                        T.C. Memo. 1995-483



                      UNITED STATES TAX COURT



     JOHN EDWARD KERRIGAN AND JOAN MARIE KERRIGAN, DECEASED,
         Petitioners v. COMMISSIONER OF INTERNAL REVENUE,
                            Respondent



     Docket No. 11309-92.                Filed October 4, 1995.



     Jonathan David Robbins and Thomas M. McCartin, for

petitioners.

     Michal Cline and Warren P. Simonsen, for respondent.

                        MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined a deficiency1 in


     1
      We granted respondent's Motion for Leave to File an Amended
Answer asserting an increased deficiency. In the amended answer,
respondent contends that she incorrectly applied withholding
credits in determining the amount of petitioners' deficiency.
Disregarding the withholding credits, the adjustments in the
notice of deficiency should have resulted in a deficiency of
$51,678 for the taxable year 1985. Petitioners do not dispute
                                                   (continued...)
                              - 2 -

petitioners' Federal income tax and additions to tax as follows:


                                  Additions to Tax
         Year   Deficiency   Sec. 6651(a)(1)   Sec. 6661

         1985    $23,877         $5,969         $5,969


     After concessions, the issues for decision are:   (1) Whether

petitioners are entitled to a Schedule A deduction for charitable

contributions in the amount of $1,127; (2) whether petitioner

Joan Marie Kerrigan (Mrs. Kerrigan) is entitled to Schedule C

deductions for advertising expenses of $3,974; car and truck

expenses of $783.50; commissions of $2,485.33; depreciation of

$2,644; and freight expenses of $39; (3) whether petitioner John

Edward Kerrigan (Mr. Kerrigan) is entitled to Schedule C

deductions for repairs of $3,610.55 and supplies of $6,143; (4)

whether Mrs. Kerrigan and Mr. Kerrigan are entitled to Schedule C

deductions for insurance expenses of $571 and $146, respectively;

laundry and cleaning expenses of $1,107 and $618.55,

respectively; office expenses of $3,342.15 and $2,829.89,

respectively; and travel and entertainment expenses of $16,657.12

and $7,113.69, respectively; (5) whether petitioners are liable



     1
      (...continued)
this in their brief, and it is clear that withholding credits are
not to be taken into account in determining the amount of the
taxpayer's "deficiency". See sec. 6211(a). Respondent, on the
other hand, agrees that petitioners are entitled to a credit for
the previously withheld tax when calculating the amount of any
unpaid tax.
                                 - 3 -

for an addition to tax under section 6651(a)2 for failure to file

a timely Federal income tax return for 1985; and (6) whether

petitioners are subject to an addition to tax under section 6661

as a result of a substantial understatement of their income tax

for 1985.


                            Background


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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.    Mr. Kerrigan filed this petition on

behalf of himself and his deceased wife.    At the time of filing,

Mr. Kerrigan resided in Potomac, Maryland.    Petitioners were

married and filed a joint 1985 Federal income tax return.    Mrs.

Kerrigan died on September 15, 1991.

     Petitioners filed their 1985 return on April 12, 1989.      On

their return, Mr. Kerrigan listed his occupation as "publisher".

Mr. Kerrigan had been employed for 25 years by the Washington

Post Co. (the Post), where he started as a classified advertising

salesman before eventually becoming a general advertising

manager.    Mr. Kerrigan resigned from his position in February

1985.    However, after plans for new employment in Chicago failed

to materialize, the Post retained him as a consultant.    Around


     2
      Unless otherwise indicated, 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.
                               - 4 -

the same time, Mr. Kerrigan also began doing work as a consultant

for the Times Journal Co., the Government Computer News, and

Atex.3

     As a consultant, Mr. Kerrigan was responsible for his own

expenses.   He claimed deductions for expenses incurred in his

consulting business on his separate Schedule C of petitioners'

1985 Federal income tax return.

     Mrs. Kerrigan listed her occupation on the couple's 1985

return as an "independent sales agent".    During 1985, Mrs.

Kerrigan worked as an independent realtor associated with Moussa

Mooadel Realtors, Inc., in Bethesda, Maryland.    She specialized

in the sale of expensive houses in the suburbs of Maryland.      Mrs.

Kerrigan reported her real estate agent income and expenses on a

separate Schedule C.

     On February 25, 1992, respondent issued a notice of

deficiency, which made numerous adjustments involving the

disallowance of deductions claimed by petitioners.    These

deductions were disallowed because petitioners failed to provide

adequate substantiation.

     Deductions from gross income are a matter of legislative

grace, and taxpayers bear the burden of proving that they are

entitled to any deductions claimed.    Rule 142(a);   Welch v.



     3
      In September 1985, Mr. Kerrigan accepted a position with
the Times Journal Co. as a publisher of what is now called the
Defense News.
                                 - 5 -

Helvering, 290 U.S. 111, 115 (1933).     Section 162(a) allows

taxpayers a deduction for "all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

any trade or business".    In order to be deductible, however, the

expenses must be "directly connected with or pertaining to the

taxpayer's trade or business".    Sec. 1.162-1(a), Income Tax Regs.

     For convenience, we will combine our findings of fact and

opinion with respect to the items which remain in issue.


Charitable Contributions


     Subject to limitation, section 170 permits a deduction for

charitable contributions paid within the taxable year.      Sec.

170(a) and (b).    Petitioners claimed charitable contributions on

their 1985 Federal income tax return in the amount of $6,364.

This amount consisted of noncash contributions of $4,184 and cash

contributions of $2,180.    Respondent allowed the noncash

contributions in full, but denied $1,127 of the cash

contributions because of a lack of adequate substantiation.

     At trial, petitioners produced four canceled checks totaling

$402.50.   Three of these checks were made payable to a "Christmas

Bazaar".   Petitioners failed to offer any testimony to

demonstrate that these expenditures were charitable

contributions.    The fourth check was made payable to the Lupus

Foundation in the amount of $100.    The Commissioner has

recognized the Lupus Foundation as a charitable organization
                                - 6 -

within the meaning of section 170(c).    See, e.g., Dept. of

Treas., Cumulative List of Organizations Described in Section

170(c) of the Internal Revenue Code of 1954, at 687 (1985).    Mr.

Kerrigan also testified that he and his wife made cash

contributions to their local Catholic church when they attended

Mass on Sundays.    Petitioners produced no documentation to

substantiate this, and Mr. Kerrigan's testimony was vague as to

the amounts and frequency of these contributions.

     Respondent has already allowed petitioners $1,053 of cash

contributions.    Petitioners' evidence falls far short of

justifying any additional amount.


Advertising Expenses


     Mrs. Kerrigan claimed a Schedule C deduction for advertising

expenses in the amount of $5,419.    Of this amount, respondent

allowed $1,445.

     Petitioners argue that Mrs. Kerrigan's expenses consisted of

expenditures for signs, open houses, and "gifts" which Mrs.

Kerrigan frequently purchased for her clients as an additional

form of advertising.    Mrs. Kerrigan's open house expenses

included expenditures for plants and chocolates, while her

business "gifts" ranged from children's toys to maternity

clothes.   At trial, petitioners presented Mrs. Kerrigan's

business log for 1985, which contains numerous entries throughout

the year, reflecting numerous expenditures for these items.    The
                                - 7 -

total for these items was $3,617.01.4   Petitioners' daughters

testified that Mrs. Kerrigan frequently purchased such items in

the course of her business.   The expenditures reflected in the

log are reasonable considering Mrs. Kerrigan's position as a

successful realtor specializing in the sale of expensive houses.

We hold that petitioners are entitled to deduct $3,617.01 for

Mrs. Kerrigan's advertising expenses.


Car and Truck Expenses


     Mrs. Kerrigan claimed a Schedule C deduction for car and

truck expenses in the amount of $2,838.50.   Of this amount,

respondent allowed $2,055.    On brief, petitioners argue that they

are actually entitled to a greater deduction than originally

claimed.

     Petitioners argue that Mrs. Kerrigan incurred gasoline and

insurance expenses of $3,093.12 on her 1985 Oldsmobile Toronado.

In arriving at this figure, it appears that petitioners counted

certain expenditures from Mrs. Kerrigan's log twice.   The log

indicates that Mrs. Kerrigan's total business expenses for the

Toronado in 1985 were $2,477.   Yet, when calculating their

expenses on brief, petitioners add to this figure the amounts of

$238 and $507.   However, these expenses had already been taken



     4
      Mrs. Kerrigan had expenditures of $2,035.04 for signs,
$1,195.27 for items for open houses, and $386.70 for business
"gifts".
                                - 8 -

into account in arriving at the initial figure of $2,477.

Petitioners argue that Mrs. Kerrigan used the Toronado for

business purposes 96 percent of the time.   Exactly how this

figure was arrived at, one can only speculate.    Petitioners also

contend that they are entitled to a mileage deduction for Mrs.

Kerrigan's use of a 1980 Mercedes 350 SL.   No deduction for this

appears to have been claimed on their return.    However,

petitioners do not explain why this mileage was not claimed on

their return, nor have they offered any evidence to prove what,

if any, use of the Mercedes was attributable to business.

Petitioners have not established an entitlement to deductions in

excess of the amount allowed by respondent.   Accordingly, we

sustain respondent's disallowance.


Commission Expenses


     Petitioners claimed a Schedule C deduction of $6,412.33 for

commissions paid by Mrs. Kerrigan in connection with the sale of

real estate in 1985.   Respondent allowed a deduction of $3,927.

Petitioners attempted to prove that the additional commissions

were paid to their daughters.   The testimony of the daughters was

vague as to how these "commissions" were computed, as well as to

their amounts.   Moreover, Mr. Kerrigan observed at trial that his

daughters appeared to "overstate" the amount of their

commissions.   Interestingly, the checks that petitioners offered

to substantiate these "commissions" were made payable to either
                                - 9 -

Safeway (a grocery store) or Britches (a clothing store), rather

than to the daughters themselves.   In addition, Mrs. Kerrigan

failed to record these checks in her business log or to provide

her children with Forms W-2 or 1099.    Petitioners have failed to

substantiate any deductions in excess of the amount already

allowed by respondent.


Depreciation


     Petitioners also claimed a deduction on Mrs. Kerrigan's

Schedule C for depreciation in the amount of $5,030.     Respondent

allowed $2,386.    Petitioners on brief again argue that they are

entitled to a larger depreciation deduction than they originally

claimed.

     Mrs. Kerrigan claimed a depreciation deduction for three

items:   Her 1985 Oldsmobile Toronado, her "office" in

petitioners' house in Potomac, Maryland, and a condominium that

petitioners owned in Ocean City, Maryland, which Mrs. Kerrigan

allegedly used as an office.   We find several difficulties with

Mrs. Kerrigan's depreciation deduction.   First, petitioners have

not offered sufficient evidence of Mrs. Kerrigan's cost basis in

the Toronado.   Second, we repeat our inability to understand how

Mrs. Kerrigan arrived at a figure of "96 percent business use"

for the vehicle.   Thus, we have no way of knowing if this is a

proper allocation between business and personal use.     In

addition, petitioners have failed to provide us with any evidence

of Mrs. Kerrigan's cost basis in petitioners' house in Potomac.
                               - 10 -

Finally, we have no evidence of petitioners' cost basis in the

Ocean City property, and except for Mr. Kerrigan's self-serving

testimony at trial, there is no evidence that Mrs. Kerrigan used

the Ocean City condominium as an office.    We therefore sustain

respondent's determination.


Freight Expenses


     Mrs. Kerrigan claimed a Schedule C deduction for freight

expenses in the amount of $122.    Respondent allowed $83.   Since

petitioners have not presented any evidence to substantiate this

deduction, we sustain respondent's determination.


Repair Expenses


     Respondent disallowed Mr. Kerrigan's $3,610.55 Schedule C

deduction for repairs in its entirety.    Petitioners offered

nothing to substantiate most of this amount, nor do they explain

how it was computed.   Petitioners argue on brief that they have

presented sufficient documentary evidence to substantiate a

deduction in the amount of $329.    They offered a handwritten log

prepared by Mr. Kerrigan as a record of his business, travel, and

entertainment expenses for 1985.    However, they produced no

invoices or canceled checks.   Under these circumstances, we hold

that Mr. Kerrigan has not adequately substantiated the business

purpose of this Schedule C deduction.    See sec. 1.162-1(a),

Income Tax Regs.
                               - 11 -

Supplies


     Respondent disallowed Mr. Kerrigan's entire Schedule C

deduction for supplies in the amount of $6,143.23.    On brief,

respondent concedes that petitioners have substantiated a

deduction of $98.25.    At trial, petitioners presented credit card

receipts totaling $226.64.   Most of these receipts were for

purchases at the Drug Fair in Potomac, Maryland.    Descriptions on

the receipts of the various purchases are either nonexistent or

illegible.    Because petitioners have failed to substantiate a

business purpose for this deduction, we sustain respondent's

disallowance of these expenses except for the $98.25 which

respondent concedes.


Insurance Expenses


     Respondent disallowed Schedule C deductions for insurance

expenses by Mrs. Kerrigan and Mr. Kerrigan in the respective

amounts of $571 and $146.96.    Petitioners presented insufficient

evidence at trial to convince us that they are entitled to these

deductions.   Petitioners produced an insurance bill from the Erie

Insurance Co. in the amount of $238.    We are uncertain, however,

of the date on which this bill was either issued or paid.5     We

therefore sustain respondent's determination.



     5
      We note the apparent similarity between this bill and the
car and truck expense deduction claimed by Mrs. Kerrigan for a
$238 payment to the Erie Insurance Co. on Jan. 7, 1985.
                                - 12 -

Laundry and Cleaning Expenses


     Respondent disallowed Schedule C deductions for cleaning

expenses by Mrs. Kerrigan and Mr. Kerrigan in the respective

amounts of $1,107 and $618.55.    None of these expenses appear to

be recorded in Mrs. Kerrigan's business log.    While petitioners

produced canceled checks totaling $660.25 payable to "Crest" or

"Crest Cleaners", they failed to demonstrate the business purpose

for these checks.    Accordingly, we sustain respondent's

determination.


Office Expenses


     Mrs. Kerrigan and Mr. Kerrigan claimed a Schedule C

deduction for office expenses in the respective amounts of

$4,409.15 and $3,715.89.    Respondent allowed $1,067 and $886,

respectively.    While petitioners offered no evidence to

substantiate Mr. Kerrigan's deduction, they did present several

entries from Mrs. Kerrigan's log in an attempt to substantiate

her deduction.    Some of these expenditures, however, do not

appear to be within the realm of office expenses.    Some of the

expenses include lawn care and house painting for house

settlements.    Petitioners have failed to substantiate deductions

for office expenses in addition to the amounts already allowed by

respondent.
                                 - 13 -

Travel and Entertainment Expenses


     Mrs. Kerrigan claimed a Schedule C deduction for travel and

entertainment expenses in the amount of $16,834.12.    Respondent

allowed a deduction of $177.

     Mrs. Kerrigan claimed expenses in 1985 for 259 meals for a

total cost of $6,931.   Petitioners argue that these meals were

consumed during meetings Mrs. Kerrigan had with her business

clients and associates.

     Section 274 disallows deductions for entertainment expenses

unless the taxpayer is able to establish that the item is related

to, or associated with, the active conduct of his or her trade or

business.   Sec. 274(a)(1)(A).    At the same time, section 274(d)

imposes substantiation requirements for these deductions which

are even more exacting than the requirements under section 162

for ordinary and necessary business expense deductions.    A

taxpayer generally must substantiate each expenditure by

producing adequate records or sufficient evidence to corroborate

his or her own statements.   Sec. 1.274-5(c)(1), Income Tax Regs.

The "adequate records" standard, in turn, requires that a

taxpayer maintain an account book, which contains contemporaneous

entries which clearly indicates the requisite business purpose.

Sec. 1.274-5(c)(2)(i) and (ii), Income Tax Regs.    In addition, a

taxpayer must generally supply documentary evidence, such as

receipts or paid bills.   Sec. 1.274-5(c)(2)(iii), Income Tax

Regs.   Alternatively, taxpayers who are unable to satisfy the
                                - 14 -

"adequate records" threshold are still entitled to a deduction

for expenses that they can substantiate with other corroborative

evidence.     Sec. 1.274-5(c)(3), Income Tax Regs.   Usually, this

will consist of the written or oral testimony of the individuals

entertained by the taxpayer.     Sec. 1.274-5(c)(3), Income Tax

Regs.

   Section 274(e) modifies the requirements of subsection (a) in

permitting a deduction for expenses incurred for food and

beverages that are furnished to individuals under circumstances

generally considered conducive to a business discussion.      Sec.

274(e)(1).     Factors entering into this determination include the

surroundings in which the food and beverages are furnished, the

trade, business, or income-producing activity of the taxpayer,

and the relationship to such trade, business, or activity of the

person furnished with the food or beverages.     Sec. 274(e).

     Mrs. Kerrigan did not record the business purpose of these

almost daily meals or the business relationship of the persons

whom she entertained.     Nor have petitioners introduced testimony

of any of Mrs. Kerrigan's business clients.     See sec. 1.274-

5(c)(3), Income Tax Regs.     Under these circumstances, petitioners

have not met the substantiation requirements.     See, e.g., Sam

Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1558 (1987);

Walliser v. Commissioner, 72 T.C. 433, 442 (1979).

        In addition, Mrs. Kerrigan claimed a business deduction for
                               - 15 -

a 9-day trip to Hawaii in March 1985.6     At trial, Mr. Kerrigan

testified that this was a business trip for both him and Mrs.

Kerrigan.   However, Mrs. Kerrigan did not record in her log the

business purpose of the trip or any meetings she had there.

Moreover, there was no testimony presented at trial indicating

that Mrs. Kerrigan ever worked outside of suburban Maryland in

1985.

     Mr. Kerrigan also claimed a Schedule C travel and

entertainment expense deduction of $12,409.69.     Respondent

allowed a deduction of $5,296.   Mr. Kerrigan failed to

substantiate any deductions for travel and entertainment in

excess of the amount already allowed by respondent.


Section 6651(a)


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

file a timely return.   Sec. 6651(a)(1).    Respondent's

determination is presumed correct, and petitioners bear the

burden of proving otherwise.   Rule 142(a); Abramo v.

Commissioner, 78 T.C. 154, 163 (1982).     Section 6651(a) provides

an exception when the taxpayer's failure to file is due to

reasonable cause and not willful neglect.     Petitioners make no

argument that there was reasonable cause for their nearly 3-year

delay in filing.   Instead, they argue that no deficiency exists,



     6
      Petitioners did not allocate any portion of their travel
expenses as personal expenditures.
                               - 16 -

and maintain that by filing late, they were merely deferring

receipt of their tax refund.    Thus, we sustain the addition to

tax.


Section 6661


       Section 6661(a) provides for an addition to tax equal to 25

percent of the amount of any underpayment which is attributable

to a substantial understatement of income tax.     The amount of the

understatement is equal to the excess of the amount of tax that

is required to be shown on the return for the taxable year over

the amount of the tax actually shown on the return.      Woods v.

Commissioner, 91 T.C. 88, 94 (1988).      An understatement is

"substantial" when it exceeds the greater of 10 percent of the

tax which is required to be shown on the return or $5,000.       Sec.

6661(b)(1).    However, the amount of the understatement may be

reduced for amounts that the taxpayer adequately discloses or

supports with substantial authority.     Sec. 6661(b)(2)(B);

Mitchell v. Commissioner, T.C. Memo. 1994-242.      Petitioners have

failed to present any argument or evidence regarding the

applicability of either exception.      Rather, they contend that no

understatement exists.    Accordingly, we sustain the addition to

tax.



                                            Decision will be entered

                                     under Rule 155.
