                          T.C. Memo. 1998-158



                        UNITED STATES TAX COURT



            ROBERT C. FORS AND LUCILLE FORS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 4868-97.             Filed April 30, 1998.



        Robert C. Fors, pro se.

        John C. Schmittdiel, for respondent.



                          MEMORANDUM OPINION


        DINAN, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
                                                   (continued...)
                                - 2 -

     Respondent determined a deficiency in petitioners' Federal

income tax for 1992 in the amount of $4,607 and an accuracy-

related penalty pursuant to section 6662(a) in the amount of

$921.

     After concessions by the parties, the issues remaining for

decision are:   (1) Whether petitioners are entitled to Schedule C

business expense deductions attributable to petitioner husband's

real estate activity in excess of amounts allowed by respondent;

(2) whether petitioners are entitled to an investment tax credit;

and (3) whether petitioners are liable for the section 6662(a)

accuracy-related penalty.2

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.    Petitioners resided in Rosemount,

Minnesota, on the date the petition was filed in this case.      All

references to petitioner in the singular are to Robert C. Fors.

     Petitioner works as a real estate salesman.    During 1992,

petitioner wife worked as a computer lab clerk at a school in

Rosemount, Minnesota.




     1
      (...continued)
Practice and Procedure.
     2
          Respondent's adjustments to petitioners' liability for
self-employment taxes, deduction for one-half of such liability,
and earned income credit are computational and will be resolved
by the Court's holdings on the issues in this case.
                                - 3 -

     The first issue for decision is whether petitioners are

entitled to Schedule C business expense deductions attributable

to petitioner's real estate activity in excess of amounts allowed

by respondent.

     On a Schedule C attached to petitioners' 1992 return,

petitioner reported gross income from his real estate activity in

the amount of $43,915.   He claimed business expenses paid in

connection with his real estate activity in the total amount of

$35,806.   Respondent made adjustments in the statutory notice of

deficiency to nearly all of the claimed expenses.   Although some

of the claimed expenses were wholly or partially disallowed,

respondent also allowed deductions for numerous expenses in

amounts in excess of the amounts claimed on the Schedule C.     The

expenses discussed, infra, are the only ones which petitioner

addressed at trial.   We deem petitioner to have conceded

respondent's adjustments to the claimed expenses which he failed

to address.   Furthermore, respondent's counsel conceded at trial

that petitioner is entitled to deductions for advertising,

insurance, utilities, and postage in amounts in excess of the

amounts allowed in the statutory notice of deficiency:

                 Statutory Notice       Conceded     Total
                  of Deficiency         at Trial    Allowed

     Advertising      $1,332             $106       $1,438
     Insurance           391              392          783
     Utilities           223              480          703
     Postage             255              254          509
                                   - 4 -

     Respondent's determinations in the statutory notice of

deficiency are presumed to be correct, and petitioners bear the

burden of proving otherwise.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).    Moreover, deductions are strictly a

matter of legislative grace, and petitioners bear the burden of

proving their entitlement to any deductions claimed.       Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Office Expenses - Computer

     Petitioner claimed a deduction for office expenses in the

amount of $3,340 on his Schedule C.        Respondent disallowed $2,450

of the claimed deduction.    The parties agree that the claimed and

disallowed office expenses include an amount claimed for the

purchase of a computer.

     Petitioner purchased an Apple Macintosh computer on May 15,

1992 for $2,013 (not including Minnesota sales tax of 6.5

percent).    He purchased the computer through petitioner wife's

employer because of the discounts offered by Apple to employees

of educational institutions.

     Respondent's position is that the cost of the computer is

generally not deductible because it is subject to the section 168

depreciation rules.    We agree.    Respondent further argues that

petitioner failed to make a proper section 179 election which is

required for the computer to be treated as a currently deductible

expense.    Petitioner contends that it is unfair to hold that a
                                 - 5 -

failure to make a timely election on the return prevents him from

deducting a business expense.3

     Section 179(a) generally allows a taxpayer to elect to treat

the cost of section 179 property as a current expense in the year

the property is placed in service, within certain dollar

limitations.    An election under section 179 must be made on the

taxpayer's original return for the taxable year or a timely filed

amended return.    Sec. 179(c)(1)(B); sec. 1.179-4(a), Income Tax

Regs.    The election must specify the items of section 179

property to which the election applies and the cost of each of

the items.    Sec. 179(c)(1)(A); sec. 1.179-4(a)(1) and (2), Income

Tax Regs.    After reviewing the record, we find that petitioner

failed to make the requisite election.    He failed to specify that

he was claiming a section 179 deduction for the cost of the

computer.4   We therefore hold that petitioner is not entitled to

a section 179 deduction for 1992 for the cost of the computer.5

     3
          Respondent concedes that the computer was used by
petitioner 80 percent of the time in connection with his real
estate activity. Petitioner has not proved that he used the
computer for business purposes more than 80 percent of the time.
     4
          Petitioner failed to attach to the return a Form 4562
on which the specific items to be deducted under sec. 179 must be
listed. In addition, there is no indication on the face of the
Schedule C that the claimed office expenses included the amount
paid for the computer. In fact, we note that petitioner had
difficulty at trial recalling which category of expenses the
computer was claimed under.
     5
          Respondent concedes that petitioner is entitled to a
depreciation deduction with respect to the computer for 1992. We
                                                   (continued...)
                                - 6 -

Interest Expense

     Petitioner claimed a deduction for interest paid in the

amount of $989 on his Schedule C.     In the statutory notice of

deficiency, respondent allowed the claimed deduction.      Petitioner

now contends that he is entitled to a deduction for interest paid

in the total amount of $2,999.88.

     Section 163(a) provides that there shall be allowed as a

deduction all interest paid or accrued within the taxable year on

indebtedness.   Petitioner submitted a record from Southview Bank

which shows that he paid interest in the amount of $2,999.88

during 1992.    Petitioner testified that the proceeds of Southview

Bank loan were used to operate his real estate business during

1992.

     Based on the record, we find that the interest paid by

petitioner to Southview Bank during 1992 constitutes interest

paid on indebtedness which is properly allocable to petitioner's

trade as a real estate salesman.    The interest therefore does not

constitute personal interest which would be disallowed by section

163(h)(1).   See sec. 163(h)(2)(A).     Accordingly, we hold that

petitioner is entitled to a Schedule C deduction for 1992 for

interest paid in the amount of $2,999.88.

     5
      (...continued)
therefore instruct respondent to include the conceded amount in
his Rule 155 computation. Respondent's counsel could not provide
the Court with the exact amount of the deduction at trial because
petitioner did not notify respondent that the claimed office
expenses included the computer until shortly before trial.
                               - 7 -

Meals and Entertainment Expenses

     Petitioner claimed a deduction for meals and entertainment

expenses in the amount of $8,240, after accounting for the

section 274(n)(1) 80-percent limitation.    In the statutory notice

of deficiency, respondent disallowed $5,804 of the claimed

deduction.   Respondent argues that petitioner has failed to

substantiate his meals and entertainment expenses in excess of

the amount allowed in the statutory notice of deficiency.

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

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Section 274(d) provides that no

deduction shall be allowed with respect to any traveling expense,

including meals while away from home, or for any entertainment

expenses, unless the taxpayer meets strict substantiation

requirements.   Sec. 274(d)(1) and (2).   In particular, the

taxpayer must substantiate by adequate records or by sufficient

evidence corroborating the taxpayer's own statement the amount,

time, place, and business purpose of the expense.    Sec. 274(d).

     Petitioner submitted some receipts for the claimed meals and

entertainment expenses.   He also submitted copies of his daily

planner along with weekly charts on which he listed the amount

and purpose of the expenses he allegedly paid during 1992 in the

course of his real estate activity.

     Respondent's revenue agent, Marci Coopersmith, examined

petitioner's daily planner, weekly charts, and other receipts
                               - 8 -

which he showed to her shortly before trial.   Based on her review

of his records and his statements during the examination, Ms.

Coopersmith testified that she determined that petitioner was not

entitled to a deduction for meals and entertainment expenses in

excess of the amount allowed in the statutory notice of

deficiency.   Respondent submitted a computer printout of the

results of Ms. Coopersmith's examination as part of the record in

this case; she stated to the Court that the computer printout was

her summary of the amounts substantiated by petitioner and

allowed by her.

     After reviewing the daily planner and the weekly charts,

examining petitioner's records, and listening to petitioner's

testimony, we find that Ms. Coopersmith correctly concluded that

the meals and entertainment expenses allowed in the statutory

notice of deficiency equal or exceed the amount substantiated by

petitioner's records and statements.   It appears from the record

that respondent went to great lengths to sort through

petitioner's assorted records only a week before the trial in an

effort to allow petitioner all of the deductions to which he was

entitled.   Petitioner's records do not support a finding

different from respondent's determination, and he failed to

provide any testimony which convinces us that respondent erred in

his determination.   We therefore hold that petitioner is not

entitled to a Schedule C deduction for meals and entertainment

expenses in excess of the amount allowed by respondent.
                               - 9 -

     The second issue for decision is whether petitioners are

entitled to an investment tax credit for 1992.

     Petitioners did not claim an investment tax credit on their

1992 return.   Petitioners contend that they have an unused

investment tax credit in the amount of $1,839 which was

originally claimed on their 1984 return.

     Petitioners have not proved that the allegedly unused credit

was not absorbed as a carryback to any of their 3 taxable years

preceding their 1984 taxable year (1981, 1982, and 1983).     Sec.

39(a).   Moreover, they have not proved that any remaining amount

was not absorbed as a carryforward to any of the 7 taxable years

following their 1984 taxable year (1985 through 1991) but

preceding the taxable year in issue (1992).   Id.   Therefore, we

have no way of determining the proper amount, if any, of the

alleged credit which may be used as a carryforward to 1992.

Accordingly, we hold that petitioners are not entitled to an

investment tax credit for 1992.

     The fourth issue for decision is whether petitioners are

liable for the section 6662(a) accuracy-related penalty.

Respondent's determinations of negligence are presumed to be

correct, and petitioners bear the burden of proving that the

penalties do not apply.   Rule 142(a); Welch v. Helvering, 290

U.S. at 115; Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,
                               - 10 -

one of which is negligence or disregard of rules or regulations.

Sec. 6662(b)(1).   Respondent determined that petitioners are

liable for the accuracy-related penalty imposed by section

6662(a) for their underpayment of tax in 1992, and that such

underpayment was due to negligence or disregard of rules or

regulations.   "Negligence" includes a failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue laws or to exercise ordinary and reasonable care in the

preparation of a tax return.   Sec. 6662(c); 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.

     Section 6664(c)(1), however, provides that the penalty under

section 6662(a) shall not apply to any portion of an

underpayment, if it is shown that there was reasonable cause for

the taxpayer's position with respect to that portion of the

underpayment and that the taxpayer acted in good faith with

respect to that portion.   The determination of whether a taxpayer

acted with reasonable cause and in good faith is made on a case-

by-case basis, taking into account all the pertinent facts and

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

important factor is the extent of the taxpayer's effort to assess

his proper tax liability for the year.   Id.

     Based on the record, we find that petitioners have not

proved that their underpayment was due to reasonable cause or
                              - 11 -

that they acted in good faith.   Although petitioners were able to

produce some records at the administrative level and at trial

that support their entitlement to business expense deductions,

nearly all of the figures which petitioners listed on their 1992

Schedule C were erroneous.   We hold that petitioners are liable

for the section 6662(a) accuracy-related penalty.

     To reflect the foregoing,



                                         Decision will be entered

                                    under Rule 155.
