                         T.C. Memo. 2003-215



                       UNITED STATES TAX COURT



               CHRISTOPHER Y. KIMM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4102-01.                Filed July 17, 2003.


     Steve Mather and Stephen J. Mihaly, for petitioner.

     Jean Song, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $9,717 deficiency

in petitioner’s Federal income tax for 1996.     The issues for

decision are (1) whether Christopher Y. Kimm (petitioner) is

entitled to deduct a $30,000 payment to his father in 1996 as an

ordinary and necessary business expense under section 162 and (2)
                               - 2 -

whether petitioner is liable for an accuracy-related penalty

under section 6662.1

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time he filed the

petition, petitioner resided in Walnut, California.

A.   Background

     During 1996, petitioner worked as the director of

acquisitions for K Young Homes, Inc.   From November 1974 to March

1996, Douglas T. Kimm (petitioner’s father), owned a 7-Eleven

franchise and operated other businesses within Southern

California.   During the year in issue, petitioner’s father lived

with his daughter and with petitioner in their respective

apartments.   Petitioner’s father would travel back and forth

between the two apartments.   For more than half of the year 1996,

petitioner’s father resided with petitioner in his apartment.

B.   Proposed Business Arrangement

     During the last quarter of 1996, petitioner spoke to his

father about helping petitioner locate U.S. real estate

investment opportunities for the purpose of selling interests to



     1
       All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -

Asian investors.   At that time, the real estate experience of

petitioner’s father consisted of the ownership of a 7-Eleven

franchise for approximately 22 years and the purchase and sale of

two commercial properties and his personal residence.

     The proposed arrangement was for petitioner’s father to

locate potential real estate investments and advise petitioner on

their profitability.   Petitioner’s father agreed to drive around

Southern California and assist in locating investment

opportunities.   In exchange, petitioner orally agreed to pay2

petitioner’s father $30,000 annually for his services.

C.   Maintenance of Records

     In December 1996, petitioner opened a checking account with

Bank of America (Bank of America account).   The Bank of America

account was petitioner’s personal account.   During the same

month, petitioner’s father received a check drawn from

petitioner’s Bank of America account in the amount of $30,000.

     At this time, petitioner’s father did not have a checking

account.    Therefore, in January 1997, petitioner’s father asked

Mark M. Hathaway (Mr. Hathaway), his tax attorney and C.P.A., to

deposit the check in Mr. Hathaway’s client trust account (trust

account).   From the trust account, Mr. Hathaway made payments as



     2
       We use the words “pay,” “paid,” and “payment” in our
findings of fact for convenience only. We do not intend our use
of these terms to indicate any conclusion about the substance of
the transactions at issue.
                                 - 4 -

petitioner’s father instructed either to petitioner’s father

directly or to creditors of petitioner’s father.

     For the year 1996, petitioner did not provide to the Court

records of any sites visited, dates or hours worked, or mileage

traveled by petitioner’s father.    Petitioner and petitioner’s

father never executed a written consulting agreement.    Petitioner

did not issue to petitioner’s father a Form 1099-MISC,

Miscellaneous Income, for the $30,000 payment.

D.   1996 Tax Return

     Mr. Hathaway prepared U.S. Individual Income Tax Returns for

both petitioner and petitioner’s father for 1996.    On his

Schedule C, Profit or Loss From Business, petitioner’s father

claimed a loss of $26,085 from his 7-Eleven business, gross

income of $30,000 for the payment received from petitioner, and

on his Schedule D, Capital Gains and Losses, he claimed a short-

term capital loss of $59,500 from the sale of his 7-Eleven store.

     On April 15, 1997, petitioner timely filed his 1996 Federal

income tax return.     On his 1996 return, petitioner deducted the

$30,000 paid to petitioner’s father for consulting services.

     Respondent issued a notice of deficiency to petitioner

regarding his 1996 tax year.    In the notice of deficiency,

respondent determined, inter alia, that petitioner was not

entitled to deduct the $30,000 paid to petitioner’s father in

1996.
                                 - 5 -

                              OPINION

A.   Ordinary and Necessary Business Expense

     The question we consider is whether petitioner is entitled

to deduct the $30,000 that petitioner paid to petitioner’s father

as an ordinary and necessary business expense under section 162.

Section 162(a) allows a deduction for “all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.

     The question as to whether an expenditure satisfies the

requirements of section 162 is one of fact.       Commissioner v.

Heininger, 320 U.S. 467 (1943).    “Intrafamily transactions

resulting in the distribution of income within a family unit are

subject to the closest scrutiny.”        Van Zandt v. Commissioner, 40

T.C. 824, 830 (1963) (citing Commissioner v. Tower, 327 U.S. 280

(1946)), affd. 341 F.2d 440 (5th Cir. 1965); see Helvering v.

Clifford, 309 U.S. 331 (1940).

     Petitioner maintains that the $30,000 was a consulting fee

payment made as part of an oral agreement between petitioner and

his father in 1996.   Petitioner argues that he established a

business to sell interests in U.S. real estate investments to

Asian investors.   He further argues that the $30,000 check paid

to his father in 1996 was deductible on petitioner’s Schedule C,

Profit or Loss From Business, as an ordinary and necessary
                               - 6 -

business expense relating to petitioner’s real estate investment

business.

     Respondent argues that petitioner was not involved in any

business activity with petitioner’s father during 1996, and

therefore the $30,000 paid to petitioner’s father was not for the

purpose of carrying on a trade or business under section 162.

Respondent further argues that the $30,000 was in actuality a

redistribution of tax liability.    Petitioner’s father already had

a Schedule C loss of $26,085 from his 7-Eleven store to offset

the $30,000 while petitioner was able to gain a tax liability

reduction of $9,717 by claiming a $30,000 expense against his

total wages of $127,039.   We agree with respondent.

     We note that a “deduction is a matter of legislative grace

and that the burden of clearly showing the right to the claimed

deduction is on the taxpayer.”3    INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); Rule 142(a).    Therefore, petitioner must

establish that the $30,000 paid to petitioner’s father was for

the purpose of carrying on petitioner’s trade or business.

     Taxpayers are required to keep such permanent records as are

sufficient to substantiate the amount and the purpose of any

deductions.   Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440

(2001); sec. 1.6001-1(a), Income Tax Regs.    Petitioner did not



     3
       Petitioner does not contend that sec. 7491(a) is
applicable to this case.
                               - 7 -

provide the Court with records of any sites visited, dates or

hours worked, or mileage traveled by his father in order to

establish the validity of the $30,000 consulting fee payment and

the corresponding expense to petitioner.   The personal check

petitioner issued to his father is the only documentary evidence

provided to substantiate the deduction.    The $30,000 check drawn

from petitioner’s Bank of America account fails to substantiate

the purpose of the check.   Due to the heightened scrutiny we give

to intrafamily transactions, the testimony of petitioner’s father

coupled with the $30,000 check paid from petitioner’s personal

account are insufficient to establish that petitioner and

petitioner’s father conducted business activities together during

1996.   Accordingly, petitioner has failed to substantiate the

purpose of the $30,000 payment.

     Petitioner has shown neither that he conducted a real estate

investment business during 1996 nor that he is entitled to an

ordinary and necessary business deduction for the $30,000 related

to efforts petitioner’s father allegedly made in an attempt to

secure potential real estate investment opportunities for Asian

investors.   Petitioner did not appear or testify at trial.   See

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165

(1946), affd. 162 F.2d 513 (10th Cir. 1947).   As we do not need

to accept testimony of an interested party without corroborating

evidence, the testimony of petitioner’s father, along with the
                                - 8 -

$30,000 check, does not establish that petitioner conducted a

real estate investment business during 1996 and that petitioner

was entitled to an ordinary and necessary business deduction

related to site visits that petitioner’s father allegedly made

during the last quarter of 1996.   See Wood v. Commissioner, 338

F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C. 593 (1964).

Accordingly, petitioner is not entitled to an ordinary and

necessary business expense deduction for the $30,000 paid to his

father.

B.   Accuracy-Related Penalty

     As we have found that petitioner is not entitled to the

claimed deduction, we consider next whether petitioner is liable

for a section 6662 accuracy-related penalty for negligence.

Section 6662(a) provides that if any portion of any underpayment

is due to negligence, then a taxpayer will be liable for a

penalty equal to 20 percent of the underpayment of tax required

to be shown on the return that is attributable to the taxpayer’s

negligence.   Negligence is defined as “the lack of due care or

failure to do what a reasonable and ordinary prudent person would

do” under the circumstances.    Niedringhaus v. Commissioner, 99

T.C. 202, 221 (1992).   “Negligence” includes the failure to keep

adequate books and records or to substantiate items properly.

Id.; sec. 1.6662-3(b)(1), Income Tax Regs.

     With respect to the accuracy-related penalty, respondent
                                 - 9 -

bears the burden of production.    Sec. 7491(c); Higbee v.

Commissioner, 116 T.C. at 446.    In that regard, respondent “must

come forward with sufficient evidence indicating that it is

appropriate to impose” the accuracy-related penalty.    Id.

Respondent contends that he has met that burden.

     A taxpayer may avoid the accuracy-related penalty by showing

that (1) there was reasonable cause for the underpayment, and (2)

he acted in good faith with respect to such underpayment.        Sec.

6664(c)(1).   Whether a taxpayer acted with reasonable cause and

in good faith is determined by the relevant facts and

circumstances, and most importantly, the extent to which he

attempted to assess his proper tax liability.   Sec. 1.6664-

4(b)(1), Income Tax Regs.   The good faith reliance on the advice

of an independent, competent professional as to the tax treatment

of an item may meet this requirement.    United States v. Boyle,

469 U.S. 241 (1985).

     In order for reliance on professional advice to excuse a

taxpayer from the negligence additions to tax, the reliance must

be reasonable, in good faith, and based upon full disclosure.

Id.; see Weis v. Commissioner, 94 T.C. 473, 487 (1990).      A

taxpayer acts reasonably when he provides his accountant or

attorney with all relevant information necessary to prepare his

tax return, and he relies, in good faith, on the advice of his

attorney or accountant regarding a matter of substantive tax law.
                                - 10 -

See Jaques v. Commissioner, T.C. Memo. 1989-673, affd. 935 F.2d

104 (6th Cir. 1991); see also United States v. Boyle, supra at

251.   “Ordinary business care and prudence” do not demand that

taxpayers attempt to discern error in the substantive advice of

an accountant or attorney.     Id.   Taxpayers must be able to show

that the adviser reached his or her decisions independently.     See

Leonhart v. Commissioner, 414 F.2d 749, 750 (4th Cir. 1969),

affg. T.C. Memo. 1968-98.    In the instant case, Mr. Hathaway is a

C.P.A. and an attorney certified in taxation law by the

California State Bar, Board of Legal Certification.

Additionally, petitioner and petitioner’s father fully disclosed

the facts surrounding the transaction to Mr. Hathaway and

provided him the $30,000 check petitioner had issued to his

father for consulting services.      Based on this information, Mr.

Hathaway advised both petitioner and petitioner’s father that the

appropriate income tax reporting was for petitioner’s father to

report the $30,000 payment as compensation income and for

petitioner to claim a $30,000 deduction.     Mr. Hathaway prepared

the returns for both petitioner and petitioner’s father

consistent with this advice.    Both petitioner and petitioner’s

father reasonably relied on the advice of their tax adviser in

reporting the transaction on their respective returns.

Accordingly, petitioner is not liable for the section 6662(a)

accuracy-related penalty.
                             - 11 -

     To the extent not herein discussed, we have considered all

other arguments made by the parties, and we find them to be moot

or without merit.

     To reflect the foregoing,

                                        Decision will be entered

                                   under Rule 155.
