                     T.C. Summary Opinion 2003-98



                       UNITED STATES TAX COURT



         DAVID M. FUGITT AND AUDREY J. FUGITT, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14116-01S.              Filed July 23, 2003.


     David M. Fugitt and Audrey J. Fugitt, pro sese.

     Monica J. Miller, for respondent.


     ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1    The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1999,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax for 1999 in the amount of $8,180, as well as an

accuracy-related penalty under section 6662(a) in the amount of

$1,636.2

     The issues for decision are:

     (1) Whether petitioners failed to report self-employment

income in the amount of $19,125.    We hold that they did.

     (2) Whether petitioners are liable for the accuracy-related

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

     Adjustments relating to petitioners’ earned income credit

and self-employment tax are purely mechanical matters, the

resolution of which is dependent on our disposition of the first

disputed issue.

Background

     Some of the facts have been stipulated, and they are so

found.     Petitioners resided in New Smyrna Beach, Florida, at the

time that their petition was filed with the Court.

     Petitioners are a married couple.    Petitioners have two sons

who were schoolage and living at home throughout the taxable year

in issue.

     Prior to 1999, petitioner David M. Fugitt (Mr. Fugitt) had

primarily worked selling used automobiles.    During 1999, Mr.

Fugitt worked as a recreational vehicle salesman for Southeast RV


     2
         All amounts have been rounded.
                                 - 3 -

Liquidators (Southeast).    Southeast is a recreational vehicle

broker owned by Roger Ruess (Mr. Ruess).    Petitioner worked for

Southeast throughout Florida for 106 days during 1999.

     For a portion of 1999, Southeast conducted temporary offsite

recreational vehicle sales shows (RV shows) on behalf of Revels

Nationwide RV (Revels).3    Southeast would set up the RV shows and

sell recreational vehicles on behalf of Revels.    The RV shows

typically lasted between 3 to 5 days.    Revels did not participate

in the sales at the RV shows.4    At the end of each RV show, Mr.

Ruess delivered all sales contracts to Revels.

     Southeast’s salesmen sold recreational vehicles to customers

at the RV shows.    At the time of each sale, the salesman prepared

a worksheet.   James Osburn (Mr. Osburn), a subcontractor who

worked for Mr. Ruess, generally prepared the sales contract from

the salesman’s worksheet.    Either Mr. Ruess or Mr. Osburn

approved each sale negotiated by a salesman.

     Mr. Osburn maintained a computer database of the sales made

by each salesman.   The information from each sales contract was

contemporaneously recorded in the computer database for the

appropriate salesman at the time of each sale.


     3
        In 1999, Revels sold recreational vehicles at its sales
lot located in Jacksonville, Florida, and at RV shows held
throughout Florida by Southeast.
     4
        In situations where customers offered less than the cost
of the recreational vehicle, Revels was contacted to approve the
sale.
                               - 4 -

     Southeast was generally paid a 30-percent sales commission

by Revels on each sale made at an RV show.   The sales commission

was paid on the gross profit from each sale.5

     Salesmen were generally paid a sales commission of 20-

percent of the gross profit on each of their sales, or two-thirds

of the commission paid by Revels to Southeast.   However, if a

sale resulted in a loss; i.e., the cost of the recreational

vehicle was greater than the sales price, the salesman was paid a

“flat fee” sales commission.   Prior to each RV show, Revels

provided Southeast with the cost of each recreational vehicle.

Southeast, in turn, provided each salesman with the cost of each

recreational vehicle.   Based on the information provided by

Revels and the sales contract, Mr. Osburn determined the amount

of sales commission earned by a salesman on each recreational

vehicle sold.   Sales commissions were paid by Southeast to the

salesmen in cash after Southeast delivered the sales contracts to

Revels and received its 30 percent commission.

     In addition to the sales commissions, Southeast paid each

salesman a $25 per diem payment for each day a salesman was at an

RV show.   The salesman was provided the per diem payment up front

in cash, on either a daily basis or for the entire duration of an

RV show.   The salesman was not required to account for his



     5
        The gross profit was generally the selling price of the
recreational vehicle less its cost.
                                 - 5 -

expenses, nor did any salesman do so.      In addition, Southeast

directly paid the motel expenses for each salesman.

     Southeast issued to Mr. Fugitt a Form 1099 for the taxable

year 1999 in the amount of $19,125.      The amount reported on the

Form 1099 consisted of total sales commissions and per diem

payments of $16,475 and $2,650, respectively.

     Petitioners timely filed a Form 1040, U.S. Individual Income

Tax Return, for 1999.   Petitioners attached to their return two

Schedules C-EZ, Net Profit From Business, relating to the sale of

used car and used merchandise.    On the Schedules C-EZ,

petitioners reported gross receipts totaling $7,854.      Petitioners

did not report on their return any of the amount reported on the

Form 1099 issued by Southeast.

     In the notice of deficiency, respondent determined that

petitioners failed to report self-employment income of $19,125

for the taxable year 1999.   Respondent also determined that

petitioners were liable for an accuracy-related penalty due to

substantial understatement of tax under section 6662(a)(1) and

(d)(1).

     At trial, Mr. Fugitt testified that he regarded his

arrangement with Southeast as akin to going to school to learn

how to sell recreational vehicles.       Although he conceded that he

was paid sales commissions, he estimated the amount to be “about

$900”.    Mr. Fugitt also conceded that he received total per diem
                                 - 6 -

payments from Southeast during 1999 of “more than $1,000.      He

admitted that he did not keep any records as to the amounts paid

to him by Southeast during 1999.

Discussion

     In general, the determinations of the Commissioner in a

notice of deficiency are presumed correct, and the burden is on

the taxpayer to show that the determinations are incorrect.      Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).6

     A.    Unreported Income

     Gross income includes all income from whatever source

derived.    Sec. 61(a).   Section 61(a)(1) specifically includes

income derived from compensation for services, including fees,

commissions, fringe benefits, and similar items.     A taxpayer is

required to maintain records sufficient to establish all items of

income required to be shown on the taxpayer’s tax return.      See

sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

     Per diem payments may be excluded from gross income if the

requirements of section 1.162-17(b)(1), Income Tax Regs., are

satisfied.    See Baugh v. Commissioner, T.C. Memo. 1996-70.

Section 1.162-17(b)(1), Income Tax Regs., provides:



     6
        Because petitioners failed to introduce any credible
evidence, they failed to meet the requirements of sec. 7491(a),
as amended, so as to place the burden of proof on respondent with
respect to any factual issue relevant to ascertaining liability
for the tax deficiency in issue. Accordingly, petitioners bear
the burden of proof.
                               - 7 -

     The employee need not report on his tax return (either
     itemized or in total amount) expenses for travel,
     transportation, entertainment, and similar purposes
     paid or incurred by him solely for the benefit of his
     employer for which he is required to account and does
     account to his employer and * * * for which the
     employee is paid through advances, reimbursements, or
     otherwise, provided the total amount of such advances,
     reimbursements, and charges is equal to such expenses
     * * *.

     At trial, respondent called Mr. Ruess and Mr. Osburn as

witnesses to corroborate the amount reported on the Form 1099

issued by Southeast to Mr. Fugitt for 1999.    In addition to the

testimony of these witnesses, records prepared and maintained by

Southeast were introduced that detailed the sales made by Mr.

Fugitt while employed by Southeast.    Mr. Osburn maintained a

contemporaneous record for Southeast at the time of each sale for

purposes of determining Mr. Fugitt’s sales commissions.    A

summary of Mr. Fugitt’s sales commissions and per diem payments

for 1999 was prepared by Mr. Osburn, which further supported the

Form 1099 issued by Southeast.7

     Mr. Fugitt did not keep, and thus did not produce, any

records to prove his claims.   He does not contend that he

provided Southeast with receipts to account for his actual

expenses incurred while at the RV shows.    Mr. Fugitt has failed

to present any credible evidence that the amount reported on the

Form 1099 did not properly reflect income he earned while working


     7
        This evidence would satisfy any burden of production that
respondent may have had under sec. 6201(d).
                                - 8 -

for Southeast.    Mr. Fugitt only offered his unsupported and

uncorroborated testimony.    We are not required to, and do not,

accept Mr. Fugitt’s self-serving testimony.    See Tokarski v.

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

     The testimony and records of Mr. Ruess and Mr. Osburn

corroborate the Form 1099 issued by Southeast that Mr. Fugitt was

paid total sales commissions and per diem payments in 1999 of

$19,125.   Under section 61(a), the sales commissions portion of

Mr. Fugitt’s income must be included in petitioners’ gross

income.    Since Mr. Fugitt did not meet the requirements of

section 1.162-17(b)(1), Income Tax Regs., the per diem portion

must also be included in petitioners’ gross income.    Thus, the

Form 1099 issued to Mr. Fugitt reporting income of $19,125

correctly reflected income he earned as a salesman for Southeast

during 1999.    Accordingly, we sustain respondent’s determination

and hold that petitioners failed to report self-employment income

in the amount of $19,125.8


     8
        Petitioners are allowed a deduction of 50 percent of the
meals expenses incurred by Mr. Fugitt while traveling away from
home during 1999. See secs. 162(a)(2), 274(n). Mr. Fugitt, as a
self-employed individual, may deduct an amount for meals expenses
computed at the Federal Meals and Incidental Expenses (M&IE) rate
for 1999 as an alternative to deducting the actual cost of meals
incurred while traveling away from home. See sec. 1.274-5T(j),
Temporary Income Tax Regs., 50 Fed. Reg. 46032 (Nov. 6, 1985);
Rev. Proc. 98-64, 1998-2 C.B. 825. Given that the applicable
Federal M&IE rate for 1999 is $30 per day, we hold that
petitioners’ deduction for Mr. Fugitt’s meals expenses is limited
to 50 percent of $3,180 ($30 per day x 106 days), or $1,590. See
41 C.F.R. sec. 301, Appendix A (1998).
                                 - 9 -

     B.   Section 6662(a)9

     The last issue for decision is whether petitioners are

liable for an accuracy-related penalty pursuant to section

6662(a) for the year in issue.    As relevant herein, section

6662(a) imposes a penalty equal to 20-percent of any underpayment

of tax that is due to a substantial understatement of income.

See sec. 6662(a) and (b)(2).    An individual substantially

understates his or her income tax when the reported tax is

understated by the greater of 10-percent of the tax required to

be shown on the return or $5,000.    Sec. 6662(d)(1)(A).     Tax is

not understated to the extent that the treatment of the item

related thereto is based on substantial authority or is

adequately disclosed in the return or in a statement attached to

the return and there is a reasonable basis for the tax treatment

of such item by the taxpayer.    Sec. 6662(d)(2)(B).     In addition,

no penalty shall be imposed if it is shown that there was

reasonable cause for the underpayment and the taxpayer acted in

good faith with respect to the underpayment.       Sec. 6664(c)(1).

     Petitioners make no argument with regard to substantial

authority or adequate disclosure, and we think that no such

argument can be persuasively made.       Based on the record before



     9
        Respondent has satisfied his burden of production under
sec. 7491(c) with respect to the accuracy-related penalty under
sec. 6662(a) and (b)(1). Sec. 7491(c); Rule 142(a); Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001).
                              - 10 -

us, we also conclude that petitioners had no reasonable cause for

excluding from gross income the income earned by Mr. Fugitt from

Southeast.   Accordingly, we sustain respondent’s determination

that petitioners are liable for the accuracy-related penalty

under section 6662(a) based on the understatement of income tax

for 1999.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
