                     T.C. Summary Opinion 2010-134



                        UNITED STATES TAX COURT



             JAMES MICHAEL & SUSANNE ADAMS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 8486-09S.             Filed September 9, 2010.



        James Michael Adams and Susanne Adams, pro sese.

        Michael T. Shelton, for respondent.



     COHEN, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.     Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.
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       Respondent determined a deficiency of $7,498 in petitioners’

Federal income tax for 2006 and a penalty of $1,499.60 for

negligence under section 6662(a) and (b)(1).    In an amendment to

the answer, respondent asserted an increased deficiency of

$11,009, a proportionate increase in the penalty, and substantial

understatement of income tax as an alternative ground for the

penalty.    The issues for decision are whether petitioners are

entitled to deduct travel, meals and entertainment, and vehicle

expenses and whether they are liable for the penalty.    All

section references are to the Internal Revenue Code in effect for

2006, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                             Background

       Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in Illinois at the time the petition was

filed.

       James Michael Adams (petitioner) was employed full time by

Brunswick Corp. until October 2006 and thereafter by Sokolowski,

Inc.    His title in the latter employment was Executive Vice

President of Sales and Marketing.    He also engaged in a

“consulting” activity through which he hoped to receive “finder’s

fees.”    He did not receive any income from the activity during

2006 or through the time of trial in April 2010.
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     On petitioners’ joint Federal income tax return for 2006,

petitioner claimed as business expenses $22,546 for travel,

$6,621 for meals and entertainment, and $3,664 in vehicle

expenses related to his consulting activity.   He did not maintain

contemporaneous or reliable records to substantiate the amount,

time, place, or business purpose of the expenses claimed.   Some

of the expenses claimed were nondeductible personal expenses

incurred for himself and his wife.

     In the statutory notice, only the travel expenses were

disallowed, and the stated ground for the penalty was negligence.

In the amendment to the answer, respondent asserts that the

claimed meals and entertainment and vehicle expenses are not

deductible.   Respondent also asserts, in the alternative, that

any otherwise deductible expenses are limited by the passive

activity loss rules of section 469 and that a penalty should be

imposed because of a substantial understatement of income tax for

purposes of section 6662.

                            Discussion

     The expenses in dispute in this case all require

substantiation of amount, time, place, and business purpose in

accordance with section 274(d).   Petitioner has the burden of

proving the deductions that he claimed.   See New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934); Rockwell v. Commissioner,

512 F.2d 882, 886 (9th Cir. 1975), affg T.C. Memo. 1972-133.
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     Petitioner described his consulting activity as traveling

the world in search of investors for commercial real estate

development projects.   Petitioner testified that he was actively

involved in raising capital for hotel properties and always hoped

to make a profit from that activity, even though the payment

would be received, if at all, in the indefinite future.   Neither

petitioner’s testimony nor the few documents that he produced

provided the necessary substantiation.   Some of the documents

contradicted the alleged business purpose of the expenses.    Some

of the expenses claimed were for a trip to Italy with

petitioner’s wife.   Some of the vehicle expenses were for

commuting to petitioner’s place of employment.

      Attacking petitioner’s credibility by highlighting the

inconsistencies in his records and his testimony, respondent

seeks to increase the deficiency to disallow all of the losses

claimed.   Respondent also contends that petitioner was at most an

investor in the activity rather than being engaged in a trade or

business and that any expenses incurred are not currently

deductible because of section 469.

     Section 469 limits deduction of “passive activity” losses,

such as a loss incurred in an investment activity, to income

produced from the activity.   On the section 469 issue and with

respect to the increased deficiency claimed, respondent has the
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burden of proof because the issues were raised in the amendment

to the answer.   See Rule 142(a).

     The preponderance of the evidence in this case is that

petitioner deducted personal expenses as business expenses and

failed to maintain records to substantiate travel, meals and

entertainment, or vehicle expenses as required under section 274.

Thus disallowance of all of the expenses in dispute is justified.

Because we cannot identify any appropriate deductions, we need

not address the limitations of section 469.

     Respondent has the burden of production with respect to the

section 6662 accuracy-related penalty on the ground of

negligence.   Sec. 7491(c); see Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).   Respondent also has the burden of proof

with respect to the alternative ground of substantial

understatement of income tax asserted in the amendment to answer.

     Claiming personal expenses as business expenses and failing

to maintain records substantiating any valid deductions

constitute negligence for purposes of section 6662(a) and (b)(1).

See Higbee v. Commissioner, supra at 449; sec. 1.6662-3(b)(1),

Income Tax Regs.   Because the penalty is sustained on the ground

of negligence, we need not consider whether respondent has proven

that there was a substantial understatement of income tax on the

return.
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For the reasons explained above,


                                      Decision will be entered

                                 for respondent.
