                         T.C. Memo. 2005-49



                       UNITED STATES TAX COURT



         MICHAEL P. AND PAMELA J. HOPKINS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7551-03.              Filed March 17, 2005.



     Daniel J. Cooper, for petitioners.

     Karen Nicholson Sommers, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined a deficiency of

$51,643 in, and an accuracy-related penalty of $10,328.60 under

section 6662(a)1 on, petitioners’ Federal income tax (tax) for



     1
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 2 -

1999.

     The issues remaining for decision are:

     (1)   Are petitioners entitled for 1999 to deductions with

respect to a sole proprietorship of petitioner Michael P. Hopkins

(Mr. Hopkins) in excess of the deductions allowed by respondent?

We hold that they are not.

     (2)   Should we sustain respondent’s determination to disal-

low a nonpassive loss that petitioners claimed in Schedule E of

their 1999 tax return as attributable to an S corporation owned

by Mr. Hopkins?   We hold that we should.

     (3)   Are petitioners liable for 1999 for the accuracy-

related penalty under section 6662(a)?   We hold that they are.

                         FINDINGS OF FACT

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

     Petitioners resided in Dana Point, California, at the time

they filed the petition in this case.

     From around 1965 until around 1979, Mr. Hopkins, who has a

bachelor of science degree in mechanical engineering, worked as

an engineer for Goodyear Tire and Rubber Company (Goodyear).    In

1979, Mr. Hopkins left Goodyear and worked for a small tire

company in Indiana.   In 1980, Mr. Hopkins began working in

Illinois and thereafter in California as a salesman for NRM

Corporation, a company that sold rubber and plastic extrusion

equipment to the tire industry and the plastics industry.
                                - 3 -

     During the period (1965-1979) he worked for Goodyear, Mr.

Hopkins, who participated in drag racing as a teenager, fre-

quently attended automobile races.      In 1980, Mr. Hopkins stopped

frequenting such races.   In 1985, he resumed attending automobile

races, frequenting about 8 to 10 races a year.     In at least 1999,

the year at issue, Mr. Hopkins attended automobile races in

different places throughout the United States, including Arizona,

California, Indiana, Kentucky, Pennsylvania, and Texas.

     From 1982 until around mid-June 1999, Mr. Hopkins, operating

as a sole proprietor under the name MPH Enterprises (Mr.

Hopkins’s sole proprietorship), sold on behalf of certain manu-

facturers, including Westchem, Inc. (Westchem), various plastics

products and equipment used in the medical profession and the

construction industry.    In return for such services, Mr. Hopkins

received sales-based commissions from such manufacturers.     During

approximately the first 5½ months of 1999, Mr. Hopkins’s sole

proprietorship sold on behalf of Westchem certain Westchem

plastics products that resulted in (1) sales commissions to that

sole proprietorship of an unspecified amount that was less than

$128,6102 and (2) approximately $2.5 million of gross sales to


     2
      As discussed below, petitioners reported that during 1999
Mr. Hopkins’s sole proprietorship had $128,610 of gross receipts
(i.e., sales commissions). Westchem was not the only customer of
Mr. Hopkins’s sole proprietorship, and the record does not
disclose the amount of gross receipts (i.e., sales commissions)
that Mr. Hopkins’s sole proprietorship received from its other
                                                   (continued...)
                               - 4 -

Westchem.

     During approximately the first 5½ months of 1999, Mr.

Hopkins made certain unidentified expenditures totaling $10,179

(Mr. Hopkins’s unidentified expenditures of $10,179).   During the

period January through June 7, 1999, Mr. Hopkins made certain

automobile racing expenditures totaling $67,084 (Mr. Hopkins’s

automobile racing expenditures of $67,084) to pay for, inter

alia, purchasing a race car, race car graphics, signs, and

clothes, making sponsorship payments to certain race car drivers,

and Mr. Hopkins’s airfare, lodging, meals, and other costs that

he incurred while he was frequenting various automobile races.

     On June 15, 1999, Mr. Hopkins organized and became the sole

stockholder of a corporation also known as MPH Enterprises, which

took over the operations of Mr. Hopkins’s sole proprietorship.

On the same date, that corporation filed an election to be taxed

as an S corporation.   (Hereinafter, we shall refer to the corpo-

ration known as MPH Enterprises as Mr. Hopkins’s S Corporation.)

     Approximately 90 percent of the manufacturers for whom Mr.

Hopkins’s S Corporation sold plastics products or equipment,

including Westchem, were located in California.   During approxi-

mately the second half of 1999, Mr. Hopkins’s S Corporation sold

on behalf of Westchem certain Westchem plastics products that



     2
      (...continued)
customers.
                               - 5 -

resulted in (1) sales commissions to that S corporation of an

unspecified amount that was less than $87,2493 and (2) approxi-

mately $2.5 million of gross sales to Westchem.

     During approximately the second half of 1999, Mr. Hopkins’s

S Corporation made certain expenditures totaling $16,501 (Mr.

Hopkins’s S Corporation’s expenditures of $16,501) that consisted

of loan payments of $9,609 with respect to Mr. Hopkins’s motor

home, certain unidentified automobile racing expenditures of

$6,620 (Mr. Hopkins’s S Corporation’s unidentified automobile

racing expenditures of $6,620), and certain advertising (hats)

expenditures of $282.4   During the same period, Mr. Hopkins’s S

Corporation made certain additional expenditures totaling $39,557

(Mr. Hopkins’s S Corporation’s expenditures of $39,557) that

consisted of sponsorship payments of $39,000 to race car driver

Davey Hamilton (sponsorship payments to Mr. Hamilton of $39,000)

and payments of $557 for country club dues (country club dues

payments of $557).   Sponsorship payments to a race car driver,



     3
      As discussed below, Mr. Hopkins’s S Corporation reported
that during 1999 it had $87,249 of gross receipts (i.e., sales
commissions). Westchem was not the only customer of Mr.
Hopkins’s S Corporation, and the record does not disclose the
amount of gross receipts (i.e., sales commissions) that Mr.
Hopkins’s S Corporation received from its other customers.
     4
      The parties stipulated that Mr. Hopkins’s S Corporation’s
expenditures of $16,501 consisted of the amounts set forth above.
However, those amounts total $16,511. There is no explanation in
the record for this discrepancy. We shall use the total amount
stipulated by the parties.
                               - 6 -

like the sponsorship payments to Mr. Hamilton of $39,000, enti-

tled the sponsor (1) to have (a) a decal with the sponsor’s logo

displayed on any race car that such driver drove and (b) its name

displayed on such driver’s racing uniforms and helmets and (2) to

require such driver to mention the sponsor’s name if and when

asked about his sponsors.   The size and the location of the logo

and the name of a sponsor depended on the amount of the sponsor-

ship payment that such sponsor made to the race car driver.

     Some time during 1999, Mr. Hopkins received a capital gains

distribution of $88,254 ($88,254 capital gains distribution) from

a family limited partnership that his deceased father had formed.

Around that same time, Mr. Hopkins received a taxable distribu-

tion of $204,002 ($204,002 profit-sharing plan distribution) from

his deceased father’s profit-sharing plan.

     Mr. Hopkins’s S Corporation filed Form 1120S, U.S. Income

Tax Return for an S Corporation (1999 Form 1120S), for its short

taxable year that began on June 22, 1999, and ended on December

31, 1999.   In the 1999 Form 1120S, Mr. Hopkins’s S Corporation

reported, inter alia, gross receipts of $87,249.   In that form,

Mr. Hopkins’s S Corporation deducted, inter alia, (1) Mr.

Hopkins’s S Corporation’s expenditures of $16,501 as advertising

expenses and (2) Mr. Hopkins’s S Corporation’s expenditures of

$39,557 as promotional expenses.   In the 1999 Form 1120S, Mr.

Hopkins’s S Corporation claimed an ordinary loss of $36,066 (Mr.
                               - 7 -

Hopkins’s S Corporation’s claimed 1999 ordinary loss of $36,066).

     Petitioners jointly filed Form 1040, U.S. Individual Income

Tax Return (1999 joint return), for their taxable year 1999.

Petitioners’ 1999 joint return reported, inter alia, the $88,254

capital gains distribution and the $204,002 profit-sharing plan

distribution.   Petitioners’ 1999 joint return included two

Schedules C, Profit or Loss From Business (Schedule C).   One such

schedule (Mr. Hopkins’s sole proprietorship’s Schedule C) related

to Mr. Hopkins’s sole proprietorship known as MPH Enterprises.

That Schedule C reported $128,610 of gross receipts, claimed Mr.

Hopkins’s unidentified expenditures of $10,179 as an advertising

expense deduction, and showed a net profit of $44,219.

     In Schedule E, Supplemental Income and Loss (Schedule E),

included as part of petitioners’ 1999 joint return (petitioners’

Schedule E),5 petitioners claimed, inter alia, a nonpassive loss

of $103,150 from Mr. Hopkins’s S Corporation and a total loss of

$83,872.6   The nonpassive loss of $103,150 from Mr. Hopkins’s S

Corporation claimed in petitioners’ Schedule E was equal to the

sum of (1) Mr. Hopkins’s S Corporation’s claimed 1999 ordinary


     5
      Petitioners’ Schedule E was incomplete in that it consisted
of only one page.
     6
      Petitioners determined the total loss claimed in petition-
ers’ Schedule E by reducing (1) the total of the respective
nonpassive losses that they claimed in that schedule from Mr.
Hopkins’s S Corporation and another S corporation by (2) the
nonpassive income that they reported in that schedule from a
limited partnership.
                                - 8 -

loss of $36,0667 and (2) Mr. Hopkins’s automobile racing expendi-

tures of $67,084 that petitioners claimed as “advertising and

business promotion” in Statement SBE, Supplemental Business

Expenses (Statement SBE), included as part of their 1999 joint

return.   In Statement SBE, petitioners indicated that Mr. Hopkins

incurred Mr. Hopkins’s automobile racing expenditures of $67,084

as an “S Corporation Shareholder”.

     Respondent conducted examinations of Mr. Hopkins’s S Corpo-

ration’s 1999 Form 1120S and petitioners’ 1999 joint return.

With respect to the examination of the 1999 Form 1120S, respon-

dent determined, inter alia, to disallow $12,729, and to allow

$3,772 as advertising expenses, of Mr. Hopkins’s S Corporation’s

expenditures of $16,501 that Mr. Hopkins’s S Corporation claimed

as a deduction in that form.8   Respondent also determined to


     7
      In determining the amount of Mr. Hopkins’s S Corporation’s
claimed 1999 ordinary loss of $36,066 reported in the 1999 Form
1120S, Mr. Hopkins’s S Corporation deducted from its gross
receipts reported in that form, inter alia, Mr. Hopkins’s S
Corporation’s expenditures of $16,501 and Mr. Hopkins’s S Corpo-
ration’s expenditures of $39,557.
     8
      Of the total of Mr. Hopkins’s S Corporation’s expenditures
of $16,501 that were claimed as a deduction in Mr. Hopkins’s S
Corporation’s 1999 Form 1120S, respondent (1) disallowed
(a) $9,609 as nondeductible loan payments with respect to Mr.
Hopkins’s motor home and (b) $3,130 of Mr. Hopkins’s S Corpora-
tion’s unidentified automobile racing expenditures of $6,620 as
nondeductible personal automobile racing expenditures of Mr.
Hopkins and (2) allowed (a) $3,490 of such unidentified automo-
bile racing expenditures and (b) $282 of advertising (hats)
expenditures (or a total of $3,772) as advertising expenses.
Respondent determined the former amount allowed (i.e., $3,490) as
                                                   (continued...)
                              - 9 -

disallow the entire amount of Mr. Hopkins’s S Corporation’s

expenditures of $39,557 that Mr. Hopkins’s S Corporation claimed

as a deduction in the 1999 Form 1120S.9    As a result of respon-

dent’s disallowance of various deductions, including the above-

specified deductions, respondent determined that for taxable year

1999 Mr. Hopkins’s S Corporation had ordinary income of

$26,885,10 and not an ordinary loss of $36,066 as claimed in the

1999 Form 1120S.

     Respondent issued to petitioners a notice of deficiency

(notice) for their taxable year 1999.     In that notice, respon-

dent, inter alia, disallowed $5,035, and allowed $5,144,11 of Mr.


     8
      (...continued)
4 percent of the $87,249 of gross receipts reported in Mr.
Hopkins’s S Corporation’s 1999 Form 1120S.
     9
      Respondent disallowed $557 of Mr. Hopkins’s S Corporation’s
expenditures of $39,557 as nondeductible country club dues and
the balance of such expenditures as nondeductible personal
automobile racing expenditures of Mr. Hopkins. Respondent made
that latter determination because respondent had allowed Mr.
Hopkins’s S Corporation an advertising expense deduction of
$3,490 (i.e., 4 percent of the $87,249 of gross receipts reported
in its 1999 Form 1120S). See supra note 8.
     10
      The parties stipulated that, as a result of respondent’s
disallowance of various deductions, respondent determined that
Mr. Hopkins’s S Corporation had ordinary income of $26,885 for
1999. However, respondent’s disallowance of various deductions
claimed in the 1999 Form 1120S results in Mr. Hopkins’s S Corpo-
ration’s having ordinary income of $26,685. There is no explana-
tion in the record for this discrepancy. We shall use the amount
of ordinary income stipulated by the parties.
     11
      The amount of Mr. Hopkins’s unidentified expenditures of
$10,179 that respondent determined in the notice to allow (i.e.,
                                                   (continued...)
                               - 10 -

Hopkins’s unidentified expenditures of $10,179 that petitioners

claimed as advertising expenses in Mr. Hopkins’s sole proprietor-

ship’s Schedule C.12   Based upon respondent’s examination of Mr.

Hopkins’s S Corporation’s 1999 Form 1120S, respondent also

disallowed in the notice the nonpassive loss of $103,150 from Mr.

Hopkins’s S Corporation that petitioners claimed in petitioners’

Schedule E.13   Respondent further determined in the notice that

petitioners are liable for 1999 for the accuracy-related penalty

under section 6662(a).

                              OPINION

     The parties do not address section 7491(a).   Since the year

at issue is 1999, we presume that section 7491(a) is applicable

in the instant case.   On the record before us, we find that

petitioners have failed to carry their burden of establishing

that they satisfy the applicable requirements of section


     11
      (...continued)
$5,144) is equal to approximately 4 percent of the $128,610 of
gross receipts reported in Mr. Hopkins’s sole proprietorship’s
Schedule C.
     12
      Petitioners concede, inter alia, respondent’s determina-
tion to disallow in the notice certain deductions claimed in Mr.
Hopkins’s sole proprietorship’s Schedule C, including the disal-
lowance of $5,035 of Mr. Hopkins’s unidentified expenditures of
$10,179.
     13
      As discussed above, the nonpassive loss of $103,150 from
Mr. Hopkins’s S Corporation claimed in petitioners’ Schedule E
was equal to the sum of (1) Mr. Hopkins’s S Corporation’s claimed
1999 ordinary loss of $36,066 and (2) Mr. Hopkins’s automobile
racing expenditures of $67,084 claimed in Statement SBE included
as part of petitioners’ 1999 joint return.
                                - 11 -

7491(a)(2) with respect to the factual issues relevant to ascer-

taining petitioners’ tax liability for 1999 that remain in this

case.     On that record, we conclude that petitioners’ burden of

proof on such issues, see Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933), does not shift to respondent under section

7491(a).     Moreover, with respect to any deductions that petition-

ers are claiming for 1999, deductions are strictly a matter of

legislative grace, and petitioners bear the burden of proving

that they are entitled to any deductions claimed.     INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).

     It is now petitioners’ position that for 1999 they are

entitled under section 162(a) to deduct as advertising expenses

in Mr. Hopkins’s sole proprietorship’s Schedule C an unspecified

reasonable amount of Mr. Hopkins’s automobile racing expenditures

of $67,084.14    (For convenience, we shall sometimes refer to such

claimed deduction as Mr. Hopkins’s claimed Schedule C deduction

of $67,084.)    It is also petitioners’ position that respondent’s

determination that for 1999 Mr. Hopkins’s S Corporation has

$26,885 of ordinary income that must be reported in petitioners’

Schedule E is wrong.    That is because, according to petitioners,


     14
      At trial, Mr. Hopkins conceded that during the first six
months of 1999, before Mr. Hopkins’s S Corporation was organized,
he made Mr. Hopkins’s automobile racing expenditures of $67,084.
We conclude that petitioners have conceded that they erroneously
included such automobile racing expenditures as part of the
nonpassive loss of $103,150 from Mr. Hopkins’s S Corporation
claimed in petitioners’ Schedule E.
                             - 12 -

for 1999 Mr. Hopkins’s S Corporation is entitled under section

162(a) to deduct (1) as advertising expenses an unspecified

reasonable amount of Mr. Hopkins’s S Corporation’s expenditures

of $16,501 in excess of the amount of such expenditures (i.e.,

$3,772) that respondent allowed that S Corporation to deduct15

and (2) as promotional expenses an unspecified reasonable amount

of Mr. Hopkins’s S Corporation’s expenditures of $39,557.16   We

shall address hereinafter the additional deductions for 1999 to

which petitioners claim Mr. Hopkins’s S Corporation is entitled,

and not the correlative effect in petitioners’ Schedule E that

     15
      With respect to Mr. Hopkins’s S Corporation’s expenditures
of $16,501, respondent allowed advertising expense deductions for
(1) $3,490 of unidentified automobile racing expenditures and
(2) $282 of advertising (hats) expenditures (or a total of
$3,772). Petitioners presented no evidence and make no argument
with respect to, and do not otherwise appear to challenge, $9,609
of the disallowed amount of Mr. Hopkins’s S Corporation’s expen-
ditures of $16,501, which the parties stipulated was for loan
payments with respect to petitioners’ motor home. See supra note
8. We conclude that petitioners have abandoned contesting that
disallowed amount. We further conclude that petitioners are
contesting only $3,130 of Mr. Hopkins’s S Corporation’s expendi-
tures of $16,501. For convenience, we shall sometimes refer to
such contested amount as Mr. Hopkins’s S Corporation’s claimed
advertising expense deduction of $3,130.
     16
      With respect to Mr. Hopkins’s S Corporation’s expenditures
of $39,557, petitioners presented no evidence and make no argu-
ment with respect to, and do not otherwise appear to challenge,
$557 of such expenditures, which respondent disallowed as, and
which the parties stipulated was for, country club dues. See
supra note 9. We conclude that petitioners have abandoned
contesting the disallowed country club dues payments of $557. We
further conclude that petitioners are contesting only $39,000 of
Mr. Hopkins’s S Corporation’s expenditures of $39,557. For
convenience, we shall sometimes refer to such contested amount as
Mr. Hopkins’s S Corporation’s claimed promotional expense deduc-
tion of $39,000.
                                - 13 -

would result if we were to allow all or a portion of such claimed

deductions.   (For convenience, we shall sometimes refer collec-

tively to the respective deductions that petitioners are claiming

with respect to Mr. Hopkins’s sole proprietorship and with

respect to Mr. Hopkins’s S Corporation as the deductions at

issue.)

     To establish entitlement to the deductions at issue, peti-

tioners rely on, inter alia, Mr. Hopkins’s testimony and certain

documents and a photograph.   With respect to the testimony of Mr.

Hopkins, based on our observation of his demeanor, we did not

find him to be credible.   In addition, we found Mr. Hopkins’s

testimony to be general, conclusory, vague, and/or uncorroborated

in certain material respects.    We shall not rely on Mr. Hopkins’s

testimony to establish entitlement to the deductions at issue.

     With respect to the documents and the photograph on which

petitioners rely, we find that those documents and that photo-

graph do not establish entitlement to the deductions at issue.

     In support of their position with respect to Mr. Hopkins’s

claimed Schedule C deduction of $67,084, petitioners argue that

it is appropriate under section 162(a) to compare Mr. Hopkins’s

automobile racing expenditures of $67,084 to the amount of gross

sales of Westchem (i.e., approximately $2.5 million) during the

first six months of 1999 that were attributable to the sales

efforts of Mr. Hopkins’s sole proprietorship.   In support of
                               - 14 -

their position with respect to Mr. Hopkins’s S Corporation’s

claimed advertising expense deduction of $3,130 and Mr. Hopkins’s

S Corporation’s claimed promotional expense deduction of $39,000,

petitioners argue that it is appropriate under section 162(a) to

compare the respective amounts of (1) the advertising expenses

giving rise to Mr. Hopkins’s S Corporation’s claimed advertising

expense deduction of $3,130 and (2) the promotional expenses

giving rise to Mr. Hopkins’s S Corporation’s claimed promotional

expense deduction of $39,000 to the amount of gross sales of

Westchem (i.e., approximately $2.5 million) during the last six

months of 1999 that were attributable to the sales efforts of Mr.

Hopkins’s S Corporation.17   (For convenience, we shall sometimes

refer to petitioners’ argument regarding the respective compari-

sons to be made in determining entitlement to the deductions at

issue as petitioners’ comparison argument.)

     Respondent counters that the Court should reject petition-

ers’ comparison argument and that the Court should not allow the




     17
      To support entitlement to the deductions at issue, peti-
tioners also offered the testimony of George Fague (Mr. Fague).
Mr. Fague, who formed Westchem around 1983 and who at the time of
the trial in this case was its CEO, testified that Westchem
relied on its sales representatives, including Mr. Hopkins’s sole
proprietorship and Mr. Hopkins’s S Corporation, to conduct
certain promotional activities. In addition, Mr. Fague testified
that “MPH Enterprises is one of our [Westchem’s] top performing
rep organizations”. We find that Mr. Fague’s testimony does not
establish entitlement to the deductions at issue.
                              - 15 -

deductions at issue.18

     Section 162(a) generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     The determination of whether

an expense satisfies the requirements for deductibility under

that section is a question of fact.     Commissioner v. Heininger,

320 U.S. 467, 475 (1943); Hearn v. Commissioner, 309 F.2d 431

(9th Cir. 1962), affg. 36 T.C. 672 (1961).

     In general, an expense is ordinary if it is considered

normal, usual, or customary in the context of the particular

business out of which it arose.   Deputy v. du Pont, 308 U.S. 488,

495-496 (1940).   In general, an expense is necessary if it is

appropriate and helpful to the taxpayer’s trade or business.

Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Carbine v.

Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th

Cir. 1985).

     In determining whether an expense is ordinary and necessary


     18
      The respective amounts of advertising and/or promotional
expense deductions that respondent allowed Mr. Hopkins’s sole
proprietorship and Mr. Hopkins’s S Corporation were calculated as
approximately 4 percent of the respective gross receipts of those
businesses. We reject any suggestion by respondent that approxi-
mately 4 percent of the gross receipts of a taxpayer’s business
is the standard to be used in deciding whether the amount of an
advertising or promotional expenditure is reasonable under sec.
162(a). We have previously indicated that “we did not intend to
create a rule of thumb for determining whether a certain level of
expenditure was reasonable or unreasonable” under that section.
Gill v. Commissioner, T.C. Memo. 1994-92, affd. without published
opinion 76 F.3d 378 (6th Cir. 1996).
                                - 16 -

within the meaning of section 162(a), courts generally have

focused on the existence of a reasonably proximate relationship

between the expense and the taxpayer’s business and the primary

motive or purpose for incurring it.      E.g., Greenspon v. Commis-

sioner, 229 F.2d 947, 954-955 (8th Cir. 1956), affg. on this

issue 23 T.C. 138 (1954); Henry v. Commissioner, 36 T.C. 879, 884

(1961); Larrabee v. Commissioner, 33 T.C. 838, 841-843 (1960).

In general, where an expense is primarily associated with profit-

motivated purposes, and personal benefit can be said to be

distinctly secondary and incidental, it may be deducted under

section 162(a).   E.g., Intl. Artists, Ltd. v. Commissioner, 55

T.C. 94, 104 (1970); Sanitary Farms Dairy, Inc. v. Commissioner,

25 T.C. 463, 467-468 (1955); Rodgers Dairy Co. v. Commissioner,

14 T.C. 66, 73 (1950).   Conversely, if an expense is primarily

motivated by personal considerations, no deduction for it will be

allowed under section 162(a).    E.g., Henry v. Commissioner,

supra; Larrabee v. Commissioner, supra.      A taxpayer’s general

statement that his or her expenses were incurred in pursuit of a

trade or business is not sufficient to establish that the ex-

penses had a reasonably direct relationship to any such trade or

business.   Ferrer v. Commissioner, 50 T.C. 177, 185 (1968), affd.

per curiam 409 F.2d 1359 (2d Cir. 1969).

     Even if “An expenditure may be, by its nature, ordinary and

necessary, * * * at the same time it may be unreasonable in
                                 - 17 -

amount.     In such a case only the portion which was reasonable

would qualify for a deduction under § 162(a).”     United States v.

Haskel Engg. & Supply Co., 380 F.2d 786, 788-789 (9th Cir. 1967).

     We turn now to petitioners’ comparison argument.     Petition-

ers do not cite, and we have not found, any authority supporting

that argument.19     In determining under section 162(a) whether an

advertising or promotional expenditure incurred by a taxpayer who

performs services on behalf of another taxpayer is reasonable or

unreasonable in amount, it may be appropriate, inter alia, to

compare such expenditure to the gross receipts of the taxpayer

performing such services.     We conclude that in this case it would

be inappropriate in making such a determination to compare the

advertising or promotional expenditure of the taxpayer performing

services on behalf of another taxpayer to the gross receipts of

such other taxpayer.     We reject petitioners’ comparison argument.

     In advancing their position with respect to the deductions

at issue, petitioners fail to specify the amount of Mr. Hopkins’s

claimed Schedule C deduction of $67,084, which when added to the

$5,144 of advertising expenses that respondent allowed as a

deduction, is reasonable under section 162(a).20     Petitioners

     19
      None of the cases on which petitioners rely supports
petitioners’ comparison argument. See, e.g., United States v.
Haskel Engg. & Supply Co., 380 F.2d 786, 788-789 (9th Cir. 1967);
Gill v. Commissioner, supra; Boomershine v. Commissioner, T.C.
Memo. 1987-384; Brallier v. Commissioner, T.C. Memo. 1986-42.
     20
          The record does not permit us to estimate any such amount.
                                                       (continued...)
                                - 18 -

also fail to specify the respective amounts of Mr. Hopkins’s S

Corporation’s claimed advertising expense deduction of $3,130 and

Mr. Hopkins’s S Corporation’s claimed promotional expense deduc-

tion of $39,000, which when added to the $3,772 of advertising

and promotional expenses that respondent allowed Mr. Hopkins’s S

Corporation as a deduction, are reasonable under section

162(a).21

     Based upon our examination of the entire record in this

case, we find that petitioners have failed to carry their burden

of establishing that Mr. Hopkins’s sole proprietorship and Mr.

Hopkins’s S Corporation are entitled for 1999 to any advertising

and/or promotional expense deductions under section 162(a) in

excess of the respective advertising and/or promotional expense

deductions that respondent allowed those businesses.

     We turn next to the determination in the notice that peti-

tioners are liable for 1999 for the accuracy-related penalty

under section 6662(a).     Respondent determined that petitioners

are liable for that penalty because of:     (1) Negligence or

disregard of rules or regulations under section 6662(b)(1) or

(2) a substantial understatement of tax in petitioners’ 1999

joint return under section 6662(b)(2).


     20
      (...continued)
See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930);
see also Norgaard v. Commissioner, 939 F.2d 874, 879 (9th Cir.
1991), affg. in part and revg. in part T.C. Memo. 1989-390.
     21
          See supra note 20.
                              - 19 -

     Respondent acknowledges that respondent has the burden of

production under section 7491(c) with respect to the accuracy-

related penalty under section 6662(a).   To meet that burden,

respondent must come forward with sufficient evidence showing

that it is appropriate to impose the accuracy-related penalty.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax attributable to, inter

alia, a substantial understatement of tax, sec. 6662(b)(2).     An

understatement is equal to the excess of the amount of tax

required to be shown in the tax return over the amount of tax

shown in the tax return, sec. 6662(d)(2)(A), and is substantial

in the case of an individual if it exceeds the greater of 10

percent of the tax required to be shown or $5,000, sec.

6662(d)(1)(A).

     The amount of the understatement shall be reduced to the

extent that it is attributable to, inter alia, the tax treatment

of an item for which there is or was substantial authority.     See

sec. 6662(d)(2)(B)(i).   In order to satisfy the substantial

authority standard of section 6662(d)(2)(B)(i), petitioners must

show that the weight of authorities supporting their tax return

position is substantial in relation to those supporting a con-

trary position.   See Antonides v. Commissioner, 91 T.C. 686, 702

(1988), affd. 893 F.2d 656 (4th Cir. 1990).   That standard is not
                               - 20 -

so stringent that a taxpayer’s treatment must be one that is

ultimately upheld in litigation or that has a greater than

50-percent likelihood of being sustained in litigation.      Sec.

1.6662-4(d)(2), Income Tax Regs.    A taxpayer may have substantial

authority for a position even where it is supported only by a

well-reasoned construction of the pertinent statutory provision

as applied to the relevant facts.    See sec. 1.6662-4(d)(3)(ii),

Income Tax Regs.    There may be substantial authority for more

than one position with respect to the same item.    Sec.

1.6662-4(d)(3)(i), Income Tax Regs.

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.    Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.    Sec. 1.6664-4(b)(1), Income Tax Regs.

     We have (1) sustained the determinations in the notice that

gave rise to the deficiency that respondent determined22 and


     22
      Those determinations include a determination to disallow
the nonpassive loss of $103,150 from Mr. Hopkins’s S Corporation
that petitioners claimed in petitioners’ Schedule E. That
                                                   (continued...)
                                 - 21 -

(2) rejected petitioners’ position that they are entitled to Mr.

Hopkins’s claimed Schedule C deduction of $67,084 that petition-

ers originally claimed in petitioners’ Schedule E as part of the

nonpassive loss of $103,150 from Mr. Hopkins’s S Corporation.23

On the record before us, we find that respondent has satisfied

respondent’s burden of production under section 7491(c) with

respect to the accuracy-related penalty under section 6662(a)

determined in the notice.

     Petitioners argue that respondent’s determination under

section 6662(a) is wrong because “there is substantial authority

for the Sole Proprietorship and the Subchapter S Corporation’s

tax treatment of the expenses for advertising and promotion.”

(We shall refer to that argument as petitioners’ substantial

authority argument.)     Although respondent bears the burden of

production with respect to the accuracy-related penalty at issue,

respondent “need not introduce evidence regarding reasonable

cause, substantial authority, or similar provisions. * * * the

taxpayer bears the burden of proof with regard to those

issues.”24     Higbee v. Commissioner, 116 T.C. at 446.


     22
      (...continued)
nonpassive loss was equal to the sum of (1) Mr. Hopkins’s S
Corporation’s claimed 1999 ordinary loss of $36,066 and (2) Mr.
Hopkins’s automobile racing expenditures of $67,084 claimed in
Statement SBE included as part of petitioners’ 1999 joint return.
     23
          See supra note 22.
     24
       We thus reject petitioners’ argument that respondent
                                                    (continued...)
                              - 22 -

     With respect to petitioners’ substantial authority argument

as it relates to Mr. Hopkins’s claimed Schedule C deduction of

$67,084, petitioners’ treatment in their 1999 joint return of Mr.

Hopkins’s automobile racing expenditures of $67,084 is different

from the position they are now advancing with respect to such

expenditures.   In petitioners’ 1999 joint return, petitioners

included Mr. Hopkins’s automobile racing expenditures of $67,084

as part of the nonpassive loss of $103,150 from Mr. Hopkins’s S

Corporation that they claimed in petitioners’ Schedule E.25

Petitioners concede that that treatment was wrong.   See supra

note 14.   On the record before us, we reject petitioners’ sub-

stantial authority argument as it relates to Mr. Hopkins’s

claimed Schedule C deduction of $67,084.

     With respect to petitioners’ substantial authority argument

as it relates to Mr. Hopkins’s S Corporation’s claimed advertis-

ing expense deduction of $3,130 and Mr. Hopkins’s S Corporation’s

claimed promotional expense deduction of $39,000, we find that

all of the authorities on which petitioners rely to support

entitlement to those deductions are materially distinguishable



     24
      (...continued)
“failed to provide sufficient evidence that the Sole Proprietor-
ship or Subchapter S Corporation’s treatment of any item was not
supported by substantial authority.”
     25
      The balance of the nonpassive loss of $103,150 from Mr.
Hopkins’s S Corporation that petitioners claimed in petitioners’
Schedule E consisted of Mr. Hopkins’s S Corporation’s claimed
1999 ordinary loss of $36,066.
                                 - 23 -

from the instant case, and their reliance on those authorities is

misplaced.26     On the record before us, we reject petitioners’

substantial authority argument as it relates to Mr. Hopkins’s S

Corporation’s claimed advertising expense deduction of $3,130 and

Mr. Hopkins’s S Corporation’s claimed promotional expense deduc-

tion of $39,000.

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that there was

reasonable cause for, and that they acted in good faith with

respect to, any portion of the underpayment for petitioners’

taxable year 1999.

     Based upon our examination of the entire record in this

case, we find that petitioners have failed to carry their burden

of establishing that they are not liable for 1999 for the accu-

racy-related penalty under section 6662(a).27

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

irrelevant, moot, and/or without merit.

     To reflect the foregoing and the concessions of petitioners,




     26
          See supra note 19.
     27
      In light of our finding that petitioners are liable for
the year at issue for the accuracy-related penalty because of a
substantial understatement of tax under sec. 6662(b)(2), we shall
not address respondent’s argument that petitioners are liable for
that year for that penalty because of negligence or disregard of
rules or regulations under sec. 6662(b)(1).
- 24 -

     Decision will be entered

for respondent.
