                   T.C. Summary Opinion 2001-42



                      UNITED STATES TAX COURT



           ROBERT B. AND BETTY D. HARRIS, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 19681-98S.                   Filed March 27, 2001.


     Robert D. Hyde, for petitioners.

     Martha J. Weber, for respondent.



     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7463 in effect at the time the petition was

filed.1   The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.




     1
          Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. All Rule references are to the Tax Court Rules
of Practice and Procedure.
                              - 2 -


     Respondent determined deficiencies of $17,170.70,

$16,615.35, and $4,476.02 in petitioners' Federal income taxes

for 1994, 1995, and 1996, respectively, and accuracy-related

penalties under section 6662(a) of $3,434.14, $3,323.07, and

$895.20 for those years.

     Following concessions by the parties,2 the issues for

decision are: (1) Whether the tax home and principal place of

business of Robert B. Harris (petitioner) was Memphis, Tennessee,

or Los Angeles, California, during 1994; (2) whether petitioners

are entitled to deductions for home office expenses under section

280A for each of the years at issue; (3) whether petitioners are

entitled to deductions for Schedule C expenses for 1994, 1995,

and 1996 in excess of amounts allowed by respondent; and (4)

whether petitioners are liable for the accuracy-related penalty

under section 6662(a) for negligence or disregard of rules and

regulations for each of the years at issue.   The remaining

adjustments in the notice of deficiency for the years at issue

are computational and will be resolved by the Court's holdings on

the aforementioned issues.




     2
          In the stipulation of facts, respondent conceded a
$26,335.72 unreported income adjustment for 1995. At trial,
respondent conceded petitioners’ entitlement to a deduction for
meals and entertainment expenses of $112.45 for 1994. On brief,
petitioners conceded that, during 1995 and 1996, petitioner’s tax
home and principal place of business was Los Angeles, California.
                                - 3 -


     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioners’

legal residence was Memphis, Tennessee.

     Petitioner has a bachelor of science degree in accounting

from East Tennessee State University and, since the mid-1960's,

has worked in the field of accounting and tax return preparation.

In 1964 or 1965, petitioner was employed by the Internal Revenue

Service (IRS) as a revenue agent in Memphis, Tennessee.    In the

early 1970's, he left the IRS to work as a comptroller for Stax

Records (Stax) in Memphis.    After about 18 months with Stax, he

left that employment and started a business known as Memphis

Talent Consultants to provide business, financial, and tax advice

to recording artists.    During the 1970's and 1980's, petitioner

traveled to various cities in the United States, including

Nashville, Tennessee, Los Angeles, California, Washington, D.C.,

and Detroit, Michigan, in an attempt to attract clients for his

consulting business.    From the early to mid-1980's, petitioner

rented an apartment in Nashville where he set up an office in the

living and dining room areas.    He used the apartment bedrooms as

living quarters when he stayed overnight in Nashville.    That

office was closed during 1986 or 1987.

     During the late 1980's and early 1990's, petitioner had

various clients in Memphis and Los Angeles for whom he performed
                                - 4 -


business consulting, tax advice, and return preparation.    During

these years, petitioner traveled to Los Angeles from Memphis once

or twice a year.

     During 1993, petitioner decided to resume his activity at

Nashville.    Petitioner began renting a condominium there in late

1993.    Also during 1993, one of his Los Angeles clients, Isabell

Records, Inc. d/b/a Bellmark Records (Bellmark), began

experiencing financial success with one of its recordings and,

thus, had an increasing need for petitioner’s services.

     Due to the prospect of Bellmark’s increasing revenues, the

owner of Bellmark, Alexander Bell (Mr. Bell), requested during

the latter part of 1993 that petitioner devote his full time to

Bellmark matters and that petitioner remain in Los Angeles to be

"on call" for Mr. Bell and Bellmark.    Mr. Bell believed that

Bellmark was on the verge of generating significant revenues

(which had not previously been the case), and he wanted

petitioner to work full time in setting up an accounting

department, structuring business administration policies, and so

forth.    After discussing the matter with his wife, petitioner

Betty D. Harris, petitioner agreed to work for Bellmark full time

and live in Los Angeles provided that he would be compensated

$100,000 per year for his services, plus expenses.    No time

limitation was placed on this arrangement; rather, the

arrangement between petitioner and Bellmark was to last for an
                               - 5 -


indefinite period of time.   Mr. Bell anticipated that it would

take a minimum of 18 to 24 months to structure accounting and

administrative departments and have them running smoothly enough

that petitioner’s full-time presence and participation would no

longer be required.

     During 1994, 1995, and 1996, petitioner worked for Bellmark

in Los Angeles 287, 281, and 282 days, respectively.   He was paid

$97,200 for his Los Angeles work during 1994; however, he did not

receive the agreed upon compensation for 1995 or 1996.    Moreover,

petitioner was not reimbursed by Bellmark for any expenses

incurred in the years at issue.   Nevertheless, petitioner

continued to devote the majority of his time to Bellmark in the

hopes of eventually receiving such moneys.3

     On their joint Federal income tax return for 1994,

petitioners included a Schedule C, Profit or Loss From Business

(Schedule C), in connection with petitioner’s financial and tax

consultant business.   That Schedule C included the following

income and expenses:




     3
          The principal reason why petitioner was not compensated
and reimbursed was that some of the recordings of Bellmark
contained the musical talents of several artists, and each of
those artists was entitled to royalties, an element which was
apparently not anticipated by Mr. Bell or petitioner and that
apparently heavily drained Bellmark’s resources.
                                   - 6 -


     Income:

            Gross receipts                 $105,600.00
                               1
            Cost of Goods Sold              (30,634.35)
            Gross income                   $ 74,965.65

     Expenses:

            Advertising                    $   866.90
            Car and truck expenses           3,987.59
            Insurance                        1,111.67
            Legal & professional               980.00
            Office expense                     446.59
            Rent or lease (vehicles)         1,840.15
            Rent or lease (other)            5,500.00
            Repairs & maintenance              186.82
            Supplies                         1,309.94
            Travel                           8,413.70
                                  2
            Meals & Entertainment              515.73
                           3
            Other expenses                   2,783.77
             Total expenses                $27,942.86

     Net profit                            $47,022.79

     1
       Includes Los Angeles apartment rental payments and
     $36 per day claimed as per diem for 344 days away from
     home.
     2
         Fifty percent of $1,031.46 expenses.
     3
       Consisted of expenses for equipment, miscellaneous,
     parking, telephone, and dues & subscriptions.



     Petitioners also included Schedules C with their 1995 and

1996 joint Federal income tax returns.         For 1995, the

Schedule C included:
                                 - 7 -


     Income:

            Gross receipts               $11,700.00
            Cost of goods sold                  -0-
            Other income                      67.52
             Gross income                $11,767.52

     Expenses:

            Advertising                  $   115.47
            Car and truck expenses         2,378.90
            Insurance                        568.62
            Legal & professional           7,920.00
            Office expense                   386.54
            Rent or lease (other)         19,072.62
            Supplies                       1,152.79
            Travel                         7,533.63
                                  1
            Meals & Entertainment          4,892.87
                           2
            Other expenses                 5,724.52
             Total expenses              $49,745.96

     Net loss                         ($37,978.44)

     1
         Fifty percent of $9,785.75 expenses.
     2
       Consisted of expenses for dues & subscriptions,
     equipment, lodging, miscellaneous, parking, security,
     and telephone.


     For 1996, petitioners reported the following Schedule C

income and expenses:

     Income:

            Gross receipts               $4,289.00
            Cost of Goods Sold                -0-
            Other income                      -0-
            Gross income                 $4,289.00
                                - 8 -


     Expenses:

            Car and truck expenses      $ 2,224.23
            Insurance                       613.73
            Legal & professional            468.54
            Office expense                  125.10
            Rent or lease (other)         6,595.00
            Supplies                        441.11
            Travel                        4,044.61
                                  1
            Meals & Entertainment         2,453.16
            Utilities                       665.19
                           2
            Other expenses                2,106.53
             Total expenses             $19,737.20

     Net loss                         ($15,448.20)

     1
         Fifty percent of $4,906.31 expenses.
     2
       Consisted of expenses for dues & publications,
     lodging, miscellaneous, parking, security, shipping &
     postage, and telephone.


     In the notice of deficiency, respondent made the following

adjustments to petitioners’ income and expenses for each of the

years at issue:


     Adjustments              1994              1995         1996
                          1               2              3
     Schedule C exp.       $55,766.06      $38,722.93     $19,737.20
     Unreported income          -0-         26,335.72           -0-
     One-half SE tax          (101.63)      (1,913.18)       (303.01)
      Total adjustments    $55,664.43      $63,145.47     $19,434.19
    1
      In the explanation of items, the disallowed deductions
    totaled $55,766.96; however, in the statement of income tax
    changes the adjustment to income was $55,766.06. The record
    does not contain an explanation for this 90-cent
    discrepancy. For 1994, $2,810.25 of the deductions claimed
    on Schedule C were allowed and the $55,766.06 total
    adjustments shown above for 1994 include $30,634.35 claimed
    by petitioner for Los Angeles expenses that he listed on
    Schedule C as cost of goods sold.
                               - 9 -

     2
       For 1995, the total Schedule C expenses was $49,745.96.
     Respondent allowed $11,023.03 and disallowed $38,722.93.
     3
       For 1996, respondent disallowed all the deductions claimed
     on Schedule C.


As a result of these adjustments, respondent determined that

petitioners were liable for additional self-employment taxes and

the accuracy-related penalty under section 6662(a) for each of

the years in question.

     In the stipulation of facts, respondent conceded an

unreported income adjustment of $26,335.72 for 1995.   At trial,

respondent conceded that petitioners were entitled to Schedule C

deductions for meals and entertainment expenses (prior to the 50-

percent limitation) totaling $112.45 for 1994.   On brief,

petitioners conceded that, during 1995 and 1996, petitioner’s

principal place of business or tax home was Los Angeles,

California.

     The first issue is whether the tax home or principal place

of business of petitioner was Memphis, Tennessee, or Los Angeles,

California, during 1994.4   Petitioners contend the tax home


     4
          Since petitioners conceded that petitioner’s tax home
for 1995 and 1996 was Los Angeles, petitioners are not entitled
to the claimed deductions for away from home expenses relating to
petitioner’s employment in Los Angeles for those years. This
would include, for 1995, $13,240.00 apartment rental expenses and
an $8,400 per diem amount for meals (prior to the 50-percent
limitation), as well as approximately $863.80 of travel expenses
for car rental and air travel between Los Angeles and Memphis
                                                   (continued...)
                                - 10 -


during 1994 was Memphis and, thus, expenses incurred in Los

Angeles are deductible.   Conversely, respondent contends that

petitioner’s tax home during 1994 was Los Angeles and, as such,

petitioners are not entitled to deduct expenses incurred in Los

Angeles that year.

     For 1994, petitioners reported $18,250.55 for petitioner’s

Los Angeles apartment rent and $12,384 as per diem expense for

meals away from home, which they subtracted from gross receipts

as cost of goods sold on Schedule C of their 1994 return.

Additionally, petitioners deducted the following expenses in

connection with petitioner’s Los Angeles activities: (1) $146.94

of their total car and truck expenses; (2) $1,840.15 of their

total rent or lease for car rental expenses; (3) $786.35 of their

total travel expenses, which represented dry cleaning in Los

Angeles and airline tickets between Memphis and Los Angeles; and

(4) $646.07 of their total meals and entertainment expenses

(prior to the 50-percent limitation).    During 1994, petitioner

was in Los Angeles 287 days.5


     4
      (...continued)
(petitioners failed to satisfy the strict substantiation
requirements of sec. 274(d) with respect to travel expenses
between Los Angeles and Memphis, particularly the business
purpose for such travel; see infra) and, for 1996, $4,600 for
meals (prior to the 50-percent limitation), $501.34 for car and
truck expenses, and $292.21 of travel expenses for car rental.
     5
      It is notable that petitioner was also in Los Angeles 281
                                                   (continued...)
                              - 11 -


     Deductions are a matter of legislative grace.    See New

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

Petitioners bear the burden of proving that petitioner's tax home

was not in Los Angeles during 1994.    See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Daly v. Commissioner, 72

T.C. 190, 197 (1979), affd. 662 F.2d 253 (4th Cir. 1981).       The

cost of goods purchased for resale in a taxpayer's business is an

offset to gross receipts in computing gross income.    See Metra

Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987).

Petitioner's purported travel expenses are not cost of goods sold

but are expenses that would reduce petitioner's income, if at

all, as a deduction pursuant to section 162.   Thus we shall

discuss the cost of goods sold and deductions together.

     A taxpayer ordinarily may not deduct a personal expense.

See sec. 262.   Section 162(a), however, allows a taxpayer to

deduct traveling expenses incurred while away from home.    A

taxpayer may deduct a traveling expense under section 162(a)(2)

if the following three conditions are satisfied: (1) The expense

must be reasonable (e.g., lodging, transportation, fares, and

food); (2) it must be incurred while away from home; and (3) it

must be an ordinary and necessary expense incurred in the pursuit

of a trade or business.   See Commissioner v. Flowers, 326 U.S.


     5
      (...continued)
and 282 days during 1995 and 1996, respectively.
                               - 12 -


465, 470 (1946).    The rationale in allowing such a deduction is

to alleviate the burden falling upon a taxpayer whose business

requires that he or she incur duplicate living expenses.    See

Tucker v. Commissioner, 55 T.C. 783, 786 (1971); Kroll v.

Commissioner, 49 T.C. 557, 562 (1968).    Whether the taxpayer

satisfies the three recited conditions is purely a question of

fact.   See Commissioner v. Flowers, supra at 470; see also Wills

v. Commissioner, 411 F.2d 537, 540 (9th Cir. 1969), affg. 48 T.C.

308 (1967).

     For purposes of section 162(a)(2), generally a taxpayer’s

tax home is the vicinity of his principal place of business

rather than the location of his personal residence.   See Mitchell

v. Commissioner, 74 T.C. 578, 581 (1980); Kroll v. Commissioner,

supra at 561-562.   However, an exception to this general rule

exists where a taxpayer's employment in another area is temporary

as opposed to indefinite.    See Peurifoy v. Commissioner, 358 U.S.

59 (1958); Horton v. Commissioner, 86 T.C. 589, 593 (1986).       A

taxpayer's tax home is his or her personal residence if the

employment at a different location is temporary; i.e., the

taxpayer's presence at the other location is considered to be

away from home, and the taxpayer may deduct the expenses

associated with traveling to and living at a temporary job site.

See Kroll v. Commissioner, supra at 562.    A taxpayer's tax home

is the location of his or her employment if the employment is
                               - 13 -


indefinite or permanent; i.e., the taxpayer's presence at a

second location is not considered away from home.    See id.

       A place of business is a temporary place of business if the

employment is such that termination within a short period of time

can be foreseen.    See Albert v. Commissioner, 13 T.C. 129, 131

(1949).    Conversely, employment is categorized as indefinite,

substantial, or indeterminate if its termination cannot be

foreseen within a fixed or reasonably short period of time.      See

Stricker v. Commissioner, 54 T.C. 355, 361 (1970), affd. 438

F.2d. 1216 (6th Cir. 1971).    Employment which is temporary may

become indefinite due to changed circumstances or the passage of

time.    See Norwood v. Commissioner, 66 T.C. 467, 470 (1976).

When that occurs, the location of the taxpayer's employment

becomes his or her tax home.    See Kroll v. Commissioner, supra at

562.    Whether a taxpayer’s employment is temporary or indefinite

is a question of fact.    See Peurifoy v. Commissioner, supra at

61; cf. Harvey v. Commissioner, 283 F.2d 491 (9th Cir. 1960),

revg. 32 T.C. 1368 (1959).    However, a "taxpayer shall not be

treated as being temporarily away from home during any period of

employment if such period exceeds 1 year."    Sec. 162(a).

       Petitioners contend that, even though petitioner’s

employment in Los Angeles eventually lasted several years, it was

temporary during 1994 because, at that time, it could not have

reasonably been foreseen, nor was it intended by the parties,
                               - 14 -


that petitioner would work in Los Angeles for more than 1 year.

The record of this case, however, proves otherwise.    Mr. Bell,

who testified at trial, anticipated, in late 1993, that

petitioner’s full-time services in Los Angeles would be required

for at least 18 to 24 months in order to develop a "Rolls Royce

accounting department" for Bellmark.    Moreover, both petitioner

and Mr. Bell agreed that the compensation arrangement of $100,000

per year plus living expenses was an open-ended arrangement on

which no time limitation was placed.

     The Court is satisfied that it was certainly foreseeable, in

late 1993, that petitioner’s full-time services in Los Angeles

would be required beyond a period of 1 year.    Additionally,

petitioner’s full-time services in Los Angeles did exceed or

extend beyond 1 year.    On this record, the Court holds that

petitioner’s employment in Los Angeles during 1994 was indefinite

and not temporary.

     Since petitioner conducted business activities in both Los

Angeles and Memphis during 1994, the Court deems it prudent to

also examine whether petitioner's principal place of business

during 1994 was Los Angeles or Memphis.    In the event that a

taxpayer possesses two places of business or employment separated

by considerable distances, his choice of one as his tax home

carries little weight.    Instead, courts often apply an objective

test in which they consider: (1) The length of time spent at each
                               - 15 -


location; (2) the degree of activity in each place; and (3) the

relative proportion of taxpayer's income derived from each place.

See Markey v. Commissioner, 490 F.2d 1249, 1255 (6th Cir. 1974),

revg. T.C. Memo. 1972-154; Montgomery v. Commissioner, 64 T.C.

175, 180 (1975), affd. 532 F.2d 1088 (6th Cir. 1976); Sherman v.

Commissioner, 16 T.C. 332 (1951); Sargent v. Commissioner, T.C.

Memo. 1984-390.   Although no single factor is dispositive,

particular emphasis sometimes is placed on the amount of time

spent by a taxpayer at a given location.   See Markey v.

Commissioner, supra at 1252.   In general, a taxpayer is required

to establish his tax home at his major duty post so as to

minimize the amount of business travel away from home that must

be undertaken.    See Wills v. Commissioner, 411 F.2d 537, 540 (9th

Cir. 1969), affg. 48 T.C. 308 (1967).

     Petitioner spent 287 days in Los Angeles during 1994 but

only 25 days in Memphis.   Petitioner's degree of activity in

connection with Bellmark in Los Angeles during 1994 far exceeded

the degree of any other activity conducted by petitioner during

that year, including any Memphis activity.   Petitioner's nearly

full-time efforts during 1994 were devoted to Bellmark in Los

Angeles.   Finally, petitioner earned $97,200 from his Los Angeles

activity for 1994 but only $4,000 from his Memphis activity in

that year.   Thus, the Court finds that petitioner's principal

place of business during 1994 was Los Angeles.
                                 - 16 -


     On this record, the Court holds that petitioner’s tax home

during 1994 was Los Angeles.     Petitioners are not entitled to

deduct the Los Angeles living expenses of petitioner or expenses

for travel between Los Angeles and Memphis during that year.6

Respondent is sustained on this issue.

     The second issue is whether petitioners are entitled to

deductions for home office expenses under section 280A for each

of the years at issue.    For 1994, 1995, and 1996, petitioners

claimed various expenses on Schedule C that petitioners contend

were in conjunction with an office petitioner maintained in their

personal residence at Memphis.     The claimed expenses were:

                             1                   2            3
     Expense             1994             1995         1996

     Insurance      $1,111.67           –-           $613.73
     Telephone         756.48           --            676.55
     Security          --             $1,040          137.50
     Utilities         –-               –-            665.19
     1
       Petitioners deducted 1/3 of their total homeowner’s
     insurance and 73 percent of their total telephone expenses.




     6
          To the extent that the per diem amount deducted by
petitioners for 1994 ($36 x 344 days = $12,384) exceeded the
number of days petitioner was in Los Angeles (344 - 287 = 57
days) and would thus be attributable to other cities, petitioners
failed to produce evidence that would satisfy the strict
substantiation requirements of sec. 274(d) with respect to these
expenses. Additionally, with respect to travel expenses between
Los Angeles and Memphis, petitioners failed to produce evidence
to satisfy the strict substantiation requirements of sec. 274(d),
particularly in connection with the business purpose for such
travel. See discussion infra.
                              - 17 -

     2
       Petitioners deducted 50 percent of their total home-
     security expenses.
     3
       Petitioners deducted 25 percent of their total homeowner’s
     insurance, 50 percent of their total telephone expenses, 50
     percent of their total home-security expenses, and 50
     percent of their total utilities.


Petitioners contend that petitioner maintained office space in

three separate areas of their personal residence for the purpose

of conducting a tax return preparation business.   A room directly

adjacent to the front entry hall of petitioners’ home was a

waiting room, and a smaller room directly adjacent thereto,

adjacent to the kitchen and eating area, was an office.

Additionally, a room adjacent to the guest bedroom and bathroom

was a computer and files room.   Other than the described rooms,

petitioners’ home consisted of a garage, utility room,

kitchen/eating area, family room, master bedroom, master

bathroom, guest bedroom, and guest bathroom.

     Under section 162(a), a taxpayer is permitted to deduct all

ordinary and necessary expenses paid or incurred in carrying on a

trade or business.   Under section 280A(c)(1)(A), however,

deductions associated with a home office are generally disallowed

unless the home office is used exclusively and regularly as the

principal place of business of the taxpayer.   Respondent contends

that the residence areas claimed by petitioners as a home office

for petitioner’s tax return preparation business were not used
                              - 18 -


exclusively or regularly for such activity, nor did these areas

constitute petitioner’s principal place of business.

     Where a taxpayer’s business is conducted in part in the

taxpayer’s residence and in part at another location, the

following two primary factors are considered in determining

whether the home office qualifies under section 280A(c)(1)(A) as

the taxpayer’s principal place of business: (1) The relative

importance of the functions or activities performed at each

business location, and (2) the amount of time spent at each

location.   See Commissioner v. Soliman, 506 U.S. 168, 175-177

(1993).

     Whether the functions or activities performed at the home

are necessary to the business is relevant but not controlling.

The location at which goods and services are delivered to

customers generally will be regarded as an important indicator of

the principal place of the taxpayer’s business and is given great

weight in most cases.   See id. at 175, 176.   The relative

importance of business activities engaged in at the home may be

substantially outweighed by business activities engaged in at

another location.   The Supreme Court has stated:

     If the nature of the business requires that its
     services are rendered or its goods are delivered at a
     facility with unique or special characteristics, this
     is a further and weighty consideration in finding that
     it is the delivery point or facility, not the
     taxpayer’s residence, where the most important
     functions of the business are undertaken.
                               - 19 -



Id. at 176.

     One of petitioners’ Memphis neighbors, Jerrel Walker (Mr.

Walker), testified that petitioner prepared his tax returns

during each of the years at issue.      Mr. Walker contacted

petitioner, both at his Memphis residence and in Los Angeles,

during the years at issue.   Mr. Walker verified that the room in

petitioners’ home claimed as an office contained a desk and file

cabinets, and the waiting room had a dining room table.        Also,

Mr. Walker and petitioners were personal friends, and he visited

petitioners’ home on social occasions.

     A business contact of petitioner’s, David Porter (Mr.

Porter), testified that petitioner had prepared his tax returns

for many years and that he had visited petitioners’ Memphis

residence for such purposes.   However, Mr. Porter had business

meetings with petitioner at locations outside of petitioners’

home, including, but not limited to, Los Angeles and the Memphis

International Airport during the years at issue.      Mr. Porter

frequently contacted petitioner by telephone in both Los Angeles

and Nashville.

     In a tax return preparation business, the most important

function is the delivery of the completed return to the taxpayer

for signature and filing.    No matter how much preparatory work is

performed, none is of any value unless the completed return is
                               - 20 -


delivered to the taxpayer, who then executes and files the same.

See Strohmaier v. Commissioner, 113 T.C. 106, 112-113 (1999).

The delivery of a completed return is the service for which

petitioner would ultimately have been paid.    However, no evidence

was produced to show where, or in what manner, petitioner

delivered completed tax returns to his clients.

     However, it is clear from the record that petitioner spent

the substantial majority of his time, during each of the years at

issue, conducting his tax return preparation business at

locations other than Memphis, Tennessee, primarily at Los

Angeles.    Thus, most of petitioner’s business activities were

performed outside of his claimed home office at Memphis.

     On this record, the Court finds that the areas of

petitioners’ Memphis residence that they claim constituted a home

office were not used exclusively and regularly in petitioner’s

tax return preparation business during 1994, 1995, or 1996.

Moreover, the Court finds that petitioners’ home was not

petitioner’s principal place of business during any of the years

at issue.    Consequently, respondent is sustained on the

disallowance of the home office expenses claimed by petitioners

for 1994, 1995, and 1996.7


     7
          For 1994 and 1996, portions of the claimed telephone
expenses consisted of monthly payments to Cellular One of Memphis
for a mobile phone. All checks to Cellular One were signed by
                                                   (continued...)
                                   - 21 -


     The third issue is whether petitioners are entitled to

deductions for other Schedule C expenses, for 1994, 1995, and

1996, in excess of amounts allowed by respondent.          The remaining

Schedule C expenses for each of the years at issue mainly

constitute expenses in connection with petitioner’s business

activities at Memphis and Nashville, Tennessee, as well as

certain other various business expenses.           The amounts disallowed

by respondent are as follows:


     Expense            1994                1995             1996

     Car & truck      $3,840.61             --            $1,722.89
     Legal & prof.        980.00        $2,920.00             468.54
     Office               –-                –-                125.10
     Rent or lease      5,500.00          5,832.62          6,595.00
     Supplies             –-                –-                441.11
     Travel             7,627.35          6,669.83          3,752.40
                  1
     Meals & ent.         385.39          1,385.75            306.31
                      2                 3                 4
     Other              2,027.29          3,263.81          1,292.48
     1
         Prior to the 50-percent limitation.
     2
       Consists of $751.35 for equipment, $147.39 for
     miscellaneous, $358.55 for parking, and $770.00 for dues &
     publications.
     3
       Consists of $1,965.39 for lodging and $1,298.42 for
     miscellaneous.
     4
       Consists of $35.32 for dues & publications, $814.14 for
     lodging, $90.65 for miscellaneous, $190.40 for parking, and
     $161.97 for shipping & postage.


     7
      (...continued)
petitioner wife and were written on petitioners’ joint checking
account. Petitioners produced no evidence to show that this
cellular phone was used in connection with any business activity
of petitioner.
                                - 22 -




     As noted earlier, to qualify for deduction, an expense must

be both ordinary and necessary within the meaning of section

162(a).   See Deputy v. duPont, 308 U.S. 488, 495 (1940).      Whether

an amount claimed constitutes an ordinary and necessary business

expense is a question of fact to be determined from the evidence

presented with the burden being on the taxpayer.    See Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933); Allen v.

Commissioner, T.C. Memo. 1988-166.

     Additionally, a taxpayer is required to maintain records

sufficient to establish the amount of his or her income and

deductions.   Sec. 6001.   Under certain circumstances, where a

taxpayer establishes entitlement to a deduction but does not

establish the amount of the deduction, the Court is permitted to

estimate an allowable amount.    See Cohan v. Commissioner, 39 F.2d

540 (2d Cir. 1930).   However, there must be sufficient evidence

in the record to permit the Court to conclude that a deductible

expense was incurred for at least the amount allowed.    See

Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).      In

estimating the amount allowable, the Court bears heavily against

the taxpayer whose inexactitude is of his or her own making.      See

Cohan v. Commissioner, supra at 544.

     However, in the case of travel expenses, specifically

including meals and lodging while away from home, as well as in
                               - 23 -


the case of entertainment expenses and expenses with respect to

"listed property", section 274(d) overrides the so-called Cohan

doctrine.    See Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

Section 274(d) imposes stringent substantiation requirements for

deductions related to travel, entertainment, gifts, and "listed

property (as defined in section 280F(d)(4))".    Passenger

automobiles are listed property under section 280F(d)(4)(i).

Section 274(d) denies these deductions unless:


     the taxpayer substantiates by adequate records or by
     sufficient evidence corroborating the taxpayer's own
     statement (A) the amount of such expense or other item,
     (B) the time and place of the travel, entertainment,
     amusement, recreation, or use of the facility or
     property, or the date and description of the gift, (C)
     the business purpose of the expense or other item, and
     (D) the business relationship to the taxpayer of
     persons entertained, using the facility or property, or
     receiving the gift. * * *


Thus, under section 274(d), deductions for automobile expenses,

travel expenses, and meals and entertainment expenses may not be

estimated.   Instead the taxpayer must provide adequate records or

corroborate testimony with other evidence.

     Of the Schedule C expenses at issue, the following are

subject to the strict substantiation requirements of section

274(d):
                                 - 24 -



     Expense           1994                1995        1996

     Car & truck     $3,840.61           –-          $1,722.89
     Travel           7,627.35        $6,669.83       3,752.40
     Meals & ent.       385.39         1,385.75         306.31
     Other:
          Parking       358.55              –-          190.40
          Lodging       –-                1,965.39      814.14


In support of these expenses, petitioners produced various

receipts and statements purporting to show the actual

expenditures.   However, petitioners failed to produce credible

evidence, if any evidence at all, as to the business purpose of

each expense.   Moreover, petitioners failed to introduce evidence

establishing the business relationship to petitioner with any

persons purportedly being entertained or using the facilities or

property rented by petitioner.

     Petitioners’ evidence with respect to these expenses does

not satisfy the stringent substantiation requirements of section

274(d).   Moreover, as noted earlier, the Court cannot allow or

estimate an allowable deduction for any of these expenses under

the Cohan rule.   Thus, the Court holds that petitioners are not

entitled to deduct any of the claimed expenses for the years at

issue in excess of what was allowed by respondent.8


     8
          As stated previously, respondent conceded that
petitioners are entitled to deductions for meals and
entertainment expenses (prior to the 50-percent limitation)
totaling $112.45 for 1994. This amount will be taken into
                                                   (continued...)
                               - 25 -

     The following claimed Schedule C expenses are not subject to

the substantiation requirements of section 274(d) but are,

nevertheless, deductible only if they are ordinary and necessary

under section 162(a) and not personal expenses under section 262:


     Expense            1994             1995           1996

     Legal & prof. $ 980.00          $2,920.00      $  468.54
     Office           –-                –-             125.10
     Rent or lease  5,500.00          5,832.62       6,595.00
     Supplies         –-                –-             441.11
     Other:
          Equipment   751.35              –-             –-
          Misc.       147.39            1,298.42          90.65
          Dues/sub.   770.00              –-              35.32
          Shipping    –-                  –-             161.97


For 1994, petitioners deducted legal and professional expenses of

$980.    Petitioners submitted copies of canceled checks dated

January 28, 1994, to Pamela Shell in the amount of $180 and

February 22, 1994, to Raymond A. Harris in the amount of $800.

Both checks were signed by petitioner; however, neither check

listed in the memo section the reason or purpose for the payment.

No evidence was presented to show the relationship of the payees

to petitioner’s business activities, or to show that the payments

were incurred in carrying on petitioner’s trade or business.

Thus, the Court holds that these expenses have not been

substantiated under section 162(a) and are not deductible.



     8
      (...continued)
account in a Rule 155 computation.
                               - 26 -

     For 1995, petitioners deducted legal and professional

expenses of $7,920, of which respondent allowed $5,000.    The

remaining $2,920 amount was disallowed in the notice of

deficiency.   In support of the deductibility of this $2,920,

petitioners produced canceled checks showing the following

payments:


     Date            Payee                    Amount

     01/13/95        Susan Javellana          $  500
     01/23/95        Betty Crutcher              500
     01/23/95        Jim Costa                    70
     07/28/95        Tanya L. Lynch              400
     07/28/95        Antonio Cristi              100
     07/28/95        Tanya Oliver                100
     07/28/95        Vanessa M. Taylor           550
     12/15/95        Titi Oconnor                700
       Total                                  $2,920


All of these checks were signed by petitioner; however, none

listed a notation in the memo section as to the purpose or reason

for payment, nor whether the payees were attorneys.    Moreover, no

evidence was presented to show the relationship of most of these

payees to petitioner’s business activities.   Finally, no evidence

was presented that would indicate these payments were incurred in

petitioner’s trade or business.   Thus, the Court holds that these

expenses are not deductible.

     For 1996, petitioners deducted $468.54 in legal and

professional expenses, all of which was disallowed by respondent.
                                - 27 -

In support of the deductibility of this amount, petitioners

produced canceled checks showing the following payments:


     Date            Payee                        Amount

     01/25/96        Ron Lawson                   $ 250.00
     02/14/96        Seymour Rosenberg              100.00
     04/13/96        AAA Auto Club South             59.00
     11/09/96        Sam's Club                      59.54
       Total                                      $ 468.54


The check to Ron Lawson was signed by petitioner; however, the

others were signed by petitioner wife and were written on

petitioners’ joint account.    The check to Ron Lawson listed no

notation in the memo section.    The checks to Sam's Club and AAA

Auto Club South, respectively, listed 9-digit and 11-digit

numbers in the memo section which appear to be account numbers.

The check to Seymour Rosenberg has a notation of “Business

Advice” in the memo section.    No evidence was presented to show

the relationship of Ron Lawson or Seymour Rosenberg to

petitioner’s business activities.    Moreover, no evidence was

presented that would indicate any of these payments was incurred

in petitioner’s trade or business.       The Court holds that these

expenses are not deductible.

     The remaining rent or lease expenses at issue, i.e., $5,500

for 1994, $5,832.62 for 1995, and $6,595 for 1996, constitute

amounts paid by petitioner for rental property in Nashville,

Tennessee.   Throughout the years at issue, petitioner rented a
                                - 28 -

condominium at 403 South Timber Drive in Nashville.    Petitioner

began renting this condominium during the latter part of 1993.

Petitioner contends he used this condominium as an office during

the years at issue, even though he was in Nashville only 30 days,

37 days, and 44 days, respectively, for the years 1994, 1995, and

1996.    Petitioner contends he maintained this office as a point

of contact in Nashville for potential clients.    The condominium

was located in a residential area of Nashville.    Petitioner

claims that he set up the downstairs portion of the condominium

as an office and kept an air mattress upstairs where he slept

when he stayed overnight in Nashville.    There was a telephone and

answering machine but no fax machine or copy machine in the

condominium.    Petitioner contended that no one lived in the

condominium when he was not in Nashville.

     Petitioner testified that a woman named Debra Push (Ms.

Push), who petitioner identified as a songwriter, would

occasionally check the mail and answering machine for petitioner

when he was not in Nashville.    Ms. Push was not compensated

monetarily for this service.    The Court notes, however, that

petitioner incurred additional lodging expenses in Nashville

during the years at issue at Embassy Suites, Crowne Plaza,

Wyndham Garden Hotels, and similar establishments.9   Petitioner

testified that the reason for incurring these additional lodging


     9
            Sometimes these expenses were $100 or more per night.
                              - 29 -

expenses was that his condominium wasn’t “up to snuff” to the

point that he was comfortable meeting there with new clients or

other clients he wanted to impress.

     Ms. Toya Turney (Ms. Turney) of the Nashville Electric

Service (NES), who was called by respondent, testified, based on

the records of NES, that Ms. Push had electrical power activated

in her name at 403 South Timber Drive on November 23, 1992.     The

records of NES further reflected that, up until the trial date of

this case on October 26, 1999, Ms. Push’s utility account at 403

South Timber Drive remained active.     Finally, Ms. Turney

testified that the NES electricity usage records for 403 South

Timber Drive indicated that someone was living at that location

during each of the years at issue.     This testimony contradicts

petitioner's testimony that he used this property only 30 to 40

days per year.

     On this record, the Court finds that the amounts expended by

petitioner, during 1994, 1995, and 1996, for the rental of a

condominium at 403 South Timber Drive in Nashville were not

ordinary and necessary expenses incurred in the conduct of

petitioner's trade or business.   Thus, the Court holds these

expenses are not deductible by petitioners.

     For 1994, petitioners deducted other expenses of $751.35 for

equipment, $147.39 for miscellaneous, and $770 for dues and

subscriptions.   The equipment expenses consisted of several
                             - 30 -

amounts paid to unidentified recipients for unidentified

merchandise or services, $6.15 paid to a pharmacy for

unidentified merchandise, $10.81 paid to an unidentified

recipient for reading glasses, $109.91 to Costco Wholesale for

"Oscar",10 sheets, pillows, a rug, and some kitchen supplies, and

$609.94 to Costco for unidentified merchandise.   The

miscellaneous expenses included $60 paid to this Court for "A.

Johnson - Filing Fee", $20 to the City of Los Angeles for an

undisclosed purpose, a $4 automatic teller machine withdrawal,

$28 for a one-way Greyhound bus ticket for petitioner wife from

Nashville to Memphis, and $5.42 to the U.S. Postal Service.11

     Petitioners failed to prove that any of these expenses were

ordinary and necessary expenses incurred in the conduct of a

trade or business of petitioner.   Moreover, with respect to the

$770 for dues and subscriptions, petitioners produced no evidence

to show that this amount was actually expended.   Thus, the Court

holds that petitioners are not entitled to deduct any of these

expenses.




     10
          The Court surmises that this was some type of “Oscar De
La Renta” merchandise, which would indicate that it was either
housewares such as sheets or towels, clothing or fashion
accessories, jewelry, perfume, or a similar item that would be
personal in nature.
     11
          No documentary proof was submitted to show that any of
the remaining claimed amount was actually expended.
                               - 31 -

     For 1995, petitioners deducted other miscellaneous expenses

of $1,298.42.    These expenses consisted mainly of a $1,000

payment to Bellmark for an undisclosed purpose, as well as

payments by petitioner wife to the U.S. Postal Service, a $39

payment to Avis,12 $5 for a frequent flyer guide, a $15 credit

card late fee, $20 for a Federal Express package from Al Bell,

and a $111.88 credit card charge for Farm Gusher in Tijuana,

Mexico (totaling $1,190.88).    None of these expenses was

established as an ordinary and necessary expense incurred in the

conduct of a trade or business; consequently, petitioners are not

entitled to deduct these expenses.

     For 1996, petitioners deducted office expenses of $125.10,

supplies expenses of $441.11, miscellaneous expenses of $90.65,

$35.32 for dues and publications, and $161.97 for shipping and

postage.   The claimed office expenses consisted mostly of several

amounts paid to unidentified recipients for unidentified

merchandise or services, four rolls of film purchased from a

Kroger grocery store, a watch battery, plastic tape, a padlock,

and other merchandise purchased from a Staples office supply

store.    The claimed supplies expenses consist of amounts paid to

Sam’s Club for unidentified merchandise.




     12
          The notation “Bellmark” was listed in the memo section
of this canceled check.
                               - 32 -

     The only evidence presented with respect to miscellaneous

expenses of $90.65 consisted of $32 paid to the U.S. Postal

Service and $27.05 to Seessel’s grocery store in Memphis.13      Both

checks were signed by petitioner wife and were written on

petitioners’ joint checking account.    The check to Seessel’s

contained a notation in the memo section that the purchase was

for flowers.   The dues and publications expense consisted of

$35.32 paid to Rodale Books.   The shipping and postage expenses

consisted of numerous payments to the Postal Service and Mail

Boxes, Etc., for various mailing and shipping charges as well as

for postage stamps.   At least one shipping charge was from

petitioner to petitioners’ daughter.

     The evidence is insufficient to show that any of these

expenses were ordinary and necessary expenses incurred in the

conduct of a trade or business, and, therefore, these expenses

are not deductible.

     On this record, the Court holds that petitioners are not

entitled to Schedule C deductions for 1994, 1995, and 1996 in




     13
          Nothing further was submitted with respect to the
remaining amount claimed.
                              - 33 -

excess of the amounts allowed by respondent.14   Respondent is

sustained on this issue.

     The final issue is whether petitioners are liable for the

accuracy-related penalty under section 6662(a) for negligence or

disregard of rules or regulations for each of the years at issue.

Section 6662(a) provides that, if it is applicable to any portion

of an underpayment in taxes, there shall be added to the tax an

amount equal to 20 percent of the portion of the underpayment to

which section 6662 applies.   Section 6662(b)(1) provides that

section 6662 shall apply to any underpayment attributable to

negligence or disregard of rules or regulations.

     Section 6662(c) provides that the term "negligence" includes

any failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws, and the term "disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations.   Negligence is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances.   See Neely v. Commissioner, 85


     14
          Some of the claimed deductions were for expenses of
Bellmark. Petitioners are not entitled to deduct such expenses.
Both petitioner and Mr. Bell testified that petitioner was to be
reimbursed by Bellmark for all expenses incurred by him, during
the years at issue, on behalf of Bellmark. It is well
established that a trade or business deduction is not allowable
to the extent that an employee is entitled to reimbursement from
his employer. See Orvis v Commissioner, 788 F.2d 1406, 1408 (9th
Cir. 1986), affg. T.C. Memo. 1984-533; Lucas v. Commissioner, 79
T.C. 1, 7 (1982).
                                - 34 -

T.C. 934, 947 (1985).     Negligence also includes any failure by

the taxpayer to keep adequate books and records or to

substantiate items properly.     See sec. 1.6662-3(b)(1), Income Tax

Regs.

     However, under section 6664(c), no penalty shall be imposed

under section 6662(a) with respect to any portion of an

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

such portion and that the taxpayer acted in good faith with

respect to such portion.     The determination of whether a taxpayer

acted with reasonable cause and in good faith depends upon the

facts and circumstances of each particular case.     See sec.

1.6664-4(b)(1), Income Tax Regs.     Relevant factors include the

taxpayer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and reliance on the

advice of a professional, such as an accountant.     See Drummond v.

Commissioner, T.C. Memo. 1997-71.     However, the most important

factor is the extent of the taxpayer's effort to determine the

taxpayer's proper tax liability.     See sec. 1.6664-4(b)(1), Income

Tax Regs.     An honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge, and education

of the taxpayer may indicate reasonable cause and good faith.

See Remy v. Commissioner, T.C. Memo. 1997-72.

        For all 3 years, the underpayments resulted from

respondent's disallowance of petitioners’ Schedule C deductions
                               - 35 -

and, additionally, in 1995, from respondent’s determination of

unreported income.

     Respondent conceded that petitioners are entitled to

deductions for meals and entertainment expenses totaling $112.45

for 1994 and that petitioners did not have unreported income for

1995.    Petitioners conceded that, during 1995 and 1996,

petitioner’s tax home was Los Angeles, and, thus, petitioners

were not entitled to deduct Los Angeles living expenses for those

years.    The remainder of respondent's adjustments at issue for

1994, 1995, and 1996 have been sustained.

     Petitioners' evidence was far short of what was required to

sustain the disputed adjustments in the notice of deficiency for

1994, 1995, and 1996.    Furthermore, petitioners presented no

evidence to show that they used due care in claiming deductions

on their returns for 1994, 1995, and 1996 that were subsequently

adjusted in the notice of deficiency and either conceded by

petitioners or sustained by this Court in favor of respondent,

nor did petitioners present evidence to show that they had

reasonable cause to claim such deductions.

     Petitioner failed to maintain adequate books and records to

reflect his business expenses for any of the relevant years.

Petitioner was an experienced tax return preparer who was, or

should have been, abundantly familiar with the substantiation

requirements of section 274(d) and the necessity of maintaining
                                - 36 -

sufficient books and records to accurately reflect his income and

expenses.   Moreover, petitioner should certainly have been aware

of the controlling factors in determining a taxpayer’s tax home

and of the stringent requirements surrounding a home office

deduction under section 280A.    If petitioner had not been

familiar with these rules and requirements, his many years of

experience in preparing returns should have led him to research

the law on these matters before filing returns claiming such

deductions.

     The Court finds that petitioners made an insufficient effort

to determine their proper tax liabilities in filing their returns

for 1994, 1995, and 1996.   Moreover, in light of petitioner’s

experience, knowledge, and education, the Court finds that

petitioners’ claiming deductions, which were disallowed by

respondent and subsequently conceded by petitioners or sustained

by this Court in favor of respondent, did not constitute a

reasonable and honest misunderstanding of fact or law.

     On this record, the Court holds that petitioners negligently

or intentionally disregarded rules or regulations with regard to

the adjustments in the notice of deficiency for 1994, 1995, and

1996 that were either conceded by petitioners or sustained by

this Court in favor of respondent.       Accordingly, the imposition

of the accuracy-related penalties under section 6662(a) for 1994,

1995, and 1996 is sustained.
                             - 37 -

     Finally, to the extent the Court has failed to address any

argument of petitioners herein, the Court concludes such argument

is without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                   Decision will be entered

                              under Rule 155.
