                        T.C. Memo. 1998-31



                      UNITED STATES TAX COURT



        RONALD D. CIARAVELLA, Petitioner v. COMMISSIONER
                 OF INTERNAL REVENUE, Respondent

        ICARUS, INCORPORATED, Petitioner v. COMMISSIONER
                 OF INTERNAL REVENUE, Respondent



     Docket Nos. 9650-96, 9651-96.           Filed January 26, 1998.



     Russell S. Koss, for petitioners.

     Willie Fortenberry, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   In these consolidated cases, respondent

determined the following deficiencies and penalty with respect to

petitioners' Federal income taxes:
                                       - 2 -


                             Ronald D. Ciaravella

                                               Accuracy-Related Penalty
     Year Ended           Deficiency                Sec. 6662(a)

         12/31/92           1
                             -0-                          -0-
         12/31/93          $39,512                       $7,902
     1
       Respondent's disallowance of deductions for trade or
business expenses claimed by Mr. Ciaravella in connection with
race car activities would not result in taxable income for 1992
but would eliminate the net operating loss carryover from 1992
that Mr. Ciaravella claimed on his 1993 income tax return.

                                 Icarus, Inc.
             Year Ended                              Deficiency

               8/31/91                                 $10,210
               8/31/92                                   5,546
               8/31/93                                  15,002


     All section references are to the Internal Revenue Code as

in effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

     After concessions,1 the issues for decision are as follows:

     (1) Whether and to what extent Icarus, Inc. (Icarus) is

entitled to deduct expenditures related to race car activities in

computing the taxable income shown on its consolidated returns

for fiscal years ended August 31, 1991, 1992, and 1993.




     1
       Respondent concedes that Icarus, Inc., is entitled to
deduct $11,644 of the $91,644 claimed as advertising expenses for
FYE Aug. 31, 1993. Respondent also concedes that Mr. Ciaravella
is entitled to IRA deductions of $2,000 for each of the years
1992 and 1993. Any adjustments to petitioners' deficiencies and
penalty by reason of the foregoing concessions would be made in
the Rule 155 computations.
                               - 3 -


     (2) Whether and to what extent, for the calendar years 1992

and 1993, gross receipts of Ronald D. Ciaravella (Mr. Ciaravella)

in the name of his sole proprietorship, Innovative Advertising

(Innovative), are includable in his gross income as constructive

dividends received from Icarus.

     (3) Whether Mr. Ciaravella is entitled to deductions for

expenditures claimed as business expenses on the Innovative

Schedules C for the years 1992 and 1993.

     (4) Whether Mr. Ciaravella is liable for the accuracy-

related penalty under section 6662(a) for 1993 due to negligence

or disregard of rules or regulations.

     We disallow part of the race car expenditures claimed as

deductions by Icarus, but hold that no amounts paid to Mr.

Ciaravella through Innovative are includable in Mr. Ciaravella's

income as constructive dividends.   We further hold that Mr.

Ciaravella is not entitled to deduct business expenses on the

Innovative Schedules C, thereby disallowing the net losses

claimed thereon.   Finally, we hold that Mr. Ciaravella is liable

for the accuracy-related penalty for 1993 in an amount equal to

20 percent of the underpayment to be determined under a Rule 155

computation.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

herein by this reference.
                               - 4 -


     Sarasota, Florida, was Mr. Ciaravella's residence and

Icarus' principal place of business at the respective times they

filed their petitions.

     Mr. Ciaravella is a calendar year taxpayer and the sole

shareholder of Icarus, a domestic corporation that filed

consolidated U.S. corporation income tax returns with its wholly

owned subsidiary, Dolphin Aviation, Inc. (Dolphin), on the basis

of a fiscal year ending August 31.

     Icarus functions as the holding company for Dolphin, which

is a fixed-base operator of a general aviation facility at the

Sarasota/Bradenton International Airport.   Dolphin leases 17

acres of land from the airport but owns all the improvements on

the land, including hangars, fuel farms, ramp areas, and office

space.   Dolphin rents office space to aviation-related entities,

such as aircraft brokers and an aircraft sales company, provides

helicopter storage space for the Manatee County Sheriff's

Department, and rents hangar space for occupancy by private and

company-owned aircraft.

     In its day-to-day operations, Dolphin provides transient

services, such as the sale of jet fuel, catering services, the

sale of airplane parts, and general maintenance and repair work

for aircraft flying into and out of the airport.   Dolphin also

sells and leases aircraft, including selling used Learjets at

prices ranging from $200,000 to close to $2,000,000. The Learjet

is the DC-3 of the jet age, and its resale values have increased
                               - 5 -


over time.   Dolphin purchases used Learjets, many of which are 20

and 30 years old, replaces the engines, rehabilitates, repairs,

and paints them, and then leases them to corporations and

individuals.   Between leases, Dolphin tries to sell the jets.

     Sarasota Jet Center, Inc. (Sarasota), and Nomad Distributors

Intl., Inc. (Nomad), are corporations that are also directly or

indirectly owned or controlled by Mr. Ciaravella.   They are

members of a controlled group of corporations, within the meaning

of section 1563(a), which includes Icarus and Dolphin, but are

not included on the Icarus consolidated return because they are

not members of the Icarus affiliated group within the meaning of

section 1504(a).   Sarasota and Nomad also sell aircraft and at

times buy aircraft from Dolphin and then sell them to third

parties.

     The following are the yearend cost balances of aircraft

owned by Dolphin2 and held for sale or lease:

      FYE 1991                  FYE 1992             FYE 1993
     $2,958,000                $2,668,000           $3,893,000




     2
       The Court requested the parties to provide posttrial
information as to the yearend inventory balances of aircraft
owned by Dolphin. Petitioner submitted inventory balances for
aircraft owned by Dolphin and other corporations that are
directly or indirectly owned by Mr. Ciaravella. Our findings
concerning the yearend inventory balances are based on the costs
of the aircraft that petitioner has proven belonged to Dolphin
during the years in issue.
                                    - 6 -


The following are the cost balances for aircraft owned by the

entire controlled group of corporations, including Dolphin,

Nomad, and Sarasota:

      FYE 1991                       FYE 1992                  FYE 1993
     $7,178,808                     $7,014,710                $8,352,710


     During the fiscal years beginning September 1, 1991, and

ending August 31, 1996, Dolphin sold the following aircraft at

prices that resulted in $5,304,000 of gross sales:

Purchase    Sale      Manufacture
  Date      Date         Date     Aircraft       Buyer               Price

03/31/92   06/22/92     1965     Lear 24     Florida Broadcast      $210,000
                                             Management, Inc.

05/23/88   06/25/92     1965     Lear 24     Sarasota Jet            230,000
                                             Center, Inc.

02/05/93   02/05/93     1979     Piper       Florida Broadcast       150,000
                                 Aerostar    Management, Inc.

05/16/88   10/01/93     1979     Nomad N24   Nomad Distributors      690,000
                                             Intl. Inc.

05/25/88   06/29/94     1978     Lear 35     Samaritan Air          1,330,000
                                             Ontario, Canada

Unknown    08/26/94     1980     Nomad N22   International Jet       300,000
                                             Center - Miami, FL

08/22/90   10/28/94     1980     Piper       Richard Taller           82,000
                                 Saratoga    Wheeling, FL

01/02/95   04/12/95     1980     Cessna      Robert Kilby - VA        37,000
                                 C172

01/02/95   06/23/95     1980     Piper       U.S. Aviation Group,     75,000
                                 Seneca      Inc. - Sarasota, FL

02/23/94   01/23/96     1966     Lear 24     Younkin & Boreing,      275,000
                                             Inc. - Dover, DE

08/27/93   08/14/96     1980     Lear 35     Valley Construction,   1,925,000
                                             Inc. - Las Vegas, NV
                                 - 7 -


Selling aircraft is a high-profit-margin part of Dolphin's

business.   For the fiscal years ending August 31, 1992 and 1993,

approximately 30 percent of Dolphin's gross receipts came from

aircraft sales and leases.

     Mr. Ciaravella is the chief executive officer and sales

manager of Dolphin, overseeing its general operations and

playing the primary role in the marketing of Dolphin's products

and services, including sales and leases of airplanes.

Mr. Ciaravella has been flying since 1969, when he was age 17 and

started working for the previous owners of Dolphin.    In time he

bought the business from them.    Unlike some aircraft salesmen,

Mr. Ciaravella can actually fly the aircraft he markets; he has

more than 9,000 hours of flying time, including about 1,000 hours

in Learjets.

     Dolphin used to be a distributor for Piper aircraft and

would sell propeller-driven aircraft made by Piper, Beechcraft,

and Cessna until the mid-1980's when those companies went out of

business.   Mr. Ciaravella began to purchase Learjets in an effort

to reinvigorate the aircraft sales and leasing portion of

Dolphin's business.   Used Learjets are at the low end of the

price scale for commercial grade jet aircraft.

     In 1988, Mr. Ciaravella went to three different schools to

learn how to drive high-performance, open-wheeled race cars.

Open-wheeled race cars have large tires, uncovered by fenders,

and they are much more difficult to drive than stock cars and
                                - 8 -


sports cars.   Unlike stock cars and sports cars, open-wheeled

cars cannot be driven on public roads.

     Since 1989, Mr. Ciaravella has owned an open-wheeled race

car, which he drives five or six times a year in races on a

national circuit sponsored by Merrill Lynch and Rolex.    No prize

money is awarded, only points to determine an overall winner at

the end of the racing season.   Mr. Ciaravella usually finishes in

the top 5 of a 30-car field.    Mr. Ciaravella thought that racing

cars would help him build a dashing, gallant image that would

allow him to meet and ingratiate himself with people interested

in buying and leasing high performance aircraft, such as

Learjets, that he would be marketing.    The market for used

aircraft is nationwide, and Mr. Ciaravella believes that racing

open-wheeled cars on a national circuit has given him and Dolphin

national exposure to potential customers.

     During the years at issue, Mr. Ciaravella's race car bore a

number of logos.   Most conspicuous was the Dolphin logo, which

appeared in large letters on the sides of the car, along with his

own name "Ron Ciaravella" in smaller letters.    At a typical race,

Mr. Ciaravella's name and the Dolphin name were announced when

the race car entered the track.   On the weekend of the race,

people would gather in the paddock areas, adjacent to the track,

to look over the cars and talk with the drivers.    These races

attract a rather upscale crowd, many of whom have an interest in

flying.   Mr. Ciaravella has met a number of celebrities and other
                                  - 9 -


prominent figures through his racing activities.          As a result of

a contact that Mr. Ciaravella made at one of his races, on

August 14, 1996, Dolphin sold a Learjet to a Las Vegas

construction company for $1,925,000.        Mr. Ciaravella claims that

his racing activities resulted in other contacts that have led to

the sale and lease of aircraft by Dolphin.          Dolphin reimbursed

Mr. Ciaravella for the bulk of the expenses connected with his

racing activities, treating them as advertising expenses.

     Mr. Ciaravella's race car also bore the logos of Champion,

Checkers, and Valvoline during the years in issue; in return, he

received free spark plugs from Champion and free oil from

Valvoline.      Dolphin has never sponsored or placed its logo on any

other race car.

     During fiscal periods ending August 31, 1991, August 31,

1992, and August 31, 1993, Dolphin used the following five

advertising accounts:3

     Account No.                  Trade Magazine/Publication/Other

         6051                             (a)   Trad-A-Plane
                                          (b)   Clubhouse
                                          (c)   Mcgraw
                                          (d)   Trader Publication
                                          (e)   Remuo

         6052                             (a) Trad-A-Plane
                                          (b) Thurot Tech Aviation
                                          (c) Bham News



     3
       It is not clear why five separate accounts are used, nor
is it clear why the name of some publications appear in more than
one account.
                             - 10 -


         6053                         (a) Race Car
                                      (b) GTE - Yellow Pages
                                      (c) Ac-U-Kwik-Kalatee

         6055                         (a)   Trad-A-Plane
                                      (b)   MAB/MBC
                                      (c)   Aviator's Hotline
                                      (d)   Maxwell

         6056                         (a)   Aviation Directory
                                      (b)   Select Directory
                                      (c)   Ac-U-Kwik-Kalatee
                                      (d)   Air Charter
                                      (e)   Aopa's USA

     The following table sets forth Dolphin's expenditures in

connection with each of the advertising accounts listed above:



  Account        FYE 1991      FYE 1992            FYE 1993

   6051          $15,439      $3,736.00           $3,315.53
   6052            3,324       1,298.83              113.36
   6053           67,877      47,456.63           83,642.95
   6055           12,689      17,641.26              266.58
   6056           15,292      18,277.34            4,305.99

    Total        114,621      88,410.06           91,644.41


     Respondent disallowed deductions for Dolphin's advertising

expenses in the 6053 account, in the following amounts:

(1) $56,250 for fiscal year ending August 31, 1991; (2) $43,321

for fiscal year ending August 31, 1992; and (3) $80,0004 for

fiscal year ending August 31, 1993.     All of respondent's

disallowances related to the race car expenditures.



     4
       Originally, respondent disallowed the entire $91,644, but
later conceded that $11,644, the portion of advertising expenses
not related to the race car, was deductible.
                                - 11 -


     Dolphin reimbursed Mr. Ciaravella for his race car

expenditures by making deposits into the checking account of his

sole proprietorship, Innovative.    For the years 1992 and 1993,

Mr. Ciaravella reported amounts received from Dolphin on the

Innovative Schedules C as gross receipts from advertising and

also deducted the same amounts as expenses relating to race car

activities on the Innovative Schedules C.    He also claimed

depreciation deductions on the race car and the trailer used to

haul the race car and deducted the costs of replacement parts and

maintenance of the car, as well as payments made to Tim Albright,

who was responsible for maintaining the race car and was the head

of the pit crew at the races.

     Dolphin also made payments to Innovative for expenses

arising from Dolphin's conventional advertising activities.

Trade publications and magazines, in which Dolphin placed

advertisements, would send their invoices to Dolphin and

correspond directly with Dolphin.    However, payments for the

advertising services were made from Innovative's checking account

and were deducted by Mr. Ciaravella on the Innovative Schedules C

for the years 1992 and 1993.

     Mr. Ciaravella reported gross receipts and expenses of

Innovative on Schedules C for the years 1992 and 1993 in the

following amounts:
                              - 12 -




                                Schedule C - Innovative
                               1992                  1993

Gross receipts               $59,041              $114,066

Expenses:

  Advertising1                 8,014                     3,118

  Commissions & fees             550                       -0-
                                                    2
  Depreciation                 5,775                 15,100

  Rental or lease              1,015                       321
   of vehicles, machinery,
   & equipment

  Repairs & maintenance       37,046                    86,002

  Taxes and licenses             129                       811

  Travel, meals &              3,674                     5,309
   entertainment

  Fuel                         4,619                    10,702

  Other expenses3              2,357                     2,609

   Total expenses             63,178               123,972

Profit (Loss)                 (4,137)                   (9,906)
     1
       These expenses refer to the payments made by Innovative to
trade publications in which Dolphin advertised.
     2
       The depreciation deduction was claimed on both the race car
and a trailer used to transport the car to race locations. The
trailer was purchased in 1993.
     3
       Boat fuel expenses relating to the fuel provided by Dolphin
to power boats were listed under this category. See infra p. 13.

Respondent disallowed all deductions claimed by Mr. Ciaravella on

the Innovative Schedules C on the ground that the expenses were
                              - 13 -


not incurred in a trade or business.   Respondent also removed the

gross receipts received by Mr. Ciaravella and reported by him on

the Innovative Schedules C and recharacterized and included them

as constructive dividends.

     Although most deposits into Innovative's checking account

were made by Dolphin, there were some deposits from

other sources.   In August 1992, R.C.I., of Naples, Florida, paid

$1,700 for race car parts purchased from Mr. Ciaravella.      In

November 1993, the Model Search of Florida paid $2,065.50 to

Mr. Ciaravella as compensation for the use of the race car as a

prop in a movie production.   In June and July 1993, Mark Pritch,

another race car driver, paid $35,000 for the rental of

Mr. Ciaravella's trailer and truck and other equipment.

     Dolphin also arranged to place its logo on power boats

engaged in racing events sponsored by charities.    The boating

events averaged 10 races a year, at locations all across the

country.   These races also attracted upscale crowds.   In exchange

for being allowed to display its logo, Dolphin provided jet fuel

to the boat owners when they were in the greater Sarasota area,

including St. Petersburg and Tampa.    Mr. Ciaravella deducted the

cost of the boat fuel provided by Dolphin on his Innovative

Schedules C for his 1992 and 1993 returns.

     Mr. Ciaravella's 1993 return was prepared by a Mr. Buchman,

who is an employee of I D S Tax and Business Services.    His 1992

return was not signed by a paid preparer.    Vivian Wright,
                               - 14 -


Dolphin's corporate treasurer, prepared the Icarus consolidated

returns for the years in issue.



                               OPINION

1. Icarus Deductions

     Section 162 generally allows a deduction for ordinary and

necessary business expenses.   Whether an expense is deductible

under section 162 is ultimately a question of fact.    Commissioner

v. Heininger, 320 U.S. 467, 475 (1943).   Generally, an expense is

ordinary under section 162, if it bears a reasonably proximate

relationship to the operation of the taxpayer's business.    Deputy

v. du Pont, 308 U.S. 488, 495-496 (1940); Gill v. Commissioner,

T.C. Memo. 1994-92, affd. without published opinion 76 F.3d 378

(6th Cir. 1996).   Generally, an expense is necessary if it is

helpful and appropriate in promoting and maintaining the

taxpayer's business.   Carbine v. Commissioner, 83 T.C. 356, 363

(1984), affd. 777 F.2d 662 (11th Cir. 1985); Gill v.

Commissioner, supra.

     Even if an expense is ordinary and necessary, it is

deductible under section 162 only to the extent it is reasonable

in amount.   United States v. Haskel Engg. & Supply Co., 380 F.2d

786, 788-789 (9th Cir. 1967); Gill v. Commissioner, supra;

Brallier v. Commissioner, T.C. Memo. 1986-42.   The element of

reasonableness is inherent in the phrase "ordinary and necessary"
                                - 15 -


in section 162.     Commissioner v. Lincoln Elec. Co., 176 F.2d 815,

817 (6th Cir. 1949).

     On its consolidated returns, Icarus deducted as advertising

expenses the Dolphin payments made through Innovative to

reimburse Mr. Ciaravella for his race car expenditures.    The

burden is upon Icarus to prove that Dolphin's race car

expenditures were ordinary and necessary to its business of

selling and leasing aircraft.    Rule 142(a); Amey & Monge, Inc. v.

Commissioner, 808 F.2d 758, 761 (11th Cir. 1987); Gill v.

Commissioner, supra; Brallier v. Commissioner, supra.

     We find that there is a proximate relationship between the

race car expenditures and the Dolphin business.    Mr. Ciaravella's

racing activities were well calculated to provide him national

exposure that he could take advantage of in his capacity as chief

executive and sales manager of Dolphin.     Mr. Ciaravella met a

number of celebrities and other prominent people at the races.

These are the types of people who may be interested in buying or

leasing the high performance aircraft held by Dolphin and other

members of the Icarus controlled group.    Accordingly, we conclude

that the expenses are ordinary.

     We also find that the racing activity provided benefits to

the Dolphin business.    Mr. Ciaravella's name and company were

announced at each race.    Spectators saw the Dolphin logo on the

sides of the car.    Even if, as respondent contends, the cars were

moving too fast during the actual races for the logo to be
                             - 16 -


noticed, the logo was seen at the start of the races as well as

in the paddock areas, where spectators gathered to get a closer

look at the cars and provided Mr. Ciaravella with the opportunity

to meet and greet potential customers.   The fact that Valvoline

and Champion compensated Mr. Ciaravella for displaying their

logos indicates that the advertising exposure provided by these

races did provide its sponsors with some economic benefit.   Most

importantly, the contacts made at the races during the years in

issue were helpful in selling and leasing aircraft, the record

indicating at least one highly profitable sale in a later year

that resulted from Mr. Ciaravella's racing activities.

Accordingly, we conclude that the race car expenses are

necessary, in the accepted sense of being helpful.

     The connection between racing cars and advertising a

business that leases and sells jet aircraft is a stronger

connection than the connections put forth by petitioners in Gill

v. Commissioner, supra; Boomershine v. Commissioner, T.C. Memo.

1987-384; and Brallier v. Commissioner, supra.   Each of the above

cases also deals with a corporation that paid the race car

expenses of its sole shareholder and claimed deductions for the

payments as advertising expenses.   In those cases, this Court

also found that the expenses were ordinary and necessary but only

allowed a portion of the race car expenses to be deducted.   The

petitioner in Gill raced a stock car to advertise his wholly

owned corporation's quilting and stencil business.   The
                              - 17 -


petitioner in Brallier raced a stock car to advertise his wholly

owned corporation's pizza restaurant franchise.    The petitioner

in Boomershine raced a car to advertise his wholly owned

corporation that erected metal buildings.   The connection between

the excitement and appeal of racing cars and owning and flying in

high performance jet aircraft is much stronger than the

connection between racing cars and selling stencils, pizza, or

metal buildings.

     Notwithstanding the foregoing, we still do not find that the

expenses are entirely reasonable in amount.   In determining the

extent to which advertising expenses are reasonable, we compare

the amount expended for the activity in question with the amount

of benefit reasonably expected to be derived.     Lang Chevrolet Co.

v. Commissioner, T.C. Memo. 1967-212; see also Sanitary Farms

Dairy, Inc. v. Commissioner, 25 T.C. 463 (1955); Rodgers Dairy

Co. v. Commissioner, 14 T.C. 66 (1950).

     We have found that Mr. Ciaravella's racing activities were

calculated to help sell and lease aircraft.   But the aircraft he

was trying to sell were not only owned by Dolphin, but also by

Sarasota and Nomad, corporations within the same controlled group

as Dolphin, but not included with Dolphin on the Icarus

consolidated return.   It is axiomatic that in order for an

expense to be deductible by a taxpayer, it must be incurred in

the taxpayer's own trade or business, not that of another.

Columbian Rope Co. v. Commissioner, 42 T.C. 800, 814-816 (1964);
                              - 18 -


Oxford Dev. Corp. v. Commissioner, T.C. Memo. 1964-182; see also

Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593-594

(1943); Deputy v. du Pont, 308 U.S. at 493-494.

     On the basis of the cost balances of aircraft on hand by

Dolphin as compared to the entire controlled group, we find that

the following are the percentages of the total cost of aircraft

of the entire group held for sale and lease which were owned by

Dolphin during the years in issue:

      FYE 1991                  FYE 1992              FYE 1993
       41.2%                     38.0%                 46.6%

     Because Mr. Ciaravella had interests in entities other than

Dolphin that owned aircraft, we are not convinced that the entire

amount spent by Dolphin on race car expenditures reasonably

compares with the benefit that it, as opposed to other members of

the Ciaravella controlled group, could reasonably expect to

derive.   When Mr. Ciaravella made contacts at the races, he was

trying to sell and lease aircraft held by Dolphin, Nomad, and

Sarasota, not Dolphin exclusively.     Consequently, Dolphin is not

entitled to deduct, on the Icarus consolidated return, the entire

amount of the race car expenses that it paid.

     Where a taxpayer establishes his entitlement to a deduction,

but does not establish the amount of that deduction, we are

permitted to estimate the amount allowable, Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Rolland v.

Commissioner, T.C. Memo. 1959-161, affd. 285 F.2d 760 (5th Cir.

1961); Gill v. Commissioner, T.C. Memo. 1994-92; Boomershine v.
                              - 19 -


Commissioner, supra, provided there is sufficient evidence in the

record to provide a rational basis for an estimate, Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).

     In Cohan v. Commissioner, supra at 540, the Court recognized

that the expenses of an impresario in entertaining actors and

crew members were legitimate and deductible.   The taxpayer,

however, did not produce any of the receipts substantiating such

expenses.   The Court directed the Board of Tax Appeals to

estimate such expenses "bearing heavily if it chooses upon the

taxpayer whose inexactitude is of his own making".

     Although Cohan is a case of substantiation, we, as well as

other courts, including the Court of Appeals for the Eleventh

Circuit, to which this case would be appealable, have extended

the Cohan principle to cases where all the expenditures have been

substantiated.   See Ellis Banking Corp. v. Commissioner, 688 F.2d

1376, 1383 (11th Cir. 1982), affg. in part and remanding in part

on this issue T.C. Memo. 1981-123; Gill v. Commissioner, supra;

Boomershine v. Commissioner, supra; Rolland v. Commissioner,

supra.   In these cases, the courts relied on Cohan to support the

propriety of estimating the portions of expenses that were

reasonably deductible.

     Since the advertising purpose of the race car expenditures

was to sell and lease aircraft, a rational estimate of the

amounts reasonably deductible on the Icarus consolidated return

for each fiscal year is the portion that bears the same ratio to
                                 - 20 -


all the race car expenditures as the ratio of the values of

aircraft owned by Dolphin to the values of aircraft owned by all

the members of the controlled group.      Applying Cohan, we allow

Icarus deductions for advertising expenses for fiscal years ended

August 31, 1991, 1992, and 1993, in amounts equal to the

percentages of the costs of aircraft owned by Dolphin multiplied

by the amount of total deductions claimed.     This amounts to the

following allowed deductions:


      FYE 1991                    FYE 1992             FYE 1993
      $23,175                     $16,462              $37,280

2. Includability of Dolphin's Payments in Mr. Ciaravella's Gross
   Income as Constructive Dividends

     Respondent argues that the gross receipts of Innovative

representing the race car expenses paid by Dolphin should be

removed from the Innovative Schedules C and recharacterized as

constructive dividends to Mr. Ciaravella.     In general, a dividend

is "any distribution of property made by a corporation to its

shareholders".    Sec. 316(a).   There is no requirement that a

dividend be formally declared or even intended by the

corporation.     Loftin & Woodard, Inc. v. United States, 577 F.2d

1206, 1214 (5th Cir. 1978).

     The determination of whether a payment by a closely held

corporation is a constructive dividend to its sole shareholder is

ultimately a question of fact.     Hardin v. United States, 461 F.2d

865 (5th Cir. 1972).    Generally, the determination requires an

inquiry into whether a corporation has conferred an economic
                              - 21 -


benefit on its shareholder, and whether the item primarily

benefits the shareholder's personal interests as opposed to the

business interests of the corporation.   Ireland v. United States,

621 F.2d 731, 735 (5th Cir. 1980); Chapman v. Commissioner, T.C.

Memo. 1997-147; Gill v. Commissioner, supra.

     We have held that substantial portions of the payments made

by Dolphin through Innovative to Mr. Ciaravella, which were

reported as gross receipts on the Innovative Schedules C, are

deductible as advertising expenses of Dolphin.   To the extent

that such expenses are deductible by Icarus on the consolidated

returns, they do not constitute constructive dividends to Mr.

Ciaravella, inasmuch as such amounts primarily benefit the

business interests of Dolphin.

     The remaining portions of the Innovative gross receipts

consist of: (1) The race car expenses paid by Dolphin that are

disallowed as deductions on the Icarus consolidated returns;

(2) the portion of payments made by Dolphin that were eventually

paid to trade publications and magazines in which Dolphin

advertised; and (3) payments by third parties for the sale of

race car parts and rental of the race car and race car equipment.

     We hold that these remaining portions of the gross

receipts likewise do not constitute constructive dividends to

Mr. Ciaravella.   The portion of the race car expenses that was

disallowed as a deduction to Icarus, even though it does not

represent amounts expended for the business interests of Dolphin,
                               - 22 -


represents amounts expended for the business interests of other

corporations that are members of the same controlled group as

Dolphin.   Because such amounts were not expended primarily for

the personal benefit of Mr. Ciaravella, they do not constitute

constructive dividends and are not includable in his income.

The portion of gross receipts that was paid to the trade

publications and magazines in which Dolphin advertised was

expended for the business interests of Dolphin, not for the

personal interests of Mr. Ciaravella.   The portion of gross

receipts that consisted of payments from unrelated third parties

cannot be dividends to Mr. Ciaravella because he had no ownership

interest in those entities.5

3. Business Expenses of Innovative

     The next issue concerns the deductions for business expenses

claimed by Mr. Ciaravella on his Innovative Schedules C for his

1992 and 1993 returns.   Under section 162, an ordinary and

necessary expense is deductible if it is "paid or incurred during

the taxable year in carrying on any trade or business".    Under

section 167, depreciation deductions are allowed for the wear and

     5
       Respondent argues only that the Schedule C gross receipts
should be recharacterized as dividends. Although respondent
mentions in passing that the gross receipts should be
recharacterized as dividends (or other income), respondent does
not provide any analysis or argument for treatment as other
income of the amounts of gross receipts constituting payments
from parties other than Dolphin. Accordingly, we do not reach
that question, which would, among other things, require us to
deal with the question of the proper treatment of expenses
incurred in earning such income. Cf. sec. 183(b).
                              - 23 -


tear “of property used in the trade or business".    The Supreme

Court has said that "to be engaged in a trade or business"

generally means that (1) there is an activity; (2) that is

carried on with continuity and regularity; and (3) the primary

purpose of such activity is income or profit.     Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987); Hughes v. Commissioner, T.C.

Memo. 1995-202.

     Mr. Ciaravella bears the burden of proving that Innovative

is a trade or business that supports his entitlement to deduct

business expenses.   Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933).   Applying the teaching of Groetzinger, Mr. Ciaravella has

the burden to show that he is engaged in the regular and

continuous activity of advertising through his sole

proprietorship, Innovative, with the primary motive of profit.

     Innovative functioned essentially as a conduit.    The record

in the present case lacks any reference to any actual activity

in which Innovative is engaged.   Innovative's life has been

limited to a checkbook existence, functioning as a financial

intermediary.   Although Mr. Ciaravella claims that Innovative was

created to handle the advertising for Dolphin so as to qualify

for trade discounts, there is no indication in the record that it

was doing so during the taxable years at issue.    Trade

publications in which Dolphin would advertise would send invoices

to, and deal directly with, Dolphin, not Innovative.    The only
                              - 24 -


role Innovative appeared to play was to function as a checking

account, receiving deposits from Dolphin and in turn issuing

checks to trade publishers for the advertising expenses of

Dolphin.6

     Innovative played the same role with respect to payments

made by Innovative for the race car expenses and boat fuel

expenses.   Innovative simply acted as a conduit through which

Dolphin would reimburse Mr. Ciaravella for expenses incurred in

connection with the racing activity.   And, although it was

Dolphin that provided fuel to the boats that displayed its logo,

the fuel expenses were deducted on Mr. Ciaravella's returns as an

expense incurred by Innovative.7    Accordingly, all deductions

claimed on Mr. Ciaravella's Schedules C in connection with

Innovative are disallowed.   Similarly, because Innovative is not

a trade or business, respondent's reversal of gross receipts

included in Mr. Ciaravella's income is sustained.   In short, our

treatment of Mr. Ciaravella's Innovative Schedules C, namely, the

reversal of gross receipts and disallowance of deductions, in



     6
       The passive role played by Innovative is further confirmed
by the fact that Icarus in its consolidated return with Dolphin
deducted the same expenses as Innovative for advertising and for
race car expenditures during the years in issue.
     7
       Unlike other expenses for which Mr. Ciaravella was
reimbursed by Dolphin, the boat fuel was provided by Dolphin
directly to the boat racers in exchange for having the Dolphin
logo displayed on the boats.
                              - 25 -


effect amounts to a disallowance of the Innovative Schedules C

net losses of $4,137 for 1992 and $9,906 for 1993.

     We regard Mr. Ciaravella's racing activity not as his trade

or business, carried on by him through a sole proprietorship, but

as an activity carried on by him on behalf of Dolphin, for which

Dolphin reimbursed him.   This is much the same as the case of a

corporate officer who voluntarily pays the expenses of an

activity conducted for the benefit of his corporate employer.

The gross receipts of Mr. Ciaravella, in the name of Innovative,

are akin to reimbursements from his corporate employer for race

car expenses that he paid out of his own pocket.   The net losses

claimed on the Schedules C that we have disallowed are akin to

payments made by Mr. Ciaravella for racing activities on behalf

of Dolphin for which Dolphin did not reimburse him.   Voluntary

payments by a corporate officer for activities conducted on

behalf of his corporate employer, for which he is not reimbursed,

are not deductible by the officer, in the absence of an agreement

or clear understanding as to a corporate policy that the employee

is expected to make such payments, without reimbursement, as part

of the conditions of his employment.   See, e.g., Westerman v.

Commissioner, 55 T.C. 478 (1970); Stone v. Commissioner, T.C.

Memo. 1996-507.   There is no evidence of any such agreement or

understanding in the case at hand.

4. Accuracy-Related Penalty
                               - 26 -


     Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable

to one or more of the items set forth in section 6662(b).

Respondent determined that the entire underpayment of

Mr. Ciaravella's tax was due to negligence or intentional

disregard of rules or regulations.      Sec. 6662(b)(1).   Under the

Treasury Regulations, “The term `negligence’ includes any failure

to make a reasonable attempt to comply with the provisions of the

internal revenue laws”.   Sec. 1.6662-3(b)(1), Income Tax Regs.

“Disregard” includes any careless, reckless, or intentional

disregard of rules or regulations.      Sec 6662(c); sec. 1.6662-

3(b)(2), Income Tax Regs.

     The accuracy-related penalty does not apply to any portion

of an underpayment as to which the taxpayer acted with reasonable

cause and good faith.   Sec. 6664(c)(1).     Such a determination is

made by taking into account all facts and circumstances,

including the taxpayer's experience, knowledge, and education, as

well as reliance on a tax adviser.      Sec. 1.6664-4(b)(1), Income

Tax Regs.    Petitioner bears the burden of proving that

respondent's imposition of a penalty under section 6662 is

erroneous.    ASAT, Inc. v. Commissioner, 108 T.C. 147 (1997).

     Petitioner argues that he relied on the advice of a tax

professional to prepare his tax returns for the years in issue.

Reliance on a tax professional is not an absolute defense but is
                              - 27 -


only a factor to be considered.   Ewing v. Commissioner, 91 T.C.

396, 423-424 (1988), affd. without published opinion 940 F.2d

1534 (9th Cir. 1991).   Reliance on a return preparer may

demonstrate reasonable cause and good faith if the evidence in

the record shows that the taxpayer actually relied on a competent

tax adviser and provided the adviser with all necessary and

relevant information.   Daugherty v. Commissioner, 78 T.C. 623,

641 (1982); Pessin v. Commissioner, 59 T.C. 473, 489 (1972);

Tebarco Mechanical Corp. v. Commissioner, T.C. Memo. 1997-311.

     Mr. Ciaravella claims that he relied on the advice of Mr.

Buchman, a return preparer, in setting up Innovative and claiming

deductions for the race car expenditures.   Mr. Buchman did not

testify at the trial, nor was there any other evidence of any

particular advice he may have given to Mr. Ciaravella.   Neither

did Mr. Ciaravella testify as to any particular advice he

received from Mr. Buchman.   Accordingly, we find insufficient

evidence that Mr. Ciaravella relied on the advice of a return

preparer, and we sustain respondent's imposition of the accuracy-

related penalty under section 6662(a).

          To reflect the foregoing and respondent's concessions,



                                   Decisions will be entered under

                               Rule 155.
