                          T.C. Memo. 2003-30



                      UNITED STATES TAX COURT



       MICHAEL CHIN AND JULIE HEDRICH CHIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 599-01.                  Filed February 6, 2003.



     Robert F. Klueger, for petitioners.

     Michael W. Berwind, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax and penalties for the taxable

years 1994 and 1997 as follows:

                                                  Penalty
          Year             Deficiency          Sec. 6662(h)

          1994              $22,319               $8,928
          1997               22,318                8,927
                                   - 2 -

        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, unless otherwise

indicated.

        After concessions,1 the sole issue for our consideration is

whether petitioners have shown entitlement to a deduction for

rent payments as ordinary and necessary business expenses under

section 162(a).

                             FINDINGS OF FACT2

     Petitioners Michael Chin and Julie Hedrich Chin resided in

Corona, California, at the time their petition was filed in this

case.       Michael Chin3 (petitioner) graduated from medical school

in 1984 and became licensed to practice medicine as both a

physician and surgeon in California on December 16, 1985.

Petitioner’s primary medical practice specialty is general

surgery, and his secondary practice specialty is vascular

surgery.       During the years at issue, petitioner leased or

subleased two offices in Corona, California, and one office in



        1
       In the statutory notice of deficiency, respondent
determined accuracy-related penalties due to a gross valuation
misstatement under sec. 6662(h). Respondent conceded the sec.
6662(h) penalties in his posttrial brief.
        2
       The parties’ stipulations of facts are incorporated by
this reference.
        3
       Petitioner Julie Hedrich Chin is a party to this case by
reason of the fact that she filed joint Federal income tax
returns with Michael Chin for the years at issue.
                              - 3 -

Wildomar, California, to operate his medical practice.   All three

offices were within Riverside County limits, and petitioner paid

aggregate rent for the offices of $31,760 in 1994 and $24,039 in

1997.

     At all pertinent times petitioner maintained appropriate

State, county, and local licenses to conduct business at all of

his office locations in Riverside County and maintained hospital

privileges at several hospitals in Riverside County.   Petitioner

also maintained both general business and surgical telephone

listings in three local Riverside County telephone directories

and was a member of the Riverside County Medical Association.

     For the 1994 and 1997 tax years, petitioner reported on his

Schedule C, Profit or Loss From Business, gross receipts of

$1,056,961 and $1,253,902, respectively.   All of these gross

receipts were derived from petitioner’s medical practice at the

three Riverside County offices.   Further, for 1994 and 1997,

petitioner reported taxable income of $620,115 and $737,341,

respectively, and was in the 39.6-percent tax rate bracket.

     In November 1989, petitioner’s mother, Chi Ying Chin,

acquired a commercial building at 13732 Ventura Boulevard,

Sherman Oaks, California (Sherman Oaks Property).   Sherman Oaks,

California, is approximately 10 miles northwest of Los Angeles

and approximately 70 miles west of Riverside County.
                               - 4 -



     On November 18, 1991, the Skin Service Club, Inc. (Skin

Service Club), was incorporated as a C corporation under

California law.    Petitioner and his brother, David Sywehong

Chin, each owned 50 percent of the Skin Service Club stock.     Two

years later, on November 15, 1993, the Skin Service Club elected

to be taxed as an S corporation.

     The Skin Service Club conducted business at the Sherman Oaks

Property in 1992, 1993, and 1994.   Petitioner, however, did not

acquire, in his name, any City of Los Angeles permits or licenses

needed to conduct business in the town of Sherman Oaks.    In

addition, petitioner never maintained a medical or surgical

listing in any Sherman Oaks telephone directory, and he was not a

member of the Los Angeles County Medical Society.

     For both years at issue, the Skin Service Club reported zero

gross receipts.   Further, the Skin Service Club did not generate

any revenue from the time of its conversion to an S corporation

through December 30, 1996, when the company was dissolved.

During its entire period of operation, the Skin Service Club did

not claim any rent expense relating to the Sherman Oaks Property.

     On November 13, 1991, petitioner executed a 10-year lease on

suite B of the Sherman Oaks Property, with petitioner’s mother as

landlord.   Under the terms of the lease, petitioner made rent

payments to his mother of $52,000 in 1994 and $48,000 in 1997.

Petitioner deducted these amounts as business expenses on his
                               - 5 -

Schedule C attached to his Forms 1040, U.S. Individual Income Tax

Return, for each tax year.   Notwithstanding petitioner’s 1997

rent payments, the Sherman Oaks Property was vacant during this

entire year.

     Petitioner’s mother reported the payments received from

petitioner as rental income on her 1994 and 1997 tax returns.    In

1994, despite $52,000 in rent receipts from petitioner,

petitioner’s mother had zero taxable income after deductions.    In

1997, petitioner’s mother had taxable income of $56,778 and was

in the 28-percent tax rate bracket.

     During 1994 and 1995, petitioner’s brother filed three

business name registrations in the State of California, each

designating the Sherman Oaks Property as the place of business.

One of the filings, that of Great Western Kingdom, specifically

designated suite B of the Sherman Oaks Property as the company’s

place of business.   In 1994, petitioner paid his brother $36,000

in nonemployee compensation, which petitioner reported using a

Form 1099-MISC, Miscellaneous Income, and petitioner’s brother

reported on his Schedule C as gross receipts from Great Western

Kingdom.

                              OPINION

     The question we consider is whether petitioner is entitled

to deduct the Sherman Oaks Property rent payments (rent payments)

made to his mother as ordinary and necessary business expenses
                               - 6 -

under section 162.   Section 162(a) allows a deduction for “all

the ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.    Section

162(a)(3) specifically includes “rentals or other payments

required to be made as a condition to the continued use or

possession, for purposes of the trade or business, of property to

which the taxpayer has not taken or is not taking title or in

which he has no equity” as deductions that qualify as ordinary

and necessary.

      The question as to whether an expenditure satisfies the

requirements of section 162 is one of fact.    Commissioner v.

Heininger, 320 U.S. 467 (1943).   In addition, “intrafamily

transactions resulting in the distribution of income within a

family unit are subject to the closest scrutiny.”     Van Zandt v.

Commissioner 40 T.C. 824, 830 (1963) (citing Commissioner v.

Tower, 327 U.S. 280 (1946); Helvering v. Clifford, 309 U.S. 331

(1940)), affd. 341 F.2d 440 (5th Cir. 1965).

     Petitioner maintains that the Sherman Oaks Property rent

payments were made as part of an oral agreement between him and

his brother when incorporating the Skin Service Club in 1991.     In

return for the contribution of day-to-day management services to

the corporation by petitioner’s brother, petitioner would be

solely obligated to make rent payments on the Sherman Oaks

Property lease.   Petitioner further maintains that the agreement
                               - 7 -

called for petitioner’s brother to perform cosmetology services

and to refer his clients to petitioner for sclerotherapy

treatment of varicose veins.

     Petitioner argues that he conducted his medical practice at

the Sherman Oaks Property as a part of the business activity of

the Skin Service Club.   Petitioner further argues that, despite

the fact that the Skin Service Club is a corporation,

petitioner’s rent payments for the years at issue were deductible

on petitioner’s Schedule C as ordinary and necessary business

expenses relating to petitioner’s personal medical practice.    On

the other hand, respondent argues that petitioner was not

involved in any business activity at the Sherman Oaks Property

during the years at issue, and therefore petitioner’s rent

payments were not incurred to carry on a trade or business under

section 162.   Respondent further argues that the rent payments

were in actuality a redistribution of income from petitioner, who

was in the highest tax bracket, to his mother, who was in a lower

tax bracket.   We agree with respondent.

     We note that a “deduction is a matter of legislative grace

and that the burden of clearly showing the right to the claimed

deduction is on the taxpayer.”4   INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); see also Rule 142(a).   Therefore,

     4
       The examination commenced before July 22, 1998.
Accordingly sec. 7491 burden of proof and production standards
are not applicable. See sec. 7491.
                                - 8 -

petitioner must establish that his Sherman Oaks Property rent

payments were incurred in carrying on his trade or business.

     Petitioner has not shown that he ever conducted his medical

practice at Sherman Oaks Property.      The only evidence petitioner

offered was his own self-serving testimony that he had an oral

agreement with his brother and that he saw patients at     Sherman

Oaks Property in 1991 and 1992.   As we do not need to accept

self-serving testimony without corroborating evidence, this

testimony, by itself, is not enough to establish that petitioner

conducted business activity at the Sherman Oaks Property during

1994 and 1997.    Niedringhaus v. Commissioner, 99 T.C. 202 (1992).

Further, even if we accepted petitioner’s testimony, it does not

relate to business activity at the Sherman Oaks Property for the

1994 and 1997 tax years.   Petitioner offers no evidence

indicating that he conducted his medical practice at the Sherman

Oaks Property in either 1994 or 1997.

     Many facts, however, indicate an absence of business

activity by petitioner at the Sherman Oaks Property during the

years at issue.   Petitioner did not take any of the customary

steps of starting up a medical practice at Sherman Oaks Property

that he had taken in Riverside County.     Petitioner did not

acquire business permits or licenses, did not maintain any type

of local telephone listing, did not have any local hospital

privileges, and was not a member of the Los Angeles County
                                 - 9 -

Medical Society.   Even if petitioner was to rely on his brother

for patient referrals, these customary business steps were not

taken to attract clients in addition to the referrals.

     Most notably, petitioner fails to explain how he could have

conducted his medical practice at the Sherman Oaks Property while

failing to generate any revenue.    In 1994, petitioner reported

Schedule C gross receipts of $1,056,961.    None of these gross

receipts were shown to be derived from activity at the Sherman

Oaks Property.   Further, the Skin Service Club reported zero

gross receipts on its S corporation tax return.    If petitioner

had conducted his medical practice at the Sherman Oaks Property

at any time in 1994, such activity would have generated revenue

reportable on either petitioner’s Schedule C or the Skin Service

Club’s corporate return.

     Respondent concedes that the Skin Service Club conducted

some business activity at the Sherman Oaks Property during 1994.

However, the business activity was minimal at best, with zero

revenue and minimal expenses.    There is no evidence indicating

that petitioner was involved with the Skin Service Club’s

business activity during 1994.

     In 1997, none of petitioner’s $1,253,902 Schedule C gross

receipts were derived from activity at the Sherman Oaks Property.

Further, the Skin Service Club was dissolved before 1997, and the

Sherman Oaks Property was completely vacant for the entire year.
                              - 10 -

Given these facts, no business activity was conducted by anyone

at the Sherman Oaks Property in 1997.

     Although there was little or no business activity during the

years at issue, petitioner had entered into a lease for the

property, paid rent, and had some type of informal understanding

or arrangement with his brother relating to the Skin Service

Club.   These facts, at least in form, suggest the expectation of

possible business activity.   However, according to the record and

in substance, petitioner’s rent payments merely benefited

petitioner’s brother and mother.   Petitioner’s brother was

provided with a place to operate various of his business

ventures, and petitioner’s mother received monthly income

payments.   In addition, petitioner has not shown any relationship

between the rent payments and any income-producing activity of

petitioner, including his medical practice.   Although

petitioner’s rent payments reflect his generosity to his family,

they fall short of the section 162 standard for deductibility.

     Accordingly, we hold that petitioner did not conduct any

business activity at the Sherman Oaks Property during 1994 or

1997.   We further hold that petitioner’s relationship to his

brother and/or the Skin Service Club does not provide a basis for

petitioner to claim a deduction for rental expenses on his

personal Schedule C.   Any business activity that did occur at the

Sherman Oaks Property during the years at issue could only have
                              - 11 -

been that of one of the several ventures entered into by

petitioner’s brother.5   Petitioner’s rent payments were personal

expenditures unrelated to his medical practice and designed to

support his brother’s business interests while shifting income to

his mother, who was in a lower tax bracket.

     To the extent not herein discussed, we have considered all

other arguments made by the parties and conclude that they are

moot or without merit.

     To reflect the foregoing and concessions of the parties,


                                    Decision will be entered

                               for respondent.




     5
       Petitioner did not argue that the rent payments were a
type of investment or contribution of capital in the Skin Service
Club entitling him to deductions for one-half of the rent
payments via the S corporation pass-through rules.
