                        T.C. Memo. 2010-268



                      UNITED STATES TAX COURT



                JAMES A. HILL, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2620-07.              Filed December 8, 2010.



     James A. Hill, Jr., pro se.

     Kristen I. Nygren, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes of $86,836 and $133,303 and

accuracy-related penalties under section 6662(a)1 of $17,367 and


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, in effect for the
years in issue, and all Rule references are to the Tax Court
                                                   (continued...)
                               - 2 -

$26,661 for 2003 and 2004, respectively.     Petitioner filed a

timely petition contesting respondent’s determinations.      After

concessions,2 the issues for decision are:    (1) Whether

petitioner failed to report his pro rata share of ordinary income

from an S corporation for 2003 and 2004; (2) whether petitioner

failed to report commission income earned by his sole

proprietorship in 2003 and 2004; (3) whether and to what extent

certain expenses petitioner incurred in 2004 are deductible; and

(4) whether petitioner is liable for the section 6662(a)

accuracy-related penalty.   The remaining issues are

computational.

                        FINDINGS OF FACT

     Some of the facts have been stipulated.     We incorporate the

stipulated facts into our findings by this reference.       Petitioner

resided in Georgia when the petition was filed.

     Petitioner has been active in the real estate industry in

Georgia as a land developer and a licensed real estate broker


     1
      (...continued)
Rules of Practice and Procedure.   All monetary figures have been
rounded to the nearest dollar.
     2
      The parties agree that petitioner is entitled to deduct
$22,203 for depreciation and sec. 179 expenses and $9,100 for
commissions and fees in 2003. Petitioner concedes that he is not
entitled to deduct $6,204 for contract labor in 2003, $8,000 for
alimony in 2003, or $24,921 for alimony in 2004. Respondent
concedes that for 2004 petitioner is entitled to deduct $13,019
for commissions and fees, $6,239 of the $55,186 depreciation
adjustment, and $10,511 of the $22,236 adjustment for legal and
professional fees.
                               - 3 -

since 1973.   Petitioner generally conducts business through his

sole proprietorship, Real Estate North.   Petitioner reported Real

Estate North’s 2003 and 2004 income and expenses on Schedules C,

Profit or Loss From Business, using the cash accounting method.

Petitioner holds an undergraduate degree in real estate and two

master of business administration (MBA) degrees--one in finance,

the other in real estate--from Georgia State University.

I.   The Huntington Park Property

     In 2002 petitioner identified a 28-acre piece of property

(the Huntington Park property) in West Cobb County, Georgia, that

he hoped to develop into a residential subdivision.   Petitioner

formed a limited liability company, Parkwood Development Corp.

(Parkwood), to acquire the property.   Petitioner was the

president of Parkwood, and he and his then wife, Cynthia Taylor

Hill (Mrs. Hill), were each 50-percent shareholders in Parkwood.

At all relevant times, Parkwood was an S corporation.

     Petitioner contacted the seller of the Huntington Park

property, Haven Exchange Services, L.L.C., a qualified

intermediary3 for McCray Properties, Inc., and negotiated for

Parkwood to purchase the Huntington Park property for $1.1

million.   The purchase price included a $100,000 broker’s




     3
      Haven Exchange Services, L.L.C., is in the business of
serving as a qualified intermediary in sec. 1031 exchanges.
                               - 4 -

commission to Real Estate North.   Petitioner secured a loan from

Branch Bank & Trust to fund the purchase.

     Petitioner attended the real estate closing on February 7,

2003, in his dual capacity as broker and as the purchaser’s

representative.   At the closing, Robert Garrison (Mr. Garrison),

the closing attorney, credited to Real Estate North’s account

$10,000 in earnest money that Real Estate North had been holding

in escrow from Parkwood.   Mr. Garrison also tendered a check to

petitioner, payable to Real Estate North, for $90,000.

Petitioner informed Mr. Garrison that he did not want to accept a

commission on the sale, and he asked Mr. Garrison to redraft the

closing agreement to eliminate Real Estate North’s commission.

Mr. Garrison refused to redraft the closing documents.    Instead,

he asked petitioner to endorse the $90,000 check to Mr.

Garrison’s escrow account.   Mr. Garrison then applied the $90,000

to the purchase price of the Huntington Park property.    A

February 7, 2003, closing statement signed by petitioner

indicates that Real Estate North received a $100,000 commission

in the transaction.   Petitioner, however, did not report the

$100,000 commission on his 2003 Form 1040, U.S. Individual Income

Tax Return.

     Following the closing, Parkwood subdivided the Huntington

Park property into 35 lots and began developing the property.    In

May 2003 Parkwood entered into an agreement with Sullivan Homes
                                - 5 -

whereby Sullivan Homes agreed to purchase all 35 lots over an 18-

month period.    The lot sales began on August 14, 2003, and

continued throughout 2003 and 2004.

     In December 2003 Sullivan Homes entered into an agreement

with Real Estate North giving Real Estate North the exclusive

right to market and sell homes at the Huntington Park property

subdivision.    Petitioner had a sales trailer at the Huntington

Park property for most of 2004 that he and two sales agents used

for onsite sales work.    Real Estate North earned $360,314 in

commission income from lot and home sales at the Huntington Park

property in 2004, but petitioner reported only $346,254 on his

2004 Schedule C.

     On its 2003 and 2004 Forms 1120S, U.S. Income Tax Return for

an S Corporation, Parkwood reported ordinary income of $322,327

and $479,803, respectively.    Petitioner’s pro rata shares of

Parkwood’s 2003 and 2004 income, as reported on Parkwood’s

Schedules K-1, Shareholder’s Share of Income, Deductions,

Credits, etc., were $161,164 and $239,902, respectively.

Parkwood’s 2003 Form 1120S was prepared at petitioner’s direction

by Liberty Tax Service.    The accountant who prepared the Form

1120S advised petitioner in writing that petitioner was required

to report his pro rata share of Parkwood’s 2003 income on his
                                 - 6 -

individual income tax return.4    Nevertheless, petitioner did not

report any income attributable to Parkwood on either his 2003 or

2004 Federal income tax return.

II.   Petitioner’s Divorce

      In January 2004 petitioner filed for divorce from Mrs. Hill

in the Superior Court of Cobb County (Cobb County court).

Parkwood was the primary asset at issue in petitioner and Mrs.

Hill’s divorce case.   During the divorce proceedings the Cobb

County court concluded that petitioner, who was in control of

Parkwood, was dissipating Parkwood’s assets and mismanaging its

day-to-day affairs to the detriment of the marital estate.    In

July 2004 the Cobb County court ordered petitioner to give Mrs.

Hill at least 72 hours’ notice of any real estate closings

associated with the Huntington Park property and to obtain Mrs.

Hill’s signature on all checks drawn on Parkwood’s account.

Subsequently, the Cobb County court found that petitioner had

failed to comply with its order, and in March 2005 the Cobb

County court held petitioner in willful contempt of court and

removed him as an officer of Parkwood.    Petitioner’s failure to

cooperate ultimately led the Cobb County court to appoint a

receiver to control Parkwood and conclude its affairs.




      4
      Indeed, petitioner acknowledged at trial that he knew he
was required to report the income.
                                - 7 -

     Petitioner and Mrs. Hill’s divorce case culminated with a

jury trial in 2006.   At the conclusion of the trial the jury

determined that Parkwood should be dissolved and that petitioner

and Mrs. Hill should receive $325,000 and $875,000, respectively,

in the dissolution.   The Cobb County court subsequently awarded

Mrs. Hill $100,000 in attorney’s fees.   After the Final Judgment

and Decree was adjusted accordingly, petitioner was awarded

$225,000 and Mrs. Hill was awarded $975,000 with respect to

Parkwood.

III. Petitioner’s Home Office

     In 2004 petitioner purchased a three-story townhouse in

Atlanta, Georgia.   The upper level of the townhouse consists of

two bedrooms and two bathrooms; the main level consists of a

foyer, an eat-in kitchen, a dining room, a living room, a den,

and a powder room; and the lower level consists of a two-car

garage, storage space, and approximately 650 square feet of

unfinished space.

     Shortly after moving in, petitioner hired a decorator and

spent $35,710 to furnish the main floor.   Petitioner used the

main floor (with the exception of the kitchen) as an office

suite.   Specifically, he used the dining room as a conference

room and the living room as an informal sitting area for business

meetings.   Petitioner estimated that in 2004 he had 15 to 20

meetings in his home office suite with subcontractors and other
                               - 8 -

business associates.   Petitioner also used the storage space on

the lower level and one-half of the garage to store office

equipment, supplies, and office furniture.

     Petitioner also used the main floor for recreational and

personal activities in 2004.   Petitioner and his girlfriend,

Roberta W. Taylor (Ms. Taylor), occasionally watched television

on the main floor and on at least two occasions hosted church and

homeowners association meetings on the main floor.   Moreover, the

townhouse’s only entrance is on the main floor, and petitioner

and Ms. Taylor used the main floor whenever they entered or left

the townhouse, the kitchen, and the other levels.

     On his 2004 Schedule C petitioner deducted $56,800 in

depreciation and section 179 expenses.   Petitioner’s depreciation

and section 179 expenses included $35,710 for office furniture,

$13,237 for a Harley Davidson motorcycle petitioner purchased in

2004, $4,228 for a Ford Explorer sport utility vehicle, and

$2,011 for petitioner’s personal residence.   Petitioner did not

keep any logs or records with respect to the motorcycle.

Petitioner also deducted $12,824 attributable to the business use

of his home and $22,236 for legal and professional services in

2004.

     On November 6, 2006, respondent issued a notice of

deficiency with respect to petitioner’s 2003 and 2004 Federal

income tax returns, in which he determined that petitioner (1)
                              - 9 -

failed to report his pro rata share of Parkwood’s income for 2003

and 2004, (2) failed to report the $100,000 commission Real

Estate North earned on the sale of the Huntington Park property

in 2003 and $14,060 of commission income Real Estate North earned

for 2004, (3) improperly deducted $55,186 in depreciation and

section 179 expenses for 2004, (4) improperly deducted $12,824

for the business use of his home in 2004, and (5) improperly

deducted $22,236 for legal and professional fees for 2004.5

Respondent also determined that petitioner was liable for the

accuracy-related penalty under section 6662(a) for 2003 and 2004.

Petitioner timely filed a petition in this Court.

                             OPINION

I.   Burden of Proof

     Ordinarily, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving that they are incorrect.   Rule 142(a)(1); Welch

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

Appeals for the Eleventh Circuit, to which an appeal in this case

would lie absent a stipulation to the contrary, see sec.

7482(b)(1)(A), has held that for the presumption of correctness



     5
      Respondent initially determined that only $1,614 of
petitioner’s $56,800 depreciation and sec. 179 expenses for 2004
was deductible. Respondent has since conceded $6,239 of the
remaining $55,186 depreciation and sec. 179 expenses and $10,511
of the $22,236 legal and professional fee deduction. See supra
note 2.
                              - 10 -

to attach in unreported income cases, the determination must be

accompanied by “‘some evidentiary foundation linking the taxpayer

to the alleged income-producing activity’”, Blohm v.

Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993) (quoting

Weimerskirch v. Commissioner, 596 F.2d 358, 362 (9th Cir. 1979),

revg. 67 T.C. 672 (1977)), affg. T.C. Memo. 1991-636.     A

determination that is unsupported by any evidence is arbitrary

and erroneous, Weimerskirch v. Commissioner, supra at 362, but

the required showing is minimal, Blohm v. Commissioner, supra at

1549 (citing Carson v. United States, 560 F.2d 693, 697 (5th Cir.

1977)).   Once the minimal evidentiary showing has been made, the

presumption of correctness attaches, and it becomes the

taxpayer’s burden to prove that the determination is arbitrary or

erroneous.   Blohm v. Commissioner, supra at 1549.   Respondent has

linked petitioner to the income-producing activity by

demonstrating that (1) petitioner was a 50-percent shareholder in

Parkwood in 2003 and 2004 and (2) petitioner was the sole

proprietor of Real Estate North in 2003 and 2004.    Accordingly,

the presumption of correctness attaches to respondent’s

determination that petitioner failed to report income in 2003 and

2004.

     If the taxpayer produces credible evidence with respect to

any factual issue relevant to ascertaining the taxpayer’s

liability and meets certain other requirements, section 7491(a)
                               - 11 -

shifts the burden to the Commissioner with respect to these

factual issues.   Petitioner does not assert that section 7491(a)

shifts the burden to the Commissioner, and the record does not

permit us to conclude that section 7491(a) applies.

Consequently, petitioner bears the burden of proof with respect

to all factual issues.

II.   Unreported Income

      A.   Parkwood

      An S corporation is not subject to the Federal corporate

income tax.   Sec. 1363(a).   Instead, an S corporation’s items of

income, gain, loss, deduction, and credit--whether or not

distributed--flow through to the shareholders, who must report

their pro rata shares of such items on their individual income

tax returns for the shareholder taxable year within which the S

corporation’s taxable year ends.   Sec. 1366(a); Mourad v.

Commissioner, 121 T.C. 1, 3 (2003), affd. 387 F.3d 27 (1st Cir.

2004); see also, e.g., Dunne v. Commissioner, T.C. Memo. 2008-63;

sec. 1.1366-1(a), Income Tax Regs.      The character of any item is

passed through to the shareholder.      Sec. 1366(b).

      Petitioner does not dispute that Parkwood made a valid

subchapter S election that was effective for 2003 and 2004, that

Parkwood earned ordinary income of $322,327 and $479,803 in 2003

and 2004, respectively, or that his pro rata shares of Parkwood’s

2003 and 2004 income were $161,164 and $239,902, respectively.
                             - 12 -

Instead, petitioner argues that he was not required to report the

income in 2003 and 2004 because he did not receive distributions

from Parkwood in those years.6   Petitioner’s argument is without

merit (indeed, petitioner suggested at trial that he knew his

position was contrary to the Code).   As discussed in the

preceding paragraph, it is well established that an S corporation

shareholder is required to report his or her pro rata share of

the S corporation’s income--whether or not distributed--on the

shareholder’s individual income tax return for the shareholder

taxable year within which the S corporation’s taxable year ends.

Sec. 1366(a); Mourad v. Commissioner, supra at 3; sec. 1.1366-

1(a), Income Tax Regs.; see also Burke v. Commissioner, T.C.

Memo. 2005-297 (a partner is taxable on his distributive share of

partnership income when realized by the partnership despite a

dispute among the partners as to their respective distributive

shares), affd. 485 F.3d 171 (1st Cir. 2007).   Accordingly,

petitioner was obligated to report his pro rata shares of

Parkwood’s 2003 and 2004 income on his 2003 and 2004 tax returns,




     6
      Petitioner, who bears the burden of proof, see Rule 142(a),
testified at trial that he reported the income from Parkwood when
he received it; i.e., when the Cobb County court issued its Final
Judgment and Decree and Order on Defendant’s Motion for Attorney
Fees in late 2006. However, on his 2006 Federal income tax
return, petitioner did not report any income from Parkwood, and
the revenue agent who audited petitioner’s 2005-2007 Federal
income tax returns credibly testified at trial that petitioner
did not report the income in 2006 or any other year.
                                - 13 -

and we sustain respondent’s income adjustments with respect to

Parkwood.

     B.     Real Estate North

     Section 61(a) defines gross income as “all income from

whatever source derived, including (but not limited to) * * *

Compensation for services, including fees, commissions, fringe

benefits, and similar items”.    The definition is construed

broadly and extends to all accessions to wealth, clearly

realized, over which the taxpayer has complete control.

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).          A

cash basis taxpayer generally receives income as of the date a

check is received, unless the taxpayer’s control of the proceeds

is subject to substantial limitations or restrictions.       Kahler v.

Commissioner, 18 T.C. 31, 34-35 (1952) (holding that a commission

check received on December 31, 1946, was taxable income in 1946

even though the taxpayer did not cash the check until January 2,

1947).    A taxpayer ordinarily cannot avoid recognizing income by

refusing to accept a check.     See Hamilton Natl. Bank v.

Commissioner, 29 B.T.A. 63, 67 (1933); see also Stoller v.

Commissioner, T.C. Memo. 1983-319.       Likewise, a taxpayer cannot

avoid recognizing income of which he is the true earner by

attempting to transfer his right to the income to someone else.

See Lucas v. Earl, 281 U.S. 111, 114-115 (1930).
                               - 14 -

     Respondent determined that petitioner failed to report the

$100,000 commission earned by Real Estate North in 2003 in the

transaction in which Parkwood purchased the Huntington Park

property.   Petitioner counters that the commission was not income

because he never actually received the commission but instead

applied the commission to reduce the purchase price of the

Huntington Park property.   Petitioner’s argument is unavailing

for several reasons.

     First, the record is clear that petitioner did, in fact,

realize the commission.   Petitioner testified that he asked Mr.

Garrison to redraft the closing documents to eliminate the

commission, but Mr. Garrison refused.   Whatever discussions

occurred at the closing, the fact remains that petitioner was

tendered a $90,000 commission check and signed the closing

statement affirming that Real Estate North received a $100,000

commission in the transaction.    The commission was not subject to

any limitations or restrictions.   Thus, the commission was income

when tendered.   See Kahler v. Commissioner, supra at 34-35;

Stoller v. Commissioner, supra.    The fact that petitioner did not

deposit the check into his or Real Estate North’s bank account is

immaterial.   Petitioner cannot alter the tax consequences of the

transaction by claiming, after the fact, that he did not want to

accept the commission.    See Commissioner v. Natl. Alfalfa

Dehydrating & Milling Co., 417 U.S. 134, 148-149 (1974) (“a
                              - 15 -

transaction is to be given its tax effect in accord with what

actually occurred and not in accord with what might have

occurred”).

     Second, both this Court and the U.S. Court of Appeals for

the Eleventh Circuit have rejected the argument that a commission

paid to a broker or agent who is purchasing for his own account

is a purchase price reduction and is not income to the recipient.

Commissioner v. Daehler, 281 F.2d 823 (5th Cir. 1960),7 revg. 31

T.C. 722 (1959); Williams v. Commissioner, 64 T.C. 1085, 1088

(1975) (“The fact that the commissions received by * * * [the

taxpayer] were derived from transactions in which he was

purchasing property for his own account does not alter the

commissions’ character as income to him”); see also Olken v.

Commissioner, T.C. Memo. 1987-589; McIver v. Commissioner, T.C.

Memo. 1977-174.   Petitioner earned his commission as a broker by

negotiating the purchase of the Huntington Park property,

structuring the transaction, and arranging financing.   See Olken

v. Commissioner, supra.   Thus, even if petitioner had not


     7
      The U.S. Court of Appeals for the Eleventh Circuit was
established on Oct. 1, 1981, pursuant to the Fifth Circuit Court
of Appeals Reorganization Act of 1980, Pub. L. 96-452, 94 Stat.
1994. In Bonner v. City of Prichard, 661 F.2d 1206, 1207 (11th
Cir. 1981), the U.S. Court of Appeals for the Eleventh Circuit
adopted the decisions of the U.S. Court of Appeals for the Fifth
Circuit handed down before the close of business on Sept. 30,
1981, as the governing law for the Eleventh Circuit.
Accordingly, Commissioner v. Daehler, 281 F.2d 823 (5th Cir.
1960), revg. 31 T.C. 722 (1959), is binding precedent in the
Eleventh Circuit.
                               - 16 -

received the $100,000 commission but instead transferred his

rights to the money to Parkwood, the transfer would constitute an

anticipatory assignment of income.      See Lucas v. Earl, supra at

114-115.

     Finally, we note that “the Commissioner may bind a taxpayer

to the form in which the taxpayer has cast a transaction.”

Bradley v. United States, 730 F.2d 718, 720 (11th Cir. 1984); see

also Commissioner v. Natl. Alfalfa Dehydrating & Milling Co.,

supra at 149 (“while a taxpayer is free to organize his affairs

as he chooses, nevertheless, once having done so, he must accept

the tax consequences of his choice, whether contemplated or

not”).   Petitioner deliberately structured the purchase of the

Huntington Park property so that Real Estate North would receive

a $100,000 commission.   Petitioner cannot avoid paying tax on the

income by attempting, after the fact, to recharacterize the

commission.

     Respondent also determined that petitioner failed to report

$14,060 of commission income in 2004.     Petitioner did not

specifically assign error to the determination in his petition,

nor did he contest the determination at trial or in his posttrial

brief.   Accordingly, we conclude that petitioner has conceded the

issue.   See Rule 34(b)(4).   We sustain respondent’s income

adjustments with respect to Real Estate North.
                              - 17 -

III. Deductions

     Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he is entitled to the

deductions claimed.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),

affd. 540 F.2d 821 (5th Cir. 1976); see also Rule 142(a).

Section 162(a) generally allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     In some instances, a taxpayer

must satisfy additional requirements to deduct expenses that

would otherwise be deductible under section 162.    See, e.g.,

secs. 274(d), 280A.   No deduction is allowed for personal,

living, or family expenses.   Sec. 262(a).   As explained below,

petitioner is not entitled to deduct expenses in excess of the

amounts respondent allowed because he has not established that

such expenses were deductible.

     A.   Home Office Expenses

     Section 280A(a) disallows any deduction, otherwise allowable

under the Code, with respect to the business use of a taxpayer’s

personal residence, except as provided in section 280A.    Section

280A(c)(1) provides, in relevant part:

          (1) Certain business use.--Subsection (a) shall
     not apply to any item to the extent such item is
     allocable to a portion of the dwelling unit which is
     exclusively used on a regular basis--
                             - 18 -


               (A) as the principal place of business
          for any trade or business of the taxpayer,
          [or]

               (B) as a place of business which is used
          by patients, clients, or customers in meeting
          or dealing with the taxpayer in the normal
          course of his trade or business, * * *

For a deduction to be allowed under section 280A(c)(1), the

taxpayer must establish that a portion of his personal residence

was (1) exclusively used, (2) on a regular basis, (3) for one of

the purposes enumerated in section 280A(c)(1).8   Hamacher v.

Commissioner, 94 T.C. 348, 353 (1990).   Moreover, section

280A(c)(2) provides that section 280A(a)--

     shall not apply to any item to the extent such
     item is allocable to space within the dwelling
     unit which is used on a regular basis as a storage
     unit for the inventory or product samples of the
     taxpayer held for use in the taxpayer’s trade or
     business of selling products at retail or
     wholesale, but only if the dwelling unit is the
     sole fixed location of such trade or business.

     Petitioner argues that he was entitled to deduct $12,824 in

2004 with respect to the business use of his home because he used



     8
      Where a taxpayer’s business is conducted in part at a home
office and in part at other locations, the following two primary
factors are considered in determining whether the home office
qualifies under sec. 280A(c)(1)(A) as the taxpayer’s principal
place of business: (1) The relative importance of the activities
performed at each business location and (2) the amount of time
spent at each location. Commissioner v. Soliman, 506 U.S. 168,
175-177 (1993); see also Strohmaier v. Commissioner, 113 T.C.
106, 112 (1999).
                              - 19 -

the main floor (with the exception of the kitchen) exclusively

for business and most of the ground floor exclusively for storage

of office equipment and furniture used in his trade or business.

The only evidence petitioner introduced in support of his

argument was his own testimony and that of his girlfriend, Ms.

Taylor.   Although petitioner testified that he used the main

floor of the townhouse exclusively for business in 2004, Ms.

Taylor testified that she occasionally watched television on the

main floor and that she and petitioner used the main floor on at

least two occasions to host church and homeowners association

functions.   Moreover, Ms. Taylor testified (and the blueprints

confirm) that she and petitioner used the main floor to enter and

leave the townhouse, the kitchen, and the other levels.   We do

not find petitioner’s testimony on the extent of his business use

of the main floor to be credible given Ms. Taylor’s testimony

that the main floor was not used exclusively for business.

Accordingly, petitioner has not met his burden of proving that he

used the main floor of his residence exclusively and on a regular

basis for one of the purposes enumerated in section 280A(c)(1),

and we hold that he is not entitled to deduct expenses paid or
                              - 20 -

incurred with respect to the business use of the main floor of

his home in 2004.9

     We also find that petitioner has failed to prove that he is

entitled to deduct expenses attributable to his use of part of

the ground floor of his townhouse for storage.   Petitioner

testified that in 2004 he used the storage space and one-half of

the garage to store office furniture and supplies.    Once again,

even if we were to accept petitioner’s testimony as credible, his

use of the space did not satisfy the section 280A(c)(2)

requirement because he did not testify that he used the space to

store inventory or product samples, nor is he in the business of

selling products at retail or wholesale.   Accordingly, petitioner

is not entitled to deduct expenses attributable to his business

use of the ground floor of his home.

     B.   Depreciation and Section 179 Expense

          1.   Furniture

     The costs of furnishing a home ordinarily are nondeductible

personal expenses.   Sec. 262(a); Turner v. Commissioner, 68 T.C.

48, 51 (1977); sec. 1.262-1(b)(3), Income Tax Regs.   Petitioner



     9
      Because petitioner has failed to satisfy the exclusive use
test, we need not decide whether petitioner’s home office was his
principal place of business or a place of business used by
clients or customers in meeting or dealing with petitioner in the
course of his trade or business. See sec. 280A(c)(1).
                             - 21 -

argues that the costs of furnishing the main floor were ordinary

and necessary expenses in his business because he used the main

floor as a model home within his own home.   As petitioner

explained at trial:

     I think atmosphere, color, surroundings, when people
     walk into a subdivision and walk into a model home,
     it’s very important they feel like it’s a place that
     they would want to live. That’s the same way I
     furnished my office, and again, by the same interior
     designer from Ethan Allen.

While the furnishing of a model home may play an important role

in the success or failure of a real estate development, it does

not follow that it was ordinary or necessary for petitioner to

decorate the main floor of his personal residence in the same

manner he furnished his model homes.   Petitioner’s townhouse was

not a model home, and the costs of furnishing it to suit his

tastes are quintessentially personal expenses.   We sustain

respondent’s adjustment.

          2.   Motorcycle

     Section 274(a)(1)(A) generally disallows deductions,

otherwise allowable under the Code, involving entertainment,

amusement, or recreational activities, and section 274(a)(1)(B)

generally disallows deductions, otherwise allowable, incurred
                              - 22 -

with respect to a facility10 used in connection with such

activities.   Section 274(d) provides, in relevant part:

          SEC. 274(d). Substantiation Required.--No
     deduction or credit shall be allowed--

                *    *    *    *    *    *    *

               (2) for any item with respect to an
          activity which is of a type generally
          considered to constitute entertainment,
          amusement, or recreation, or with respect to
          a facility used in connection with such an
          activity,

                *    *    *    *    *    *    *

     unless the taxpayer substantiates by adequate records
     or by sufficient evidence corroborating the taxpayer’s
     own statement (A) the amount of such expense or other
     item, (B) the time and place of the travel,
     entertainment, amusement, recreation, or use of the
     facility or property, or the date and description of
     the gift, (C) the business purpose of the expense or
     other item, and (D) the business relationship to the
     taxpayer of persons entertained, using the facility or
     property, or receiving the gift. * * *

The strict substantiation requirements of section 274(d) also

apply to any “listed property”, sec. 274(d)(4), which includes,


     10
      Sec. 274 does not define the term “facility”. However,
the legislative history reveals that the term “facility”
“includes any item of real or personal property which is owned,
rented, or used by a taxpayer in conjunction or connection with
an entertainment activity”, and includes, e.g., “yachts, hunting
lodges, fishing camps, swimming pools, tennis courts, and bowling
alleys. Facilities also may include airplanes, automobiles,
hotel suites, apartments, and houses (such as beach cottages and
ski lodges) located in recreational areas.” H. Conf. Rept.
95-1800, at 249 (1978), 1978-3 C.B. (Vol. 1) 521, 583; S. Rept.
95-1263, at 174-175 (1978), 1978-3 C.B. (Vol. 1) 315, 472-473;
see also Ireland v. Commissioner, 89 T.C. 978, 981-982 (1987)
(discussing the legislative history of sec. 274).
                               - 23 -

inter alia, “any * * * property used as a means of

transportation,” sec. 280F(d)(4)(A)(ii).

     Petitioner contends that he should be allowed to deduct

$13,237 with respect to his motorcycle in 2004 because he used

the motorcycle exclusively in his business.   Specifically,

petitioner testified that he purchased the motorcycle solely for

the purpose of riding with pavers, pipe contractors, and other

subcontractors, and that the rides allowed petitioner to develop

a sense of “esprit de corps” with the subcontractors, which had a

beneficial effect on his and their work.   Even if we were to

accept petitioner’s testimony as credible, which we do not, we

would nevertheless conclude he is not entitled to deduct expenses

with respect to his motorcycle because he failed to comply with

the strict substantiation requirements of section 274(d).

     Petitioner concedes that his motorcycle, like a yacht, is a

facility used in connection with an activity generally considered

to constitute entertainment.   Alternatively, petitioner’s

motorcycle qualifies as listed property, for which no deduction

is allowed unless the taxpayer meets strict substantiation

requirements with respect to the property.    However, petitioner

has failed to substantiate by adequate records or by sufficient

evidence corroborating his own testimony the amount of expenses

attributable to the motorcycle, the time and place of his use of

the motorcycle, the business purpose of the expense, or his
                               - 24 -

relationship with the other riders.     Accordingly, petitioner may

not deduct expenses relating to his purchase or use of the

motorcycle in 2004.

     C.     Legal Fees

     The deductibility of legal fees depends upon the origin of

the claim with respect to which the fees were incurred.      United

States v. Gilmore, 372 U.S. 39, 49 (1963).     Legal fees incident

to a divorce generally are not deductible, because they are

personal.    Sec. 262; United States v. Gilmore, supra; Hicks Co.

v. Commissioner, 56 T.C. 982, 1023 (1971) (citing United States

v. Patrick, 372 U.S. 53 (1963)), affd. 470 F.2d 87 (1st Cir.

1972); sec. 1.262-1(b)(7), Income Tax Regs.    However, divorce-

related legal fees that are allocable to tax advice or collection

of taxable alimony or incurred in a dispute regarding entitlement

to business profits may be deductible under section 212.      Wild v.

Commissioner, 42 T.C. 706, 711 (1964) (legal fees incurred to

produce monthly alimony payments, which were includable in the

taxpayer’s gross income, were deductible under section 212); see

also Hahn v. Commissioner, T.C. Memo. 1976-113 (legal fees

incurred to protect the taxpayer’s right to income from marital

property were deductible under section 212); sec. 1.262-1(b)(7),

Income Tax Regs.    In Hahn v. Commissioner, supra, the taxpayer

incurred legal fees in connection with her divorce.    The

taxpayer’s attorney estimated that 77 percent of the time he
                               - 25 -

spent on the case was related to the issue of the taxpayer’s

interests in certain of her husband’s properties.    Id.    We held

that “the fees attributable to legal work involving the claim of

ownership in the * * * [property] are not deductible, but those

attributable to the award of income from the * * * [property] are

deductible.”   Id.   We went on to determine that 30 percent of the

taxpayer’s legal expenses were attributable to matters involving

the taxpayer’s right to income and were therefore deductible

under section 212.    Id.

     Petitioner argues his legal fees were incurred for the

primary purpose of protecting his interest in Parkwood, but the

record reflects only that the payments were made to lawyers and

law firms that handled petitioner’s divorce.    Unlike the taxpayer

in Hahn v. Commissioner, supra, petitioner has not introduced any

evidence that would permit us to estimate how much, if any, of

his legal fees was incurred to protect his interest in Parkwood.

Petitioner also made no attempt to further allocate his legal

fees as between his ownership interest in Parkwood and his right

to income from Parkwood.    Accordingly, we conclude that

petitioner may not deduct legal fees incurred in 2004 in

connection with his divorce, except as respondent already

allowed.
                                - 26 -

IV.   Section 6662(a) Accuracy-Related Penalties

      Section 6662(a) and (b)(2) imposes an accuracy-related

penalty equal to 20 percent of the portion of an underpayment

that is attributable to, inter alia, any substantial

understatement of income tax.    A substantial understatement is

any understatement that exceeds the greater of (1) 10 percent of

the tax required to be shown on the return for the taxable year,

or (2) $5,000.   Sec. 6662(d)(1)(A).     An understatement is the

excess of the amount of tax required to be shown on the return

for the taxable year, over the amount of tax actually shown on

the return.   Sec. 6662(d)(2)(A).

      The amount of the understatement under section 6662(d)(2)(A)

shall be reduced by that portion attributable to, inter alia, the

tax treatment of any item by the taxpayer if there was

substantial authority for such treatment.      Sec. 6662(d)(2)(B)(i).

Substantial authority is an objective standard based on an

analysis of the law and its application to the relevant facts.

Lawinger v. Commissioner, 103 T.C. 428, 440 (1994); sec.

1.6662-4(d)(2), Income Tax Regs.    Substantial authority exists

only if, taking into account all authorities, the weight of

authority supporting the treatment is substantial in relation to
                              - 27 -

the weight of authority supporting contrary treatment.     Sec.

1.6662-4(d)(3)(i), Income Tax Regs.

     No penalty shall be imposed under section 6662 with respect

to any portion of an underpayment if the taxpayer had reasonable

cause and acted in good faith with respect to such portion.        Sec.

6664(c).   In determining whether a taxpayer had reasonable cause

and acted in good faith, all facts and circumstances are taken

into account.   Sec. 1.6664-4(b)(1), Income Tax Regs.    Generally,

the most important factor is the extent of the taxpayer’s effort

to assess his proper liability.   Id.   Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

the taxpayer’s education and experience.    Id.

     The Commissioner generally bears the burden of production in

any court proceeding with respect to any penalty or addition to

tax, sec. 7491(c), but the taxpayer bears the ultimate burden of

proof, Higbee v. Commissioner, 116 T.C. 438, 446 (2001).     To meet

his burden of production under section 7491(c), the Commissioner

must come forward with sufficient evidence that it is appropriate

to impose the relevant penalty.   Id.   However, the Commissioner’s

obligation under section 7491(c) is conditioned on the taxpayer’s

assigning error to the penalty or addition to tax.      Swain v.
                              - 28 -

Commissioner, 118 T.C. 358, 363 (2002).   Where the taxpayer fails

to assign error to such penalty or addition to tax, the taxpayer

is deemed to have conceded the issue under Rule 34(b)(4).      Id.

     Respondent determined that petitioner is liable for the

section 6662(a) accuracy-related penalty for 2003 and 2004.

Petitioner failed to assign error to the penalty in his petition,

in his pleadings, or at trial.   Accordingly, petitioner is deemed

under Rule 34(b)(4) to have conceded the issue, and respondent is

not required to produce evidence that imposition of the penalty

is appropriate.   In any event, respondent has satisfied his

burden under section 7491(c) by demonstrating that petitioner’s

2003 and 2004 Federal income tax returns substantially

understated petitioner’s income tax liabilities.   Petitioner has

neither alleged nor proved that he had substantial authority for

all or any portions of the understatements, nor has he

demonstrated that he had reasonable cause or acted in good faith

with respect to any portions of the underpayments.   On the

contrary, petitioner suggested in his testimony that he knew his

treatments of various items on his 2003 and 2004 Federal income

tax returns were improper.   Accordingly, we conclude that

imposition of the section 6662(a) penalty is appropriate.
                             - 29 -

V.   Conclusion

     In summary, we conclude that petitioner (1) failed to report

ordinary income from Parkwood on his 2003 and 2004 Federal income

tax returns; (2) failed to report commission income earned by

Real Estate North of $100,000 and $14,060 for 2003 and 2004,

respectively; (3) improperly deducted expenses relating to the

business use of his home, expenses relating to a Harley Davidson

motorcycle, and legal fees incurred with respect to his divorce

in 2004; and (4) is liable for the section 6662(a) and (b)(2)

accuracy-related penalty.

     We have considered the parties’ remaining arguments and, to

the extent not discussed herein, we conclude those arguments are

irrelevant, moot, or without merit.

     To reflect the foregoing,


                                      Decision will be entered under

                                 Rule 155.
