                  T.C. Summary Opinion 2004-104



                     UNITED STATES TAX COURT



   DALE H. SUNDBY AND EDITH LITTLEFIELD SUNDBY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6977-01S.             Filed July 28, 2004.


     Dale H. Sundby, pro se.

     Michael S. Hensley, for respondent.



     GOLDBERG, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

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

should not be cited as authority.   Unless otherwise indicated,

subsequent 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.
                                - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $26,783 and $122 for the taxable years 1991 and

1994.   The issue for decision is whether petitioners are entitled

to certain deductions they claimed on Schedule C, Profit or Loss

From Business, in 1994.   Petitioners resided in San Diego,

California, on the date the petition was filed in this case.

     On April 6, 1993, petitioner husband (petitioner)

incorporated an entity in the State of California with the name

Access Anytime Anywhere, Inc.   On May 12, 1993, this

corporation’s name was changed to Navis Communications (Navis).

On December 19, 1993, petitioner signed a document as director of

Navis that, inter alia, named petitioner as the chairman,

president, chief executive officer (CEO), secretary, and chief

financial officer of Navis.   By letter dated May 2, 1994, Navis

was notified by the Internal Revenue Service that its election to

be treated as an S corporation had been accepted “effective

beginning Jan. 1, 1994, subject to verification if we examine

your return.”   Navis’s status was suspended on December 16, 1997,

and then again on June 1, 2001.

     On November 9, 1994, petitioner incorporated another entity

in the State of California with the name Search2000.    The

corporation’s name was changed to Power Agent, Inc., on September

19, 1995, and its status was suspended on January 2, 2001.    A

Federal income tax return was filed for Power Agent in September
                                - 3 -

1996 with respect to its taxable year beginning November 9, 1994,

and ending December 31, 1994.   This return reflected zero income

and zero expenses.

     Navis conducted business throughout 1994.    A conference

table, computer supplies and software, business cards, legal

services, fax repair services, and access to an information

service were all purchased by Navis during that year.    In

addition, Navis maintained a Federal Express shipping account and

a Sprint telephone service account.

     Throughout 1994, petitioner sent and received various

correspondence in his capacity as CEO of Navis.    The

correspondence appearing in the record can be summarized as

follows.   On January 4, 1994, petitioner sent a letter as CEO of

Navis to Integrated Systems Solutions Corp. of Bethesda,

Maryland, concerning products under development by Navis.     On

January 19, 1994, EDS Commercial Services (EDS) sent petitioner a

letter concerning the development of a product known as WorkUSA.

This letter stated in part:

     My proposal is that EDS and NAVIS begin a four-month design
     effort. During this stage, EDS will establish a core
     organization staffed with the expertise necessary to further
     define the business processes and requirements, and design
     the data base, application systems and technology platform.
     * * * we understand the purpose of obtaining these estimates
     is to assess EDS’ ability to deliver a full solution, we
     also understand that the figures may be used [by] NAVIS in
     obtaining financial backing from outside investors. EDS
     asks that the source of these estimates be held in
     confidence between EDS and NAVIS until such time as NAVIS
     and EDS reach an agreement to proceed.
                                 - 4 -

Attached to the letter was a document titled “An Estimate to

NAVIS Communications”, which spelled out in detail the proposal

being offered by EDS to Navis.    In May 1994, petitioner prepared

proposals for Goldman Sachs and Sprint concerning products in

development; both of these proposals indicated that they were

from Navis, and both named petitioner as the CEO thereof.    On

September 1, 1994, Price Waterhouse, L.L.P., sent a letter to

petitioner as CEO of Navis.   This letter stated that “Navis

Communications has asked Price Waterhouse to conduct a market

evaluation study of its new product SEARCHNET, to be launched in

November 1994”, and the letter concluded by stating that “we are

confident that we can successfully help Navis determine the

market penetration and initial marketing program required for a

successful launch of SEARCHNET.”    Throughout 1994, Navis also

entered into a variety of confidentiality and nondisclosure

agreements with a number of individuals and business entities.

There is no evidence in the record indicating that a tax return

was filed for Navis with respect to 1994 or any other taxable

year.

     Petitioner gained a business advantage from the

incorporation of Navis insofar as the corporation gave petitioner

“a more legitimate base, versus Dale Sundby the sole proprietor”

in his business dealings.
                               - 5 -

     Petitioners filed a Schedule C with their joint Federal

income tax return for taxable year 1994.    The Schedule C, which

named petitioner as the proprietor of a business engaged in

“information services”, listed the following gross receipts and

deductions:

     Gross receipts                              -0-
     Car and truck expenses                    $4,606
     Depreciation and section 179 expense      13,930
     Employee benefit programs                  7,897
     Legal and professional services            6,379
     Office expense                            15,188
     Supplies                                   2,936
     Travel                                     9,443
     Meals and entertainment                    2,815
     Utilities                                  3,706
     Home office expense                       22,169
     Net loss                                 (89,069)

Taking into account the Schedule C loss, petitioners reported

adjusted gross income of negative $80,020 and zero tax liability

for 1994.   Petitioners also filed a Form 1045, Application for

Tentative Refund, on which they requested a tentative refund for

1991 on account of a net operating loss (NOL) carryback from 1994

to that year of $81,923.   Respondent issued petitioners a refund

of $26,783 in accordance with this request.

     In the notice of deficiency, respondent determined that

petitioners are not entitled to deduct the $89,069 claimed as
                               - 6 -

trade or business expenses in 1994.1    The notice of deficiency

states:

     It is determined that the amount of $89,069.00 as a loss
     from an information services business for the taxable year
     ended December 31, 1994 is not allowed because you did not
     establish that such an activity constitutes a bona fide
     business entered into for profit. Further, it has not been
     established that the claimed expenses were incurred or, if
     incurred, paid by you during the taxable year for ordinary
     and necessary business purposes or that any claimed amount
     qualifies as an allowable deduction under the provisions of
     the Internal Revenue Code. Further, it has been determined
     that the claimed Schedule C expenses are start-up
     expenditures and not deductible in the taxable year ended
     December 31, 1994 under section 162 of the Internal Revenue
     Code. Further, it has been determined that the claimed
     Schedule C expenses were not your expenses but those of the
     corporations, Search 2000 and Navis Communications.
     Accordingly, with the disallowance of all of your Schedule C
     expenses and home office expenses taxable income is
     increased $89,069.00.

Because the Schedule C expenses were disallowed, respondent also

determined that petitioners are not entitled to the NOL carryback

from 1994 to 1991.   The entire amount of the 1991 deficiency of

$26,783 results from the disallowance of the NOL carryback and

related computational adjustments.     With respect to 1994,

respondent also determined that income of $866 received by

petitioner wife from Personalized Workout of La Jolla, Inc., is

subject to self-employment income tax.     This adjustment gives

rise to the entire amount of the 1994 deficiency of $122.

Despite stating a general objection to the 1994 deficiency in


     1
      In lieu of the home office expense deduction of $22,169,
respondent allowed petitioners additional itemized deductions for
taxes and mortgage interest totaling the same amount.
                                   - 7 -

their petition, petitioners did not address this underlying

adjustment in the petition, at trial, or in their brief.      We

therefore consider the issue to have been abandoned by

petitioners.

     The sole dispute in this case is whether petitioners are

entitled to the Schedule C deductions claimed in 1994.      If

petitioners are entitled to the deductions, they are also

entitled to the NOL carryback to 1991.      Petitioners’ primary

arguments at trial and in their brief can be summarized as

follows:    Petitioner was engaged in a trade or business outside

of the corporations that he owned, and the Schedule C expenses

are his individual expenses rather than those of a corporation;

or, in the alternative, because Navis was an S corporation, all

of its expenses should have passed through to petitioner,

allowing petitioners to deduct those expenses on their individual

return.    Petitioners also argue that they are entitled to

Schedule C deductions in amounts greater than those claimed on

their return.

     A taxpayer generally may not deduct personal, living, and

family expenses.    Sec. 262(a).    Expenses that are ordinary and

necessary in carrying on a trade or business of the taxpayer, on

the other hand, generally are allowed as deductions to the

taxpayer in the year in which they are paid or incurred.      Sec.

162(a).    A taxpayer is engaged in a trade or business if the
                               - 8 -

taxpayer is involved in the activity with continuity and

regularity and with the primary purpose of making a profit.

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).   However,

the trade or business of a taxpayer is separate and distinct from

the trade or business of a corporation owned by that taxpayer.

Moline Props., Inc. v. Commissioner, 319 U.S. 436 (1943).     The

Supreme Court has stated:

          The doctrine of corporate entity fills a useful purpose
     in business life. Whether the purpose be to gain an
     advantage under the law of the state of incorporation or to
     avoid or to comply with the demands of creditors or to serve
     the creator’s personal or undisclosed convenience, so long
     as that purpose is the equivalent of business activity or is
     followed by the carrying on of business by the corporation,
     the corporation remains a separate taxable entity. * * *
     [Id. at 438-439; fn. refs. omitted.]

Because the corporation is a separate taxable entity, the

expenses paid or incurred in carrying on the trade or business of

the corporation are deductible by the corporation rather than by

its shareholders.   Sec. 162(a); Moline Props., Inc. v.

Commissioner, supra; Deputy v. du Pont, 308 U.S. 488, 494 (1940);

Weigman v. Commissioner, 47 T.C. 596 (1967), affd. per curiam 400

F.2d 584 (9th Cir. 1968).   This is so even where the shareholders

personally pay the ordinary and necessary expenses of the

corporation’s trade or business.   Deputy v. du Pont, supra; Rand

v. Commissioner, 35 T.C. 956 (1961).   In certain circumstances,

the corporate form may be disregarded where it is “a sham or

unreal”.   Moline Props., Inc. v. Commissioner, supra at 439.
                                - 9 -

However, if a taxpayer chooses to conduct business through a

corporation and gains an advantage from its use, the taxpayer is

not permitted subsequently to deny the existence of the

corporation for tax purposes.    Id.; Weigman v. Commissioner,

supra.

     In general, any “small business corporation” may elect to be

an “S corporation” under section 1362(a)(1).      One of the effects

of electing S corporation status is that income earned by the

corporation is not taxed at the corporate level.      Sec. 1363(a).

However, taxable income is still computed at the corporate level.

Sec. 1363(b).   Accordingly, S corporations are required to file

yearly tax returns and to provide copies of the information on

those returns to its shareholders.      Sec. 6037(a) and (b).   The

individual shareholders, in turn, are required to either report

on their own returns all S corporation items consistently with

the corporate return or to file a statement identifying

inconsistencies or noting that a corporate return was not filed.

Sec. 6037(c).   Thus, the corporate entity cannot be ignored, even

if the corporation has elected S corporation status.      Byrne v.

Commissioner, 45 T.C. 151, 157 (1965), affd. 361 F.2d 939 (7th

Cir. 1966); see also Weibusch v. Commissioner, 59 T.C. 777

(1973), affd. 487 F.2d 515 (8th Cir. 1973).

     Taxpayers are required to maintain records sufficient to

establish the amounts of income, deductions, and other items
                              - 10 -

which underlie their Federal income tax liabilities.   Sec. 6001;

sec. 1.6001-1(a), (e), Income Tax Regs.

     At trial, petitioner admitted that the amounts on the

Schedule C are estimates, and that he cannot provide the

supporting documents that were used to arrive at the amounts of

the expenses shown thereon.   In support of their argument that

they are entitled to deductions in amounts greater than those

claimed on the Schedule C, petitioners offered and the Court

received into evidence hundreds of pages of receipts and invoices

allegedly showing various business expenditures that were grouped

into several categories corresponding to lines on the Schedule C.

The summaries of the receipts and invoices provided with respect

to each category are merely lists of receipts rather than any

type of business record maintained contemporaneously with the

conduct of the business activities--petitioner testified that

petitioners assembled these records only after the examination of

their return had begun.   Petitioners did not maintain separate

bank accounts or credit cards for use in their business

activities, and the checks and credit cards that were used to pay

the expenses bear the name of petitioner or petitioner wife.    We

conclude that petitioners have not maintained adequate books and

records and that they have not properly substantiated the items

claimed on their return, despite petitioners’ arguments to the
                                - 11 -

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

Regs.2

     Some of the receipts and invoices petitioners provided have

no plausible connection to any trade or business and are clearly

nondeductible personal expenses under section 262.    For example,

petitioners seek to deduct the cost of installing a wireless

fencing system for their dog.    There are also numerous other

expenses which are likely personal with respect to which

petitioners have provided inadequate explanations concerning

their business purpose.    These expenses include gasoline and car

washes for petitioners’ family cars, as well as various travel

expenses.   Petitioners introduced into evidence groups of

receipts and summaries for the travel expenses, and these

summaries contained notations concerning the alleged business

purpose of the travel.    The notations for a July 1994 trip to

Vail, Colorado, indicate that the purpose was a “Search2000 Board

of Directors meeting”.    However, Search2000 was not incorporated



     2
      Sec. 7491 does not apply in this case because the
underlying examination began before July 22, 1998, see Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001(c), 112 Stat. 727, when petitioners were
notified by letter dated July 16, 1997, that their application
for tentative refund was under examination. We note that, had
sec. 7491(a) applied, it would not have shifted the burden of
proof to respondent because petitioners have not maintained
adequate books and records and have not substantiated the amounts
shown on their return. Sec. 7491(a)(2). The burden of proof
remains on petitioners to show respondent’s determinations in the
notice of deficiency to be in error. See Rule 142(a).
                              - 12 -

until 4 months after this alleged meeting, and the notations

indicate that the meeting involved only petitioner, Archie McGill

as director, and petitioner wife as vice president.    The

notations for another trip, this one to Hawaii in June 1994, also

indicate various business meetings related to Search2000 took

place.   However, these alleged business meetings occurred solely

between petitioner and petitioner wife over hotel dinners.

     Certain receipts and invoices petitioners provided do

reflect likely trade or business expenses.    However, the expenses

that were billed to Navis clearly were incurred by Navis rather

than petitioners.   We further conclude that the other business-

related expenses that reflect petitioner or petitioner wife as

the purchaser or payor also were expenses of Navis rather than a

sole proprietorship of petitioner.     Petitioner held himself out

as the CEO of Navis in his business dealings, and the evidence of

business activities in the record reflects that the activities

were those of Navis rather than of petitioner as a sole

proprietor.   Other than petitioner’s testimony, there is no

evidence in the record supporting his contention that he was

conducting his business activities as a sole proprietor--whether

such a business was as a venture capitalist, as petitioners

argue, or another activity--and that Navis was a mere “shell”

that conducted no business.   We do not accept petitioner’s

testimony because it is self-serving, uncorroborated, and
                              - 13 -

contradicted by the documentary evidence in the record.    See

Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992).

     In their brief, petitioners argue that Navis was just one of

many “ventures” operated by petitioner, and that Navis “remained

dormant and was only used for interacting with potential

partners”, with the purpose of being available as a corporate

entity for any one of petitioner’s ventures should the need

arise.   However, the documentary evidence demonstrates that the

correspondence that was sent and received under Navis’s name

refers to various products or proposals offered by Navis; these

products or proposals have the same names as what petitioners

assert were separate business ventures.   We conclude that Navis

itself was offering these products or proposals as a part of its

business activities.   Petitioners further argue:

     Despite respondent’s contention * * * that petitioner
     “states, however, that Navis was nothing more than a ‘shell
     corporation,’ and was not a separate entity from Dale
     Sundby, sole proprietor,” petitioner never made that
     statement. In fact, petitioner stated the opposite, that he
     was CEO of Navis, a separate entity from the sole
     proprietorship. As CEO of Navis, it was not inappropriate
     for the petitioner to hold himself out as such. Using Navis
     provided for legitimacy in signing agreements with other
     corporations. Petitioner had no obligation to disclose to
     any of these parties that Navis had not yet received a
     transfer of any intellectual property * * * from the sole
     proprietorship, had no checking account, etc.

Because we have found that Navis rather than petitioner was

carrying on the trade or business, petitioners’ distinction is

one without a difference.   If petitioners argue that Navis was a
                                - 14 -

separate taxable entity, the expenses they incurred were those of

the corporation and therefore nondeductible by them.   See Deputy

v. du Pont, 308 U.S. 488 (1940).    If petitioners argue that Navis

was not a separate taxable entity, the entity cannot now be

disregarded for tax purposes and its expenses remain

nondeductible by petitioners.    See Moline Props., Inc. v.

Commissioner, 319 U.S. 436 (1943).

     An issue involving Navis as a corporate entity was

previously addressed by this Court in Sundby v. Commissioner,

T.C. Memo. 2003-204.   In that case, a deficiency with respect to

petitioners’ taxable year 1997 was before the Court.   Petitioners

had claimed a bad debt deduction of $350,000 on a Schedule C in

1997.   We concluded that, assuming arguendo that a bona fide debt

had existed, Navis would have been entitled to a bad debt

deduction rather than petitioners.       We stated:

     The promissory note was made between Search2000 and Navis
     [in 1995]. Because Navis was incorporated under the laws of
     the State of California and there are other indicia of its
     separate status, we shall treat it as a separate entity. * *
     * Since the promissory note was made payable to Navis, it is
     Navis that would be entitled to the bad debt deduction, if
     any were to be allowed, and petitioners have not shown that
     the note was transferred to them personally. Moreover,
     petitioners have not shown that any S corporation election
     was in effect for Navis for the year in issue [1997].

In reaching this conclusion, we found that Navis was a

corporation when the promissory note was signed in 1995, and we

held that the corporate form could not be disregarded with

respect to that transaction at the time that the debt allegedly
                              - 15 -

became worthless in 1997.   The Court’s findings in Sundby are

consistent with our finding in this case that the business

activity conducted by petitioner in 1994 was conducted in his

role as CEO of Navis rather than in a sole proprietorship, and

our holding is not affected by petitioners’ failure to introduce

evidence of an S corporation election in the prior case.

     In summary, the Court has received into evidence hundreds of

pages of receipts and invoices offered by petitioner, who argues

that each and every one represents a deductible expense.

However, we conclude that many of the expenses are nondeductible

personal expenses, see sec. 262(a), and that, to the extent that

the receipts are for trade or business expenses, the expenses

relate to the trade or business of Navis rather than petitioner,

see Moline Props., Inc. v. Commissioner, supra.   Petitioners are

not now free to disregard the corporate entity for tax purposes

after gaining a business advantage from its use, and the fact

that petitioners personally paid certain expenses does not alter

their characterization as corporate expenses.   See id.; Deputy v.

du Pont, supra; Weigman v. Commissioner, 47 T.C. 596 (1967); Rand

v. Commissioner, 35 T.C. 956 (1961).   Petitioners have provided

no other grounds for deducting any of the remaining expenses, if

any, evidenced by the receipts.3


     3
      One invoice received in evidence as alleged substantiation
for petitioner’s Schedule C expenses, labeled by petitioners as
“office/conference room upholstery fabric for chairs”, listed the
                                                   (continued...)
                              - 16 -

     Finally, we address a point petitioners raised at trial.

Petitioners assert that the explanation in the notice of

deficiency regarding the disallowance of the Schedule C expenses

was too vague to allow for an adequate response.    We agree that

the explanation as a whole suffers from a certain lack of clarity

or specificity.   However, the notice of deficiency in effect sets

forth several alternative theories under which respondent

determined that petitioners are not entitled to any of the

Schedule C deductions.   The Commissioner generally is permitted

to set forth alternative grounds for adjustments in a notice of

deficiency, as well as to take alternative positions at trial.

Doggett v. Commissioner, 66 T.C. 101 (1976).     On account of our

holding, however, we need not address every such argument

respondent raised in this case.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                    Decision will be entered

                               for respondent.




     3
      (...continued)
purchaser as “Edith Littlefield Sundby, SBMI Interiors”. Another
invoice labeled “office decorative fabric for couch” listed the
purchaser only as “SBMI Interiors”, while numerous other invoices
for similar items list only petitioner wife as the purchaser. No
mention is made of SBMI Interiors elsewhere in the record, and
petitioners have not argued that petitioner wife was engaged in a
trade or business of any type, other than with respect to the
$866 in income that she received from Personalized Workout of La
Jolla, Inc.
