                        T.C. Memo. 1998-115



                      UNITED STATES TAX COURT



        EDWARD E. AND CONSTANCE M. THORPE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


          EDWARD E. THORPE AND COMPANY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 23895-95, 23900-95.      Filed March 23, 1998.



     Cheryl Frank and Chaya Kundra, for petitioners.

     Alan R. Peregoy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes and accuracy-related penalties

in these consolidated cases as follows:
                                    - 2 -

                   Edward E. and Constance M. Thorpe
                          docket No. 23895-95

                                            Accuracy-related Penalty
          Year          Deficiency                 Sec. 6662(a)

          1990            $8,641                    $1,728
          1991             7,538                     1,508
          1992             7,198                     1,440


                        Edward E. Thorpe & Co.
                         docket No. 23900-95

                                            Accuracy-related Penalty
          FYE           Deficiency                Sec. 6662(a)

         6/30/91          $38,803                   $7,761
         6/30/92           20,862                    4,172


     After concessions,1 the issues remaining for decision are:

     1
      Petitioner Edward E. Thorpe & Co. (ETCO) concedes that it
is not entitled to: (1) Cost of goods sold/meals expenses of
$4,251 and $4,996 claimed in the fiscal years ending June 30,
1991 and 1992, respectively; (2) a deduction in the amount of
$5,744 for payments made to a pension plan claimed on its
corporate income tax return for the fiscal year ended June 30,
1992; (3) a deduction in the amount of $2,655 for premiums paid
to life insurance companies for insurance on the life of Edward
E. Thorpe claimed on its corporate income tax return for the
fiscal year ended June 30, 1990; (4) office expenses in the
amount of $1,249 claimed on its corporate income tax return for
the fiscal year ended June, 30, 1992; and (5) deductions for
"dues and publications" in the amounts of $3,078 and $2,376 for
the fiscal years ending June 30, 1990 and 1992, respectively.

     Petitioners Edward E. Thorpe and Constance M. Thorpe
concede: (1) $2,655 paid by ETCO to life insurance companies is
includable in their income as a constructive dividend in 1990,
and (2) amounts of $3,078 and $2,376 paid by ETCO for "dues and
publications" are includable in their income as a constructive
dividend in the taxable years 1990 and 1992, respectively.

     Respondent concedes: (1) ETCO is entitled to a cost of
goods sold/meals deduction in the amount of $4,526 for the fiscal
                                                   (continued...)
                              - 3 -

(1) Whether expenses incurred by Mrs. Thorpe related to travel

and entertainment at various trade shows and conventions were

properly deducted in the years at issue by Edward E. Thorpe & Co.

(ETCO) for the fiscal years June 30, 1990, 1991, and 1992; (2)

whether amounts received as rental payments in 1990, 1991, and

1992 by Mr. and Mrs. Thorpe from ETCO were excessive and should,

in part, be characterized as constructive dividends received by

Mr. and Mrs. Thorpe; (3) whether amounts remitted by ETCO by

check to an insurance company were deductible where no check was

presented for payment by the insurance company; (4) whether

premiums paid by ETCO for various life and disability insurance

policies were properly deducted as expenses during the fiscal

years June 30, 1990, 1991, and 1992; (5) whether expenses related

to the use of two leased automobiles were properly deducted in

the years at issue by ETCO; (6) whether alleged "advance"

payments from ETCO to Mr. and Mrs. Thorpe are includable in Mr.

and Mrs. Thorpe's income for the years in issue; (7) whether

amounts paid to Edward E. Thorpe, Jr., the son of Mr. and Mrs.

Thorpe, must be included in Mr. and Mrs. Thorpe's income in 1990;

     1
      (...continued)
year ended June 30, 1990, which amount was disallowed in
computing the net operating loss carryover to the fiscal year
ended June 30, 1991; (2) ETCO is entitled to deductions for
equipment rental fees paid to R.W. Nichols in the amounts of
$5,804, $4,183, and $5,744 for fiscal years ended June 30, 1990,
1991, and 1992, respectively; and (3) ETCO is entitled to
deductions for "dues and publications" in the amounts of $100 and
$125 for fiscal years ending June 30, 1990 and 1992,
respectively.
                                   - 4 -

(8) to the extent various expenses deducted by ETCO are

disallowed, must the expenses then be characterized as

constructive dividends received by Mr. and Mrs. Thorpe; and (9)

whether ETCO and Mr. and Mrs. Thorpe are liable in the years at

issue for accuracy-related penalties pursuant to section 6662.2


                             FINDINGS OF FACT


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

The stipulation of facts, second stipulation of facts, and

stipulation of settled issues are incorporated herein by this

reference.       At the time the petitions were filed, Mr. and Mrs.

Thorpe resided in Silver Spring, Maryland, and ETCO's principal

place of business was located in Kensington, Maryland.

     During the years in issue, Edward Thorpe was the chief

executive officer of ETCO.       Mr. Thorpe owned 100 percent of the

shares of ETCO.       ETCO was incorporated on May 6, 1982, and became

engaged in a specialized type of contracting, which principally

involved interior renovation of kitchens and bathrooms in public

housing.       Constance Thorpe was the chief financial officer of

ETCO.       Mrs. Thorpe was responsible for the financial aspects of

ETCO including accounts receivable, accounts payable, payroll,

and insurance.       The remaining officers of ETCO included Mr. Ron

        2
      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.
                                 - 5 -

Echols, who was responsible for field operations, and Mr. Edward

Thorpe, Jr., the son of Mr. and Mrs. Thorpe.

     Mr. and Mrs. Thorpe started ETCO as a home-based business.

ETCO procured most of its business through direct solicitation of

housing authorities in various states.    In an effort to market

ETCO's services directly to housing authorities, ETCO

participated in trade shows and conventions for which ETCO

incurred travel and entertainment expenses.    Mr. Thorpe attended

the trade shows and conventions where he would represent ETCO by

stationing himself at an exhibit booth, which displayed ETCO's

products.   Mrs. Thorpe attended a number of conferences with Mr.

Thorpe.   While at the trade shows, Mrs. Thorpe occupied the

display booth and talked to people about ETCO's product, met new

or prospective clients, learned more about the market, and

solicited new business.   In the fiscal tax years ending June 30,

1990, 1991, and 1992, ETCO incurred and deducted on its U.S.

Corporation Income Tax Returns (Forms 1120) travel and

entertainment expenses of $74,395, $81,237, and $75,749,

respectively.

     In 1988, the officers of ETCO began looking for commercial

office space from which to run its business operations.    The

officers spent approximately 1 year evaluating the local

commercial real estate market.    During that time, the officers

contacted numerous real estate agents and researched real estate

listings in local newspapers.
                               - 6 -

     On October 13, 1989, Mr. and Mrs. Thorpe executed an

agreement to purchase an office condominium in Kensington,

Maryland, for $165,000.   The closing took place on April 18,

1990, and on the same day, Mr. and Mrs. Thorpe executed a

promissory note in the amount of $132,000, which note is

guaranteed by ETCO.   The office condominium space consisted of

900 square feet, inclusive of storage space.   The monthly payment

on the note was $1,341.75.   Also, on April 18, 1990, Mr. and Mrs.

Thorpe and ETCO executed an agreement for the lease of the

Kensington office condominium from Mr. and Mrs. Thorpe to ETCO

requiring a monthly lease payment of $2,500 from ETCO to Mr. and

Mrs. Thorpe.

     ETCO reported its taxable income and kept its books using

the cash method of accounting for the fiscal years in issue.

During the years 1988 through 1990, ETCO presented pension plan

contribution checks to Union Central Life Insurance Co. through

Mr. William Sloan, its insurance agent.   When the checks were

presented to Mr. Sloan, he would compile data and send the

corresponding checks and data to the pension plan company.   In

his capacity as a broker, Mr. Sloan was able to place business

with several different companies without specific attachment to

any one company.

     In 1990, ETCO decided not to use Union Central Life

Insurance Co. as the insurance provider for its pension plan.     In

an effort to find another insurer, ETCO contacted Mr. Sloan, who
                               - 7 -

recommended that ETCO set up a replacement pension plan with

TransAmerica Insurance Co. (TransAmerica).   The officers of ETCO

completed the application for the new pension plan and made a

check in the amount of $64,000 payable to TransAmerica.    ETCO

submitted the application and the $64,000 check to TransAmerica

through Mr. Sloan.   Mr. Sloan submitted the documents and the

check for $64,000 to Mr. Tom Boone, an employee of TransAmerica.

The $64,000 was properly credited to ETCO's account with

TransAmerica.

     On March 8, 1991, ETCO made a check in the amount of $22,000

payable to TransAmerica.   The $22,000 check was also submitted to

Mr. Sloan, who then forwarded the check to TransAmerica.     The

$22,000 check never cleared ETCO's bank account, and the funds

were never credited to ETCO's account with TransAmerica.     On May

20, 1991, Mrs. Thorpe contacted Mr. Sloan to inquire as to why

the check had not cleared ETCO's bank account.   Mr. Sloan

thereafter contacted TransAmerica and was informed that

additional information was needed in order to process ETCO's

application to TransAmerica for insurance.   In September of 1991,

Mrs. Thorpe inquired further as to why the $22,000 had not been

credited to ETCO's account with TransAmerica.    Mr. Sloan informed

Mrs. Thorpe that TransAmerica was waiting on further information.

     On January 29, 1992, upon notice that the check dated March

8, 1991, in the amount of $22,000 had not been credited to ETCO's

account, ETCO made another check payable to TransAmerica in the
                               - 8 -

amount of $22,000.   ETCO presented the replacement check in the

amount of $22,000 to Mr. Sloan, who again forwarded the second

check to TransAmerica.   The replacement check also did not clear

ETCO's bank account and was not credited to ETCO's account with

TransAmerica.   On July 3, 1992, ETCO requested that Mr. Sloan

return all documents related to the ETCO pension plan.   As a

result, the plan documents, the second $22,000 check, and the

original $64,000 were returned to ETCO.

     Upon notice that the second check had not been credited to

ETCO's account with TransAmerica, ETCO sought out a new insurance

carrier through another insurance agent.   On August 31, 1992,

upon finding a replacement insurance carrier, ETCO made a third

check in the amount of $22,000.   This check was made payable to

Aetna, a separate insurance company.3

     During the fiscal years in issue, ETCO paid life insurance

premiums for Edward Thorpe, Constance Thorpe, and Mr. Echols.

ETCO was also the owner and beneficiary of the life insurance


     3
      The parties stipulate that an ETCO check made payable to
Aetna, dated Aug. 31, 1992, in the amount of $22,000, represents
an amount claimed as a deduction on ETCO's tax return for the
fiscal year ended June 30, 1990. Respondent disallowed a
deduction in the amount of $22,000 in ETCO's tax year ending June
30, 1990. It is unclear how many checks in the amount of $22,000
were issued by ETCO and how many of those checks were returned.
Because we hold that the amount was not deductible under the
facts presented, we need not decide whether the check dated Mar.
8, 1991, was the first check or when the first $22,000 check was
remitted to TransAmerica or how such a check could relate to the
check dated Aug. 31, 1992, and be deductible in the year ending
June 30, 1990.
                                - 9 -

policies on each of the individuals.    On July 1, 1983, Mr. Thorpe

executed an application for disability insurance with Time

Insurance Co. as the insurer.    On November 4, 1989, Mr. Echols

executed an application, as owner, for disability insurance with

Time Insurance Co.    ETCO paid the insurance premiums on both

disability insurance policies and, subsequently, deducted the

expenses on its tax returns for the years in issue.    ETCO also

maintained liability, workman's compensation, commercial auto,

medical, excess liability, and casualty and surety insurance.

     In 1988, Mr. and Mrs. Thorpe signed two vehicle lease

agreements on behalf of ETCO for two vehicles they drove during

the years in issue.    ETCO made the lease payments for both of the

automobiles during the years in issue.    Both lease agreements

listed Mr. and Mrs. Thorpe as the lessees of the automobiles, and

both automobiles were leased from the same company.    The first

lease was for a 1988 Lincoln Towncar and was dated May 10, 1988.

Paragraph 24 of the lease agreement on the Lincoln contained two

boxes in which the lessees could indicate that the automobile was

intended to be used for either business purposes or personal use.

Neither box was marked to indicate that the lessees intended to

use the Lincoln for either business or personal use.    The second

lease was for a 1988 Mercury Colony Park and was signed July 20,

1988.   Paragraph 24 of the lease agreement for the Mercury

specifically designated the vehicle's use as being for business.
                               - 10 -

     Mr. and Mrs. Thorpe also entered into an auto insurance

contract for both of the vehicles.      The insurance contract shows

a vehicle-use designation for each automobile.     The insurance

contract, like the lease agreement, indicates that the Mercury

was to be used for business.   However, the vehicle-use indication

for the Lincoln is marked as personal.

     Throughout the years in issue, both ETCO and Mr. and Mrs.

Thorpe used the services of Mr. Lewis Buck, a certified public

accountant, to help maintain their books and records.     Mr. Buck

also performed annual audits for ETCO and prepared tax returns

for both ETCO and Mr. and Mrs. Thorpe.

     Mr. Buck determined the amount of business usage of the

leased vehicles based on a 12-month period.     Mr. Buck discussed

the amount of personal usage for each of the vehicles with Mr.

and Mrs. Thorpe and analyzed the check register, lease

agreements, odometers, daily logs, and other documents to

determine that Mr. and Mrs. Thorpe should reimburse ETCO for

personal use of the two automobiles.     At the end of each yearly

audit, Mr. Buck would have a meeting with Mr. and Mrs. Thorpe and

the officers of ETCO to review items and make recommendations.

At the expiration of the auto leases in December 1993, Mr. Buck

recommended that Mr. and Mrs. Thorpe reimburse ETCO for the

amount of personal use for each of the vehicles during the lease

term.   Mr. Buck determined that Mr. and Mrs. Thorpe should pay

ETCO for 25 percent of the use of the vehicles.     On December 3,
                              - 11 -

1993, Mr. and Mrs. Thorpe made a check payable to ETCO in the

amount of $5,334 for their personal use of the automobiles.


                              OPINION


Deductions for Travel to Conventions and Auto Expenses


     In the notice of deficiency issued to ETCO, respondent

disallowed ETCO's deductions for travel and entertainment

expenses, which were incurred by Mrs. Thorpe during her

attendance at various conventions on behalf of ETCO.     Respondent

also disallowed ETCO's deductions for expenses related to the

leased automobiles.   Respondent disallowed the travel and auto

expenses on the bases that ETCO failed to establish that there

was a business purpose for the expenses and, further, that it

failed to substantiate some of the claimed expenses in accordance

with sections 162, 262, and 274(d).     ETCO, on the other hand,

contends that it is entitled to deduct all the claimed expenses.

     Section 162(a) provides that "There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business".   To be "necessary" an expense needs to be "appropriate

and helpful" to the taxpayer's business.     Welch v. Helvering, 290

U.S. 111, 113 (1933).   For an expense to be "ordinary", "the

transaction which gives rise to it must be of common or frequent

occurrence in the type of business involved".     Deputy v. du Pont,
                                - 12 -

308 U.S. 488, 495 (1940) (citing Welch v. Helvering, supra at

114).   ETCO bears the burden of proving that the claimed expenses

are deductible.     Welch v. Helvering, supra at 115.

     Mrs. Thorpe was an officer and an employee of ETCO.      Mrs.

Thorpe attended various trade shows and conventions at which she

occupied the display booth, talked to people about ETCO's

product, met new or prospective clients, learned more about the

market, and solicited new business.      ETCO procured most of its

business through direct solicitation of housing authorities in

various states where trade shows and conventions attracted

prospective clients.    Respondent does not question the expenses

incurred by Mr. Thorpe who, like Mrs. Thorpe, was an officer and

employee of ETCO.    Under these facts and circumstances, we find

that the travel and entertainment expenses incurred by Mrs.

Thorpe were ordinary and necessary business expenses of ETCO.

See Duncan v. Bookwalter, 216 F. Supp. 301, 305 (W.D. Mo. 1963).

     Respondent argues that $1,514, $786, and $1,095 of the total

travel and entertainment expenses of $74,395, $81,237, and

$75,749 deducted by ETCO for the fiscal years ending June 30,

1990, 1991, and 1992, respectively, are not allowed because they

do not meet the substantiation requirements under section 274(d).

Under section 274(d)(4), the taxpayer must substantiate:      (1) The

amount of the claimed expense; (2) the time and place the expense

was incurred; and (3) the business purpose of the expense.      At

trial, respondent attempted to elicit testimony that would show a
                               - 13 -

lack of business purpose on the part of Mrs. Thorpe in attending

the various conferences.    On brief, respondent argues that Mrs.

Thorpe's presence at the conventions was primarily a personal

benefit to her rather than a business purpose that benefited

ETCO.   Respondent's argument regarding lack of substantiation was

not meaningfully addressed until the reply brief was filed.

Respondent has isolated a small percentage of travel expenses

that has been attributed specifically to Mrs. Thorpe.    It would

be difficult to imagine how respondent could attribute an exact

amount of expenses to Mrs. Thorpe without any substantiation of

the expenses in the first place.    Further, where Mr. and Mrs.

Thorpe attended the conferences together, certain expenses, such

as meals and lodging, must have been substantiated for Mr. Thorpe

on the same documentation as would have been used for Mrs.

Thorpe.   Respondent does not question the substantiation of Mr.

Thorpe's travel expenses.    Under these circumstances, we find

that respondent's argument regarding lack of substantiation is

without merit.

     With respect to the automobiles, the Mercury and the Lincoln

are listed property under section 280F(d)(4)(A)(i) because they

are passenger automobiles.    A taxpayer may not deduct automobile

expenses, unless he or she substantiates by adequate records or

by sufficient evidence corroborating the taxpayer's own statement

the amount, time and place, and business purpose of the expense.

Sec. 274(d)(4).
                              - 14 -

     ETCO did not provide sufficient substantiation to refute

respondent's determination of the automobile expenses as required

under section 274(d)(4).   Although ETCO offered a mileage log,

which showed destinations, dates, and miles driven, ETCO did not

offer records to substantiate which of the two automobiles had

been driven on each date, the total odometer mileage for each

automobile, return dates, or the business purpose of each trip

they took in each of the automobiles.   Added to the lack of

substantiation to determine accurately the business-use

percentage are the facts that the Lincoln was not designated as a

business-use automobile on the lease agreement and was designated

as a personal-use vehicle on the insurance contract.   We find

that ETCO has not carried its burden to show that deductions in

excess of that determined in respondent's notice of deficiency

should be allowed.4

     Respondent further argues that the amounts of the automobile

lease payments and the automobile insurance payments, paid by

ETCO and attributed to Mr. and Mrs. Thorpe's personal use, were

constructive dividends from ETCO to Mr. and Mrs. Thorpe.

Generally, section 61 provides that gross income includes income

from whatever source derived, including fringe benefits, gross

     4
      In the notice of deficiency sent to ETCO, respondent also
determined that ETCO's income must be increased by $713 in fiscal
year 1990 due to the auto lease inclusion requirements. See sec.
280F. Petitioners do not contest this amount, either at trial or
on their briefs. Therefore, respondent's determination with
respect to this amount is sustained.
                              - 15 -

income derived from business, and dividends.    When a corporation

confers an economic benefit upon a shareholder, in his capacity

as such, without an expectation of reimbursement, that economic

benefit becomes a constructive dividend, taxable as such.    Loftin

& Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir.

1978); Jones v. Commissioner, T.C. Memo. 1997-400.     An

expenditure made by a corporation for the personal benefit of its

shareholders may result in the receipt of constructive dividends.

Ireland v. United States, 621 F.2d 731, 735 (5th Cir. 1980).

     Because we have sustained respondent's determination with

respect to the automobiles used by petitioners individually, we

further find that ETCO's payments of expenses associated with Mr.

and Mrs. Thorpe's personal use of the automobiles resulted in a

constructive dividend to Mr. and Mrs. Thorpe to the extent that

they did not reimburse ETCO for the expenses.


Office Rent Deductions


     Respondent argues that expenses incurred by ETCO for office

condominium rental are not allowable as a deduction to the extent

that the rent exceeded the fair market rental value.    Respondent

further determined that a portion of the perceived excess rental

payments constitutes a constructive dividend from ETCO to Mr. and

Mrs. Thorpe.   Respondent contends that the rent paid by ETCO for

the office condominium was not established at arm's length

between the parties.   ETCO, on the other hand, argues that the
                                - 16 -

amount of rent was not excessive, as established by their expert

witness, and that the rental payments are deductible under

section 162.

     Section 162(a)(3) generally provides that a taxpayer may

deduct rent paid in carrying on a trade or business.    Section

162(a)(3) does not specifically limit deductions for rental

payments to a "reasonable allowance."     Levenson & Klein, Inc. v.

Commissioner, 67 T.C. 694, 715 (1977).    Nevertheless, if there is

a close relationship between the lessor and lessee, "an inquiry

into what constitutes reasonable rental is necessary to determine

whether the sum paid is in excess of what the lessee would have

been required to pay had he dealt at arm's length with a

stranger."     Id. at 715 (quoting Place v. Commissioner, 17 T.C.

199, 203 (1951), affd. per curiam 199 F.2d 373 (6th Cir. 1952)).

A close relationship between lessor and lessee does not mean that

a valid lease agreement between them cannot exist.     Feldman v.

Commissioner, 84 T.C. 1, 5 (1985), affd. 791 F.2d 781 (9th Cir.

1986); Kansas City S. Ry. v. Commissioner, 76 T.C. 1067, 1102

(1981).   Therefore, we are required to examine the circumstances

surrounding the arrangement to determine whether the rent was in

excess of the amount which an unrelated lessee would have paid in

an arm's-length transaction.     W.H. Braum Family Partnership v.

Commissioner, T.C. Memo. 1993-434; see also Harmon City, Inc. v.

United States, 733 F.2d 1381, 1383 (10th Cir. 1984).
                               - 17 -

     At trial, petitioners presented their expert witness, Mr.

Peter Larson III.   Petitioners offered the expert report of Mr.

Larson for the purpose of proving the amount of rent charged to

ETCO by Mr. and Mrs. Thorpe was not excessive.      In his report,

Mr. Larson described the condition of the real estate market in

the Washington, D.C., metropolitan and surrounding area in the

early 1990's as having experienced a dramatic decline, which

caused average rents to be reduced from annual square foot rates

from "upper $20's to low $30's to numbers that did not support

[many commercial projects]."   Mr. Larson also indicated in his

report that because of the dramatic decline in the real estate

market, many large institutions sought to restructure leases.

Mr. Larson reasoned that because Mr. and Mrs. Thorpe premised the

amount of rent they charged ETCO on the amount of their debt

obligation in the office condominium, there would be no reason to

consider restructuring their lease agreement with ETCO.

     Mr. and Mrs. Thorpe received rent from ETCO of $30,000 per

year ($2,500 per month).   Respondent determined that the fair

market rent was $14,028 per year.5      Neither petitioners nor their

expert presented any evidence which would contest respondent's

determination of fair market value based on reasonable


     5
      Mr. and Mrs. Thorpe received rent from ETCO of $30,000 per
year, and respondent determined that the dividend from rental
payments was $15,972 for each of the years in issue. Thus, the
fair rent per year would be $14,028 ($30,000 less dividend of
$15,972 equals $14,028).
                               - 18 -

comparisons with similar rental property under any valuation

method.    Mr. Larson's report generally summarizes market

conditions as they existed in the late 1980's and early 1990's in

the Washington, D.C., and surrounding vicinity.    Mr. Larson's

report does not persuade us that the amount of rent paid by ETCO

was not in excess of the amount which an unrelated lessee would

have paid in an arm's-length transaction, and we are not bound by

it.   Parker v. Commissioner, 86 T.C. 547, 561 (1986).    Mr.

Larson's report contained no calculation of fair market rent

based on any method of valuation which could be accepted by the

Court.    We find that petitioners have not met their burden of

proving that respondent's determination of market valuation was

incorrect.    Therefore, ETCO is not entitled to a rent deduction

for each of the years in issue in excess of that amount

determined in the notice of deficiency.6   Further, Mr. and Mrs.

Thorpe received a constructive dividend in the amount of the

difference.



      6
      In the notice of deficiency for Mr. and Mrs. Thorpe,
respondent disallowed rental real estate losses associated with
the office condominium resulting from the recharacterization of
the office rental income as constructive dividends. Generally,
sec. 469 provides that the deduction allowed for a limited amount
of passive losses arising from rental real estate activities
becomes phased out as the taxpayer's adjusted gross income
reaches certain levels. Sec. 469(i). To the extent sec. 469
disallows a deduction for losses associated with petitioner's
resulting rental losses, the parties must make appropriate
adjustments in their Rule 155 calculation in accordance with the
outcome of our opinion in this case.
                              - 19 -

Pension Plan Contribution


     Respondent argues that ETCO is not entitled to a $22,000

deduction claimed in its fiscal year ending June 30, 1990, by

remittance of a check for an alleged payment of a pension plan

contribution.   In general, a cash basis taxpayer may deduct

expenses only "for the taxable year in which paid."   Sec. 1.461-

1(a)(1), Income Tax Regs.   Checks do not represent final payment

relieving a debtor of liability, but rather constitute only

conditional payment which becomes absolute when the creditor

presents the check to the bank, which then honors it.    Md. Code

Ann., Com. Law I sec. 3-310(b)(1) (Michie 1997); Weber v.

Commissioner, 70 T.C. 52, 57 (1978).   For Federal tax purposes,

the subsequent payment of the check relates back to the date of

delivery so as to allow deductions even where checks are

presented and honored during later years.   Weber v. Commissioner,

supra at 57; see Clark v. Commissioner, 253 F.2d 745, 748 (3d

Cir. 1958), affg. in part, revg. in part, and remanding T.C.

Memo. 1956-176; Commissioner v. Bradley, 56 F.2d 728 (6th Cir.

1932), affg. 19 B.T.A. 49 (1930); Estate of Spiegel v.

Commissioner, 12 T.C. 524 (1949).   But where the checks were not

presented and honored in due course, this Court has held that no

payment ever occurred because the condition upon which the

conditional payment rested was never satisfied.   Weber v.

Commissioner, supra at 57; Estate of Hubbell v. Commissioner, 10
                               - 20 -

T.C. 1207 (1948); Eagleton v. Commissioner, 35 B.T.A. 551 (1937),

affd. 97 F.2d 62 (8th Cir. 1938).

     The record shows that on March 8, 1991, ETCO remitted a

check in the amount of $22,000 to TransAmerica via Mr. Sloan.

TransAmerica never presented the check to ETCO's bank for

payment.   A second check for the same amount dated January 29,

1992, was made and remitted to TransAmerica to replace the lost

check dated March 8, 1991.   The check dated January 29, 1992, was

ultimately returned to ETCO.   Because neither of ETCO's checks

made payable to TransAmerica was presented and honored in due

course, it does not constitute payment, which would relate back

to an earlier date of the delivery of either check to

TransAmerica.   Because none of the $22,000 checks made payable to

TransAmerica were presented for payment, we find that no payment

occurred, and ETCO is not entitled to a deduction in fiscal years

ending June 30, 1990 or 1991 under the cash basis method of

accounting.

Premiums for Life and Disability Insurance Policies


     Respondent argues that ETCO is not entitled to the expense

deductions for life and disability insurance premiums in the

amounts of $6,345, $5,490, and $3,690 for the fiscal years ended

June 30, 1990, 1991, and 1992, respectively.   Respondent contends

that ETCO was the owner and beneficiary of such policies.   ETCO

contends that it is entitled to deduct the premiums paid during
                                - 21 -

the years in issue on policies which insure the lives of ETCO's

corporate officers, notwithstanding the fact that ETCO was the

beneficiary of the policies.     ETCO also argues that premiums paid

on disability policies for Mr. Thorpe and Mr. Echols are

deductible by ETCO.

       Section 264(a)(1) specifically provides that no deduction

shall be allowed for premiums paid on any life insurance policy

when the taxpayer is directly or indirectly a beneficiary under

the policy.     ETCO paid and deducted the premiums for insurance

policies on the lives of Mr. and Mrs. Thorpe and Mr. Echols.

ETCO was also the owner and beneficiary on each of the policies.

As such, section 264(a)(1) disallows a deduction of any amounts

paid by ETCO in connection with the life insurance policies.

       With respect to the disability insurance policies on Mr.

Thorpe and Mr. Echols, respondent cites Rugby Prods. Ltd. v.

Commissioner, 100 T.C. 531 (1993), as authority for disallowing

ETCO's deductions for the disability payments in the years in

issue.     Generally, where an employee has all the rights of

ownership in a disability insurance policy, and none of the

benefits are payable to the corporation, the corporation may pay

and deduct premiums on the disability policy in accordance with

section 162.7    Rugby Prods. Ltd. v. Commissioner, supra at 538-

541.

       7
      Respondent does not argue that the deductions were not
ordinary and necessary business expenses under sec. 162.
                              - 22 -

     ETCO submitted, as evidence, a policy schedule for the

disability policy covering Mr. Thorpe.    The schedule lists Mr.

Thorpe as the "insured" and then lists "the insured" as the

"owner".   Thus, Mr. Thorpe is listed as both the owner and

insured of the policy schedule.    The policy schedule shows an

effective date of July 21, 1983, and an annual premium of

$1,073.20 until July 21, 2007.    Similarly, ETCO submitted an

application for insurance, which was signed by Mr. Echols, as the

"proposed insured".   On the same form just below Mr. Echols'

signature, there was another signature line for the "signature of

owner/applicant (if other than proposed insured)".    This

signature line was left blank indicating that the insured, Mr.

Echols, was intended to be the owner of the policy.    We find this

evidence to be determinative in finding that ETCO was not the

beneficiary of the two disability insurance policies.    Unlike the

taxpayer in Rugby Prods. Ltd. v. Commissioner, supra, ETCO is not

a beneficiary of the policies, and our holding in Rugby Prods.

Ltd., does not operate to preclude the deductions for the

premiums in this case.   Accordingly, ETCO is entitled to deduct

the disability premiums in question.


Payments From ETCO to Mr. Thorpe and Payments to Eugene Thorpe


     In the notice of deficiency sent to Mr. and Mrs. Thorpe,

respondent determined that $2,775, $2,150, and $1,800 paid to Mr.

Thorpe as advance travel allowances for the years 1990, 1991, and
                              - 23 -

1992, respectively, must be included in Mr. and Mrs. Thorpe's

income for the years in issue.    Respondent also determined that

$1,150 paid to Eugene Thorpe in 1990 must be included in Mr. and

Mrs. Thorpe's income.   Petitioners offered no evidence at trial

either to prove that these amounts were in fact included in

income or to justify their failure to include the amounts in

income.   Moreover, petitioners did not argue on brief that such

amounts were excludable from gross income.   We, therefore,

sustain respondent's determination.


Accuracy-related Penalty


     Respondent determined that ETCO and Mr. and Mrs. Thorpe are

liable for accuracy-related penalties under section 6662.

Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b).

Respondent asserts that the entire amount of each underpayment in

issue was due to petitioners' negligence or disregard of rules or

regulations.   Sec. 6662(b)(1).

     Negligence has been defined as the failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.   Neely v. Commissioner, 85 T.C. 934, 947 (1985).

Respondent's determinations are presumed correct, and petitioners

bear the burden of proving otherwise.   Rule 142(a); Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982).    Reasonable reliance
                                - 24 -

upon an expert opinion, asserted in good faith, can shield a

taxpayer from penalties for negligence or disregard under section

6662.    Glick v. Commissioner, T.C. Memo. 1997-65; see also United

States v. Boyle, 469 U.S. 241, 250 (1985); Collins v.

Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister

v. Commissioner, T.C. Memo. 1987-217.     However, when a taxpayer

claims reliance on an accountant, the taxpayer must establish

that the correct information was provided to the accountant and

that the item was incorrectly claimed as a result of the

accountant's error.     Ma-Tran Corp. v. Commissioner, 70 T.C. 158,

173 (1978).

        Although petitioners argue that they relied on the advice of

Mr. Buck, petitioners have not established that they provided Mr.

Buck with correct information or that they received guidance from

Mr. Buck as to the propriety of ETCO's deductions.      Therefore, we

hold that ETCO and Mr. and Mrs. Thorpe are liable for the

accuracy-related penalties.



                                           Decisions will be entered

                                      under Rule 155.
