                  T.C. Summary Opinion 2001-56



                     UNITED STATES TAX COURT



             LEON & MAMIE M. GAITHER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3952-99S.                    Filed April 16, 2001.



     Leon M. Gaither, pro se.

     Francis C. Mucciolo, for respondent.


     CARLUZZO, 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue.   Rule references

are to the Tax Court Rules of Practice and Procedure.    The
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decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.

       Respondent determined deficiencies in petitioners’ Federal

income taxes, additions to tax, and penalties as follows:

Year        Deficiency     Sec. 6651(a)(1)      Sec. 6662(a)

1992         $11,354           $1,555              $2,271
1993          11,041            1,364               2,208
1994          10,646              521               2,129

       The issues for decision for each year in issue are:     (1)

Whether petitioners are entitled to various trade or business

expense deductions; (2) whether petitioners had reasonable cause

for failing to file a timely Federal income tax return; and (3)

whether the underpayment of tax required to be shown on

petitioners’ Federal income tax return is due to negligence.

Background

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

Petitioners are husband and wife.    They filed a joint Federal

income tax return for each year in issue.    At the time the

petition was filed, petitioners resided in Jacksonville, Florida.

References to petitioner are to Leon Gaither.

       During the years in issue, petitioner was the sole

proprietor of Gaither and Associates (G&A).    He was also the sole

shareholder of Professional Services of Jacksonville, Inc. (PSI),
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a corporation that petitioner had organized several years

earlier.   The working relationship between petitioner, through

G&A, and PSI is not entirely clear from the record, but both were

involved in the following income-producing business activities

during the years in issue.

     Petitioner, doing business as G&A, purchased surplus

property or scrap items from government auctions with the

intention to:    (1) Resell the items intact at a profit; or

(2) dismantle the items so that precious or nonprecious metals

could be recovered and sold.    In addition, petitioner, through

G&A, also collected obsolete telecommunications equipment from

private companies.    This equipment was either resold for salvage

or scrap, or disposed of in an environmentally sound manner.

     The services offered by petitioner, through G&A, were labor

intensive.   For example, property purchased for resale or

dismantling had to be transported, typically in rented vehicles,

from one location to another, as did items collected for

disposition.    Those items that required dismantling to recover

precious and nonprecious metals were dismantled by hand.

     Petitioner, through G&A, had no employees during the years

in issue; PSI, however, did.    Accordingly, PSI provided to G&A

what might be loosely referred to as contract labor services,
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although there is nothing in the record that remotely resembles

any formal agreement or arrangement between G&A (or petitioner)

and PSI.   Formalities aside, it appears that PSI and petitioner,

through G&A, were involved in a fee or profit splitting

arrangement in connection with the above-described business

activities that petitioner was involved with during the years in

issue.

     Petitioners’ 1992 return was filed on May 30, 1995; their

1993 return was filed on July 18, 1995; and their 1994 return was

filed on September 1, 1995.    No extension to file had been

requested or granted with respect to any of the years in issue.

Each return was prepared by a professional income tax return

preparer who had prepared petitioners’ Federal income tax returns

for a number of years prior to the years in issue.    The return

preparer also prepared the Federal income tax returns of PSI for

the years 1992 through 1994.    For each year, petitioner provided

the return preparer with various personal and corporate books and

records.   Petitioner also explained various transactions and

business practices involving G&A and PSI to the return preparer.

     For each year in issue, petitioners included a Schedule C,

Profit or Loss From Business, on which items of income and

deductions attributable to G&A are reported as follows:
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                          1992             1993         1994

Gross receipts          $19,612          $23,362      $11,430

Depreciation                167            - 0 -        - 0 -
Interest income           9,344           11,482       11,562
Office expense              458              743           80
Rent - machinery          2,578            1,467        - 0 -
Rent - property          10,203           11,662        7,260
Taxes                     - 0 -              225        - 0 -
Supplies                    129            - 0 -        - 0 -
Travel                   12,794            - 0 -        - 0 -
80 percent meals          1,482              383        - 0 -
Fuel                        211            1,960          948
Car rental                3,831            5,243        6,592
Material                  - 0 -           15,242           64
Legal/professional          308            - 0 -           67
Expenses for PSI          - 0 -            - 0 -       20,340
  Total Expenses         41,505           48,407       46,913
Net loss                 21,893           25,045       35,483

     The following items of income and deductions are reported

on PSI’s corporate Federal income tax returns:

                          1992             1993         1994
Income
Gross receipts          $66,879           $8,425       $2,204
Cost of goods sold       28,446           35,444        5,049
Gross profit             38,433          (27,019)      (2,845)

Deductions
Wages                   $24,206           $16,825      $13,141
Repairs/maintenance       - 0 -               270        - 0 -
Rents                    31,949            19,043       13,459
Taxes                     2,540             2,290        1,768
Interest                  2,391             4,922       10,289
Depreciation                305               258          184
Other1                    7,200             8,816        4,986
  Total                  68,591            52,424       43,827
Net loss                 30,158            79,533       46,672



     1
       Items in this category include: Alarm and security,
bank charges, car and truck expense, insurance, legal and
professional, office, postage, repair and maintenance, telephone,
travel, and utilities.
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     With minor exceptions, in the notice of deficiency

respondent disallowed all of the deductions claimed on the

Schedules C.   According to the explanation contained in the

notice of deficiency, the deductions were disallowed because “it

has not been established that * * * these amounts were for

ordinary and necessary business expense (sic) of your business”.

[Emphasis added.]   At trial, respondent further explained that

the deductions were disallowed because the underlying expenses

were determined to be PSI’s expenses, not petitioner’s.   In the

notice of deficiency, respondent further determined that for each

year in issue petitioners are liable for the addition to tax

under section 6651(a)(1) for the failure to file a timely Federal

income tax return, and that petitioners are liable for an

accuracy-related penalty under section 6662(a) because the

underpayment of tax required to be shown on their return is due

to negligence.

Discussion

A. Schedule C Expenses

     In general, section 162(a) allows a taxpayer to deduct all

“ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.   To qualify

for a deduction under section 162(a), the expense paid or

incurred by the taxpayer must have been paid or incurred in the

taxpayer’s trade or business.   Generally, a shareholder of a
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corporation is not entitled to deductions for business expenses

of the corporation because the trade or business of the

corporation is considered separate and distinct from the trade or

business of the shareholder.    See Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943); Deputy v. duPont, 308

U.S. 488, 495 (1940).

     While we are not exactly sure of what arrangements were in

effect between petitioner (doing business through G&A) and PSI,

we are satisfied that in some manner they split the fees or

profits generated by the business activities described above.

We cannot tell with any degree of precision what expenses should

properly be considered expenses of G&A, and therefore deductible

on the Schedules C, and what expenses should properly be

considered expenses of PSI, and therefore not deductible at all

by petitioners.   See Moline Props., Inc. v. Commissioner, supra.

Nevertheless, because petitioner, through G&A, was involved in

income-producing activities, we think it improper that all of the

deductions claimed on the Schedules C should be considered

entirely attributable to PSI.   Instead, based upon what sense we

can make from the record (including the testimony of petitioners’

professional income tax return preparer) and taking into account

respondent’s agreement that substantiation, including the type

contemplated by section 274(d), is not in issue for any year,
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we find that petitioners are entitled to claim the following

deductions on the Schedules C:

                          1992             1993          1994

Office Expense            $458             $743           $80
Rent - machinery         2,578            1,467         - 0 -
Rent - property         10,203           11,662         7,260
Taxes                    - 0 -              225         - 0 -
Supplies                   129            - 0 -         - 0 -
Travel                  12,794            - 0 -         - 0 -
80 percent meals         1,482              383         - 0 -
Fuel                       211            1,960           948
Car rental               3,831            5,243         6,592
Legal                      308            - 0 -            67
Depreciation              $167            - 0 -         - 0 -
  Total                 32,161           21,683        14,947

B.   Section 6651(a)

      For each year, respondent determined that petitioners are

liable for the section 6651(a)(1) addition to tax for failure to

file a timely return.   Section 6651(a)(1) provides for an

addition to tax in an amount equal to 5 percent of the amount of

the tax shown on the return for the first month, plus an

additional 5 percent for each additional month or fraction of a

month during which the failure to file continues, up to a maximum

of 25 percent of the tax in the aggregate.    This addition to tax

is applicable unless the taxpayer can demonstrate that the

failure is due to a reasonable cause and not due to willful

neglect.

      Petitioners agree that their return was filed late for each

year in issue.   According to petitioner, the returns were not

timely filed because of an ongoing financial crisis they were
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experiencing.   A taxpayer’s poor financial status, however, is

not reasonable cause within the meaning of section 6651.   See

Tabbi v. Commissioner, T.C. Memo. 1995-463.    To the extent that

there remains a deficiency for each year after taking into

account the Schedule C deductions allowed above, respondent’s

imposition of the section 6651(a)(1) addition to tax for each

year is sustained.

C.   Negligence Penalty

      In the notice of deficiency, respondent also determined that

the underpayment of tax required to be shown on petitioners’

return for each year in issue is due to petitioners’ negligence,

and imposed a penalty under section 6662(a).   See sec. 6662(b)(1)

and (c).   Section 6662(a) provides for a penalty in an amount

equal to 20 percent of the portion of the underpayment of tax

attributable to negligence or intentional disregard of rules or

regulations.

      Negligence includes “any failure to make a reasonable

attempt to comply with the provisions” of the internal revenue

laws or to exercise that level of care exhibited by a reasonable

person under the same or similar circumstances.   Sec. 6662(c);

Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-

3(b)(1), Income Tax Regs.   Disregard includes “any careless,

reckless, or intentional disregard.”   Sec. 6662(c).
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     The negligence penalty does not apply if the taxpayer

establishes that he or she relied in good faith upon the advice

of a competent and experienced accountant or return preparer in

the preparation of the taxpayer’s return.   See Weis v.

Commissioner, 94 T.C. 473, 487 (1990).   To show good faith

reliance, the taxpayer must show that the return preparer was

supplied with the information necessary for the preparation of an

accurate return.   To the extent that errors have been made on the

return, the taxpayer must demonstrate that the errors were the

result of the return preparer’s mistakes.   See Pessin v.

Commissioner, 59 T.C. 473, 489 (1972).

     We are satisfied that petitioners in good faith reasonably

relied upon their income tax return preparer to properly account

for the transactions between petitioner and PSI that resulted in

the deductions claimed, and now disallowed, on the Schedules C.

Consequently, petitioners are not liable for the negligence

penalty for any year in issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,



                                         Decision will be

                                    entered under Rule 155.
