                        T.C. Memo. 2001-42



                      UNITED STATES TAX COURT



           A.J. CONCRETE PUMPING, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20217-98.                 Filed February 23, 2001.



     James L. McDonald, Sr., for petitioner.

     Larry D. Anderson, for respondent.



                        MEMORANDUM OPINION

     GERBER, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax and section 66621 accuracy-

related penalties as follows:




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable periods under
consideration, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
                               - 2 -

                                             Penalty
         TYE              Deficiency       Sec. 6662(a)
     Mar. 31, 1992         $201,698           $40,340
     Mar. 31, 1994           59,524            11,905

     After concessions,2 the issues remaining for our

consideration are:   (1) Whether petitioner understated its 1992

and 1993 gross receipts by $56,787 and $74,046,3 respectively;

(2) whether petitioner had unreported equipment rental income

from Olympic Concrete Pumping, Inc. (Olympic), in 1992 of

$62,789; (3) whether petitioner had installment sale gains in

1993 and 1994 of $31,500 and $53,602, respectively, from the

disposition of equipment that purportedly had been leased; (4)

whether petitioner had unreported income in 1992 of $88,893 from

an equipment sale arranged by Olympic; (5) whether petitioner

overstated its beginning inventory for 1992 by $61,066; (6)


     2
       The parties agree that for the Mar. 31, 1992, tax year:
(1) Petitioner is entitled to an additional $57,182 depreciation
allowance; (2) petitioner is not entitled to deduct the $3,748
interest disallowed; and (3) petitioner is not entitled to deduct
the $10,247 tax expense disallowed. The parties agree that for
the Mar. 31, 1993, tax year: (1) Petitioner is not entitled to
deduct the $12,256 bad debt expense disallowed; (2) petitioner is
not entitled to deduct the $39,110 depreciation expense
disallowed; and (3) petitioner is not entitled to deduct the
$3,748 interest expense disallowed. The parties agree that for
the Mar. 31, 1994, tax year petitioner is entitled to an
additional $65,340 depreciation allowance.

     3
       The 1993 tax year in which a loss was reported was not the
subject of a deficiency determination. Instead, respondent
adjusted various items that had the effect of reducing the net
operating loss carryover to the 1994 year. One of those
adjustments was based on the bank deposits analysis resulting in
the determination of the $74,046 increase to gross receipts.
                               - 3 -

whether petitioner expensed a $22,250 capital asset in 1992 that

it also was depreciating; (7) whether petitioner is entitled to a

miscellaneous deduction in 1992 of $11,997; (8) whether

petitioner is entitled to auto and truck expense deductions in

1992, 1993, and 1994 of $3,794, $6,177, and $5,925, respectively;

(9) whether petitioner is entitled to depreciation deductions

connected with the personal use of automobiles in 1992, 1993, and

1994 of $1,590, $9,623, and $594, respectively; (10) whether

petitioner is entitled to the following expenses in 1992 paid for

the benefit of Olympic:   Purchases--$6,128; fuel--$13,233; legal

fees--$10,931; travel--$11,412; (11) whether petitioner

overstated its insurance expenses for 1992, 1993, and 1994 by

$3,191, $1,401, and $1,401, respectively; (12) whether petitioner

overstated its 1992 repair expenses by $1,543; (13) whether

petitioner is entitled to a $64,291 investment tax carryover from

1991 to 1992; (14) whether petitioner is entitled to a $196 jobs

credit carryover from 1991 to 1992; and (15) whether petitioner

is liable for the accuracy-related penalty under section 6662 for

1992 and 1994 in the amounts of $40,340 and $11,905,

respectively.
                               - 4 -

Background4

     Petitioner’s principal place of business at the time of the

filing of the petition in this case was Mableton, Georgia.

Petitioner, a subchapter C corporation, is a general contractor

engaged in the business of pumping concrete.   During the 1992,

1993, and 1994 tax years, Alan Bone (Bone) and Jeffrey Guerrero

(Guerrero) owned 51 percent and 49 percent, respectively, of its

common stock.

Understatement of Gross Receipts

     Findings of Fact

     Respondent conducted an examination of petitioner’s 1992

through 1994 tax years.   In connection with an analysis of

petitioner’s reported receipts for the 1992 through 1994 tax

years, respondent’s agent, Ronald Harkins (Agent Harkins),

performed bank deposits analyses of petitioner.    For 1992, Agent

Harkins received the analysis that petitioner prepared for the

purpose of assisting him during the examination.   Petitioner’s

analysis reflected the items that petitioner had included in

gross receipts.   On the basis of that analysis of petitioner’s

bank deposits for the 1992 tax year, Agent Harkins concluded that


     4
       The parties’ stipulated facts and exhibits are
incorporated herein by this reference. Because this case
involves numerous adjustments and/or issues for our
consideration, we have found general facts under the title
“Background”, and facts specific to each issue are found
separately within the separately captioned sections of the
opinion considering each specific adjustment or issue.
                               - 5 -

petitioner had omitted certain specific items of income.   In

particular, it appeared that a deposit of $39,500 received from

McDevitt & Street and deposits totaling $17,287 received from

Floyd & Lloyd Rentals5 had not been included in gross receipts.

In response to Agent Harkins’ findings, petitioner advised that

the amounts were included in rent and other income, categories

reported separately from the gross receipts on petitioner’s 1992

corporate return.   Agent Harkins analyzed those specific return

items, compared them to petitioner’s financial records, and found

that the amounts reported in the rent and other income categories

did not include the $39,500 and $17,287 amounts.   Agent Harkins

did not check any other of petitioner’s accounts or records to

determine whether the analysis received from petitioner was, in

other respects, correct.

     For purposes of trial, petitioner prepared another analysis

of the bank deposits for the 1992 tax year that purported to

contain a reconciliation of the bank deposits and the amounts

reported on the 1992 corporate tax return.   That analysis, in an

attempt to account for the $39,500 and $17,287 amounts, contained

numerous unexplained adjustments used to effect the

reconciliation.   The analysis presented for purposes of trial did



     5
       Several exhibits contained in the record refer to this
entity as “Ford and Lloyd”. Petitioner, however, refers to it as
“Floyd and Lloyd”. For consistency, we refer to it as “Floyd and
Lloyd”.
                                - 6 -

not show that respondent’s analysis of petitioner’s accounts for

rent and other income was in error.

     On the basis of a bank deposits analysis for the 1993 tax

year (without the designation of any specific items of income),

respondent determined that petitioner had understated 1993 gross

receipts by $74,046.   Likewise, for the 1994 tax year, respondent

used a generalized bank deposits analysis to conclude that

petitioner had overreported its income by $66,737.    Petitioner

does not dispute the 1994 adjustment reducing its gross receipts.

With respect to respondent’s 1993 bank deposits analysis,

petitioner provided its own analysis in an attempt to show that

its gross receipts were overreported for its 1993 taxable year.

Petitioner’s analysis contained a reconciliation of its 1993

deposits to the income amount reported on its 1993 corporate

return.   Petitioner’s reconciliation reflected reductions from

total deposits of amounts that were not includable in gross

receipts, such as proceeds of loans from Merrill Lynch and other

similar items.    Respondent did not present any evidence regarding

the methodology used in conducting the 1993 bank deposits

analysis or contradicting the items petitioner explained were

from nontaxable sources.

     Discussion

     Taxpayers are required to maintain adequate records of

taxable income.   See sec. 6001.   During the examination of
                                 - 7 -

petitioner’s 1992 income tax return, Agent Harkins performed a

bank deposits analysis, in which he determined that specific

deposits reflected in petitioner’s financial records had not been

reported in 1992 gross receipts on the corporate return.     In

addition, respondent performed bank deposits analyses for 1993

and 1994 generally reflecting that gross receipts had been either

underreported or overreported.

     In cases where taxpayers have not maintained business

records or where their business records are inadequate, the

Commissioner is authorized to reconstruct income by any method

that, in the Commissioner’s opinion, clearly reflects income.

See sec. 446(b); Parks v. Commissioner, 94 T.C. 654, 658 (1990).

The Commissioner’s method need not be exact but must be

reasonable.   See Holland v. United States, 348 U.S. 121 (1954).

     The bank deposits method for computing unreported income has

long been sanctioned by the courts.      See Factor v. Commissioner,

281 F.2d 100, 116 (9th Cir. 1960), affg. T.C. Memo. 1958-94;

DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16

(2d Cir. 1992).   Bank deposits are prima facie evidence of

income.   See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Where the taxpayer has failed to maintain adequate records as to

the amount and source of his or her income and the Commissioner

has determined that the deposits are income, the taxpayer must
                               - 8 -

show that the determination is incorrect.   See Rule 142(a); Welch

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

     In calculating petitioner’s 1992 income using the bank

deposits method, Agent Harkins found several items that were not

reported on petitioner’s income tax return.   In particular, it

was determined that deposits from McDevitt & Street totaling

$39,500 and deposits from Floyd & Lloyd totaling $17,287 were not

reported as income.   Petitioner admits receiving the income and

contends that the income from McDevitt & Street was included in

“Other Income” on its tax return, and the income from Floyd &

Lloyd was included in “Rental Income” on its tax return.

     Respondent, however, reviewed petitioner’s “Other Income”

and “Rental Income” accounts and determined that the income from

McDevitt & Street and Floyd & Lloyd was not included in any of

those accounts.   Accordingly, respondent has specifically

identified items of income that were not included on petitioner’s

1992 corporate tax return.   Petitioner, at trial, introduced a

new analysis of deposits in an attempt to show that the

questioned 1992 income items were reported and that petitioner’s

reported 1992 income was overstated by a few thousand dollars.

The 1992 schedule presented by petitioner at trial was not the

same schedule that had been presented to Agent Harkins during the

audit examination, and it did not reconcile to petitioner’s books

of account.   Petitioner’s analysis presented at trial,
                               - 9 -

accordingly, did not deal with Agent Harkins’ analysis of

petitioner’s financial records to verify that the schedule

provided by petitioner during the examination was correct.

Finally, petitioner did not explain the differences between the

two schedules.   Accordingly, respondent’s determination was based

on verified and uncontradicted specific items of income that were

omitted from petitioner’s 1992 income, and respondent’s

determination of understatement of gross receipts for 1992 is

sustained.

     Respondent also determined that petitioner understated its

gross receipts by $74,046 for the 1993 year.   The statutory

notice of deficiency contains a net reduction of $59,177 to

petitioner’s claimed 1993 net operating loss, thereby reducing

the amount of any carryover to the 1994 year from the $231,441

claimed to $172,264.   The $59,177 net adjustment comprises 10

items decreasing and one item increasing the 1993 net operating

loss.   Our trial record and the notice of deficiency contain no

details or explanations of the $74,046 proposed understatement of

gross receipts for 1993, and the amount is apparently the result

of a general bank deposits analysis by Agent Harkins.

     Unlike the specific adjustments for 1992, respondent’s

adjustment for 1993 is based on generalized bank deposits.

Petitioner addresses respondent’s determination on that item by

reconciling the total bank deposits to the items on its return in
                              - 10 -

an attempt to show omissions and errors in respondent’s

reconstruction for 1993.   In that regard, the Commissioner’s

income reconstructions are subject to taxpayers’ showing

computation errors and omissions and/or errors in the

Commissioner’s methodology.   See Webb v. Commissioner, 394 F.2d

366, 372-373 (5th Cir. 1968), affg. T.C. Memo. 1966-81.

Petitioner’s reconciliation, in great part, depends upon

nontaxable loan receipts in a total amount exceeding $466,000,

along with other nontaxable items that petitioner subtracted from

total deposits to arrive at reportable income.   Respondent has

not countered petitioner’s showing of nontaxable items that would

reduce the total bank deposits to arrive at reportable income for

the 1993 year.

     Accordingly, petitioner has shown that respondent’s approach

to reconstructing its 1993 gross receipts is flawed.    We are

unable to draw any conclusion, as respondent apparently wishes us

to do, from the fact that we have found that petitioner

understated 1992 income.   That is so because respondent’s

approach for 1992 was to identify specific items of omitted

income.   Accordingly, we find that petitioner did not understate

its 1993 income by $74,046 as determined by respondent.
                               - 11 -

Understatement of Equipment Rental Income

     Findings of Fact

     On March 15, 1990, Bone and Guerrero formed a new S

corporation, Olympic, to operate a business project in Washington

State.   In 1992, Guerrero owned 51 percent of Olympic’s common

stock and Bone owned the remaining 49 percent.    Bone and Guerrero

each contributed $500 to Olympic, arranged for Olympic to lease

concrete pumping trucks, and permitted Olympic to borrow capital

from petitioner.   During the period under consideration, Olympic

made repayments to petitioner.    During its existence, Olympic

leased trucks and concrete pumping equipment from petitioner for

use in Olympic’s business.    Olympic discontinued business in

1992.

     Olympic, pursuant to the lease with petitioner, was

obligated to pay an $11,681.41 monthly rental for use of the

equipment.   Olympic paid petitioner $190,415.89 during the fiscal

year ending March 31, 1992.    Of the $190,415.89, petitioner

reported $64,839 as rental proceeds on its 1992 tax return.      Of

the remaining $125,576 in payments, petitioner contends that they

should be treated as nontaxable payments on a loan.    Respondent,

however, has allowed only one-half of the $125,576, or $62,788,

to be treated as a loan repayment from Olympic to petitioner, and

respondent treated the other one-half as additional lease
                               - 12 -

payments or income to petitioner. Conversely, respondent allowed

Olympic an additional $62,788.89 deduction.

     Discussion

     Rents are includable in gross income.    See sec. 61(a)(5).

Respondent determined that during 1992 petitioner received more

rental income than it reported.    An analysis of petitioner’s

deposits reflected that various payments were made from Olympic

to petitioner.    These amounts represented both loan repayments

and equipment rental payments.    Petitioner admits that Olympic

rented petitioner’s pumping equipment but alleges that all of the

$125,576 in deposits to its account from Olympic represented loan

repayments of principal, which are not includable in income.

Further, the lease agreement between petitioner and Olympic

called for monthly rental payments of $11,681.41, or $140,176.92

annually.    The schedule of payments from Olympic to petitioner

reflects that the total monthly payments approximated the

$11,681.41 monthly amount called for in the lease.    Combining the

$64,839 reported by petitioner and the $62,789 determined by

respondent would result in petitioner’s reporting $127,627, or

$12,549.92 less than the $140,176.92 called for by the terms of

the lease.    Petitioner contends that respondent’s determination

is arbitrary but has offered no evidence that would show that it

is in error.
                               - 13 -

     The record indicates that Olympic made $190,415.89 in

payments to petitioner during the fiscal year ending March 31,

1992.    Only $64,839, however, was reported as rental proceeds on

petitioner’s 1992 income tax return.    Petitioner has failed to

show that the deposits in question from Olympic were loan

repayments rather than rental payments.    Accordingly,

respondent’s determination regarding the unreported rental income

of $62,7896 for the 1992 tax year is sustained.

Sale vs. Lease

     Findings of Fact

     During the years at issue, petitioner entered into lease

arrangements under which various parties were permitted the use

of petitioner’s concrete pumping equipment.    Each of these

arrangements required monthly payments to petitioner for a

specific period of as little as 36 months to as long as 60

months, depending upon the arrangement.    Under the agreements,

the “lessee” bore the burden of all expenses for necessary

repairs, maintenance, operation, and replacements required to be

made to maintain the equipment in good condition.    The “lessee”

was also required to maintain insurance on the equipment.      Each


     6
       At trial, respondent asserted that a $125,577 adjustment
for a rental income understatement could have been determined.
Respondent, however, determined that only 50 percent of the
$125,577 difference would be rental income and the remaining 50
percent loan repayment. Respondent’s determination was
apparently based on some prior agreement or understanding with
petitioner.
                                - 14 -

agreement contained the stipulation that, upon the expiration of

the lease, the lessee had the option to purchase the equipment

for $1.

     Discussion

     We must consider whether the lease arrangements executed

during the years in issue constituted sales or whether they were

leases with an option to buy.    Respondent argues that petitioner

mischaracterized the lease agreements by reporting the related

items as though the agreements were leases instead of sales;

i.e., reporting as income only the monthly payments rather than

reporting all the sale proceeds at the front end of the

transaction.    Respondent determined that the arrangements were,

in substance, installment sales and that petitioner had

unreported gains of $31,500 and $53,602 for 1992 and 1994,

respectively.     Petitioner contends that it properly characterized

and reported the transactions as leases with an option to buy.

     Whether a sale is complete for Federal tax purposes depends

on all of the facts and circumstances.    See Derr v. Commissioner,

77 T.C. 708, 724 (1981).    We consider the following factors in

deciding whether a sale has occurred:    (1) Whether the seller

transferred legal title; (2) whether the benefits and burdens of

ownership passed to the buyer; (3) whether the owner had a right

under the agreement to require the other party to buy the

property; and (4) how the parties treated the transaction.    See
                               - 15 -

Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237-

1238 (1981).

     Each lessee entered into an agreement in which the lessee

would make payments covering a period ranging from 36 months to

60 months, depending on the agreement.   At trial, however,

petitioner admitted that most of the payments for the leases were

received in a single or lump-sum payment.    The agreements also

provided that the lessee had the option of purchasing the

equipment for $1 by giving the lessor 30 days’ notice before the

expiration of the lease.   The agreements also required the lessee

to pay the expense of all repairs on the equipment and maintain

insurance for the equipment.

     Petitioner argues that the transaction was treated

consistently as a lease for tax purposes.    The test, however,

does not center on the labels given to a transaction, but,

rather, the intent of the parties should be examined from the

viewpoint of what they intended to happen.    See Oesterreich v.

Commissioner, 226 F.2d 798, 801 (9th Cir. 1955).    The fact that

the purported lessees bore the burden of expenses for repairs,

insurance, and maintenance and could acquire the property at the

end of the lease term for a $1 option is a strong indication

that, regardless of the labels, the parties intended these

transactions to be a sale of the equipment.    See Kwiat v.
                              - 16 -

Commissioner, T.C. Memo. 1989-382; Van Valkenburgh v.

Commissioner, T.C. Memo. 1967-162.

     Considering all the facts, we conclude that it was unlikely

that the $1 option would remain unexercised at the end of the

term.   Furthermore, while there is no indication that title

actually passed to the lessees during the term of the lease, the

lessees bore the burdens and benefits of ownership.     Therefore,

the lease agreements substantially shifted the benefits and

burdens of ownership from petitioner to the lessees and

constitute sales for tax purposes.     Accordingly, respondent’s

position on this issue is sustained.

Unreported Gain on Sale of Assets

     Findings of Fact

     On March 6, 1992, Olympic sold property leased from

petitioner to Ralph’s Concrete and Vance Gribble.     In exchange

for the property, Olympic received cash proceeds of $440,121.

Olympic remitted $216,395 of the $440,121 to petitioner and

retained $223,726.   On its March 31, 1992, tax return, petitioner

reported a $227,061 gain from the sale of these assets.     Both

parties agree that petitioner incorrectly computed the gain from

the sale of these assets.   The correct gain is $315,954.

     Discussion

     On March 6, 1992, Olympic sold various pieces of pumping

equipment that were owned by petitioner.     On its 1992 tax return,
                               - 17 -

petitioner reported a $227,061 gain from this sale.    The parties

agree that petitioner miscalculated the gain from the disposition

of the property, and the amount in the notice of deficiency is

correct.   Petitioner, however, now contends that Olympic was the

true owner of this property, and the gain from the sale of the

equipment should be reported by Olympic and not petitioner.

     Petitioner’s contention, however, is wholly unsupported in

the record.    At trial, Mr. Bone, petitioner’s 51-percent owner,

in response to the question of who owned the equipment, replied

that petitioner owned it.    Petitioner also failed to present any

evidence regarding the agreement between petitioner and Olympic

with respect to the equipment under consideration.    Consistent

with respondent’s determination and petitioner’s reporting of the

transaction is the fact that Olympic’s 1991 and 1992 tax returns

included $125,816 and $146,847, respectively, in equipment lease

deductions.    Olympic’s reporting of lease payments supports our

holding here that the arrangement between petitioner and Olympic

was a lease.   Accordingly, respondent’s determination regarding

the gain on the sale of equipment is sustained.

Overstatement of Inventory

     Findings of Fact

     Petitioner listed its 1991 ending inventory as $30,602.

Petitioner listed its 1992 beginning inventory as $91,668.    The

difference is attributable to Olympic’s 1992 discontinuation of
                               - 18 -

its business and petitioner’s receipt of Olympic’s repair parts

worth approximately $61,000.

     Discussion

     Respondent determined that petitioner overstated its 1992

beginning inventory by $61,066.    In computing a taxpayer’s gross

income, cost of goods sold is an offset or reduction from gross

receipts in determining income.    See sec. 1.61-3(a), Income Tax

Regs.   Cost of goods sold is determined by adding purchases to

the beginning inventory and subtracting the ending inventory.

The method for computing cost of goods sold is mechanical.

     Petitioner argued that the $61,066 change in beginning

inventory was the result of its receiving additional available

repair parts from Olympic, which discontinued business

operations.   Petitioner, however, failed to explain why it

treated repair parts as inventory.      Petitioner’s primary business

was providing a service (transporting concrete and leasing

equipment).   The leases to third parties, other than Olympic,

were effectively sales where the lessees/purchasers took care of

their own repairs.   With respect to the lease to Olympic, the

repair parts were not shown to have been purchased or maintained

as inventory by petitioner.    Substantially, petitioner was in a

service industry, and it is unclear why petitioner would regard

repair parts as inventory.    That is so regardless of whether
                               - 19 -

those repair parts were given to petitioner without consideration

or in the form of a loan repayment.

     Petitioner has not shown that the repair parts were

merchandise held for sale to customers in the normal course of

its business.   Accordingly, respondent’s determination that

petitioner’s 1992 beginning inventory was overstated is

sustained.

Expense Items

     A.   Findings of Fact

     1.   Equipment Purchase

     During 1991, petitioner purchased equipment from Traylor

Brothers for $22,250 and deducted the cost of the equipment on

its 1992 tax return.   Respondent determined that petitioner was

not entitled to expense the cost of equipment but that the cost

should be capitalized and depreciated.7

     2.   Miscellaneous Expense

     For its 1992 tax year, petitioner claimed a deduction for

miscellaneous expense items in the total amount of $15,204.

Respondent determined that petitioner failed to establish that

the entire amount was for ordinary and necessary business

expenses, disallowing $11,997 of the $15,204 claimed deduction.



     7
       Petitioner claimed depreciation in the amount of
$3,214.29. Respondent, however, determined that the correct
depreciation deduction should have been $4,500.16 and made the
necessary upward adjustment.
                               - 20 -

     3.    Automobile and Truck Expense

     Petitioner also claimed automobile and truck expenses in

1992, 1993, and 1994 of $32,456, $60,550, and $58,082,

respectively. Respondent determined that petitioner is not

entitled to automobile and truck expenses in 1992, 1993, and 1994

of $3,794, $6,177, and $5,925, respectively, and disallowed those

amounts.

     4.    Depreciation on Personal Use Automobiles

     Petitioner claimed depreciation deductions in connection

with automobiles its shareholders personally used for 1992, 1993,

and 1994 of $1,590, $9,623, and $594, respectively.     On the basis

of the nature of and facts surrounding petitioner’s business,

respondent allowed 50 percent of the depreciation amounts claimed

by petitioner on the automobiles.

     5.    Olympic’s Expenses Paid by Petitioner

     Petitioner claimed deductions in the 1992 tax year for

expenses paid on behalf of Olympic.     These expenses included

purchases of $6,128, fuel expenses of $13,233, legal fees of

$10,931, and travel expenses of $11,412.     Respondent determined

that petitioner is not entitled to deduct these expenses.
                               - 21 -

     6.   Insurance Expenses

     Petitioner deducted expenses for insurance in 1992 and 1994

in the amounts of $147,2538 and $66,876, respectively.

Respondent determined that petitioner is not entitled to deduct

$3,191 in 1992 and $1,401 in both 1993 and 1994 and disallowed

those amounts.

     7.   Repair Expenses

     Petitioner deducted repair expenses for 1992 in the amount

of $2,825.   Respondent determined that petitioner is not entitled

to deduct $1,543 and disallowed that amount.

     B.   Discussion

     1.   Equipment Expense

     Petitioner deducted, as equipment expenses, $22,250 that had

been paid for equipment purchased in 1992.   Respondent disallowed

the $22,250 deduction after it was determined that the purchased

equipment had been included on petitioner’s return as a fixed

asset and depreciation expense claimed in addition to the $22,250

deduction.   After examining the fixed asset schedule,

respondent’s agent concluded that the equipment should have been

capitalized rather than expensed.




     8
       In the notice of deficiency, respondent determined that
petitioner deducted $147,253 for insurance expenses in 1992.
Petitioner’s tax return, however, reflects claimed insurance
expense of $130,213.
                               - 22 -

     Petitioner presented documentation regarding the purchase of

the equipment but did not explain why the cost of the asset was

deducted as an expense and also capitalized and depreciated.

Petitioner’s sole statement in its brief regarding this issue is

as follows:   “A.J. Concrete Pumping, Inc. purchased used

inoperative equipment in the amount of $22,250 from the Bellamy

Brothers, Inc., so as to ‘cannibalize’ it for spare parts not

readily available in the open market.”   We find this

uncorroborated statement to be, by itself, unhelpful and

unpersuasive.   Accordingly, respondent’s disallowance of the

$22,250 deduction is sustained.

     2.   Miscellaneous Deduction

     Petitioner deducted $15,204 for miscellaneous costs on its

1992 tax return.   Respondent disallowed $11,997 of this amount,

and petitioner did not present any evidence supporting this

deduction.    On brief, petitioner’s sole argument regarding this

issue is that respondent is taking a “convenient position” that

this expense belongs to Olympic and not petitioner, and borders

on being a “whipsaw proposed adjustment”.   Regardless of

petitioner’s opinion about respondent’s proposed adjustments,

petitioner has failed to present any evidence substantiating its

entitlement to the “miscellaneous deduction”.   Accordingly,

respondent’s determination on this item is sustained.
                                - 23 -

     3.   Automobile Expenses

     Respondent disallowed automobile and truck expenses for the

1992, 1993, and 1994 tax years of $3,794, $6,177, and $5,925,

respectively.   Respondent disallowed the above-listed amounts

because of petitioner’s failure to substantiate that the amounts

were expended for business use of automobiles and trucks.

Petitioner did not offer any evidence at trial or present any

argument on brief regarding these amounts.   Accordingly,

respondent’s determination on these items is sustained.

     4.   Depreciation Deductions

     For the 1992 and 1993 tax years, petitioner depreciated the

full cost of vehicles used by shareholders Bone and Guerrero

without taking into consideration their personal use of the

vehicles.   Petitioner attempted to justify the full amount of

depreciation it claimed on the grounds that the vehicles were

required to be available on call 24 hours a day.

     Section 167 allows a deduction for the depreciation of

business equipment used in the course of a business or trade.

Section 280F, however, reduces the amount of depreciation that

can be claimed for passenger automobiles.    Specifically, section

280F limits the allowable amount of depreciation to a multiple

equal to the percentage of actual business use.    See sec. 1.280F-

2T(i), Temporary Income Tax Regs., 49 Fed. Reg. 42707 (Oct. 24,

1984).
                                - 24 -

       Additionally, section 274(d) requires, in the case of

claimed deductions for business use of passenger automobiles,

that taxpayers substantiate the amount of business use.       In order

to substantiate a deduction attributable to listed property, a

taxpayer must maintain adequate records to show the amount of the

expense, the time and place of use, and the business purpose for

the use.    See, e.g., Whalley v. Commissioner, T.C. Memo. 1996-

533.    To substantiate a deduction by means of adequate records, a

taxpayer must maintain an account book, a log, a statement of

expense, or trip sheets to establish the element of use.       See

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

46017 (Nov. 6, 1985).

       Petitioner did not produce any records concerning personal

versus business use of the vehicles.     Respondent allowed

petitioner 50 percent of the claimed depreciation on the basis of

oral testimony during the audit examination and the nature of and

facts surrounding petitioner’s business.     At trial, petitioner

presented no evidence other than uncorroborated and undocumented

oral testimony.     Accordingly, respondent’s determination on this

issue is sustained.

       5.   Olympic’s Expenses Paid by Petitioner

       Petitioner claimed several deductions in its 1992 tax year

for expenses that were paid on behalf of Olympic.     These

deductions included $10,931 for legal expenses, $6,128 for
                              - 25 -

machine parts, $13,233 for fuel costs, and $11,412 for traveling

expenses.   Petitioner claimed that the amounts paid on behalf of

Olympic were petitioner’s ordinary and necessary business

deductions.

     Whether a corporation may deduct the expenses it pays for

the benefit of another corporation turns in large part upon the

relationship of the corporations.    In Oxford Dev. Corp. v.

Commissioner, T.C. Memo. 1964-182, the Court held that a

corporation paying the expenses of another could not deduct those

expenses because they were the expenses of another corporation

and not its own.   However, in Coulter Elecs., Inc. v.

Commissioner, T.C. Memo. 1990-186, affd. 943 F.2d 1318 (11th Cir.

1991), the Court allowed a parent to deduct the expenses of a

subsidiary corporation.   In Austin Co. v. Commissioner, 71 T.C.

955, 967 (1979), the Court stated:     “Expenses incurred for the

benefit of another taxpayer are clearly not deductible under

section 162, * * * but if the taxpayer pays the expense of

another for its own proximate and direct benefit, a deduction may

be allowable.”

     Petitioner claims that amounts paid on behalf of Olympic

were ordinary and necessary business deductions.     Respondent

argues that petitioner had no equity ownership in Olympic, and

the only relationship between petitioner and Olympic was that

stock in both companies was owned by Bone and Guerrero.
                                - 26 -

     It appears that petitioner paid these expenses on behalf of

Olympic in order to protect Bone and Guerrero’s investment in

Olympic.   They were Olympic’s sole shareholders, and any benefit

from the payments would have inured to them, not to petitioner.

Bone testified that he made regular trips to Washington State to

motivate Olympic employees and “get things rolling”.     Bone stated

that he had a substantial personal investment in Olympic and that

the trips he took to Washington State helped him to protect his

investment.   Petitioner did not have an equity interest in

Olympic, and the evidence does not establish that petitioner paid

the expenses of Olympic to protect petitioner’s business

interests.    Accordingly, respondent’s determination regarding

this adjustment is sustained.

     6.    Insurance Expenses

     Respondent determined that petitioner did not fully

substantiate its insurance expenses.     At trial, petitioner did

not address this issue in any detail.     While Bone testified that

petitioner was required by banking institutions to maintain

insurance on the lives of the shareholders, no corroborating

documentary or other evidence was offered on this point.     Under

these circumstances, petitioner has not shown that the insurance

deduction was an ordinary and necessary business expense of

petitioner.    Accordingly, respondent’s determination on this

issue is sustained.
                               - 27 -

     7.   Repair Expenses

     Respondent determined that petitioner made an adjusting

entry in 1992 of $1,543 for repair costs for which no support was

provided.   Consequently, respondent disallowed this amount.

Petitioner did not attempt to substantiate this amount and

presented no evidence at trial.   Accordingly, petitioner is not

entitled to the $1,543 repair expenses disallowed by respondent.

Investment Tax Credit

     Findings of Fact

     During the period between 1984 and 1992, petitioner

purchased numerous pieces of equipment on which it claimed the

investment tax credit (ITC).   During the period between 1984 and

1992, petitioner recaptured the ITC from the disposition of an

automobile that was sold on September 30, 1985. Petitioner’s tax

returns for the 1984 through 1992 tax years, however, reflect the

disposition of various pieces of equipment.

     Discussion

     A taxpayer who claims an ITC must maintain various records

establishing certain important facts pertaining to each item of

section 38 property for which an ITC has been claimed.   Chief

among these records are those required to keep track of specific

details identifying ITC assets and their acquisition and

disposal.   These records are required not only to verify the

amount of the credit taken but also to determine whether any ITC
                              - 28 -

property is disposed of prematurely, thereby triggering the

recapture provisions.   Section 1.47-1(e)(1)(i), Income Tax Regs.,

requires that a taxpayer’s records show:   (1) The date on which

the section 38 property is disposed of or otherwise ceases to be

section 38 property; (2) the estimated useful life of the section

38 property as determined by reference to section 1.46-3(e),

Income Tax Regs.; (3) the month and taxable year that the section

38 property was placed in service; and (4) the basis of the

section 38 property.

     A taxpayer who fails to keep these records required for

identification of ITC property becomes subject to a series of

special rules.   Under these special rules, a taxpayer is treated

as having disposed of, in the taxable year, any ITC property

which he is unable to establish was still on hand at the end of

that taxable year.   If that deemed disposition occurs within the

recapture period of the estimated useful life of the property,

recapture results.   If the taxpayer fails to establish when the

ITC property being retired during the taxable year was actually

placed in service, the taxpayer is treated as having placed it in

service in the most recent prior year in which similar property

was so placed in service.   This result shall govern unless and

until the taxpayer can prove that the property placed in service

in that most recent year is currently on hand.   In that event,

the taxpayer will be treated as having placed the retired
                               - 29 -

property in service in the next most recent year.    See sec. 1.47-

1(e)(1)(ii) and (iii), Income Tax Regs.

     The regulations under section 47 raise rebuttable

presumptions that the facts are adverse to the taxpayer who fails

to maintain the required records.    These presumptions arise not

only when the taxpayer fails to maintain records at all but where

the records fail to establish the requisite facts.

     Petitioner reported an ITC carryover of $64,291 for the 1992

taxable year.    The ITC carryover was generated in the 1984-86

taxable years.    Petitioner had substantial asset dispositions

between 1984 and 1992 but, with the exception of one automobile

sale in 1985, reported no ITC recapture.    During respondent’s

examination, petitioner did not present adequate records or

schedules to support each of the assets sold and the basis of the

assets remaining which relate to the unused ITC.    Because

petitioner did not present adequate records or schedules to

support the ITC carryover, respondent determined that no ITC was

available for carryover to 1992 or later years.

     In support of its ITC claim, petitioner produced copies of

its 1984 through 1991 tax returns and a collection of schedules,

photographs, and invoices.    Petitioner, however, made no attempt

to explain the schedules and invoices except to ask one of its

witnesses if “a lot of work” went into their preparation.

Respondent’s agent testified that an audit of an ITC issue
                              - 30 -

involves reviewing invoices to document the acquisition of assets

and the sale documents which relate to the assets acquired.    The

agent further testified that he was unable to reconcile the

assets listed on the schedule with the assets listed on the

returns.   Likewise, we have examined the schedules but are unable

to ascertain which assets have been sold.   Petitioner’s records

are inadequate for purposes of the ITC, and accordingly we

sustain respondent’s determination that petitioner is not

entitled to a $64,291 ITC carryover from its 1991 to its 1992

taxable year.

Jobs Credit

     Findings of Fact

     Petitioner claimed a jobs credit carryover in 1992 of

$25,500.   Respondent determined that the jobs credit carryover

from 1991 to 1992 was $25,304 rather than $25,500.

     Discussion

     Petitioner claimed a jobs credit carryover in 1992 of

$25,500.   Respondent determined that jobs credits were previously

used in the 1989, 1990, and 1991 taxable years, leaving only

$25,304 available for 1992.   Accordingly, respondent disallowed

$196 of the jobs credit carryover claimed by petitioner in 1992.

On brief, petitioner conceded this issue.   Thus, respondent’s

determination on this issue is sustained.
                                - 31 -

Accuracy-Related Penalty

     Respondent determined that petitioner is liable for an

accuracy-related penalty for its 1992 and 1994 taxable years

under section 6662(a).     That section imposes a penalty in the

amount of 20 percent of any portion of the underpayment

attributable to negligence or disregard of rules or regulations.

Negligence is the lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.   See Neely v. Commissioner, 85 T.C. 934, 947

(1985).   The negligence penalty will apply if, among other

things, the taxpayer fails to maintain adequate books and records

with regard to the items in question.     See Crocker v.

Commissioner, 92 T.C. 899, 917 (1989).

     Respondent determined that petitioner was liable for the

penalty on the entire underpayment in each of the years under

consideration.   Petitioner failed to address the accuracy-related

penalty in its brief and presented no evidence at trial as to why

its actions were reasonable.     Accordingly, petitioner has failed

to show that its actions were reasonable and not careless, and

not made with intentional disregard of rules or regulations, and
                             - 32 -

is liable for the section 6662(a) penalty for the 1992 and 1994

tax years.

     To reflect the foregoing and to account for concessions of

the parties,

                                   Decision will be entered

                              under Rule 155.
