                        T.C. Memo. 2000-330



                      UNITED STATES TAX COURT



   BERNARDUS A. P. DOBBE AND KLAZINA W. DOBBE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

         HOLLAND AMERICA BULB FARMS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 17625-97, 17626-97.      Filed October 25, 2000.



     Joseph M. Wetzel, Gary R. DeFrang, Russell A. Sandor,

Michael C. Wetzel, and Darin S. Christensen, for petitioners.

     Robert V. Boeshaar, Wesley F. McNamara, and Thomas J.

Travers, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     MARVEL, Judge:   Respondent determined a deficiency in the

Federal income tax of petitioners Bernardus A. P. Dobbe and

Klazina W. Dobbe (Mr. and Mrs. Dobbe or the Dobbes) of $34,614
                               - 2 -

for the taxable year 1993.   Respondent also determined a

deficiency in the Federal income tax of petitioner Holland

America Bulb Farms, Inc. (Holland America), of $35,304 for its

fiscal year ended September 30, 1993 (FYE 1993).   Petitioners

filed separate petitions contesting respondent’s determinations.

Because these cases present common issues of fact and law, they

were consolidated for trial, briefing, and opinion pursuant to

Rule 141(a).1

     After concessions,2 the issues for decision are:

     (1) Whether Holland America is entitled to deduct the

following expenses as ordinary and necessary business expenses

under section 162(a):   (a) $35,296 in landscaping expenses, (b)

$34,246 in grocery expenses reimbursed to Mr. and Mrs. Dobbe, (c)

$12,203 for the construction of a new solarium attached to Mr.

and Mrs. Dobbe’s residence, (d) miscellaneous expenses claimed



     1
      All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. Monetary amounts are
rounded to the nearest dollar.
     2
      In the notice of deficiency, respondent disallowed a
deduction of $3,926 by Holland America for a telephone system.
Before trial, the parties agreed that Holland America’s
expenditure of $3,926 will be treated as a capital expense and
that Holland America will be allowed depreciation deductions
under secs. 167 and 168 using MACRS guidelines and a 7-year
recovery period. Accordingly, Holland America’s taxable income
for FYE 1993 is increased $3,926 to reflect Holland America’s
concession concerning the deductibility of the expense under sec.
162(a) and decreased $982 to reflect the depreciation deduction
conceded by respondent.
                                 - 3 -

for electricity ($2,000), real estate property tax ($2,054), and

hazard insurance premiums ($350) attributable to the Dobbe

residence, and (e) $1,455 for the cost of a set of golf clubs

given to a flower bulb broker/salesman;

     (2)    whether Mr. and Mrs. Dobbe are entitled to exclude

reimbursement for groceries of $34,276 from their income under

section 119(a); and

     (3)    whether the payment by Holland America of the expenses

listed in (1) above resulted in constructive dividends to Mr. and

Mrs. Dobbe.

                           FINDINGS OF FACT

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

The stipulation of facts is incorporated herein by this

reference.

     Mr. and Mrs. Dobbe are married and resided at 1066 South

Pekin Road, Woodland, Washington, on the date their petition was

filed.     Holland America’s principal place of business was also

1066 South Pekin Road, Woodland, Washington, on the date its

petition was filed.

     Holland America, a subchapter C corporation incorporated in

1988 under the laws of the State of Washington, is engaged in the

business of importing and growing flower bulbs, which it sells to

cut flower producers.     Since 1988, Mr. and Mrs. Dobbe have been

the sole shareholders of Holland America.     During the taxable
                                 - 4 -

years at issue, Mr. Dobbe was the president of Holland America,

and Mrs. Dobbe was the vice president, treasurer, and secretary

of Holland America.   Holland America used the accrual method of

accounting and a fiscal year ended September 30 for all relevant

years.

1066 South Pekin Road

     Mr. and Mrs. Dobbe have owned the property located at 1066

South Pekin Road since approximately 1981.    The property consists

mostly of cropland but also includes some noncropland on which

warehouses, a shed for storing machinery, various greenhouses,

and Mr. and Mrs. Dobbe’s personal residence are located.    Holland

America’s main office is attached to the side of the Dobbe

residence.   The office and the residence share a common driveway.

During 1993, Mr. and Mrs. Dobbe and their children lived in the

residence year round.

     From 1989 through September 30, 1991, two separate annual

written leases were in effect.    The “Building Lease Agreement”

leased “that certain warehouse and shed” to Holland America “for

the purpose of packaging, storing and maintaining bulbs and cut

flowers, and maintaining equipment” for $3,500 per month.    The

“Lease of Crop Land” leased the cropland for horticulture

purposes for $5,200 per month.    From October 1, 1991, through

September 30, 1993, a comprehensive annual written lease replaced

the separate leases, but the categories of property covered by
                                - 5 -

the leases did not change.    Under the comprehensive lease in

effect for the periods at issue here, Mr. and Mrs. Dobbe leased

“those certain warehouses and shed” and “the crop land” at 1066

South Pekin Road.   None of the leases from 1988 through September

30, 1993, contained any reference whatsoever to Mr. and Mrs.

Dobbe’s residence, and their scope was not ambiguous.    The leases

did not include the Dobbe residence.

Holland America’s Shareholder Loans

     Holland America has been financed, in part, by shareholder

loans since its incorporation in 1988.    Holland America’s

liability to its shareholders was reflected in annual corporate

minutes and evidenced by annual promissory notes.

     Holland America deposited money each month into an accounts

payable liability account (accounts payable account), which was

used to account for both unpaid accrued rent under its lease and

interest accruing on the promissory notes.    Mr. and Mrs. Dobbe

reported both the interest and the rent as income on their

Federal income tax returns.    Throughout each year, Holland

America deducted funds from the accounts payable account as it

made payments on behalf of Mr. and Mrs. Dobbe for personal

expenses.   At the end of each accounting year, the balance of the

accounts payable account was reconciled.    If the accounts payable

account was positive (corporation owed money to Mr. and Mrs.

Dobbe), Holland America would pay the balance to Mr. and Mrs.
                              - 6 -

Dobbe; the Dobbes would then lend the money back to Holland

America to meet its business needs.    The amount lent back was

added to the principal balance of the promissory notes payable by

Holland America to Mr. and Mrs. Dobbe.    If the account balance

was negative (shareholders owed money to corporation), because

payments for Mr. and Mrs. Dobbe’s personal expenses exceeded the

rent and interest obligations, the balance was credited against

the principal of the promissory notes.

     As of September 30, 1992 and 1993, Holland America owed Mr.

and Mrs. Dobbe $893,701 and $1,200,000, respectively.      The

expenses at issue in this case were treated as business expenses

and not as personal expenses for purposes of the accounting

protocol described above.

1993 Deductions

     Holland America claimed, and respondent disallowed, the

following deductions for FYE 1993:

            Deduction                       Amount disallowed

     Advertising (landscaping)                   $35,296
     Supplies (groceries)                         34,246
     Small tools (solarium)                       12,203
     Miscellaneous expenses
          Property tax                             2,054
          Hazard insurance premiums                  350
          Electricity                              2,000
     Employee relations (golf clubs)               1,455

     Landscaping

     In 1993, Holland America hired a landscaping service to

improve the grounds at 1066 South Pekin Road with extensive new
                                 - 7 -

landscaping.     The landscaping consisted of new grass, trees,

bushes, shrubs, and flowers installed primarily near and

surrounding Mr. and Mrs. Dobbe’s residence.     Holland America paid

$35,296 for the landscaping services and deducted this amount as

an “advertising expense” on its FYE 1993 Federal income tax

return.

     Groceries

     On September 10, 1991, Holland America adopted a corporate

policy that required its officers to be available for duty at all

times in order to discharge their duties properly and to monitor

all activities on the farm, including the maintenance of coolers

to protect bulbs and the overseeing of bulb and flower harvesting

activities.    The policy “required the corporation to pay for the

officers meals and lodging in the performance of their duties.”

The policy was approved by Mr. and Mrs. Dobbe, acting in their

capacity as corporate officers, and was memorialized in Holland

America’s corporate minutes.     The policy was renewed each year

and was in effect throughout Holland America’s FYE 1993.

     Pursuant to the above policy, Holland America reimbursed Mr.

and Mrs. Dobbe in November 1993 for all of Mr. and Mrs. Dobbe’s

groceries purchased from January 1989 through September 1993.

Mrs. Dobbe had initially paid for the groceries by checks drawn

on her personal checking account.     The amount reimbursed,

$34,246, represented the cost of groceries for every meal
                                  - 8 -

prepared or eaten by the Dobbe family at their home from January

1989 through    September 1993.   Only $6,417 of the amount

reimbursed was for groceries purchased during Holland America’s

FYE 1993.    Holland America paid the grocery reimbursement only to

Mr. and Mrs. Dobbe and not to any other employees because the

policy covered only corporate officers.

     Holland America deducted the grocery reimbursement of

$34,246 from its FYE 1993 Federal income tax return as

“supplies”.     Mr. and Mrs. Dobbe excluded the reimbursed amount

from their 1993 gross income.

     Solarium

     Before 1993, the Dobbe residence had only one solarium

attached to it (old solarium).     The old solarium is near the pool

behind the house and has a sitting area and a hot tub.     No tax

deduction was ever taken for the old solarium.

     During FYE 1993, Holland America paid $12,203 for the

construction of a new solarium on the Dobbe residence (new

solarium).    The new solarium’s door leads out of Mr. and Mrs.

Dobbe’s kitchen and dining area.     Unlike the old solarium, the

new solarium is built primarily of glass, and its floor is made

of teakwood.

     After the construction of the new solarium was completed,

Holland America used it at some point during FYE 1993 to

experiment with growing at least one new plant.     The record,
                              - 9 -

however, does not reveal whether the new solarium was used for

business purposes after September 30, 1993.   On its FYE 1993

Federal income tax return, Holland America deducted the entire

cost of the new solarium as a “small tools” expense.

     Miscellaneous Expenses

     During FYE 1993, Holland America paid various expenses

associated with the property located at 1066 South Pekin Road,

including electricity, property tax, and hazard insurance

premiums.

     Holland America paid and deducted the entire electricity

bill associated with the property for FYE 1993.   In FYE 1993,

there were approximately six or seven separate electricity meters

for various buildings on the property.   There was only one

electricity meter attached to Mr. and Mrs. Dobbe’s residence.

Holland America paid the $2,000 electricity bill attributable to

the Dobbe residence, as shown by a separate electricity meter,

and deducted the entire amount on its Federal income tax return.

     Holland America also paid, and claimed a deduction for, the

entire property tax associated with the property at 1066 South

Pekin Road, including that portion determined to be associated

with Mr. and Mrs. Dobbe’s residence ($2,054).

     Lastly, Holland America paid, and claimed a deduction for,

all hazard insurance premiums associated with the property
                                - 10 -

located at 1066 South Pekin Road.    Premiums attributable to Mr.

and Mrs. Dobbe’s residence ($350) were included in the amount

deducted.

     Deduction for Golf Clubs

     During FYE 1993, Holland America purchased a set of golf

clubs for Rinus Heemskerk, a flower bulb salesman/broker for

Holland America who worked in The Netherlands.   As a commissioned

broker, Mr. Heemskerk received sales commissions from both

Holland America, as purchaser, and from the seller.   The sales

commissions were based on sale prices and were included in the

purchase prices Holland America paid for the bulbs.

     Holland America did not issue a Form W-2, Wage and Tax

Statement, or a Form 1099, Miscellaneous Income, to Mr. Heemskerk

for the golf clubs.   Holland America purchased the golf clubs for

Mr. Heemskerk as an incentive for future performance and in

appreciation for his past service to the company.   Holland

America deducted the entire cost of the golf clubs, $1,455, as an

“Employee Relations” expense or “Customer Ref” expense.

                                OPINION

I. Was Mr. and Mrs. Dobbe’s Residence Leased to Holland America
During and Before FYE 1993?

     In support of their position that Holland America was

entitled to deduct the grocery expense reimbursement and the

various expenses paid with respect to the Dobbe residence,

petitioners argue that the Dobbe residence was leased to Holland
                                - 11 -

America during FYE 1993 and prior periods.     Petitioners offered

testimony from Mr. and Mrs. Dobbe and from their accountant to

prove that (1) the written leases in effect during FYE 1993 and

prior years included the Dobbe residence, and (2) even if the

written leases did not include the residence, there was an oral

lease covering the residence during FYE 1993 and prior years.

Respondent objected to the testimony, citing Washington State’s

parol evidence rule.    We conditionally admitted the testimony

over respondent’s objection but reserved final ruling and

directed the parties to brief the issue.     Upon consideration of

the applicable law and the evidence in the record, we conclude

that the testimony is admissible solely on the question of

whether petitioners entered into an oral lease covering the

residence.

     A.    The Parol Evidence Rule

     It is well settled that the State law applicable to the

contract at issue governs whether parol evidence is admissible.

See Estate of Craft v. Commissioner, 68 T.C. 249, 262 (1977),

affd. per curiam 608 F.2d 240 (5th Cir. 1979).     The parties agree

that Washington State law applies to the leases at issue in this

case.     Under Washington State law, the general rule is that

“parol evidence is not admissible for the purpose of adding to,

modifying, or contradicting the terms of a written contract, in

the absence of fraud, accident, or mistake.”     Berg v. Hudesman,
                               - 12 -

801 P.2d 222, 229 (Wash. 1990).   However, “extrinsic evidence is

admissible as to the entire circumstances under which the

contract was made, as an aid in ascertaining the parties’

intent.”   Id. at 228.   For parol evidence to be admissible, it is

not necessary that we first find that the contract is ambiguous.

See id. at 230.   The Supreme Court of Washington clarified that

     as stated in Olsen v. Nichols, 86 Wash. 185, 149 P.
     668, parol evidence is admissible to show the situation
     of the parties and the circumstances under which a
     written instrument was executed, for the purpose of
     ascertaining the intention of the parties and properly
     construing the writing. Such evidence, however, is
     admitted, not for the purpose of importing into a
     writing an intention not expressed therein, but with
     the view of elucidating the meaning of the words
     employed. Evidence of this character is admitted for
     the purpose of aiding in the interpretation of what is
     in the instrument, and not for the purpose of showing
     intention independent of the instrument. It is the
     duty of the court to declare the meaning of what is
     written, and not what was intended to be written. If
     the evidence goes no further than to show the situation
     of the parties and the circumstances under which the
     instrument was executed, then it is admissible. [Id. at
     229-230; emphasis added.]

     In Berg, the Supreme Court of Washington made it clear that

this rule authorizes the use of extrinsic evidence only to

interpret the meaning of the words of a contract, and “not for

the purpose of showing intention independent of the instrument.”

Id.; see also Hollis v. Garwall, Inc., 974 P.2d 836, 842-847

(Wash. 1999); In re Marriage of Schweitzer, 937 P.2d 1062, 1066

(Wash. 1997).
                                - 13 -

     In Ban-Co Inv. Co. v. Loveless, 587 P.2d 567, 573 (Wash. Ct.

App. 1978), the Washington Court of Appeals emphasized that to be

admitted under the parol evidence rule, parol evidence should not

vary or contradict that which has been reduced to writing but

must be additional to and consistent with the contents of the

document.   The court stated:

     People have the right to make their agreements partly
     oral and partly in writing, or entirely oral or
     entirely in writing; and it is the court’s duty to
     ascertain from all relevant, extrinsic evidence, either
     oral or written, whether the entire agreement has been
     incorporated in the writing or not. That is a question
     of fact. [Id. at 572.]

     In this case, the disputed testimony was offered not to

prove the circumstances under which the written leases were

executed but rather to prove that the parties to the leases

intended to include the Dobbe residence in the leases.

Petitioners argued that the leases were not complete and that

more property was covered by the lease agreements than was

explicitly stated therein.   Petitioners argued, in the

alternative, that the testimony proves that petitioners agreed

upon a “second oral lease” leasing the Dobbe residence to Holland

America.

     Because the disputed testimony was offered, in part, to

expand the scope of the leases in a manner inconsistent with and

beyond that clearly stated therein, in violation of Washington

State’s parol evidence rule, see Berg v. Hudesman, supra, we
                                - 14 -

agree with respondent that the parol evidence rule prevents

petitioners from using the testimony to expand the scope of the

written leases.   We nevertheless conclude that the disputed

testimony is admissible on the question of the existence of a

separate oral lease, and we overrule respondent’s objection.

     B.   The Alleged Oral Lease

     To overcome the fact that the written leases did not

encompass the Dobbe residence, petitioners contended at trial

that there was also an oral lease by which Mr. and Mrs. Dobbe

leased their residence to Holland America during 1993 and prior

years.    The only proof in support of petitioners’ contention,

however, was the testimony of Mr. and Mrs. Dobbe and their

accountant that Mr. and Mrs. Dobbe intended to lease the

residence to Holland America.    Petitioners conceded at trial that

no additional rent was paid by Holland America for the residence

and offered no testimony whatsoever regarding the other terms and

conditions normally included in a valid and enforceable lease.

     Under Washington State law, a valid lease must identify the

property leased, the parties to the lease, and the terms and

conditions of the lease, including the rent or other

consideration paid or to be paid for the leasehold interest.       See

Emrich v. Connell, 716 P.2d 863, 867 (Wash. 1986).     Moreover,

Washington State’s statute of frauds requires that an agreement

to lease for more than 1 year be in writing.    See Family Med.
                              - 15 -

Bldg., Inc. v. State, Dept. of Soc. & Health Servs., 702 P.2d

459, 461 (Wash. 1985).

     We are not required to accept the self-serving testimony of

a taxpayer or witnesses closely aligned with the taxpayer’s

position in circumstances where the testimony is uncorroborated

by other reliable sources and is not credible.    See Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).     The dearth of credible

evidence in support of petitioners’ position that an oral lease

covered the Dobbe residence during the relevant periods and the

failure of petitioners to prove that any rent was paid for the

alleged oral lease compel a conclusion that the Dobbe residence

was not leased to Holland America.     After evaluating the facts in

this record and weighing them against the testimony of Mr. and

Mrs. Dobbe and their accountant, we hold that petitioners have

failed to prove that Mr. and Mrs. Dobbe orally leased their

residence to Holland America at any time from 1989 through FYE

1993.   See Rule 142(a); cf. Ban-Co Inv. Co. v. Loveless, supra at

573 (“the existence of the oral agreement was proven by

substantial evidence (including documentary evidence) other than

merely the testimony of the parties alleging it”).

II. Was Holland America Entitled To Deduct Various Expenses as
Ordinary and Necessary Business Expenses?

     Section 162(a) permits a taxpayer to deduct expenses paid or

incurred during the taxable year in carrying on the taxpayer’s

trade or business.   Deductions are strictly a matter of
                              - 16 -

legislative grace; Holland America bears the burden of

substantiating claimed deductions.     See Rule 142(a); INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,

290 U.S. 111 (1933).

     In order for Holland America to meet its burden of proof, it

must prove that the expenses deducted (1) were paid or incurred

during the taxable year, (2) were incurred to carry on its trade

or business, and (3) were ordinary and necessary expenditures of

the business.   See sec. 162(a); Commissioner v. Lincoln Sav. &

Loan Association, 403 U.S. 345, 352 (1971).     An expense is

ordinary if it is customary or usual within a particular trade,

business, or industry or relates to a transaction “of common or

frequent occurrence in the type of business involved.”     Deputy v.

du Pont, 308 U.S. 488, 495 (1940).     An expense is necessary if it

is appropriate and helpful for the development of the business.

See Commissioner v. Heininger, 320 U.S. 467, 471 (1943).

Personal, living, or family expenses are not deductible.    See

sec. 262(a).

     We hold that none of the expenses in dispute, except the

cost of the golf clubs, was properly deducted under section

162(a).   Our reasons are set forth below.

     A.   In General

     Petitioners adamantly asserted an aggressive and

nondiscerning position regarding the disputed expenses deducted
                              - 17 -

by Holland America.   They insisted that Mr. and Mrs. Dobbe leased

to Holland America the entire property located at 1066 South

Pekin Road, including the Dobbe residence.   By reason of its

alleged leasehold interest in the Dobbe residence, Holland

America claimed it furnished lodging and meals on its business

premises to Mr. and Mrs. Dobbe and is entitled to deduct 100

percent of Mr. and Mrs. Dobbe’s personal lodging and grocery

costs as its business expenses.

     As we previously held, the written leases in effect for

periods prior to October 1, 1993, did not cover the Dobbe

residence.   Although the record establishes that Mr. and Mrs.

Dobbe set aside a portion of their residence as Holland America’s

business office, the record is devoid of any persuasive evidence

establishing that any part of the Dobbe residence actually was

rented by Holland America and, in particular, that any of the

rent paid by Holland America to Mr. and Mrs. Dobbe was

attributable to the residence.    With this framework in mind, we

address each of the disputed expense categories.

     B.   Landscaping (“Advertising” Expense)

     Petitioners argued that the entire landscaping expense,

incurred primarily to install landscaping near and surrounding

Mr. and Mrs. Dobbe’s residence, was properly deducted under

section 162.   According to petitioners, the new landscaping was

necessary to improve the “first impression” of Holland America’s
                              - 18 -

business and allowed Holland America to display and promote its

products to the public.   Respondent contends the majority of the

landscaping was done to improve the grounds surrounding Mr. and

Mrs. Dobbe’s residence, including the front, side, and back yards

and the area near the outdoor swimming pool; therefore, the

improvements made to property owned by Mr. and Mrs. Dobbe

primarily benefited Mr. and Mrs. Dobbe personally and are not

deductible as a business expense.3

     Under appropriate circumstances, landscaping expenses may be

deductible when the expenses legitimately are connected to the

taxpayer’s trade or business and the requirements for

deductibility otherwise are met.     See Hefti v. Commissioner, T.C.

Memo. 1988-22, affd. 894 F.2d 1340 (8th Cir. 1989); Rhoads v.

Commissioner, T.C. Memo. 1987-335.     When, however, a corporation

makes an expenditure that primarily benefits the corporation’s



     3
      In the notice of deficiency, respondent determined, in the
alternative, that, if any of the landscaping costs are ordinary
and necessary business expenses, the expense is a capital
expenditure that is not deductible but is subject to depreciation
under the MACRS guidelines with a 15-year recovery period. See
Alabama-Ga. Syrup Co. v. Commissioner, 36 T.C. 747 (1961), revd.
on other grounds sub nom. Whitfield v. Commissioner, 311 F.2d 640
(5th Cir. 1962). The record does not contain any evidence as to
the useful lives of the various installations, nor does the
record disclose how Holland America had any depreciable interest
in the landscaping. Holland America did not own the property on
which the landscaping was installed, nor did it have a leasehold
interest covering that part of the property. We need not decide,
however, whether the landscaping expense must be capitalized
because of our holding, infra, that the landscaping was not an
ordinary and necessary business expense.
                               - 19 -

shareholders and only tangentially benefits the corporation’s

business, the amount of the expenditure may be taxed to the

shareholder as a constructive dividend and is not deductible

under section 162.    See Hood v. Commissioner, 115 T.C. ___, ___

(2000) (slip op. at 13-14); Magnon v. Commissioner, 73 T.C. 980,

993-994 (1980); American Insulation Corp. v. Commissioner, T.C.

Memo. 1985-436.

     We accept, for the sake of argument, that the appearance of

a business and its grounds can contribute to the success of the

business.    We also acknowledge that Holland America’s clients

visited the farm regularly.    Most, if not all, of the landscaping

improvements, however, were installed near and surrounding Mr.

and Mrs. Dobbe’s residence.    The residence and its grounds were

owned by Mr. and Mrs. Dobbe and were not leased to Holland

America.    Although some of the improvements could be seen by

Holland America’s customers who visited the farm for business

purposes,4 the incidental benefit to the corporation does not

trump the primarily personal benefit to Mr. and Mrs. Dobbe.

     Petitioners did not introduce any evidence to demonstrate

how much of the landscaping cost, if any, could be allocated to

Holland America’s leasehold interest.    Moreover, petitioners



     4
      Some of the improvements, including improvements by the
outdoor swimming pool and areas on the back and side of the
residence, barely were visible to customers entering the
driveway.
                              - 20 -

offered little evidence that the landscaping improvements were

appropriate or necessary to the maintenance and development of

Holland America’s business.   See Commissioner v. Heininger, 320

U.S. at 471.   Drive-by customers accounted for a very small

percentage of Holland America’s sales, and there is no evidence

in the record demonstrating that sales to Holland America’s

regular customers increased in any material way as a result of

the improvements.   At trial, Martin Meskers, a flower grower from

Oregon who has purchased bulbs from Holland America since its

incorporation and spends about $500,000 per year at Holland

America, testified that the new landscaping was nice and gave a

good first impression.   Mr. Meskers admitted, however, that he

still would spend the same amount per year even if the

landscaping was not as nice because Holland America carries the

product he needs.

     We hold that petitioners have not proven that the

landscaping expenses were ordinary and necessary business

expenses deductible by Holland America under section 162.

     C.   Groceries (“Supplies” Expense)

     In November 1993, Holland America reimbursed Mr. and Mrs.

Dobbe in the amount of $34,246 for all groceries purchased for

every meal prepared or eaten by the Dobbe family at their home

from January 1989 through September 1993.   Holland America

deducted the entire reimbursement as a “supplies” expense on its
                               - 21 -

FYE 1993 Federal income tax return.5    Respondent disallowed the

deduction.    We uphold respondent’s determination.

     A corporate policy promulgated for the first time in

November 1991 required Holland America’s corporate officers, Mr.

and Mrs. Dobbe, to be present on the farm at all times to monitor

activities and deal with problems on the farm.    That policy also

required Holland America to furnish lodging and meals to Mr. and

Mrs. Dobbe.    Although the policy contained no provision making it

retroactive to 1989 or authorizing Holland America to reimburse

Mr. and Mrs. Dobbe for their grocery expenses, Holland America

relied on the policy to justify reimbursing Mr. and Mrs. Dobbe

for all their groceries purchased from January 1989 through

September 1993.    Petitioners conceded that the groceries were

consumed by Mr. and Mrs. Dobbe, their children, and occasional

business clients and visitors.6




     5
      Of the $34,246 reimbursed by Holland America for the cost
of groceries, only $6,417 was for groceries purchased from Oct.
1, 1992, through Sept. 30, 1993. Respondent argues that, even if
the corporate policy covers grocery reimbursement and supports a
deduction for some part of the reimbursement, Holland America is
not entitled to deduct on its FYE 1993 return the cost of
groceries purchased in prior fiscal years. We do not need to
address this issue in light of our holding.
     6
      Holland America has not argued that sec. 274(n) applies,
and Mr. and Mrs. Dobbe have not argued that the reimbursement
they received for the cost of their groceries is excluded from
their income under sec. 132 as a “de minimis fringe” benefit.
See Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096 (9th Cir.
1999), revg. T.C. Memo. 1997-445.
                                - 22 -

     Generally, meal expenditures are treated as personal

expenses and are not deductible for Federal income tax purposes.

See sec. 262; Rhoads v. Commissioner, T.C. Memo. 1987-335;

Fenstermaker v. Commissioner, T.C. Memo. 1978-210; sec. 1.262-

1(a) and (b)(5), Income Tax Regs.    Only those meal expenditures

that satisfy the requirements for deductibility under section

162(a) may be deducted as business expenses.

     Holland America has failed to prove that its reimbursement

of Mr. and Mrs. Dobbe’s grocery expenses, covering a 5-year

period, was anything more than the payment of a personal expense

of its shareholders-officers.    Although Holland America contended

that the reimbursement met the requirements of section 162(a), it

did not offer any credible evidence to show that the

reimbursement was ordinary or necessary under the circumstances

involved here.   Mr. and Mrs. Dobbe lived on the farm.   They

bought groceries and cooked their meals in their own home.

Although Mr. and Mrs. Dobbe were involved in the day-to-day

operation of the farm and may have eaten meals occasionally while

addressing issues on the farm, they did so for their own

convenience.   The mere possibility that an emergency may arise on

the farm does not convert a personal expense into a business

expense.   See Rhoads v. Commissioner, supra.

     Holland America had other employees in addition to Mr. and

Mrs. Dobbe, yet the corporate policy was limited solely to Mr.
                              - 23 -

and Mrs. Dobbe.   Holland America did not demonstrate that Mr. and

Mrs. Dobbe were the only employees available for or capable of

dealing with farm emergencies or that its reimbursement of Mr.

and Mrs. Dobbe’s grocery expenses was necessary to ensure that

competent employees would be available to deal with such

emergencies during customary mealtimes.

     Although business customers occasionally stayed overnight at

the farm and some of the groceries presumably were consumed by

them,7 Holland America has not argued that the amount paid as

reimbursement must be apportioned to reflect business and

personal use.   Rather, Holland America seeks to deduct the cost

of all groceries consumed by Mr. and Mrs. Dobbe, their family,

and visitors, regardless of whether the groceries were consumed

in connection with a legitimate business activity.   Holland

America concededly did not keep any records that would permit us

to isolate those costs incurred for business, if any.   Without a

more definitive record, any allowance would amount to unguided

largess.   See Williams v. United States, 245 F.2d 559, 560 (5th

Cir. 1957); Reynolds v. Commissioner, T.C. Memo. 2000-20;

Williams v. Commissioner, T.C. Memo. 1998-93.   Accordingly, we




     7
      Neither Holland America nor Mr. and Mrs. Dobbe maintained
any records of the people who visited the Dobbe residence and/or
consumed meals there allegedly for business purposes. See sec.
274(d).
                                - 24 -

uphold respondent’s determination disallowing the entire $34,246

deduction.

     D.   Solarium (“Small Tools” Expense)

     Holland America spent $12,203 to construct a new solarium

attached to the Dobbe residence and deducted the entire cost of

the new solarium as a “small tools” expense.    Petitioners argue

that the new solarium was used solely for business purposes in

the year the deduction was taken and that Holland America greatly

benefited from the construction of the new solarium because the

expense enabled it to experiment with and develop a new product,

the medicinal herb Echinacea.    Thus, petitioners contend, the

expense properly was deductible under section 162(a) or, in the

alternative, the new solarium was deductible as an experimental

procedure under section 174(a).    Respondent contends the new

solarium benefited Mr. and Mrs. Dobbe personally and added value

to their home; therefore, the new solarium was primarily a
                                - 25 -

personal expense, which is not deductible under section 162(a).8

We agree with respondent.

     Although Holland America used the solarium to experiment

with growing Echinacea at some point during FYE 1993, petitioners

failed to convince us that the new solarium was used primarily

for business during FYE 1993 or that it was used primarily for

business purposes thereafter.    Petitioners produced several

photographs which showed the new solarium almost completely

empty, demonstrating neither a business purpose nor a personal

purpose for the new solarium.    The record was remarkably silent

regarding the business use of the new solarium after September

30, 1993.    Although both Mr. and Mrs. Dobbe testified that the

new solarium was not used for personal purposes in 1993, we did

not find their testimony convincing on this point.    We are not

required to accept petitioners’ self-serving, undocumented

testimony.    See Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir.



     8
      In his notice of deficiency respondent determined in the
alternative that if any part of the solarium costs was incurred
primarily to benefit the business of Holland America, it is a
capital expenditure that is not deductible but is subject to
depreciation under the MACRS guidelines with a 27.5-year recovery
period. The record does not contain any evidence as to the
useful life of the solarium, nor does the record disclose how
Holland America had any depreciable interest in the solarium.
Holland America did not own the residence that the solarium
improved, nor did it have a leasehold interest with respect to
the residence. We need not decide whether the solarium expense
must be capitalized because of our holding, infra, that the cost
of constructing the solarium was not incurred for the primary
benefit of Holland America.
                                - 26 -

1964), affg. 41 T.C. 593 (1964); Tokarski v. Commissioner, 87

T.C. at 77; Williams v. Commissioner, supra.     We find, therefore,

that petitioners have failed to prove that the new solarium was

constructed and used primarily for business reasons, and we

sustain respondent’s determination disallowing the deduction.9

     E. Miscellaneous Expenses

     Respondent disallowed miscellaneous deductions for expenses

paid by Holland America attributable to the Dobbe residence.

During FYE 1993, Holland America claimed a deduction for the

entire amount of property tax, hazard insurance premiums, and the

electricity bill associated with the property at 1066 South Pekin

Road.     After an examination, respondent determined the following

amounts to be attributable to the Dobbe residence:    Property tax

($2,054), hazard insurance premiums ($350), and electricity

($2,000).10



     9
      Petitioners asserted, in the alternative, that the true
purpose of the new solarium was to enable Holland America to
conduct growing experiments; consequently, the expenditure
qualified as a research and experimental expenditure under sec.
174(a). See sec. 263(a)(1)(B); sec. 1.174-2, Income Tax Regs.
Except for a brief, one-sentence mention of sec. 174(a), however,
Holland America has not presented any meaningful argument based
on sec. 174(a), nor has it proved that it meets the requirements
of sec. 174(a).
     10
       Respondent’s witness, Susan Signor, a revenue agent,
testified to the above amounts. At trial, petitioners’ attorney
objected to the introduction of this evidence on the grounds of
best evidence, competence, and relevance; however, petitioners
did not dispute the accuracy of the amounts either at trial or on
brief.
                              - 27 -

     Respondent contends that the miscellaneous expenses

attributable to the Dobbe residence were nondeductible personal

expenses of Mr. and Mrs. Dobbe and that Holland America conferred

an economic benefit on Mr. and Mrs. Dobbe by paying those

expenses.   Petitioners argue the miscellaneous deductions were

ordinary and necessary business expenses because Holland America

leased the entire farm, including the residence, for business

purposes.   We agree with respondent that Holland America is not

entitled to deduct the expenses attributable to Mr. and Mrs.

Dobbe’s residence.

     The expenses of maintaining a household, including

utilities, insurance premiums, and property tax, are personal

living expenses and are not deductible.   See sec. 262(a); sec.

1.262-1(b)(2) and (3), Income Tax Regs.   As we held earlier in

this opinion, the residence was not leased to Holland America

and, with the exception of the office, was not used for business

purposes.   Because the miscellaneous expenses were personal and

were unrelated to the business of Holland America, we sustain

respondent’s determination that the above amounts are not

deductible as ordinary and necessary business expenses.

     F.   Golf Clubs (“Customer Relations” Expense)

     Holland America claimed a deduction of $1,455, which it

spent to purchase a set of golf clubs for Rinus Heemskerk, a

flower bulb salesman/broker in The Netherlands.   Holland America
                              - 28 -

contends the entire cost of the golf clubs is deductible as an

ordinary and necessary business expenditure because it purchased

the golf clubs as a sales incentive and for services rendered by

Mr. Heemskerk.   Respondent argues the golf clubs are

characterized more properly as a gift than as compensation; thus,

pursuant to section 274(b), the deduction should be limited to

$25, and the remaining cost of the golf clubs should be

disallowed.

     Section 274(b) provides that no deduction shall be allowed

under section 162 or section 212 for any expense for gifts made

directly or indirectly to any individual to the extent that the

expense exceeds $25.   Section 274(b) and related regulations

flatly disallow deductions for business gifts greater than $25.

See Sanford v. Commissioner, 50 T.C. 823, 830 (1968), affd. 412

F.2d 201 (2d Cir. 1969).   The requirements imposed by section

274(b) are in addition to the requirements imposed by section

162(a).   Holland America has the burden of proving initially that

its expenditure was an ordinary and necessary expense, was

proximately related to its trade or business, and was not for a

business gift subject to the restrictions of section 274(b).     See

sec. 274(d); Sanford v. Commissioner, supra at 826.     Whether the

golf clubs were given to Mr. Heemskerk as a gift or for services

rendered must be determined from all the facts and circumstances.

See St. John v. Commissioner, T.C. Memo. 1970-238.
                               - 29 -

     A voluntarily executed transfer of property by one to

another, without any consideration or compensation therefor, is

not necessarily a gift within the meaning of section 274(b).      See

Commissioner v. Duberstein, 363 U.S. 278, 285 (1960); Olk v.

United States, 536 F.2d 876, 877-878 (9th Cir. 1976).    If the

transfer “proceeds primarily from ‘the constraining force of any

moral or legal duty,’ or from ‘the incentive of anticipated

benefit’ of an economic nature, * * * it is not a gift.”

Commissioner v. Duberstein, supra at 285 (citations omitted).       A

gift, in the statutory sense, “proceeds from a ‘detached and

disinterested generosity’ * * * ‘out of affection, respect,

admiration, charity or like impulses.’”    Commissioner v.

Duberstein, supra at 285 (citations omitted); see also Olk v.

United States, supra.   The intention of the payor controls

whether the payment is characterized as a gift.   See Commissioner

v. Duberstein, supra at 286; Bogardus v. Commissioner, 302 U.S.

34, 43 (1937).   The question of whether a payment is a gift is a

question of fact to be determined on the basis of the facts of

each case.   See Commissioner v. Duberstein, supra at 290; Woody

v. United States, 368 F.2d 668, 670 (9th Cir. 1966).

     In his direct testimony at trial, Mr. Dobbe was asked:    “And

so when you purchased these golf clubs, was it in the form of

compensation to encourage Mr. Heemskerk to continue to do a good

job?”   Mr. Dobbe responded:   “I would say incentive to continue
                              - 30 -

to do a good job.”   On cross-examination, Mr. Dobbe testified

that he regularly paid Mr. Heemskerk a commission for his efforts

in purchasing bulbs for Holland America.   When Mr. Dobbe was

asked whether the golf clubs were related to a particular

purchase, he responded:

     They–-I knew he loved the game of golf in whatever free
     time he had, and it would be a tremendous treat to
     receive a set of clubs from the United States, and for
     his service and for his unbelievable importance to our
     business, I felt it was an incredible incentive for
     what he up to that point meant for our business and
     what he hopefully was going to continue to mean for our
     business.

     We conclude that Holland America purchased the golf clubs

for Mr. Heemskerk as an incentive for future performance and in

appreciation for his past services to the company.   Thus, Holland

America did not give the golf clubs to Mr. Heemskerk out of a

“detached and disinterested generosity”; rather, Holland America

anticipated receiving an economic benefit in the future.    See

Commissioner v. Duberstein, supra at 285; Olk v. United States,

supra at 877-878.

     Accordingly, we hold that the golf clubs were not a “gift”

within the meaning of section 274(b).   We further hold that

Holland America has met its burden of establishing that the cost

of the golf clubs was an ordinary and necessary business expense

deductible under section 162(a).
                               - 31 -

III. Were Mr. and Mrs. Dobbe Entitled To Exclude the Amount of
Reimbursement for Groceries From Their Income Under Section
119(a)?

     Under certain conditions, meals furnished for the

convenience of the employer are excludable from the gross income

of the employee.    See sec. 119(a) and (b).    The value of meals

furnished to an employee by his employer is excluded from an

employee’s gross income if two elements are met:      (1) The meals

are furnished on the business premises of the employer, and (2)

the meals are furnished for the convenience of the employer.        See

sec. 119(a); sec. 1.119-1(a)(1), Income Tax Regs.      Meals must be

provided in kind.    See Commissioner v. Kowalski, 434 U.S. 77, 84

(1977); Tougher v. Commissioner, 51 T.C. 737, 744-746 (1969),

affd. 441 F.2d 1148 (9th Cir. 1971).

     Mr. and Mrs. Dobbe argue they are entitled to exclude the

grocery reimbursement from their income under section 119(a).

Respondent disagrees, arguing that, in order to be excludable

under section 119(a), meals must be provided in kind and on the

business premises of the employer.      Respondent disallowed the

exclusion, and we uphold respondent’s determination.

     The grocery reimbursement is not excludable under section

119(a) for two reasons.    First, our holding that the leases did

not include Mr. and Mrs. Dobbe’s residence leads to the

conclusion that the meals in question were furnished to Mr. and

Mrs. Dobbe in their personal residence and not on Holland
                              - 32 -

America’s business premises as required by section 119(a).11    See

sec. 1.119-1(a)(1), Income Tax Regs.   Second, Mr. and Mrs. Dobbe

received cash reimbursement for their grocery expenses, not in-

kind meals.   By its terms, section 119(a) covers meals furnished

by the employer and not cash reimbursements.   See Commissioner v.

Kowalski, supra; Tougher v. Commissioner, supra; Harrison v.

Commissioner, T.C. Memo. 1981-211; Koven v. Commissioner, T.C.

Memo. 1979-213; McDowell v. Commissioner, T.C. Memo. 1974-72.

     Petitioners concede on brief that Mr. and Mrs. Dobbe

purchased the groceries and were reimbursed by Holland America,

but they contend that purchasing the groceries was a “separate

transaction”.   Petitioners argue that a corporation can act only

through its agents and that Mrs. Dobbe, acting as an agent of

Holland America, purchased the groceries, prepared the meals, and

provided the meals to the officers of the corporation.

Petitioners contend that this sort of “separate transaction”

amounts to receiving in-kind meals and, therefore, qualifies for

the exclusion under section 119(a).




     11
      Cf. Boyd Gaming Corp. v. Commissioner, 177 F.3d at 1099
(employer’s eating facilities were located on the business
premises); Harrison v. Commissioner, T.C. Memo. 1981-211 (“We
have found as a fact that the meals in question were served and
consumed on the farm, which was the business premises of the
employer, HFL.”); McDowell v. Commissioner, T.C. Memo. 1974-72
(“There is no question that the meals and lodging were furnished
on the business premises of the employer-corporation, the
ranch.”).
                              - 33 -

     In support of their argument, petitioners cite McDowell v.

Commissioner, supra.   In McDowell, the Commissioner argued that

the taxpayers were not entitled to exclude the cost of meals from

their income because they were prepared by the taxpayers from

food purchased at the grocery store.     In McDowell, we declined to

consider the Commissioner’s argument, which was raised for the

first time in the Commissioner’s reply brief, because there was

no evidence in the record as to preparation of the meals, and

“the rudimentary principles of equity and justice forbid our

consideration of this argument.”   Id.    We did not address whether

cash reimbursements for groceries provided under similar

circumstances qualified under section 119(a) as in-kind meals.

We allowed the exclusion, noting there was no question that the

meals were furnished on the business premises of the employer-

corporation and the meals were provided for the convenience of

the employer-corporation.   Our decision in McDowell is

distinguishable from this case.

     Petitioners also rely on Caratan v. Commissioner, 442 F.2d

606 (9th Cir. 1971), revg. 52 T.C. 960 (1969), Johnson v.

Commissioner, T.C. Memo. 1985-175, and J. Grant Farms, Inc. v.

Commissioner, T.C. Memo. 1985-174.     The sole issue in each of

these cases was whether the taxpayers were required to accept

lodging furnished to them as a condition of their employment as

required by section 119(a).   In each of these cases, the parties
                                 - 34 -

agreed the lodging was provided on the employer’s premises.

These cases provided little or no insight as to whether the

grocery reimbursement should be excluded from Mr. and Mrs.

Dobbe’s income under section 119(a) and, thus, do not inform our

analysis.

     In this case, Mr. and Mrs. Dobbe did not receive in-kind

meals.   Mr. and Mrs. Dobbe received cash reimbursement for all

grocery expenses dating back to January 1989.     Although the

corporate policy required Holland America to “pay for the

officers meals”, it paid grocery reimbursement instead.     The

groceries were consumed by anyone dining in the residence,

including Mr. and Mrs. Dobbe’s children.     The Dobbe family

purchased and consumed the groceries as any other family might

have done.    Mr. and Mrs. Dobbe, however, took advantage of the

tax laws to obtain nontaxable reimbursement from their

corporation for the entire cost of their daily food consumption.

Like the taxpayers in Simpson v. Commissioner, T.C. Memo. 1997-

223, “petitioners want the Government to subsidize their daily

food consumption.”     Mr. and Mrs. Dobbe are not entitled to such a

benefit.     See sec. 262(a).   We hold that Mr. and Mrs. Dobbe are

not entitled to exclude the cash reimbursement for groceries from

their income under section 119(a).
                              - 35 -

IV. Did Holland America’s Payment of the Expenses Discussed
Above Result in a Constructive Dividend to Mr. and Mrs. Dobbe?

     Respondent determined that Holland America’s payment of the

landscaping, grocery reimbursement, solarium addition, and

miscellaneous expenses resulted in economic gain, benefit, or

income to Mr. and Mrs. Dobbe as individuals, which is taxable to

them as a constructive dividend.   Petitioners contend the

expenditures primarily benefited Holland America’s business and

not Mr. and Mrs. Dobbe; in the alternative, they contend that, if

we hold that Holland America’s payment of the expenses primarily

benefited Mr. and Mrs. Dobbe, then those payments must be treated

as loan repayments rather than constructive dividends.   We

disagree and hold that Holland America’s payment of the disputed

expenses resulted in constructive dividends to Mr. and Mrs.

Dobbe.

     Dividends are includable in a taxpayer’s gross income.   See

sec. 61(a)(7).   Section 316(a) defines a dividend as any

distribution of property made by a corporation to its

shareholders out of its earnings and profits.   “Where the

corporation confers an economic benefit on a shareholder without

the expectation of repayment, that benefit may be a constructive

dividend, taxable to the shareholder.”   Spera v. Commissioner,

T.C. Memo. 1998-225; see also sec. 61(a)(7); Magnon v.

Commissioner, 73 T.C. at 993-994; American Insulation Corp. v.

Commissioner, T.C. Memo. 1985-436.
                                - 36 -

     The test for a constructive dividend is twofold:    (1) The

expense must be nondeductible to the corporation; and (2) it must

represent some economic gain, benefit, or income to the owner-

taxpayer.    See Meridian Wood Prods., Inc. v. United States, 725

F.2d 1183, 1191 (9th Cir. 1984).     “The crucial test * * * is

whether ‘the distribution was primarily for shareholder

benefit.’”     Spera v. Commissioner, supra (quoting Loftin &

Woodard, Inc. v. United States, 577 F.2d 1206, 1215 (5th Cir.

1978)); Hood v. Commissioner, 115 T.C. at ___ (slip op. at 13).

“‘[W]hether or not a corporate distribution is a dividend or

something else, such as a gift, compensation for services,

repayment of a loan, interest on a loan, or payment for property

purchased, presents a question of fact to be determined in each

case.’”     Hardin v. United States, 461 F.2d 865, 872 (5th Cir.

1972) (quoting Lengsfield v. Commissioner, 241 F.2d 508, 510 (5th

Cir. 1957), affg. T.C. Memo. 1955-257); see also Commissioner v.

Gordon, 391 U.S. 83, 88-89 (1968).

     We already have determined that all of the expenses at

issue, with the exception of the golf clubs, are nondeductible to

Holland America; therefore, the first element of the test is met.

As explained below, the second element of the test, whether Mr.

and Mrs. Dobbe received an economic benefit from the expenditures

made by Holland America, is also satisfied.
                                - 37 -

     A.     The Cost of the New Solarium and the Landscaping

     Construction services performed by a corporation that

improve property owned by its shareholder may constitute a

constructive dividend.     See Spera v. Commissioner, supra (citing

Magnon v. Commissioner, supra).     To make this determination, we

must look at all the facts and circumstances surrounding the

expenditures, including the nature of the improvements and

evidence that the shareholder benefited from the corporate

expenditures.     See Spera v. Commissioner, supra.12

     The landscaping improvements clearly improved Mr. and Mrs.

Dobbe’s property.     The new solarium also added value to the

property.    Although Holland America claims it benefited from the

use of the new solarium in the year it was constructed, it has

not shown that whatever short-term incidental benefit it received

from its limited business use of the new solarium outweighed the

primarily personal benefit resulting from the addition of the

solarium to Mr. and Mrs. Dobbe’s residence.     The new solarium is


     12
      As a general rule, improvements made by a lessee (Holland
America) to a leasehold estate do not result in income to the
lessor (Mr. and Mrs. Dobbe) in the year of the improvement or
upon termination of the lease. See sec. 109; M.E. Blatt Co. v.
United States, 305 U.S. 267 (1938); Bardes v. Commissioner, 37
T.C. 1134 (1962); Spera v. Commissioner, T.C. Memo. 1998-225;
Weigel v. Commissioner, T.C. Memo. 1996-485. In this case,
however, we have determined that the improvements on the land
were made to property that was not leased to Holland America;
i.e., the landscaping services and solarium construction were
performed on land surrounding and including the Dobbe residence,
which was not included in the lease. The general rule,
therefore, is not applicable here.
                                - 38 -

near the outdoor pool and is connected to the old solarium, which

was used solely for personal reasons.     Mr. and Mrs. Dobbe have

failed to prove that they did not receive an economic benefit

from the construction of the new solarium or that its primary use

was for business purposes.     The cost of the new solarium and the

landscaping must be included in Mr. and Mrs. Dobbe’s income as a

dividend.    See secs. 61(a)(7), 316.

       B.   The Grocery Expense Reimbursement

       The grocery expense reimbursement also represented economic

gain to Mr. and Mrs. Dobbe.     Since Mr. and Mrs. Dobbe are not

entitled to exclude the reimbursement for groceries from their

income under section 119, they must include the entire

reimbursement in their income as a dividend.     See secs. 61(a)(7),

316.

       C.   Miscellaneous Expenses

       Holland America’s payment of the miscellaneous expenses

attributable to Mr. and Mrs. Dobbe’s residence also directly

benefited Mr. and Mrs. Dobbe.     Utilities, insurance, and property

taxes for a taxpayer’s personal residence are inherently personal

expenses, are not normally subsidized by a corporation, and are

usually drawn from a taxpayer’s personal funds.     Payment of a

shareholder’s personal expenses by a corporation provides an

economic benefit to the shareholder and is taxable as a

constructive dividend to the extent of earnings and profits.       See
                               - 39 -

Spera v. Commissioner, T.C. Memo. 1998-225.    Holland America’s

payment of the miscellaneous expenses resulted in a constructive

dividend to Mr. and Mrs. Dobbe as determined by respondent.    See

secs. 61(a)(7), 316.

     D.   The Shareholder Loan Account

     Mr. and Mrs. Dobbe argue that, even if we hold that payment

of the expenses in question benefited them financially, the

payments should be treated as corporate repayments of their

shareholder loans.    Petitioners rely on Creske v. Commissioner,

T.C. Memo. 1988-574, to support their position that prior loans

from a shareholder to a corporation are sufficient consideration

to avoid the imposition of a constructive dividend.    We disagree.

     In Creske, Wausau Tile, Inc. (Wausau), paid bonuses to its

shareholders and employees in the form of promissory notes, which

were credited to note payable accounts.    The bonuses were

properly declared as income in each year and Federal and State

income taxes were withheld.    In order to obtain industry

discounts, Wausau expressly authorized and approved payment of

the costs of building a new home for one of its officers and

directors, William J. Creske, as a way of repaying the promissory

notes payable to him.    Thus, Wausau paid the expenses incurred

during 1983 and 1984 that related to the purchase of the lot of

land and various subsequent construction costs of Mr. Creske’s

personal residence.    Over the course of 2 years, Wausau issued
                              - 40 -

approximately 65 checks for the construction of the home totaling

$123,909; only $65,137 was applied to reduce Mr. Creske’s note

payable account.   Respondent argued that the costs not deducted

from Mr. Creske’s note payable account constituted constructive

dividends.

     The issue in Creske turned on whether the failure to apply

the uncredited amounts to Mr. Creske’s note payable account was

intentional or whether it was attributable to a mistake by

Wausau’s bookkeeping department.   We found that Mr. Creske

intended to pay for all his construction costs as they were

incurred and that Mr. Creske had the financial means to pay the

construction costs.   We held that payment of the expenses

incurred in the construction of Mr. Creske’s personal residence

did not result in constructive dividends to Mr. Creske; rather,

the amounts incurred represented repayment of indebtedness and

were supposed to be posted to his note payable account.      Creske

is distinguishable from this case.

     Mr. and Mrs. Dobbe have failed to prove that Holland America

intended to treat its payment of the expenses as repayments of

Mr. and Mrs. Dobbe’s shareholder loans.   Holland America

disguised the various expenses as “advertising” (landscaping),

“supplies” (groceries), and “small tools” (solarium) deductions.

Petitioners’ accountant testified that Holland America regularly

paid various personal expenses, charged the expenses against the
                             - 41 -

rent, interest, and principal the corporation owed them, and

deducted the expenses from the Dobbes’ shareholder loan account.

If this had been done with the disputed expenses, petitioners

would have had a stronger argument.    The record before us

supports our finding that Holland America attempted to deduct the

personal expenses of its shareholders by disguising them as

business expenses on its Federal income tax return.     Since

petitioners did not classify Holland America’s payments of Mr.

and Mrs. Dobbe’s personal expenses as loan repayments, we will

not do it for them under the circumstances involved here.

     We have carefully considered all remaining arguments made by

the parties for contrary holdings and, to the extent not

discussed, find them to be irrelevant or without merit.

     To reflect the foregoing,



                                           Decisions will be entered

                                      under Rule 155.
