                       T.C. Memo. 1996-189



                     UNITED STATES TAX COURT



     MARCUS WAYNE AND JUDITH CAROLINE RAMSEY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16830-94.             Filed April 18, 1996.



     Marcus Wayne and Judith Caroline Ramsey, pro sese.

     Roberta A. Duffy, for respondent.



                       MEMORANDUM OPINION

     JACOBS, Judge: Respondent determined a $19,575 deficiency in

petitioners’ 1989 Federal income tax, and a $3,915 section 6662(a)

accuracy-related penalty for such year.
                                            -2-

     The issues for decision are: (1) Whether petitioners are

entitled    to    a    claimed      $23,822.36      deduction    for   contributions

allegedly made by or on behalf of petitioner Marcus Ramsey to a

simplified employer pension-individual retirement account plan; (2)

whether petitioners are entitled to deduct business expenses for

1989 in excess of the amounts allowed by respondent; and (3)

whether petitioners are liable for the section 6662(a) accuracy-

related penalty for such year.

     Some    of       the   facts    have    been    stipulated     and   are   found

accordingly.      The stipulation of facts and attached exhibits are

incorporated herein by this reference.

     For convenience and clarity, we have combined our findings of

fact and opinion with respect to each issue.                    As used herein, the

term “petitioner” refers to Marcus Wayne Ramsey; “petitioners”

collectively refers to Marcus Wayne and Judith Caroline Ramsey.

All section references are to the Internal Revenue Code for the

year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

                                 General Findings

     At the time they filed their petition, petitioners, husband

and wife, resided in Poway, California. They filed a joint Federal

income tax return, Form 1040, for 1989, dated August 14, 1990.

Subsequent to filing the petition in this case, petitioners filed

an amended 1989 return, Form 1040X, dated April 11, 1995, which

respondent accepted. The amended return restated petitioner’s wage
                                   -3-

income and Schedule A employee business expenses as Schedule C

items.

Issue 1.      Retirement Plan Contributions

     The first issue for decision is whether petitioners are

entitled to a deduction for contributions allegedly made by or on

behalf of petitioner to a retirement plan.

     Cal-American

     Petitioner was involved in the formation of Cal-American

Insurance Company (Cal-American), a property and casualty insurance

company, and was its president from September 1984 to March 1989.

Prior    to   Cal-American’s   formation,   petitioner   was   the   deputy

insurance commissioner for the State of California. Cal-American

was acquired in 1987 by Westech Insurance Network, Inc. (Westech),

which also owned Bancsure Insurance Services, Inc. (Bancsure).

     Although president of Cal-American, in actuality petitioner

was an employee of Westech.       And, from the time Cal-American was

acquired by Westech until March 1989, petitioner’s salary as well

as reimbursement for his expenses were paid by Bancsure, which

issued a Form 1099-Misc. and Form W-2 to petitioner for 1989.           The

Form 1099-Misc. reflected nonemployee compensation in the amount of

$32,422.56. The Form W-2 reflected wages paid to petitioner in the

amount of $62,500. The $62,500 was composed of salary payments for

January and February, plus a severance payment.

     Arrowhead
                                       -4-

     Following termination as president of Cal-American, petitioner

provided consulting services to Arrowhead General Insurance Agency

(Arrowhead).       Arrowhead     issued      petitioner    a   1989   Form    W-2,

reflecting $74,503.25 in wages and $8,041 in Federal and $3,956.31

in State income taxes withheld.

     Individual Retirement Account

     In February 1989, an individual retirement account, account

No. 063-19555-6, was established on petitioner’s behalf at Security

Pacific National Bank.        The account was classified as a “SEP”, and

Cal-American was the named employer.             Petitioner deposited $11,250

into the account at that time. Petitioners claim that petitioner

received the $11,250 from Westech, in addition to his wage and

severance payments.      Petitioners did not include the $11,250 in

income for 1989.

     On their 1989 tax return, petitioners claimed a $23,822.36

deduction    for   payments    made    to    a   “self-employed    SEP”,     which

respondent     disallowed.       The    record      does   not    indicate    how

petitioners determined the $23,822.36.
                                  -5-

     Discussion

     A Simplified Employee Pension (SEP) plan is described in

section 408(k).1     A SEP is a plan pursuant to which an employer


     1
          SEC. 408(k) states in pertinent part:

     (k) Simplified Employee Pension Defined.--

          (1) In general.--For purposes of this title,
          the term “simplified employee pension” means
          an individual retirement account or
          individual retirement annuity--

                  (A) with respect to which the
                  requirements of paragraphs (2),
                  (3), (4), and (5) of this
                  subsection are met, and

                  (B) if such account or annuity is
                  part of a top-heavy plan, with
                  respect to which the requirements
                  of section 416(c)(2) are met.

          (2) Participation requirements.--This
          paragraph is satisfied with respect to a
          simplified employee pension for a year only
          if for such year the employer contributes to
          the simplified employee pension of each
          employee who--

                  (A) has attained age 21,

                  (B) has performed service for the
                  employer during at least 3 of the
                  immediately preceding 5 years, and

                  (C) received at least $300 in
                  compensation (within the meaning of
                  section 414(q)(7)) from the
                  employer for the year.

             *       *     *      *     *     *       *

          (3) Contributions may not discriminate in
                                                          (continued...)
                               -6-

makes direct contributions to its employees’ individual retirement


     1
      (...continued)
          favor of the highly compensated, etc.--

               (A) In general.--The requirements
               of this paragraph are met with
               respect to a simplified employee
               pension for a year if for such year
               the contributions made by the
               employer to simplified employee
               pensions for his employees do not
               discriminate in favor of any highly
               compensated employee (within the
               meaning of section 414(q)).

              *     *     *     *     *     *        *

          (4) Withdrawals must be permitted.--A
          simplified employee pension meets the
          requirements of this paragraph only if--

               (A) employer contributions thereto
               are not conditioned on the
               retention in such pension of any
               portion of the amount contributed,
               and

               (B) there is no prohibition imposed
               by the employer on withdrawals from
               the simplified employee pension.

          (5) Contributions must be made under written
          allocation formula.--The requirements of this
          paragraph are met with respect to a
          simplified employee pension only if employer
          contributions to such pension are determined
          under a definite written allocation formula
          which specifies--

               (A) the requirements which an
               employee must satisfy to share in
               an allocation, and

               (B) the manner in which the amount
               allocated is computed.
                                           -7-

accounts       or   individual      retirement     annuities   as   defined   under

section        408(a)     and    (b).    Self-employed    individuals    or   sole

proprietors are treated as their own employers under a SEP plan.

See secs. 401(c)(4), 408(k)(7).

       To prevail, as a threshold matter, petitioners must prove that

there was a plan that qualified as a SEP under section 408(k)

during 1989, and that such plan was established by Westech or

another employer.               To do so, petitioners rely on petitioner’s

employment agreement with Westech, pursuant to which Westech was

obligated to establish a SEP/IRA for petitioner’s benefit and

contribute thereto an amount equal to 15 percent of petitioner’s

base salary.2

       The only documents petitioners introduced to substantiate the

SEP deduction under scrutiny were petitioner’s employment agreement

with Westech and a document showing that $11,250 was deposited into

the Security Pacific National Bank account. Respondent argues that

these documents, by themselves, do not establish that a qualified

SEP was established.             We agree with respondent.

       Although petitioners have shown that $11,250 was deposited

into       a   Security    Pacific      National   Bank   account   during    1989,

petitioners have not shown that Westech or any other employer


       2
            Under the employment agreement petitioner was to
receive a base salary of $75,000 per year. The amount that
petitioner deposited into Security Pacific National Bank account
No. 063-19555-6 in February 1989 equals 15 percent of
petitioner’s base salary (15% x $75,000 = $11,250).
                                   -8-

established a SEP for petitioner’s benefit, as required by section

408(k).    Even, however, were we to assume that there was an

employer-established SEP for petitioner’s benefit, petitioners have

failed to show that Westech or any other employer of petitioner

made the required qualifying contribution to such a SEP.           Indeed,

the   record   indicates   that   the    $11,250   deposit   was   made   by

petitioner, and not by Westech or another employer of petitioner.

Further, the record does not enable us to trace the source of the

$11,250 deposit to the $62,500 or any other employment payment

petitioner received from Westech.3        See sec. 408(l).   And finally,

the Forms W-2 attached to petitioners’ 1989 Form 1040 fail to

reflect any amount contributed by Westech to a SEP on petitioner’s

behalf.

      Petitioners allege that not only was petitioner employed as

president of Cal-American during the first quarter of 1989, but

also for the remainder of 1989 he was self-employed as an insurance

consultant. As noted previously, self-employed individuals or sole

proprietors are treated as their own employers under a SEP plan.

See secs. 401(c)(4), 408(k)(7).         However, petitioners have failed

to prove that petitioner was self-employed at any time during 1989.

Indeed, the record supports a contrary conclusion.


      3
          A letter from Bancsure to petitioner dated Mar. 31,
1989, refers to a total severance payment of $61,812.50, of which
$6,812.50 represented expense reimbursement and pension payments.
The letter makes no allocation of the $6,812.50 as between
expense reimbursement and pension payments.
                                       -9-

      Despite petitioners’ claim that petitioner provided consulting

services    to    Arrowhead    in   1989   as   an    independent   contractor,

Arrowhead issued petitioner a Form W-2 (rather than a Form 1099)

for all payments it made to him in 1989; it also withheld State and

Federal income taxes from these payments.               Moreover, petitioners

initially claimed on Schedule A attached to their 1989 tax return

all   of   petitioner’s       business     expenses    as   employee   business

expenses.        And finally, petitioner did not pay self-employment

taxes on the income he received from Arrowhead.               The record thus

supports a finding that petitioner was an employee of Arrowhead,

not an independent contractor.               The only evidence to support

petitioners’ independent contractor allegation is petitioner’s

self-serving testimony, which we do not believe.

      To summarize, petitioners did not meet their burden of proof

that an employer-qualifying-SEP was established at any time by or

on behalf of petitioner, nor did they prove that an employer of

petitioner made a qualifying SEP contribution on petitioner’s

behalf.    Consequently, petitioners are not entitled to the claimed

deduction for a SEP contribution.

Issue 2. Business Expenses

      The second issue for decision is whether petitioners are

entitled to business expense deductions in excess of the amounts

allowed by respondent.
                                       -10-

     Background

     Petitioners have five daughters, three of whom lived with them

during 1989.   Petitioners resided at 28316 Gitano, Mission Viejo,

California (Mission Viejo residence), until August 1989, when they

sold their Mission Viejo residence and moved to 14026 Donart Drive,

Poway, California (Poway residence).

     The Mission Viejo residence contained 2,100 square feet.

Petitioner claimed he used an enclosed loft area in this residence

as an office. This room was no larger than 144 square feet.

     Petitioners’     Poway   residence       measured       2,360   square   feet.

Petitioners remodeled and improved the Poway residence by: Framing

and plastering the basement, building a patio cover, building a

closet in the bedroom of one of their daughters, placing stained-

glass windows in the living room and foyer, building a pad for

their travel trailer, installing an intercom system, installing

blinds   throughout    the    house,    installing       a    dehumidifier,    and

installing rain gutters.

     Petitioner claims he used the basement of the Poway residence

as an office; but he testified that when visitors came to the Poway

residence for business purposes, he would meet with them in the

living room, the kitchen, or the family area, as opposed to meeting

them in his “basement office”.
                                   -11-

      Petitioners determined that 9.53 percent of the Mission Viejo

and Poway residences was used for business purposes in 1989.

      During the year in issue, petitioners owned at least 4 cars:

A 1987 Suzuki Samurai, a 1987 Cadillac Fleetwood, a 1987 Ford

Aerostar, and a 1984 Dodge Colt.          Petitioner claims he used the

Cadillac 82 percent of the time for business and that the other

automobiles were used for personal use.        Petitioners also owned a

1987 Nomad Travel Trailer (a recreational vehicle).            The travel

trailer was stored at the Laguna Hills Golf Range and was not used

for business purposes.

      Pursuant to petitioner’s employment agreement with Westech,

Westech was required to provide petitioner with either a $250,000

life insurance policy or to reimburse him for the cost of keeping

an   existing   policy   in   force.   Westech   was   also   required   to

reimburse petitioner for his employee business expenses,4 including

office supplies, telephone, dues, travel and entertainment, and

automobile expenses of $1,000 per month. Arrowhead also reimbursed

petitioner for his employee business expenses.




      4
          Westech reimbursed petitioner for at least $4,266.41 of
the business expenses he incurred in 1989.
                                  -12-

     Petitioners’ 1989 Forms 1040 and 1040X

     Petitioners claimed a $51,363.965 deduction for unreimbursed

employee business expenses on Schedule A and Form 2106 (Employee

Business Expenses) attached to their 1989 Form 1040. The deduction

consisted of the following:

     Vehicle expenses           $15,987.84
     Parking fees                     39.00
     Travel expense                7,597.64
     Business expenses            23,230.95
     Meals and entertainment       5,635.66
     Less 20 percent of meals and
       entertainment              (1,127.13)
     Total                      $51,363.966


     In the notice of deficiency, respondent allowed $8,096 of the

claimed vehicle expenses and $39 for parking fees. Because Westech

reimbursed   petitioner   for   some   of   these   expenses,   respondent

reduced the otherwise allowable deduction by $3,000.            Respondent

disallowed the remainder of the claimed employee business expenses

for lack of substantiation.

     Subsequent to filing their petition, petitioners filed an

amended return (Form 1040X) for 1989 and recharacterized their

     5
          Petitioners claimed miscellaneous expenses totaling
$53,490.34 on Schedule A attached to their 1989 Form 1040. This
amount was composed of $2,126.38 in claimed investment expenses
(which petitioners have conceded) and the $51,363.96 in employee
business expenses addressed below. After applying the 2 percent
of adjusted gross income limitation, petitioners’ deduction for
miscellaneous expenses totaled $50,783.03.
     6
          The parties stipulated that Westech reimbursed
petitioner for at least $4,266.41 of his 1989 business expenses.
                                     -13-

previously    claimed    Schedule    A   unreimbursed    employee   business

expenses     as    Schedule   C   business    expenses    associated   with

petitioner’s services as an “independent contractor”.          Petitioners

also increased the amount of the deduction from $51,363.96 to

$57,348. The expenses claimed on Schedule C were:

            Advertising                      $513
            Bad debt                       10,000
            Car operating expenses          6,201
            Depreciation (car)              2,850
            Depreciation (house)           10,300
            Employee benefits (life         1,424
                   insurance)
            Interest (car)                  1,660
            Office expense                  4,046
            Supplies                        9,023
            Travel                          7,465
            Meals/entertainment             4,832
             (less 20 percent of meals and
             entertainment)                  (966)
            Total                         $57,3487

     Discussion

     Deductions are a matter of legislative grace.            New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).          Taxpayers bear the

burden of establishing that they are entitled to the claimed

deductions.       Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114

(1933).    This includes the burden of substantiating the amount and

purpose of the item claimed.        Sec. 6001; Hradesky v. Commissioner,

65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.



     7
          The parties stipulated that petitioners are not
entitled to the $10,000 bad debt deduction.
                                         -14-

1976); sec. 1.6001-1(a), Income Tax Regs.                        If claimed deductions

are not adequately substantiated, we may estimate them, provided we

are convinced that the taxpayer has incurred such expenses and we

have   a   basis    upon      which    to   make       an    estimate.         Cohan   v.

Commissioner, 39 F.2d 540 (2d Cir. 1930); Vanicek v. Commissioner,

85 T.C. 731, 743 (1985).

        Pursuant    to     section     162(a),     a    taxpayer      may     deduct   all

ordinary and necessary expenses paid or incurred during the taxable

year in carrying on a trade or business.                In general, an expense is

ordinary if it is considered “normal, usual, or customary” in the

context of the particular business out of which it arose.                          Deputy

v. duPont, 308 U.S. 488, 495-496 (1940).                     The term “ordinary” is

also used to distinguish currently deductible items from capital

expenditures.       Commissioner v. Tellier, 383 U.S. 687, 689-690

(1966).    An expense is necessary if it is appropriate and helpful

to the operation of the taxpayer’s trade or business.                         Carbine v.

Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th

Cir. 1985); Heineman v. Commissioner, 82 T.C. 538, 543 (1984).

Only the portion of an expense that is reasonable in amount is

deductible under section 162.            United States v. Haskel Engineering

& Supply Co., 380 F.2d 786, 788-789 (9th Cir. 1967).

       Pursuant    to    section      262(a),    personal,         living,    or   family

expenses   may     not   be   deducted,     except          as    otherwise    expressly

provided in the Code.         Furthermore, no deduction is allowed if an

employee is reimbursed for his expenses and does not include such
                                      -15-

reimbursement in his gross income.            See sec. 1.162-17(b), Income

Tax Regs.

     At trial, petitioners produced receipts and checks that they

claim represent      the   expenses    they   incurred   in    the   course   of

petitioner’s business. Respondent argues that the claimed expenses

are neither ordinary nor necessary.             For the reasons discussed

below, we agree with respondent.

     The record clearly indicates that petitioners attempted to

claim as business expenses those that were personal in nature.

Furthermore, the evidence shows that a portion of the claimed

business expenses were reimbursed either by Westech or Arrowhead.

     We hereafter discuss separately each of petitioners’ claimed

business expenses.

     1.   Advertising

     Three of petitioners’ daughters played recreational softball

and soccer. Petitioners deducted $513 in costs associated with

their   daughters’    participation     in    softball   and   soccer   as    an

advertising expense.       They claim that they sponsored the teams and

in return received advertising space in the team pamphlet.

     Petitioners admit that the payment for the claimed expense was

in reality a contribution to the league in which their daughters’

teams competed.   We find that this payment was a personal expense,

not a business expense.         Petitioners are not entitled to the

claimed 1989 advertising expense.
                                           -16-

      2.    Car Expenses

             a.    Operating Costs

      Petitioners deducted $6,2018 as automobile operating expenses.

Although petitioners provided numerous receipts to substantiate

this deduction, the receipts do not connect the claimed expenses to

the use of the Cadillac, the only car petitioner used for business

purposes.       Moreover, some of the claimed expenses are clearly not

related    to     the    use   of   any    automobile.        Having   reviewed    and

considered petitioners’ documentation, we hold that petitioners are

not   entitled      to    a    deduction    for   any    of   the   claimed   $6,201

automobile expenses.

            b.     Interest

      Petitioners deducted $1,660 as an interest expense.                         They

presented evidence that they incurred this expense with regard to

the Cadillac.       Because the parties have stipulated that petitioner

used the Cadillac 82 percent of the time for business use, we allow




      8
           The claimed operating expenses all related to the
Cadillac and were composed of the following:

      Insurance                                $849.54
      Operating costs                         3,818.13
      Repairs                                 1,310.08
      Visa and Discover charges               1,584.68
      Total                                  $7,562.43

      Times 82 percent business use = $6,201.19
                                       -17-

a deduction for interest expense in the amount of $1,361 (82

percent   x $1,660), rather than the amount petitioners claimed.

            c.     Depreciation

     Petitioners claimed a $2,850 depreciation deduction for the

Cadillac.     In the notice of deficiency, respondent allowed an

amount in excess of this figure.

     3.     Home Office Expenses

     Petitioners claimed numerous household expenses as part of

their claimed home office deduction.          Included within this claimed

deduction are the following:

     Depreciation
          Direct capital improvements                   $9,135.03
          Indirect capital improvements                  1,164.56
     Office expenses
          Telephone (Mission Viejo)                          467.45
          Telephone (Poway)                                  503.21
          Cellular telephone
           (account 0438631)                             1,138.88
           (account 1019538)                               471.12
          Home insurance
           (9.53 percent of $525.33)
           (Mission Viejo)                                    25.59
           (Poway)                                            24.47
          Home operating costs
            (9.53 percent of $14,854.86)                 1,415.67

     Section 280A denies deductions with respect to the use of a

dwelling unit used by the taxpayer as a residence during the

taxable year.       Section 280A(c), however, permits the deduction of

expenses allocable to a portion of the dwelling unit that is used

exclusively and on a regular basis as “the principal place of

business”    for    any   trade   or   business   of   the   taxpayer.   Sec.
                                       -18-

280A(c)(1)(A).         In the case of an employee, the exclusive use of a

portion of the dwelling unit must be for the convenience of the

employer.     Sec. 280A(c)(1).         The determination as to whether a

dwelling unit is the principal place of business of a taxpayer

depends on the particular facts of each case.                   Commissioner v.

Soliman, 506 U.S. 168, 174-175 (1993).

      The facts in this case clearly reveal that petitioners are not

entitled     to    any    home     office    expense      deduction    for     1989.

Petitioners have failed to prove that during 1989 petitioner used

his claimed home office exclusively and on a regular basis as his

principal place of business, or as a place of business for meeting

with clients or customers in the normal course of his business.

Nor   have    petitioners        satisfied    the    convience-of-the-employer

requirement of section 280A(c)(1) for the period during which

petitioner was an employee.

             a.    Depreciation (Houses)

      Petitioners determined that 9.53 percent of their Mission

Viejo and Poway residences was used for business purposes in 1989.

They claimed a $9,135.03 depreciation deduction for direct capital

improvements to their Poway residence.                 This deduction includes

expenses     associated     with    remodeling      the   basement    for     use   as

petitioner’s business office.

      Petitioners        also     deducted    $1,164.56      (9.53     percent       x

$12,219.94)       as   indirect    capital    improvements     to     their    Poway
                                   -19-

residence. The expenses for which a deduction was claimed included:

Stained glass windows in the living room and foyer, a closet in the

bedroom of one of their daughters, a trailer pad for petitioners’

recreational vehicle, miscellaneous carpentry work, a dehumidifier,

an intercom system, and rain gutters.

     Petitioners claimed depreciation based on a percentage of all

repairs or improvements to both their Mission Viejo and Poway

residences, as well as their day-to-day costs of maintaining each

residence (such as the costs for their housekeeper, gardener, cable

television, dishwasher repair, plumbing, etc.), whether business

related or not.

     As previously stated, petitioners have not met the tests of

section 280A(c)(1); thus they are not entitled to the claimed

depreciation deduction.

          b.   Telephone Expenses

     Petitioners    claimed   a   deduction   for   $2,581   of    telephone

expenses (both for regular and cellular telephones).              They had a

second telephone line installed at both their Mission Viejo and

Poway residences.

     At first, petitioners argued that these telephone lines were

used exclusively for business purposes.        They later admitted that

although they had deducted 100 percent of these expenses, personal

calls were also made from these telephones.            Petitioners were

unable to approximate the percentage of business use.
                                    -20-

     With regard to the cellular telephone, petitioners failed to

provide evidence that the phone was used solely for business

purposes, and they were unable to estimate the percentage of

business use.

     Petitioners are not entitled to any of their claimed $2,581

telephone expense deduction.

            c.   Home Insurance and Operating Costs

     Petitioners deducted 9.53 percent (amounting to $509) of the

cost of insuring both their residences, as well as $1,415.67 for

home office operating costs (9.53 percent x $14,854.86).          The home

office operating costs consist of the following:              Petitioners’

gardener, petitioners’ housekeeper, storage for their recreational

vehicle at the local golf range, membership fees for a recreational

vehicle club, home appliance and fixture repairs, plumbing repairs,

lawn mower repairs, utilities, garbage, and water expenses, cable

television expenses, homeowners’ association fees, charges for the

installation of a security system as well as the monthly charges

associated therewith, playground equipment for their backyard, and

miscellaneous home maintenance costs.

     None   of   these   expenses    was   shown   to   be   deductible   by

petitioners under section 280A or any other provision of the Code;

rather, these costs appear to be personal in nature. Consequently,

petitioners are not entitled to deduct these expenses.



     9
          Their deduction was mistakenly based on a calculation
of 382 days, rather than 365 days.
                                        -21-

       4.   Office Supplies

       Petitioners claimed a $9,023 deduction for office supplies.

While they provided copies of numerous receipts, checks, and charge

card   billing      statements    to    support     their   claimed    deduction,

petitioners failed to show that the expenses were ordinary and

necessary     to    the     conduct    of   petitioner’s       business   or    the

reasonableness of these expenses.              Again, the record reveals that

petitioners attempted to deduct personal expenses as business

expenses.     This is not permitted; the claimed deductions are not

allowable.

       5.   Employee Benefits

       Petitioners claimed a $1,424 employee benefit program expense.

Such expense related to petitioner’s life insurance policies. This

expense was not shown to be a properly allowable business expense.

       6.   Travel/Meal and Entertainment Expenses

       Petitioners claimed $7,465 in travel expenses and $4,832 in

meal and entertainment expenses.

       Section     274(d)    requires   that    a   taxpayer     substantiate    by

adequate records or by sufficient evidence corroborating his own

statement expenses claimed for travel and entertainment by showing

(1) the amount of the expense, (2) the time and place of travel or

entertainment,       (3)    the   business      purpose     of   the   travel    or

entertainment, and (4) the business relationship to the taxpayer of

each person entertained.          These four elements must be established
                                      -22-

for each separate expenditure.           Sec. 1.274-5(c)(1), Income Tax

Regs.

      Petitioners have failed to produce any of the requisite

detailed substantiation.          They have failed to present evidence as

to the nature and business purpose of the claimed expenses.                      We

therefore     disallow     petitioners’        1989        travel,      meal,   and

entertainment expenses in full.

Issue 3.     Accuracy-Related Penalty

      The final issue for decision is whether petitioners are liable

for the section 6662(a) accuracy-related penalty for negligence or

substantial understatement of income tax for 1989.                     Section 6662

imposes an addition to tax equal to 20 percent of the portion of

the   underpayment   that     is    attributable      to    (1)    negligence    or

disregard     of   rules     or     regulations,       or     (2)       substantial

understatement of income tax.         Sec. 6662(a) and (b)(1) and (2).

      “Negligence” includes any failure to make a reasonable attempt

to comply with the provisions of the Internal Revenue Code, and

“disregard”    includes     any    careless,    reckless,         or    intentional

disregard.    Sec. 6662(c).       Negligence is defined as the lack of due

care or the failure to do what a reasonable and ordinarily prudent

person would do under the circumstances. Marcello v. Commissioner,

380 F.2d 499, 506-507 (5th Cir. 1967), affg. in part and remanding

in part 43 T.C. 168 (1964); Neely v. Commissioner, 85 T.C. 934, 947

(1985).
                                       -23-

     There is a substantial understatement of income tax if the

amount of the understatement for the taxable year exceeds the

greater of (1) 10 percent of the amount required to be shown on the

tax return    or (2) $5,000.        Sec. 6662(d)(1)(A).        The amount of the

understatement     is    reduced,    however,    if    there    was   substantial

authority    for   the    taxpayer’s     treatment     of   the    item.     Sec.

6662(d)(2)(B).      In order to satisfy the substantial authority

standard, petitioners must show that the weight of authorities

supporting their position is substantial in relation to those

supporting a contrary position. Antonides v. Commissioner, 91 T.C.

686, 702 (1988), affd. 893 F.2d 656 (4th Cir. 1990).

     Petitioners have the burden of proving that respondent’s

determination of the accuracy-related penalty is in error.                   Rule

142(a).     Petitioners have failed to provide any evidence to show

that they were not negligent (indeed the record reveals otherwise),

and they have not pointed to any authorities to support their

position and bring them within the exception to the definition of

substantial    understatement.           Thus,    we    sustain       respondent’s

determination with regard to this issue.

To reflect the foregoing,



                                                  Decision will be entered

                                              under Rule 155.
