                        T.C. Memo. 1995-518



                      UNITED STATES TAX COURT



      SHERMAN J. MILLER AND ALICE K. MILLER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5593-93.              Filed October 30, 1995.



     Nick R. Hay, for petitioners.

     Mary E. Dean and Sherri L. Feuer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SCOTT, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax for the

calendar years 1987 and 1988 as follows:
                                        Additions to Tax
                           Sec.         Sec.           Sec.        Sec.
Year   Deficiency     6653(a)(1)(A)   6653(a)(1)(B) 6653(a)(1)     6661
                                         1
1987    $8,195            $410                           --      $2,049
1988     5,062              --          --              253       1,266
        1
            50 percent of the interest due on $7,780.


       All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

       Some of the issues raised by the pleadings have been

disposed of by agreement of the parties, leaving for decision:

(1) Whether petitioners are entitled to deduct travel expenses,

including expenses of maintaining a condominium for trips to

Hayward, Wisconsin, as ordinary and necessary business expenses

related to an insurance business of Sherman J. Miller; (2)

whether petitioners are entitled to deduct amounts paid as dues

to the Midland Hills Country Club of Roseville, Minnesota,

for the years at issue; (3) whether petitioners are liable for

additions to tax for negligence under sections 6653(a)(1)(A) and

(B) for 1987 and section 6653(a)(1) for 1988; and (4) whether

petitioners are liable for additions to tax for substantial

understatement of tax under section 6661 for each of the years

1987 and 1988.

                                 FINDINGS OF FACT

       Some of the facts have been stipulated and are found

accordingly.
                                -3 -

     Petitioners, husband and wife, who resided in Roseville,

Minnesota, at the time of the filing of their petition in this

case, filed their joint Federal income tax return for the

calendar year 1987 with the Andover Internal Revenue Service

Center, and filed their joint Federal income tax return for the

calendar year 1988 with the Kansas City Internal Revenue Service

Center.

     During the years 1987 and 1988, Sherman J. Miller

(petitioner) was employed as a full-time school teacher in the

St. Paul, Minnesota, area.   During these years, petitioner was

also self-employed selling insurance.   He was licensed to sell

insurance in both Wisconsin and Minnesota.   Petitioner conducted

his insurance business in the St. Paul area out of his home in

Roseville, Minnesota.

     During the years at issue, petitioner made trips in the

summer months to the Hayward, Wisconsin, area.   Hayward is a

recreational area located approximately 160 miles northeast of

St. Paul, which attracts people from Wisconsin, Minnesota, Ohio,

and Illinois.    Petitioner spent approximately 35 days in Hayward

during the summer months of each of the years 1987 and 1988.

Petitioner usually spent 2 days in Hayward on each trip.

     Petitioner solicited clients and potential clients for his

insurance business in the St. Paul, Minnesota, area through both

direct mail and by field work, which he referred to as

"prospecting".   Petitioner's insurance-related activity in
                                -4 -

Hayward consisted primarily of "prospecting" in the years here in

issue.    Petitioner considers that when an insurance agent meets

potential clients who are willing to speak about insurance, the

agent is "prospecting".   Petitioner's "prospecting" activities in

the Hayward area consisted of going to dinner, playing golf at

the Tagalong Country Club, and having drinks with persons he

considered potential clients.

     For the taxable year 1987, petitioner reported gross

receipts in the amount of $6,795 from his insurance business, of

which $2,249 was identified as related to business in Hayward,

Wisconsin.    For the taxable year 1988, petitioner reported gross

receipts in the amount of $5,803, none of which was identified on

the return as relating to business in Hayward.

     Petitioner deducted expenses that he claimed as related to

his insurance business in Hayward on both Schedule C, Profit (and

Loss) from Business or Profession, and Form 2106, Employee

Business Expenses, of his Federal income tax return for each of

the taxable years 1987 and 1988.

     On August 7, 1984, petitioners purchased a condominium that

was located approximately 14 miles southwest of Hayward (the

condominium) for $39,417.    The condominium was a three-bedroom

unit.    For the taxable years 1984 through 1986, petitioners, on

Schedule E of their Federal income tax returns, deducted expenses

connected with the condominium, listing it as rental property.
                                -5 -

     During the years at issue, petitioner traveled from his home

in the St. Paul area to Hayward in a 1986 GMC van which he used

solely for trips to Hayward.    When he was in Hayward, petitioner

ate and slept at the condominium.      Petitioner's wife accompanied

him on 50 to 60 percent of his trips to Hayward.     Some of the

time, petitioner's wife helped petitioner drive.     While in

Hayward, petitioner's wife would use the condominium for her

personal activities, including reading, knitting, and

embroidering.   Petitioner's wife would also shop in the Hayward

area.   Sometimes petitioner's wife would play golf with

petitioner and other persons at the Tagalong Country Club near

Hayward and go out to dinner with petitioner and other persons in

Hayward.   Petitioners maintained a boat which was located near

the Hayward condominium.

     There were hotels, motels, and condominiums available for

rent in the Hayward area during the summers of 1987 and 1988.

Condominiums were rented in the Hayward area for approximately

$100 a day.

     During the years at issue, the condominium was unsuitable

for use during the winter months.

     During the years at issue, petitioners were members of and

paid dues to the Midland Hills Country Club of Roseville,

Minnesota (the country club).   Both petitioners used the country

club.   Both petitioners played golf at the country club.

Petitioner sometimes had meals and drinks at the country club
                               -6 -

with clients and potential clients in connection with his

insurance-prospecting activity.   The country club was also used

by petitioners' family for a family wedding in 1987.    Petitioner

treated various required charges at the country club, such as

valet charges, ladies prize fee charges, and locker room charges,

in the same manner he treated the charges for dues.    These

charges were incurred by country club members regardless of

whether the member actually used these services.   There were

charges made by petitioner at the country club on 33 days during

1987 which related to drinks or meals with prospective insurance

clients.

     On their 1986 and 1987 Federal income tax returns,

petitioners deducted expenses for the 1986 van, the condominium,

and meals and entertainment.   Petitioners claimed as deductions

on their Federal income tax returns the following expenses which

were stated to be related to petitioner's insurance activities in

Hayward:
                               -7 -

     Expense                              1987        1988

     Van Expenses
          Gas, oil, repairs              $1,760       $959
          Other                             239        364
          Depreciation                    4,545      4,426
            Subtotal                      6,544      5,749

     Condominium Expenses
          Depreciation - condominium      2,759      2,759
                       - furnishings        933      1,045
          Insurance                         177        177
          Real estate taxes                 712        717
          Other assessments                 100        100
          Maintenance fees                  400        400
          Utilities                         330        286
          Repair                             32         25
          Other supplies                    926      1,034
            Subtotal                      6,369      6,543

     Meals and Entertainment                547        574

            Total Expenses               13,460     12,866


     Petitioner compiled a list of business expenses for the

years here in issue only at the time he prepared his tax return.

Petitioner made notations on dinner receipts for country club

dinners at the time he prepared his tax returns and not at the

time of the dinner.   Petitioner made a number of mistakes in his

recordkeeping.   Petitioner had lost or misplaced some of the

receipts at the time of the trial of this case.

     Petitioner went through his receipts at the time he prepared

his returns to segregate them between items he considered

business and items he considered personal at that time.

Petitioner's schedule of insurance company expenses was prepared

from receipts that he gathered from three different locations.
                                -8 -

Petitioner kept some of his receipts relating to the Hayward area

in a drawer.

     Respondent in her notice of deficiency disallowed the

deductions claimed by petitioners for expenses relating to the

condominium and the 1986 van, and the deduction claimed for

country club dues for each of the years 1987 and 1988 on the

basis that petitioners' trips to Hayward were primarily personal

and the primary use of the condominium was personal, and that

petitioner had not established that the country club dues were

deductible.    Respondent determined that the real estate taxes on

the condominium were deductible as an itemized deduction on

Schedule A.

     In 1987 petitioners claimed $4,419 for meals and

entertainment on Form 2106.   Respondent has conceded $1,050 of

this amount, and petitioner has conceded $1,469. In 1988

petitioners claimed $3,245 for meals and entertainment.

Petitioners have conceded $917 of this amount.   Of the amount

originally claimed, $1,900 and $2,328 of dues expenses paid to

the country club remain at issue for the taxable years 1987 and

1988, respectively.

                               OPINION

     Section 162(a)(2) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including traveling expenses

while away from home in the pursuit of a trade or business.    Sec.
                                -9 -

1.162-2(a), Income Tax Regs.    If travel expenses are incurred for

both business and other purposes, the travel expenses are

deductible only if the travel is primarily related to the

taxpayer's trade or business.    Sec. 1.162-2(b)(1), Income Tax

Regs.   If a trip is primarily personal in nature, the travel

expenses incurred are not deductible even if the taxpayer engages

in some business activities at the destination.    Sec. 1.162-

2(b)(1), Income Tax Regs.    Whether travel is related primarily to

the taxpayer's trade or business or is primarily personal is a

question of fact.    See Holswade v. Commissioner, 82 T.C. 686,

698, 701 (1984).

     Petitioner states that he originally purchased the

condominium as an investment, but when he had difficulty renting

it, he decided in 1987 to convert the condominium to business use

as lodging when he traveled to Hayward.    Petitioner testified

that it was difficult to find a hotel room in Hayward during his

visits there.    However, he also stated that he had not been in

business in Hayward until 1987, when he decided to use the

condominium in his insurance business.

     Petitioner called his business activity in Hayward

"prospecting".    He said that he used two primary methods of

prospecting, which were direct mail and "sunshining", and that

the method he used in Hayward was "sunshining".    "Sunshining",

according to petitioner, was meeting people who would be likely

candidates for purchasing insurance.    Petitioner stated that a
                                -10 -

potential client was "anyone that is living and breathing and of

appropriate age".   If petitioner asked a golfing partner whether

he needed insurance, he considered the game to be a business

meeting and the expenses connected with that meeting deductible.

     Petitioner's wife accompanied petitioner on 50 to 60 percent

of his trips to Hayward.   Petitioner testified that his wife

accompanied him on these trips as a chauffeur, but there is

nothing in the record to indicate that petitioner needed a

chauffeur as an ordinary and necessary business expense.

     Based on the record, we conclude that petitioners' trips to

Hayward were primarily for personal activities, and, therefore,

they are not entitled to deduct the travel expenses to Hayward or

the expenses related to the condominium under section 162.

Petitioner testified that he only visited Hayward during the

summer months.   Petitioner testified that he played golf "usually

with a prospect or a client", implying that he also played golf

without clients.    Petitioner's wife testified that she used the

condominium for personal use, including knitting and

embroidering, and that she shopped in the Hayward area while on

her trips there.    The fact that petitioner's wife accompanied him

on a substantial number of his trips to Hayward, without a

showing that she assisted petitioner in any business activities,

further indicates that the trips were primarily personal.

Petitioners maintained a boat in Hayward.   They claimed that the
                                -11 -

boat was never used by them in the years here in issue, but did

not explain why they kept it.

     Petitioner contends that all his social contacts in Hayward,

which to an appreciable extent were while playing golf, were

business meetings.   Petitioner offered a list of persons he

claimed he met with in Hayward for business reasons.   Some of

these persons who were called as witnesses by respondent at the

trial testified that they had no recollection of meeting with

petitioner to discuss insurance during the years here at issue.

Mrs. Carolyn Butterbaugh had no recollection of discussing

insurance with petitioner during the dates petitioner claimed to

have met with her.   Mr. Richard Olsen stated that he never met

with petitioner in the Hayward area.    He further testified that

he never purchased insurance from petitioner.   Mr. John Rausch

could not recall discussing insurance with petitioner.   Some of

these persons did recall playing golf with petitioner or with

petitioner and his wife at the Tagalong Club in the Hayward area.

Some of the people petitioner claimed he had business meetings

with in Hayward were from the St. Paul area.

     The discrepancy arising from petitioner's claims of business

meetings with persons who denied they had business meetings with

petitioner is explained by petitioner's definition of a business

meeting.   Petitioner defined the prospecting aspect of his

business as "introducing yourself, shaking hands, * * * making

people like you and want to be with you".   Petitioner's business
                               -12 -

deductions were for such activities as playing golf or having

dinner with persons he considered potential clients, since

occasionally he would ask them whether they needed insurance.

Petitioner claims such activities were business meetings.    Under

section 162, however, a more direct, primary relationship to the

production of business income must be shown to establish that

such a meeting is a business meeting.   Henry v. Commissioner, 36

T.C. 879, 884 (1961).   Since petitioner has failed to prove that

the trips to Hayward were more business than personal, the

claimed costs associated with these trips are not deductible.

     We are also unpersuaded by petitioner's argument that other

lodging in the Hayward area during the summer months was not

reasonably available.   Petitioner testified that a depressed

rental market was the reason he did not continue to use the

condominium as rental property.   Another witness, Mrs. Janet

Loftus, testified as to the availability of hotels and

condominiums in the area.   The availability of lodging

accommodations in Hayward was also testified to by Mrs. Carolyn

Butterbaugh.   Petitioner testified that condominiums rented for

"about $100 a day".   We find that the evidence indicates that

other lodging would have been available to petitioner at a cost

far less than maintaining the condominium.   In our view,

petitioner merely decided that he was dissatisfied with his

rental income from the condominium and would find another use for

it under which, in his view, he would be entitled to deduct the
                               -13 -

expenses connected with the condominium.     Since he was an

insurance agent, he decided that when he was in the Hayward area

he would on occasion speak to a golfing partner or dinner

companion about insurance and thereby justify deducting the costs

connected with the condominium and his trips to Hayward.

     We, therefore, sustain respondent's disallowance of

petitioners claimed travel expenses to the Hayward area from

Roseville.   Because we have concluded that the travel expenses

are not deductible since they were not incurred primarily for

business purposes, we need not address the issue of whether the

expenses were reasonable.1

     Next at issue is whether petitioner is entitled to deduct

country club dues during the years at issue.     Section 274

generally disallows deductions for expenses for entertainment

facilities, unless the taxpayer establishes that the facility was

used primarily for the furtherance of the taxpayer's trade or

business and that the item was directly related to the active

conduct of such trade or business.     Sec. 274(a)(1)(B); sec.

274(a)(2)(C).   In order to show that the facility was used

primarily for the furtherance of a taxpayer's trade or business,

the taxpayer must show that the actual use of the facility during

     1
        For these same reasons, we also find that petitioners are
not entitled to a deduction under sec. 212. In order for
petitioners to be entitled to a deduction under sec. 212, the
predominant purpose and use of the property must not be for
recreation, a hobby, or some other nonprofit motive. Sec. 1.212-
1(c), Income Tax Regs.
                               -14 -

the taxable year was more for business use than for personal use,

and the taxpayer is required to maintain records segregating the

use of the facility into business and personal categories.    Sec.

1.274-5T(c)(6)(iii), Temporary Income Tax Regs., 50 Fed. Reg.

46022 (Nov. 6, 1985).   The requirements of section 274 are in

addition to those of section 162, and petitioner must satisfy, as

an initial matter, the "ordinary and necessary" business expense

requirement of section 162.   Randall v. Commissioner, 56 T.C.

869, 874-875 (1971).

     Petitioner offered into evidence the receipts from the

country club for the year 1987, which he determined were for

business expenditures at the time he prepared his return.    There

was no evidence, however, that petitioner ever had any direct

business meetings at the country club.   There was only evidence

of his prospecting activities, which did not rise to the level of

a direct business meeting as required.   Petitioner has failed to

show that the activities at the country club, which afforded

contacts with possible future clients, had any direct

relationship to the production of business income.   See Henry v.

Commissioner, supra.

     Petitioner contends that the receipts from the country club

for 1987 illustrate that during more than 50 percent of the days

that he used the country club, the use was for business purposes.

He claims that for this reason he is entitled to a deduction

under the "deemed to have established" rule of section 1.274-
                                 -15 -

2(e)(4), Income Tax Regs.    We disagree that petitioner has

established by these receipts that 50 percent of the total

calendar days of his use of the country club during a taxable

year were days of business use.     Petitioner's claim is based on

food and drink charges, which respondent agreed he was entitled

to deduct.    However, section 1.274-2(e)(4), Income Tax Regs.,

requires that the taxpayer show that he had a "substantial and

bona fide business discussion", within the meaning of section

1.274-2(d)(3)(i)(a), Income Tax Regs., to count the day as a

business use.    Furthermore, there is no showing that petitioner

and his family did not use the club on other days for golf,

tennis, swimming, or other purposes which would not show on a

food or beverage tab.    The largest single bill in 1987 is for a

wedding reception which petitioners consider use for 1 day.    It

is inconceivable that such an affair would not have required a

number of other days of visits to the country club in planning

the affair.    The fact that respondent agreed that the relatively

small amounts, as compared to other 1987 country club charges,

shown on the thirty-three receipts were deductible by petitioner

does not establish that the dues paid to the country club were

ordinary and necessary expenditures under section 162.     Randall

v. Commissioner, supra.     Petitioner had a family membership in

the club.    He has made no showing of how much his wife and

children used the country club in 1987, and, other than his

totally unsupported testimony that 50 percent of the use of the
                               -16 -

club in 1988 was for business, there is no evidence of what, if

any, business use was made of the country club in 1988.

     Petitioners contend that, in any event, they are not liable

for additions to tax for negligence pursuant to section

6653(a)(1)(A) and (B) for the taxable year 1987 and pursuant to

section 6653(a)(1) for the taxable year 1988.    Negligence is

defined as a lack of due care or a failure to do what a

reasonable and ordinarily prudent person would do under the

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

     Based on the record in this case, we find that petitioners

have failed to show that they were not negligent.    Petitioner

failed to keep adequate records of expenditures, particularly

with regard to the activities at the country club.    Petitioner

had lost or misplaced some of the receipts by the time of trial.

Petitioner admitted to making several mistakes in the records

that he did keep.   We, therefore, find that petitioners were

negligent in keeping business records to verify the expenses of

the insurance business for the years at issue.

     Petitioners also contest respondent's determination of

additions to tax under section 6661 for each of the years here in

issue.   Section 6661(a) imposes an addition to tax of 25 percent

of the underpayment attributable to a substantial understatement

of income tax.   An understatement is defined as the tax required

to be shown on the return less the tax shown on the return,

reduced by any rebates.   Sec. 6661(b)(2).   An understatement is
                               -17 -

substantial if it exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000.     Sec.

6661(b)(1)(A).

     If a taxpayer has substantial authority for his tax

treatment of any item on the return, the understatement is

reduced by the amount of tax attributable to that item.     Sec.

6661(b)(2)(B)(i).   Similarly, the amount of understatement is

reduced by the tax attributable to any item adequately disclosed

either on the taxpayer's return or in a statement attached to the

return.   Sec. 6661(b)(2)(B)(ii).

     Petitioners have not shown that there was either substantial

authority for their position with respect to any of the items not

conceded by respondent, or that there was adequate disclosure of

any of these items on the returns.     Petitioners' argument that

there was substantial authority, merely because the issues were

litigated in this case, is without merit.     We, therefore, sustain

the additions to tax under section 6661 for each of the years

here in issue if, upon recomputation of petitioner's tax

liability for the years here in issue, a substantial

understatement as stated in section 6661(b)(1)(A) results.



                                                 Decision will be

                                       entered under Rule 155.
