (9th Cir. 1996).

Petitioners argue that they are entitled to a deduction for

each subject year attributable to their business use of a portion

of the residence. According to petitioners, the office,

guest bedroom closet, and garage (collectively, premises) in or

at the residence were used exclusively for business, and the

premises are approximately 25 percent of the residence’s square

footage. We understand petitioners to argue that, during each

subject year, Michelsen stored inventory on the premises and used

the premises to work on opening more Nature’s Touch stores. We

also understand petitioners to argue that Michelsen also used the

premises after the formation of NT to conduct her business as an

officer of NT.

We do not believe that petitioners meet any of the three

prongs underlying the just-referenced exception of section

280A(c)(1). As to 1997, when Michelsen operated the Nature’s

Touch stores as a sole proprietor, the stores’ principal place of

business was not in any part of the residence. Nor are we

12
(...continued)
is the sole fixed location of that business. See sec.
280A(c)(2). That provision is inapplicable here, where the
residence was not the sole fixed location of the Nature’s Touch
shops.
 -32-

persuaded that Michelsen met there with customers, clients, or

patients in the normal course of business. Nor does the record

establish that any part of the residence, including the garage,

was in an “unattached separate structure”.

We also are not persuaded that the exception was met for

either remaining year in issue. In order for a taxpayer to

establish use on a “regular” basis, the business use must be more

than occasional or incidental. See Jackson v. Commissioner,

76 T.C. 696, 700 (1981). In order for a taxpayer to establish

that use of a portion of a dwelling is “exclusive”, the portion

must be used only for business purposes. See Sam Goldberger,

Inc. v. Commissioner, 88 T.C. 1532, 1556-1557 (1987); Hefti v.

Commissioner, T.C. Memo. 1993-128; see also Irwin v.

Commissioner, T.C. Memo. 1996-490. See generally sec.

1.280A-2(g)(1), Proposed Income Tax Regs., 45 Fed. Reg. 52404

(Aug. 7, 1980). The failure of a taxpayer to establish that the

use of a portion of a dwelling is both “regular” and “exclusive”

is fatal to the taxpayer’s claim that such use falls within the

exception of section 280A(c)(1). See Sam Goldberger, Inc. v.

Commissioner, supra at 1556-1557. Although the record

establishes that Michelsen performed at the residence a lot of

work for the Nature’s Touch stores, petitioners have not offered

sufficient evidence regarding the amount of time and nature of

the work conducted anywhere in the premises so as to establish
 -33-

regular use, nor have they established that any portion of the

premises was used exclusively in a business.13 Accord Browning

v. Commissioner, supra. We reject petitioners’ claim for home

office deductions related to the residence.

D. Self-Employment Deductions Other Than Home Office Deduction

Section 162(a) lets taxpayers deduct “all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”. Under that section, an

expenditure is deductible if it is: (1) An expense, (2) an

ordinary expense, (3) a necessary expense, (4) paid (in the case

of a cash method taxpayer) or incurred (in the case of an accrual

method taxpayer) during the taxable year, and (5) made to carry

on a trade or business. See Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352-353 (1971); Lychuk v.

Commissioner, 116 T.C. 374, 386 (2001). In the case of personal

travel expenses, a taxpayer also must meet two additional rules.

First, the travel expenses must arise from travel that is related

primarily to the taxpayer’s business. See sec. 1.162-2(b)(1),

Income Tax Regs.; see also Reed v. Commissioner, 35 T.C. 199

13
In fact, Michelsen by her own account acknowledged that
the garage was not used exclusively for business purposes and
contended that the only portion of the residence used exclusively
for business was the room with the office. While petitioners ask
the Court to find as to the office that Michelsen spent much time
there working on expanding the Nature’s Touch shops through the
opening of additional shops, we decline to find such a fact on
the basis of the record at hand.
 -34-

(1960). Second, the taxpayer must substantiate, by adequate

records or other sufficient evidence corroborating his or her own

statement, each of the following elements: (1) The amount of

each expenditure; (2) the time and place the expenditure was

incurred; (3) the business purpose of the expenditure; and (4) in

the case of entertainment expenses, the business relationship to

the taxpayer of the person entertained. See sec. 274(d);

Meridian Wood Prods. Co. v. United States, 725 F.2d 1183,

188-1191 (9th Cir. 1984); Johnston v. Commissioner, T.C. Memo.

1980-477, affd. 696 F.2d 1003 (9th Cir. 1982). In the case of

meals incurred while not traveling, substantiation by sufficient

evidence requires that the taxpayer establish the cost, amount,

time, place, and date of the expenditure by “direct evidence”

(e.g., a detailed writing); the taxpayer may establish business

purpose or business relationship by “circumstantial evidence”

corroborating the taxpayer’s own statement. Sec.

1.274-5T(c)(3)(i), Temporary Income Tax Regs., 49 Fed. Reg. 42704

(Oct. 24, 1984).

1. 1997

Of the Schedule C expenses disallowed for 1997, petitioners

challenge only the expenses for travel (to the extent of $5,978)

and other ($18,719).
 -35-

a. Travel

Petitioners argue that they have substantiated $5,978 of

expenses claimed as travel expenses for 1997 through the

introduction of Exhibit 112-P. We disagree. Exhibit 112-P was

received into evidence through the parties’ stipulation that the

exhibit reflects “documents which Petitioners contend pertain to

business meals, travel and lodging incurred in taxable year

1997”. Exhibit 112-P has approximately 75 pages, and petitioners

have not organized or presented the “documents” included therein

(mainly photocopies of receipts) in a manner that persuades us

that any of the expenses reflected in this exhibit are properly

deductible by petitioners. See Romer v. Commissioner, T.C. Memo.

2001-168. Nor do petitioners in their posttrial opening brief

make any concerted attempt to persuade us that they have

satisfied the requirements for deductibility; petitioners’ entire

argument on this point is that “These travel expenses are

substantiated in Exhibit 112-P and should be allowed.” We

sustain respondent’s determination that petitioners are not

entitled to deduct these claimed expenses.14

14
We note that during respondent’s audit of the subject
years Michelsen prepared a “travel expense record” for 1997 and
that this expense record was admitted into evidence as part of
Exhibit 135-P. The expense record is an 8-page document that
lists in single spaces each day in 1997 (i.e., 01/01/97,
01/02/97, and so on). To the right of some of the days is a
brief statement by Michelsen as to the business that she
performed for the Nature’s Touch shops on the corresponding day,
(continued...)
 -36-

b. Other Expenses

Petitioners argue that they have substantiated the $18,719

claimed as “other expenses” through the introduction of Exhibits

119-P and 120-P. We disagree. Exhibit 119-P was received into

evidence through the parties’ stipulation that the exhibit

reflects “documents which Petitioners contend pertain to other

expense for taxable years 1997”. Exhibit 120-P was received into

evidence through the parties’ stipulation that the exhibit

reflects “documents which Petitioners contend pertain to the bank

deposit analysis”. Together, Exhibits 119-P and 120-P have

approximately 110 pages, and the “documents” included therein

(mainly canceled checks, bank statements, and receipts) do not

persuade us that the expenses reflected therein are properly

deductible by petitioners. Nor do petitioners in their posttrial

opening brief persuade us that they have satisfied the

requirements for deductibility; petitioners’ entire argument in

brief as to this point is as follows:

The deduction taken of $18,719 has been adequately
substantiated (Exh 119-P and 110-P). Natures Touch as
a sole proprietorship during the first 10 months of
1997 was an accrual taxpayer. Expenses budgeted to
begin the Carlsbad store location were accrued by the
sole proprietorship. This is an issue that Respondents

14
(...continued)
as well as her statement of any purported business meal that she
purchased on that day along with the identity of the person with
whom she dined. We give little weight to the “expense record”.
We note that the expenses reflected in many of the invoices in
Exhibit 112-P do not appear on Michelsen’s expense record.
 -37-

[sic] counsel may raise. Petitioners believe they
should prevail.

We sustain respondent’s determination that petitioners are not

entitled to deduct these claimed expenses (except for $3,668 that

respondent concedes is deductible).

2. 1998

Of the Schedule C expenses (other than home office

deduction) disallowed for 1998, petitioners do not challenge any

of those expenses.

3. 1999

Of the Schedule C expenses (other than home office

deduction) disallowed for 1999, petitioners challenge only the

expenses for lease ($7,476), travel ($4,129), and meals ($9,789).

a. Lease Expense

Petitioners argue that the $7,476 claimed as a lease expense

was actually a legal expense that is deductible as such. We do

not find that any of that amount is deductible. Petitioners’

entire argument in brief as to this point is that “The amount

listed on Schedule C for lease expense was misclassified. The

$7,476 amount related to legal fees related to a tax litigation

matter and should be fully deductible (TR2-130:1-12; TR 225:17-

227:14)”. The reference to “TR2-130:1-12” is to the following

testimony by LeBloch on direct examination:

There is a mistake on the Schedule C attached to
the 1997 [sic] return, and the mistake is a
misclassification. There was listed an amount on the
 -38-

line that called for lease expense. The amount was
$7,476.

In reviewing workpapers, that amount should have
been classified as legal expense. It related to the
legal cost that Cathy Michelsen had incurred related to
a Tax Court proceeding dealing with taxable years 1993
through 1995 and paid to a law firm, the Joseph Mudd
Law Firm. Those proceedings related to Tax Court
Docket 14780-97.

The reference to “TR 225:17-227:14” is to Michelsen’s direct

testimony that she had a case in this Court in the “1999 time

frame” and had received a bill from an attorney named Joseph Mudd

for $7,632.75 of legal fees. We are unpersuaded that petitioners

are entitled to deduct for 1999 the $7,476 claimed for that year

as a lease (or, as they claim now, a legal) expense.

b. Travel

Petitioners argue that they have substantiated the $4,129 of

expenses claimed as a business travel deduction through the

introduction of Exhibit 123-P and the testimony of Michelsen.

That evidence, petitioners conclude, proves that they traveled to

Australia to attend the Sydney gift show, to search for a

location in Australia to open a fourth Nature’s Touch store, and

to identify merchandise to import into the United States. We

disagree that petitioners are entitled to any of their reported

travel expenses for 1999. Petitioners have simply not persuaded

us that their trip to Australia was related primarily to

Michelsen’s reported work for her sole proprietorship during 1999

as a “Corporate Director/Consultant”. Nor have petitioners
 -39-

persuaded us as to the specifics of their day-to-day activities

while in Australia or, more specifically, the amount of time that

they purportedly spent on business versus personal pursuits.

Exhibit 123-P was received into evidence through the parties’

stipulation that the exhibit reflects “documents which

Petitioners contend pertain to business related travel for

taxable year 1999”. Exhibit 123-P has approximately 70 pages,

and petitioners have not organized or presented the “documents”

included therein (mainly photocopies of receipts) in any manner

that persuades us that any of the expenses reflected in this

exhibit are properly deductible by petitioners. Nor do

petitioners in their posttrial opening brief persuade us that

they have satisfied the requirements for deductibility;

petitioners’ entire argument on this point is:

The trip had a clear business purpose. Ms. Michelsen
was actively pursuing a business expansion.
(TR169:16-171:1) Substantiated costs total $12,847
(Exhibit 123-P). Only one-third of this expense was
allocated to business. A deduction of $4,129, which
was taken on the return, should be allowed.

We sustain respondent’s determination that petitioners are not

entitled to deduct these claimed expenses.

c. Meals

Petitioners argue that they have substantiated the $9,789 of

expenses claimed as a meals deduction for 1999 through the

introduction of Exhibit 124-P. We disagree. Exhibit 124-P was
 -40-

received into evidence through the parties’ stipulation that the

exhibit reflects “documents which Petitioners contend pertain to

overnight business meal expense for taxable year 1999”. Exhibit

112-P has approximately 20 pages, and petitioners have not

organized or presented the “documents” included therein (mainly

photocopies of receipts) in any manner that persuades us that any

of the expenses reflected in this exhibit are properly deductible

by petitioners as “meals”. See Romer v. Commissioner, T.C. Memo.

2001-168. Nor do petitioners in their posttrial opening brief

make any concerted attempt to persuade us that they have

satisfied the requirements for such deductibility; petitioners’

entire argument on this point is that “Expenses incurred are

substantiated in Exhibit 124-P. Total expenses are $9,789.” We

sustain respondent’s determination that petitioners are not

entitled to deduct these claimed expenses.

E. Epilogue

We have considered all of the parties’ arguments, and all

arguments not discussed herein have been rejected as moot,

irrelevant, or without merit.

Decision will be entered

under Rule 155.