                           T.C. Memo. 1996-564



                         UNITED STATES TAX COURT



      HENRY PETER NOVICK AND CAROLYN S. NOVICK, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3478-94.                  Filed December 30, 1996.



     Gino P. Cecchi, for petitioners.

     Scott Johnson and Lori M. Mersereau, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS,    Judge:       Respondent     determined     the    following

deficiencies    and   accuracy-related     penalties     with    respect   to

petitioners' Federal income taxes:


                                         Accuracy-Related Penalty
     Year              Deficiency               Sec. 6662(a)
     1989              $18,167                     $2,933
                                       - 2 -

     1990                  24,146                           4,829
     1991                  39,162                           7,832

     The deficiencies result from respondent's determination that

petitioners are not entitled to deductions to the extent claimed

for Schedule E rental losses, miscellaneous employee business

expenses, charitable contributions, and investment interest.                   The

accuracy-related penalty is based on respondent's determination

that petitioners were negligent with respect to the preparation of

their    tax    returns.   For   the   reasons       that   follow,   we   sustain

respondent's determinations in all respects.

     All section references are to the Internal Revenue Code in

effect for the years under consideration.              All Rule references are

to the Tax Court Rules of Practice and Procedure.

                              FINDINGS OF FACT1

     Petitioners,      husband      and      wife,    resided   in    Sacramento,

California, at all relevant times, including the time they filed

their petition.      They filed joint Federal income tax returns for

each of the 3 years under consideration.

     Petitioner      Henry   Novick     is    a   physician,    specializing    in

urology.       Dr. Novick conducted his medical practice in corporate

form until 1986, at which time the corporation was dissolved.

During the years under consideration (1989-91), he was an employee




     1
          The stipulation of facts and the accompanying exhibits
are incorporated by this reference.
                                      - 3 -

of Sacramento Sierra Medical Group; petitioner Carolyn Novick was

a housewife.

Schedule E Rental Losses

     During each of the years under consideration, petitioners

reported    income     and    expenses   attributable      to    three   rental

activities on Schedule E of their tax returns:             The Texas rental,

the Tahoe rental, and the F Street (Sacramento) Duplex rental.

Respondent disallowed numerous expenses claimed by petitioners with

respect    to   each   of    these   rental   properties   and    recalculated

petitioners' net Schedule E gain/loss after applying the passive

activity loss rules.2        Petitioners do not dispute the application

of the passive activity loss rules to the rental expenses claimed

on Schedule E of their tax returns.           The following tables show the

income/loss reported by petitioners and the amounts allowed by

respondent with respect to each of the three rental properties,

before application of the passive activity loss rules (hereafter

referred to as Pre-Pals):



     2
          Pursuant to sec. 469(a), a passive activity loss is
generally not allowed as a deduction for the year sustained.
Sec. 469(d)(1) defines a passive activity loss as the amount by
which (A) the aggregate losses from all passive activities for
the taxable year exceed (B) the aggregate income from all passive
activities for that year. Passive activities are those
activities that involve the conduct of a trade or business in
which the taxpayer does not materially participate. Sec.
469(c)(1). Rental activity ordinarily is treated as a passive
activity irrespective of whether there is material participation.
Sec. 469(c)(2), (4).
                                      - 4 -

                                          TEXAS RENTAL

                         1989                1990                    1991
                  Reported Allowed    Reported Allowed         Reported   Allowed

Income           $2,268     $2,268    $3,767      $3,767       $2,344          $2,344
 (Rent & royalty)

Advertising         220          0         405         0               0             0
Auto/travel       2,654          0           0     1,211           2,832             0
Cleaning/           210          0         920         0             345             0
  maintenance
Repairs             244        322          284         0           428        1,170
Supplies            141          0          792         0           695            0
Taxes               145        145          310       140           164           78
Utilities             0          0          156         0             0            0
Association fee       0          0        2,889         0             0            0
Paint                 0          0          255         0           112            0
Gardening &         360        360          674         0           420            0
 landscaping
Licenses            108          0         111           0            25           0
Management fees     220          0         235           0           320           0
Pest Control         82          0         100           0           622           0
Security & safety    42          0         223           0             0           0
Telephone           190          0         217           0           318           0
Oil prod exp         48          0         108           0         1,700           0
Depletion             0          0           0           0           269         269
Fence                 0          0           0           0           478           0

Net Profit        (2,396)    1,441    (3,912)      2,2731      (6,384)           827
  Pre-Pals

1
    No explanation was given for the mathematical discrepancy.


                                          TAHOE RENTAL

                        1989                 1990                   1991
                 Reported Allowed     Reported   Allowed       Reported        Allowed

Income          $ 1,140     $ 1,140   $    980    $      980   $    220    $   220
 (Rent & royalty)

Advertising         480         0           695           0         113          0
Auto/travel         681       357         1,520       1,372           0          0
Cleaning/           204       230           511         130         490          0
  maintenance
Insurance           484       484           502          493        505         84
Legal and other     100         0         2,157            0        859          0
  professional fees
Repairs           1,548     1,287         2,168         573          984       298
Supplies          1,236       104         1,173           0        1,082         0
Taxes             2,123       212         2,344       2,286          855       312
Utilities         1,228       741         1,330       1,120          746       636
Security              0       312             0           0            0         0
Telephone           632       172           541           0          681        67
                                       - 5 -
Gardening &           541        0         890           653      2,280        480
  landscaping
Licenses              644        0         610             0          0          0
Management fees         0        0         519             0        425          0
Paint               2,434        0         841             0        390          0
Pest control          255        0         983             0        239          0
Plumbing              223        0         409             0        289          0
Security              647        0           0             0        513          0
Move                    0        0           0             0          0        969
Snow removal            0        0           0             0          0         25
Depreciation       13,354   13,354      13,354        13,354          0          0

Net Profit        (25,674) (18,025)1   (30,049)1     (19,001)   (10,231)    (1,548)1
  Pre-Pals

1
    No explanation was given for the mathematical discrepancy.



                            F STREET (SACRAMENTO) DUPLEX RENTAL

                          1989                 1990                     1991
                   Reported Allowed     Reported   Allowed       Reported    Allowed

Income           $12,614    $12,614      $14,604      $14,604     $15,000      $15,000
 (Rent & royalty)

Advertising          124          0            418          0         214               0
Auto/travel          780         51            820          0           0               0
Cleaning/            896        270            672        150         620               0
  maintenance
Insurance            351        352          356          356         375              363
Mortgage interest 3,448           0        3,553            0           0                0
  paid to bks.
Legal & other          0          0            690          0         582               0
  professional fees
Repairs            5,068      1,308        4,127            0       1,844           338
Supplies             635        241        1,029            0       2,342           123
Taxes              2,390      1,255        2,592            0       2,690         2,660
Utilities          1,711        839        1,520        1,106       1,619         1,374
Gardening/           658          0          743          536         781           480
  landscaping
License/tax          630        541          521            0         280               0
Management fees    1,241        360        1,091           40         820               0
Paint              2,146        318        1,682            0         417               0
Pest control         209        120        1,120            0         212               0
Plumbing/repair      756          0          296            0         180               0
Security             510         39          723            0         611               0
Telephone              0          0          210            0         298
Maintenance            0          0            0          150           0             0
Glass                  0          0            0           56           0             0
Other                  0          0            0          264           0             0
Garage                 0          0            0        1,035           0             0
Fence                  0          0            0            0         192             0
Accounting             0          0        1,035            0       1,100             0
Depreciation       4,429      4,622        4,429        4,760       4,430         4,667
                                       - 6 -
Net Profit         (13,368)    2,298    (13,023)       6,1501    (4,607)       4,995
  Pre-Pals

1
    No explanation was given for the mathematical discrepancy.

      Respondent's auditor reduced/disallowed the amounts claimed by

petitioners primarily on the basis of failure to substantiate.                      In

some instances, the amount was reduced/disallowed on the basis that

either      the   expenditures    involved     were    personal     in     nature   or

petitioners failed to indicate the reason the expenditures were

claimed.

Miscellaneous Employee Business Expenses

      For each of the years under consideration, petitioners claimed

a   deduction      for    miscellaneous     employee     business    expenses       on

Schedule A of their tax returns. The following table shows the

items of expenses claimed by petitioners, and the amounts allowed

by respondent, for each of the years under consideration:

                                1989              1990                 1991
                         Reported Allowed   Reported Allowed     Reported Allowed

Auto                 $ 7,020            0   $ 7,020          0   $ 7,020           0
Other asset--            119        $ 775     6,015    $ 1,632        43     $ 1,459
  depreciation
Office expenses        8,252            0   18,922           0         0           0
Promotion              1,962            0        0           0         0           0
Storage and rent      18,400            0   18,340           0    18,340           0
Equipment              8,000            0        0           0         0           0
Conferences           13,764            0   10,349           0         0           0
Legal & accounting    16,610       19,916    2,665       4,080    39,281      27,980
Advertising pamphlet   6,750        6,750        0           0         0           0
Tax return prep.         689          639        0           0         0         685
Dues & pubs.               0            0    2,567           0       840           0
Maintenance                0            0    3,668           0     4,026       1,461
Education                  0            0        0           0     6,257           0
Leasehold impr.            0            0   12,500      19,616    12,500      19,287
Moving                     0            0        0           0     2,212           0

    Total                81,566    28,080   82,046      25,328    90,519      50,872
                                     - 7 -

       The office and storage expenses relate to Dr. Novick's use of

petitioners' residence to store medical records and equipment from

Dr.     Novick's   previously      dissolved     professional   corporation.

(During the years under consideration, Dr. Novick did not conduct

his medical practice, nor did he see patients, in his home.)              The

stored medical records were those of so-called inactive patients --

patients that Dr. Novick had not seen within 3 years.            The medical

equipment stored in petitioners' residence was equipment that Dr.

Novick had used in his prior medical practice and was not needed by

Sacramento Sierra Medical Group, Dr. Novick's employer during all

years under consideration. Petitioners determined that 30 percent

of their home was used for storage of Dr. Novick's medical records

and equipment.       They calculated the office/storage expenses by

taking 30 percent of their home              mortgage payments, interest,

taxes, insurance, maintenance, and utilities.               Petitioners also

claimed a deduction for home mortgage interest and real estate

taxes on Schedule A of their tax returns, thereby double counting

these    items.    The   parties    stipulated     that   petitioners'   home

office/storage was not for the convenience of Sacramento Sierra

Medical Group.

        The automobile expenses relate to an automobile that Mrs.

Novick purportedly used to transport medical files, charts, and x

rays    from   petitioners'   home    to   Dr.   Novick's   medical   office.
                                    - 8 -

Petitioners allocated 90 percent of the automobile for business use

and 10 percent for personal use.

     Dr.    Novick    received    reimbursement   from    his    employer      for

claimed    employee    business    expenses.   Petitioners       presented      no

documentation at trial to substantiate any of the disallowed

miscellaneous employee business expenses.

Charitable Contributions

        For each of the years under consideration, petitioners claimed

a deduction for charitable contributions.            The following table

shows     the   amounts   of     charitable    contributions         claimed    by

petitioners, and the amounts allowed and disallowed by respondent,

for each of the years under consideration:

                                      1989        1990           1991

        Claimed                     $15,145     $21,111     $25,443
        Allowed                      13,421      15,450      18,931
        Disallowed (at issue)         1,724       5,661       6,502

        Petitioners    presented     no   documentation         at    trial     to

substantiate their claims for charitable contributions in excess of

those allowed by respondent.

Investment Interest

        Petitioners claimed a $15,000 investment interest deduction on

their 1990 tax return which was disallowed by respondent.                As best

we can glean from the record (which with respect to this item is

inadequate), the deduction relates to interest on a $50,000 loan

secured by a life insurance policy with General Services Life
                                     - 9 -

Insurance Co.      Respondent allowed petitioners a deduction for

$7,500 (as a personal interest expense) of the $15,000 claimed.

Petitioners presented no documentation at trial to substantiate

their claim for the investment interest expense deduction.

Preparation of Tax Returns

      Petitioners'    tax    returns     for      each   of   the    years     under

consideration were prepared by their accountant, Donald Fenton.

Mr.   Fenton   prepared     the   returns    by    entering    the       information

provided to him by petitioners.                Mr. Fenton did not receive

documentation to verify or substantiate the deductions claimed by

petitioners; he took the list of expenses they provided to him at

face value.     Mr. Fenton was not aware that some of the employee

business   expenses   claimed      by   petitioners      were,      in    actuality,

reimbursed by Dr. Novick's employer.

                                    OPINION

      Deductions are a matter of legislative grace.                  New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).               Taxpayers bear the

burden of establishing that they are entitled to the claimed

deductions.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114

(1933).    This includes the burden of substantiating the amount and

purpose of the item claimed.        Sec. 6001; Hradesky v. Commissioner,

65 T.C. 87, 90 (1979), affd. per curiam 540 F.2d 821 (5th Cir.

1976); sec. 1.6001-1(a), Income Tax Regs.
                                      - 10 -

     Petitioners claim that respondent's notice of deficiency is

"uninformative",       and    "therefore     respondent             has    the   burden   of

producing evidence from which the petitioners' tax liability can be

determined".     Petitioners'         claim        is     without          merit.     While

respondent's notice of deficiency to petitioners is not a model of

clarity, nonetheless, it is not uninformative.                       Moreover, Rule 142

places the burden of proof on petitioners, except in situations not

relevant herein.        "This burden is a burden of persuasion; it

requires * * *[petitioners] to show the merits of [their] claim by

at   least   a   preponderance        of     the    evidence."                 Rockwell    v.

Commissioner, 512 F.2d 882, 885 (9th Cir. 1975), affg. T.C. Memo.

1972-133.    Where      the     Commissioner            has     made       a     deficiency

determination denying the taxpayer's entitlement to a claimed

deduction    (such     as    here),   "the    taxpayer          has       'the   burden    of

producing enough evidence to rebut the deficiency determination and

the burden of persuasion in substantiating a claimed deduction'."

Goldberg v. United States, 789 F.2d 1341, 1343 (9th Cir. 1986)

(quoting Valley Title Co. v. Commissioner, 559 F.2d 1139, 1141 (9th

Cir. 1977), revg. and remanding T.C. Memo. 1975-48).

Schedule E Rental Losses

     Section     212    provides      a    deduction          for    all    ordinary      and

necessary expenses paid or incurred during the taxable year with

respect to the management, conservation, or maintenance of property

held for the production of income.             However, the taxpayer must be
                                   - 11 -

able to provide verification or substantiation for any deduction

claimed with respect to such expenses.            In the case before us, no

documentation was introduced to substantiate any of the disallowed

rental expenses.    Indeed, Dr. Novick and Mr. Fenton admitted that

they did not have any documents to substantiate the disallowed

rental deductions.

     The   only   evidence    in   the   record     offered   to   support   the

disallowed rental expenses relating to the Texas rental was                  Dr.

Novick's   testimony   with    regard    to   the    automobile    and   travel

expenses. Dr. Novick testified that in 1989, petitioners and their

three children (ages 1, 7, and 14) took a trip to inspect the Texas

property and to show petitioners' children the property lines of

the property they would one day inherit.

     The only evidence in the record to support the disallowed

rental expenses relating to the Tahoe property was Dr. Novick's

testimony that because the Tahoe property was a cedar house, it had

to be pressure-sealed with sealant oil each year.             No testimony or

documentation was offered as to the cost for this treatment.

     The   evidence    offered      by   petitioners      with     respect   to

establishing their entitlement to the deduction for rental activity

losses was woefully short of that required.             Petitioners neither

produced   enough     evidence     to    rebut    respondent's      deficiency

determination nor produced enough evidence to satisfy their burden

of persuasion.     Consequently, petitioners are not entitled to any
                                        - 12 -

Schedule     E     rental    expenses    in    excess    of    those   allowed    by

respondent.

Miscellaneous Employee Business Expenses

      Petitioners introduced no documentation to substantiate any of

the disallowed miscellaneous employee business expenses for any of

the years under consideration.                 Nor was there any meaningful

testimony     to    support    petitioners'      entitlement     to    the   claimed

employee business expenses.

      With respect to the claimed office and storage expenses (which

relate to Dr. Novick's use of petitioners' residence to store

medical      records    of    inactive        patients   and    certain      medical

equipment), petitioners failed to come within any of the exceptions

provided by section 280A(c) to the general rule denying a deduction

for   home    office    expenses.3        We     specifically     note    that   (1)

      3
          Sec. 280A provides generally that no deduction is
allowable with respect to the use of a dwelling unit which is
used by the taxpayer during the taxable year as a residence.
Sec. 280A(c) provides exceptions to this general rule.
          Pursuant to sec. 280A(c)(1), a taxpayer may deduct an
otherwise allowable item of expense allocable to the portion of a
taxpayer's personal residence which is used exclusively on a
regular basis:

             (A) [as] the principal place of business for
             any trade or business of the taxpayer,

             (B) as a place of business which is used by
             patients, clients, or customers in meeting
             with the taxpayer in the normal course of
             * * * [the taxpayer's] trade or business, or

             (C) in the case of a separate structure
             which is not attached to the dwelling unit,
                                                      (continued...)
                                     - 13 -

petitioners    stipulated     that    the     use   of   their    home   as    an

office/storage was not for the convenience of Dr. Novick's employer

(thus, petitioners do not come within the exception under section

280A(c)(1)), and (2) the only items stored at petitioners' home

were medical equipment and files (thus, petitioners do not come

within the exception under section 280A(c)(2)).

      With respect to the claimed depreciation on the automobile

that Mrs. Novick purportedly used to transport medical files,

charts, and x rays from petitioners' home to Dr. Novick's medical

office, we note that Mrs. Novick was not an employee of either Dr.

Novick or Sacramento Sierra Medical Group, nor was the use of the

car for that purpose required as a condition of her husband's

employment.    Thus, even assuming arguendo the automobile was used

90   percent   for   such   purposes,   the    depreciation      would   not   be

deductible.     See sec. 280F(d)(3).          Moreover, even if Dr. Novick

used the automobile for such purposes, that use still would not be

      3
       (...continued)
           in connection with the taxpayer's trade or
           business.

However, where the taxpayer is an employee, the exclusive use
requirement set forth above must be for the convenience of the
taxpayer's employer.
          Sec. 280A(c)(2) permits a taxpayer to deduct an
otherwise allowable item of expense with respect to the use of a
taxpayer's personal residence "which is used on a regular basis
as a storage unit for the inventory of the taxpayer held for use
in the taxpayer's trade or business of selling products at retail
or wholesale, but only if * * * [the personal residence] is the
sole fixed location of such trade or business."
                                  - 14 -

deductible, as there was no evidence introduced to show that

Sacramento Sierra Medical Group (Dr. Novick's employer) required as

a condition of Dr. Novick's employment that Dr. Novick transport

the medical files to and from his home.              Further, petitioners

stipulated that the storage of the medical records at their home

was not for the convenience of Dr. Novick's employer.

     Petitioners claimed employee business expenses other than the

home/office   and   automobile    expenses   which   were    disallowed   by

respondent.   Dr. Novick received reimbursement from his employer

for some of these expenses.         Mr. Fenton was not aware of the

reimbursement when he prepared petitioners' tax returns.

     Respondent's determination with respect to the disallowed

miscellaneous employee business expenses for each of the years

under consideration is sustained.

Charitable Contributions

     Section 170 allows a deduction for charitable contributions,

but only if verified pursuant to regulations.         In the case at bar,

petitioners had no documentation to verify (substantiate) their

claims for charitable contributions in excess of those allowed by

respondent.    Because the disallowed deductions have not been

verified, petitioners are not entitled to them.

Investment Interest

     Petitioners    claimed   a   $15,000    deduction      for   investment

interest on their 1990 tax return.           Petitioners presented no
                                   - 15 -

evidence to substantiate this deduction.         Nonetheless, respondent

allowed   petitioners   $7,500   of    the   $15,000   claimed.     Because

petitioners failed to satisfy their burden of proof with respect to

the remaining $7,500, we sustain respondent's determination in this

regard.

Accuracy-Related Penalty

     Respondent determined that petitioners were negligent with

respect to the preparation of their 1989-91 returns and accordingly

determined that they are liable for the accuracy-related penalty

under section 6662(a) for each of the years under consideration.

     The accuracy-related penalty is equal to 20 percent of any

portion   of   an   underpayment      attributable     to   the   taxpayer's

negligence or disregard of rules or regulations.            Sec. 6662(a) and

(b)(1).   Negligence is defined as the failure to exercise the due

care that a reasonable, prudent person would exercise under similar

circumstances.      Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th

Cir. 1984), affg. 79 T.C. 714 (1982); Neely v. Commissioner, 85

T.C. 934, 947 (1985).     A taxpayer has the burden of proving that

the Commissioner's determination is in error.           Rule 142(a); Luman

v. Commissioner, 79 T.C. 846, 860-861 (1982).

     Petitioners claim they were not negligent because the returns

for the years under consideration were prepared by an accountant.

However, reliance on professional advice, by itself, is not an

absolute defense to negligence.       A taxpayer must first demonstrate
                                    - 16 -

that his reliance was reasonable. Freytag v. Commissioner, 89 T.C.

849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501

U.S. 868 (1991).

     In the case at bar, Mr. Fenton, petitioners' accountant, acted

merely as a scrivener; he did not audit or verify the information

given him by petitioners.          Hence, we do not accept petitioners'

reliance on a professional advice defense.

     Giving consideration to all the facts before us, we conclude

that petitioners were negligent and that they disregarded rules and

regulations with respect to the preparation of their 1989-91 tax

returns:   They double deducted home mortgage interest and real

estate taxes; they claimed a $15,000 investment interest expense

when they had documentation indicating that, at best, they were

entitled to a $7,500 interest deduction; they claimed miscellaneous

employee business expenses for which Dr. Novick had been reimbursed

by his employer; they overstated expenses related to their rental

activities;     and    they   failed   to    maintain    adequate   records.

Consequently,     we     sustain     respondent's       determination   that

petitioners are liable for the accuracy-related penalty on the

amount of the underpayment for 1989, 1990, and 1991.

     To reflect concessions by respondent,


                                                Decision will be entered

                                            under Rule 155.
