                        T.C. Memo. 1995-460



                      UNITED STATES TAX COURT



         KENT MAERKI AND KATHLEEN TURNER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15393-93.               Filed September 27, 1995.



     Kevin J. Mirch, for petitioners.

     David W. Sorensen, for respondent.



                        MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined a deficiency in

petitioners' 1990 Federal income tax in the amount of $11,280 and

an addition to tax in the amount of $564, pursuant to section

6651(a)(1).1

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
                                                   (continued...)
                               - 2 -

     The issues for decision are:   (1) Whether petitioners

underreported gross income in the amount of $4,398; (2) whether

petitioners are entitled to deduct $38,271 for expenses, which

they claimed on Schedule C, for a business known as the

Registry;2 (3) whether petitioners are entitled to deduct $8,951

for expenses, which they claimed on Schedule C, for a business

known as Express Network Technologies (ENT); and (4) whether

petitioners are liable for the addition to tax pursuant to

section 6651(a)(1).3

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.   At the time the petition was filed,

petitioners resided in Scottsdale, Arizona.   During the year in

issue, petitioners were married, and they filed a joint return

for that year.

     For convenience, we will combine our findings of fact and

opinion with respect to each of the issues presented.

Respondent's determination is presumed correct, and petitioners

     1
      (...continued)
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
      Respondent's notice of deficiency disallowed $43,820.
Respondent concedes that $5,549 in claimed education expenses was
erroneously disallowed twice.
     3
      Respondent also determined that petitioners had overstated
their income by the amount of $16,830 on their Schedule C for a
business known as Fiduciary Administrative Services Trust (FAST).
Petitioners do not contest this adjustment.
                                - 3 -

bear the burden of proving otherwise.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933).


Issue 1.   Underreported Gross Income


     Respondent determined that petitioners failed to report

income from the following sources:


       Arizona State   lottery winnings             $1,409
       Interest from   Valley Bank of Nevada         1,119
       Dividend from   the Franklin Fund             1,651
       Dividend from   Dreyfus Worldwide MM Fund       190
       Dividend from   American Capital Growth          19
       Dividend from   Value Line Fund                  10

       Increase to income                            4,398


Petitioners do not seriously dispute the fact that they received

and failed to report these amounts.     However, in an attempt to

offset this unreported income, petitioners contend that they

erroneously reported a $5,200 loan as income on their Schedule C

for the Registry.   The Registry was a business operated by Mr.

Maerki (hereinafter referred to as petitioner) whose purpose was

to raise capital and do consulting work for other businesses.

     Petitioner was the only witness who testified at trial.      He

testified that $5,200 had been borrowed and produced a printout

of his computerized records showing a $5,200 deposit to the

Registry account with the description "Equipment Loan Other

Income".   Petitioners produced no other corroborating evidence of

the transaction such as loan documents.     In answer to his
                                - 4 -

attorney's questions concerning whether he overreported income by

this amount, petitioner stated:    "If this was put on the tax

return, which I understand it was, we overstated it, yes."    Based

on the record before us, petitioners have not met their burden of

proof to show that they erroneously reported $5,200 in loan

proceeds as gross receipts.


Issue 2.    Schedule C Expenses for the Registry


     On the Schedule C for the Registry, petitioners deducted

expenses of over $126,000.    Respondent has disallowed $38,271 of

those Schedule C deductions.

     Respondent disallowed $8,521, which was deducted as employee

benefits on petitioners' Schedule C for the Registry.    Petitioner

agreed at trial that he had no substantiation for $2,168 of this

amount.4    Of the remaining amount, petitioners claim they are

entitled to deduct $4,256 for medical expenses, $1,497 for child

care, and $600 for travel reimbursement.

     Medical expenses paid as part of an employee benefit plan

can be deducted as a business expense.    Sec. 1.162-10(a), Income

Tax Regs.    Of the medical expenses claimed as a business

     4
      On brief, petitioners argue that they actually understated
employee benefits expenses because they failed to take
depreciation on a vehicle they purchased for $28,000. This
depreciation was allegedly not claimed on their return and,
therefore, was not part of the disallowed deduction.
Petitioners' evidence falls far short of showing that the vehicle
was used in their business so as to entitle them to a
depreciation deduction that was not claimed previously.
                                - 5 -

deduction by petitioners, all but $22 was spent for medical

services for petitioners.    Petitioners have not proven that an

employee plan existed for the Registry.    Except for petitioner's

conclusory testimony that a plan existed, there is no evidence of

such a plan or its terms of coverage.    Medical expenses are

normally considered to be personal,5 and an employer's payment of

medical expenses for employees would normally constitute taxable

income.   Section 105 provides for the exclusion of employer-paid

medical expenses if certain conditions are met.    However, even if

some type of plan did exist, petitioners have not established (or

even argued) that it would meet the conditions of section 105.

We sustain respondent's disallowance of the claimed medical

expenses.

     Petitioner testified that the $1,497 of child care expenses

deducted as employee benefits was paid for the care of

petitioners' child.   Petitioners provided checks for child care

totaling only $818.   Such expenses would normally be considered

personal, and an employer's payment of its employees' child care

expenses would normally be includable in the employees' taxable

income.   Section 129 provides an exception for qualified

dependent care programs.    Petitioners have neither proven nor

argued that their situation meets the requirements of section


     5
      Petitioners elected the standard deduction on their return
and, therefore, make no claim for an itemized deduction under
sec. 213.
                                - 6 -

129.    We sustain respondent's disallowance of the deduction for

child care expenses.

       Petitioner testified that $600 of the amount claimed as

employee benefits was a reimbursement to petitioner Kathleen

Turner for travel expenses she incurred as a member of the board

of directors for Crystal Communications, a client of the

Registry.    Petitioners produced a $600 check payable to Ms.

Turner.    There was no explanation on the check, and petitioners

produced no other documentation showing the nature of the alleged

travel.    Petitioners did not explain why this was classified as

an employee benefit rather than a travel expense, nor have they

shown that the $600 expense was not included in the $1,558 of

travel expenses allowed as a deduction on the Schedule C for the

Registry.    Petitioners have failed to prove entitlement to the

$600 deduction.

       On Schedule C for the Registry, petitioners claimed a

deduction for "other expenses" in the amount of $29,750, which

respondent also disallowed.    These "other expenses" included

expenses for bank charges of $1,881, seminars/education of

$5,549, dues of $1,187, business gifts of $53, casual labor of

$350, and "other" in the amount of $20,730.

       With respect to the portion of bank charges related to

credit cards, petitioner testified that he used credit cards in

his name for both business and personal affairs.    With respect to

bank charges related to an escrow account, petitioner testified
                                - 7 -

that they related to an escrow account that was opened for a

client.    Petitioners produced no records showing which portion of

the bank charges for credit cards related to business or personal

matters, nor did they produce any records to show the nature of

the escrow account and related charges.      Petitioners have not

shown that they are entitled to a business deduction for these

bank charges.

     The education expenses deducted were paid to Lamson College,

apparently for petitioner Kathleen Turner.      Petitioner testified

that he required his wife to take courses that would help her

perform services for the business.      Except for petitioner's

testimony at trial, no evidence was produced to show that the

expenditures incurred for education were ordinary and necessary

business expenses of the Registry.      Petitioners failed to produce

any documents to show which specific courses were taken or the

nature of the courses, and petitioner Kathleen Turner did not

testify.   Petitioners have failed to carry their burden of

showing that respondent's determination is incorrect.

     With respect to the disallowance of the deduction for

"dues", petitioners provided copies of checks that appear to be

for various magazines, periodicals, and other publications.

Petitioner testified that some of these checks were for magazines

needed for business purposes.   Petitioner testified that a

portion of the amount deducted for "dues" also included

advertisements in at least four magazines and/or periodicals.
                               - 8 -

Petitioners have not shown that these alleged advertising

expenses were not included in amounts already allowed for

advertising.   The Schedule C for the Registry shows a separate

deduction for advertising in the amount of $617.    Petitioner

also testified that a portion of the expenses for "dues"

consisted of payments to United Cable for cable television.

Petitioner testified that approximately one-third of petitioners'

house was used for business and that the cable television service

was provided for the whole house.   Based on this, we are unable

to determine what portion, if any, of the cable television costs

might be applicable to the business of the Registry.   Petitioner

also testified that a portion of the expenses for "dues"

consisted of payments for supplies, even though on the Schedule C

for the Registry, petitioners deducted $2,063 for supplies.

Again, petitioners have not shown that these amounts were not

included in the deduction allowed for supplies on Schedule C.

Petitioners have failed to establish their entitlement to the

claimed "dues" deduction.

     With respect to the deductions for gifts, petitioners

produced a check for $53, which indicates on its face that it was

for Godiva chocolates.   This was recorded on the business records

as a gift, and petitioner testified that it was for a gift to one

of the Registry's customers.   We hold that petitioners have

established that the $53 was a deductible business expense.

     With respect to $350 claimed as a labor expense, petitioners
                               - 9 -

produced seven canceled checks to Lorraine S. Whipps, each in the

amount of $50.   The dates of these checks indicated that they

were issued approximately every 2 weeks from September 14 to

December 14, 1990.   The records of the Registry record these

checks as "Contract Wages", and petitioner testified that they

were paid for miscellaneous labor for the business.   We hold that

petitioners have established that these items were deductible

expenses.

     With respect to the "other" expenses claimed in the amount

of $20,730, petitioners now apparently claim that $16,755 of this

amount actually represents trust preparation fees, which should

have been claimed on the Schedule C for ENT rather than the

Schedule C for the Registry.   Petitioner testified that he

operated ENT and that ENT did "business consulting, living trust,

and also was involved in starting a couple of other businesses; a

legal preparation services business and some others."    The checks

making up the $16,755 were all drawn on ENT's account.

Petitioner gave no explanation of how checks drawn on ENT's

account were deducted as expenses of the Registry, nor is it

clear whether or not these amounts were already deducted on ENT's

Schedule C.   There was no other documentation (such as invoices

or contracts) presented showing the nature and purpose of these

payments.   Petitioners again simply failed to prove entitlement

to the deductions claimed.

     Petitioners appear to argue that the remainder of the
                               - 10 -

"other" expenses was interest of $3,255.29 paid on a home equity

loan.    Petitioner testified that the loan proceeds from this loan

were used in his business, but he provided no supporting

documents to establish this.    We also find it curious that a

deduction for $3,255.29 of alleged business interest would be

buried in a $20,110.29 business deduction classified as "other"

when the Schedule C provides a specific line for interest

deductions.    In any event, based on the record before us,

petitioners have failed to prove entitlement to a business

deduction for interest.6


Issue 3.    Education Expenses on Schedule C for ENT


     On the Schedule C for ENT, petitioners deducted expenses of

over $135,000.    Respondent has disallowed $8,951 of those

Schedule C deductions.

     Petitioners claimed a deduction for education expenses on

the Schedule C for ENT in the amount of $8,951.    Petitioner

testified that $5,000 of this amount was attributable to the cost

of a training seminar for Jon Palmieri, an ENT employee.

Petitioners produced a canceled check to "The Estate Plan" that

indicates it was for training for Mr. Palmieri.    The "Profit and

Loss" statement for ENT for the year ended December 31, 1990,


     6
      Petitioners presumably could have elected to deduct this
interest as an itemized deduction. Instead, they elected to use
the standard deduction.
                              - 11 -

shows total expenses for education in the amount of $5,000.     In

her brief, respondent notes the fact that this statement shows

only $5,000--rather than the $8,951--that petitioners claimed on

the Schedule C for ENT.   Respondent argues that this shows that

the other items of education expenses should be disallowed, but

respondent makes no argument on brief that specifically addresses

the $5,000 amount.   Based on the record before us, we hold that

petitioners are entitled to a $5,000 education expense deduction

with respect to ENT.

     Petitioner testified that the claimed education expenses

also include expenses for other items, such as the rental of

rooms from the Arizona Club and the rental of booths for home

shows.   Petitioner admitted that he had a personal account with

the Arizona Club and that he visited that establishment for

nonbusiness purposes.   In addition, the Schedule C for ENT

already claimed a deduction for the rental of other business

property in the amount of $3,569.63.   Petitioners have not shown

that the amount of rental expenses claimed as education expenses

is not included in the deduction allowed for rents on the

Schedule C.   As previously noted, petitioners' own disbursement

journal shows that only $5,000 was spent for education.   Except

for the $5,000, petitioners have failed to overcome the

presumption that respondent's determination is correct.
                               - 12 -

Issue 4.    Addition to Tax Pursuant to Section 6651


     Respondent determined that petitioners' return was filed 1

day late.    Section 6651 imposes an addition to tax for failure to

file a timely tax return, unless such failure was due to

reasonable cause and not due to willful neglect.    Petitioners

neither argued nor offered any evidence to show that the addition

to tax pursuant to section 6651 should not be imposed.

Therefore, we sustain respondent's determination that the

addition to tax is applicable.



                                          Decision will be entered

                                     under Rule 155.
