                           T.C. Memo. 1999-358



                         UNITED STATES TAX COURT



          JOHN H. MINER AND HOLLY K. MINER, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 21663-96.                  Filed October 26, 1999.



       Hubert E. Kelly, for petitioners.

       John W. Duncan, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       COLVIN, Judge:   Respondent determined deficiencies in

petitioners' income tax and additions to tax as follows:

                                  Additions to tax            Penalty
                           Sec.           Sec.        Sec.     Sec.
Year     Deficiency     6651(a)(1)     6653(a)(1)     6654    6662(a)
1988      $13,717         $3,207         $2,034      $1,282      -
1989        8,428            -             -            364    $4,167
1991       14,586          3,306           -            -       2,917
                               - 2 -

     Petitioners' corporation, Cost Less Auto Parts, Inc. (Cost

Less), paid $175,000 to a shareholder (Leonard Jasiak) to buy his

Cost Less stock.   Around that time, Jasiak promised (for no

consideration) that he would not compete against Cost Less.

     The issues for decision are:1

     1.   Whether the fact that Jasiak voluntarily promised not

to compete against Cost Less entitles Cost Less to amortize any

of its payment for Jasiak's stock.     We hold that it does not.

     2.   Whether Cost Less has shown that a $10,000 reduction in

its ending inventory for each year in issue is necessary to

clearly reflect its income.   We hold that it has not.

     3.   Whether Cost Less or petitioners may deduct expenses

for the business use of petitioners' vehicle or miscellaneous

expenses that petitioner paid on behalf of Cost Less.     We hold

that they may not.




     1
       Petitioners concede that, if there are deficiencies in
income tax for 1988 and 1991, they are liable for the addition to
tax under to sec. 6651(a)(1) for those years.
     Respondent determined that petitioners are liable for the
addition to tax for failure to pay estimated tax under sec. 6654
for 1988 and 1989. We lack jurisdiction to decide this issue if
petitioners filed income tax returns for years in which the
addition is asserted. See sec. 6665(b)(2); Meyer v.
Commissioner, 97 T.C. 555, 562 (1991); Fujita v. Commissioner,
T.C. Memo. 1999-164; Cherry v. Commissioner, T.C. Memo. 1998-360;
Reese v. Commissioner, T.C. Memo. 1997-346. Petitioners filed
income tax returns for those years. Thus, we lack jurisdiction
to decide whether petitioners are liable for the addition to tax
under sec. 6654 for 1988 and 1989. Sec. 6665(b)(2).
                                 - 3 -

     4.      Whether petitioners are liable for the addition to tax

or penalty for negligence for 1988, 1989, and 1991.       We hold that

they are not.

     Section references are to the Internal Revenue Code as

amended.     Unless otherwise specified, Rule references are to the

Tax Court Rules of Practice and Procedure.       References to

petitioner are to John H. Miner.

                         I.   FINDINGS OF FACT

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

A.   Petitioners

     Petitioners are married and lived in Tucson, Arizona, when

they filed their petition in this case.

B.   Cost Less Auto Parts, Inc.

     1.      Formation

     Leonard Jasiak (Jasiak) and petitioner organized Cost Less

Auto Parts, Inc. (Cost Less), in 1974.     Petitioners owned 50

percent of the stock, and Jasiak and his wife owned the other 50

percent2 from 1974 to the time Jasiak sold his shares to Cost

Less.     Cost Less was an S corporation under section 1361 during

the years in issue.




     2
       At a date not stated in the record, Jasiak acquired his
wife's interest so that he owned a 50-percent interest in Cost
Less.
                                - 4 -

     2.    Operation

     Cost Less buys and sells new and used auto parts in Tucson.

It has one place of business.

     Jasiak and petitioner ran Cost Less.     Jasiak was the general

manager.   He ordered and sold parts and supervised employees.    He

knew the business very well.

     The auto parts business in Tucson was highly competitive

during the years in issue.   Cost Less had about 30 competitors

within a 5-mile radius during the years in issue, including auto

parts stores, new car dealerships, salvage yards, discount

stores, drug stores, and grocery stores.

     Jasiak started another auto parts store in 1975 or 1976,

operated it about 1-1/2 years, and then closed it.

     3.    Sale of Jasiak's Cost Less Stock

     In 1986, Jasiak decided that he wanted to retire and sell

his stock to Cost Less.   Jasiak intended to leave Tucson and not

to compete with Cost Less.   Jasiak orally promised petitioner

that he would not compete with Cost Less.     Jasiak and petitioner

never discussed whether Cost Less would make any payment to

Jasiak in exchange for Jasiak's promise not to compete.

     Petitioner offered to have Cost Less pay Jasiak book value

for his stock.3   Jasiak wanted more than book value.   They



     3
       The record does not show how much petitioner initially
offered Jasiak for his stock.
                                - 5 -

finally agreed that Cost Less would pay $175,000 for Jasiak's

stock.   Jasiak and petitioner did not discuss whether the payment

to Jasiak was for a covenant not to compete.

     Jasiak and petitioner went to Raymond Douglas Zirkle

(Zirkle), Cost Less' lawyer.    Zirkle prepared a draft agreement

that included a covenant not to compete.    Jasiak objected to the

fact that Zirkle included a covenant not to compete in the draft

agreement because he had already promised petitioner that he

would not compete.    Jasiak thought petitioner should have been

satisfied with his promise that he would not compete.    Jasiak

refused to sign the agreement if it included a covenant not to

compete.

     Petitioner and Jasiak told Zirkle to delete the covenant not

to compete from the written agreement.    On December 24, 1986,

Cost Less and Jasiak signed a written agreement which stated that

Cost Less agreed to buy all of Jasiak's Cost Less stock for $35

per share for his 5,000 shares, for a total of $175,000.    Cost

Less agreed to pay Jasiak $50,000 at closing, and the $125,000

balance at the rate of $3,100 per month beginning January 1,

1987, until paid.    The written agreement did not include a

covenant not to compete.    The written agreement states that it

supersedes any "pre-existing agreements and understandings

between the parties relating to the subject matter hereof, and

may not be modified except in writing executed by both parties".
                                - 6 -

     Jasiak and Cost Less amended the agreement in writing on

February 13, 1987, to prohibit Cost Less from prepaying any of

the balance due on the amount Cost Less owed Jasiak for his stock

and to provide a security interest for the amount Cost Less owed

Jasiak.

     Jasiak did not compete with Cost Less after 1986.

     4.    Inventory

     Cost Less had about 75,000 items in inventory during the

years in issue.   It kept records of its inventory on a computer

with an inventory control software program.   During the years in

issue, as Cost Less received new inventory, its employees entered

the cost of each new item into its computer program.   When Cost

Less employees entered the cost of new inventory items, the

computer program automatically changed the amount stated as the

cost of identical items remaining in inventory.   For example, if

Cost Less had a water pump in inventory which had cost $20, and

Cost Less obtained another identical water pump for $30, the

inventory program would show the cost of both water pumps as $30.

The Cost Less computer program would then reduce inventory by $30

when the first water pump was sold.

     5.    Transportation

     Cost Less had two pickup trucks to pick up and deliver

parts.    Petitioner also sometimes used his 1979 van for Cost Less

errands.   Less than a year before trial and at least 6 years
                                - 7 -

after the last year in issue, petitioner prepared a document from

his own memory in which he estimated the number of miles that he

drove his van for business in 1988, 1989, and 1991.

C.   Income Tax Returns for Cost Less and Petitioners

     Lawrence I. Subrin (Subrin) was Cost Less' accountant during

the years in issue.    Subrin prepared returns for Cost Less (Forms

1120) for 1988, 1989, and 1991.   Cost Less filed its Federal

income tax returns for 1988 on September 1, 1989, for 1989 on

September 19, 1990, and for 1991 on September 17, 1992.   About

November 7, 1990, Cost Less filed an amended return for 1989 that

Subrin had prepared.

     In September or October 1993, petitioner asked Don Bailey

(Bailey), a certified public accountant since 1983, to review

petitioners' business and personal taxes.   Bailey was

petitioners' accountant from then through the date of trial.

Bailey has three bachelor of arts degrees, a master of business

administration degree, and he has completed about half of the

hours required for a master’s degree in taxation.

     Bailey prepared joint Federal income tax returns for

petitioners for the years in issue (1988, 1989, and 1991).

Petitioners filed them on November 5, 1993.

     Bailey asked petitioner about the $175,000 payment to

Jasiak.    Bailey asked Zirkle whether there was a covenant not to

compete.   Petitioner and Zirkle explained the circumstances
                               - 8 -

surrounding Jasiak's sale of stock to Bailey.   Bailey concluded

that Cost Less was entitled to amortize the full $175,000 over a

7-year period, on the assumption that Cost Less paid $175,000 for

a covenant not to compete and nothing for the stock.     Bailey

prepared amended returns for Cost Less in which Cost Less

amortized the $175,000 over 7 years.

     Petitioner told Bailey how the Cost Less inventory system

worked.   Petitioner estimated that Cost Less overstated its

inventory by about $10,000 per year.   Bailey accepted

petitioner's estimate and reduced closing inventory by $10,000 on

each of Cost Less' amended returns that he prepared.

     Petitioner and Bailey also discussed petitioner's van use

and payment of miscellaneous expenses.   Petitioner did not give

Bailey any incorrect information.   In the amended returns Bailey

prepared, Cost Less deducted $3,000 per year for petitioner's van

use, and $50 per week for petitioner's payment of miscellaneous

Cost Less expenses.

     On December 15, 1993, Cost Less filed the amended income tax

returns that Bailey prepared for 1988, 1989, and 1991.

Respondent disallowed the changes Bailey made in Cost Less'

amended returns.

     Respondent mailed a notice of deficiency to petitioners on

July 9, 1996.   All of the adjustments in the notice of deficiency

relate to Cost Less.   Petitioners filed a petition in which they
                                   - 9 -

dispute the adjustments in the notice of deficiency and claim

that they overpaid income taxes by $888 for 1988, $11,247 for

1989, and $1,363 for 1991.

                             II.    OPINION

A.   Covenant Not To Compete

     1.    Petitioners' Contentions

     Cost Less amortized over 7 years all of the $175,000 payment

it made to Jasiak to buy Jasiak's stock.      Petitioners now contend

that Cost Less may amortize only $165,000 of the $175,000 (i.e.,

the difference between $175,000 and what petitioners contend is

the $10,000 book value of Jasiak's Cost Less stock).

     In the alternative, petitioners contend that Cost Less may

amortize amounts based on the value of the covenant not to

compete.   Petitioners point out that Jasiak orally promised that

he would not compete against Cost Less around the time Cost Less

agreed to buy Jasiak's stock.      Petitioners contend that the

amounts paid by Cost Less to Jasiak were consideration for

Jasiak's oral promise not to compete.

     2.    Analysis

     A taxpayer may amortize a covenant not to compete from a

departing shareholder if the parties intended that some of the

payment from the business to the departing shareholder was for

the covenant, and the amount agreed to be paid for the covenant

reflected economic reality.    See Patterson v. Commissioner, 810
                                 - 10 -

F.2d 562, 571 (6th Cir. 1987), affg. T.C. Memo. 1985-53; Better

Beverages, Inc. v. United States, 619 F.2d 424, 428 n.5 (5th Cir.

1980); Throndson v. Commissioner, 457 F.2d 1022, 1024-1025 (9th

Cir. 1972), affg. Schmitz v. Commissioner, 51 T.C. 306 (1968);

Annabelle Candy Co. v. Commissioner, 314 F.2d 1, 8 (9th Cir.

1962), affg. T.C. Memo. 1961-170.     Thus, petitioner must prove

that Jasiak and petitioner intended for some of the payment to be

for a covenant not to compete and that the amount intended to be

paid reflected economic reality.     As discussed next, we conclude

that petitioner proved neither point.

            a.     Whether Jasiak and Cost Less Intended To Allocate
                   Part of the $175,000 to Jasiak's Promise Not To
                   Compete

     Petitioners contend that Jasiak and Cost Less intended to

allocate part of the $175,000 to his promise not to compete.     We

disagree.    There is no credible evidence that the parties

intended to allocate any of the $175,000 to Jasiak's promise not

to compete.      Before petitioner and Jasiak signed the agreement,

Jasiak orally promised not to compete with Cost Less.     They did

not discuss allocating, much less did they allocate, any part of

the $175,000 payment to Jasiak's promise not to compete.

     In their written agreement, Jasiak and petitioner stated

that Cost Less was paying $35 per share for 5,000 shares, for a

total payment of $175,000.     By its own terms, the agreement

superseded all others and could be modified only in writing.
                              - 11 -

Petitioner and Jasiak agreed to a written change in the agreement

barring prepayment and providing a security interest; this shows

that they understood that changes in the agreement must be in

writing.

     Petitioners ask us to consider parol evidence of Jasiak's

and petitioner's intent regarding payment for Jasiak's promise

not to compete.   Petitioners' reliance on parol evidence is

unhelpful to petitioners for two reasons.   First, the evidence is

not credible.   Petitioner testified that he intended for Jasiak's

oral promise to be part of the written agreement and that he

would not have agreed to Cost Less buying Jasiak's stock without

Jasiak's covenant not to compete.   Petitioners contend that

Jasiak's testimony shows that petitioner intended that part of

the $175,000 payment from Cost Less to Jasiak was for his oral

promise not to compete.   Jasiak testified that none of the

$175,000 was for the covenant not to compete.   Jasiak's testimony

is consistent (and petitioner's position is inconsistent) with

the written agreement and with Jasiak's and petitioner's decision

to delete any references to a covenant not to compete from their

written agreement.   We found Jasiak's testimony to be more

credible than petitioner's.

     The second reason petitioners' reliance on parol evidence is

unhelpful to them is that under Arizona's parol evidence rule, we

do not consider parol evidence where the written agreement is
                              - 12 -

clear.   Under Arizona's parol evidence rule, courts first

consider parol or extrinsic evidence a party offers, and, if the

written agreement is ambiguous and reasonably susceptible to the

interpretation asserted by that party, the parol or extrinsic

evidence is admissible to establish the intent of the parties.

See Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134, 1140

(Ariz. 1993).   The written agreement is inconsistent with

petitioners' position that the $175,000 was paid, in part, for

Jasiak's promise not to compete.   It is not ambiguous or

susceptible to petitioners' interpretation.   Thus, we do not

consider petitioner's testimony to establish the intent of the

parties.   See Taylor v. State Farm Mut. Auto. Ins. Co., supra.

     We conclude that Cost Less may not amortize any amount for

Jasiak's oral promise not to compete because the parties did not

allocate or intend to allocate any amount to it.   Patterson v.

Commissioner, supra; Better Beverages, Inc. v. United States,

supra; Annabelle Candy Co. v. Commissioner, supra; Peterson Mach.

Tool, Inc. v. Commissioner, 79 T.C. 72, 81 (1982), affd. 54 AFTR

2d 84-5407, 84-2 USTC par. 9885 (10th Cir. 1984); Major v.

Commissioner, 76 T.C. 239, 247 (1981); Lucas v. Commissioner, 58

T.C. 1022, 1032 (1972).

           b.   Whether There Is Evidence of the Value of Jasiak's
                Promise Not To Compete

     Petitioners contend that Jasiak's oral promise not to

compete was valuable.   Petitioners contend that the fact that
                              - 13 -

Jasiak knew the auto parts business well and that he started

another auto parts store in 1975, which was open for about 1-1/2

years, shows that the covenant not to compete had value.

Petitioners contend that the value of the covenant not to compete

is $175,000 less the book value of Cost Less which petitioners

contend is $10,000.

     We disagree.   We believe Jasiak's oral promise to Cost Less

not to compete had little or no value.   The fact that Jasiak

opened another auto parts store in 1975, which was open 1-1/2

years, does little to show he was a competitive threat to Cost

Less when he wanted to retire in 1986.   The auto parts business

was highly competitive.   It is not clear whether his oral promise

included a specific duration or geographic area.   His oral

promise provided for no consideration.   Thus, it may not have

been enforceable.   See Amex Distrib. Co. v. Mascari, 724 P.2d

596, 601 (Ariz. Ct. App. 1986); American Credit Bureau, Inc. v.

Carter, 462 P.2d 838, 840 (Ariz. Ct. App. 1969).

     If we knew the fair market value of Jasiak's Cost Less

stock, and we knew that the $175,000 payment was intended to be

made for both the stock and a covenant not to compete, then, as

petitioners request, we might be able to derive the value of the

covenant.   See, e.g., Annabelle Candy Co. v. Commissioner, supra

at 7-8; Beaver Bolt, Inc. v. Commissioner, T.C. Memo. 1995-549;

Standard Lumber & Hardware Co. v. Commissioner, T.C. Memo. 1958-
                                  - 14 -

159.       But we cannot do that here because Jasiak and petitioner

intended there to be no payment for Jasiak's promise not to

compete.

       Petitioner did not offer any evidence to show the fair

market value of the stock.       Instead, petitioner contends that

$10,000 is the book value of Jasiak's Cost Less stock.         We

disagree that it is appropriate to use $10,000 as the fair market

value of Jasiak's Cost Less stock.         First, Jasiak rejected

petitioner's offer to sell the stock for book value, which

suggests its fair market value was higher.         Second, petitioners

offered no convincing evidence that the book value of Cost Less

stock was $10,000.       Bailey testified that the book value and par

value of Cost Less were both "about" $1 per share, for a total of

$10,000.       Petitioners offered no records or other corroboration

for this point.       Bailey's explanation how he computed book value

was unconvincing.       He testified that par value4 was $1 per share,

and that this was also its book value.5        We are not convinced

from Bailey's testimony that the book value of a share of Cost




       4
       Par value is an arbitrary value assigned to a share of
stock by the corporation's charter. See Kohler, Kohler's
Dictionary for Accountants 374 (5th ed. 1983); Nickerson,
Accounting Handbook for Nonaccountants 176 (1975).
       5
       The book value of a share of common stock is equal to
assets of the corporation less liabilities divided by the number
of outstanding shares. See Kohler, supra at 71.
                               - 15 -

Less stock is equal to its par value, or that the fair market

value of Jasiak's Cost Less stock is $10,000 here.

     We conclude that there is no credible evidence that Jasiak's

oral promise not to compete had any value.

          c.     Whether To Estimate an Amount To Allocate to
                 Jasiak's Promise Not To Compete

     Petitioners contend that we should apply the Cohan rule

(enunciated in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930)), to estimate an amount for Jasiak's promise not to

compete if we decide that Cost Less may not amortize $165,000.

We disagree.   We may estimate an amount under Cohan if the

taxpayer is entitled to deduct some amount.   See id.    Here, as

discussed above at paragraph II-A-2-a, Cost Less may not deduct

any amount for Jasiak's promise not to compete because Jasiak and

petitioner intended to allocate none of the $175,000 payment to

Jasiak's promise.   Thus, Cohan does not apply.

          d.     Cases Cited by Petitioners

     Petitioners contend that this case is indistinguishable from

Standard Lumber & Hardware Co. v. Commissioner, supra, in which

we permitted the taxpayer to amortize the cost of a covenant not

to compete.    Petitioners contend that Standard Lumber & Hardware

Co. supports the proposition that Cost Less may allocate part of

the $175,000 payment to Jasiak to a covenant not to compete

despite the terms of the written agreement of sale.     Petitioners

also contend that Standard Lumber & Hardware Co. supports the
                                 - 16 -

proposition that the value of (and amount paid for) the stock in

Cost Less is its book value, leaving the rest of the $175,000

payment from Cost Less to Jasiak to be allocated to the covenant

not to compete.   We disagree.

     In Standard Lumber & Hardware Co., the partners had a

written partnership agreement which stated that the remaining

partners would pay a withdrawing partner an amount equal to the

book value ($32,587.22) of his partnership interest.      The

partners had an oral agreement that any departing partner would

not compete against the partnership.      The partners signed a

dissolution agreement.   The remaining partners paid the

withdrawing partner $70,000 by check.      The dissolution agreement

and check said that the $70,000 was for the withdrawing partner’s

interest in the partnership.     Neither the dissolution agreement

nor the certified check mentioned a covenant not to compete.      The

remaining partners continued to operate the business and did not

amortize the covenant.   A successor corporation filed an amended

return and amortized part of the $70,000 as the cost of the

covenant.   We found that $37,412.78 (the difference between

$32,587.22 and $70,000) was intended to be paid for the covenant

not to compete.

     Here, in contrast, Jasiak specifically rejected any payment

for his promise not to compete, and he specifically rejected

being paid for his stock based on the book value of his stock.
                               - 17 -

Thus, Standard Lumber & Hardware Co. is significantly different

from this case.

     Petitioners cite Patterson v. Commissioner, 810 F.2d at 571,

for the proposition that a covenant not to compete has value if

it has economic reality.    Petitioners' reliance on Patterson is

misplaced; Patterson is in accord with respondent's position

here.   We held in Patterson that the taxpayer could not amortize

any amount because there was a written agreement in which all of

the payment to the withdrawing party was specifically for stock

and goodwill and none was for a covenant not to compete.   See id.

at 573.   This was so even though there was a covenant not to

compete which may have had some value.   Like the taxpayer in

Patterson, petitioner and Jasiak signed an agreement which said

all of Cost Less' payment to Jasiak was for stock.   Thus, whether

the covenant not to compete had independent value does not alter

the outcome of this case.

     In none of the other cases petitioners cite was there a

written agreement specifying that all of the payment to the

withdrawing party was for stock.   See Schulz v. Commissioner, 294

F.2d 52, 55 (9th Cir. 1961), affg. 34 T.C. 235 (1960); O'Dell &

Co. v. Commissioner, 61 T.C. 461, 467 (1974); United Fin. &

Thrift Corp. v. Commissioner, 31 T.C. 278, 285-286 (1958), affd.

282 F.2d 919 (4th Cir. 1960); Silberman v. Commissioner, 22 T.C.

1240 (1954); Michaels v. Commissioner, 12 T.C. 17, 19 (1949);
                                - 18 -

B.T. Babbitt, Inc. v. Commissioner, 32 B.T.A. 693, 696 (1935);

Fletcher v. Commissioner, T.C. Memo. 1965-273.

     3.   Conclusion

     We conclude that petitioner may not amortize any of Cost

Less' $175,000 payment for Jasiak's oral promise not to compete

because petitioner and Jasiak did not intend to allocate any of

the payment to the promise, and petitioner has not proven that

Jasiak's promise had value.

B.   Inventory Adjustment

     Petitioners contend that Cost Less may reduce its ending

inventory by $10,000 for each year in issue because, according to

petitioners' estimate, Cost Less' inventory software overstated

its ending inventory by that amount.

     We have long held that a taxpayer may adjust inventories to

correctly reflect income.     Elm City Nursery Co. v. Commissioner,

6 B.T.A. 89 (1927); Baumann Rubber Co. v. Commissioner, 4 B.T.A.

671 (1926).   Petitioners do not explain how they computed the

$10,000 amount.   Petitioners appear to defend the $10,000 amount

because the consumer price index (CPI) increased .185 percent on

all items from January 1, 1988, to December 31, 1991.

However, they did not show (1) how many of the 75,000 parts had

price increases in any year; (2) how many parts remained in

inventory at the end of the year for which the computer program

increased costs; (3) the amount of price increases; (4) what
                              - 19 -

happens if inventory prices decrease; or (5) whether Cost Less

used first in first out, or last in first out, or any other

method.

     Petitioners contend that respondent conceded that they

overstated the inventory of Cost Less.     We disagree.   Respondent

agrees that petitioners' inventory records are not accurate but

not that Cost Less overstated its inventory.

     Petitioners contend that we must allow Cost Less to adjust

its inventory, citing Western Wheeled Scraper Co. v.

Commissioner, 14 B.T.A. 496, 504 (1928).     Petitioners' reliance

on Western Wheeled Scraper Co. v. Commissioner, supra, is

misplaced.   That case holds that a taxpayer may adjust its

inventory to correct clear errors.     In that case, the Board of

Tax Appeals allowed the taxpayer to adjust inventory for specific

items and amounts which the taxpayer showed were duplicated in

inventory but not for other, vague items.     See id. at 504-505.

     Cost Less may not reduce its ending inventory without

showing the amount of the adjustment that is needed to clearly

reflect income.   We conclude that Cost Less may not reduce

inventory by $10,000 for any of the years in issue.

C.   Deduction for Van Use

     Petitioner used his 1979 van for business from the early

1980's through the years in issue.     Petitioners contend that Cost

Less may deduct an amount based on the mileage that petitioner
                                - 20 -

estimated for business use of his van for 1988, 1989, and 1991.

We disagree.

     A taxpayer may not deduct costs for the use of a passenger

vehicle unless the taxpayer substantiates the amount of the

expense, the time and place of travel, and the business purpose

of travel with adequate records or sufficient evidence

corroborating the taxpayer's statement.     See sec. 274(d).

     Petitioners contend that section 274(d) does not apply to

petitioner's van.   We disagree.    Section 274(d) applies to

passenger automobiles and other property used as a means of

transportation.   See sec. 280F(d)(4)(A)(i) and (ii).    A passenger

automobile is any 4-wheeled vehicle (including vans) which is

manufactured primarily for use on public streets, roads, and

highways and is rated at 6,000 pounds gross vehicle weight or

less.   See sec. 280F(d)(5)(A).    Petitioners have not shown that

the van has a gross weight of 6,000 pounds or more.     Thus, the

substantiation requirements of section 274(d)(4) apply to

petitioner's van.

     Less than a year before trial and at least 6 years after the

last year in issue, petitioner prepared a written estimate of his

business mileage from memory.     He did not use any records to

prepare the estimate.   Petitioner's testimony and written

estimate of his business mileage fail to satisfy the

substantiation requirements of section 274(d).     See sec. 1.274-5,
                                - 21 -

Income Tax Regs.     We conclude that petitioners have not met the

requirements of section 274(d).     See Nicholls, North, Buse Co. v.

Commissioner, 56 T.C. 1225, 1235-1236 (1971); Kennelly v.

Commissioner, 56 T.C. 936, 942 (1971), affd. 456 F.2d 1335 (2d

Cir. 1972); Marlin v. Commissioner, 54 T.C. 560, 568 (1970);

Thorpe v. Commissioner, T.C. Memo. 1998-115; Tesar v.

Commissioner, T.C. Memo. 1997-207; Group Admin. Premium Servs.,

Inc. v. Commissioner, T.C. Memo. 1996-451.     Thus, Cost Less may

not deduct business use of the van in the years in issue.

D.      Deduction for Miscellaneous Expenses

        Ordinarily, a shareholder may not deduct a payment made on

behalf of the corporation but must treat it as a loan or a

capital contribution.     See Deputy v. DuPont, 308 U.S. 488 (1940);

Betson v. Commissioner, 802 F.2d 365, 368 (9th Cir. 1986), affg.

in part, revg. in part T.C. Memo. 1984-264; Rink v. Commissioner,

51 T.C. 746, 751 (1969); see also sec. 1.263(a)-2(f), Income Tax

Regs.       Petitioners contend that petitioner occasionally paid

for miscellaneous items such as photocopies and breakfast and

lunch for Cost Less' employees and customers, and that Cost Less

did not reimburse petitioner for those expenses.    Petitioners

contend that Cost Less may deduct $50 per week for those

expenses.    However, petitioners have no records to substantiate

their claim that petitioner paid these amounts.
                                - 22 -

     Petitioners tried to show that payments of these expenses

are capital contributions to Cost Less.       Bailey testified that he

credited the estimated amount of the payments to petitioner's

equity account in the corporation.       Bailey did not say when or

how he credited petitioner's equity account.       Bailey did not

begin doing accounting work for Cost Less until 1993, which is

after the years in issue.   Petitioners offered no accounting

records into evidence.   We are not convinced that the expenses

were capital contributions to Cost Less.

     The result would be no different even if petitioners had

shown that the expenses were capital contributions to Cost Less.

Petitioners have not substantiated the expenses or shown that

those expenses were ordinary and necessary expenses of Cost Less

as required under section 162.    To the extent that petitioner

paid for meals, petitioners have failed to show that they

complied with section 274(d).

     We conclude that neither Cost Less nor petitioners may

deduct these amounts.

E.   Negligence

     Petitioners contend that they are not liable for the

addition to tax for negligence under section 6653(a)(1) for 1988

and section 6662 for 1989 and 1991 because they relied on Bailey.

     Respondent contends that petitioners may not rely on Bailey

because, in retaining Bailey and following his advice,
                              - 23 -

petitioners were ignoring apparently correct advice previously

provided by Subrin.   Respondent contends that petitioners may not

rely on Bailey because Subrin was their accountant during the

years in issue.   Respondent contends that petitioners looked for

an accountant who would give the advice that resulted in the

lowest tax liability.

     Petitioners changed from Subrin to Bailey in 1993.   We think

petitioners reasonably believed that Bailey was qualified to

provide tax advice.   We conclude that they are not liable for the

addition to tax for negligence.

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.
