                         T.C. Memo. 2009-176



                       UNITED STATES TAX COURT



              ROB AND SHIRLEY TYSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          RS TYSON AND ASSOCIATES, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 6879-07, 6880-07.     Filed July 29, 2009.



     Kathryn E. Barnhill, for petitioners.

     Catherine S. Tyson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    In these consolidated cases respondent

determined the following deficiencies in and penalties on

petitioners’ 2003 Federal income taxes:
                                - 2 -

Rob and Shirley Tyson, docket No. 6879-07

                                          Penalty
               Deficiency               Sec. 6662(a)

                 $5,199                   $1,039.80

RS Tyson & Associates, Inc., docket No. 6880-07

                                          Penalty
               Deficiency               Sec. 6662(a)

                 $8,027                   $1,605.40

Pursuant to a joint motion, these cases have been consolidated

for trial, briefing, and opinion.   The following issues remain

for decision regarding 2003:1   (1) Whether RS Tyson & Associates,

Inc. (RS Tyson), is entitled to deductions claimed for alleged

business expenses; (2) whether Rob and Shirley Tyson (Mr. and

Mrs. Tyson) are entitled to deductions claimed for alleged

expenses on Schedule E, Supplemental Income and Loss; (3) whether

Mr. and Mrs. Tyson received constructive dividends from RS Tyson;

and (4) whether petitioners are liable for accuracy-related

penalties pursuant to section 6662(a).2




     1
        Mr. and Mrs. Tyson deducted on Schedule E, Supplemental
Income and Loss, interest of $6,176 and depreciation of $12,611
for 2003. In their brief (they did not file a reply brief), they
failed to address the disallowance of those deductions.
Accordingly, we conclude that they have abandoned these issues.
See Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).
     2
        All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                  - 3 -

                            FINDINGS OF FACT

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference.      At the time they filed the petitions, Mr. and Mrs.

Tyson resided in Oklahoma, and RS Tyson had its principal place

of business in Oklahoma.

I.   RS Tyson

      During 2003 RS Tyson, a C corporation, had two business

activities:      Tyson Painting and a Shaklee distributorship.3    Mr.

and Mrs. Tyson each owned 50 percent of the outstanding shares of

RS Tyson.     Mrs. Tyson sold Shaklee products on behalf of RS

Tyson.4

      Mr. and Mrs. Tyson were not employees of RS Tyson.5    Mr. and

Mrs. Tyson reported $89 of wages and salaries from Southern Hills

Baptist Church on their 2003 return.      They reported no other

wages or salaries on that return.      RS Tyson did not report (1)




      3
        See Chaney v. Commissioner, T.C. Memo. 2009-55 (Shaklee
distributors sell nutritional and cleaning products from Shaklee
Corp.).
      4
        Respondent concedes that Mrs. Tyson conducted an active
trade or business as a distributor of Shaklee products.
      5
        It is unclear from the record whether Mr. and Mrs. Tyson
were independent contractors of RS Tyson or worked for RS Tyson
in some other capacity.
                                - 4 -

any compensation to officers or (2) salaries or wages to any

employees.

     For 2003 RS Tyson deducted the following expenses on its

Form 1120, U.S. Corporation Income Tax Return:

                 Expense                          Amount

     Rent of Mr. and Mrs. Tyson’s home           $24,000
     Lease of equipment                           12,000
     Employee benefit program                      8,919
     Laundry                                       1,893
     Travel                                        4,209
     Meals and entertainment                       1,119
     Automobile                                    8,695

Respondent disallowed these deductions.

     A.   Rent of Mr. and Mrs. Tyson’s Home and Equipment Leasing
          Expense

     On Schedule E, Mr. and Mrs. Tyson reported $36,000 of rents

received from RS Tyson.    They reported that the $36,000 consisted

of $24,000 for the use of Mr. and Mrs. Tyson’s home for Shaklee

business purposes and $12,000 for the lease of office and

painting equipment.

     RS Tyson deducted as a business expense alleged rent of

$12,000 paid to Mr. and Mrs. Tyson to lease Mr. and Mrs. Tyson’s

office equipment and painting equipment.     The record is silent as

to what specific equipment was leased.

     RS Tyson deducted as a business expense alleged rent of

$24,000 paid to Mr. and Mrs. Tyson to lease space in Mr. and Mrs.

Tyson’s home.   RS Tyson allegedly rented space in Mr. and Mrs.

Tyson’s home for $2,000 per month.      Mr. and Mrs. Tyson arrived at
                               - 5 -

this rental amount after estimating the number of hours per month

RS Tyson would need to rent meeting space (100 hours per month)

and after taking into account the hourly rates of local

establishments that rented meeting space/rooms by the hour.    The

local Marriott Hotel and other places that rented meeting

space/rooms were called, and Mr. and Mrs. Tyson learned that the

rates these establishments received for rental of meeting

space/rooms were between $75 and $100 per hour.   Mr. and Mrs.

Tyson decided that RS Tyson should rent meeting space in their

home at a cost of $20 per hour.

     Petitioners claimed that Mr. and Mrs. Tyson’s living room

was the meeting room, the dining room was where training and

makeovers took place, the kitchen was where Mrs. Tyson made

“Shaklee shakes”, and the bathroom by the office also was used

for makeovers.   The dining room was where Mr. and Mrs. Tyson ate

dinner.

     In a notice of deficiency issued to RS Tyson, respondent

disallowed the total deductions of $36,000.   In a notice of

deficiency issued to Mr. and Mrs. Tyson, respondent “determined

that the Schedule E listed did not exist during the tax year

ended December 31, 2003”, decreased rents received by $36,000,

and increased constructive dividends received by $36,000.
                                 - 6 -

     B.   Employee Benefit Program

     RS Tyson deducted $8,919 as employee benefit program

expenses.    Mr. and Mrs. Tyson each signed a document entitled

“Corporate Resolution Establishing Self-Insured Medical Payment

Plan” which established the employee benefit program of RS Tyson.

The plan provided that RS Tyson would pay or reimburse, directly

or indirectly, certain medical and dental expenses of its

employees.    The employee benefit program was intended to qualify

as one under which payments to employees are excludable from

their gross income under section 105(b).

     Under the employee benefit program the medical and dental

expenses to be paid or reimbursed would be those for which the

employee was not compensated by insurance or otherwise and which

would be treated as medical expenses under section 213.    The

amount that would be paid or reimbursed was limited to $10,000

per person per calendar year.    The employee benefit program

covered reimbursements for medical or medical-related insurance,

medical or medical-related services, life insurance, disability

insurance, dental or dental-related services, and chiropractic or

chiropractic-related services.

     During 2003 RS Tyson paid the following amounts:    $2,276 for

term life insurance for Mr. Tyson, $626 for term life insurance

for Mrs. Tyson, and $3,091 to Christian Care Medi-Share for

“Affordable, Biblical Healthcare” for Mr. and Mrs. Tyson.    During
                               - 7 -

2003 RS Tyson made reimbursements as follows:   $1,578 to Mr.

Tyson for medical expenses and $1,324 to Mrs. Tyson for medical

expenses.

     C.   Laundry Expenses

     RS Tyson deducted $1,893 as laundry expenses.    RS Tyson

deducted the cost of laundering the uniforms that Mr. Tyson used

for painting.   To substantiate this expense petitioners submitted

receipts and payments for the purchase of Mr. Tyson’s painting

uniforms, including the purchase of shirts, boots, and socks, and

one check for $36 that contained “alter paint pants” in the memo

section of the check.

     D.   Travel Expenses

     RS Tyson deducted $4,209 as travel expenses.    RS Tyson

deducted the cost of a trip by Mr. and Mrs. Tyson to Disneyland

and a personal trip for Mr. and Mrs. Tyson to Branson, Missouri.

Mr. and Mrs. Tyson took their son, daughter-in-law, and grandson

with them on the trip to Disneyland.

     E.   Meals and Entertainment Expenses

     RS Tyson deducted $1,119 as meals and entertainment

expenses.   RS Tyson deducted the cost of meals to celebrate Mr.

and Mrs. Tyson’s daughter’s graduation and Mrs. Tyson’s birthday.

Additionally, RS Tyson deducted the cost of numerous meals that

Mr. and Mrs. Tyson had with their family.    RS Tyson also deducted
                                 - 8 -

the cost of a small number of meals with Shaklee business

clients.

      To substantiate the meals and entertainment expense

deductions, petitioners submitted photocopies of receipts from

restaurants.    The receipts contained notations identifying the

persons who consumed the meals and indicating that the purpose of

the meals regarded Shaklee business such as discussing various

Shaklee products, Shaklee business plans and strategy, Shaklee

business volume, or the layout of Shaklee advertisements.

      F.   Automobile Expenses

      RS Tyson deducted $8,695 as automobile expenses.   To

substantiate this expense, RS Tyson submitted a spreadsheet

listing “car charge” and insurance; a document from Shaklee

entitled “bonus statement” that listed “car program activity”; RS

Tyson’s bank statements; photocopies of toll receipts; a

spreadsheet for “gas, repairs, insurance, and lease, etc.”; gas

receipts, many of which are illegible; and copies of insurance

payment schedules.    RS Tyson kept track of only the personal use

mileage of the automobiles.

II.   Mr. and Mrs. Tyson

      For 2003 Mr. and Mrs. Tyson deducted the following expenses

on their Schedule E:
                                - 9 -

                   Expense                 Amount

          Legal and professional fees       $350
          Insurance                          502
          Repairs                             32
          Taxes                              982
          Utilities                        1,361

Respondent disallowed these deductions.

     A.   Legal and Professional Fees

     Mr. and Mrs. Tyson deducted legal and professional fees of

$350 for 2003.    The record does not contain any information about

this deduction.

     B.   Insurance, Repairs, Taxes, and Utility Expenses

     Mr. and Mrs. Tyson deducted insurance expenses of $502,

repair expenses of $32, taxes of $982, and utility expenses of

$1,361.   These expenses arose from the alleged rental arrangement

for their home.   The record does not contain any further

information about these deductions.

     C.   Constructive Dividends:   Automobile Purchase

     In December 2003 RS Tyson paid $15,000 to Reliable Toyota.

The $15,000 was a deposit on a vehicle purchased for Mr. and Mrs.

Tyson.    Mr. and Mrs. Tyson got a loan for the balance of the cost

of the vehicle.

                               OPINION

     The Commissioner’s determinations are generally presumed

correct, and the taxpayer bears the burden of proving the
                              - 10 -

determinations erroneous.6   Rule 142(a).   The taxpayer bears the

burden of proving that he is entitled to the deduction claimed,

and this includes the burden of substantiation.    Id.; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).   A taxpayer must substantiate amounts

claimed as deductions by maintaining the records necessary to

establish he or she is entitled to the deductions.    Sec. 6001.

     Section 162(a) provides a deduction for certain business

expenses.   In order to qualify for the deduction under section

162(a), “an item must (1) be ‘paid or incurred during the taxable

year,’ (2) be for ‘carrying on any trade or business,’ (3) be an

‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’

expense.”   Commissioner v. Lincoln Sav. & Loan Association, 403

U.S. 345, 352 (1971); see also Commissioner v. Tellier, 383 U.S.

687, 689 (1966) (the term “necessary” imposes “only the minimal

requirement that the expense be ‘appropriate and helpful’ for

‘the development of the [taxpayer’s] business” (quoting Welch v.

Helvering, 290 U.S. 111, 113 (1933))); Deputy v. du Pont, 308

U.S. 488, 495 (1940) (to qualify as “ordinary”, the expense must

relate to a transaction “of common or frequent occurrence in the

type of the business involved”).   Whether an expense is ordinary

is determined by time, place, and circumstance.    Welch v.


     6
        Petitioners have not established that they satisfied the
requirements of sec. 7491(a). Accordingly, the burden of proof
does not shift to respondent.
                               - 11 -

Helvering, supra at 113-114.   Respondent has not challenged the

existence of a trade or business.7

     If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the expense, we may approximate the amount of the allowable

deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making.     Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930).     However, for the Cohan rule

to apply, there must be sufficient evidence in the record to

provide a basis for the estimate.    Vanicek v. Commissioner, 85

T.C. 731, 743 (1985).   Certain expenses may not be estimated

because of the strict substantiation requirements of section

274(d).   See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).

1.   Rent of Mr. and Mrs. Tyson’s Home

      RS Tyson deducted rental expenses for the use of Mr. and

Mrs. Tyson’s home of $24,000 for 2003.     RS Tyson claims that

during 2003 it rented most of Mr. and Mrs. Tyson’s home for

Shaklee business purposes.   Supposedly, Mr. and Mrs. Tyson’s

living room was the meeting room, the dining room was where

training and makeovers took place, the kitchen was where Mrs.

Tyson made “Shaklee shakes”, and the bathroom by the office also


      7
        In other words, respondent concedes that both Tyson
Painting and the Shaklee distributorship were legitimate
businesses carried on by RS Tyson.
                                - 12 -

was used for makeovers.    The dining room was where Mr. and Mrs.

Tyson ate dinner.

      “A close relationship between a lessor and lessee * * *

[requires] a careful examination of the circumstances surrounding

the arrangement to determine whether the payments are, in fact,

for the rental of the property.”    Feldman v. Commissioner, 84

T.C. 1, 5 (1985), affd. 791 F.2d 781 (9th Cir. 1986).      There is a

lack of proof of a bona fide rental.      See Chaney v. Commissioner,

T.C. Memo. 2009-55.    The amount claimed as rent was a

guesstimate--both as to the cost and as to the amount of time RS

Tyson used the property.    The purported rental agreement has

little reality beyond tax planning.      See id.   The purported

rental was not at arm’s length, and we disregard it for lack of

economic substance.8   Accordingly, we sustain respondent’s

determination on this issue.

2.   Employee Benefit Program

      RS Tyson deducted employee benefit program expenses of

$8,919 for 2003.    Mr. and Mrs. Tyson each signed up for the

employee benefit program offered by RS Tyson.

      “The deductibility of employee benefit plan expenses

generally requires proof, in the first instance, of an



      8
        Additionally, Mr. and Mrs. Tyson made personal use of the
alleged rented space. Furthermore, we note that respondent
reduced Mr. and Mrs. Tyson’s rental income to zero in the notice
of deficiency.
                              - 13 -

employer-employee relationship.”    Francis v. Commissioner, T.C.

Memo. 2007-33.   Mr. and Mrs Tyson reported $89 of wages and

salaries from Southern Hills Baptist Church on their 2003 return.

They reported no other wages or salaries on that return.    RS

Tyson did not report (1) any compensation to officers or (2)

salaries or wages to any employees.    No evidence of an employment

agreement was presented.   Mr. and Mrs. Tyson were not employees

of RS Tyson.   See Haeder v. Commissioner, T.C. Memo. 2001-7.

Accordingly, we sustain respondent’s determination disallowing

the employee benefit plan expense deduction.

3.   Laundry Expenses

      RS Tyson deducted laundry expenses of $1,893 for 2003.     This

allegedly consisted of the cost of laundering the uniforms Mr.

Tyson painted in.   The evidence petitioners presented consisted

of receipts and payments for the purchase of Mr. Tyson’s painting

uniforms including the purchase of shirts, boots, and socks.

Petitioners also submitted one for $36 with “alter paint pants”

in the memo section of the check.

      RS Tyson must prove that the laundry expenses claimed for

the year in issue were ordinary and necessary expenses.    Sec.

162(a); see Deputy v. du Pont, supra at 495 (deductibility under

section 162(a) is dependent upon the taxpayer’s establishing that

an expense is “normal, usual or customary” in the taxpayer’s

trade or business); see also sec. 1.162-1(a), Income Tax Regs.
                              - 14 -

(expenditures must be “directly connected with or pertaining to

the taxpayer’s trade or business”).     In order to satisfy that

burden in this instance, RS Tyson must establish that Mr. Tyson

was a bona fide employee of RS Tyson for the year in issue.     See

Haeder v. Commissioner, supra; see also Neonatology Associates,

P.A. v. Commissioner, 115 T.C. 43, 93 (2000) (“Neonatology

contributed money to the Neonatology Plan for the benefit of Mr.

Mall.   Mr. Mall was neither an employee of Neonatology nor an

individual who was eligible to participate in Neonatology’s Plan.

We conclude that these contributions served no business purpose

of Neonatology, and, hence, that they were not ordinary and

necessary expenses paid to carry on Neonatology’s business.”),

affd. 299 F.2d 221 (3d Cir. 2002); Love Box Co. v. Commissioner,

T.C. Memo. 1985-13, (“‘before expenses will be considered

ordinary and necessary under section 162, it must be established

that they bear a proximate and direct relationship to the

taxpayer’s trade or business.’” (quoting Carroll v. Commissioner,

51 T.C. 213, 218 (1968), affd. 418 F.2d 91 (7th Cir. 1969)),

affd. 842 F.2d 1213 (10th Cir. 1988).    Mr. Tyson was not an

employee of RS Tyson.   Accordingly, these were not proper

expenses of RS Tyson, and we sustain respondent’s determination

disallowing the laundry expenses.
                                - 15 -

4.   Travel Expenses

      RS Tyson deducted travel expenses of $4,209 for 2003.    A

deduction is allowed for ordinary and necessary traveling

expenses while away from home in the pursuit of a trade or

business.   Sec. 162(a)(2).   If a taxpayer travels to a

destination at which he engages in both business and personal

activities, the traveling expenses to and from the destination

are deductible only if the trip is related primarily to the

taxpayer’s trade or business.     Sec. 1.162-2(b)(1), Income Tax

Regs.   If the trip is primarily personal, the traveling expenses

to and from the destination are not deductible.      Id.; see also

sec. 262.

      In addition to satisfying the criteria for deductibility

under section 162, certain categories of expenses also must

satisfy the strict substantiation requirements of section 274(d)

in order for a deduction to be allowed.     The expenses to which

section 274(d) applies include, among other things, travel

expenses (including meals and lodging while away from home).

Sec. 274(d)(1).   We may not use the Cohan doctrine to estimate

expenses covered by section 274(d).      See Sanford v. Commissioner,

50 T.C. at 827; sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985).    To substantiate a deduction

attributable to travel, a taxpayer must maintain adequate records

or present corroborative evidence to show the following:     (1) The
                                - 16 -

amount of the expense; (2) the time and place of the travel; (3)

the business purpose of the expense; and (4) the business

relationship to the taxpayer.    Sec. 274(d) (flush language).   “To

meet the ‘adequate records’ requirements of section 274(d), a

taxpayer shall maintain an account book, diary, log, statement of

expense, trip sheets, or similar record * * *, and documentary

evidence”.   Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs.,

50 Fed. Reg. 46017 (Nov. 6, 1985).

     RS Tyson deducted the cost of a family trip for Mr. and Mrs.

Tyson to Disneyland and a personal trip for Mr. and Mrs. Tyson to

Branson, Missouri, as travel expenses.    For traveling expenses to

be deductible, they must be in pursuit of the trade or business.

Secs. 162-1(a), 162-2, Income Tax Regs.    Section

1.274-5T(b)(2)(iv) and (c)(2)(ii)(B), Temporary Income Tax Regs.,

50 Fed. Reg. 46015, 46018 (Nov. 6, 1985), provides that the

taxpayer must record the business reason for the travel or the

nature of the business benefit derived or expected to be derived

on account of the travel unless the business purpose is evident

from the surrounding facts and circumstances.

     RS Tyson has not established how the cost of a family trip

for Mr. and Mrs. Tyson to Disneyland and a personal trip for Mr.

and Mrs. Tyson to Branson, Missouri, were ordinary or necessary

to its businesses.   Furthermore, RS Tyson has failed to

substantiate the claimed travel expenses in accordance with
                                 - 17 -

sections 162 and 274.   Accordingly, we sustain respondent’s

determination on this issue.

5.   Meals and Entertainment Expenses

      RS Tyson deducted meals and entertainment expenses of $1,119

for 2003.   Section 162 permits the deduction of food and beverage

expenses if they are ordinary, necessary, and reasonable expenses

incurred by the taxpayer in its business.     No deduction is

allowed with respect to personal, living, or family expenses.

Sec. 262.

      In addition to satisfying the criteria for deductibility

under section 162, this category of expenses also must satisfy

the strict substantiation requirements of section 274(d) in order

for a deduction to be allowed.     This includes establishing the

business purpose of the expenditure or use and the business

relationship to the taxpayer of the persons entertained.     See

sec. 1.274-5T(a) and (b), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985).

      Section 274(a) further restricts the deduction of business

food and beverage expenses.    An expenditure must be directly

related to the conduct of the taxpayer’s trade or business or

associated with the active conduct of the taxpayer’s trade or

business.   Sec. 274(a)(1)(A).    An expenditure is considered

associated with the active conduct of the taxpayer’s trade or

business if the taxpayer establishes that he had a clear business
                                - 18 -

purpose in making the expenditure, such as to obtain new business

or to encourage the continuation of an existing business

relationship.    Sec. 1.274-2(d)(2), Income Tax Regs.   In order to

establish a substantial and bona fide business discussion, it

must be shown that the taxpayer actively engaged in a business

meeting, negotiation discussion, or other bona fide business

transaction, other than entertainment, for the purpose of

obtaining income or other specific trade or business benefit.

Sec. 1.274-2(d)(3)(i)(a), Income Tax Regs.    Additionally, it must

be established that this business meeting, negotiation,

discussion, or transaction was substantial in relation to the

entertainment.     Id.

     RS Tyson deducted numerous meals Mr. and Mrs. Tyson had with

their family.    For example, RS Tyson deducted meals for Mr. and

Mrs. Tyson’s daughter’s graduation and Mrs. Tyson’s birthday

celebration.     RS Tyson has not established how these expenditures

were ordinary or necessary to its businesses.    Additionally, some

of the receipts are redundant, and many of the receipts are

illegible other than Mrs. Tyson’s notes and/or re-creation of the

amounts spent.    Furthermore, RS Tyson has failed to substantiate

the claimed meals and entertainment expenses in accordance with

sections 162 and 274.    See sec. 1.274-5T(b)(3)(iv) and (v),

Temporary Income Tax Regs., 50 Fed. Reg. 46015 (Nov. 6, 1985)

(requiring proof of the name, title, or other designation of the
                                 - 19 -

persons entertained sufficient to establish the business

relationship to the taxpayer).

     After eliminating the aforementioned nondeductible food and

beverage expenses claimed by RS Tyson, a few legible receipts

remain.    These are:

          Date          Amount             Client(s)

      4/27/03           $22.52        Claude and Janet West
       9/9/03            20.18        Charles Amos
      9/18/03            18.06        Kathy Huffman
      9/23/03            28.68        Jeanette Carter
      10/8/03             6.49        Dan Cramer
      11/6/03             8.23        Sandy Brown
     11/11/03            14.74        Charles Amos
      12/2/03            12.98        Charles Amos
      12/4/03            12.32        Karen Anderson
     12/20/03            29.89        Jeanette and Charles Amos
       Total            174.09

Each of the listed persons was a Shaklee business client of RS

Tyson.    During each of these meals Shaklee business matters and

discussions were held.    Mrs. Tyson and the other person(s)

present discussed various Shaklee products, Shaklee business

plans and strategy, Shaklee business volume, and/or the layout of

Shaklee advertisements.    Accordingly, we conclude that the costs

of buying meals for these specific clients were ordinary and

necessary business expenses.

     Further, we conclude that these meals were associated with

the active conduct of RS Tyson’s Shaklee business and that the

meals directly preceded or followed substantial and bona fide

business discussions.    The meals purchased were associated with
                              - 20 -

the active conduct of RS Tyson’s Shaklee business because there

was a clear business purpose in purchasing the meals for the

clients.   RS Tyson had an existing business relationship with

these individuals, and meals were used to discuss the sale of

Shaklee products to customers and to encourage and increase the

distribution of Shaklee products.   Further, at each meal,

substantial and bona fide business discussions occurred.     At the

top of each receipt Mrs. Tyson listed what sort of business

discussion and transactions occurred at the meal.

      Accordingly, we allow RS Tyson a deduction of $87.05 for

meals and entertainment expenses.   Sec. 274(n)(1) (the amount of

the deduction for allowable food and beverages expenses shall not

exceed 50 percent of the amount of such expense).9

6.   Automobile Expenses

      RS Tyson deducted automobile expenses of $8,695 for 2003.

In addition to satisfying the criteria for deductibility under

section 162, this category of expenses also must satisfy the

strict substantiation requirements of section 274(d) in order for

a deduction to be allowed.   Secs. 274(d)(4), 280F(d)(4)(A)(i) and

(ii) (automobiles are listed property).   To substantiate a

deduction attributable to listed property, a taxpayer must

maintain adequate records or present corroborative evidence to



      9
        Total meals and entertainment expenses of $174.09 divided
by 2 equals $87.05.
                               - 21 -

show the following:    (1) The amount of the expense; (2) the time

and place of use of the listed property; and (3) the business

purpose of the use.    Sec. 1.274-5T(b)(6), Temporary Income Tax

Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

       RS Tyson neither kept a diary, log, trip sheet, or similar

record regarding the business use of the listed property nor

established the time and place of the business use of the listed

property; i.e., RS Tyson did not submit a business mileage log to

establish the amount of business miles driven.    See id.; sec.

1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017

(Nov. 6, 1985).    Mrs. Tyson explained:

       most of the time that we’re in the car, we’re doing
       business, because every time we go -- I shouldn’t say
       every time we go and drop our grandchild off at
       mother’s day out or go to church, we’re usually handing
       out our catalog. We’re always prospecting. * * *

       So when we’re out and about, we’re in business.

       RS Tyson failed to establish the time and place of business

use of the listed property and the business purpose of the use of

the listed property.    RS Tyson has failed to substantiate the

claimed automobile expenses in accordance with sections 162 and

274.    Accordingly, we sustain respondent’s determination on this

issue.

7.   Equipment Leasing Expenses

       RS Tyson deducted $12,000 for amounts paid to Mr. and Mrs.

Tyson to allegedly lease Mr. and Mrs. Tyson’s office equipment
                               - 22 -

and painting equipment for 2003.   Section 162 allows a deduction

as an ordinary and necessary business expense for “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.”    Sec. 162(a)(3).

To substantiate this expense RS Tyson introduced bank statements.

The Court reviewed the bank statements and found no checks or

other evidence indicating that this amount was paid to lease

equipment.   RS Tyson has failed to substantiate a deduction for

the claimed lease of equipment expenses.    Accordingly, we sustain

respondent’s determination on this issue.

8.   Legal and Professional Fees

      A taxpayer may deduct under section 162 legal fees paid in

obtaining legal advice with respect to the taxpayer’s trade or

business.    Levenson & Klein, Inc. v. Commissioner, 67 T.C. 694,

720-721 (1977).   Mr. and Mrs. Tyson deducted legal and

professional fees of $350 for 2003.     To substantiate this expense

they introduced bank statements.   The Court reviewed the bank

statements and found no checks or other information related to

legal and professional fees.   Mr. and Mrs. Tyson have failed to

substantiate this amount.   Accordingly, we sustain respondent’s

determination on this issue.
                               - 23 -

9.    Insurance, Repairs, Taxes, and Utility Expenses

       These expenses (insurance expenses of $502, repair expenses

of $32, taxes of $982, and utility expenses of $1,361) are

related to the alleged rental of Mr. and Mrs. Tyson’s residence

to RS Tyson.    As we previously determined, there is a lack of

proof of a bona fide rental.    See supra p. 12.   The purported

rental agreement has little reality beyond tax planning.    The

purported rental was not at arm’s length, and we disregard it for

a lack of economic substance.10   Accordingly, we sustain

respondent’s disallowance of a deduction for the insurance,

repairs, taxes,11 and utility expenses.

10.   Constructive Dividends

       Respondent determined Mr. and Mrs. Tyson received $61,812 in

constructive dividends from RS Tyson.     This amount consisted of

alleged rent expenses of $24,000, lease expenses of $12,000,

image12 expenses of $1,893, employee benefit plan expenses of

$8,919, and an automobile downpayment expense of $15,000.

       Generally, where a shareholder diverts corporate funds to

his own use, those funds constitute constructive dividends to him



       10
        Additionally, Mr. and Mrs. Tyson made personal use of
the alleged rented space.
       11
        The taxes related to Mr. and Mrs. Tyson’s residence may
be deductible as expenses on Schedule A, Itemized Deductions.
       12
        Mrs. Tyson testified that the image expense was for the
cost of purchasing and laundering Mr. Tyson’s uniforms.
                              - 24 -

and are ordinary income to the extent of the corporation’s

earnings and profits.   See secs. 301(c), 316; Truesdell v.

Commissioner, 89 T.C. 1280, 1295 (1987).   “Where a corporation

provides an economic benefit to a shareholder with no expectation

of reimbursement, the benefit is a ‘constructive dividend’ and is

taxable income.”   Benson v. Commissioner, 560 F.3d 1133, 1134

(9th Cir. 2009) (citation omitted), affg. T.C. Memo. 2004-272 and

T.C. Memo. 2006-55.

     Mr. and Mrs. Tyson each owned 50 percent of RS Tyson.    When

individuals are in substantial control of a corporation, special

scrutiny of their transactions with the corporation may be

necessary.   Haber v. Commissioner, 52 T.C. 255, 266 (1969), affd.

422 F.2d 198 (5th Cir. 1970); Roschuni v. Commissioner, 29 T.C.

1193, 1202 (1958), affd. 271 F.2d 267 (5th Cir. 1959); see Tulia

Feedlot, Inc. v. United States, 513 F.2d 800, 805 (5th Cir. 1975)

(“Transactions between related taxpayers or between a close

corporation and its principals * * * must be subject to close

scrutiny.” (citing United States v. Ragen, 314 U.S. 513 (1942))).

     RS Tyson paid $15,000 to Reliable Toyota in December 2003.

This money was a deposit on a vehicle purchased for Mr. and Mrs.

Tyson.   Mrs. Tyson admitted that “all the money is in RS Tyson”.

She testified that she has a tendency to write checks out of that

account for personal items.   The evidence established

distributions from RS Tyson to Mr. and Mrs. Tyson or on behalf of
                              - 25 -

Mr. and Mrs. Tyson including the $15,000 RS Tyson paid as a

downpayment on Mr. and Mrs. Tyson’s car.   Petitioners have failed

to prove that any of the $61,812 in question was not diverted

from RS Tyson for Mr. and Mrs. Tyson’s own use.    Accordingly,

respondent’s determination regarding the constructive dividends

is sustained.13

11.   Accuracy-Related Penalty for Mr. and Mrs. Tyson

      Section 7491(c) provides that the Commissioner will bear the

burden of production with respect to the liability of any

individual for additions to tax and penalties.    “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”.    Swain v.

Commissioner, 118 T.C. 358, 363 (2002); see Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).    The Commissioner,

however, does not have the obligation to introduce evidence

regarding reasonable cause or substantial authority.     Higbee v.

Commissioner, supra at 446-447.

      Respondent determined that RS Tyson and Mr. and Mrs. Tyson

are liable for the section 6662 penalty for 2003.    Pursuant to

section 6662(a) and (b)(1) and (2), a taxpayer may be liable for



      13
        We note that respondent did not argue that RS Tyson did
not deserve to be recognized as a separate taxpaying entity, and
petitioners do not argue that RS Tyson’s earnings and profits
were insufficient to cover the constructive dividends.
                               - 26 -

a penalty of 20 percent on the portion of an underpayment of tax

due to negligence or disregard of rules or regulations or a

substantial understatement of income tax.    Negligence “includes

any failure to make a reasonable attempt to comply with the

provisions of this title”, and disregard “includes any careless,

reckless, or intentional disregard.”    Sec. 6662(c). “Negligence”

includes any failure by the taxpayer to keep adequate books and

records or to substantiate items properly.   Sec. 1.6662-3(b)(1),

Income Tax Regs.   Respondent met his burden of production as to

Mr. and Mrs. Tyson14 as they failed to substantiate the expenses

claimed.15   See sec. 6001; sec. 1.6662-3(b)(1), Income Tax Regs.

RS Tyson overstated expenses by deducting personal expenses of

Mr. and Mrs. Tyson.   RS Tyson also failed to substantiate

expenses (e.g., laundry expenses, travel expenses, meals and

entertainment expenses, and automobile expenses).   See sec. 6001;

sec. 1.6662-3(b)(1), Income Tax Regs.




     14
        Sec. 7491(c) imposes on the Commissioner a burden of
production respecting “the liability of any individual” (emphasis
added) for a penalty, addition to tax, or additional amount.
Accordingly, respondent has no burden of production with respect
to RS Tyson.
     15
        Additionally, as we have sustained all of respondent’s
deficiency determinations against Mr. and Mrs. Tyson, there is a
“substantial understatement of income tax”. See sec.
6662(d)(1)(A) and (B). A “substantial understatement” exists if
the understatement exceeds the greater of (1) 10 percent of the
tax required to be shown on the return for a taxable year or (2)
$5,000 ($10,000 in the case of a corporation). Id.
                               - 27 -

     The accuracy-related penalty is not imposed with respect to

any portion of the underpayment as to which the taxpayer acted

with reasonable cause and in good faith.   Sec. 6664(c)(1).   The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

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

     Mr. and Mrs. Tyson attempted to use RS Tyson as a vehicle to

turn their nondeductible personal expenses into deductible

business expenses.   Petitioners’ tax return preparer was not

called as a witness.   We infer that his testimony would not have

been favorable to petitioners.   See Wichita Terminal Elevator Co.

v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513

(10th Cir. 1947).    Petitioners have failed to prove that they

acted with reasonable cause and in good faith.   See sec.

6664(c)(1).   Accordingly, we sustain the section 6662(a) penalty

against RS Tyson and Mr. and Mrs. Tyson.

     In reaching our holdings herein, we have considered all

arguments made by the parties, and to the extent not mentioned

above, we find them to be irrelevant or without merit.
                        - 28 -

To reflect the foregoing,


                                  Decision will be entered

                             for respondent in docket No.

                             6879-07.

                                  Decision will be

                             entered under Rule 155 in

                             docket No. 6880-07.
