                          T.C. Memo. 1996-444



                        UNITED STATES TAX COURT



   JAMES H. SHELTON, DECEASED, AND EVE SHELTON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 14277-94.                 Filed September 26, 1996.



        James H. Shelton1 and Eve Shelton, pro sese.

        Charles J. Graves, for respondent.


                          MEMORANDUM OPINION

        CARLUZZO, Special Trial Judge:   This case was heard pursuant

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

182.2

        1
         James H. Shelton died after this case was submitted.
        2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

     Respondent determined a deficiency in petitioners' 1992

Federal income tax in the amount of $3,471, and an accuracy-

related penalty under section 6662(a) in the amount of $694.

Following concessions by respondent, the issues for decision are:

(1) Whether petitioners properly reported cost of goods sold on a

Schedule C relating to a business conducted by James H. Shelton;

(2) whether, with respect to James H. Shelton's business,

petitioners are entitled to various Schedule C business expense

deductions in excess of those allowed by respondent; and (3)

whether petitioners are liable for the accuracy-related penalty

under section 6662(a) for the year 1992.

Background

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.   During the year in issue,

petitioners were husband and wife and filed a joint Federal

income tax return.   At the time the petition was filed in this

matter, petitioners resided in Koshkonong, Missouri.   References

to petitioner are to James H. Shelton.

     In 1992, petitioner was employed as a professor of physics

at Sierra Academy (Sierra), a community college located in

Oakland, California.   Also in 1992, petitioner was engaged in

what he described as an "education business."   Petitioner's

education business was composed of two distinct components:
                                 - 3 -

(1) Marketing activities relating to a book that he authored and

published in a previous year; and (2) private educational

seminars that he conducted that were not connected with his

employment at Sierra.

     Prior to 1992, petitioner wrote and published a book, at his

own expense.   On January 6, 1992, petitioner paid a publishing

company $3,070.50 to have 1,035 copies of his book printed.

Petitioner was charged $3.003 per copy for the first 1,000 copies

and $2.250 for the next 30 copies.       He received 5 free copies.

     During 1992, petitioners traveled to several cities,

including the following:   Phoenix, Arizona; Minneapolis,

Minnesota; Reserve, New Mexico; and Los Angeles, California.

Typically, there were large shopping malls in these cities and

located in these malls were retail bookstores.       Without making

any advance arrangements or appointments, petitioner visited

several of the bookstores in the city where he happened to be in

an attempt to market his book.    Usually he left a sample copy of

the book with the manager or other employee of the bookstore.

Petitioner did not maintain a log or other record to indicate

what bookstores he visited or the number of sample copies of his

book that he gave out during 1992.       During these trips

petitioners visited with relatives who were living in the area.

     In October of 1992, petitioner sold $124 worth of books.         He

included this amount in the amount of gross receipts he reported
                                - 4 -

on the Schedule C.   Petitioner's records do not indicate to whom,

or how many copies of his book were sold.

     Independent from his employment at Sierra, from January to

September of 1992, petitioner conducted educational seminars on

the mathematics of electronics.   The seminars were held 5 days

per week for 4 hours per day.   He taught between 3 and 6 students

at any given time.

     During January and February of 1992, petitioner used an

empty room located in an airport as his seminar classroom.

Petitioner sublet this room from Webaire.    Due to complications

involving his arrangement with Webaire, beginning in March of

1992, petitioner rented a different room at the airport directly

from the Port of Oakland.   He used this room as his seminar

classroom for the rest of the year.     The airport was located less

than one block from Sierra.   Petitioner drove a pickup truck from

his residence to Sierra and then walked from Sierra to the

airport.

     Petitioners filed a Schedule C for petitioner's "education

business" with their 1992 Federal income tax return.    On the

Schedule C, among other things, petitioners reflected gross

receipts in the amount of $7,271.   Apparently $124 of this amount

is attributable to the sales of his book, and a substantial

portion of the balance is attributable to the fees he charged for
                                - 5 -

his seminars.3   In arriving at the gross income reported on the

Schedule C, petitioners claimed cost of goods sold in the amount

of $7,030, computed as follows:
          Beginning inventory             $ -0-
          Purchases                        8,949
          Materials & supplies             1,152
          Ending inventory                 3,071
          Cost of goods sold               7,030

Petitioners also deducted various business expenses on the

Schedule C in the total amount of $11,409, resulting in a net

loss of $11,200.

       In the notice of deficiency, respondent made the following

adjustments to the items contained on the Schedule C:

                           Amount Per
Item                         Return       Adjustment     Allowed

Cost of Goods sold          $7,030         $7,030        $  -0-
Advertising                  1,282           -0-          1,282
Insurance                    1,475          1,475           -0-
Legal/Prof.                    100           -0-            100
Office Exp.                    135           -0-            135
Rent                         2,082          2,082           -0-
Repairs & Main.                170           -0-            170
Taxes & Licenses               279           -0-            279
Travel                       2,053          2,053           -0-
Utilities                      745           -0-            745
Other expenses:
  Accounting                   128           -0-            128
  Trade dues                   282           -0-            282
  Contrs.                    2,187           -0-          2,187
  Postage                      491           -0-            491


       Respondent explained her adjustment to petitioners' cost of

goods sold as follows: "Since you did not establish that the

       3
      Petitioner's records indicate that there were small amounts
of income identified as "misc." or "interest" included in the
gross receipts reported on the Schedule C.
                                - 6 -

amount shown was (a) for purchases, and (b) paid, the amount is

not deductible."   We note that the ending inventory reflected in

the cost of goods sold computation is the amount that petitioner

paid to the publishing company to have his book printed.    We

assume from this that, as of the end of 1992, with the possible

exception of the complimentary copies that the printer provided

to petitioner, all of the copies of petitioner's book remained in

inventory.   With respect to the expenses that were adjusted,

respondent explained: "Since you did not establish that the

business expense shown on your tax return was paid or incurred

during the taxable year and that the expense was ordinary and

necessary to your business, we have disallowed the amount shown."

Discussion

     Respondent's determinations, having been made in a notice of

deficiency, are presumed correct, and petitioners bear the burden

of proving such determinations to be erroneous.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).     Furthermore,

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving that he or she is entitled to any

deduction claimed.   Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934); Welch v. Helvering, supra.     This includes

the burden of substantiation.    Hradesky v. Commissioner, 65 T.C.

87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).     If

certain claimed deductions are not adequately substantiated, we
                               - 7 -

may estimate them when we are convinced from the record that the

taxpayer has incurred such expenses and we have a basis upon

which to make an estimate.   Cohan v. Commissioner, 39 F.2d 540

(2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).   However, the principle established in Cohan v.

Commissioner, supra, does not apply to deductions for travel, as

such deductions are subject to the specific substantiation

requirements imposed by section 274(d).

     Respondent does not dispute that petitioner's "education

business" constituted a trade or business within the meaning of

section 162(a) for 1992, as indicated by the fact that in the

notice of deficiency she has allowed portions of some of the

business expense deductions claimed on the Schedule C.

Furthermore, she now concedes that petitioners are entitled to a

Schedule C rent expense deduction, but only in the amount of

$1,772.35.

I. Cost of Goods Sold

     Petitioner's 1992 Schedule C reflected gross receipts in the

amount of $7,271 and cost of goods sold in the amount of $7,030.

Petitioner computed cost of goods sold by including expenditures

allegedly incurred in connection with both the book marketing

activity and educational seminars activity.   In the notice of

deficiency, respondent completely disallowed the cost of goods

sold claimed.   According to respondent, petitioner has failed to
                                - 8 -

establish that the amount reported as cost of goods sold was for

purchases and was paid.

     This Court has consistently held that the cost of goods sold

is not a deduction (within the meaning of section 162(a)), but is

subtracted from gross receipts in the determination of a

taxpayer's gross income.    Beatty v. Commissioner, 106 T.C. 268

(1996); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477

(1977), affd. 630 F.2d 670 (9th Cir. 1980); Sullenger v.

Commissioner, 11 T.C. 1076, 1077 (1948); see sec. 1.61-3(a),

Income Tax Regs.    Section 1.61-3(a), Income Tax Regs., provides

that in a manufacturing, merchandising, or mining business,

"gross income" means the total sales, less the cost of goods

sold.   Cost of goods sold does not involve the selling of

services.   See sec. 1.61-3(a), Income Tax Regs.; see also Hahn v.

Commissioner, 30 T.C. 195, 197-198 (1958), affd. per curiam 271

F.2d 739 (5th Cir. 1959).   Cost of goods sold must be reduced by

items withdrawn for personal use by the taxpayer and related

persons, see Tucker v. Commissioner, T.C. Memo. 1979-449;

Calamaras v. Commissioner, T.C. Memo. 1960-201.

     Although not exactly clear from petitioner's presentation,

we assume that the cost of goods sold here in dispute relates to

petitioner's book marketing activity as well as his educational

seminar activity.   In connection with his book marketing

activity, we assume that petitioner included the printing cost

that he paid in 1992 in the "purchases" component of his cost of
                                 - 9 -

goods sold computation.     We have no idea what other items

petitioners included in "purchases" or in "materials and

supplies."

     But for the reference to $124 in book sales income in

petitioners' records and petitioner's vague testimony on the

point, there is no other evidence of any book sales during 1992.

As for the educational seminars activity, we fail to see how any

of the expenditures that petitioner might have incurred in

connection with such activity would properly be included in a

cost of goods sold computation.     See sec. 1.61-3(a), Income Tax

Regs.; see also Hahn v. Commissioner, supra.     Conceivably, with

respect to the educational seminar business, some of the

expenditures that petitioner might have included in cost of goods

sold might have been properly deductible under section 162;

however, petitioners have made no such claim, and there is

insufficient information in the record to allow us to make such a

determination on our own.     Consequently, respondent's adjustment

reducing the cost of goods sold reported on the Schedule C is

sustained.

II. Schedule C Deductions

     In general, section 162 allows deductions for ordinary and

necessary expenses of carrying on a trade or business.     Sec.

162(a).   As used in section 162(a), "ordinary" has been defined

as that which is "normal, usual, or customary" in the taxpayer's

trade or business.   Deputy v. DuPont, 308 U.S. 488, 495 (1940).
                               - 10 -

"Necessary" has been construed to mean "appropriate" or "helpful"

in the development of the taxpayer's business.      Welch v.

Helvering, supra at 113.    Unless expressly provided for, section

262 prohibits deductions for personal, living, or family

expenses.

A. Travel expenses

     On his 1992 Schedule C, petitioner claimed a deduction in

the amount of $2,053 for travel expenses allegedly attributable

to petitioner's book marketing activity.      Petitioners routinely

traveled together, and this amount apparently includes the

expenses incurred by both of them.      Respondent disallowed the

deduction in full on the ground that the expenses were not

ordinary and necessary within the meaning of section 162, and for

lack of substantiation.    As indicated above, travel expenses are

subject to the more stringent substantiation requirements imposed

by section 274.

     To substantiate a deduction under section 274(d), a taxpayer

must maintain adequate records or present corroborative evidence

to show:    (1) The amount of the expense; (2) the time and place

of the travel; (3) the business purpose of the expense or other

item; and (4) the business relationship to the taxpayer or person

entertained.   Sec. 1.274-5T(b)(2), (3), (5), (6), (c)(1),

Temporary Income Tax Regs., 50 Fed. Reg. 46014-46017 (Nov. 6,

1985).
                                - 11 -

     In order to substantiate a deduction by means of adequate

records, a taxpayer must maintain a diary, a log, or a similar

record, and documentary evidence that, in combination, are

sufficient to establish each element of each expenditure or use.

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

46017 (Nov. 6, 1985).

     When a traveling taxpayer engages in both business and

personal activities, expenses for transportation, meals, and

lodging are deductible only if the trip is related primarily to

the taxpayer's trade or business and not primarily personal in

nature.     Sec. 1.162-2(b)(1), Income Tax Regs.    Whether a trip is

related primarily to the taxpayer's trade or business or is

personal in nature depends on the facts and circumstances in each

case.     Sec. 1.162-1(b)(2), Income Tax Regs.     Where a taxpayer's

spouse accompanies the taxpayer on a business trip, expenses

attributable to the spouse's travel are not deductible unless it

can be adequately shown that the spouse's presence on the trip

has a bona fide business purpose.     The spouse's performance of

some incidental service does not cause the spouse's expenses to

qualify as deductible business expenses.     Sec. 1.162-2(c), Income

Tax Regs.

        The manner in which petitioner attempted to market his book,

that is, merely showing up at a retail bookstore without advance

notice or an appointment, leads us to conclude that petitioners'

claimed travel expenses were not incurred primarily in connection
                                - 12 -

with petitioner's Schedule C business.     Petitioners traveled to

popular cities and visited what would normally be considered

tourist attractions.   On their trips petitioners visited with

relatives who lived in the area.     When questioned at trial,

petitioner was unable to state whether he sold any books as a

result of any of his travels.     Petitioners have failed to

convince us of a business nexus between petitioners' travels and

the sale of petitioner's book, and, we fail to see how petitioner

expected his travels to produce commensurate benefits for the

business, especially in light of the haphazard manner in which he

visited the bookstores.

     Moreover, petitioners have provided no evidence to establish

that travel expenses incurred by petitioner's wife had a "bona

fide business purpose".     See sec. 1.162-2(c), Income Tax Regs.;

sec. 262.   In addition, petitioners have not presented us with

sufficient evidence to satisfy the substantiation requirements

imposed by section 274(d).     Accordingly, we sustain respondent's

adjustment to petitioners' travel expense deduction.

B. Rent Expense Deduction

     On the Schedule C for 1992, petitioner claimed a rent

expense deduction in the amount of $2,082.     Respondent now

concedes that petitioner is entitled to a rent expense deduction

but only in the amount of $1,772.35.

     Section 162 specifically allows a deduction for rental

expenses.   Sec. 162(a)(3).    As indicated above, deductions are a
                               - 13 -

matter of legislative grace, and petitioner bears the burden of

proving his entitlement to such deductions.     Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933).     We find that petitioners

have submitted sufficient proof that during 1992 petitioner

incurred rent expenses in the amount of $1,952.62, which amount

is $179.27 more than the amount allowed by respondent.

C. Automobile Expense Deduction

     At trial, petitioners claimed that they were entitled to an

automobile expense deduction in the amount of $587.81 for 1992 in

connection with petitioner's educational seminars business.      This

amount represents expenses incurred for repairs, towing service,

and license registration for petitioner's pickup truck.

Automobile expenses are deductible pursuant to section 162 only

with respect to that portion of the automobile's use attributable

to business.    The portion attributable to personal use is

nondeductible.    Petitioner has the burden of proving what portion

of his automobile expenses was for business purposes and what

portion was for personal purposes.      Cobb v. Commissioner, 77 T.C.

1096, 1101 (1981).

     According to petitioner, he drove his truck from his house

to Sierra.    He would then walk from Sierra to the classroom,

which was located less than one block away.     Simply put,

petitioner used his pickup truck to commute from his residence to

his place of employment.    The expenses of commuting are not

deductible.    Commissioner v. Flowers, 326 U.S. 465, 470-474
                                - 14 -

(1946).   Petitioners have not convinced us that the pickup truck

was otherwise used for business purposes during the year in

issue.    Accordingly, petitioners are not entitled to an

additional deduction for automobile expenses.

D. Insurance Expense Deduction

     On the Schedule C, petitioners claimed a $1,475 insurance

expense deduction that was disallowed in the notice of

deficiency.    A portion of the deduction relates to the cost of

insurance on petitioner's pickup truck.     According to petitioner,

the balance of the deduction relates to some form of liability

insurance that petitioner was required to have in connection with

the rental of the airport space that he used as his classroom.

As indicated above, section 162 allows a deduction for ordinary

and necessary expenses incurred in connection with a trade or

business.    Sec. 162(a).   No deduction under section 162 is

allowed for insurance with respect to property that is not used

in a trade or business.     Edgar v. Commissioner, T.C. Memo. 1979-

524; Lenington v. Commissioner, T.C. Memo. 1966-264.

     Petitioner has not presented the Court with any evidence to

show what type of insurance policy he acquired in connection with

the rental of the classroom, nor did he explain why such coverage

was necessary.    As previously discussed, petitioners have failed

to prove that petitioner's pickup truck was used in connection

with his Schedule C business.     Accordingly, we find that payments
                                - 15 -

made by petitioner for insurance were personal in nature and,

pursuant to section 262, not deductible.

E. Allowed Deductions

     In the notice of deficiency, respondent allowed in full

deductions claimed for utilities, postal expenses, advertising,

office expenses, and trade dues.    Petitioner now claims that he

understated the deductions reflected on his 1992 Schedule C with

respect to these items and is entitled to deductions in excess of

the amounts already allowed.    Petitioners have not provided

sufficient evidence, documentary or otherwise, to establish that

petitioner incurred expenses in an amount greater than the amount

allowed by respondent.

III. Accuracy-Related Penalty

     Respondent determined that petitioners were liable for the

accuracy-related penalty under section 6662(a).    Section 6662(a)

and (b)(1) imposes a penalty on any portion of an underpayment

that is attributable to negligence or disregard of rules or

regulations.   The term "negligence" includes any failure to make

a reasonable attempt to comply with the statue, and the term

"disregard" includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   The penalty does not apply to any

portion of an underpayment for which there was reasonable cause

and with respect to which the taxpayer acted in good faith.      Sec.

6664(c).
                                - 16 -

     We find that petitioners are liable for the section 6662(a)

accuracy-related penalty for 1992.       Petitioners failed to

substantiate the cost of goods sold claimed on the Schedule C and

claimed trade or business expense deductions for expenditures

that were personal in nature.     Petitioners failed to offer any

reasonable explanation for the errors made on their 1992 Federal

income tax return.    Petitioner's testimony was vague and often

times inconsistent with respect to many of the deductions here in

dispute.

     Respondent's determination with respect to the imposition of

the section 6662(a) penalty is presumed correct, and petitioners

bear the burden of proving that they are not liable for the

accuracy-related penalty under section 6662(a).       Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Bixby v.

Commissioner, 58 T.C. 757, 791-792 (1972).       This they have failed

to do.     Accordingly, petitioners are liable for the section

6662(a) accuracy-related penalty for 1992.

     To reflect the foregoing and concessions by respondent,



                                             Decision will be entered

                                      under Rule 155.
