                          T.C. Memo. 1998-105



                        UNITED STATES TAX COURT



                   VALERIE JEAN GENCK, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 22967-96.                    Filed March 16, 1998.



        Valerie Jean Genck, pro se.

        Reginald R. Corlew, for respondent.



                          MEMORANDUM OPINION


        DINAN, Special Trial Judge:   This case was heard pursuant

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

182.1

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

     Respondent determined a deficiency in petitioner's Federal

income tax for 1992 in the amount of $5,127, an addition to tax

pursuant to section 6651(a)(1) in the amount of $1,313, and an

accuracy-related penalty pursuant to section 6662(a) in the

amount of $1,025.

     The issues for decision are:   (1) Whether petitioner is

entitled to Schedule C business expense deductions; (2) whether

petitioner is liable for the section 6651(a)(1) addition to tax;

and (3) whether petitioner is liable for the section 6662(a)

accuracy-related penalty.2

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   Petitioner resided in

Hollywood, Florida, on the date the petition was filed in this

case.

     Petitioner works as a self-employed musician and band

manager.   She and her husband, Matthew Genck, are members and

managers of a jazz band named "Paris" (the band).   Petitioner

spends an average of 12 hours per week performing as the band's

lead singer.   Matthew plays the bass guitar.   Although petitioner

and Matthew are primarily responsible for managing the band, they

generally split the band's profits and expenses three ways with

     2
          Respondent's adjustments to petitioner's liability for
self-employment taxes and deduction for one-half of such
liability are computational and will be resolved by the Court's
holdings on the issues in this case.
                               - 3 -

petitioner's brother-in-law, John Genck, who is the band's

drummer, composer, and technical expert.   The band also has a

full-time keyboard player, Jim Gazier, and various part-time

accompanying musicians who do not share in the band's profits.

The band performs at weddings and nightclubs at various locations

in the tricounty area of Dade County, Broward County, and Palm

Beach County, Florida.

     Petitioner and Matthew reside in an apartment located above

a marketplace at 2424 Hollywood Boulevard in Hollywood, Florida.

The apartment is divided, in roughly equal areas, into living

quarters and an office.   The two areas are connected by a single

door.   The living quarters consist of two bedrooms, a living

room, a kitchen, and a bathroom.   The office consists of a large

studio and a smaller room located adjacent thereto.   The studio

contains recording equipment and computers.   It also contains

filing cabinets in which the band's contracts, sheet music, and

supplies are stored.   The smaller room contains a desk, a

telephone, a couch, and a kitchenette.   Unlike the band's other

expenses, since the office is part of petitioner and Matthew's

apartment, they each paid and claimed deductions for 50 percent

of the band's office-related expenses for 1992.

     Petitioner spends an average of 30 hours per week managing

the band out of the office.   She promotes the band through the

distribution of advertising flyers which are designed on the

office computers.   She books the band's performances and
                                 - 4 -

negotiates contracts with its clients.   She maintains files of

the band's lyrics, music books, and audio and video demos.     She

is responsible for hiring accompanying musicians, coordinating

their stage apparel, and issuing their paychecks.   All of the

above-mentioned management activities are conducted in the

office.

     The first issue for decision is whether petitioner is

entitled to Schedule C business expense deductions.   Petitioner

filed her 1992 return under married filing separately filing

status.   On a Schedule C attached to her return, petitioner

reported gross receipts in the amount of $21,542.50 and claimed

the following deductions:

           Bad debt                            $183.33
           Car and truck expenses             3,627.20
           Depletion                          2,100.00
           Insurance                            210.00
           Interest                           1,880.00
           Professional services                645.00
           Office expenses                      629.00
           Rental of business property        2,169.33
           Supplies                           1,143.00
           Travel                                33.33
           Meals and entertainment            1,050.40
           Utilities                          1,289.00
           Stage clothes                      2,777.00
           Stage makeup                         930.00
           Miscellaneous                        890.00
           Dry cleaning                         106.00
           Donations                            940.00

     In the statutory notice of deficiency, respondent disallowed

all of the claimed deductions.

     Respondent's determinations in the statutory notice of

deficiency are presumed to be correct, and petitioner bears the
                               - 5 -

burden of proving otherwise.   Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).   Moreover, deductions are strictly a

matter of legislative grace, and petitioner bears the burden of

proving her entitlement to any deductions claimed.   Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

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

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Although we will address each

of petitioner's claimed business expense deductions separately,

infra, we generally find that petitioner's testimony was entirely

credible and do not hesitate to rely on it.    Petitioner appeared

at trial in possession of well-organized written documentation of

all of the claimed expenses.   In our view, respondent's counsel

accepted her testimony as adequate substantiation in light of his

repeated failure to ask her to corroborate her testimony with

documentary evidence.   Moreover, the statutory notice of

deficiency does not reveal respondent's basis for the blanket

disallowance of the claimed deductions.   Significantly,

respondent's counsel was unable to state, at trial, whether or

not substantiation of the amounts claimed was an issue in the

case.   We, therefore, only address the question of whether she is

entitled to deductions for the amounts paid.
                               - 6 -

Home Office Expenses - Rent and Utilities

     Petitioner claimed deductions for rent and utilities paid

with respect to her home office in the amounts of $1,200 and

$1,289, respectively.

     Section 280A(a) provides that in the case of a taxpayer who

is an individual, no deduction otherwise allowable under

chapter 1 of the Code (relating to normal taxes and surtaxes)

shall be allowed with respect to the use of a dwelling unit which

is used by the taxpayer during the taxable year as a residence.

     The term "dwelling unit" includes a house, apartment,

condominium, or similar property, and all structures or other

property appurtenant to such dwelling unit.   Sec. 280A(f)(1)(A).

     Section 280A(c) provides for exceptions to section 280A(a).

In pertinent part, section 280A(c)(1)(A) states that section

280A(a) shall not apply to any item to the extent that such item

is allocable to a portion of the dwelling unit which is

exclusively used on a regular basis as the principal place of

business for any trade or business of the taxpayer.   We are

convinced from the record that 50 percent of petitioner's

apartment was exclusively used on a regular business for her band

management activities.   We must also, however, address the

question of whether the home office constitutes her principal

place of business.

     The Supreme Court in Commissioner v. Soliman, 506 U.S. 168

(1993), postulated two primary considerations to decide whether
                               - 7 -

an office located within a taxpayer's dwelling unit is a

taxpayer's principal place of business:    (1) The relative

importance of the activities performed at each business location,

and (2) the time spent at each place.     Id. at 175.

     We find that the importance of, and the time spent on, the

activities performed at the office are sufficient to support its

treatment as petitioner's principal place of business as manager

of the band.   In addition to the various managerial and

administrative activities conducted at the office, the band

recorded and edited its promotional video and audio tapes in the

studio.   The office computers and other equipment were also used

to both create and mix portions of the band's songs.    We are

further persuaded by the fact that petitioner spent an average of

30 hours per week working in the home office.

     Petitioner's role as the band's manager and the importance

and extent of her time spent on activities performed in the

office convinces us that her home office constitutes her primary

place of business as the band manager.    Accordingly, we hold that

petitioner is entitled to the deductions claimed by her as her

share of the rent and utilities attributable to her home office.

Car and Truck Expenses

     Petitioner claimed a deduction in the amount of $3,627.20

for expenses paid for transporting the band's equipment and

members from the home office to their various performance

locations.   Since we have found, supra, that petitioner's home
                               - 8 -

office is properly treated as her primary place of business as

the band manager, it follows that the claimed transportation

expenses are not commuting expenses and may therefore be

deductible under section 162(a) as travel expenses between places

of business.   Curphey v. Commissioner, 73 T.C. 766, 777-778

(1980); Kahaku v. Commissioner, T.C. Memo. 1990-34.

Insurance

     Petitioner claimed a deduction for insurance paid in the

amount of $210.   She testified that the claimed expense

represents the amount paid by her for car insurance.   However,

petitioner failed to address whether such amount was allocated

according to her business and personal use of the car.     We

therefore hold that petitioner is not entitled to the claimed

insurance deduction of $210.

Meals and Entertainment

     Petitioner claimed a deduction for meals and entertainment

in the amount of $1,050.40 after accounting for certain

limitations.   The amount claimed consists of the per diem

allowance for meals paid for by petitioner while she was

performing at various locations.   Based upon our review of the

record, we hold that such meal expenses are not deductible

because the amount claimed was for personal living expenses.

Sec. 262.
                                - 9 -

Bad Debt

     Petitioner claimed a deduction for a bad debt in the amount

of $183.33 on her return as her share of an uncollected fee for

one of the band's performances.    In August of 1992, the band

entered into a contract with the Spectrum Club to perform two

nights for $1,100.   The band contracted with side men

(independent musicians) to perform with the group and guaranteed

the side men's wages.    Spectrum paid the band for one night's

performance; it did not pay the band for the second night.      The

band, however, paid the side men their wages for the second

night's performance.    Based upon the facts presented, we find

that petitioner may not deduct the $183.33 claimed as a bad debt.

We do, however, hold that she is entitled to claim the $183.33 as

an ordinary and necessary business expense.    Sec. 162(a).

Depreciation

     Petitioner claimed a deduction in the amount of $2,100 as

depletion.   At trial, the parties agreed that the claimed

deduction was intended to be for depreciation of equipment

purchased during 1992.    Petitioner submitted a number of checks

in support of the claimed deduction.    She contends that she

properly deducted the entire cost of the equipment pursuant to

section 179.

     Section 179 allows a taxpayer to elect to treat the cost of

section 179 property as a current expense in the year such

property is placed in service within certain dollar limitations.
                               - 10 -

Sec. 179(a).    An election under section 179 must be made on the

taxpayer's original return for the taxable year or a timely filed

amended return.    Sec. 179(c)(1)(B); sec. 1.179-4(a), Income Tax

Regs.    The election must specify the items of section 179

property to which the election applies and the cost of each of

the items.    Sec. 179(c)(1)(A); sec. 1.179-4(a)(1) and (2), Income

Tax Regs.    Petitioner did not make the requisite election on her

1992 return because she failed to specify the items for which the

section 179 deduction was claimed.3     Therefore, we hold that she

is not entitled to a section 179 deduction for 1992.

     After reviewing the checks submitted by petitioner, we are

satisfied that the amounts were paid for musical equipment,

consisting of covers and cases, that may be depreciated.

However, petitioner failed to provide an explanation for the

difference between the amount listed on her return ($2,100) and

the amount substantiated by the checks ($1,275).

     We hold that petitioner is entitled to depreciate musical

equipment placed into service in 1992 in the total amount of

$425, which represents her one-third share of the total amount

shown on the checks.    We instruct the parties to determine the

proper amount of petitioner's 1992 depreciation deduction in the




     3
          Petitioner failed to attach to her return a Form 4562
on which the specific items to be deducted under sec. 179 must be
listed.
                              - 11 -

Rule 155 computation in accordance with the appropriate section

168(e) classification.

Interest

     Petitioner claimed a deduction for interest paid in the

amount of $1,880.   The interest claimed consists of:   (1) One-

half of the interest paid during 1992 on petitioner's credit card

debt, and (2) interest paid during 1992 on a loan obtained by

petitioner to pay for studio recording time.

     Section 163(a) provides that there shall be allowed as a

deduction all interest paid or accrued within the taxable year on

indebtedness.   However, section 163(h)(1) generally disallows any

deduction for personal interest paid or accrued during the

taxable year.   Although petitioner testified that she used her

credit cards for both business and personal expenses, we accept

her estimate that 50 percent of her credit card interest was paid

on debt incurred for business purposes, based upon her credible

testimony.   Since the interest paid on the debt incurred to pay

for studio recording time is directly related to petitioner's

business, we hold that she is entitled to her claimed deduction

for interest expense.

Rental of Recording Studio

     Petitioner claimed a deduction for rental of business

property in the amount of $2,169.33.   The amount claimed includes

$1,200 paid as rent for the home office, discussed supra, and
                                - 12 -

$878 paid as rent for studio recording time.      Petitioner did not

explain what the remaining amount of $91.33 was claimed for.

Therefore, we hold that petitioner, in addition to the $1,200 of

rent for the home office, is only entitled to a deduction in the

amount of $878 for studio recording time as an ordinary and

necessary business expense.    Sec. 162(a).

Professional Services

     Petitioner claimed a deduction for professional services in

the amount of $645.     The amount claimed represents payments to an

engineer for mastering the final tracks of the band's audio and

video tapes.   We hold that this expense is deductible as an

ordinary and necessary business expense.      Sec. 162(a).

Office Expenses

     Petitioner claimed a deduction for office expenses in the

amount of $629.   The amount claimed consists of payments for

stamps, paper goods, typewriter ribbons, and computer disks.     We

hold that these expenses are deductible as ordinary and necessary

business expenses.    Sec. 162(a).

Supplies

     Petitioner claimed a deduction for supplies in the amount of

$1,143.    The amount claimed consists of payments for promotional

glossy photographs, and cassettes and compact disks containing

songs requested by customers but not previously included in the

band's repertoire.    We hold that these expenses are deductible as

ordinary and necessary business expenses.      Sec. 162(a).
                              - 13 -

Travel

     Petitioner conceded at trial that she could not explain the

claimed deduction for travel in the amount of $33.33.

Accordingly, we hold that she is not entitled to a deduction for

that amount.

Stage Clothes

     Petitioner claimed a deduction for stage clothes in the

amount of $2,777.   The amount claimed consists of clothes

purchased by petitioner and worn during her performances.    We had

the opportunity at trial to view examples of the type of clothing

worn by petitioner in her performances and agree with her that

such clothes are not suitable for ordinary use.   We hold that the

amount she paid for stage clothes is deductible as an ordinary

and necessary business expense.   Sec. 162(a); Teschner v.

Commissioner, T.C. Memo. 1997-498.

Stage Makeup

     Petitioner claimed a deduction for stage makeup in the

amount of $930.   We hold that the amount claimed is deductible as

an ordinary and necessary business expense.   Sec. 162(a).

Dry Cleaning, Donations, and Miscellaneous Expenses

     Petitioner claimed deductions for dry cleaning, donations,

and miscellaneous expenses in the amounts of $106, $940, and

$890, respectively.   Petitioner failed to explain the nature of

these expenses or how they specifically relate to her music
                                - 14 -

business.    We hold that the amounts claimed are not deductible as

ordinary and necessary business expenses.

     The second issue for decision is whether petitioner is

liable for the section 6651(a)(1) addition to tax for 1992.

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

timely file a return, unless the taxpayer establishes that such

failure is due to reasonable cause and not due to willful

neglect.    "Reasonable cause" requires the taxpayer to demonstrate

that she exercised ordinary business care and prudence and was

nonetheless unable to file a return within the prescribed time.

United States v. Boyle, 469 U.S. 241, 245-246 (1985).    "Willful

neglect" means a conscious, intentional failure or reckless

indifference.    Id. at 246.   The addition to tax equals 5 percent

of the tax required to be shown on the return if the failure to

file is for not more than 1 month, with an additional 5 percent

for each additional month or fraction of a month during which the

failure to file continues, not to exceed a maximum of 25 percent.

Sec. 6651(a)(1).

     Petitioner's 1992 return was due on April 15, 1993.    Sec.

6072(a).    She applied for and received an automatic, 4-month

extension of time to file, until August 16, 1993.4    Sec. 6081;

sec. 1.6081-4, Income Tax Regs.    Petitioner's return was not

received by respondent until November 9, 1994.


     4
          Since Aug. 15, 1993, fell on a Sunday, petitioner was
allowed an extra day to file the return. Sec. 7503.
                               - 15 -

     Petitioner did not dispute in her petition or address at

trial respondent's determination that she is liable for the

section 6651(a)(1) addition to tax.     We therefore find that she

has failed to prove that her failure to timely file her return

was not due to willful neglect or that such failure was due to

reasonable cause.   Accordingly, we hold that petitioner is liable

for the section 6651(a)(1) addition to tax for 1992.

     The third issue for decision is whether petitioner is liable

for the section 6662(a) accuracy-related penalty for 1992.

Respondent's determination of negligence is presumed to be

correct, and petitioner bears the burden of proving that the

penalty does not apply.   Rule 142(a); Welch v. Helvering, 290

U.S. at 115; Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

one of which is negligence or disregard of rules or regulations.

Sec. 6662(b)(1).    Respondent determined that petitioner is liable

for the accuracy-related penalty imposed by section 6662(a) for

her underpayment of tax in 1992, and that such underpayment was

due to negligence or disregard of rules or regulations.

"Negligence" includes a failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue laws or to

exercise ordinary and reasonable care in the preparation of a tax

return.   Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

"Disregard" includes any careless, reckless, or intentional
                                  - 16 -

disregard of rules or regulations.         Sec. 6662(c); sec.

1.6662-3(b)(2), Income Tax Regs.

     Section 6664(c)(1), however, provides that the penalty under

section 6662(a) shall not apply to any portion of an

underpayment, if it is shown that there was reasonable cause for

the taxpayer's position with respect to that portion and that the

taxpayer acted in good faith with respect to that portion.        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 the pertinent facts and circumstances.         Sec.

1.6664-4(b)(1), Income Tax Regs.      The most important factor is

the extent of the taxpayer's effort to assess her proper tax

liability for the year.     Id.

     After reviewing the record and considering our holdings on

the claimed deductions, we find that petitioner has proved that

she acted in good faith with respect to her underpayment of tax.

The record shows that she made a reasonable effort to assess her

proper tax liability.     Accordingly, we hold that petitioner is

not liable for the section 6662(a) accuracy-related penalty for

1992.

     To reflect the foregoing,



                                               Decision will be entered

                                       under Rule 155.
