                         T.C. Memo. 2001-7



                      UNITED STATES TAX COURT



            RICHARD AND JUDITH HAEDER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12109-98.                    Filed January 17, 2001.


     Richard Haeder, pro se.

     Blaine C. Holiday, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     MARVEL, Judge:   Respondent determined the following

deficiencies, additions to tax, and accuracy-related penalties

with respect to petitioners’ Federal income taxes:1



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. Monetary amounts are rounded to the nearest dollar.
                                  - 2 -

                      Addition to tax     Accuracy-related penalty
                           sec.               sec.         sec.
Year       Deficiency   6651(a)(1)         6662(b)(1)   6662(b)(2)

1989         $6,646      $1,915                –-        $1,532
1990         10,146       1,805                –-         2,026
1991          3,546         –-               $686           --
1992            268         –-                 78           --
1993          3,210         –-                 –-         1,136

       After concessions,2 the issues remaining for decision are:

       (1) Whether petitioners are entitled to deductions for wage

expenses of $1,918 for 1989 and of $2,000 for each of the years

1990 through 1993;

       (2) whether petitioners’ income from wages should be reduced

by $2,000 for each of the years 1989 through 1993;

       (3) whether petitioners are entitled to deductions for

medical plan expenses of $3,446, $4,197, $13,140, $4,568, and

$8,914 for 1989, 1990, 1991, 1992, and 1993, respectively;

       (4) whether petitioner Judith Haeder is entitled to

deductions for contributions to an individual retirement account

(IRA) of $2,000 for each of the years 1989 through 1993;

       (5) whether petitioners are entitled to additional

deductions for legal and professional expenses on petitioner

Richard Haeder’s Schedules C, Profit or Loss From Business (Sole




       2
      The parties settled several issues raised in the notice of
deficiency. Those issues are set forth in a stipulation of
agreed adjustments filed with the Court on July 13, 1999. The
parties’ concessions are not repeated here but are incorporated
herein by this reference.
                              - 3 -

Proprietorship), of $3,976 and $1,305 for the years 1990 and

1991, respectively;

     (6) whether petitioners are entitled to additional

deductions for travel expenses of $3,535, $558, $1,764, $2,738,

and $2,512 for 1989, 1990, 1991, 1992, and 1993, respectively;

     (7) whether petitioners are entitled to additional

deductions for meal and entertainment expenses of $1,592, $597,

$324, $886, and $2,104 for 1989, 1990, 1991, 1992, and 1993,

respectively;

     (8) whether petitioners are entitled to a bad debt deduction

of $300 for 1991;

     (9) whether petitioners are entitled to a deduction for a

repair expense of $2,956 for 1993;

     (10) whether petitioners omitted $1,085 from business income

for 1989;

     (11) whether petitioners omitted $2,223 of income from

prizes for 1989;

     (12) whether petitioners’ dividend income should be reduced

by $8,732 for 1992;

     (13) whether petitioners are liable for additions to tax for

late filing under section 6651 for 1989 and 1990;

     (14) whether petitioners are liable for accuracy-related

penalties under section 6662(a) and (b)(1) for 1991 and 1992

because of negligence or disregard of rules or regulations; and
                                - 4 -

     (15) whether petitioners are liable for accuracy-related

penalties under section 6662(a) and (b)(2) for 1989, 1990, and

1993 because of substantial understatements of their income tax.

                          FINDINGS OF FACT3

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

The stipulation of facts filed by the parties is incorporated in

this opinion by this reference.

Background

     Petitioners resided in Rapid City, South Dakota, when they

filed their petition.    Hereinafter, references to petitioner are

to Richard Haeder, and references to Mrs. Haeder are

to Judith Haeder.    For each of the years in issue, petitioners

claimed dependency exemptions for two minor children.

     After completing a clerkship in Washington, D.C., petitioner

had started working for a large law firm located in Portland,

Oregon, in 1967.    During the years at issue, petitioner was an

attorney licensed to practice law in the States of Oregon and


     3
      Contrary to Rule 151(e), which governs the form and content
of briefs submitted to the Tax Court, petitioners provided in
their opening brief a “statement of facts” that was not presented
in numbered statements and that, for the most part, did not give
references to the pages of the transcript, exhibits, or other
sources relied upon to support the statements contained therein.
Furthermore, in their reply brief, petitioners did not set forth
objections to respondent’s proposed findings of fact.
Consequently, in our findings of fact, we have relied heavily
upon respondent’s proposed findings. By failing to follow the
Court’s Rules, “petitioners have assumed the risk that we have
not considered the record in a light of their own illumination.”
Monico v. Commissioner, T.C. Memo. 1998-10.
                                - 5 -

South Dakota.    His practice in Oregon primarily involved labor

and personal injury law.

     In 1986, petitioners moved to Rapid City, South Dakota.

There, petitioner began practicing law as a sole proprietor.      To

establish his practice in the Rapid City area, petitioner spent

many hours in the years following the relocation performing pro

bono legal work for the elderly and for Pennington County Legal

Aid, giving talks and seminars and meeting people in the

community.    He volunteered in the community to enhance his

reputation.    When necessary, petitioner traveled to Oregon to

perform legal services.

     Petitioners filed a joint Federal individual income tax

return for each of the years at issue on the following dates:

                   Year         Date Filed

                   1989          2/01/94
                   1990          1/10/94
                   1991          2/15/94
                   1992          3/30/94
                   1993          4/15/94

Petitioner included a Schedule C relating to his law practice

with each of the returns.    On those Schedules C, petitioner

reported the following gross receipts, total expenses, and net

profit or loss:
                                 - 6 -



                  Gross            Total       Net profit
     Year        Receipts         Expenses      or (loss)

     1989         $153           $19,695        ($19,542)
     1990           –-            23,462         (23,462)
     1991          209            24,144         (23,935)
     1992           –-            13,991         (13,991)
     1993           –-            23,769         (23,769)

Most of the income reported on petitioners’ returns for 1989

through 1993 was investment income.

     Respondent audited petitioners’ returns for the years in

issue and made adjustments to income and deductions.    We address

the issues remaining for decision below.

Wages and IRA Deductions

     In Rapid City, South Dakota, petitioner maintained his law

office in his residence.    He had no office help outside of

whatever assistance Mrs. Haeder gave him.    Mrs. Haeder usually

answered the telephone, greeted visitors, and cleaned the house,

including petitioner’s office.    At his residence, petitioner

initially had only one telephone line for both business and

personal use.   Eventually he had a second line installed to

accommodate a fax machine.

     On a date that does not appear in the record, petitioner

decided to start paying Mrs. Haeder a salary.    Petitioner did not

determine Mrs. Haeder’s salary on the basis of hours worked or

services performed; instead, he based her salary on the maximum

amount a qualified individual could deduct for qualifying
                                - 7 -

contributions to an IRA.    Mrs. Header did not have a written

employment contract with petitioner.    She had no set work

schedule, and she did not maintain any time or performance

records for work allegedly performed for petitioner.

     On petitioner’s 1989 Schedule C, petitioner claimed a wage

expense of $1,918.    On each of the Schedules C for 1990 through

1993, petitioner claimed a wage expense of $2,000.    On

petitioners’ tax returns for the years at issue, Mrs. Haeder

reported $2,000 as income from wages for each of the years in

issue and also claimed a $2,000 IRA deduction for each of those

years.

     Petitioner did not pay the purported salary directly to Mrs.

Haeder.    For 1990, 1992, and 1993, on December 31 of each year,

petitioner had his brokerage firm transfer $2,000 from

petitioner’s account into an IRA maintained in Mrs. Haeder’s

name.4    For 1991, petitioner wrote a check dated December 31,

1991, in the amount of $1,847 and drawn on petitioners’ joint

account.    Petitioner wrote that check payable to himself, Mrs.

Haeder endorsed it, and Mrs. Haeder deposited it into her IRA on

January 7, 1992.

     Petitioner did not issue a Form W-2, Wage and Tax Statement,

to Mrs. Haeder for each of the years 1989 through 1992.    With the


     4
      Although petitioner claimed a deduction for wage expenses
of $1,918 for 1989, the record contains no proof of any payment
to or for the benefit of Mrs. Haeder in that year.
                               - 8 -

returns they filed for 1990 and 1991, petitioners included a

“Wages Schedule”, which reported that petitioner had paid wages

of $2,000 to Mrs. Haeder for those years.   The 1990 wages

schedule reported no information relating to FICA or Medicare tax

withholding.   The 1991 wages schedule reported that petitioner

had deducted FICA taxes of $124 and Medicare taxes of $29.    For

1993, petitioner issued a Form W-2 to Mrs. Haeder showing $2,000

in wages, $124 in FICA, and $29 in Medicare taxes.

     In the notice of deficiency, respondent determined that

petitioners were not entitled to deduct the amounts claimed on

the Schedules C for wages paid to Mrs. Haeder for the years in

issue.   Respondent also reduced petitioners’ income by the

amounts Mrs. Haeder had reported as income from wages.   In

addition, respondent determined that petitioners were not

entitled to claim the IRA deductions for the years in issue.

Medical Plan Expense Deductions

     Effective January 1, 1988, on the advice of his accountant,

John H. Fuller (Mr. Fuller), petitioner adopted an agreement

entitled “Employee Medical-Dental Expense Reimbursement Plan

[for] Richard Haeder, Attorney at Law” (plan).   The agreement

stated that it covered “all employees of RICHARD HAEDER, ATTORNEY

AT LAW” and the spouse and dependents of any covered employee.

Pursuant to the agreement:
                          - 9 -

     2. REIMBURSEMENT FOR MEDICAL & DENTAL CARE
   EXPENSES:

     Effective 1-01-88 and until termination of the
Plan, RICHARD HAEDER, ATTORNEY AT LAW shall reimburse
each covered employee, medical and dental expenses, as
defined in section 3 herein; provided, however, that
the total reimbursement to any covered employee during
any one calendar year shall not exceed the sum of
$10,000.00. Reimbursement to each covered employee
shall be made at least annually, or more frequently at
the discretion of RICHARD HAEDER, ATTORNEY AT LAW.
Upon submission of proof of payment by the employee,
RICHARD HAEDER, ATTORNEY AT LAW may, at his discretion,
pay any or all of the expenses defined herein directly,
in lieu of making reimbursement therefor.

     3.   MEDICAL AND DENTAL CARE EXPENSES DEFINED:

     (a) Medical and dental care expenses covered under
the Plan include those expenses of the covered
employees, their spouses and dependents which are in
excess of any coverage provided for under any insurance
policies owned by RICHARD HAEDER, ATTORNEY AT LAW, the
employee or under any other health or dental plan which
may be carried either by RICHARD HAEDER, ATTORNEY AT
LAW, on behalf of its employees or personally by the
employee.

     (b) The general classes of covered expenses under
the Plan will be:

                Nursing
                Hospital Bills
                Doctor and Dentist Bills
                Psychiatric Care
                Drugs and Prescriptions
                Medical related transportation, and
                Health and Accident Insurance.

     Included in the foregoing, but not by way of
limitation, will be all medical and dental expenses,
including hospital expenses, both room and board and
special hospital services; surgical expenses,
diagnostic x-rays, prenatal and maternity expenses;
infant care in hospital, services of physicians,
surgeons and specialists, in or out of hospital;
services of registered nurses, in or out of hospital;
                              - 10 -

     rental of iron lung or other equipment for therapeutic
     use, in or out of hospital; artificial limbs or other
     prosthetic appliances; diagnostic laboratory
     procedures; drugs and medicine requiring prescriptions;
     oxygen, anesthesia; blood and plasma, x-ray and radium
     treatments; local professional ambulance services;
     psychiatric treatment; dental care; surgery and
     appliances; eye glasses; hearing aids and examination
     thereof; and premiums on accident and health insurance,
     including hospitalization, surgical and medical
     insurance.

Petitioner claimed that Mrs. Haeder was eligible to participate

in that plan in her capacity as his employee and that he and

their minor children were eligible to participate in the plan as

Mrs. Haeder’s spouse and dependents.

     During the years at issue, petitioners and their children

were covered by an individual health insurance policy issued in

petitioner’s name.   The record contains no evidence that, during

those years, Mrs. Haeder also had coverage under either a health

insurance policy issued in her name or a group health insurance

policy.

     On the Schedules C for 1989, 1990, 1991, 1992, and 1993,

petitioner claimed medical plan expenses of $3,446, $4,197,

$13,140, $4,568, and $8,914, respectively, including medical

insurance premiums and medical and dental expenditures for

petitioner, Mrs. Haeder, and their two minor children.   On audit,

respondent determined that petitioners substantiated medical plan

expenses as follows:
                                 - 11 -

          Item            1989     1990     1991     1992     1993

   Insurance premiums $2,657      $3,211   $4,018   $3,520   $3,936
   Out-of-pocket costs   146         986    6,369    1,048    3,834
    Total              2,803       4,197   10,387    4,568    7,770

In the notice of deficiency, respondent determined that, although

petitioners had substantiated medical plan expense payments as

summarized above, petitioners were not entitled to deduct any of

the amounts petitioner claimed on the Schedules C for medical

plan expenses.    Respondent determined, however, that petitioners

were entitled to deduct substantiated medical expenses on their

Schedules A, Itemized Deductions, subject to the statutory

limitations.    At trial, petitioner submitted medical and dental

statements that showed payments for dental expenses totaling

$136, $86, $5,529, and $338 for 1989, 1990, 1991, and 1992,

respectively.    It is not clear from the record whether those

payments were included in the amounts previously submitted to the

IRS auditor during the audit of the returns for those years.

Legal and Professional Expenses

     On the Schedules C for 1989, 1990, and 1991, petitioner

claimed legal and professional expenses of $175,5 $8,623, and

$4,305, respectively.    Petitioner claimed no deductions for legal

and professional expenses on the Schedules C for 1992 and 1993.




     5
      Respondent made no adjustment relating to the legal and
professional expenses claimed for 1989.
                                - 12 -

     On audit, petitioners substantiated $8,527 and $4,305 of

legal and professional expenses for 1990 and 1991, respectively.

In the notice of deficiency, respondent allowed petitioners to

deduct $4,647 and $3,000 of the substantiated expenses for 1990

and 1991, respectively, on the Schedules C.    Respondent also

allowed petitioners to deduct $3,880 and $1,305 of the

substantiated expenses for 1990 and 1991, respectively, on their

Schedules A, subject to the statutory limitations, as tax

preparation fees.    Respondent disallowed $96 of the amount

claimed for 1990 as unsubstantiated expenses.

Travel Expenses

     On the Schedules C for 1989, 1990, 1991, 1992, and 1993,

petitioner claimed travel expenses of $4,830, $4,326, $2,721,

$3,532, and $3,686, respectively.    On audit, respondent

determined that petitioners had substantiated travel expenses of

$2,525, $4,312, $2,742, $3,479, and $2,870 for 1989, 1990, 1991,

1992, and 1993, respectively.    Respondent determined further that

some of the substantiated travel expenses did not relate to

petitioner’s law practice.

     From January 26 through February 4, 1989, petitioner took a

trip to Minnesota.    The airfare for that trip was $298.   On

audit, respondent determined that the trip was not related to

petitioner’s law practice but, instead, was related to his

investments.
                               - 13 -

     From October 18 through 23, 1989, petitioner and his family

took a trip to Salt Lake City, Utah.    The total airfare for that

trip was $932.   On audit, respondent determined that the trip was

not related to petitioner’s law practice.    Respondent further

determined that $714 of the expenses had been incurred for

medical purposes and the remaining expenses were personal.

     From April 12 through 16, 1990, petitioner took a trip to

Denver, Colorado.   Petitioner’s expenses for hotel, parking, and

mileage totaled $544.   On audit, respondent determined that the

trip was not related to petitioner’s law practice but, instead,

was related to his investments.

     From April 28 through May 14, 1991, Mrs. Haeder took a trip

to Salt Lake City, Utah.    Airfare for that trip was $185.   On

audit, respondent determined that the trip was personal.

     From May 16 through 18, 1991, petitioner and his father took

a trip to Minnesota.    Expenses for that trip for hotel, airfare,

rental car, and gasoline totaled $582.    On audit, respondent

determined that $192 of those expenses was related to

petitioner’s law practice.    Respondent further determined that

$190 of the expenses had been incurred for investment purposes,

and the remaining expenses were personal.

     From May 29 through June 1, 1991, petitioner and his family

took a trip to Newton, Massachusetts, and Boston, Massachusetts.

Expenses for hotels, airfare, rental cars, and telephone totaled
                              - 14 -

$1,497.   On audit, respondent determined that the trip was not

related to petitioner’s law practice.   Respondent further

determined that $880 of the expenses had been incurred for

investment purposes and the remaining expenses were personal.

     On September 17, 1991, petitioner took a trip to Boston,

Massachusetts.   Airfare for that trip was $288.   On audit,

respondent determined that the trip was not related to

petitioner’s law practice but, instead, was related to his

investments.

     From March 19 through 29, 1992, petitioner and his family

took a trip to Boston, Massachusetts.   Expenses for hotel,

airfare, rental car, and gasoline totaled $1,947.     On audit,

respondent determined that the trip was not related to

petitioner’s law practice.   Respondent further determined that

$1,273 of the expenses had been incurred for investment purposes,

and the balance of the expenses was personal.

     On July 5, 1992, petitioner took a trip to Huron, South

Dakota.   Expenses for the trip totaled $161.   On audit,

respondent determined that the trip was not related to

petitioner’s law practice but, instead, was related to his

investments.

     From March 21 through 29, 1993, petitioner took a trip to

Portland, Oregon.   Airfare for that trip was $218.    On audit,

respondent determined that $109 of the expenses was related to
                               - 15 -

petitioner’s law practice and $109 of the expenses was related to

his investments.

     From March 29 through April 5, 1993, one of petitioners’

daughters took a trip to Portland, Oregon.    Airfare for that trip

was $201.    On audit, respondent determined that the trip was

undertaken for medical purposes.

     From April 22 through May 6, 1993, Mrs. Haeder took a trip

to Salt Lake City, Utah.    Airfare for that trip was $198.   On

audit, respondent determined that the trip was personal.

     From July 1 through 5, 1993, petitioner took a trip to

Minnesota.   Expenses for hotel, airfare, and rental car totaled

$987.   On audit, respondent determined that $494 of those

expenses was related to petitioner’s law practice and $493 of

those expenses had been incurred for investment purposes.

     From July 6 through 7, 1993, petitioner took a trip to

Seattle, Washington, and Salt Lake City, Utah.    Airfare for that

trip was $373.    On audit, respondent determined that $198 of

those expenses related to petitioner’s law practice and the

balance of those expenses was personal.

     From November 11 through 17, 1993, petitioner took a trip to

Boston, Massachusetts.    Expenses for hotel, airfare, and car

rental totaled $520.    On audit, respondent determined that those

expenses were not related to petitioner’s law practice but,

instead, were incurred for investment purposes.
                                - 16 -

     In the notice of deficiency, respondent allowed petitioners

to deduct $65, $3,768, $957, $794, and $1,174 of the

substantiated expenses on the Schedules C for 1989, 1990, 1991,

1992, and 1993, respectively.    Respondent also allowed

petitioners to deduct $714 and $201 of the substantiated expenses

for 1989 and 1993, respectively, as medical expenses on their

Schedules A, subject to the statutory limitations.    In addition,

respondent allowed petitioners to deduct $298, $544, $1,168,

$1,624, and $1,122 of the substantiated expenses for 1989, 1990,

1991, 1992, and 1993, respectively, as investment expenses on

their Schedules A, subject to the statutory limitations.

Meal and Entertainment Expenses

     On the Schedules C for 1989, 1990, 1991, 1992, and 1993,

petitioner claimed meal and entertainment expenses, before

statutory limitations, of $2,508, $1,760, $535, $1,302, and

$3,046, respectively.   On audit, respondent determined that

petitioners had not submitted adequate substantiation for the

meal and entertainment expenses claimed.    Nonetheless, respondent

allowed petitioner per diem amounts, for travel related to his

law practice, for those nights that petitioner verified he was

away from home.   Thus, for 1989 respondent allowed petitioner 37

days at $14 per day for a total of $518.    For 1990 respondent

allowed petitioner 39 days at $26 per day for a total of $1,014.

For 1991 respondent allowed petitioner 5 days at $26 per day for
                               - 17 -

a total of $130.   For 1992 respondent allowed petitioner 7-1/2

days at $26 per day for a total of $195.   For 1993 respondent

allowed petitioner 14-1/2 days at $26 per day for a total of

$416.6   Respondent disallowed $1,592, $597, $324, $886, and $2,104

of the meal and entertainment expenses claimed on the Schedules C

for 1989, 1990, 1991, 1992, and 1993, respectively.

Bad Debt Deduction

     During November 1991, Ted Kadrlik (Mr. Kadrlik) asked

petitioner to represent him on check fraud charges.   Mr. Kadrlik

gambled, causing financial hardship for his family.   Petitioner

declined to represent Mr. Kadrlik, but petitioner agreed to

advance Mr. and Mrs. Kadrlik (the Kadrliks) some money.   On

November 25, 1991, petitioner gave the Kadrliks a check for $300.

The check memo line contained the notation “Loan”.    The Kadrliks

did not give petitioner a promissory note relating to the $300

payment.   The Kadrliks did not repay the money.   Petitioner asked

the Kadrliks for the money a few times, but he made no other

attempt to collect on the debt.   He believed that it would not be

appropriate to sue the Kadrliks for collection because of their



     6
      The parties stipulated that respondent allowed petitioner
$416 for 1993 calculated on the basis of $26 per day for 14-1/2
days. Our calculation, however, shows that the meal allowance
would be $377 ($26 per day multiplied by 14-1/2 days). The
parties do not explain the discrepancy, nor does the record
clarify the difference in calculations. In the absence of an
explanation, however, we defer to, and accept, the parties’
stipulation. See Rule 91(e).
                              - 18 -

financial difficulties and because petitioner thought suing the

Kadrliks might hurt his own reputation in the community.

     On petitioner’s 1991 Schedule C, petitioner claimed a

deduction for a bad debt of $300.   In the notice of deficiency,

respondent determined that petitioners were not entitled to

deduct the bad debt claimed on the 1991 Schedule C because

petitioners had not established that a bad debt had arisen from a

true debtor-creditor relationship based upon a valid and legally

enforceable obligation, or, if it were a valid debt, that the

debt had become worthless during the year and all reasonable

steps had been taken to collect it.

Repairs Expense

     During 1993, petitioner purchased an oriental rug that he

intended to use in his office on a rotating basis with another

rug he owned.   He sent the oriental rug to Portland, Oregon, for

appraisal and repairs, totaling $2,956.   Petitioner estimated

that the appraisal did not cost more than $100.   Petitioner chose

both of the rugs he intended to use in his office because he

expected them to appreciate in value.

     On petitioner’s 1993 Schedule C, petitioner claimed a repair

expense of $2,956.   In the notice of deficiency, respondent

determined that petitioners were not entitled to deduct the

repair expense because petitioner had not established that the

repair expense was for an ordinary and necessary business expense
                                - 19 -

or was expended for the purpose designated and that petitioner

had not substantiated the amount.

Additional Business Income

     In the notice of deficiency, respondent determined that

during 1989 petitioner received business income of $1,085 from a

litigation matter, which petitioners failed to include on their

return for that year.   Respondent increased petitioner’s income

accordingly.

Income From Prizes

     During November 1989, petitioner won a laptop computer from

JMS Inc., d.b.a. Computerland (Computerland).   Petitioner,

however, did not want the computer and refused to accept it.

Instead of the computer, Computerland gave petitioner a store

credit.   Petitioners did not include any income attributable to

the Computerland prize on their Federal income tax return for

1989.   In the notice of deficiency, respondent determined that

during 1989 petitioners received income attributable to the

Computerland prize of $2,223.    Respondent increased petitioners’

income for that year accordingly.

Dividend Income

     Respondent determined that for 1992 petitioners overstated

income from dividends by $8,732.    Respondent reduced petitioners’

income for that year accordingly.
                                - 20 -

Additions to Tax and Penalties

     Respondent determined that petitioners were liable for

additions to tax under section 6651(a)(1) for 1989 and 1990

because they failed to file timely returns or to show they had

reasonable cause for that failure.       Respondent also determined

that for 1991 and 1992 petitioners were liable for an accuracy-

related penalty under section 6662(a) and (b)(1) because the

underpayment of tax for those years was due to negligence or the

intentional disregard of rules or regulations.       Additionally,

respondent determined that for 1989, 1990, and 1993 petitioners

were liable for an accuracy-related penalty under section 6662(a)

and (b)(2) because the underpayment of tax for those years was

due to a substantial understatement of their income tax.

                                OPINION

     Section 61(a) provides that gross income means all income

from whatever source derived.    That section has been interpreted

broadly to encompass all gains except those specifically exempted

by Congress.   See Commissioner v. Glenshaw Glass Co., 348 U.S.

426, 430 (1955).

     Section 162(a) permits a taxpayer to deduct expenses paid or

incurred during the taxable year in carrying on the taxpayer’s

trade or business.   Deductions are strictly a matter of

legislative grace, however, and the taxpayer bears the burden of

proving that he or she is entitled to the claimed deductions.
                                   - 21 -

See Rule 142(a);7 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, 290 U.S. 111, 115 (1933); Page v.

Commissioner, 823 F.2d 1263, 1271 (8th Cir. 1987), affg. in part

and dismissing in part T.C. Memo. 1986-275.

         Section 162(a) requires a taxpayer to prove that the

expenses deducted (1) were paid or incurred during the taxable

year, (2) were incurred to carry on the taxpayer’s trade or

business, and (3) were ordinary and necessary expenditures of the

business.     See sec. 162(a); Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971).      An expense is ordinary if

it is customary or usual within a particular trade, business, or

industry or relates to a transaction “of common or frequent

occurrence in the type of business involved.”      Deputy v. du Pont,

308 U.S. 488, 495 (1940).    An expense is necessary if it is

appropriate and helpful for the development of the business.      See

Commissioner v. Heininger, 320 U.S. 467, 471 (1943).      Personal,

living, or family expenses, on the other hand, generally are not

deductible.     See sec. 262(a).

     A taxpayer is required to keep adequate records sufficient

to enable the Commissioner to determine the taxpayer’s correct


     7
      Contrary to petitioners’     assumption, the burden of proof
provisions of sec. 7491 do not     apply here because the examination
in this case began before July     22, 1998. See Internal Revenue
Service Restructuring & Reform     Act of 1998, Pub. L. 105-206, sec.
3001, 112 Stat. 726.
                               - 22 -

tax liability.   See sec. 6001; Meneguzzo v. Commissioner, 43 T.C.

824, 831 (1965).   In the absence of persuasive corroborating

evidence, we are not required to accept the self-serving

testimony of interested parties.   See Bose Corp. v. Consumers

Union of U.S., Inc., 466 U.S. 485, 512 (1984); Day v.

Commissioner, 975 F.2d 534, 538 (8th Cir. 1992), affg. in part,

revg. in part and remanding T.C. Memo. 1991-140; Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).

     With those well-established propositions in mind, we must

determine whether petitioners have satisfied their burden of

proving that they did not receive the disputed income items and

that they are entitled to the disputed deductions.

Wages, IRA Deductions, and Medical Plan Expenses

     Petitioner claimed wage expenses and medical plan expenses

on his Schedules C for the years in issue relating to payments

made to or on behalf of Mrs. Haeder allegedly in her capacity as

his employee.    Mrs. Haeder reported the salary petitioner paid to

her as income from wages on petitioners’ joint tax returns for

those years and claimed deductions for contributions to an IRA

for the years in issue.   Respondent disallowed the deductions for

wage expenses, IRA contributions, and medical plan expenses.

Respondent correspondingly reduced petitioners’ income from

wages.
                               - 23 -

     Section 162(a)(1) provides that a taxpayer may deduct as an

ordinary and necessary expense “a reasonable allowance for

salaries or other compensation for personal services actually

rendered”.   Thus, compensation is deductible only if it is

reasonable in amount and is paid or incurred for services

actually rendered.   See sec. 1.162-7(a), Income Tax Regs.8

     Whether an individual is an employee is essentially a

question of fact.    See Air Terminal Cab, Inc. v. United States,

478 F.2d 575, 578 (8th Cir. 1973); Packard v. Commissioner, 63

T.C. 621, 629 (1975).   Courts generally apply a common law agency

test to determine whether an employer-employee relationship

exists.   See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503 U.S.

318, 323-324 (1992); Community for Creative Non-Violence v. Reid,

490 U.S. 730, 751-752 (1989); Matthews v. Commissioner, 92 T.C.

351, 360 (1989), affd. 907 F.2d 1173 (D.C. Cir. 1990).   Moreover,

where a family relationship is involved, the facts require close

scrutiny to determine whether a bona fide employer-employee

relationship existed and whether the payments received were made



     8
      Whether amounts paid as wages are reasonable compensation
for services rendered is a question of fact to be decided on the
basis of the facts and circumstances of each case. See Charles
Schneider & Co. v. Commissioner, 500 F.2d 148, 151 (8th Cir.
1974), affg. T.C. Memo. 1973-130; Eller v. Commissioner, 77 T.C.
934, 962 (1981); Home Interiors & Gifts, Inc. v. Commissioner, 73
T.C. 1142, 1155 (1980); see also Martens v. Commissioner, T.C.
Memo. 1990-42, affd. without published opinion 934 F.2d 319 (4th
Cir. 1991).
                              - 24 -

on account of the employer-employee relationship or the family

relationship.   Cf. Denman v. Commissioner, 48 T.C. 439 (1967);

Shelley v. Commissioner, T.C. Memo. 1994-432; Martens v.

Commissioner, T.C. Memo. 1990-42, affd. without published opinion

934 F.2d 319 (4th Cir. 1991); Jenkins v. Commissioner, T.C. Memo.

1988-292, affd. without published opinion 880 F.2d 414 (6th Cir.

1989); Furmanski v. Commissioner, T.C. Memo. 1974-47.   In this

case, petitioner must prove that Mrs. Haeder was his bona fide

employee during the years in issue and, if so, that any expenses

claimed with respect to her alleged employment were reasonable in

amount and paid for services she actually rendered as an

employee.

     Section 1.162-10(a), Income Tax Regs., includes expenditures

for “a sickness, accident, hospitalization, medical expense,

* * * or similar benefit plan” among examples of deductible

business expenses “if they are ordinary and necessary expenses of

the trade or business.”   See also Smith v. Commissioner, T.C.

Memo. 1970-243.   In addition, section 105(b) generally allows an

employee to exclude from gross income amounts received from an

employer for expenses of medical care, as defined in section

213(d), of the employee, the employee’s spouse, or his or her

dependents.   Petitioner must prove that the medical plan expenses

claimed on the Schedules C for the years in issue were ordinary

and necessary expenses paid pursuant to a medical expense plan.
                                - 25 -

In order to satisfy that burden, petitioners must establish that

Mrs. Haeder was petitioner’s bona fide employee for the years in

issue, that the reimbursement of medical expenses was an ordinary

and necessary business expense, and that petitioners paid the

expenses during the applicable year.

     Section 219(a) allows a deduction from gross income for

qualifying contributions to an IRA, subject to certain

limitations and restrictions.    The maximum allowable deduction is

limited to the lesser of $2,000 or the amount of compensation

includable in the individual’s gross income for the taxable year.

See sec. 219(b)(1).   In order to establish that Mrs. Haeder was

entitled to the IRA deduction for each year in issue, petitioners

must prove that Mrs. Haeder had compensation includable in income

for the respective years.

     The deductions for wage expenses, IRA contributions, and

medical plan expenses require proof, in the first instance, that

Mrs. Haeder was petitioner’s employee during the years in issue.

Petitioners maintain that Mrs. Haeder was petitioner’s employee

and performed many valuable services for petitioner relating to

his law practice, including secretarial, clerical, bookkeeping,

and cleaning services.   Petitioner contends that Mrs. Haeder’s

duties were substantial, necessary, and continuing throughout the

years.   Petitioners concede that petitioner had few clients

during the early years after their move to South Dakota.   They
                              - 26 -

contend, however, that petitioner spent much of his time out in

the community, meeting people and volunteering his services.

They assert that, during petitioners’ early years in South

Dakota, Mrs. Haeder was indispensable to petitioner’s law

practice because she stayed at home to answer the telephone,

greet visitors, type and file legal documents, and keep

petitioner’s records.

     Respondent contends that Mrs. Haeder was not petitioner’s

employee during the years in issue.    Respondent asserts that the

activities performed by Mrs. Haeder were duties normally

performed by family members living in the same home, and they do

not constitute the duties of an employee.

     Our review of the record in this case confirms that

petitioners have not shown that Mrs. Haeder provided services as

petitioner’s employee during the years in issue.   Mrs. Haeder did

not testify as to the extent or nature of any services she

purportedly rendered in connection with petitioner’s law

practice.   Petitioner’s testimony relating to Mrs. Haeder’s

purported services was vague, generalized, and conclusory.     The

record contains no specific or convincing evidence regarding

clerical or secretarial services Mrs. Haeder actually performed

in connection with petitioner’s law practice.

     In their briefs, petitioners contend that during the audit

petitioner showed the IRS auditor numerous documents that Mrs.
                              - 27 -

Haeder had worked on for petitioner.9   Petitioners, however,

presented none of those documents at trial.   In fact, petitioner

did not offer into evidence any documentation of the work Mrs.

Haeder purportedly performed or of the time she purportedly spent

performing services for his law practice during the years in

issue.   The record is devoid of credible evidence establishing

that Mrs. Haeder performed any services other than those

reasonably expected of a family member.   We are not required to

accept petitioner’s self-serving, uncorroborated testimony that

Mrs. Haeder performed substantial and continuing clerical and

secretarial services for him during the years in issue.    See Bose

Corp. v. Consumers Union of U.S., Inc., 466 U.S. at 512; Day v.

Commissioner, 975 F.2d at 538; Geiger v. Commissioner, 440

F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo.

1969-159; Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992).

     Other evidence in the record supports respondent’s position

that Mrs. Haeder did not serve as petitioner’s employee during

the years in issue.   For example, except for 1993, petitioner did

not issue Mrs. Haeder a Form W-2, Wage and Tax Statement.

Furthermore, petitioner did not pay Mrs. Haeder “wages” on a


     9
      This Court does not consider statements in briefs as proof.
See Rule 143(b); Niedringhaus v. Commissioner, 99 T.C. 202, 214
n.7 (1992); Viehweg v. Commissioner, 90 T.C. 1248, 1255 (1988);
Evans v. Commissioner, 48 T.C. 704, 709 (1967), affd. 413 F.2d
1047 (9th Cir. 1969).
                                - 28 -

regular or normal basis (such as weekly, biweekly, or monthly),

nor did he pay those wages directly to her.      For 1990, 1992, and

1993, petitioner transferred funds directly into Mrs. Haeder’s

IRA account at yearend.    For 1991, petitioner wrote the check

payable to himself, Mrs. Haeder endorsed it, and Mrs. Haeder

deposited it into her IRA account.

     Petitioner determined Mrs. Haeder’s purported salary on the

basis of the maximum IRA deduction.      The record in this case

suggests that, for the years in issue, petitioner claimed the

purported employer-employee relationship between himself and Mrs.

Haeder in an attempt to enable petitioners to deduct personal

medical and dental expenses as business expenses and

contributions to the IRA account in Mrs. Haeder’s name.

     In their briefs, petitioners contend that one of

respondent’s agents audited petitioners’ 1988 return and

permitted them to deduct similar salary and medical plan expenses

claimed on the Schedule C for that year.      The record contains no

evidence of a prior year’s audit.    See supra note 9.     Even if

such proof had been offered, it would have been irrelevant

inasmuch as each tax year stands on its own and must be

considered separately.    See United States v. Skelly Oil Co., 394

U.S. 678, 684 (1969).    It is well established that the

Commissioner is not bound in any given year to allow a deduction

permitted in a previous year.    See Lerch v. Commissioner, 877
                               - 29 -

F.2d 624, 627 n.6 (7th Cir. 1989), affg. T.C. Memo. 1987-295;

Hawkins v. Commissioner, 713 F.2d 347, 351-352 (8th Cir. 1983),

affg. T.C. Memo. 1982-451; Thomas v. Commissioner, 92 T.C. 206,

226-227 (1989); Union Equity Coop. Exch. v. Commissioner, 58 T.C.

397, 408 (1972), affd. 481 F.2d 812 (10th Cir. 1973).

     On the basis of the foregoing, we hold that petitioners have

not shown that Mrs. Haeder was an employee of petitioner for the

years in issue.   Consequently, we need not address the question

of whether payments made on her behalf during the years were

reasonable in amount.   Because petitioners have not established

that Mrs. Haeder was petitioner’s employee during the years in

issue, they have failed to prove that the payments made to her or

on her behalf are allowable wage expenses on the Schedules C for

the years in issue or that payments made pursuant to the

purported employee medical expense plan are deductible on the

Schedules C for those years.   Additionally, they have not

established that Mrs. Haeder is entitled to deduct contributions

to her IRA account for those years.10   Accordingly, we sustain

respondent’s determinations as to those issues.




     10
      Respondent has determined that petitioners’ income for the
years in issue should be reduced by the wages allegedly paid to
Mrs. Haeder. We agree that respondent’s determination is
appropriate.
                              - 30 -

Legal and Professional Expenses

     Petitioner claimed deductions on his 1990 and 1991 Schedules

C for legal and professional expenses.   To the extent

substantiated, respondent allowed petitioners to deduct some of

the expenses on the Schedules C and, except for $96 for 1990, the

remainder on petitioners’ Schedules A as tax preparation fees.

     Petitioners contend that the legal and professional expenses

in dispute for 1990 and 1991 encompass accountant’s fees for the

preparation of their tax returns and legal fees paid to other

lawyers.   Petitioners assert that those legal and accountant’s

fees related to petitioner’s law practice.

     Respondent contends that petitioners have not established

that they are entitled to deductions for legal and professional

expenses relating to petitioner’s law practice in amounts greater

than those already allowed by respondent.    We agree.

Petitioners offered no proof at trial showing that the items in

dispute related to petitioner’s law practice as required by

section 162.   See supra note 9.   Thus, petitioners have not

established that they are entitled to deductions for legal and

professional expenses on the Schedules C in amounts greater than

those already allowed by respondent.   Petitioners also have not

shown that they are entitled to amounts for legal and

professional expenses on the Schedules A in amounts greater than
                               - 31 -

those allowed by respondent.   Accordingly, we sustain

respondent’s determination on this issue.

Travel, Meal, and Entertainment Expense Deductions

     Petitioner claimed deductions on his Schedules C for the

years in issue for travel, meal, and entertainment expenses.     To

the extent substantiated, respondent allowed deductions for a

portion of the travel and meal expenses on the Schedules C and a

portion of those expenses on petitioners’ Schedules A as medical

expenses or investment-related expenses.    Respondent did not

allow petitioner to deduct the balance of the claimed travel,

meal, and entertainment expenses because those expenditures were

unsubstantiated or personal.

     When a taxpayer establishes that he paid or incurred a

deductible business expense, but does not establish    the amount

of the deduction, the Court may estimate the amount allowable in

some circumstances.   See Cohan v. Commissioner, 39 F.2d 540, 543-

544 (2d Cir. 1930), affg. 11 B.T.A. 743 (1928).    There must be

sufficient evidence in the record, however, to permit the Court

to conclude that a deductible expense was incurred in at least

the amount allowed.   See Williams v. United States, 245 F.2d 559,

560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 743

(1985).   In estimating the amount allowable, the Court bears

heavily upon the taxpayer whose inexactitude is of his or her own

making.   See Cohan v. Commissioner, supra at 544.
                              - 32 -

     Section 274(d) imposes additional stringent substantiation

requirements for certain kinds of business expenses, such as

travel, meal, and entertainment expenses.   The substantiation

requirements of section 274(d) supersede the rule of Cohan v.

Commissioner, supra.   See Sanford v. Commissioner, 50 T.C. 823,

828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); Kim v.

Commissioner, T.C. Memo. 1999-261, affd. without published

opinion 215 F.3d 1319 (4th Cir. 2000); sec. 1.274-5T(a),

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

Under section 274(d), a taxpayer must substantiate the amount,

time, place, and business purpose of the expenditures with

adequate records or sufficient evidence corroborating his or her

own statement.   See sec. 1.274-5T(b) and (c), Temporary Income

Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).   If a taxpayer is

unable to fulfill the requirements of section 274(d), then he or

she is not entitled to the deduction.

     Petitioners do not address the travel, meal, and

entertainment expense issues in their briefs.   The parties,

however, stipulated facts relating to the travel expenses.     In

addition, the travel, meal, and entertainment expense issues are

specifically identified in the stipulation of agreed adjustments

as disputed adjustments.   Under those circumstances, we decline

to treat petitioners’ failure to address the issue as a
                              - 33 -

concession or abandonment of the issue.   See Rule 151(e)(5);

Lencke v. Commissioner, T.C. Memo. 1997-284.

     Our review of the record convinces us that petitioners have

failed to satisfy the stringent substantiation requirements of

section 274(d) as to any travel, meal, and entertainment expenses

not allowed by respondent.   Accordingly, we hold that petitioners

are not entitled to additional deductions for travel, meal, and

entertainment expenses beyond the amounts allowed by respondent

or as stipulated by the parties.

Bad Debt Deduction

     Petitioner claimed a deduction on his Schedule C for 1991

for a bad debt.   Petitioners contend that petitioner is entitled

to deduct the payment as an expense of his law practice.

     Respondent contends that petitioner gave $300 to family

friends and that the payment did not create a bona fide debtor-

creditor relationship.   Respondent also contends that petitioners

have not shown that, if the payment was a valid debt, it became

worthless during 1991.

     Section 166(a) authorizes a deduction for a business bad

debt that becomes worthless during the year.11   To be entitled to


     11
      Sec. 166 distinguishes between business and nonbusiness
bad debts. Nonbusiness bad debts of taxpayers other than
corporations are short-term capital losses. See sec.
166(d)(1)(B). A nonbusiness debt is a debt other than “(A) a
debt created or acquired (as the case may be) in connection with
a trade or business of the taxpayer; or (B) a debt the loss from
                                                    (continued...)
                               - 34 -

the deduction, an individual taxpayer must prove (1) that bona

fide debt was created obligating the debtor to pay the taxpayer a

fixed or determinable sum of money, (2) that the bad debt was

created or acquired in proximate relation to the taxpayer’s trade

or business, and (3) that the debt became worthless in the year

claimed.   See United States v. Generes, 405 U.S. 93, 96 (1972);

Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 284 (1990).

     Petitioner admitted that the payment to the Kadrliks

actually was in the nature of a personal loan.    Petitioners,

however, submitted no proof that the debt became worthless during

1991 or a later year.    Consequently, we hold that petitioners

have failed to prove that they are entitled to deduct the payment

to the Kadrliks as a business bad debt or as a short-term capital

loss for 1991.    Accordingly, we sustain respondent’s

determination on this issue.

Repairs Expense

     Respondent disallowed petitioner’s deduction for repairs to

an oriental rug petitioner purchased in 1993 for periodic use in

his office because petitioner did not establish that the

expenditure was an ordinary and necessary business expense.




     11
      (...continued)
the worthlessness of which is incurred in the taxpayer’s trade or
business.” Sec. 166(d)(2); see also sec. 1.166-5(b), Income Tax
Regs.
                                - 35 -

     Expenditures paid or incurred for regular maintenance to

keep property used in a trade or business in an ordinarily

efficient operating condition are currently deductible.    See

Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333, 337

(1962); secs. 1.162-4, 1.263(a)-1(b), Income Tax Regs.; see also

Ingram Indus., Inc. v. Commissioner, T.C. Memo. 2000-323.

Conversely, expenditures that constitute replacements,

alterations, improvements, or additions that prolong the life of

the property, increase its value, or make it adaptable to a

different use generally constitute capital expenditures that are

not currently deductible.   See sec. 263(a); sec. 1.263(a)-1(a)

and (b), Income Tax Regs.; see also Illinois Merchants Trust Co.

v. Commissioner, 4 B.T.A. 103, 106 (1926).     In order to establish

they are entitled to deduct the repairs expense, petitioners must

show that the purpose of the expenditure was merely to keep the

rug in an ordinarily efficient operating condition and that those

repairs did not make the rug more valuable or more useful or

appreciably prolong its life.    See Plainfield-Union Water Co. v.

Commissioner, supra; Illinois Merchants Trust Co. v.

Commissioner, supra; Ingram Indus., Inc. v. Commissioner, supra.

     Petitioners contend that the repairs were necessary to

maintain the usefulness of the rug and that they did not

substantially prolong the rug’s useful life.    Respondent contends

that petitioners used the rug in their personal residence and
                              - 36 -

that they failed to establish any connection between the use of

the rug and petitioner’s law practice.    In addition, respondent

contends that petitioners have not shown that the expense was an

ordinary and necessary business expense.12

     Petitioners purchased the rug during 1993 and had it

appraised and repaired that same year.    The fact that petitioners

had the rug appraised and repaired in the year of purchase

suggests that those repairs were part of their capital investment

in the rug.   Cf. Stoeltzing v. Commissioner, 266 F.2d 374 (3d

Cir. 1959), affg. T.C. Memo. 1958-111; Bloomfield S.S. Co. v.

Commissioner, 33 T.C. 75 (1959); Jones v. Commissioner, 24 T.C.

563 (1955), affd. 242 F.2d 616 (5th Cir. 1957); L.A. Wells

Constr. Co. v. Commissioner, 46 B.T.A. 302 (1942), affd. per

curiam 134 F.2d 623 (6th Cir. 1943); H. Wilensky & Sons Co. v.

Commissioner, 7 B.T.A. 693 (1927).     Petitioners offered no

evidence regarding the condition of the rug before and after it

was repaired, nor did they prove what effect the repairs had on

the value of the rug.   Petitioners have not carried their burden

of proving that the expenditure was an ordinary and necessary

expense of carrying on petitioner’s law practice.    Accordingly,

we sustain respondent’s determination.




     12
      Respondent also argues that, to the extent the expense is
allowable, the expenditure is a capital expenditure that should
be added to the basis of the rug.
                               - 37 -

Additional Business Income

     Respondent determined that petitioner received $1,085 in

business income that was not included in income on petitioners’

1989 Federal income tax return.13   In a stipulation of agreed

adjustments filed with this Court after the trial, the parties

identified the omission of that income as a disputed adjustment,

but petitioners did not address this issue in their briefs.

Accordingly, we treat the additional business income issue as

conceded by petitioners, and we sustain respondent’s

determination as to this income item.   See Rule 151(e)(4) and

(5); Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989); Money v.

Commissioner, 89 T.C. 46, 48 (1987).

Income From Prizes

     Respondent determined that for 1989 petitioners failed to

include in income $2,223 attributable to a prize that petitioner

won during that year.14   Petitioners do not dispute that

petitioner won a laptop computer during 1989 or that the store


     13
      At trial, petitioner stated that the issue was not in
dispute but commented further that he did not know whether the
income was received. At that time, we declined to conclude that
petitioners had conceded the issue, and we permitted them the
opportunity to offer evidence on the matter. Petitioners
presented no evidence relating to this issue at trial.
     14
      The record is silent as to whether the value of the
Computerland prize determined by respondent in the notice of
deficiency was based on a Form 1099 or some other information and
whether the amount determined by respondent reflected the retail
value of the computer, the amount of store credit issued to
petitioner by Computerland, or something else.
                                - 38 -

issued to him a store credit in lieu of the computer.

Nonetheless, petitioners contend that their income should not be

increased by the value of the prize because the computer had no

economic value or benefit to petitioner and because they never

used all of the store credit.

     Generally, gross income includes prizes and awards received

by a taxpayer during the year.    See sec. 74(a); Hornung v.

Commissioner, 47 T.C. 428, 435-436 (1967); McCoy v. Commissioner,

38 T.C. 841, 843 (1962); sec. 1.74-1(a)(1), Income Tax Regs.

When the prize awarded is not money but goods or services, the

fair market value of those goods or services is the amount to be

included in income.   See McCoy v. Commissioner, supra; Wade v.

Commissioner, T.C. Memo. 1988-118; sec. 1.74-1(a)(2), Income Tax

Regs.   We have noted:

          In valuing taxable prizes and awards for Federal
     income tax purposes, courts do not always adopt the
     same methodology. In some situations, the retail value
     of prizes and awards is used. In other situations, a
     wholesale or other discounted value is used. Objective
     factors are emphasized, but subjective factors also are
     given weight in determining the value of prizes and
     awards to particular taxpayers. [Wade v. Commissioner,
     supra; citations omitted.]

     Petitioners deny that the fair market value of the prize

petitioner actually received was $2,223.   In their briefs,

petitioners maintain that petitioner and Computerland never

agreed on the “retail value” of the prize and that petitioner

“received a carefully hedged ‘retail’ value for the prize, but
                               - 39 -

not the prize itself.”   Petitioners contend that petitioner never

redeemed the entire prize, and, therefore, he never received the

value of the prize.   Petitioner testified that the amount

petitioners should have to include in income from the prize

should be no more than 60 percent of the retail price of the

computer.

     The record contains no credible evidence showing the fair

market value of the laptop computer or the amount of the store

credit petitioner received from Computerland during 1989.    In

particular, no credible evidence was offered to show that the

amount determined by respondent as income from prizes exceeded

the amount of the store credit that petitioner admits he

negotiated and received from Computerland in 1989 in lieu of

receiving the laptop computer.   Petitioners have the burden of

proving that the value of the prize was less than the amount

determined by respondent.15   See Rule 142(a); Commissioner v.


     15
      Although neither party raised the issue, sec. 6201(d), as
amended by the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec.
602(a), 110 Stat. 1452, 1463 (1996), became effective on July 30,
1996, and applies to judicial proceedings filed on or after that
date. Sec. 6201(d) provides that if the taxpayer in a court
proceeding asserts a reasonable dispute with respect to income
reported on an information return and fully cooperates with the
Commissioner by providing, within a reasonable period of time,
access to and inspection of all witnesses, information, and
documents within the control of the taxpayer as reasonably
requested, the Commissioner shall have the burden of providing
reasonable and probative information regarding the disputed
deficiency in addition to the information return. In this case,
even if petitioners had shown that the income attributable to the
Computerland prize was reported on a Form 1099 and had asserted
                                                    (continued...)
                               - 40 -

Glenshaw Glass Co., 348 U.S. 426 (1955).    Petitioners have failed

to do so.   Accordingly, we sustain respondent’s determination.

Dividend Income

     Respondent determined that for 1992 petitioners overstated

their dividend income by $8,732.   At trial, petitioner appeared

to concede this issue.   In the stipulation of agreed adjustments

filed with the Court after trial, however, the parties included

this item in the list of adjustments still at issue.

     Petitioners nevertheless failed to address this issue in

their briefs.    Accordingly, we treat the dividend income issue as

conceded by petitioners, and we sustain respondent’s

determination on this issue.   See Rule 151(e)(4) and (5);

Petzoldt v. Commissioner, 92 T.C. at 683; Money v. Commissioner,

89 T.C. at 48.

Additions to Tax for Failure To Timely File Tax Returns

     Respondent determined that for 1989 and 1990 petitioners

were liable for additions to tax under section 6651(a)(1) because

they failed to file timely returns or to show that they had




     15
      (...continued)
that the burden of production regarding the Computerland prize
should shift to respondent under sec. 6201(d), petitioner offered
no evidence that he fully cooperated with respondent, and the
record in this case supports a conclusion that petitioner did not
fully cooperate with the Commissioner as required by sec.
6201(d). See Ketler v. Commissioner, T.C. Memo. 1999-68; Andrews
v. Commissioner, T.C. Memo. 1998-316; Hardy v. Commissioner, T.C.
Memo. 1997-97, affd. 181 F.3d 1002 (9th Cir. 1999).
                                - 41 -

reasonable cause for that failure.       Petitioners do not deny that

the returns were not timely filed.

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return unless it is shown that such failure is due to

reasonable cause and not due to willful neglect.      See sec.

6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985).         A

failure to file a timely Federal income tax return is due to

reasonable cause if the taxpayer exercised ordinary business care

and prudence and, nevertheless, was unable to file the return

within the prescribed time.   See Crocker v. Commissioner, 92 T.C.

899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Willful neglect means a conscious, intentional failure to file or

reckless indifference.   See United States v. Boyle, supra at 245.

     Petitioners did not address this issue at trial or in their

briefs.   Accordingly, we treat this issue as conceded by

petitioners, and we sustain respondent’s determination on the

additions to tax for failure to timely file a return.      See Rule

151(e)(4) and (5); Petzoldt v. Commissioner, supra at 683; Money

v. Commissioner, supra at 48.

Accuracy-Related Penalties for Negligence

     Respondent determined that for 1991 and 1992 petitioners

were liable for accuracy-related penalties for negligence.

Petitioners assert that their actions were not negligent.
                               - 42 -

     Section 6662(a) and (b)(1) imposes an accuracy-related

penalty in the amount of 20 percent of any portion of an

underpayment attributable to negligence or disregard of rules or

regulations.   The term “negligence” is defined in section 6662(c)

as “any failure to make a reasonable attempt to comply with the

provisions of this title”.    “Negligence connotes a lack of due

care or a failure to do what a reasonable and prudent person

would do under the circumstances.”      Bunney v. Commissioner, 114

T.C. 259, 266 (2000); see also Allen v. Commissioner, 925 F.2d

348, 353 (9th Cir. 1991), affg. 92 T.C. 1 (1989); Freytag v.

Commissioner, 89 T.C. 849, 887 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991).     Negligence also includes

any failure by the taxpayer to keep adequate books and records or

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

Tax Regs.   The term “disregard” includes any careless, reckless,

or intentional disregard.    Sec. 6662(c); sec. 1.6662-3(b)(2),

Income Tax Regs.

     Section 6664(c)(1) provides that the accuracy-related

penalty shall not be imposed with respect to any portion of an

underpayment if it is shown that a taxpayer acted in good faith

and that there was reasonable cause for the underpayment.       The

determination of whether a taxpayer acted with reasonable cause

and in good faith is made on a case by case basis, taking into

account all pertinent facts and circumstances.     See Compaq
                              - 43 -

Computer Corp. v. Commissioner, 113 T.C. 214, 226 (1999); sec.

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

     Petitioners contend that they are not liable for the

accuracy-related penalties for negligence because they relied on

their accountant for the preparation of their returns.   Thus, in

effect, petitioners argue that they had reasonable cause and

acted in good faith by treating the items as they did on their

returns for 1991 and 1992.   Petitioners bear the burden of

proving facts showing good faith and reasonable cause.   See Rule

142(a).

     Although a taxpayer may avoid liability for the addition to

tax for negligence if he or she shows a reasonable reliance in

good faith on a competent and experienced return preparer,

reliance on professional advice, standing alone, is not an

absolute defense to negligence.    See United States v. Boyle,

supra at 250-251; Freytag v. Commissioner, supra at 888; see also

sec. 1.6664-4(b)(1), Income Tax Regs.   Rather, it is a factor to

be considered.   See Freytag v. Commissioner, supra at 888.    To

show good faith reliance on the advice of a competent adviser,

the taxpayer must establish that he or she provided the return

preparer with complete and accurate information and that an

incorrect return was a result of the preparer's mistakes.     See

Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir. 1995),
                               - 44 -

affg. T.C. Memo. 1993-634; Weis v. Commissioner, 94 T.C. 473, 487

(1990); Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978).

     Petitioner did not testify that he supplied Mr. Fuller, who

prepared the returns for 1991 and 1992, with complete and

accurate information or that the incorrect reporting of the

disputed items was a result of the preparer's mistakes.

Additionally, Mr. Fuller did not testify that the incorrect

reporting of the items adjusted by respondent was a result of his

mistakes.16   Moreover, with respect to the deductions claimed for

wage expense, medical plan expenses, and IRA contributions, the

record fails to show that either petitioner or Mr. Fuller engaged

in any factual or legal analysis to determine whether Mrs. Haeder

qualified as petitioner’s employee.     Petitioners, therefore, have

failed to establish that the underpayment for the years in issue

resulted from their good faith reliance on the advice of their

tax preparer.   Accordingly, petitioners have failed to carry

their burden, and we sustain respondent’s determination as to the

accuracy-related penalties.

Accuracy-Related Penalties for Substantial Understatements of Tax

     Respondent determined that for 1989, 1990, and 1993

petitioners were liable for accuracy-related penalties under

     16
      Although Mr. Fuller testified at trial that he incorrectly
reported commissions refunded in 1990 in connection with
petitioner’s investment in Floating Point stock and overstated
dividend income in 1992, these items either are not at issue in
this case or do not affect adversely to petitioners the
calculation of the deficiencies.
                              - 45 -

section 6662(a) because the underpayment of tax for those years

was due to a substantial understatement of their income tax.

Petitioners contend that they are not liable for the accuracy-

related penalties for substantial understatement of income tax.

     Section 6662(a) and (b)(2) imposes a penalty equal to 20

percent of the portion of an underpayment attributable to any

substantial understatement of tax.     A substantial understatement

occurs when the amount of the understatement exceeds the greater

of 10 percent of the amount of tax required to be shown on the

return or $5,000 ($10,000 for corporations).     See sec.

6662(d)(1).   The amount of an understatement on which the penalty

is imposed will be reduced by the portion of the understatement

that is attributable to the tax treatment of an item (1) that was

supported by “substantial authority” or (2) for which the

relevant facts were “adequately disclosed in the return or in a

statement attached to the return.”     Sec. 6662(d)(2)(B).17

Additionally, no penalty will be imposed with respect to any

portion of an underpayment if it is shown that there was

reasonable cause for such portion and the taxpayer acted in good

faith with respect to such portion.     See sec. 6664(c)(1).

     Petitioners do not contend that they have substantial

authority for the tax treatment of the items that we have


     17
      For 1993 and later years, adequate disclosure must be
coupled with “a reasonable basis for the tax treatment”. See
sec. 6662(d)(2)(B)(ii).
                              - 46 -

addressed in this opinion or that they adequately disclosed all

relevant facts as to the tax treatment of those items on their

returns.   Rather, they contend only that they relied on their

accountant for the preparation of their returns.   Thus, in

effect, petitioners argue that they had reasonable cause and

acted in good faith in treating the items as they did on their

returns.

     As we discussed above in relation to the accuracy-related

penalty for negligence, petitioners have failed to establish that

the overstatement of deduction items or the understatement of

income items that they conceded before or after trial or that we

addressed in this opinion resulted from a good faith reliance on

the advice of their tax preparer.   Consequently, they have failed

to carry their burden of proving that they are not liable for the

accuracy-related penalty for substantial understatements of

income for 1989, 1990, or 1993.   Accordingly, we sustain

respondent’s determination to the extent the Rule 155 computation

for 1989, 1990, and 1993 indicates a substantial understatement

of petitioners’ income tax within the meaning of section 6662(d).

Conclusion

     We have carefully considered all remaining arguments made by

petitioners for a result contrary to that expressed herein and,

to the extent not discussed above, find them to be irrelevant or

without merit.
                        - 47 -

To reflect the foregoing and the concessions of the parties,


                                      Decision will be entered

                                 under Rule 155.
