                       T.C. Memo. 1996-160



                     UNITED STATES TAX COURT



          HANS H. AND CHERYL E. HAMMANN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1384-88.                     Filed March 28, 1996.



     Joellyn R. Cattell, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CARLUZZO, Special Trial Judge:   This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181, and 182.1   For the



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         - 2 -

years 1980 and 1981, respondent determined deficiencies in Hans

Hammann's Federal income taxes and additions to tax as follows:
                                           Additions To Tax
      Year   Deficiency   Sec. 6653(a)     Sec. 6653(a)(1) Sec.6653(a)(2)

      1980    $2,987       $149.35                 ---            ---
                                                                    1
      1981       608          ---                $30.40


      1
         This amount is 50 percent of the interest due on any part of the
deficiency due to negligence.

      Respondent also determined deficiencies in petitioners'

1983, 1984, and 1985 Federal income taxes and additions to tax as

follows:
                                     Additions To Tax

      Year   Deficiency   Sec. 6653(a)(1)    Sec. 6653(a)(2)   Sec. 6661
                                                      1
      1983    $10,150         $508                              $2,538
                                                      1
      1984     11,739          587                               2,935
                                                      1
      1985     14,307          715                               3,577


      1
         This amount is 50 percent of the interest due on any part of the
deficiency due to negligence.

      Respondent further determined that the increased rate of

interest imposed by section 6621(c) was applicable for each year

in issue.

      The issues for decision are:            (1) Whether for the years

1983, 1984, and 1985 Hans Hammann conducted a charter boat

service with the requisite profit motive to allow for deductions

under section 162(a), and, if so, whether petitioners can

substantiate the deductions claimed in connection with the

charter boat service for the years 1984 and 1985; (2) whether the

charter boat service gave rise to investment tax credits for the
                              - 3 -

years 1983, 1984, and 1985, and if so, whether the unused

portions of those credits can be carried back to the years 1980

and 1981; (3) whether petitioners claimed excessive depreciation

deductions for the years 1983, 1984, and 1985 with respect to a

condominium owned by Cheryl Hammann and held for the production

of income during those years; (4) whether state income tax

refunds petitioners received in 1984 and 1985 must be included in

their income for those years; (5) whether for the year 1985

petitioners understated their income by omitting $262 of

interest; (6) whether for the year 1983 petitioners are entitled

to a deduction for travel and entertainment expenses in

connection with Hans Hammann's journalism activity; (7) whether

for the year 1983 petitioners overstated their charitable

contribution deduction by $1,959; (8) whether Hans Hammann is

liable for the addition to tax imposed by section 6653(a) for

1980 and section 6653(a)(1) and (2)2 for the year 1981; (9)

whether petitioners are liable for the addition to tax imposed by

section 6653(a)(1) and (2) for the years 1983, 1984, and 1985;

(10) whether petitioners are liable for the addition to tax

imposed by section 6661 for the years 1983, 1984, and 1985; (11)

whether Hans Hammann is liable for the additional interest

imposed by section 6621(c) for the years 1980 and 1981; and (12)


     2
      It appears that respondent's determination was made under
sec. 6653(a)(2), notwithstanding the reference to sec.
6653(a)(1)(B) in the notice of deficiency.
                               - 4 -

whether petitioners are liable for the additional interest

imposed by section 6621(c) for the years 1983, 1984, and 1985.

     Due no doubt in part to petitioners' departure and

continuous absence from the United States since before the

petition was filed in this case, the parties were unable to agree

upon a stipulation of facts.   See Rule 91.   Petitioners did not

appear at trial, nor did anyone appear on their behalf.    The

evidence consists of videotapes produced in connection with a

videotaped deposition conducted pursuant to Rule 81(j); the

transcript prepared from those tapes; certain exhibits proffered

during the deposition; the testimony of an expert witness called

by respondent; and exhibits introduced based upon admission

requests served upon petitioners by respondent.   At the time the

petition was filed, petitioners resided in Poecking, Germany

(then West Germany).

                         FINDINGS OF FACT

General Background

     Petitioners were married in 1982.   They filed joint Federal

income tax returns for the years 1983, 1984, and 1985.    Hans

Hammann filed returns for the years 1980 and 1981 as a single

individual.   Hans Hammann is a German citizen and Cheryl Hammann

is a Canadian citizen.   During the years 1983, 1984, and 1985,

Hans Hammann was employed as a union executive in the San

Francisco metropolitan area.   He reported earnings from that

employment for those years as follows:
                                     - 5 -

            Year                              Amount
            1983                             $39,174
            1984                              41,391
            1985                              44,402


     The earnings from Hans Hammann's employment with the union

accounted for the majority of petitioners' income during those

years.   Petitioners reported adjusted gross incomes, taxable

incomes, and Federal income tax liabilities on their 1983, 1984,

and 1985 Federal income tax returns as follows:
     Year   Adjusted Gross Income   Taxable Income     Tax Liability

     1983           $30,190           $19,094             -0-
     1984            22,192             9,242             -0-
     1985            13,120              (661)            -0-


     Cheryl Hammann was not employed during 1983, 1984, or 1985.

In 1982, she enrolled in an undergraduate premedical program at

an unspecified school presumably in the San Francisco area.

     According to Cheryl Hammann, her husband worked in excess of

100 hours per week as a union official and was under a great deal

of stress as a result of his position.           Apparently, the pressures

of his employment caused Hans Hammann severe health problems

that, together with financial setbacks, caused petitioners to

move from the United States to Germany in 1986.                 Prior to leaving

the United States, Cheryl Hammann gave birth to a son, Andreas

Hammann, on January 6, 1986.         Neither petitioner has returned to

the United States since.
                               - 6 -

Charter Boat Service

     In August of 1983, petitioners purchased a used 1976 Cheoy

Lee sailboat.   Petitioners named the sailboat the Malaguena.    The

Malaguena was a 41-foot ketch, with a fiberglass hull, powered by

an in-line four-cylinder Perkins diesel engine.3

     3
      In a promotional brochure published by its manufacturer,
the sailboat was described as follows:

          With this brochure we introduce a new model, a
     cruising yacht with a difference. As soon as you step
     aboard you will notice the wide and uncluttered side
     decks, teak of course, the modern-style tumble home on
     the cabin trunkings and the three large Plexiglass 2-
     way skylights which allow ample daylight illumination
     of the cabin interior. And you have a choice of three
     sail plans.

          Down below the open-plan layout is on a single level
     entirely clear of obstructions due to the engine being
     completely below the floor amidships. The spacious
     public area is dominated by our unique horse shoe
     shaped dining table which can be lowered when required
     for use as a berth.

          The cook has really large working surfaces and plenty
     of stowages, the angled sink configuration allowing very
     easy access to the dining table, with the main mast pillar
     in just the right place to hold on to in heavy weather.

          There are more drawers, lockers and general stowages
     than you think because they are arranged differently.
     Standard equipment includes:-
     Choice of Perkins 4-108 50 BHP or Volvo MD-17C 36 HP diesel
     engines. Pedestal and wheel steering system. Bow and stern
     pulpits and side stanchions in stainless steel. Spruce
     spars, roller/slab reefing gear, deck and spar hardware, 2
     sheet and 2 or 3 halliard winches depending on rig hardware,
     2 sheet and 2 or 3 halliard winches depending on rig chosen,
     all hardware in stainless steel or bronze chromium plated.
     Navigation and cabin lights. Electric cold water pressure
     system suppling shower, wash basin and sink, sump tank,
                                                   (continued...)
                               - 7 -

     Based upon Cheryl Hammann's deposition testimony and a

survey of the Malaguena, it appears that the sailboat was in poor

condition when acquired by petitioners.   Numerous "conditions"

were noted in the survey, with recommended corrections.   The

sails were in poor shape, and the cabin required refurbishing.

The survey indicated that the sailboat was to be used for

"pleasure" service and concluded that upon completion of the

recommended repairs, the sailboat would be suitable for use.    It

is unknown whether the recommended repairs were made, and if so,

over what period of time, or at what cost.

     Petitioners purchased the Malaguena from an unrelated third

party.   The exact cost has not been provided to the Court;

however, it appears to have been in the $80,000 range.    In August

of 1983, Hans Hammann borrowed $79,785 from First Interstate, the

proceeds of which were used for the purchase of the Malaguena.

The loan was characterized as a "simple interest personal loan",

secured by the sailboat.   The term of the loan was 15 years at an

annual interest rate of 13.30 percent, repayable in monthly

installments of $1,025.14.


     3
      (...continued)
     electric sump pump, hand bilge pump, marine toilet and more
     besides.

          At option you may have a diesel generator set, electric
     cooking stove with oven, refrigeration unit in the ice
     box, water heater, teak overlay on the cabin sides,
     compass and full set of electronics.
                                - 8 -

     At her deposition, Cheryl Hammann referred to, and

apparently produced, certain books and records relating to the

operation of the charter boat service.    According to Cheryl

Hammann, the records reflect the amount of income earned and

substantiate the expenses claimed for each year.    The records

supposedly were generated from a computerized data base that

tracked the various expenses deducted and identified the folder

where substantiating documentation could be found on an expense-

by-expense basis.   For reasons not fully understood by the Court,

Cheryl Hammann did not attempt to place these books and records

into the deposition record.    Apparently, she did not want to part

with the originals and did not bring any copies to the

deposition.   Whatever her reasons, the Court has not had the

benefit of whatever information might have been contained in

those records as no such records were available at trial.

          Petitioners also maintained a handwritten log.    In this

log petitioners recorded the dates and times that the engine was

started and stopped; the dates that the boat was chartered; and a

summary of the events which took place during the periods that

the Malaguena was chartered.    Most of the entries in the log

reflect usage not tied to a charter.    During 1983, the log

reflects that the Malaguena was chartered for a total of 13 days,

excluding those instances where due to some mechanical failure

petitioners refunded the fees to the chartering party.    For the
                                 - 9 -

years 1984 and 1985, the Malaguena was chartered a total of 17

days and 16 days, respectively.    With the exception of occasional

references to refunds, the log contains little financial

information regarding the operation of the charter boat service.

The log also includes entries unrelated to the sailboat, such as

Hans Hammann's impressions regarding his employment with the

union.

     Petitioners attempted to solicit business by circulating

flyers to incoming tourists at area airports.      They also relied

upon "word of mouth" referrals from previous customers.      Other

than these two methods, petitioners used no advertising.      They

did not offer the charter boat service through brokers or rental

agents.   Petitioners would generally charter the boat only on

weekends or other times that did not conflict with Hans Hammann's

employment with the union.   Petitioners were always present on

the Malaguena during the charters.       They would only allow a

member of a charter party to actually sail the boat if the person

passed a sailing proficiency test administered by Hans Hammann,

who was an experienced sailor.    When a member of a charter party

was sailing the sailboat, petitioners described themselves as

"the crew".   From time to time Cheryl Hammann would prepare meals

in advance and serve them to the charter party while sailing.

Usually wine was also available, but after an unpleasant

experience petitioners did not allow the consumption of other
                              - 10 -

alcoholic beverages aboard the sailboat.   Although it is not

entirely clear from the record, it appears that petitioners

initially charged $250 per day to charter the Malaguena.

     Charter boat services conducted in the manner in which

petitioners conducted their activity are known as bare boat

charters, and boats used for such purposes must be registered

with the U.S. Coast Guard.   Boats which have not been

manufactured in the United States are not eligible to be

registered for such usage.   The Malaguena was not manufactured in

the United States, nor was it registered with the U.S. Coast

Guard.

     Apparently, Hans Hammann enjoyed sailing a great deal.     He

was an experienced sailor and had been involved in various

activities involving sailing prior to the years in issue.    As

best as can be determined from the record, he spent a significant

amount of time on the Malaguena.   He wanted to take his son,

Andreas, for a sail the day after the child was born, but Cheryl

Hammann objected.   He had to wait until Andreas was 3 days old to

do so.

     For the years 1983, 1984, and 1985, petitioners reported on

Schedules C4 the following amounts of income and expenses

attributable to the operation of the Malaguena:


     4
      The Schedules C identified Hans Hammann as the proprietor
of the charter boat service.
                              - 11 -

                      1983              1984            1985

Gross income         $3,250            $5,680          $6,400

Expenses:
  Advertising           ---                77             ---
  Car & truck           ---               ---           1,680
  Depreciation       11,974            18,579          19,186
  Insurance             846             1,083           2,055
  Interest            3,860            10,843          11,745
  Repairs             3,432               462             ---
  Supplies              800             1,368             ---
  Taxes                 857               701           1,391
  Travel & ent.         176             1,104             ---
  Fuel                  175               134             ---
  Boat survey           176               ---             ---
  Berth rental        1,631             2,450           2,445
  Amortization           34               ---             ---
  Telephone             ---               253             252
  Computer sup.         ---                93             ---
  Maintenance           ---               ---          15,473
  Misc.                 ---               ---           1,325

Net Loss             20,711         31,467         49,152
     The net loss reported for each year was offset against

petitioners' other income for those years.      In addition,

petitioners claimed investment tax credits stemming from the

charter boat service for the years 1983 and 1984 in the amounts

of $2,430 and $711, respectively.   Hans Hammann claimed and

received refunds of Federal income taxes paid for the years 1980

and 1981 as a result of carrying back his share of the unused

investment tax credits from 1983 and 1984 to those years.

     For the year 1983, respondent determined that the charter

boat service constituted an activity not engaged in for profit

within the meaning of section 183 and allowed expenses only in
                               - 12 -

accordance with the provisions of that section.5   For the years

1984 and 1985, respondent disallowed all of the expenses claimed

for lack of substantiation.    Unlike 1983, respondent did not

allow any expenses pursuant to section 183 for the years 1984 and

1985.    Due to respondent's characterization of petitioners'

charter boat service, all investment tax credits claimed relating

to that activity were disallowed.

Cheryl Hammann's Condominium

     Prior to her marriage to Hans Hammann, Cheryl Hammann

purchased a condominium in Augsberg, Germany.    She paid 102,000

German deutschemarks for the property.    Petitioners converted the

purchase price to dollars using a conversion rate of 1.56

deutschemarks to the dollar, resulting in a cost basis of

$65,545.    In computing the depreciation deduction for each year,

they allocated 20 percent of the cost to land and 80 percent of

the cost to the building.    They used the 125-percent declining-

balance method to compute their annual depreciation deduction

based upon a 20-year useful life.    The condominium was rented to

unidentified tenants during the years 1983, 1984, and 1985.

After taking into account depreciation deductions claimed in

previous years the following depreciation deductions were claimed

on petitioners' returns with respect to this condominium:

     5
      Consistent with respondent's determination, the allowed
expenses were taken into account in respondent's adjustment to
petitioners' itemized deductions.
                               - 13 -

           Year            Amount of Depreciation Deducted
           1983                      $3,277
           1984                       3,072
           1985                       2,880


     Respondent determined that the appropriate conversion rate

from German deutschemarks to dollars at the time of the purchase

was 2.13 deutschemarks to the dollar.   She further determined

that the useful life of the condominium was 25 years rather than

20, and that current depreciation deductions should be computed

by using the straight-line method of depreciation.   As a result,

respondent reduced the depreciation deduction for each year as

follows:

           Year                      Amount
           1983                      $1,743
           1984                       1,538
           1985                       1,346

The average conversion rate from deutschemarks to dollars during

1981 was 2.25 deutschemarks to the dollar.6

State Income Tax Refunds

     Petitioners received refunds of state income taxes as

follows:

           Year                 Amount of Refund
           1984                      $1,538
           1985                       1,346

Petitioners did not include the refunds in income.   Respondent

increased petitioners' income for each year by the amount of the

     6
      Statistical Abstract of the United States 887 (104th ed.
1984). See Fed. R. Evid. 201.
                               - 14 -

state income tax refund received during the year, explaining that

a "refund of any part of your state income tax that you deducted

in prior years, and reduced your Federal income tax in those

years, is includable in income in the year you receive the

income."    On their 1983 and 1984 Federal income tax returns,

petitioners claimed itemized deductions for state income taxes in

the amounts of $1,545 and $1,367, respectively.

Journalism Activity

     On their 1983 return, petitioners claimed a deduction in the

amount of $2,381 for travel and entertainment expenses incurred

with respect to a journalism activity conducted by Hans Hammann.

Respondent disallowed the deduction claimed upon the ground that

petitioners did not establish that the expenses were ordinary and

necessary or were expended for the business purpose designated.

No other evidence is included in the record with respect to this

activity.

Charitable Contribution Deduction

     Petitioners claimed $1,959 as a charitable contribution

deduction on a Schedule A filed with their 1983 Federal income

tax return.    Respondent disallowed the entire deduction for lack

of substantiation.    No other evidence is included in the record

with respect to this deduction.
                                  - 15 -

                                   OPINION

       The Commissioner's determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving that those determinations are erroneous.         Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).       Moreover,

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving that he or she is entitled to any

deduction claimed.       Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, supra at

115.       This includes the burden of substantiation.    Hradesky v.

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

821 (5th Cir. 1976).       In addition, section 6001 requires the

taxpayer to keep records sufficient to show whether or not the

person is liable for tax.

Charter Boat Service

       In general, section 162(a) allows a deduction for all

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business.         The term "trade

or business" is not precisely defined in the Internal Revenue

Code or the regulations promulgated thereunder.7         According to

the Supreme Court, in order for an activity to be considered a


       7
      Some sections do define the term for specific purposes.
For example, sec. 7701(a)(26) provides as follows: "The term
'trade or business' includes the performance of the functions of
a public office."
                              - 16 -

taxpayer's trade or business, the activity must be conducted

"with continuity and regularity" and "the taxpayer's primary

purpose for engaging in the activity must be for income or

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

In order for an activity to be considered a trade or business

within the meaning of section 162, a taxpayer must conduct the

activity with the requisite profit motive, or intent.    Absent an

intent to make a profit, the charter boat service could not be

considered a trade or business within the meaning of section 162.

See Commissioner v. Groetzinger, supra.

     Implicit in the manner in which petitioners reported the

income and expenses of the charter boat service is their

contention that the activity constituted a trade or business

within the meaning of section 162.     Petitioners maintain that

Hans Hammann was planning to terminate his regular employment in

order to concentrate his time on the charter boat service.     They

claim that the Malaguena was acquired specifically to be used in

a charter boat business.

     Respondent argues that the charter boat service does not

constitute a trade or business because Hans Hammann did not

engage in such activity with the requisite profit objective.

Consequently, according to respondent, petitioners cannot rely

upon section 162 to support the claimed deductions.    Because of

respondent's characterization of the charter boat service,
                                - 17 -

respondent also denied all investment tax credits claimed by

petitioners with respect to certain assets used in the activity.

     We begin with an examination of whether Hans Hammann

conducted the charter boat service with the intent to make a

profit.    The test for determining whether a taxpayer conducted an

activity for profit is whether he or she entered into, or

continued, the activity with the actual or honest objective of

making a profit.     Dreicer v. Commissioner, 78 T.C. 642, 644-645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs.    The taxpayer's expectation of

profit need not be reasonable, but the profit objective must be

bona fide, as judged by all facts and circumstances.     Dreicer v.

Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C. 411,

426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967).

     Whether Hans Hammann engaged in the charter boat service

with the requisite profit objective must be determined on a year-

by-year basis from the facts and circumstances of the case.

Golanty v. Commissioner, supra at 426; sec. 1.183-2(a) and (b),

Income Tax Regs.     More weight is given to objective facts than to

subjective statements of intent.    Sec. 1.183-2(a), Income Tax

Regs.     Petitioners bear the burden of proving that Hans Hammann

engaged in the charter boat service with the actual and honest
                              - 18 -

objective of realizing a profit.   Rule 142(a); Golanty v.

Commissioner, supra at 426.

     The following factors, which are nonexclusive, should be

considered in the determination of whether an activity is engaged

in for profit:   (1) The manner in which the taxpayer carried on

the activity; (2) the expertise of the taxpayer or his or her

advisors; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) the expectation that assets used in

the activity may appreciate in value; (5) the success of the

taxpayer in carrying on other similar or dissimilar activities;

(6) the taxpayer's history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which

are earned; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation.   Sec. 1.183-2(b),

Income Tax Regs.   No one factor is determinative in and of

itself, and a profit objective does not hinge on the number of

factors satisfied.   Sec. 1.183-2(b), Income Tax Regs.

     Based upon an examination of all the facts and

circumstances, and taking into account the above factors, we are

unable to conclude that Hans Hammann conducted the charter boat

service with a bona fide, honest and objective profit motive.

     We find that the charter boat service was operated not with

the requisite profit objective necessary to be considered a trade

or business, but rather as a means to subsidize a recreational
                              - 19 -

activity.   Hans Hammann obviously derived a great deal of

personal pleasure from sailing as evidenced by his desire to

involve his son in the activity shortly after the child's birth.

     It is also obvious, based upon the types of expenses

reported on the Schedules C, that sailing can be a financial

burden.   With the exceptions of a de minimis amount for

advertising in 1984, and marginal fuel costs, the expenses

incurred by petitioners in connection with the ownership and use

of the Malaguena would have been incurred regardless of the

operation of the charter boat service.   Most likely Hans Hammann

was aware of the fixed costs that would be involved in owning,

maintaining, and sailing a boat such as the Malaguena.     Given

petitioners' financial status at the time the sailboat was

acquired, he no doubt realized that he would have to offer the

charter boat services in an attempt to subsidize such costs.

Because of the demands of his employment with the union, Hans

Hammann could only devote limited periods of time to the charter

boat service.   Considering such time limitations against Hans

Hammann's practice not to offer the Malaguena for charter unless

he was present on the boat, it would appear to be impossible for

the charter boat service to be a profitable operation during the

relevant years.   We conclude that the Malaguena was acquired by

petitioners for recreational purposes, albeit with the intent to

offset some of the costs of ownership through the charter boat
                                - 20 -

service.    Such an intent is not a sufficient profit motive for

purposes of section 162.

     Accordingly, for the year 1983, respondent's allowance of

the expenses attributable to the operation of the charter boat

service only to the extent permitted by section 183 is sustained.

In addition, because petitioners have failed to substantiate any

such expenses deducted in 1984 and 1985, respondent's adjustments

disallowing the deductions for those years are likewise

sustained.    Sec. 6001.

     Because petitioners have failed to persuade us that the

charter boat service was conducted as a trade or business, it

follows that respondent's disallowances of the investment tax

credits for the years 1983 and 1984 must also be sustained, and

we so hold.    Secs. 38, 48.   It further follows that Hans Hammann

improperly claimed investment tax credit carrybacks to the years

1980 and 1981, and the deficiencies determined by respondent

against him for those years are sustained as well.

Cheryl Hammann's Condominium

     The dispute on this issue arises primarily from respondent's

determination that petitioners used an improper currency

conversion rate in computing the depreciable basis of the

property.     The conversion rate used by respondent in making her

adjustments is more favorable to petitioners than the average

conversion rate for the years involved.    In any event,
                               - 21 -

respondent's determination, having been made in the notice of

deficiency, is presumed correct, and petitioners have the burden

of proof to establish that such determination is erroneous.      Rule

142(a); Welch v. Helvering, 290 U.S. at 115.    This they have

failed to do.   Accordingly, respondent's adjustments to

petitioners' depreciation deductions for the years 1983, 1984,

and 1985 are sustained.

State Income Tax Refunds

     Respondent included in petitioners' gross income state

income tax refunds in the amounts of $1,538, and $1,346 for 1984,

and 1985, respectively.    Section 111(a) provides that a refund of

taxes for which a deduction was allowed in an earlier year must

be included in the year of receipt, except to the extent the

earlier deduction did not result in a tax benefit.    Tracy v.

Commissioner, T.C. Memo. 1985-40.    Because petitioners claimed

itemized deductions for the years 1983 and 1984 for state income

taxes paid, it would appear that the exception set forth in

section 111(a) is not applicable.   Consequently, respondent's

adjustments increasing petitioners' income by the amounts of

state income tax refunds received in the years 1984 and 1985 are

sustained.

Interest Income

     Respondent determined that petitioners understated their

income by omitting $262 of interest income received in 1985.
                               - 22 -

Except as otherwise provided, gross income includes all income

from whatever source derived, including interest income.      Sec.

61(a)(4); sec. 1.61-7, Income Tax Regs.    Petitioners have

presented no evidence to challenge respondent's determination on

this issue, and accordingly, we hold for respondent.

Hans Hammann's Journalism Activity

       As indicated above, deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving that he or

she is entitled to any deduction claimed.    Rule 142(a); INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice

Co. v. Helvering, 292 U.S. at 440; Welch v. Helvering, supra at

115.    This includes the burden of substantiation.   Hradesky v.

Commissioner, 65 T.C. at 90.    Deductions for travel and

entertainment are subject to the more stringent substantiation

requirements imposed by section 274(d).

       Petitioners have not presented any evidence to show that the

travel and entertainment expenses deducted in 1983 were ordinary

and necessary expenses incurred in carrying on a trade or

business.    In addition, petitioners have not carried their burden

of proof with respect to the substantiation requirements imposed

by section 274(d).    Accordingly, we sustain respondent's

determination on this point.

Charitable Contribution Deduction

       Section 170 provides for the allowance as a deduction of any

charitable contribution as defined under section 170(c) made
                                - 23 -

within a taxable year.    Sec. 170(a).   Section 1.170A-13(a)(1),

Income Tax Regs., provides that for contributions of cash a

taxpayer shall maintain for each contribution a canceled check or

receipt from the donee indicating the name of the donee, the date

of the contribution, and the amount of the contribution, or in

the absence of a check or receipt from the donee, reliable

written records.

     Petitioners have presented no evidence to substantiate the

charitable contribution deduction claimed for 1983.     Petitioners

have failed to satisfy their burden of proof.     Accordingly,

respondent's determination with respect to this issue is

sustained.

Additions to Tax

     Section 6653(a), for the year 1980, and section 6653(a)(1),

for the years 1981, 1983, 1984, and 1985, impose an addition to

tax of 5 percent of the underpayment if any part is due to

negligence or intentional disregard of rules or regulations.      For

the years 1981, 1983, 1984, and 1985, section 6653(a)(2) imposes

an additional addition to tax equal to 50 percent of the interest

payable under section 6601 with respect to the portion of the

underpayment attributable to such negligence or disregard of

rules or regulations.     Negligence is a lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances.     Neely v. Commissioner, 85 T.C.

934, 947-948 (1985).     Petitioners have the burden of proving
                              - 24 -

error in respondent's determination that these additions to tax

should be imposed against them.

     Petitioners have failed to demonstrate that they were not

negligent or that they had a reasonable basis for claiming any of

the deductions in dispute.   Petitioners have not satisfied their

burden of proof and accordingly, the additions to tax under

section 6653(a) and section 6653(a)(1) and (2) are sustained.

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

percent of an underpayment when there is a substantial

understatement of income tax for the taxable year.   Section

6661(b)(2)(A) defines the term "understatement" as being the

excess of (i) the amount of tax required to be shown on the

return for the taxable year over (ii) the amount shown on the

return.   Section 6661(b)(1)(A) provides that an understatement is

substantial if it exceeds the greater of (i) 10 percent of the

amount of tax required to be shown on the return or (ii) $5,000.

For this latter purpose, an understatement is reduced to the

extent it is either based on substantial authority or adequately

disclosed in the return or in a statement attached to the return.

Sec. 6661(b)(2)(B).

     Petitioners have not presented any evidence to refute

respondent's determination under section 6661.   Accordingly,

petitioners have not carried their burden of proof, and

respondent's determination with respect to the imposition of the

section 6661 penalty is sustained.
                               - 25 -

Section 6621(c)

     Respondent also determined that petitioners are liable under

section 6621(c) for increased interest on all or a portion of

their tax deficiencies for all years in issue.     Section 6621(c)

provides that increased interest is due if a "substantial

underpayment" is attributable to a "tax motivated transaction".

A "substantial underpayment" is an underpayment of more than

$1,000.   Sec. 6621(c)(1).   Deductions disallowed because an

activity was not engaged in for profit are deemed attributable to

a tax-motivated transaction.    Sec. 301.6621-2T, Q&A-4, Temporary

Proced. & Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984).      We

have determined that the charter boat service was not entered

into for profit.   Accordingly, we hold that Hans Hammann is

liable for the increased interest imposed by section 6621(c) with

respect to the entire amount of the deficiencies for the years

1980 and 1981.    We further hold that petitioners are liable for

the increased interest imposed by section 6621(c) with respect to

the portions of the deficiencies for the remaining years in issue

attributable to the deductions disallowed because the charter

boat service was not conducted for profit.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
