                         T.C. Memo. 2009-168



                       UNITED STATES TAX COURT



          LELAND B. AND BRENDA J. BRUNS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6881-07.                 Filed July 14, 2009.



     Kathryn Barnhill, for petitioners.

     Catherine S. Tyson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $10,695 deficiency

in and a $2,139 section 6662(a)1 penalty on petitioners’ 2003

Federal income tax.    The issues for decision are:   (1) Whether


     1
        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.
                                - 2 -

petitioners are entitled to deductions claimed; and (2) whether

petitioners are liable for the accuracy-related penalty under

section 6662(a).

                           FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference.   At the time they filed the petition, petitioners

resided in South Dakota.

     Petitioner Brenda Bruns (Mrs. Bruns), Joetta Swanhorst (Mrs.

Bruns’s mother), and Heather Mitzel (petitioners’ daughter) are

the partners of ABS Associates (ABS).2    Mrs. Bruns is entitled to

100 percent of the profits and losses of ABS.    Petitioner Leland

Bruns (Mr. Bruns) is not a partner of ABS.

     ABS is an independent distributor of Shaklee Corp.

(Shaklee), which produces nutritional and cleaning products.    The

Shaklee business model allows distributors of products to earn

income in three ways:   (1) Distributors earn income from

purchasing Shaklee products at a wholesale price and reselling

them at a higher price; (2) distributors are paid commissions on




     2
        ABS is not subject to the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA) partnership audit and
litigation rules. See sec. 6231(a)(1)(B) (the partnership ABS
had 10 or fewer partners and all partners were natural persons
and U.S. citizens).
                                 - 3 -

the purchases of distributors in their group;3 and (3)

distributors receive bonuses on the purchases of leaders they

develop.     Leaders are distributors who generate sales of $2,000

per month or more.     ABS is a leader, has developed 12 leaders,

and has approximately 500 to 600 customers, not counting the

customers of other distributors or leaders that ABS trained.

       ABS holds customer meetings to look for potential

distributors.     In the lower level of petitioners’ personal

residence, petitioners keep a small inventory of Shaklee

products, equipment, and sales aides used in training and

development.     Customers and distributors come to the lower level

of petitioners’ home to get products and receive coaching.

       During 2003 ABS earned $77,547 from its activities related

to the distribution of Shaklee products.4     On Form 1065, U.S.

Return of Partnership Income, ABS reported gross income of

$78,570 and net income of $60,570 after taking an $18,000

deduction for rent paid.     All income from ABS was distributed to

Mrs. Bruns, and she reported this income on petitioners’ 2003

Form 1040, U.S. Individual Income Tax Return.



       3
        Each distributor has a group of customers. A customer
may get discount buying privileges by paying a fee to become a
member or distributor. Once the customer becomes a distributor,
the customer-distributor is in the group of his original
distributor and starts a group of his own.
       4
           Respondent does not dispute the income to Mrs. Bruns from
ABS.
                                   - 4 -

Schedule C Expenses

     On petitioners’ Schedule C, Profit or Loss From Business,

attached to their 2003 Form 1040, petitioners claimed expenses of

$44,975 paid during 2003, which resulted from Mrs. Bruns’ work

for ABS in the distribution and sale of Shaklee products.

Petitioners were issued a notice of deficiency that disallowed

some of the expenses claimed on that Schedule C.     The following

is a table of reported expenses, the amount of each expense

allowed after examination, and the amount disallowed:

     Item               Amount Claimed     Allowed     Disallowed

Advertising                      $4,854    $1,361        $3,493
Car and truck expenses            2,238       798         1,440
Commissions and fees                495       495          –-
Contract labor                    1,490       -–          1,490
Depreciation                      1,500     1,500          --
Insurance                            47        47          --
Other interest                      101       101          --
Legal and professional
  services                          679       679          --
Business (office) expenses        9,545     1,331         8,214
Rent or lease--vehicle,
  machinery, and equipment        5,968    3,647         2,321
Taxes and licenses                  635      635          --
Travel                            4,253    2,526         1,727
Meals and
  entertainment                   2,582     1,192         1,390
                             1                           2
Other expenses                   10,588     8,588         2,000
  Total                          44,975    22,900        22,075
     1
       This amount is the total of the following claimed
business expenses: Freight postage expenses of $988, business
phone expenses of $4,684, cleaning expenses of $175, books/
publications subscription expenses of $304, meeting expenses of
$952, sales aids expenses of $1,390, bank charge expenses of $95,
and image expense of $2,000.
     2
        This disallowed amount is the complete disallowance of
petitioners’ claimed “image” expense of $2,000.
                                - 5 -

1.   Advertising Expenses

      Petitioners claimed deductions for advertising expenses of

$4,854; respondent allowed $1,361 and disallowed $3,493.    The

$1,361 deduction allowed includes $500 respondent determined

petitioners were entitled to for advertising-related gifts worth

$25 apiece to 20 individuals.

      Shaklee leaves advertising up to distributors and does not

advertise or market its products.   ABS does not advertise in the

phonebook or on the Internet; instead, Mrs. Bruns goes out and

meets customers’ families and friends to sell Shaklee products.

She then rewards customers who go out and talk up the product,

who have provided consistent business or increased their volume

of products sold, and who have been willing to introduce her to

their families and friends.   As a reward Mrs. Bruns will give

books, movies, cards, jewelry, flowers, and food.    Mrs. Bruns’

reward criteria are that the person be a good referral source,

love the products, and be a consistent customer.    Petitioners

provided photocopies of receipts for gifts purchased by Mrs.

Bruns and substantiated gifts to 26 individuals.

      Additionally, ABS paid to have newsletters, flyers, and

pictures printed.   Mrs. Bruns took pictures at Shaklee-related

meetings and when she met with different groups of Shaklee

customers, distributors, and leaders.   She then sent the photos

over the Internet and used them in presentations to show sales
                               - 6 -

leaders’ achievements with their group members.   Petitioners

submitted photocopies of receipts and invoices from Harold’s

Photo Centers, Office Max, Vista Print, and Express Copy &

Printing for copies, a Nikon camera with accessories, photo

development costs, and shipping labels.   The receipts total

$699.13.   The camera purchased by ABS is used only for taking

pictures of customers and has never been used by petitioners for

personal purposes.

2.   Car and Truck Expenses

      Mrs. Bruns drove a passenger vehicle to and from activities

related to the distribution and sale of Shaklee products.

Petitioners claimed deductions for car-related expenses of

$2,238; respondent allowed $798 and disallowed $1,440.

      Petitioners submitted photocopies of gasoline receipts,

carwash receipts, and car repair/maintenance invoices and

receipts. The gasoline receipts total $1,132.49, the carwash

receipts total $115.20, and the car repair/maintenance invoices

and receipts total $102.84.

3.   Contract Labor Expenses

      Petitioners claimed deductions for contract labor expenses

of $1,490, and respondent disallowed the full amount.    At trial

petitioners conceded they are entitled only to a $910 deduction

for contract labor.
                               - 7 -

      To substantiate the expenses for contract labor, petitioners

submitted a Quicken printout that showed payments totaling

$1,489.66 made to Robin Berg on numerous occasions, Cournie

Gunderson on 1/14/03, Michelle Bruns on 2/1/03, Robin Ramsey on

3/21/03, Richie Clary on 4/16/03, and Brandon Carpet Cleaning on

11/15/03.   Petitioners hired Robin Berg to clean their office and

living space.   No invoices or canceled checks were submitted to

prove payment of contract labor expenses.

4.   Business Expenses

      Petitioners claimed deductions for business expenses of

$9,545 incurred by Mrs. Bruns in distributing and selling Shaklee

products; respondent allowed $1,331 and disallowed $8,214.

      Petitioners submitted photocopies of receipts totaling

$7,619.17 to substantiate their claimed business expenses of

$9,545.   Petitioners submitted receipts for furniture, a portable

CD player with speakers, supplies, refreshments, and decorations

used by Mrs. Bruns in her role as a Shaklee salesperson.   The

furniture receipts were for display cases, storage and file

cabinets, a table, a rubber floor cover, and a chair.   There was

a receipt for a portable CD player with speakers Mrs. Bruns used

for training herself and others about Shaklee products when at

home and when traveling.   The supplies receipts were for pens,

paper, tape, printing costs, and various other items.

Petitioners also submitted receipts for refreshments, such as
                                - 8 -

coffee and candy that Mrs. Bruns offered to customers, and

receipts for seasonal decorations Mrs. Bruns put up in the space

she devoted to meeting with customers and displaying Shaklee

products.

      Although Mrs. Bruns often delivers Shaklee products to

customers and meets with Shaklee distributors and leaders at

restaurants, she does have customers, distributors, and leaders

stop by her home.    She maintains and displays a small inventory

of Shaklee products in her home, and she receives and stores

Shaklee products ordered by customers.   Further, Mrs. Bruns keeps

a desk and file cabinets which store Shaklee distribution and

sales information.   In another cabinet she stores Shaklee

training tapes, CDs, and sales aids.    Adjacent to that cabinet is

a table used for customer appointments and business planning with

distributors and leaders.

5.   Rent or Lease--Vehicle, Machinery, and Equipment

      Petitioners claimed and deducted vehicle leasing expenses of

$5,968; respondent allowed $3,647 and disallowed $2,321.     As a

result of ABS’ high volume of sales in 2003, ABS qualified for

and participated in a car bonus program where ABS selected a car

from Shaklee’s lease program.

      Petitioners submitted monthly statements issued by Shaklee

to ABS from December 2002 through November 2003.   On each

statement ABS earned a monthly $400 car bonus credit and incurred
                                - 9 -

a monthly lease charge of $702.21 and a monthly insurance charge

of $88.20.   ABS paid these charges in advance (i.e., in December

2002, ABS made lease payments for January 2003).

     ABS’ participation in the Shaklee bonus program resulted in

a monthly car lease and insurance cost of $790.41 to ABS at a

yearly cost of $9,484.92.   This amount was subtracted from the

direct deposit to ABS from Shaklee each month after the $400 car

bonus was added as earnings.    If ABS had not participated in

Shaklee’s car leasing program, ABS would have received $400 per

month in cash.

     Petitioners drove two other vehicles in addition to the ABS

car and reported having occasionally driven the ABS car for

unrelated business matters.    The ABS car was driven a total of

23,550 miles in 2003 and the total number of business miles

petitioners claimed the car was driven in 2003 was 18,755.    Mrs.

Bruns calculated 79 percent business use for the car.

     Petitioners submitted a 2003 mileage log, a 2003 daily

planner, and a list of abbreviations used in the mileage log and

the daily planner.   The mileage log lists the destination to

which Mrs. Bruns drove, the person Mrs. Bruns met with, the miles

driven to arrive at the location, and an abbreviation of the

business purpose for the meeting.    The business purposes stated

included leaving information (such as literature or CDs),

conducting a demonstration of products, delivering products,
                               - 10 -

orienting new members, and conducting an overview of business

with distributors and sales leaders.    The mileage log reported

18,242 miles traveled for 2003 but failed to list the business

purpose for 1,266 of the reported miles traveled.

6.   Travel Expenses

      Petitioners claimed deductions for travel expenses of

$4,253; respondent allowed $2,526 and disallowed $1,727.

Petitioners’ Quicken printout reported travel expenses of

$2,770.16.    To substantiate the travel expenses, petitioners

provided photocopies of receipts from hotel stays and a receipt

from a travel agency.    Because ABS has no territorial

limitations, many of its customers are in States other than South

Dakota.    Petitioners wrote on the top of each photocopied receipt

the purpose for the trip.    The total of the photocopied receipts

is $2,464.60.    However, some of the receipts were missing a date,

and one receipt was in Mr. Bruns’ name.

      Respondent disallowed expense deductions for a trip for

petitioners to see Kim and Mike Bruns, relatives and distributors

for ABS.    Respondent disallowed expense deductions for a trip to

see Mrs. Bruns’ mother, Joetta Swanhorst, a “bonus earner” for

ABS who lives in a retirement community in Aberdeen, South

Dakota.    Petitioners seek to deduct the cost of a three-night

hotel stay in Aberdeen, South Dakota.    Respondent disallowed

expense deductions for a trip to meet with Lori Kimball, a “bonus
                              - 11 -

earner” for ABS who lives in Minnesota.    Petitioners stayed in a

hotel near her to spend time with her while they were in

Minneapolis and provided a photocopy of a hotel receipt for

$168.36 for two nights.   Respondent disallowed expenses incurred

in petitioners’ overnight stay at the Radisson Encore Hotel on

December 26, 2003. It was an “award bonus weekend” where

petitioners stayed with six other persons, including petitioners’

daughter, and shared with them the possible business

opportunities in distributing Shaklee products.   ABS paid for

petitioners’ and their daughter’s rooms.   Petitioners provided

photocopies of their receipts for two rooms at the rate of $80.66

per night for staying overnight on December 26, 2003.

     Petitioners claimed a deduction of $144.15 for luggage used

to carry Shaklee samples and supplies and submitted as

substantiation a receipt that was missing the date of purchase

and had no description of the item.

     Petitioners claimed a deduction of $201.40 for a handbag and

a coin purse used to carry sales cards, name tags, and business

cards.   Petitioners provided photocopies of two receipts for

$71.02 and $130.38; neither receipt contained a description of

the items purchased.
                              - 12 -

     7.   Meals and Entertainment Expenses

     Petitioners claimed a deduction of $2,5825 for meals and

entertainment expenses in 2003; respondent allowed $1,192 and

disallowed $1,390.   At trial Mrs. Bruns conceded that petitioners

were entitled to a deduction of only $2,195 because she had

realized her husband was not a partner of ABS and his meals were

not deductible.

     To substantiate the meals and entertainment expense

deductions, petitioners submitted photocopies of receipts from

restaurants and grocery stores and a list of abbreviations used

by Mrs. Bruns to reference the purpose of the meal.     At the top

of most of the receipts, Mrs. Bruns wrote a specific business

purpose for incurring the expense.     The business purposes

included trips into Sioux Falls for Shaklee sales-related

errands, nutrition talks, catalog presentations, leaving

literature, business meetings with other Shaklee groups or

leaders, product delivery or exchanges, bookkeeping, Shaklee

products opportunity meetings (to attract new distributors),

member orientations, appreciation of members, and delivering

voice CDs about Shaklee products and about becoming a Shaklee

distributor.




     5
        The $2,582 deduction is 50 percent of claimed meals and
entertainment expenses of $5,164.
                              - 13 -

      The receipts petitioners submitted total $3,429.58.

However, many of the receipts did not show proof of payment,

lacked the date, or did not have a specific business purpose

listed for the expense.

      Some of the receipts from restaurants were for meals costing

less than $10.   Mrs. Bruns admitted one of the receipts for a

meal costing $9.60 was only for her meal although she did have

the meal with a customer.

8.   Other Expenses

      Petitioners claimed deductions for other expenses of

$10,588.   Respondent disallowed an expense of $2,000 that

petitioners incurred for “image”.6     Mrs. Bruns explained that the

expense for product promotion reflected the cost of various

products that she took from the inventory of ABS after it

purchased them from Shaklee and that Mrs. Bruns personally tried,

let others try, or gave away at gatherings.     Mrs. Bruns

personally tried new products to see whether she believed in the

product and to figure out a way to promote it.     Mrs. Bruns

admitted some of the products were used for her personal care.

      In substantiating the claimed product promotion expense,

petitioners submitted two invoices listing the product, the

quantity, and the price of the item used for product promotion.



      6
        We take “image” to mean product promotion and shall
refer to it as such.
                              - 14 -

The invoices showed that petitioners had used $6,822.24 in

products.   However, Mrs. Bruns asked the Court to disregard

$1,124.76 worth of products listed on the invoice because they

had been used for personal care. Petitioners claimed a deduction

for product promotion after taking certain numbers from the two

invoices and rounding the number to $2,000.    In picking which

items were used for personal care and which were used as demo

products, Mrs. Bruns made an educated guess.

Schedule E Expenses

     On Schedule E, Supplemental Income and Loss, petitioners

reported $18,000 of alleged rents received from ABS and related

expenses of $3,471.   The notice of deficiency disregarded the

alleged rental agreement, decreased rents received by $18,000,

and disallowed expenses claimed of $3,471.    The notice of

deficiency increased petitioners’ other income by $18,000 to

reflect the disregarded rental agreement.    In disregarding the

alleged rental of petitioners’ home to ABS, the income of the

partnership was increased by $18,000.   Since Mrs. Bruns was

entitled to 100 percent of the partnership’s income and expenses,

her income from the partnership was increased by $18,000 in 2003.

     ABS allegedly leased premises owned by petitioners for

$1,500 a month.   Petitioners and ABS had a month-to-month oral

agreement in 2003, and ABS allegedly had leased space from

petitioners for 13 or 14 years.   ABS wrote monthly rent checks to
                               - 15 -

Mr. Bruns.    To substantiate this expense, petitioners submitted

photocopies of checks written to Leland Bruns on or around the

15th of every month for the year 2003.

     On the Schedule E for 2003, petitioners claimed expenses of

$3,471 arising from the leasing arrangement.    The expenses were

as follows:   Insurance $358, taxes $1,092, utilities $1,150, and

depreciation $871.    The insurance, taxes, and utilities expenses

were calculated by multiplying the annual amount for the house by

40 percent, the approximate percentage of the lease space ABS

occupied in the house.

     Petitioners established the monthly rent charged to ABS by

visiting spaces in the community that were smaller than the space

ABS rented from petitioners.    The rents of the smaller spaces

were approximately $9 to $13 per square foot.    Petitioners

measured the area ABS leased to be approximately 1,400 square

feet and charged a little over $1 per square foot.

     In the space ABS allegedly rented there is a meeting space

and a working area.    In the meeting area there is a TV for

presentations, and it is connected to cable.    There is no door or

lock which separates the area used by ABS from the other part of

the house.    ABS allegedly uses the space for Mrs. Bruns to meet

with clients, hold meetings, and sell products.    However, Mr.

Bruns and Mrs. Bruns occasionally watch entertainment shows,
                               - 16 -

sports, and news on the television in the meeting area.   Mr.

Bruns has access to the meeting area.

Schedule A Deductions

     On Schedule A, Itemized Deductions, petitioners claimed

itemized deductions totaling $9,793 for taxes paid, gifts to

charity, tax preparation fees, and safe deposit expenses.

Petitioners claimed a deduction of $7,353 for alleged gifts to

charity.    The notice of deficiency disallowed $945 of the claimed

gifts to charity.   After a concession by petitioners of $51.02,

$893.98 of claimed gifts to charity remains in dispute.

     The standard deduction for petitioners in 2003 was $9,500.

The itemized deductions allowed in the notice of deficiency do

not exceed the standard deduction to which petitioners are

entitled.   Accordingly, the notice of deficiency allowed the

standard deduction.

     To substantiate the disallowed gifts to charity, petitioners

submitted a letter from their church, Abiding Savior Free

Lutheran Church, stating that they had donated a baking rack in

November of 2003 and an invoice from Furniture Discounters

stating they had paid $423.98 for a new baking rack to be

delivered to their church.

     Petitioners also claimed cash gifts of $470 made in 2003.

Petitioners allegedly made these donations in amounts of $20 or

$30 at miscellaneous events that occurred throughout the year to
                                  - 17 -

various organizations that asked Mr. or Mrs. Bruns for a

donation.    Petitioners did not provide any substantiation for the

additional $470 cash donations claimed.


                                  OPINION

I.    Burden of Proof

       In pertinent part, Rule 142(a)(1) provides, as a general

rule:    “The burden of proof shall be upon the petitioner”.

However, section 7491(a) places the burden of proof on the

Commissioner with regard to certain factual issues.       Petitioners

have alleged section 7491(a) applies, and respondent bears the

burden of proof.    However, the burden of proof is inconsequential

to the outcome of this case.

II.    Deficiency

       The Commissioner’s determinations are generally presumed

correct, and the taxpayer bears the burden of proving the

determinations erroneous.       Rule 142(a).   The taxpayer bears the

burden of proving that he is entitled to the deduction claimed,

and this includes the burden of substantiation.        Id.; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).      A taxpayer must substantiate amounts

claimed as deductions by maintaining the records necessary to

establish he or she is entitled to the deductions.       Sec. 6001.

       Section 162(a) provides a deduction for certain business-

related expenses.       In order to qualify for the deduction under
                                - 18 -

section 162(a), “an item must (1) be ‘paid or incurred during the

taxable year,’ (2) be for ‘carrying on any trade or business,’

(3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an

‘ordinary’ expense.”   Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971); see also Commissioner v.

Tellier, 383 U.S. 687, 689 (1966) (the term “necessary” imposes

“only the minimal requirement that the expense be ‘appropriate

and helpful’ for ‘the development of the [taxpayer’s] business”

(quoting Welch v. Helvering, 290 U.S. 111, 113 (1933))); Deputy

v. du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”,

the expense must relate to a transaction “of common or frequent

occurrence in the type of the business involved”).    Whether an

expense is ordinary is determined by time, place, and

circumstance.   Welch v. Helvering, supra at 113-114.   Respondent

has not challenged the existence of ABS’ Shaklee distributorship

as a business and Mrs. Bruns’ related activities in distributing

and selling Shaklee products.

     If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the expense, we may approximate the amount of the allowable

deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making.     Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930).     However, for the Cohan rule

to apply, there must be sufficient evidence in the record to
                                - 19 -

provide a basis for the estimate.     Vanicek v. Commissioner, 85

T.C. 731, 743 (1985).    Certain expenses may not be estimated

because of the strict substantiation requirements of section

274(d).   See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).

     A.   Schedule C Expenses

          1.   Advertising Expenses

     In general, advertising expenses to promote a taxpayer’s

trade or business are deductible pursuant to section 162(a).

Brallier v. Commissioner, T.C. Memo. 1986-42; sec. 1.162-1(a),

Income Tax Regs.    Petitioners claimed advertising expenses of

purchasing gifts for selected customers, printing a newsletter,

and the purchase of a camera.

               a.   Gift Expenses

     The cost of gifts may be an ordinary and necessary business

expense if the gifts are connected with the taxpayer’s

opportunity to generate business income.    Brown v. Commissioner,

T.C. Memo. 1984-120 (finding similarly gifts not connected with

taxpayer’s opportunity to generate business income where

taxpayer, physician employed by hospital, gave out Parker pens as

promotional gifts because physician did not depend upon referrals

for business); cf. Eder v. Commissioner, a Memorandum Opinion of

this Court dated Feb. 10, 1950 (finding gifts were not connected

with taxpayer’s opportunity to generate business income where
                              - 20 -

taxpayer gave cosmetic sets to office workers employed by someone

else and to telephone operators employed by someone else and paid

monthly by taxpayer to put through calls and deliver messages).

Mrs. Bruns has the burden of proving to what extent the gift

items contributed to her income.    See Sutter v. Commissioner, 21

T.C. 170, 173-174 (1953).

     Business gift deductions pursuant to section 162 are

restricted to $25 per donee per taxable year.   Sec. 274(b)(1).

     Further, section 274(d) requires adequate substantiation.     A

taxpayer claiming a deduction for a business gift is required to

substantiate the gift with adequate records or sufficient

evidence corroborating his own testimony as to (1) the cost of

the gift; (2) the date and description of the gift; (3) the

business purpose of the gift; and (4) the business relationship

of the person receiving the gift.   Sec. 1.274-5T(b)(5), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).   Respondent

allowed petitioners to deduct $25 per donee for gifts to 20

individuals.

     Unlike the gifts in the situations in Eder and Brown, the

gifts given were connected with opportunities for Mrs. Bruns to

generate business.   Gifts were given only to customers who were

good referral sources, loved the products, and were consistent

customers.   The referrals and introductions Mrs. Bruns received

from the gift recipients were to individuals who were not Shaklee
                                - 21 -

customers.    Because of the dependence Mrs. Bruns placed on

personal connections and interactions in distributing Shaklee

products, these introductions were an important part of building

the Shaklee customer base.    Accordingly, the gifts given were an

ordinary and necessary advertising expense of Mrs. Bruns in

selling Shaklee products.

     However, petitioners have failed to adequately substantiate

every gift expense.    Petitioners provided photocopies of receipts

for items purchased for the purpose of making gifts, but many of

the receipts were illegible as to the amount spent, the date of

the purchase, or the item purchased.     On the receipts which did

contain such information, petitioners consistently failed to note

the person to whom the gift was given, and many of the gifts

exceeded the $25 restriction imposed by section 274(b).

Petitioners have adequately substantiated advertising business

gift expenses to 26 individuals and are entitled to a deduction

of $650.   This exceeds the amount allowed by respondent by $150

as we have allowed a deduction for gifts of $25 to 6 recipients

in addition to the 20 recipients previously allowed by

respondent.

               b.   Newsletter and Camera Expenses

     Petitioners have not provided the content of the newsletters

or information as to how the printing of the newsletters is an
                                - 22 -

ordinary and necessary expense.    Accordingly, we cannot allow a

deduction for these printing expenses.

     Mrs. Bruns received income (as allocated by ABS) in 2003

from the sales of Shaklee distributors and leaders under ABS.

Mrs. Bruns stated she was constantly looking for new distributors

and coaching distributors on becoming leaders.    The photos taken

by Mrs. Bruns of Shaklee sales gatherings and distributed among

distributors and leaders in her group were a part of this

coaching.   The camera purchased by Mrs. Bruns was used

exclusively for this business purpose.    However, the useful life

of the camera is greater than 1 year.     Accordingly, she must

capitalize the cost.    See Best Lock Corp. v. Commissioner, 31

T.C. 1217, 1234-1235 (1959) (cost of catalogs with useful life of

more than 1 year must be capitalized); Ala. Coca-Cola Bottling

Co. v. Commissioner, T.C. Memo. 1969-123 (cost of signs, clocks,

and scoreboards with useful lives of more than 1 year must be

capitalized).    Petitioners are entitled to a $62.15 deduction for

the substantiated costs of printing photos and an allowable

camera depreciation deduction.    These are in addition to the

amount respondent allowed.

         2.     Car and Truck Expenses

     Petitioners claimed a deduction for car and truck expenses

incurred in 2003 for gasoline, car washes, repairs, and

maintenance on the vehicle leased and used for business purposes.
                               - 23 -

Petitioners claimed $2,238; respondent allowed $798 and

disallowed $1,440.

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

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.      Under that provision, an

employee or a self-employed individual may deduct the cost of

operating an automobile to the extent that it is used in a trade

or business.   However, under section 262 no portion of the cost

of operating an automobile that is attributable to personal use

is deductible.

     A passenger vehicle is listed property under section

280F(d)(4).    Section 274(d) disallows any deduction with respect

to listed property unless the taxpayer adequately substantiates:

(1) The amount of the expense, (2) the time and place of the

travel or the use of the property, (3) the business purpose of

the expense, and (4) the business relationship of the persons

using the property.

     Mrs. Bruns provided a mileage log that listed the date of

travel, the length of the travel, and the business purpose of the

travel in a majority of the entries.      After totaling the miles

recorded for 2003, Mrs. Bruns calculated that she used the car 79

percent of the time for business purposes.7     Upon recalculation



     7
        Mrs. Bruns arrived at 79 percent by dividing business
miles of 18,755 by total miles of 23,550.
                                - 24 -

of the business percentage use, we conclude the business

percentage use is 72 percent.8

     Petitioners submitted gasoline receipts listing the amount

of gasoline purchased, method of payment, and date.      The dates on

the receipts are consistent with the reported travel in the

mileage log; i.e., there are increased gas purchases when the

mileage log reports more miles traveled.      The gasoline receipts

total $1,132.49.   Petitioners submitted carwash receipts of

$115.20 listing the service provided, the amount, and the date

rendered.   The car washes are spaced throughout 2003 and are

reasonable in amount and frequency.      Petitioners submitted

receipts of payment totaling $102.84 for repairs and maintenance

on the passenger vehicle.   The receipts, which are for oil

changes, specify Mrs. Bruns’ car and are spaced throughout 2003

as the car mileage increased.    We conclude petitioners have met

their burden of substantiating these actual expenses of operating

a vehicle for business purposes and are entitled to a deduction

of $972.389 in addition to the amount respondent allowed.




     8
        Some of the entries in petitioners’ mileage log did not
contain a purpose. The total of the entries containing the miles
traveled, the date, and the purpose of the trip is 16,976 miles.
     9
        The total of gas expenses of $1,132.49 plus carwash
expenses of $115.20 plus repairs and maintenance expenses of
$102.84 times business use of 72 percent equals $972.38.
                                    - 25 -

           3.    Contract Labor Expenses

     In general, payments made or incurred by a trade or business

for personal services rendered are ordinary and necessary

business expenses and may be deducted under section 162.       Sec.

1.162-7(a), Income Tax Regs.        Petitioners failed to provide any

proof of payment and did not provide sufficient substantiation to

permit a reasonable estimate of contract labor expenses.

Accordingly, respondent’s complete disallowance of a deduction is

sustained.

           4.     Office Expenses

     The cost of materials and supplies consumed and used in

operations during a taxable year is generally considered an

ordinary and necessary expense of conducting a business or for-

profit activity.       Sec. 162; sec. 1.162-3, Income Tax Regs.

Petitioners submitted photocopies of receipts for business

furniture which total $5,106.83 and photocopies of receipts for

business supplies, refreshments, and decorations which total

$2,512.34.

     Petitioners introduced into the record photographs showing

the use of the furniture whose costs are claimed as a business

expense.    The furniture stored business information and Shaklee

products kept as inventory or orders and displayed Shaklee

products.       Although Mrs. Bruns delivered Shaklee products to

customers, customers would also stop by her home to pick up
                               - 26 -

products.   This required her to devote an area to storing a small

inventory of products for sale and those ordered by customers and

to displaying Shaklee products for sales.    Because leaders and

distributors would also stop by her home, Mrs. Bruns had to

provide a meeting place and store Shaklee informational tapes,

CDs, and sales aids.   An area for Mrs. Bruns to coach

distributors and leaders was frequently used and helpful to

increasing revenue.    Further, sales aids and training materials

to refer to was helpful to Mrs. Bruns in selling Shaklee products

and coaching others on how to successfully sell Shaklee products.

Accordingly, the business furniture was an ordinary and necessary

business expense of Mrs. Bruns in selling Shaklee products.

     Petitioners also claimed an office expense deduction for the

purchase of a portable CD player with speakers.    Because much of

the training Mrs. Bruns received as a Shaklee distributor was

done through CDs that she could listen to on a portable CD player

while at home or while traveling, the CD player was necessary to

sell Shaklee products.   However, the receipt petitioners

submitted included the purchase of two radios unrelated to the

business; we disallow a deduction for those radios.

     Mrs. Bruns used the supplies in her business of selling

Shaklee products.   The total amount spent on business supplies,

decorations, and refreshments is not excessive in consideration

of her business.    The cost of pens, paper, and other office
                               - 27 -

supplies to keep track of products, customer orders, and sales

was an ordinary and necessary business expense she incurred

selling Shaklee products.    Further, offering coffee and candy to

customers was helpful to Mrs. Bruns in promoting the sale of

Shaklee products when customers visited her.    Putting up seasonal

decorations in the area of her home where Shaklee customers

visited was also helpful to Mrs. Bruns in selling Shaklee

products.

     Petitioners’ business expense receipts for purchases of

furniture, supplies, refreshments, and decorations adequately

substantiated those purchases.    Each receipt was dated and

provided the amount spent, a description of the item purchased,

and the reason for the purchase.    However, because the furniture

and the portable CD player with speakers have an expected useful

life exceeding 1 year, petitioners may not deduct the full

amounts paid as ordinary and necessary business expenses.      The

costs of the business furniture and the portable CD player with

speakers are capital expenses, and petitioners must properly

depreciate the property.    They are entitled to an allowable

depreciation deduction.    See sec. 263(a)(1); sec. 1.263(a)-2(a),

Income Tax Regs.   Petitioners are entitled to an ordinary and

necessary business expense deduction of $2,512.3410 for business



     10
        This is the total of the substantiated business
supplies, decorations, and refreshment purchases in 2003.
                                 - 28 -

supplies, decorations, and refreshments purchased in 2003.      The

business supplies deduction and the depreciation deductions for

the furniture and the CD player are allowed in addition to the

amounts respondent already allowed.

          5.   Rent or Lease--Vehicle, Machinery, and Equipment

     Petitioners claimed a deduction of $5,968 for leasing

expenses associated with the business vehicle leased by ABS and

used by Mrs. Bruns in 2003.      Respondent allowed a deduction of

$3,647, and $2,321 remains at issue.      Car leasing expenses are

subject to the section 274(d) strict substantiation requirements

(explained supra) because a car is listed property.      Sec.

280F(d)(4).

     We found that Mrs. Bruns used the leased passenger car 72

percent of the time for business purposes in 2003.      The direct

deposit reports issued to ABS from Shaklee show a monthly car

charge of $790.41.   Petitioners have substantiated ABS’ car

leasing expense of $6,829.14.11     Accordingly, petitioners are

entitled to a deduction for the full amount claimed on their 2003

tax return.

          6.   Travel Expenses

     A deduction is allowed for ordinary and necessary traveling

expenses incurred while away from home in the pursuit of a trade



     11
        This number results from multiplying $790.41 x 12 months
x 72 percent of business use.
                                   - 29 -

or business.     Sec. 162(a)(2).    If a taxpayer travels to a

destination at which he engages in both business and personal

activities, the traveling expenses to and from the destination

are deductible only if the trip is related primarily to the

taxpayer’s trade or business.       Sec. 1.162-2(b)(1), Income Tax

Regs.     If the trip is primarily personal, the traveling expenses

to and from the destination are not deductible; however, expenses

at the location properly allocable to the taxpayer’s trade or

business are deductible.     Id.

        Whether a trip is related primarily to the taxpayer’s trade

or business depends on the facts and circumstances in each case.

Sec. 1.162-2(b)(2), Income Tax Regs.        An important factor is the

amount of time during the trip spent on personal activity

compared to the amount of time spent on activities directly

relating to the taxpayer’s trade or business.        Id.   If a member

of the taxpayer’s family accompanies him on a business trip,

expenses attributable to the family member are not deductible

unless it can be adequately shown that the presence of the family

member on the trip has a bona fide business purpose.        Sec. 1.162-

2(c), Income Tax Regs.

        Of the $4,253 petitioners claimed as travel expenses,

respondent allowed $2,526 and disallowed $1,727.       Respondent

disallowed deductions for expenses of trips to see relatives, to

visit a friend in Minnesota, and to spend a weekend with
                               - 30 -

petitioners’ daughter and with others.   Respondent also

disallowed deductions for costs of luggage, a handbag, and a coin

purse.

     Petitioners submitted photocopies of receipts for travel

expenses incurred in 2003.   The disallowed deductions are for

trips having a mixed business and pleasure motivation.

Petitioners saw friends and relatives who were customers and

distributors of ABS and who earned bonuses for ABS in 2003.

Updating these earners about the new Shaklee products and

providing coaching on business leadership was business related.

Visiting with friends and relatives about matters not related to

ABS was for pleasure.

     Where a trip has mixed motivations of business and pleasure,

the costs of traveling to and from the location are deductible

only if the primary purpose of the trip is business.   Sec. 1.162-

2(b)(1), Income Tax Regs.    Petitioners have failed to prove how

much time was spent on each trip for business and for pleasure.

Without this information we cannot conclude that these trips were

primarily for business and must disallow the costs of traveling

to and from these locations.   Petitioners would be entitled to a

deduction for expenses incurred at the location properly

allocable to business activities.   However, petitioners have

failed to provide sufficient information to allow any of the
                                 - 31 -

disallowed travel expenses.      Petitioners have not shown which

expenses are properly allocable to business-related activities.

     Petitioners also claimed travel expense deductions for

amounts incurred to purchase business luggage.      Petitioners

failed to provide receipts adequately substantiating these

expenses.     Accordingly, petitioners are not entitled to a

deduction for travel expenses above that allowed by respondent.

         7.     Meals and Entertainment Expenses

     Section 162 permits the deduction of food and beverage

expenses incurred by a taxpayer if they are ordinary, necessary,

and reasonable expenses incurred by the taxpayer in his business.

No deduction is allowed with respect to personal, living, or

family expenses.     Sec. 262.   However, section 162(a) permits the

deduction of amounts expended for meals (not lavish or

extravagant under the circumstances) when away from home in the

pursuit of a trade or business.      In the context of section

162(a)(2), a taxpayer’s home generally refers to the area of a

taxpayer’s principal place of employment, whether or not in the

vicinity of the taxpayer’s personal residence.      Daly v.

Commissioner, 72 T.C. 190, 195 (1979), affd. 662 F.2d 253 (4th

Cir. 1981); Kroll v. Commissioner, 49 T.C. 557, 561-562 (1968).

“[I]n the pursuit of a trade or business” has been read to

mean:   “The exigencies of business rather than the personal

conveniences and necessities of the traveler must be the
                               - 32 -

motivating factors.”   Commissioner v. Flowers, 326 U.S. 465, 474

(1946).

     Section 274(a) further restricts the deduction of business

food and beverage expenses.   Such expenditures must be directly

related to the conduct of the taxpayer’s trade or business, or

associated with the active conduct of the taxpayer’s trade or

business, to be deductible.    Id.

     An expenditure is considered associated with the active

conduct of the taxpayer’s trade or business if the taxpayer

establishes that she had a clear business purpose in making the

expenditure, such as to obtain new business or to encourage the

continuation of an existing business relationship.   Sec. 1.274-

2(d)(2), Income Tax Regs.

     In order to establish a substantial and bona fide business

discussion, the taxpayer must show that he actively engaged in a

business meeting, negotiation discussion, or other bona fide

business transaction, other than entertainment, for the purpose

of obtaining income or other specific trade or business benefit.

Sec. 1.274-2(d)(3)(i)(A), Income Tax Regs.   Additionally, the

taxpayer must establish that this business meeting, negotiation,

discussion, or transaction was substantial in relation to the

entertainment.   Id.   Entertainment which occurs on the same day

as a substantial and bona fide business discussion will be
                               - 33 -

considered to directly precede or follow the discussion.      Sec.

1.274-2(d)(3)(ii), Income Tax Regs.

     Food and beverage expense deductions are further limited by

section 274(k) and (n).   No deduction is permitted for food and

beverage expenses unless the expense is not lavish or extravagant

under the circumstances and the taxpayer is present at the

furnishing of such food or beverages.      Sec. 274(k).   Further, the

amount of the deduction that would otherwise be allowed for food

and beverage expenses is generally reduced by 50 percent.      Sec.

274(n)(1).

     Finally, in order to deduct food and beverage expenses, a

taxpayer must meet the strict substantiation requirements of

section 274(d).   To substantiate these expenditures the taxpayer

must prove:   (a) The amount; (b) the time and date; (c) the

place; (d) the business purpose; and (e) the business

relationship.   Sec. 1.274-5T(b)(3), Temporary Income Tax Regs.,

50 Fed. Reg. 46015 (Nov. 6, 1985).      The majority of the

photocopied receipts and accompanying information petitioners

submitted either did not have a sufficient business purpose, were

for a personal expense, or otherwise failed to meet the strict

substantiation requirements.

     Petitioners submitted numerous grocery store receipts as

food and beverage expenses with a notation that they were for

guests.   Petitioners failed to specify the time and date of the
                              - 34 -

entertainment of the guests, the place where they entertained the

guests, the business purpose of buying the groceries for the

guests, and the business relationship of the guests.    Because

petitioners have failed to meet the strict substantiation

requirements of section 274(d), we cannot allow a deduction for

these expenses.

     Petitioners submitted receipts for personal meals of both

Mr. and Mrs. Bruns.   Mr. Bruns was not an employee or partner of

ABS or a participant in Mrs. Bruns’ activities in distributing

Shaklee products.   Mrs. Bruns conceded at trial that petitioners

were not entitled to a deduction for these expenses.

     Many of the receipts for food and beverage expenses were for

an amount under $10 and for a single serving of food.    Mrs. Bruns

admitted a particular receipt for a single serving of food in the

amount of $9.60 was only for her meal, but she said she ate with

a customer.   Expenses for meals are personal and as such

nondeductible unless a business purpose can be shown for

incurring the expenses, as in the case of expenses incurred away

from home in the pursuit of business and not lavish or

extravagant under the circumstances.   Secs. 262(a), 162(a)(2);

Drill v. Commissioner, 8 T.C. 902, 903 (1947); sec. 1.262-

1(b)(5), Income Tax Regs.

     We conclude petitioners’ home, for purposes of section

162(a)(2), was in the Sioux Falls area of South Dakota.
                                - 35 -

Petitioners claimed multiple deductions under $10 in amount for

meal expenses Mrs. Bruns incurred when she was not away from

home.    These are personal expenses and are not deductible.     See

Drill v. Commissioner, supra.     The meal expenses Mrs. Bruns

incurred while she was away from home were not lavish or

extravagant under the circumstances, were incurred in the pursuit

of business, and are deductible.     At the top of each receipt

submitted to substantiate meal expenses incurred while away from

home was a notation explaining Mrs. Bruns’ business purpose in

being away from home.     The majority of the notations referenced a

Shaklee convention, and we are persuaded that the exigencies of

business prompted Mrs. Bruns to travel away from home and incur

these expenses.

        After eliminating the aforementioned nondeductible food and

beverage expenses petitioners claimed, expenses totaling

$1,409.83 remain.     These expenses meet the strict substantiation

requirements of section 274(d) and are for meals where Mrs. Bruns

met with a customer to conduct some form of business for ABS.

        A majority of these receipts are for amounts in the range of

$15 to $30.     Treating customers, distributors, and leaders to a

meal is a strategy Mrs. Bruns employed to increase the sale of

Shaklee products.     Mrs. Bruns used the meals as an opportunity to

deliver products to customers, spend time with customers to

encourage them to buy more Shaklee products, and discuss
                               - 36 -

potentially starting their own distributorships.     She used the

meals with distributors and leaders as opportunities to review

business strategy in their Shaklee distributorships.     These

business meals occurred consistently throughout 2003 and were

helpful in promoting the sale of Shaklee products by distributors

and leaders Mrs. Bruns supervised.      Accordingly, we conclude the

costs of meals for specific customers, distributors, and leaders

were incurred by Mrs. Bruns to increase the sale of Shaklee

products by Mrs. Bruns, her distributors, and leaders and were

ordinary and necessary business expenses of Mrs. Bruns in selling

Shaklee products.

     Further, we conclude these meals were associated with the

active conduct of Mrs. Bruns’ business of distributing Shaklee

products and the meals directly preceded or followed a

substantial and bona fide business discussion.     The meals

purchased were associated with the active conduct of Mrs. Bruns

in distributing and selling Shaklee products because there was a

clear business purpose in purchasing the meals for customers,

distributors, and leaders.   Mrs. Bruns had an existing business

relationship with these individuals, and meals were used to

facilitate sales of Shaklee products to customers and to

encourage and increase the distribution of Shaklee products by

distributors and leaders.    Further, at each meal, substantial and

bona fide business discussions occurred.     At the top of each
                                - 37 -

receipt, petitioners listed what sort of business discussion and

transactions occurred at the meal.       Accordingly, petitioners are

entitled to a deduction of $704.9212 for the meals and

entertainment expenses incurred in 2003.      This is in addition to

the $1,192 deduction respondent allowed.

          8.   Other Expenses

     The products used by Mrs. Bruns and claimed as a product

promotion expense of petitioners were not specified.      Rather Mrs.

Bruns admitted personal use of products and guessed at the amount

of alleged non-personal-use products.      Without more specificity

as to which products Mrs. Bruns used for product promotion, we

cannot conclude that any portion of the $2,000 product promotion

expense she claimed as a deduction is allowable as an ordinary

and necessary business expense.

     B.   Schedule E Expenses

     Petitioners assert that ABS rented basement space in

petitioners’ residence during 2003.      ABS subtracted $18,000 in

rental expenses from its gross income on its Form 1065.      The

alleged rental was month to month, and there was no written

rental agreement.   There is lack of proof of a bona fide rental.

The purported rental was not at arm’s length, and we disregard it



     12
        This is 50 percent of the total expenses of $1,409.83
which met the requirements of secs. 162 and 274(a) and (d). A
50-percent reduction of the allowed deduction is required by sec.
274(n).
                                - 38 -

for lack of economic substance.     Accordingly, we disallow

deductions petitioners claimed on Schedule E of their return for

insurance, taxes, utilities, and depreciation attributed to the

rental.

     C.    Schedule A Deductions:   Charitable Contributions

     In general, a taxpayer is entitled to deduct charitable

contributions made during the taxable year to or for the use of

certain types of organizations.     Sec. 170(a)(1), (c).   A taxpayer

is required to substantiate charitable contributions; records

must be maintained.     Sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.     Petitioners claim to have made charitable contributions of

$893.98 in 2003:     Approximately $470 in cash contributions of $20

to $30 increments to undisclosed charitable organizations and

$423.98 by delivery of a new baking rack to their church.

     A contribution of cash in an amount less than $250 made in a

tax year beginning before August 17, 2006, may be substantiated

with a canceled check, a receipt, or other reliable evidence

showing the name of the donee, the date of the contribution, and

the amount of the contribution.     Sec. 1.170A-13(a)(1), Income Tax

Regs.     Petitioners have provided no substantiation of the cash

contributions, nor have they adequately identified the recipients

of these contributions.     Accordingly, petitioners are not

entitled to deduct these claimed cash charitable contributions.
                                  - 39 -

       Contributions of cash or property in excess of $250 require

the donor to obtain contemporaneous written acknowledgment of the

donation from the donee.    Sec. 170(f)(8).    At a minimum, the

contemporaneous written acknowledgment must contain a description

of any property contributed, a statement as to whether any goods

or services were provided in consideration, and a description and

good-faith estimate of the value of any goods or services

referred to.    Sec. 170(f)(8)(B).    Petitioners claim to have

contributed a baking rack to their church.      The receipt they

provided establishes they paid $423.98 for a new baking rack to

be delivered to their church.      The invoice establishes the fair

market value of the baking rack as $423.98.      Petitioners have

provided a letter of acknowledgment from their church which meets

the statutory requirements of a contemporaneous written

acknowledgment.    Accordingly, petitioners are entitled to a

$423.98 charitable contribution deduction.

III.    Section 6662(a) Penalty

       Section 7491(c) provides that the Commissioner bears the

burden of production with respect to the liability of any

individual for additions to tax and penalties.      “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”.      Swain v.

Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.
                                - 40 -

Commissioner, 116 T.C. 438, 446 (2001).     The Commissioner,

however, does not have the obligation to introduce evidence

regarding reasonable cause or substantial authority.      Higbee v.

Commissioner, supra at 446-447.

       Respondent determined that petitioners are liable for the

section 6662(a) penalty for 2003.     Pursuant to section 6662(a)

and (b)(1) and (2), a taxpayer may be liable for a penalty of 20

percent on the portion of an underpayment of tax due to

negligence or disregard of rules or regulations or a substantial

understatement of income tax.    An “understatement” is the

difference between the amount of tax required to be shown on the

return and the amount of tax actually shown on the return.      Sec.

6662(d)(2)(A).    A “substantial understatement” exists if the

understatement exceeds the greater of (1) 10 percent of the tax

required to be shown on the return for a taxable year or (2)

$5,000.    See sec. 6662(d)(1)(A).   Respondent met his burden of

production as there was a substantial understatement of income

tax.

       The accuracy-related penalty is not imposed with respect to

any portion of the underpayment as to which the taxpayer acted

with reasonable cause and in good faith.     Sec. 6664(c)(1).   The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

circumstances.    Sec. 1.6664-4(b)(1), Income Tax Regs.
                              - 41 -

     Petitioners deducted as business expenses personal items

such as travel with relatives and personal use of Shaklee

products.   At trial petitioners conceded some of these personal

items and claimed inadvertent error.    However, petitioners should

have discovered these inadvertent errors well in advance of

trial.   Further, petitioners deducted rent when no written rental

agreement existed and the alleged rent was for an area where

petitioners watched TV and relaxed.    Petitioners have failed to

show they acted with reasonable care and in good faith.

Accordingly, we sustain the section 6662(a) penalty.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
