                   T.C. Summary Opinion 2006-27



                     UNITED STATES TAX COURT



         DOUGLAS L. AND NANCY H. MAXFIELD, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8075-04S.               Filed February 16, 2006.



     Douglas L. and Nancy H. Maxfield, pro se.

     Avery Cousins III, for respondent.


     POWELL, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463.1    The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.




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


     Respondent determined deficiencies in petitioners’ 2000 and

2001 Federal income taxes and accuracy-related penalties as

follows:

           Years     Deficiency           Sec. 6662 Penalty

           2000      $22,221              $4,444.20
           2001       20,892               4,178.49

     The issues are (1) whether petitioners are entitled to

various deductions claimed on Schedule C, Profit or Loss From

Business, for the years in issue, and (2) whether petitioners are

liable for the penalties under section 6662.          At the time the

petition was filed petitioners resided in Bowie, Maryland.

                               Background

     The facts may be summarized as follows.          Petitioners filed

Federal income tax returns for the taxable years 2000 and 2001.

Each return included a Schedule C for Common Sense Consultants,

Inc. (CSCI),2 and Galaxy 6 (Galaxy).        Petitioners reported gross

receipts, cost of goods sold, and deductions for the two entities

as follows:

                                  2000                2001
Galaxy 6

Gross receipts                    $3,883              $8,240

Cost of goods sold                 5,755                -0-
Expenses:
     Advertising                      82                424
     Bad debt                        -0-                926
     Travel                          -0-                198

     2
         CSCI was not incorporated.
                                - 3 -


  Other expenses:
     Mountain View                 -0-         6,500
     Bank service charge           -0-            50
     Bank tracing costs            -0-           598

CSCI

Gross receipts                 $31,265        25,850

Cost of goods sold              15,157          -0-
Expenses:
     Advertising                 2,100          -0-
     Car                        15,382        17,062
     Depreciation                  763         3,944
     Insurance                   3,493         3,768
     Legal                        -0-          1,544
     Office                       -0-          3,398
     Rental                        203           -0-
     Repairs                     8,977        10,049
     Supplies                    3,467         4,495
     Taxes & licenses              427           137
     Travel                      2,450           579
     Meals & entertainment       2,631         2,516
     Utilities                   6,939         8,275
     Equipment & upgrades        6,503           768
     Work clothes                3,319           957
     Lodging                     3,384           936
     Publications                  606           423
     Political contributions       220           -0-
     Donations                    -0-            224
     Postage                       307           141
     Training, etc.                487         1,227
     Expenses (boat)              -0-          6,531
     Dry Cleaning                  195           -0-
     Equipment                    -0-          5,260
     Materials                    -0-          4,168

       Galaxy appears to have been a conduit for credit card

payments for rents on cabins in Washington State that were owned

by the mother and brother of petitioner Douglas L. Maxfield

(petitioner).    The reason for this arrangement is unclear.
                                 - 4 -


     CSCI is, using petitioner’s words, “an umbrella business

that deals in legal issues, construction issues, any [sic]

advice.”   While petitioner allegedly gives legal advice, he does

not practice law.   Apparently, the construction aspect of CSCI

during the years before the Court involved property belonging to

the parents of petitioner Nancy H. Maxfield.    Petitioner also was

a “hearing officer for section 8 assistance and terminations” in

Prince George’s County, Maryland, for which he was paid

$4,987.50.

     Petitioner’s records for the deductions listed above

consisted of credit card monthly statements.    With respect to the

expenses for car, repairs, and a portion of the insurance the

deductions allegedly relate to petitioner’s expenses for local

transportation.   Petitioner claimed deductions for both alleged

mileage and actual expenses.   The travel and lodging expenses

relate to trips to California, Florida, and Texas by automobile,

and to Alaska and Washington State by airplane.    Petitioner did

not maintain any logs or similar type records concerning the

automobile or travel expenses.    The deductions for insurance

include insurance for automobiles, a boat, homeowners insurance,

and life insurance on petitioner.

     At trial respondent was willing to allow the following cost

of goods sold and deductions for trade or business expenses:
                                - 5 -



                                2000           2001

     Cost of goods sold1       $2,100           -0-

     Deductions

     Car                        7,634        $10,284
     Insurance                     33             33
     Legal                        -0-            772
     Supplies                     626          1,001
     Utilities                    763            900
     Publications                 100            100
     Postage                      154             71
     Training, etc.               244            614
     Advertising2                  82            -0-
     1
         Claimed with respect to Galaxy.
     2
         Claimed with respect to Galaxy.

These deductions are based on the assumption that petitioner

operated a trade or business of being a housing hearing officer

for the county under CSCI.    During the trial, the parties agreed

that Galaxy was a conduit; the income should not have been

reported, and the deductions claimed, other than those stated for

the year 2000 and the amounts paid to petitioner’s mother, were

not allowable.

                             Discussion

A. Deductions

     Section 162 allows a deduction for “all the ordinary and

necessary expenses paid * * * during the taxable year in carrying

on any trade or business”.    Similarly, section 212 allows

deductions for ordinary and necessary expenses incurred “for the

production or collection of income.” On the other hand, “no
                                 - 6 -


deduction shall be allowed for personal, living, or family

expenses.”   Sec. 262(a).   Furthermore, section 274(d) provides

that no deduction shall be allowed, inter alia, with respect to

travel and entertainment expenses and “listed property (as

defined in section 280F(d)(4))” unless the taxpayer substantiates

by adequate records or by sufficient evidence corroborating the

taxpayer’s own statement (1) the amount of such expense or item,

(2) the time and place of the travel, entertainment, or use of

the property, (3) the business purpose of the item, and (4) the

business relationship to the taxpayer of the persons entertained

or using the property.   Listed property includes passenger

automobiles.   Sec. 280F(d)(4)(A)(i).

     Petitioner claims to have two separate businesses operating

under the names of Galaxy and CSCI.      Petitioner's testimony

concerning both was confusing.    It is axiomatic that a taxpayer

must be engaged in a trade or business if any expense is

deductible under section 162.    Respondent concedes that

petitioner was engaged in a trade or business, but, as far as we

can determine from this record, that concession is based on

petitioner’s activity as a hearing officer for the county.

Petitioner also claims that he “deals in legal issues”.      We found

that his testimony concerning this activity was, at best,

confusing and contradictory.    First, his testimony concerning

income from this activity was obtuse.      He “went out to California
                                - 7 -


and did an estate out there when my cousin died.”    He went to

Florida as a “process server and served my ex son-in-law some

papers”.    He helped “several old folks” in Texas with Social

Security and “got them food stamps and a little money and their

medical services.”    He helped another person get veteran’s

benefits.    Petitioner is not licensed to practice law.

Furthermore, he has no records concerning these activities, and

there is no indication of what, if any, income petitioner derived

from these endeavors.    Second, with regard to the construction

activity, petitioner testified that he had closed that activity

before the year 2000.    While there is some indication that some

work was done on his in-laws’ residence, petitioner’s role in

that work is unspecified.

     Most of the deductions claimed for expenses are patently

without legal bases.3   Petitioner claimed deductions for boat

expenses, but he has no records to support any business use of

the boat.   He has no logs or any other documentation showing the

business use of any automobiles that satisfy the requirements of

section 274(d).4   Moreover, he deducted both actual expenses and



     3
        The provisions of sec. 7491(a)(1) do not apply.
Petitioners have not satisfied the record-keeping requirements of
sec. 7491(a)(2).
     4
        Respondent, however, did allow a deduction for automobile
expenses based on mileage that includes an element of the cost of
insurance.
                                - 8 -


mileage for the automobiles.    The deductions claimed for clothes

and food were for everyday clothing and meals which are clearly

personal expenses.    The claimed utility expense deductions were

for the total utilities for his home and clearly have more than

an incidental personal portion in the amount claimed.5    Even

putting aside the failure to comply with section 274(d), there is

no evidence as to the business nature of the claimed travel and

lodging expenses.    Petitioner’s testimony concerning the travel

expenses indicates that members of his family traveled with him.

The insurance, other than that allowed by respondent, consisted

of personal life insurance and automobile insurance.     In sum, we

find no basis for the amount of the deductions claimed.

B. Section 6662 Penalties

     Section 6662(a) provides a penalty in an amount equal to 20

percent of the portion of any underpayment attributable to, among

other things, “Negligence or disregard of rules or regulations”.

Sec. 6662(b)(1).    “‘Negligence’ includes any failure to make a

reasonable attempt to comply with the provisions * * * [of the

Internal Revenue Code], and the term ‘disregard’ includes any

careless, reckless, or intentional disregard.”   Sec. 6662(c).

Negligence also includes any failure by the taxpayer to keep



     5
        Respondent allowed a portion of the utilities and
homeowners insurance based on petitioner’s use of a portion of
his home for business purposes.
                               - 9 -


adequate books and records or to substantiate items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs.     We have no difficulty in

finding that petitioners are guilty of negligence for both years

before the Court.6   They claimed deductions that are clearly

improper and made no attempt to keep satisfactory records as

required by section 6001.   Petitioners claim that they used

“Turbo Tax”, a computer program for preparing tax returns, and

any fault lies with that program.   While section 6664(c) provides

an exception for a portion of the underpayment due to reasonable

cause, petitioner’s have not shown reasonable cause here.     The

“Turbo Tax” program depends on the entry of correct information.

Petitioners certainly knew that they were deducting personal

expenses when they entered items such as routine meals,

clothing, insurance, etc.   Respondent’s determinations are

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect respondent’s concessions at trial,

                                            Decision will be entered

                                       under Rule 155.




     6
        Respondent has met his burden of production with respect
to the penalties, sec. 7491(c), and petitioners bear the burden
of proof, Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
