                        T.C. Memo. 2000-358



                      UNITED STATES TAX COURT



                   UMIT TARAKCI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8641-99.                 Filed November 21, 2000.


     Roger E. Lageschulte, for petitioner.

     Roy Wulf, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined a deficiency in

petitioner’s 1993 Federal income tax of $28,928, an addition to

tax under section 6651(a)(1)1 in the amount of $739.75, and an



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

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

$5,785.60.2

     After concessions, the issues for decision3 are:   (1)

Whether petitioner’s leasing activity was a trade or business;

(2) whether petitioner’s losses constitute nondeductible passive

losses under section 469; (3) whether petitioner substantiated

deductions claimed on his Schedule C, Profit or Loss From

Business; (4) whether petitioner is liable for an addition to tax

for failing to timely file his 1993 Federal income tax return;

and (5) whether petitioner is liable for the accuracy-related

penalty under section 6662(a).

                         FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   Petitioner is a cash

method taxpayer who resided in Fall City, Washington, at the time

he filed his petition.

     Petitioner is a scientist with an M.S. degree in solid state

devices and a Ph.D. degree in ultrasonic and semiconductor device



     2
      All subsequent references to monetary amounts are rounded
to the nearest dollar.
     3
      The notice of deficiency contains adjustments to
petitioner’s itemized deductions and statutory exemption
allowance for the year in issue. These are computational
adjustments which will be resolved by the outcome of the issues
to be decided, and we do not separately address them.
                               - 3 -

issues.   Petitioner has worked for various companies dealing with

the applications of ultrasound, a highly specialized and

technical subject matter.   In June of 1993, petitioner’s

employment with Acuson, an ultrasound company located in

California, ended after 5-1/2 years of service.   In August of

1993, petitioner commenced employment with Siemens Ultrasound,

located in Washington State.   Petitioner moved to Washington at

that time but returned to California on the weekends throughout

the remainder of 1993.   At the time of trial, petitioner remained

employed with Siemens Ultrasound.

     In 1989, petitioner formed a sole proprietorship, “Cilena

Industries” (Cilena), under the laws of the State of California

for the purpose of manufacturing special semiconductor devices

and materials and conducting research in the semiconductor

industry.   Petitioner originally intended to use Cilena as the

main business entity from which to conduct research and

development.   However, petitioner abandoned this intention

shortly after formation and, instead, engaged Cilena in other

business activities.   Cilena’s activities for the period 1990 to

1993 included:   (1) Providing consulting services; (2) leasing

specialized equipment for use in the semiconductor industry;4 and


     4
      The equipment leased by Cilena included a fixed location
clean room facility, air-conditioning and exhaust and other
ancillary systems, pattern generation equipment, photomask
measurement and photomask defect detection systems, wet
                                                   (continued...)
                                - 4 -

(3) the construction and operation of a portable “clean room”5

facility.    Cilena maintained a business checking account, and

petitioner consistently disclosed the existence of Cilena on his

Schedule C.    Petitioner never reported any income attributable to

the equipment leasing activity.

     In October of 1990, petitioner and Raymond Cotter (Mr.

Cotter) entered into an oral agreement to commence business as

equal partners in “Aeternum”, a general partnership formed under

the laws of the State of California.    On May 22, 1992, petitioner

and Mr. Cotter reduced the partnership agreement to writing and

specified that Aeternum had been in existence since October 3,

1990.    The purpose of Aeternum was to “engage in the general

business of electronic device research and development,

computerized design, applied research, manufacturing and

consulting, and any other business agreed on by the majority of

Partners in writing.”    Petitioner and Mr. Cotter were required to

contribute services to Aeternum but were not required to

contribute any initial capital.    The partnership agreement



     4
      (...continued)
processing equipment, microscopes and measurement systems, a
sputter deposition system, photolithography equipment, and
miscellaneous items.
     5
      The portable clean room was a relatively small, mobile
structure containing equipment designed to conduct research in
the semiconductor field. The temperature inside the structure
was precisely controlled and clean-room filtered air was
circulated.
                                - 5 -

provided that all equipment was leased from Cilena, except for

four items which were owned by petitioner and Mr. Cotter in

proportion to their shares in the partnership.      Aeternum

originally operated out of the facilities petitioner had leased

for Cilena.   However, Aeternum’s operations soon required a

larger facility, and a separate facilities lease was entered into

with a third party in May of 1991.      Petitioner and Mr. Cotter

shared in the maintenance of Aeternum’s financial books, but no

partnership returns were filed while Aeternum was in existence.6

     On January 16, 1992, Cilena and Aeternum signed an equipment

leasing agreement.    The agreement was applicable to “all rental

transactions between * * * [Cilena] and * * * [Aeternum] during

the period commencing on August 1, 1990 and concluding on

December 31, 1996.”   Petitioner, petitioner’s brother Andrew West

(Dr. West), and petitioner’s cousin Bahadir Icel (Mr. Icel)

signed the lease on behalf of Cilena.      Petitioner and Mr. Cotter

signed the lease agreement on behalf of Aeternum.      The monthly

amount charged under the equipment lease was to be computed by

multiplying the rental value of the equipment by a percentage

which was equal to one-twelfth of the highest prevailing U.S.

annual prime interest rate plus one-twelfth percent.      The lease



     6
      A bankruptcy settlement agreement designated Mr. Cotter as
the “Tax Matters Partner” and required him to file Federal and
State income tax returns for Aeternum, but it was unclear at the
time of trial whether Mr. Cotter had actually filed the returns.
                                - 6 -

agreement acknowledged that the rental price was less than

prevailing market rentals for the same or similar equipment.     In

consideration of this factor, Aeternum was required, at its sole

expense, to store any nonrental equipment owned by Cilena in a

safe and suitable manner for the remainder of the equipment

lease.   The lease agreement did not require Cilena to operate,

maintain, or render any services with respect to the rental

equipment.   The lease agreement provided that Aeternum owed

Cilena for past due expenses in the amount of $5,189 for rent and

$9,818 for other expenses and that such debts had to be repaid

before petitioner and Mr. Cotter could withdraw any profits from

Aeternum.    Aeternum was the sole lessee of the equipment and

never paid any of the rent due to Cilena under the equipment

leasing agreement.

     For the period 1990 through April of 1993, Aeternum served

between 20 and 30 customers and incurred losses of approximately

$10,000.    Neither petitioner nor Mr. Cotter reported his share of

this loss.   By early 1993, Aeternum was approximately $21,000

delinquent on the rental payments due under the facilities lease

with the third party.    No business was conducted by Aeternum

after April of 1993, and at that time the facilities lease still

had 3 years remaining and approximately $150,000 in future rental

payments.
                              - 7 -

     On April 21, 1993, petitioner filed for bankruptcy in order

to avoid paying the rent due under the facilities lease.   A

bankruptcy trustee was appointed for petitioner.   On April 23,

1993, Mr. Cotter filed a lawsuit against petitioner, Dr. West,

and Mr. Icel in the United States Bankruptcy Court for the

Northern District of California seeking the dissolution of

Aeternum, an accounting, and damages in excess of $1 million.

Petitioner employed various attorneys in connection with his

bankruptcy and the defense of Mr. Cotter’s lawsuit.

Contemporaneous with the lawsuit being filed, petitioner removed

the rental equipment from the facilities leased by Aeternum and

stored some of the equipment in a storage space rented in Dr.

West’s name.

     An attorney representing petitioner in Aeternum’s affairs

made the following reference for May 1, 1993, in an invoice to

petitioner: “telephone conf. with * * * [petitioner] re

representing * * * [Dr. West] in action against landlord re

equipment sold to * * * [Dr. West] by * * * [petitioner]”.     A

different attorney representing petitioner in his bankruptcy and

Aeternum affairs made the following reference for July 23, 1993,

in an invoice to petitioner: “conference with * * * [Dr. West’s

attorney] re: his comments and changes pursuant to list of

equipment for items sold”.
                                - 8 -

     On August 30, 1993, petitioner and Mr. Cotter entered into a

Mutual Settlement and Release Agreement (Settlement Agreement)

under applicable laws of the State of California.   In the

Settlement Agreement, petitioner made the following

representation with respect to the equipment that was leased

under the contract between Cilena and Aeternum:

     [Petitioner] represents and warrants that he does not
     own the Leased Equipment and that he assigned such
     Leased Equipment to * * * [Dr. West]; as such, to the
     best of * * * [petitioner’s] knowledge, * * * [Dr.
     West] is the true owner of the Leased Equipment.

The “leased equipment” was defined under the Settlement Agreement

to be “the equipment used by * * * [Aeternum] subject to the

lease by and between * * * [Aeternum] and * * * [Dr. West], as

assignee of Cilena Industries.”

     The Settlement Agreement resolved the litigation that Mr.

Cotter had commenced, resulted in the dismissal of petitioner’s

bankruptcy proceedings, and dissolved Aeternum.   Numerous assets,

to the extent they were owned by the partnership, were ordered to

be transferred to Mr. Cotter.   Additionally, other equipment

which was originally leased to Aeternum by Cilena was ordered

transferred to Mr. Cotter.   Mr. Cotter was required to execute

and deliver to petitioner a Form UCC-1 Financing Statement,7

pursuant to California law, securing the rental equipment for an


     7
      The Form UCC-1 Financing Statement is used to provide
public notice of a security agreement. See Cal. Com. Code secs.
9302, 9401-9403 (West 1990).
                                - 9 -

indemnity obligation that Mr. Cotter owed petitioner under the

Settlement Agreement.   The rent owed to Cilena under the

equipment lease was not mentioned in the Settlement Agreement.

     On June 30, 1995, petitioner filed his 1993 Form 1040, U.S.

Individual Income Tax Return.    Petitioner reported adjusted gross

income of $47,535 ($143,054 wage income, $116 dividend income,

$92,635 business loss, $3,000 capital loss).

     On his Schedule C, petitioner reported $2,850 in gross

receipts for consulting services rendered by Cilena.        The amount

earned for the consulting services was unrelated to Cilena’s

equipment leasing activity.    The following business expenses were

reported on petitioner’s Schedule C:

          Item                                  Amount
                                               1
     Legal and professional                     $57,924
     Depreciation                                20,815
     Equipment storage                             5,326
                                                 2
     Equipment transportation                      3,669
     Travel                                        3,104
     Security antitheft                            2,394
     Car and truck                                   820
     Business telephone                              733
     Office                                          241
                                                    3
     Meals                                            160
     Advertising                                      126
     Professional publications                        108
     Repairs and maintenance                           65
       Total                                    $95,485
     1
      Petitioner concedes that $1,635 of the legal and professional
fees concerned litigation with his former employer, Acuson, and
argues that it should have been reported on his Schedule A, Itemized
Deductions, rather than Schedule C.
     2
      Petitioner concedes that $1,800 in equipment transportation
expenses was not paid until a subsequent year. Accordingly, the
equipment transportation expense at issue is $1,869.
                               - 10 -
     3
      Petitioner concedes that some of the meal expenses were not
related to Cilena and further that the meal expenses attributable to
Cilena must be reduced. Accordingly, the meal expenses at issue are
$36.

     On February 3, 1999, respondent issued a notice of

deficiency for the year 1993 disallowing petitioner’s entire

business loss.   Petitioner timely filed a petition to this Court

seeking a redetermination.    In his amended answer to the

petition, respondent asserted that petitioner’s 1993 business

loss was subject to the passive activity loss limitations of

section 469.

                               OPINION

I.   Trade or Business of Leasing Equipment

     The notice of deficiency disallowed petitioner’s deductions

for a variety of reasons, one of which was that petitioner did

not establish that he was in the trade or business of leasing

equipment.   Respondent did not make this argument in his original

brief and only alluded to it in his reply brief.8

     Based on the evidence in the record, we hold that petitioner

engaged in the trade or business of leasing equipment with the

primary purpose of making a profit.      See Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987); Wolf v. Commissioner, 4 F.3d

709, 713 (9th Cir. 1993), affg. T.C. Memo. 1991-212; Warden v.

Commissioner, T.C. Memo. 1995-176, affd. without published

     8
      Respondent has not challenged whether the provision of
consulting services and operation of a portable clean room were
trade or business activities of petitioner.
                                - 11 -

opinion 111 F.3d 139 (9th Cir. 1997).       While the activity was

ultimately not profitable, petitioner’s original intention of

using the equipment for his own business, his noncollection of

rent to promote his interest in Aeternum, his intelligence with

respect to the semiconductor industry and the equipment being

leased, and the absence of elements of personal pleasure or

recreation all indicate that petitioner’s primary purpose was

generating a profit.

II.   Section 469

      Respondent’s primary argument is that any loss incurred by

petitioner was incurred in a leasing activity and therefore

should be disallowed pursuant to the passive activity loss

limitations of section 469.     Because respondent first asserted

the passive loss argument in his amended answer, respondent bears

the burden of proof on this issue.       See Rule 142(a); Shea v.

Commissioner, 112 T.C. 183, 191 (1999).

      A.     Active or Passive Loss

      Pursuant to section 469(a), a passive activity loss is

generally not allowed as a deduction for the year in which it is

sustained.    A passive activity loss is defined as the excess of

the aggregate losses from all passive activities for the taxable

year over the aggregate income from all passive activities for

that year.    See sec. 469(d)(1).     Passive activities are those

activities which involve the conduct of a trade or business in
                                - 12 -

which the taxpayer does not materially participate.     See sec.

469(c)(1).     Rental activities are presumptively passive, without

regard to whether the taxpayer materially participates in the

activity.    See sec. 469(c)(2), (4).    Both parties agree that

petitioner’s equipment leasing activity is a rental activity and

that the income therefrom is passive in nature, unless petitioner

qualifies under one of the six exceptions listed in the

regulations.    See Welch v. Commissioner, T.C. Memo. 1998-310;

sec. 1.469-1T(e)(3)(ii)(A) through (F), Temporary Income Tax

Regs., 53 Fed. Reg. 5702 (Feb. 25, 1988).

     B.      Incidental Exception

     An activity involving the use of tangible property is not

considered a rental activity if “The rental of such property is

treated as incidental to a nonrental activity of the taxpayer”

for the taxable year.     Sec. 1.469-1T(e)(3)(ii)(D), Temporary

Income Tax Regs., supra at 5702.     Section 1.469-1T(e)(3)(vi)(C),

Temporary Income Tax Regs., 53 Fed. Reg. 5703 (Feb. 25, 1988),

provides, in pertinent part:

          (C) Property used in a trade or business. The
     rental of property during a taxable year shall be
     treated as incidental to a trade or business activity
     (within the meaning of paragraph (e)(2) of this
     section) if and only if--

                   (1) The taxpayer owns an interest in such
             trade or business activity during the taxable
             year;

                  (2) The property was predominantly used in
             such trade or business activity during the taxable
                              - 13 -

          year or during at least two of the five taxable
          years that immediately precede the taxable year;
          and

               (3) The gross rental income from such
          property for the taxable year is less than two
          percent of the lesser of--

                    (i) The unadjusted basis of such
               property; and

                    (ii)   The fair market value of such
               property.

     Respondent’s sole argument is that the “incidental”

exception does not apply because the equipment leasing activity

was not incidental to any other activity of Cilena.   Petitioner

contends that the trade or business activities of Aeternum are

trade or business activities of petitioner for purposes of this

exception.

     A “trade or business activity”, for purposes of the

“incidental” exception, is defined as an activity (other than a

rental activity or an activity incidental to the activity of

holding property for investment) that:    (1) Involves the conduct

of a trade or business (within the meaning of section 162); (2)

is conducted in anticipation of the commencement of a trade or

business; or (3) involves research or experimental expenditures

that are deductible under section 174.9   Sec. 1.469-4(b)(1),


     9
      Sec. 1.469-1T(e)(3)(vi)(C), Temporary Income Tax Regs., 53
Fed. Reg. 5703 (Feb. 25, 1988), references paragraph (e)(2) for
the definition of “trade or business activity.” Paragraph (e)(2)
references sec. 1.469-1(e)(2), Income Tax Regs., which further
                                                   (continued...)
                              - 14 -

Income Tax Regs.   The evidence in the record establishes that

Aeternum, a general partnership engaged in the manufacturing of

semi-conductor devices, was a trade or business.

     The first issue is whether the trade or business activities

of Aeternum, a general partnership, can be classified as the

trade or business activities of petitioner for purposes of the

“incidental” exception.   The regulations require that the

taxpayer own “an interest in such trade or business activity”,

not that the taxpayer be the sole owner of the trade or business.

Sec. 1.469-1T(e)(3)(vi)(C)(1), Temporary Income Tax Regs., 53

Fed. Reg. 5703 (Feb. 25, 1988).   Section 1.469-4(a), Income Tax

Regs., provides that a taxpayer’s activities include those

conducted through a partnership for purposes of grouping a

taxpayer’s trade or business activities with rental activities.

Additionally, petitioner was actively involved in affairs of the

general partnership and substantially contributed both time and

effort to the success of Aeternum.     Based on the regulations and

the facts before us, we hold that the trade or business

activities of petitioner for 1993 include the trade or business

activities of Aeternum for purposes of the “incidental”

exception.   Cf. Podell v. Commissioner, 55 T.C. 429, 433 (1970)

(interpreting “his trade or business” under section 1221(1) to



     9
      (...continued)
references sec. 1.469-4(b)(1), Income Tax Regs.
                              - 15 -

mean the trade or business of the partnership).

     To gain entitlement to the “incidental” exception,

petitioner must pass a three-part test.    The first part requires

petitioner to own an interest in Aeternum during 1993.

Petitioner was a 50-percent owner of Aeternum from October of

1990 until the partnership was effectively dissolved in August of

1993.   The second part requires a finding that the equipment was

predominantly used by Aeternum during 1993 or during at least two

of the previous 5 taxable years.    The evidence shows that

Aeternum relied on Cilena’s equipment to manufacture products for

the period 1990 through April of 1993 and that the equipment was

an integral part of the partnership business.    The final part

requires that petitioner’s gross rental income from the equipment

leasing activity be less than 2 percent of the lesser of the

unadjusted basis of the equipment and the fair market value of

the equipment.   Petitioner reported zero gross rental income from

the equipment for 1993, as well as for the previous taxable years

during which the equipment lease was in effect.    The evidence in

the record reflects that the equipment had an unadjusted basis

and fair market value above zero.    Respondent, who carries the

burden of proof as to this issue, has failed to present evidence

that petitioner received gross rental income and has also failed

to establish the unadjusted basis or fair market value of the

equipment.   We hold that the “incidental” exception set forth in
                               - 16 -

the regulations under section 469 applies to petitioner.

     The passive loss limitations of section 469 still apply to

petitioner unless the material participation standard is met.

See sec. 469(c)(1); Welch v. Commissioner, supra.     A taxpayer is

treated as materially participating in an activity only if the

taxpayer is involved in the activity on a basis which is regular,

continuous, and substantial.    See sec. 469(h)(1).   Petitioner

conducted the equipment leasing activity through his sole

proprietorship and personally purchased equipment, used materials

to construct equipment for use in the operations of the

partnership, maintained business expense records, and conducted

transactions relating to the leasing activity.    Based on all the

facts and circumstances, we hold that petitioner was involved in

the leasing activity on a basis that was regular, continuous, and

substantial.    See sec. 1.469-5T(a)(7), Temporary Income Tax

Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988).

III. Entitlement and Substantiation of Claimed Deductions

     Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving the entitlement to any

deduction claimed.    See INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).10   Taxpayers must substantiate any deductions


     10
      Sec. 7491, as effective for court proceedings arising in
connection with examinations after July 22, 1998, shifts the
                                                   (continued...)
                              - 17 -

claimed.   See Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).   Taxpayers are

required to maintain records sufficient to enable the

Commissioner to determine the taxpayer’s correct tax liability.

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

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

necessary expenses incurred during the taxable year in carrying

on a trade or business.   To be “necessary” an expense must be

“appropriate and helpful” to the taxpayer’s business.     Welch v.

Helvering, 290 U.S. 111, 113 (1933).   To be “ordinary” the

transaction which gives rise to the expense must be of common or

frequent occurrence in the type of business involved.     Deputy v.

du Pont, 308 U.S. 488, 495 (1940).

     The Schedule C deductions in issue fall into eight

categories:   (1) Legal and professional fees; (2) depreciation;

(3) travel and meals; (4) equipment transportation and storage;

(5) office; (6) telephone; (7) security; and (8) advertising.




     10
      (...continued)
burden of proof to the Commissioner, subject to certain
limitations, where a taxpayer introduces credible evidence with
respect to factual issues relevant to ascertaining the taxpayer’s
liability for tax. See Internal Revenue Service Restructuring
and Reform Act of 1998, Pub. L. 105-206, sec. 3001, 112 Stat.
726-727. Respondent contends that the examination commenced
before July 22, 1998, and petitioner has not argued that sec.
7491 is applicable to him.
                               - 18 -

     A.    Legal and Professional Fees

     Petitioner claimed a deduction of $57,92411 for legal and

professional expenses.    The amounts in issue relate to expenses

associated with petitioner’s personal bankruptcy proceeding and

with defending against the lawsuit filed by Mr. Cotter.

Petitioner argues that such expenses are deductible because they

are related to his trade or business interests.   Respondent

argues that such expenses are not ordinary and necessary and that

petitioner has failed to provide a basis for allocating the costs

between business and personal expenses.

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

necessary expenses paid or incurred during the year in carrying

on a trade or business.   Section 262(a) disallows a deduction for

personal expenses.   To decide whether an expense is deductible as

a trade or business expense as opposed to a nondeductible

personal expense, we look to the origin and character of the

expense.   See Woodward v. Commissioner, 397 U.S. 572, 577 (1970);

United States v. Gilmore, 372 U.S. 39, 48 (1963);12 American


     11
      Petitioner concedes that $1,635 of this amount was
incorrectly reported on his Schedule C but contends that it may
be deductible on Schedule A as a miscellaneous itemized
deduction. Petitioner failed to provide computations or other
evidence to support this contention.
     12
      “[T]he origin and character of the claim with respect to
which an expense was incurred, rather than its potential
consequences upon the fortunes of the taxpayer, is the
controlling basic test of whether the expense was ‘business’ or
                                                   (continued...)
                                 - 19 -

Stores Co. & Subs. v. Commissioner, 114 T.C. 458, 470 (2000).

Legal expenses are deductible if the claim arises in connection

with the taxpayer’s profit-seeking activities.     See United States

v. Gilmore, supra at 48.      In the present case, if petitioner’s

personal bankruptcy is proximately related to his trade or

business, then the legal expenses associated with the bankruptcy

are deductible.     See Kornhauser v. United States, 276 U.S. 145,

153 (1928); Dowd v. Commissioner, 68 T.C. 294, 303-304 (1977);

Ainsworth v. Commissioner, T.C. Memo. 1987-398; Cox v.

Commissioner, T.C. Memo. 1981-552.

       In April of 1993, petitioner filed for bankruptcy in order

to avoid paying the rent Aeternum owed under the facilities

lease.      Petitioner argues that his bankruptcy resulted from the

liabilities of Aeternum, and, thus, the expenses originated from

the business affairs of Aeternum and are deductible under section

162.    The origin of the claim in this case was petitioner’s share

of the liability for the debt owed by Aeternum, a business in

which petitioner had a 50-percent interest.     Aeternum’s failure

to pay rent forced petitioner into seeking bankruptcy protection.

The legal expenses incurred by petitioner were related to the

business activities of Aeternum and are deductible.     See sec.

162(a); see also Scofield v. Commissioner, T.C. Memo. 1997-547.



       12
      (...continued)
‘personal’”. United States v. Gilmore, 372 U.S. 39, 49 (1963).
                               - 20 -

     Two days after petitioner filed for bankruptcy, Mr. Cotter

filed a lawsuit in the United States Bankruptcy Court against

petitioner based on multiple causes of action relating to the

equipment leasing activity of Cilena and the partnership affairs

of Aeternum.   As a result, petitioner was forced to defend

against such causes of action in order to protect his interests

in Aeternum and Cilena.   A lawsuit “ordinarily and, as a general

thing at least, necessarily requires the employment of counsel

and payment of his charges.”   Kornhauser v. United States, supra

at 152.   Petitioner incurred legal expenses as a result of Mr.

Cotter’s lawsuit, which arose directly out of the business

affairs of Cilena and Aeternum.   These expenses are deductible

under section 162.

     Having established that petitioner is entitled to the legal

expenses incurred in his bankruptcy and the defense of Mr.

Cotter’s lawsuit, we must decide whether petitioner has

sufficiently substantiated the claimed deduction.

     The legal expenses in issue consist of:   (1) Payment to Dr.

West in the amount of $13,749 for anticipated legal and travel

expenses; (2) payment to George Bozzo in the amount of $500

relating to the business affairs of Cilena and Aeternum; (3)

payment to Sunnyvale Bar Association in the amount of $30 for

referral to a bankruptcy attorney; (4) payment to Larry Hughes in

the amount of $4,350 for legal work relating to petitioner’s
                             - 21 -

bankruptcy; (5) payment to Berliner Cohen in the amount of

$22,000 for legal work relating to petitioner’s bankruptcy and

partnership dispute; and (6) payment to Murray & Murray in the

amount of $15,660 for bankruptcy trustee services.

     Petitioner presented copies of checks, invoices, and his own

testimony as support for the claimed deductions.   However,

petitioner failed to establish that the payment to Dr. West was

for actual legal expenses that petitioner incurred.   Accordingly,

we hold that petitioner is entitled to a deduction of $42,540

($57,924 claimed deduction minus $1,635 concession minus $13,749

payment to Dr. West).

     B.   Depreciation

     Petitioner claimed a deduction of $20,815 for depreciation.

Section 167(a) allows as a depreciation deduction a reasonable

allowance for the exhaustion, and wear and tear, of property used

in a taxpayer’s trade or business.

     Respondent argues that Dr. West owned the rental equipment

that depreciation is being claimed on and that petitioner’s

depreciation schedule is unreliable because petitioner failed to

link the expenditures for the equipment with the depreciation

schedule and equipment identified in the equipment lease.

Petitioner argues that he owned the equipment for the entire

taxable year 1993 and that he has depreciated such equipment in a

consistent and accurate manner.
                              - 22 -

     Legal ownership is not a prerequisite to the right to a

depreciation deduction, but rather depreciation is predicated on

an investment in the property.   See Helvering v. F. & R. Lazarus

& Co., 308 U.S. 252, 254 (1939); Blake v. Commissioner, 20 T.C.

721, 732 (1953).   The evidence in the record reflects that

petitioner divested himself of ownership and an investment in the

rental equipment during the year in issue.

     Respondent’s contention that Dr. West was the legal owner of

the rental equipment during 1993 is supported by the evidence.

An attorney representing petitioner in Aeternum’s affairs made

the following reference for May 1, 1993, in an invoice sent to

petitioner: “telephone conf. with * * * [petitioner] re

representing * * * [Dr. West] in action against landlord re

equipment sold to * * * [Dr. West] by * * * [petitioner]”.     In an

separate invoice, a different attorney representing petitioner in

his bankruptcy and Aeternum affairs made the following reference

for the date of July 23, 1993: “conference with * * * [Dr. West’s

attorney] re: his comments and changes pursuant to list of

equipment for items sold”.   Petitioner also made the following

representation in the Settlement Agreement with respect to the

equipment that Cilena rented to Aeternum under the equipment

lease:

     [Petitioner] represents and warrants that he does not
     own the Leased Equipment and that he assigned such
     Leased Equipment to * * * [Dr. West]; as such, to the
     best of * * * [petitioner’s] knowledge, * * * [Dr.
                              - 23 -

     West] is the true owner of the Leased Equipment.

     Petitioner testified that he delivered his business records,

checkbooks, and all his assets to the bankruptcy trustee after he

filed for bankruptcy.   If petitioner transferred all his assets

to the bankruptcy trustee, then petitioner could not have been

able to sell or transfer the equipment to Dr. West after the

filing of bankruptcy.   Petitioner’s own testimony and the

documentary representations concerning ownership of the rental

equipment all point to Dr. West being the owner of the property

prior to petitioner’s filing for bankruptcy.

     Additional facts, such as the Settlement Agreement

identifying Dr. West as the lessor of the rental equipment (as an

assignee of Cilena), petitioner testifying that he “assigned” the

rental equipment to Dr. West, a storage space facility being

rented in Dr. West’s name, and Mr. Cotter’s testimony that he

thought Dr. West owned the property further support respondent’s

position.   Petitioner testified that his representation in the

Settlement Agreement that Dr. West was the true owner of the

rental equipment was the culmination of a plan on the part of

petitioner, Dr. West, and Mr. Cotter to avoid the sale of the

rental equipment by petitioner’s bankruptcy trustee and that

petitioner is still the true owner of the equipment.    We do not

accept petitioner’s self-serving, uncorroborated testimony on

this issue.   See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
                             - 24 -

     Petitioner testified that he borrowed money from Dr. West to

support the formation and business affairs of Cilena.   Petitioner

also presented documentary evidence and credible testimony with

respect to his purchases of the rental equipment.   However,

petitioner’s continuous insistence that he still owns the rental

equipment is inconsistent with the evidence in the record.13

Petitioner has failed to present sufficient evidence to prove the

period of time he owned the rental equipment in 1993.   Petitioner

presented a depreciation schedule, a schedule of expenditures

related to the equipment, the equipment lease, and his 1993 tax

return as support for his depreciation deduction, but he did not

adequately link the documents to provide a coherent basis upon

which to determine an appropriate deductible amount.    Petitioner

did not provide evidence establishing that any of the

depreciation claimed was related to the portable clean room.

Accordingly, we hold that petitioner has not provided sufficient

evidence for us to estimate the amount of depreciation; as a


     13
      Petitioner contends that he is still the legal owner
because Mr. Cotter never fulfilled the conditions prescribed by
the Form UCC-1 Financing Statement. Petitioner represented in
the Settlement Agreement that he was no longer the owner of the
rental equipment. The Form UCC-1 Financing Statement was
required as security for Mr. Cotter’s indemnity obligation to
petitioner for Aeternum liabilities assumed by Mr. Cotter. The
Form UCC-1 Financing Statement evidences only a security
interest, not an ownership interest, and petitioner has not
established that Mr. Cotter failed to fulfill his obligations
under the Settlement Agreement. See Cal. Com. Code sec. 9302
(West 1990); see also Waddell v. Commissioner, 86 T.C. 848, 858
(1986), affd. 841 F.2d 264 (9th Cir. 1988).
                               - 25 -

result, petitioner has failed to establish entitlement to a

depreciation deduction.    See Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 743

(1985).

     C.     Travel and Meals

     Petitioner claimed deductions for business-related travel,

business meals, and automobile expenses.    Section 274(d) allows a

deduction for travel expenses if the taxpayer satisfies strict

substantiation requirements through either adequate records or

the taxpayer's own detailed statement that is corroborated by

sufficient evidence.    The substantiation requirements of section

274(d) also apply to “listed property”, which includes any

passenger automobile.    Secs. 274(d)(4), 280F(d)(4)(A)(i).14    At a

minimum, the taxpayer must establish:    (1) The amount of the

expense; (2) the time and place the expense was incurred; (3) the

business purpose of the expense; and (4) the business

relationship to the taxpayer of any persons entertained or using

the property.   See sec. 274(d).

     Petitioner claimed a deduction of $820 for car and truck

expenses.   Petitioner points to his 1993 Schedule C and 1993 Form



     14
      The rule under Cohan v. Commissioner, 39 F.2d 540 (2d Cir.
1930), is not applicable to deductions subject to the
substantiation requirements of sec. 274(d). See Sanford v.
Commissioner, 50 T.C. 823, 828 (1968), affd. per curiam 412 F.2d
201 (2d Cir. 1969); sec. 1.274-5T(a)(4), Temporary Income Tax
Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
                              - 26 -

4562, Depreciation and Amortization, as documentary evidence to

substantiate the claimed deduction.    Section 1.274-

5T(c)(2)(ii)(C), Temporary Income Tax Regs., 50 Fed. Reg. 46018-

46019 (Nov. 6, 1985), requires that the date of each business use

of an automobile must be stated in order to gain entitlement to a

deduction.   While petitioner has identified the business use

mileage, he has failed to describe the automobile used, provide

the dates of use, and identify the business purpose involved.

Petitioner has failed to establish entitlement to this deduction.

     Petitioner claimed a deduction of $3,104 for travel expenses

related to flying between Seattle and San Francisco from August

of 1993 throughout the end of that year.    As support for these

expenses, petitioner presented copies of travel tickets, various

receipts, and Cilena’s expense account records.    In arguing that

the costs were personal in nature, respondent points to the facts

that petitioner stayed with his mother, lived in San Francisco

his whole life prior to moving to Washington, and implied he

visited friends on these trips.

     Petitioner argues that the trips were necessary in order to

attend bankruptcy meetings, meet with attorneys, arrange for the

moving and storage of equipment, and recover business records.

No evidence was presented establishing the extent and specific

nature of the business conducted on each trip.    The evidence in

the record reflects that petitioner was no longer the owner of
                              - 27 -

the rental equipment at the time the trips occurred.

Additionally, petitioner has not argued that the trips were

related to the consulting services or portable clean room.

Accordingly, we hold that petitioner has failed to prove

entitlement to this deduction.

     Petitioner claimed a deduction of $160 for business meals.

However, petitioner concedes that he is entitled only to a

deduction of $36, relating to one business lunch.15    The only

evidence presented by petitioner is a reference in the expense

account records of Cilena to a “technician lunch”.    Petitioner’s

failure to present more evidence as to the business aspect of

this lunch precludes entitlement to the deduction.

     D.   Equipment Transportation and Storage

     Petitioner claimed deductions of $5,326 in equipment storage

expenses and $3,66916 in equipment transportation costs.   The

storage and equipment transportation expenses are deductible if

they are ordinary and necessary in carrying on petitioner’s trade

or business activities.   See sec. 162(a).   Petitioner has failed



     15
      Petitioner testified that other deducted meals were not
related to his business activities and contended that such meals
would properly be deductible on Schedule A, Itemized Deductions,
as job search expenses. Petitioner failed to provide any
computations or other evidence to support this contention.
     16
      Petitioner concedes that $1,799.50 in equipment
transportation expenses was not paid until a subsequent year.
Accordingly, the equipment transportation expense at issue is
$1,869.20.
                                - 28 -

to establish the periods of ownership with respect to the rental

equipment.    Petitioner does not argue that the transportation and

storage expenses were related to the consulting services or

portable clean room.     Accordingly, petitioner is not entitled to

deduct the equipment transportation and storage expenses.

     E.     Office

     Petitioner claimed deductions of $108 for professional

publications and $241 for copying, printing, and postage

expenses.     As support for the professional publications

deduction, petitioner submitted the business expense account

records of Cilena for 1993, showing the $108 in publication

expenses, and testified as to the nature of the publications.       We

hold that these expenses are properly deductible as ordinary and

necessary expenses.

     Petitioner testified that the other office expenses related

to the general activities of Cilena and the dissolution of

Aeternum.     Petitioner presented the expense account records of

Cilena to support the amounts claimed.     Based on the evidence in

the record, petitioner has established entitlement to the

deduction of $241 for the other office expenses.

     F.      Telephone

     Petitioner claimed a deduction of $733 for business

telephone expenses, including the use of a cellular phone.

Respondent does not challenge the amount or that petitioner made
                                - 29 -

the payments.    Respondent does challenge the nature of the

telephone calls.    Petitioner presented regular telephone records

from April, May, and June of 1993, bearing notations of the calls

which were business in nature.    Petitioner presented cellular

phone records from July to December of 1993 indicating the time,

amount, and place of the calls.    Cellular phones are classified

as “listed property” under section 280F(d)(4)(A)(v), and such

expenses must be substantiated by adequate records or sufficient

evidence which corroborate the taxpayer's own testimony,

including:   (1) The amount of the expenditure or use based on the

appropriate measure; (2) the time and place of the expenditure or

use; and (3) the business purpose of the expenditure or use.      See

sec. 274(d).    Petitioner testified that the business purpose of

the calls related to legal matters and the affairs of Cilena, as

well as the dissolution of Aeternum.     We hold that petitioner has

established entitlement to a deduction for the regular telephone

and cellular phone expenses incurred.

     G.   Security

     Petitioner claimed a deduction of $2,394 for security

antitheft services related to the protection of the rental

equipment.     Private security payments to protect property which

is subject to potential loss or destruction arising from the

operation of a business are deductible expenses under section

162(a).   See Munson v. Commissioner, 18 B.T.A. 232, 236-237
                                - 30 -

(1929).    Petitioner’s failure to prove the period of ownership

with respect to the equipment precludes entitlement to any

deduction for the security antitheft costs.

     Petitioner also claimed a repair and maintenance deduction

of $65 for lock services incurred in early April of 1993.

Petitioner testified that a lock at the Aeternum facilities was

damaged and that he replaced the lock to protect his own

investment, not to protect an Aeternum investment.     Petitioner’s

claimed deduction is for an expense related solely to property

which he has not established ownership of.     Accordingly,

petitioner is not entitled to this deduction.

     H.     Advertising

     Petitioner claimed a deduction of $126 for advertising

expenses related to the sale of equipment owned by Cilena.

Advertising expenses are allowed as a deduction under section 162

if the taxpayer can show a sufficient connection between the

expenditure and the taxpayer's business.     See RJR Nabisco Inc. v.

Commissioner, T.C. Memo. 1998-252; sec. 1.162-1(a), Income Tax

Regs.

     To substantiate the advertising deduction, petitioner

testified that the expense was related to the selling of

equipment and provided respondent with a copy of a Cilena check

for $126, payable to “San Jose Mercury News”, dated June 14,

1993.     Petitioner also referenced the payment in his itemized
                                 - 31 -

expense account report for Cilena.        Petitioner has not

established that he was the owner of the rental equipment on this

date.      Further, petitioner has not argued that the advertising

expense was related to the consulting services or portable clean

room.      Therefore, petitioner has not proven entitlement to the

claimed deduction.

IV.   Addition to Tax

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

file a required return on or before the specified filing date.

The addition to tax is 5 percent of the amount required to be

shown as tax on the return and an additional 5 percent is imposed

for each additional month or fraction thereof during which the

failure continues, but not to exceed 25 percent in the aggregate.

See sec. 6651(a)(1).      This addition to tax may be avoided only if

petitioner can show that his failure to file was due to

reasonable cause and not willful neglect.        See Rule 142(a);

United States v. Boyle, 469 U.S. 241, 245-246 (1985).17

      Petitioner filed his 1993 tax return on June 30, 1995.

Petitioner argues that the bankruptcy proceedings required him to

provide documents to the bankruptcy trustee which were necessary

for him to effectively file his tax return, and the trustee did

not return the documents to petitioner until the spring of 1995.

As a general matter, the unavailability of information or records


      17
           See supra note 10.
                               - 32 -

is not reasonable cause for failure to timely file a tax return.

See Crocker v. Commissioner, 92 T.C. 899, 913 (1989); Electric &

Neon, Inc. v. Commissioner, 56 T.C. 1324, 1342-1343 (1971), affd.

without published opinion 496 F.2d 876 (5th Cir. 1974).    A

taxpayer is required to timely file a tax return based on the

best information available and thereafter to file an amended

return if necessary.    See Estate of Vriniotis v. Commissioner, 79

T.C. 298, 311 (1982).    Nothing in the record suggests that

petitioner applied for an extension of time to file his 1993

return.   Petitioner did not establish that he made adequate

efforts to gain access to necessary tax documents held by the

bankruptcy trustee.    The evidence shows that the bankruptcy

proceeding was dismissed in August of 1993, long before

petitioner’s 1993 tax return was due.    Additionally, petitioner

maintained his business expense records on computer files which

were not under the control of the bankruptcy trustee, indicating

that he could have prepared a timely 1993 return with a

reasonable degree of accuracy.    Petitioner has presented no

evidence showing that either Acuson or Siemens Ultrasound

submitted their Form W-2, Wage and Tax Statement, in an untimely

manner which would prejudice petitioner’s ability to file his

1993 tax return.   In light of the evidence before us, we find

that petitioner has not demonstrated that his failure to timely

file his 1993 return was due to reasonable cause or a lack of
                                  - 33 -

negligence.     Accordingly, we hold that petitioner is liable for

the addition to tax under section 6651(a)(1).

V.   Accuracy-Related Penalty

     Section 6662(a) imposes a penalty equal to 20 percent of the

portion of an underpayment of tax attributable to a taxpayer’s

negligence, disregard of rules or regulations, or substantial

understatement of income tax.       See sec. 6662(a), (b)(1) and (2).

“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).

The term “disregard” includes any careless, reckless, or

intentional disregard of rules or regulations.       Sec. 6662(c).   An

understatement is “substantial” if it exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

Sec. 6662(d)(1) and (2).       Respondent’s determination that

petitioner is negligent is presumptively correct, and the burden

is on petitioner to show a lack of negligence.       See Hall v.

Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo.

1982-337.18     The accuracy-related penalty applies unless

petitioner demonstrates that there was reasonable cause for the

underpayment and that he acted in good faith with respect to the

underpayment.     See sec. 6664(c).




     18
          See supra note 10.
                               - 34 -

     Petitioner has established that he was involved in an active

trade or business activity.    With respect to the claimed

deductions, petitioner provided detailed expense accounts records

and credible testimony.   Petitioner testified that he relied on

his accountant to prepare his 1993 tax return, as petitioner had

done in previous years.   Reliance on an accountant to prepare tax

returns is not sufficient by itself to establish reasonable

cause.    See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662

(1987).    The taxpayer must also show that he supplied the tax

preparer with complete and accurate information sufficient to

properly prepare the return, that the incorrect return was the

result of the tax preparer’s mistakes, and that the taxpayer in

good faith relied on the advice of a competent tax preparer.      See

Pessin v. Commissioner, 59 T.C. 473, 489 (1972).

     While petitioner may have provided his accountant with

detailed records, the expenses listed in the records were not

allowable as business deductions.    Petitioner has not alleged

that his accountant made any mistakes in preparing petitioner’s

1993 tax return.    Additionally, petitioner’s insistence that he

is still the owner of the rental equipment is troubling in light

of the substantial evidence to the contrary.    Based on the

evidence in the record, petitioner has failed to demonstrate
                             - 35 -

reasonable cause or a lack of negligence.   Accordingly, we hold

that petitioner is liable for the accuracy-related penalty.




                                        Decision will be entered

                                   under Rule 155.
