                          T.C. Memo. 1998-368



                        UNITED STATES TAX COURT



               KENNETH AND SHEILA SMITH, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 16296-97.                    Filed October 8, 1998.



        Gregory G. McGill and Douglas G. Wymore, for petitioners.

        Anne W. Durning, 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
Practice and Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioners' Federal

income tax for 1994 in the amount of $9,200.

     After a concession by respondent,2 the issue remaining for

decision is whether petitioners are entitled to business expense

deductions.

     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 Phoenix,

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

references to petitioner in the singular are to Kenneth Smith.

     All of respondent's substantive adjustments in the statutory

notice of deficiency involve amounts claimed with respect to

petitioner's involvement with Tracstar Simulcasting, Inc.

(Tracstar).3   Tracstar provided live satellite transmission of

dog and horse races to various off-track betting (OTB) locations.

It installed all of the equipment at the racetracks and the OTB

locations necessary for sending and receiving the satellite

signals.   The racetracks were generally located in Arizona, but




     2
          In the event that the Court holds that petitioners are
not entitled to the claimed Schedule C deduction for interest
paid with respect to their motor homes, respondent concedes that
petitioners are entitled to an additional sec. 163(h)(3)
qualified residence interest deduction for such interest.
     3
          Respondent's adjustment to petitioners' liability for
alternative minimum tax is computational and will be resolved by
the Court's holding on the issue in this case.
                                 - 3 -

the satellite signals were transmitted to OTB locations

throughout the United States.

     During 1994, petitioner was the owner of record of

approximately half of Tracstar's outstanding shares of voting

stock.   He served as Tracstar's vice president and as a member of

its board of directors.

     Petitioner was in charge of Tracstar's day-to-day

operations.   He supervised the engineering staff and their

installation of equipment in the field.    He represented Tracstar

at various trade shows.    He was also responsible for raising

additional capital for Tracstar's future projects.

     Petitioner was often required to purchase equipment to be

installed at Tracstar's sites.    In lieu of obtaining financing

for the equipment, petitioner was authorized to charge the

equipment on Tracstar's American Express Corporate credit card

(the Corporate card).4    He charged other Tracstar expenses on the

Corporate card, including his travel and meal expenses incurred

in connection with Tracstar's business.    Petitioner also charged

personal expenses on the Corporate card.

     Petitioner also had an American Express Gold credit card

(the Gold card) in his own name.    As with the Corporate card, he

charged Tracstar's business expenses on the Gold card.    During

     4
          Tracstar's employees David C. Lunder and Jim Pitcher
were also authorized to use the Corporate card. Their itemized
charges are stated separately from petitioner's on the monthly
statements.
                                - 4 -

1994, petitioner Sheila Smith, and petitioners' daughter, Tara

Smith, were also authorized to use the Gold card.    The monthly

statements separately identified petitioner's, Sheila's, and

Tara's charges.   Each of them regularly charged personal expenses

on the Gold card.    Petitioners also had numerous Visa credit

cards which were used solely for charging personal expenses.

     The monthly statements for both the Corporate card and the

Gold card were forwarded to Tracstar.    Kathy Parsons, Tracstar's

bookkeeper during 1994, would review each of the itemized charges

and determine whether a charge constituted a business expense of

Tracstar or a personal expense.    Regardless of the nature of the

charges, Tracstar would pay the entire account balance.    To the

extent that personal expenses were charged to the Corporate Card

and the Gold card by petitioner and his family, the amounts of

such personal expenses which were paid by Tracstar were debited

to an account labeled "Due from Officer Smith" (the personal

expense account).5   Tracstar's balance sheet dated December 31,

1993, shows a debit balance in the personal expense account in

the amount of $19,717.28.

     In early August of 1994, Tracstar's management, including

petitioner, decided to begin issuing periodic bonuses to its

     5
          This accounting procedure was not followed for the Dec.
22, 1994, Gold Card statement. Rather, after making her
determination of the personal versus business nature of the
expenses, Ms. Parsons forwarded the statement to petitioner for
him to pay in full and credited the personal expense account by
the amount of the business expenses for the billing period.
                                - 5 -

officers.    The after-tax amounts of petitioner's bonus payments

were credited against the debit balance in the personal expense

account.    In other words, the bonus payments were used to repay

the amount owed by petitioner to Tracstar for personal expenses

charged to the Corporate card and the Gold card.   The total

amount credited to the personal expense account in this manner

during 1994 was $21,798.66.   Tracstar's balance sheet dated

December 31, 1994, shows a debit balance in the personal expense

account in the amount of $20,289.68.

     Petitioner ceased working for Tracstar in January 1995.   He

disputes his liability for some of the charges which Ms. Parsons

characterized as personal expenses and debited to the personal

expense account.   Litigation over the amounts payable by

petitioner and Tracstar was ongoing at the time of the trial in

this case.

     Petitioners filed a joint Federal income tax return for

1994.   Their return was prepared by Tracstar's accountant,

Michael Klecka.    Petitioners reported the total of petitioner's

regular ($65,000 = 26 payments times $2,500) and bonus

compensation ($31,680 = 11 payments times $2,880) from Tracstar

as wages and other compensation on petitioners' 1994 return.

     Petitioners claimed a Schedule C business loss deduction in

the amount of $19,553.   In the statutory notice of deficiency,

respondent disallowed the claimed deduction.    The Schedule C and
                               - 6 -

a self-prepared statement attached to petitioners' return reports

no gross receipts and claims the following expenses:

     Car and truck expenses                         $97
     Depreciation                                13,428
          Motor home                   $8,133
          Motor home                    4,777
          Computer                        518
     Interest                                     5,579
          Mortgage                      1,757
          Other                         3,822
     Office expense                                 193
     Rental of vehicles, machinery,
          & equipment                               101
     Travel, meals, & entertainment      231
          After 50% limitation                      115
     Miscellaneous expense                           40

     Petitioners claimed a Schedule A deduction for unreimbursed

employee business expenses in the amount of $23,494, after the

section 67(a) limitation.   In the statutory notice of deficiency,

respondent disallowed the claimed deduction.    Petitioners

attached a Form 2106-EZ and a self-prepared statement which list

the claimed expenses, before the limitation, as follows:

     Travel expenses                               $862
     Repairs & maintenance                        2,522
     Various gifts                                  318
     Computer & office supplies                      29
     Telephone                                      169
     Tracstar Simulcasting, Inc #XX-XXXXXXX      21,169

     At trial and in their opening brief,6 petitioners made no

distinction between the claimed Schedule C trade or business

expenses and the claimed Schedule A employee business expenses.

Their accountant, Michael Klecka, was not called to testify as to

     6
          Petitioners did not submit a reply brief as they were
instructed to by the Court.
                                - 7 -

the origins of the amounts claimed.     In general, petitioner's

testimony focused on disputing Ms. Parsons' characterization of

the Corporate card and the Gold card charges.     Other than the

claimed deductions related to the motor homes, petitioners have

offered no persuasive evidence in the record to account for the

amounts claimed on their 1994 return.

     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).

     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, including the trade or business

of being an employee.    Commissioner v. Flowers, 326 U.S. 465

(1946).   Taxpayers are required to substantiate amounts claimed

as deductions by maintaining the records needed to establish

entitlement to the deductions claimed.     Sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

Disputed Credit Card Charges

     Petitioners argue that the disputed credit card charges are

Tracstar's business expenses.   The disputed charges highlighted
                              - 8 -

by petitioner total approximately $17,500.    Petitioner contends

that he is entitled to deductions for these expenses because they

constitute business expenses paid by him during 1994.

     To the extent that the disputed expenses are personal in

nature, they are not deductible pursuant to section 262.     To the

extent that the disputed expenses are Tracstar's business

expenses, they are not deductible by petitioner because he has

failed to establish that his unreimbursed payment of Tracstar's

business expenses qualifies as an ordinary and necessary expense

of his own business under section 162(a).    Deputy v. du Pont, 308

U.S. 488 (1940); Kaplan v. Commissioner, 21 T.C. 134, 146 (1953).

     The litigation over the nature of the expenses will

ultimately determine who is liable for the disputed charges.     If

any of the expenses are found to be business in nature,

petitioner is likely to be reimbursed by Tracstar to the extent

he paid for them with his bonus payments.    We hold that

petitioner is not entitled to deductions for the disputed

expenses.

Motor Home Interest and Depreciation

     In 1990, petitioners purchased a 1989 Southwind motor home.

On or about November 1, 1994, petitioners replaced the 1989

Southwind motor home with a 1994 Dynasty motor home.    On their

1994 return, petitioners claimed deductions for interest and

depreciation for both of the motor homes.    Petitioners did not

maintain a log of the business use of the motor homes.      In their
                                 - 9 -

opening brief, petitioners take the position that only the 1989

Southwind motor home was used in connection with Tracstar's

business.

     Based on the record, we find that petitioners have not

substantiated with adequate records the extent, if any, that

their motor homes were used for business purposes during 1994.

We refuse to rely on petitioner's self-serving testimony of the

alleged business use of the motor homes because it is not

corroborated by any other individual's testimony or any written

records of business use.    Niedringhaus v. Commissioner, 99 T.C.

202, 219-220 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).   Other than petitioner's uncorroborated testimony, the

only evidence of any business use of the motor homes is several

photographs.    We find these photographs unreliable because they

do not reveal when they were taken and do not identify the motor

home pictured.   We hold that petitioners are not entitled to

interest and depreciation deductions for business use of their

motor homes.7

     To reflect the foregoing,



                                              Decision will be entered

                                         under Rule 155.

     7
          Respondent concedes that petitioners are entitled to an
additional qualified residence interest deduction in the amount
of $5,579 for interest paid with respect to the motor homes
during 1994. See supra note 2.
