                        T.C. Memo. 1999-400



                     UNITED STATES TAX COURT



     EARL E. CLOUD, JR. AND SHEILA S. CLOUD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8299-96.                  Filed December 8, 1999.




     Earl E. Cloud, Jr., pro se.

     Linda K. West, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined the following

deficiencies, additions to tax, and penalties with regard to

petitioners’ Federal income taxes:
                              - 2 -



                                Additions to Tax and Penalties
                                 Sec.          Sec.        Sec.
  Taxable Year   Deficiency   6651(a)(1)    6653(a)(1)     6662

         1988     $11,775       $2,361         $662             –-
         1989      18,818        4,118          –-           $3,764
         1990      19,613          –-           –-            3,923
         1991      12,827          --           --            2,565

     Unless otherwise indicated, all section references are to

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

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

Procedure.

     After a concession,1 the issues for decision are:

(1) Whether petitioners were engaged in a trade or business

involving equipment rental or metal fabrication so as to be

entitled to deductions for depreciation and other business

expenses; (2) whether petitioners are entitled to claim certain

net operating losses for taxable years 1988 and 1989; (3) whether

petitioners are liable for the addition to tax under section

6651(a) for taxable years 1988 and 1989; and (4) whether

petitioners are liable for the addition to tax under section

6653(a)(1) for taxable year 1988 and the penalty under section

6662 for taxable years 1989, 1990, and 1991.

     1
       Petitioners failed to present any evidence to dispute
respondent’s determination that they are liable for self-
employment tax. They have not addressed the issue on brief. We
treat petitioners’ failure to address this issue, in effect, as a
concession. See Rule 151(e)(4) and (5); Sundstrand Corp. & Subs.
v. Commissioner, 96 T.C. 226, 344 (1991); Money v. Commissioner,
89 T.C. 46, 48 (1987).
                               - 3 -

                         FINDINGS OF FACT

     The parties have stipulated some of the facts, which are

incorporated in our findings by this reference.    Petitioners

resided in Huntsville, Alabama, when the petition was filed.

Petitioners filed joint Federal income tax returns for each of

the years at issue.

     In 1983, petitioner husband (hereinafter petitioner) and his

father incorporated Pacer Industries, Inc. (Pacer), an Alabama

corporation.   Petitioner was the principal stockholder and

managed the business, while also engaging in the practice of law.

Pacer manufactured vending machines in Fyffe, Alabama, employing

on average 20-30 persons and servicing as many as 30-40

customers.

     In early 1987, Pacer ceased operations in Fyffe when the

City of Fyffe locked the doors and put a lien on the building

because Pacer was delinquent in paying its rent.    In September

1987, some of Pacer’s manufacturing equipment was moved from

Fyffe to a building then being leased by Idea Technologies, Inc.

(Idea Technologies), in Huntsville, Alabama.   In late 1987,

petitioner negotiated with John Ford, who was general manager of

one of Pacer’s customers, Management Marketing Consultants, to

manufacture 600 to 800 vending machines.    Stan Rowe was hired to

oversee a crew of several contract-basis workers and an Idea

Technologies employee.   After delivery of approximately 400
                               - 4 -

vending machines, work on this job ceased in February 1988, when

Idea Technologies lost its lease on the Huntsville building.

     In March 1988, the manufacturing equipment was relocated to

a building that had just been leased by Venco, Inc. (Venco), in

Brownsboro, Alabama.   John Ford located another supplier to

fulfill his vending machine order.     The equipment was not used in

any further manufacturing activity.

     Beginning in 1983, National Acceptance Co. of America (NAC)

provided Pacer a revolving line of credit, receiving a security

interest in Pacer’s assets, including its equipment, as well as a

personal guaranty from petitioner.     Pacer became delinquent on

this debt.   In 1986, NAC commenced a lawsuit seeking monetary

damages from Pacer and petitioners for loan and guaranty

obligations and seeking judicial foreclosure of its rights in

Pacer’s real and personal property.     Petitioners made

counterclaims against NAC.   Other creditors of Pacer and

petitioners were made party defendants in the lawsuit.       Among

these creditors was the Internal Revenue Service.

     The lawsuit was dismissed on July 8, 1988, after all parties

entered into a settlement agreement.     The settlement agreement

indicates that Pacer owed approximately $920,000 to the various

creditors that were parties to the lawsuit, and that petitioners

were personally liable for approximately $840,000.     The

settlement agreement recites that the assets of Pacer, upon
                               - 5 -

liquidation, were believed to be worth less than the obligations

that Pacer owed NAC.   The settlement agreement states:

     Pacer is presently selling its assets to Venco for an agreed
     upon purchase price of $614,000. Such purchase price is to
     be paid in monthly installments * * *. Pacer shall retain a
     Security Interest in its assets as sold to Venco until Venco
     has made payment in full of such purchase price, plus
     interest. The purchase of the assets by Venco is subject to
     the existing liens and security interest in or covering such
     assets * * *.

     Under the settlement agreement, Venco’s monthly installment

payments for Pacer’s assets were required to be paid to the

various creditors involved in the lawsuit.   The settlement

agreement specifies the amounts of the monthly installment

payments and the manner in which they are to be divided among the

creditors.   The settlement agreement also provides that

petitioner will not be released from his personal obligations

until the various creditors have received payments totaling at

least $162,735.2   Under the settlement agreement, in the event a

default occurred in the payment of any payment from Venco, NAC

was entitled to file a previously executed consent judgment in

favor of NAC and against Pacer and petitioners for the sum of

their debts to NAC.




     2
       This total comprises required installment payments
totaling $36,920 to NAC and installment payments totaling $24,494
to the State of Alabama Department of Economic and Community
Affairs, as well as satisfaction in full of petitioner’s $101,321
Federal tax liability.
                               - 6 -

     On July 1, 1988, Pacer entered into a written agreement (the

asset sale agreement) to sell all of its assets to Venco for

$598,500, payable in installments corresponding to the amounts

specified in the settlement agreement.   The asset sale agreement

states that Pacer agrees to allow Venco, should Venco deem it

economically necessary, to resell the equipment, “with the

understanding that in the event of such sale all proceeds derived

from said sale shall be tendered to Pacer Industries” for

distribution to its creditors holding security interests in the

equipment.   The asset sale agreement recites that Venco

“understands and accepts the fact that * * * [Pacer] contemplates

the cessation of all business operations, and the potential of

filing for protection under the Bankruptcy Code of the United

States of America.”

     Venco never made any payments for the Pacer equipment.    On

September 10, 1988, Venco executed a written bill of sale

transferring the equipment to petitioner for consideration of $10

and “other good and valuable consideration”.   The bill of sale

states:

          Said sale is subject to all liens of record, security
     interest, and other encumbrances of record as identified in
     the Asset Sales Agreement where Venco, Inc. obtained title
     dated July 1, 1988.

          Cloud’s liability to Venco shall be limited for
     assumption of the debt outstanding on this property to
     the lesser of, the outstanding payments due as shown on
     the Asset Sale Agreement or ONE HUNDRED AND SIXTY-FIVE
     THOUSAND DOLLARS AND 00/100 ($165,000.00) and no more.
                               - 7 -

     Petitioner made payments as necessary to be released from

personal liability under the settlement agreement, but the

payments fell short of discharging Pacer’s total liabilities.      In

the summer of 1990, NAC seized the manufacturing equipment.

     Petitioners made delinquent filing of their Federal income

tax returns for taxable years 1988 and 1989 on February 15, 1991.

Their Federal income tax returns for taxable years 1990 and 1991

were filed on October 21, 1991, and October 19, 1992,

respectively.   Petitioners filed Schedules C, Profit or Loss from

Business, for businesses described as “equipment rental” for

taxable years 1988, 1989, and 1990, and as “metal fabrication”

for 1991.   On these Schedules C, petitioners reported no income

but claimed deductions in the following amounts:

                       1988        1989        1990         1991

  Depreciation       $25,591     $51,151     $51,151    $31,942
  Interest            15,278        -–          -–         -–
  Freight              1,320        –-          -–         –-
  Repairs                670        –-         5,897       –-
  Utilities/phone      2,000        -–          -–         -–

     Respondent disallowed these claimed deductions on grounds

that petitioners had not established that they were engaged in

the trade or business of equipment rental or metal fabrication,

or that they had any basis in any assets relating to such

activities.
                                - 8 -

                               OPINION

     Section 162 allows a deduction for all the ordinary and

necessary expenses paid or incurred while carrying on a trade or

business.    Section 167(a) allows a depreciation deduction for

property used in the trade or business or held for the production

of income.

     For an activity to constitute a trade or business, it is

well settled that “the taxpayer must be involved in the activity

with continuity and regularity and that the taxpayer’s primary

purpose for engaging in the activity must be for income or

profit.”    Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

To determine whether petitioners are carrying on a trade or

business requires an examination of the facts.    See Higgins v.

Commissioner, 312 U.S. 212, 217 (1941).    Petitioners bear the

burden of proof.    See Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933).

     Petitioners claim that they were engaged in the trade or

business of manufacturing vending machines.3   It is undisputed,

however, that there was no significant manufacturing activity

after February 1988, when the manufacturing equipment was

relocated from Huntsville to Brownsboro and work on the Ford



     3
       Although petitioners’ Schedules C for taxable years 1988,
1989, and 1990 list the business as “equipment rental”,
petitioners have not argued at trial or on brief that they were
ever engaged in such a trade or business.
                                - 9 -

order ceased.   The manufacturing equipment belonged to Pacer, not

petitioners, until July 1988, as evidenced by the July 1988

agreement transferring the equipment from Pacer to Venco.    It was

not until September 1988 that Venco transferred the equipment to

petitioner, as evidenced by the bill of sale dated September 10,

1988, which also expressly reconfirms that title to the equipment

was not transferred from Pacer to Venco until July 1, 1988.

     Accordingly, we conclude that petitioner’s involvement with

the manufacturing activity in question--which activity was

confined to the first 2 months of the 4 years at issue and

involved equipment still owned by Pacer--was in his capacity as

shareholder and manager of Pacer, and not in his individual

capacity.   Generally, a taxpayer may not deduct expenses incurred

or paid on behalf of another taxpayer.   See Deputy v. du Pont,

308 U.S. 488, 493-494 (1940).   Similarly, a shareholder

ordinarily may not deduct expenses incurred as an investor in a

corporation.    See Whipple v. Commissioner, 373 U.S. 193, 199-200,

203 (1963).

     At trial, petitioners sought to establish through parol

evidence that, notwithstanding the unambiguous documentary

evidence to the contrary, petitioner actually acquired the

equipment from Venco in 1987.   Petitioners argue that Venco

actually purchased the metal fabrication equipment from Pacer in

1987 and that in the fall of 1987, petitioner entered into an
                              - 10 -

oral agreement with Venco to purchase the equipment in question,

by accepting an “assignment” of the Venco purchase agreement.

Petitioners argue that this oral agreement was memorialized in

the bill of sale from Venco to petitioner dated September 10,

1988.

     Petitioners’ attempted reliance on parol evidence to

contradict the terms of unambiguous written contracts is

unavailing, as contrary to applicable State law.    See Miner v.

Commissioner, T.C. Memo. 1999-358; Colafrancesco v. Crown

Pontiac-GMC, Inc., 485 So. 2d 1131, 1133 (Ala. 1986) (“It is

fundamental that the parol evidence rule prohibits the

contradiction of a written agreement by evidence of a prior oral

agreement.”) (quoting Shepherd Realty Co., Inc. v. Winn-Dixie

Montgomery, Inc., 418 So. 2d 871, 874 (Ala. 1982)).

     Moreover, apart from petitioner’s own self-serving

testimony, the parol evidence adduced does not credibly support

petitioners’ contentions.   Ed Zielinski testified on behalf of

petitioners.   Zielinski’s testimony, exhibiting uncertain

remembrance of dates, establishes at most that in 1987 he and

petitioner may have engaged in discussions and negotiations that

culminated in the September 1988 transfer of equipment from

Venco to petitioner.   Zielinski testified that “probably around

June or something” of 1988, he entered into oral agreements to

sell the manufacturing equipment to petitioner.    Accordingly,
                                - 11 -

his testimony does not establish that there was any actual

agreement to transfer the equipment before the summer of 1988,

when Pacer transferred the equipment to Venco.4

     On brief, petitioners argue that even if petitioner did not

acquire title to the manufacturing equipment until September

1988, he should be viewed as acquiring beneficial or

constructive ownership of the equipment in the fall of 1987.

The facts indicate otherwise.    Petitioners’ Federal income tax

returns state that the manufacturing equipment depreciated on

those returns was acquired by petitioners on July 1, 1988.5    The

record does not show that petitioner assumed any economic

obligations with regard to the equipment in the fall of 1987.

Nor does the record credibly establish that petitioner’s

involvement with the equipment before September 1988 was other

than in his capacity as shareholder and manager of Pacer, which




     4
       The testimony of Stan Rowe and the affidavit of John Ford,
upon which petitioners also rely, merely indicate that work
occurred on the Ford order in late 1987 and early 1988, and do
not establish that petitioner owned the manufacturing equipment
at those times.
     5
       On brief, petitioners suggest that they reported acquiring
the equipment on July 1, 1988, because they were using the half-
year convention provided under sec. 1.167(a)-11(c)(2)(iii),
Income Tax Regs. Petitioners’ explanation, however, is
inconsistent with their argument that they acquired the equipment
in 1987.
                              - 12 -

still held title to the equipment and which remained in

existence at least until July 1, 1988.6

     Petitioners argue that even if the manufacturing equipment

was idle after petitioner acquired it, he nevertheless should be

considered to be in the trade or business of metal fabrication,

because he continued, albeit unsuccessfully, to pursue new work

orders until the equipment was repossessed by NAC in the summer

of 1990.   Apart from petitioner’s self-serving and

uncorroborated testimony, however, there is no evidence of such

business activity.   Petitioner’s testimony does not credibly

establish that he was involved in his personal capacity in the

metal fabrication business with continuity or regularity, with

the primary purpose of producing income or profit.    Cf.

Commissioner v. Groetzinger, 480 U.S. at 35.   To the contrary,

petitioner testified that during the years at issue, he was so

busy in his family law practice that petitioners were unable

even to file timely tax returns.

     Having failed to establish that they were engaged in the

trade or business of manufacturing vending machines, petitioners

have failed to show that the depreciable assets were used in a



     6
       That Pacer remained in business on July 1, 1988, is
indicated by the July 1, 1988, asset sale agreement between Pacer
and Venco, which states that Pacer “contemplates the cessation of
all business operations, and the potential of filing for
protection under the Bankruptcy Code of the United States of
America.”
                                - 13 -

trade or business within the meaning of section 167(a)(1).       See

Steen v. Commissioner, 508 F.2d 268, 270 (5th Cir. 1975), affg.

61 T.C. 298 (1973).   Nor have petitioners asserted or

established that they otherwise held the manufacturing equipment

for the production of income within the meaning of section

167(a)(2).   Cf. Yanow v. Commissioner, 44 T.C. 444, 450-451

(1965), affd. 358 F.2d 743 (3d Cir. 1966).

     Even if we were to assume arguendo that petitioners were in

the trade or business of manufacturing vending machines during

the years at issue, they have failed to substantiate their

entitlement to the depreciation or other business deductions

claimed.   To substantiate entitlement to depreciation

deductions, petitioners must establish, among other things, the

property’s depreciable basis.    See Delsanter v. Commissioner, 28

T.C. 845, 863 (1957), affd. in part and remanded on another

issue 267 F.2d 39 (6th Cir. 1959).       Petitioners have failed to

do so.   On their Federal income tax returns for the years in

issue, petitioners reported depreciable basis in the

manufacturing equipment that fluctuated erratically from year to

year.7   On brief, petitioners now claim smaller amounts of


     7
       For taxable year 1988, petitioners reported opening
adjusted basis of zero, an increase in basis during the year of
$45,000, and their amount at risk as $45,000. For taxable year
1989, petitioners reported opening adjusted basis of $614,000, a
decrease in basis of $505,631, and their amount at risk as
$108,639. For taxable year 1990–-the year in which NAC
                                                   (continued...)
                              - 14 -

depreciation than were claimed on the returns, apparently

reducing the claimed depreciable basis by certain items that

petitioners now concede were never moved from Fyffe.

     Petitioners have introduced no books or records to

substantiate or explain their claimed depreciable basis, even

though petitioner testified that he kept books and records which

he supplied to his accountant.8   We draw an adverse inference

from petitioners’ failure to introduce such evidence that is

within their possession.   Cf. Citron v. Commissioner, 97 T.C.

200, 217-218 (1991); Wichita Terminal Elevator Co. v.


     7
      (...continued)
repossessed the equipment--petitioners reported opening basis of
$79,448, an increase in basis of $50,000, and their amount at
risk as $129,448. For taxable year 1991–-after petitioners no
longer possessed the equipment–-petitioners reported their
adjusted basis in the equipment and their amount at risk as
$31,942.
     8
       For at least some of the years in issue, petitioners
appear to compute their depreciable basis by reference to the
provision in the September 1988 bill of sale, which purported to
limit petitioner’s liability to Venco for assumption of the debt
outstanding on the property to no more than $165,000. This
$165,000 liability limit, however, approximates petitioner’s
personal liability as previously agreed to under the settlement
agreement with petitioners’ and Pacer’s various creditors. We
question whether petitioner assumed any such liabilities pursuant
to his purchase of the equipment from Venco and consequently
whether such liabilities are appropriately included in
petitioner’s depreciable basis in the equipment. Furthermore, we
question the bona fides of the various purported transfers of the
manufacturing equipment from Pacer to Venco and then to
petitioner. The record does not explain why Venco, having
purportedly purchased the equipment from Pacer in July 1988 for
$598,500, would then sell the equipment back to petitioner in
September 1988 for $10 stated consideration, with the parties
agreeing that petitioner’s liabilities would not exceed $165,000.
                              - 15 -

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).   Moreover, having conceded that the manufacturing

equipment was repossessed in the summer of 1990, petitioners

have offered no credible explanation as to why they continued to

claim depreciation allowances on it for all of 1990 and 1991.

      Similarly, petitioners have failed to substantiate the

other business expenses claimed as deductions.    Taxpayers are

required to substantiate claimed deductions by maintaining and

producing the records needed to establish entitlement to their

claimed deductions.   See sec. 6001.   Petitioners failed to do

so.   They presented no invoices or canceled checks to

substantiate their claimed payments for freight, interest,

repairs and maintenance, or utilities and telephone.9

Accordingly, we sustain respondent’s determination in this

regard.




      9
       Petitioners introduced copies of a number of canceled
checks, many of which appear to represent payments to satisfy
petitioner’s personal obligations to various creditors as
determined under the settlement agreement. Several of the checks
are made payable to Venco or Ed Zielinski. Petitioner testified
that these checks represent his reimbursements to Zielinski for
amounts expended on petitioner’s behalf for wages, supplies, and
parts. None of the checks, however, have been shown to correlate
to the deductions claimed on petitioners’ Schedules C, which
include no deductions for wages, supplies, or parts.
                                - 16 -

Net Operating Loss Deductions

     On their 1988 and 1989 Federal income tax returns,

petitioners claimed net operating loss carryforwards (NOL’s) of

$25,450 and $8,108, respectively.    Respondent disallowed $16,390

of the 1988 NOL and all of the 1989 NOL after determining that

petitioners had failed to carry back the losses before carrying

them forward, as required by section 172(b)(1)(A) and (2).

Respondent recalculated the NOL’s, which resulted in most of the

NOL’s being absorbed in earlier years.

     At trial, petitioners presented no evidence regarding this

issue.   On brief, petitioners state that their “only objection

to Respondent’s requested adjustment involves the amount of net

operating lose [sic] actually used for the years in question.”

Conceding that some reduction in their claimed NOL’s is

appropriate, petitioners argue, with little elaboration, that

“The exact amount of that reduction would be less than the [sic]

claimed by the respondent.”

     Having failed to present evidence to overcome respondent’s

determinations to reduce their allowable NOL’s, petitioners have

failed to carry their burden of proof regarding this issue.   See

Rule 142(a); Golub v. Commissioner, T.C. Memo. 1999-288.

Accordingly, we sustain respondent’s determinations.
                                - 17 -

Addition to Tax for Failure To File Timely Tax Returns

     Unless shown to be for reasonable cause and not due to

willful neglect, failure to file a return on the due date

generally results in an addition to tax in the amount of 5

percent for each month during which such failure continues, but

not exceeding 25 percent in the aggregate.    See sec. 6651(a)(1).

     Petitioners’ 1988 Federal income tax return was due

April 17, 1989.   It was filed February 15, 1991.   Petitioners’

1989 Federal income tax return was due April 16, 1990.    It was

also filed February 15, 1991.

     Neither at trial nor on brief have petitioners specifically

addressed respondent’s determination that they are liable for

the section 6651(a) addition to tax.     Petitioner testified that

petitioners had suffered several misfortunes.    He testified that

his law partner was murdered and that petitioner wife was

frequently ill, necessitating numerous trips to the Mayo Clinic.

Petitioners’ return preparer testified, however, that the murder

occurred in 1980 and that the Mayo Clinic trips were more recent

than the years at issue.   The scant evidence in the record fails

to establish any clear nexus between these misfortunes and

petitioners’ failure to file timely Federal income tax returns.

     Petitioner also testified that he was busier than usual

with his law practice, in part because his father, who was also

petitioner’s law partner, had undergone open-heart surgery.
                               - 18 -

Being “too busy”, however, does not constitute reasonable cause

for failure to file timely returns.     See Dustin v. Commissioner,

53 T.C. 491, 507 (1969); Olsen v. Commissioner, T.C. Memo. 1993-

432.   As a practicing attorney, petitioner should have been

alert to his legal obligations to file Federal income tax

returns.    We sustain respondent’s determinations on this issue.

Sections 6653(a)(1) and 6662

       For returns due after December 31, 1988, section 6653(a)(1)

imposes an addition to tax equal to 5 percent of the

underpayment if any part of any underpayment is “due to

negligence or disregard of rules or regulations”.    For returns

due after December 31, 1989, section 6662 imposes a penalty

equal to 20 percent of the portion of the underpayment that is

attributable to negligence or disregard of rules or regulations.

Under both sections 6653(a)(3) and 6662(c), negligence includes

any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and disregard includes

any careless, reckless, or intentional disregard.

       A taxpayer’s failure to keep adequate books and records may

constitute negligence and also indicates disregard of the rules

or regulations requiring a taxpayer to keep records sufficient

to establish, among other things, the taxpayer’s gross income

and deductions.    See Crocker v. Commissioner, 92 T.C. 899, 917

(1989).
                               - 19 -

     Petitioners have failed to show that they were not

negligent and did not disregard rules and regulations.

Petitioners claimed deductions to which they were not entitled.

They failed to show that they maintained adequate books and

records to provide a rational basis for their claimed deductions

and losses.   They claimed depreciation allowances for property

for periods when the property was held by other entities.     They

claimed other business deductions for which they have produced

no substantiation.   Accordingly, we sustain respondent’s

determination on this issue.

     Petitioners argue that the various personal misfortunes and

business pressures previously described “limited and restricted

* * * [petitioner’s] access to information, and records

necessary to complete his returns.”     The sparse evidentiary

record regarding these various misfortunes does not establish,

however, that any such adverse circumstances would have

persisted in 1991 and 1992, when petitioners’ returns were

finally filed with the assistance of a certified public

accountant.   Moreover, we are unconvinced that the underpayments

as determined herein are attributable to petitioners’ lack of

information and records rather than to petitioners’ lack of good

faith in attempting to comply with the provisions of the

Internal Revenue Code.   Accordingly, we sustain respondent’s

determinations on these issues.
                        - 20 -

To reflect the foregoing,


                                 Decision will be entered

                            for respondent.
