                        T.C. Memo. 2010-75



                      UNITED STATES TAX COURT



       C. MICHAEL AND GWENDOLYN E. WILLOCK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25616-06.               Filed April 14, 2010.



     C. Michael and Gwendolyn E. Willock, pro se.

     Jeanne Gramling, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARIS, Judge:   On September 14, 2006, respondent mailed to

petitioners a notice of deficiency (notice) that determined

deficiencies in their Federal income tax of $140,135 and $154,888

for tax years 2002 and 2003, respectively, and penalties under
                                - 2 -

section 66621 of $28,027 and $30,978 for 2002 and 2003,

respectively.    Petitioners, then residing in the State of North

Carolina, timely petitioned this Court for redetermination of the

deficiencies and penalties.

     The issues for decision as framed by the parties are:

     (1)    whether petitioners’ car and truck expenses were

ordinary and necessary business expenses, and whether petitioners

adequately substantiated those expenses;

     (2)    whether petitioners’ vehicle was placed in service

during taxable year 2003;

     (3)    whether petitioners adequately substantiated as dental

practice expenses their travel and entertainment expenses for

their trip to Hawaii, professional fees paid to an individual for

marketing and networking training, and fees for janitorial

services;

     (4)    whether petitioners’ losses from their dental equipment

leasing business are properly deductible from the income they

received from their condominium rental;

     (5)    whether petitioners’ participation in a multi-level

marketing company and an organic farming business was for profit;

     (6)    whether certain deposits made to petitioners’ joint




     1
      Section references are to the Internal Revenue Code of 1986
(Code), as amended. Rule references are to the Tax Court Rules
of Practice and Procedure.
                               - 3 -

bank account are properly includable as income, or whether those

deposits repaid a loan made to their son; and

     (7)   whether petitioners are liable for accuracy-related

penalties.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are found

accordingly.   The stipulation of facts and the attached exhibits

are incorporated herein by this reference.

I. The Dental Practice Items

     Petitioner husband is a dentist.   In 2002 and 2003 he

operated his dental practice through an S corporation known as C.

Michael Willock, DDS, PA.   For tax years 2002 and 2003 respondent

determined increases in the dental practice’s gross receipts by

reference to bank deposits and disallowed or reduced deductions

for some of the expenses claimed by the practice.   The parties

agree that the amounts reported as the dental practice’s gross

receipts for 2002 and 2003 should be increased by $87,744 and

$7,271 respectively.   However, what remains in dispute are

petitioners’ claimed deductions for car and truck expenses,

section 179 expenses, travel expenses, professional fees, and

cost of janitorial services.   These expenses are flow-through

items incurred by the S corporation.
                                 - 4 -

     A. Car and Truck Expenses

     Respondent denied petitioners’ claimed deductions for car

and truck expenses of $23,705 and $22,899 for tax years 2002 and

2003, respectively.   In 2002 petitioners drove an Audi and a Land

Rover, both of which were claimed by petitioners to have been

driven solely for business purposes.     Petitioner wife had veneers

(cosmetic dental applications) applied to her teeth by petitioner

husband.    Petitioners claim that any time petitioner wife drove

anywhere in one of the vehicles she was “a walking, talking

billboard for [the] dental office” because of the veneer work

petitioner husband had performed.    Additionally, each vehicle had

a license plate holder that displayed the name of the dental

practice.   Petitioner husband used the vehicles to perform

various tasks for the dental practice, such as purchasing office

supplies.   During 2002 and 2003, petitioners owned four vehicles:

a GMC Envoy, an Audi, a Land Rover, and a Chevy Tahoe.

Petitioner wife testified that she drove the Audi until the lease

expired,2 after which she drove the Land Rover.

     Petitioners started leasing the Land Rover on May 1, 2002,

and the dental practice claimed deductions for lease payments

with respect to both the Land Rover and the Audi during 2002.

Petitioners leased the Audi until February 10, 2003.    During 2002



     2
      Petitioners leased the Audi and the Land Rover, and owned
the GMC Envoy and the Chevy Tahoe.
                                - 5 -

and 2003 petitioners also reported a $750 monthly expense for

“GMAC”, which is reflected in their car and truck expenses for

2002 and 2003.    It is unclear which vehicle these payments were

for.    The vehicles were owned or leased by petitioners

individually, not by the dental practice; however, the dental

practice claimed the deductions.

       B. Section 179 Expense Deduction

       The dental practice claimed section 179 expense deductions

for tax years 2002 and 2003 in the respective amounts of $20,301

and $38,630.    Respondent concedes the deduction of $20,301 for

tax year 2002.    Respondent partially disallowed the section 179

expense deduction for 2003 claimed in regard to the GMC Envoy.

On the dental practice’s return, petitioners reported that the

GMC Envoy was placed in service on November 18, 2003, and that it

was used solely for business purposes.    Petitioners purchased the

GMC Envoy after the lease for the Land Rover expired.

Petitioners’ lease on the Land Rover ended sometime after 2003,

i.e., in 2004.    It therefore appears that petitioners retained

the Land Rover lease through 2003, and purchased the GMC Envoy

after 2003.    The GMC Envoy bore a license plate holder with the

name of the dental practice.    The GMC Envoy was titled in

petitioners’ names rather than in the name of the dental

practice, which claimed the deductions.
                                 - 6 -

     C. Travel Expenses

     Respondent disallowed travel expenses of $5,082 for 2002,

which petitioners claim they incurred during a business trip to

Hawaii for a dental conference.     Petitioners were in Hawaii from

May 3 through 12, 2002.     Petitioners testified that the dental

conference was held from May 7 through 10, 2002.     Petitioners

presented the Court an invoice for the purchase of dental

equipment which they claim they purchased in Hawaii during the

dental conference.   The invoice, however, states only when the

equipment was purchased, not where it was purchased.

     D. Professional Fees

     Petitioners deducted professional fees of $10,080.50 for tax

year 2002, which amount they claimed was paid to Ron Lewis, the

pastor of petitioners’ church.     Petitioners hired Ron Lewis to

instruct petitioner wife in the areas of networking and marketing

so that she could be a more effective salesperson and marketer

for the dental practice.     These instructional sessions

purportedly occurred in petitioners’ home and, for a brief period

of time, over the telephone.     Petitioners presented copies of

Forms 1096, Annual Summary and Transmittal of U.S. Information

Returns, and 1099-MISC, Miscellaneous Income, in support of these

claimed expenses for consulting.     No Social Security number is

listed for Ron Lewis on either form, and no evidence was offered
                               - 7 -

to confirm that the tax forms were actually delivered to Ron

Lewis.   Ron Lewis did not testify at trial.

     E. Janitorial Expenses

     Respondent disallowed some of the dental practice’s claimed

janitorial expenses for both 2002 and 2003, and a portion of

these expenses remains in dispute.     With respect to 2002, the

dental practice claimed janitorial expenses of $20,226.     The only

expenses remaining in dispute are certain expenses in connection

with payments claimed to have been made to the “Sotelos”, a

landscaping service, in the amount of $12,208.     Petitioners

testified that these expenses were reported on their 2002 income

tax return and represent expenses incurred for landscaping

services provided for the dental practice.     All of the invoices

from the Sotelos are addressed to petitioners at their home

address, and were not addressed to the dental practice or sent to

the dental practice address.

     In tax year 2003, petitioners deducted janitorial expenses

of $11,648, of which amount respondent allowed $4,192.     Of the

disallowed amount, $1,500 represents an amount petitioners claim

to have paid to their son Ryan Willock on behalf of the

condominium association where the dental office is located.

Petitioners testified that they paid their son to provide

landscaping upgrades to the dental practice.     Petitioners claim

that the landscaping had not been updated in several years, and
                                - 8 -

that such work was necessary to present a professional appearance

to new and existing dental practice patients.    However,

petitioners presented no documentation supporting this claimed

expense.    The remaining $6,0743 reflects a payment to Ryan

Willock, as evidenced by a Form W-2, Wage and Tax Statement, that

petitioners generated.    Petitioners provided no evidence of the

services which their son purportedly provided for this amount,

nor any evidence that the Form W-2 was delivered to him.

II. Dental Practice Leases

     Petitioners owned a condominium which they leased to

petitioner husband’s dental practice, which was operated as an S

corporation.    In both 2002 and 2003, a profit was reported with

respect to this rental property.    Petitioners also owned a

company known as Dental Equipment Leasing, L.L.C. (DEL), which

leased a CEREC milling machine4 to the dental practice.     DEL did

not lease any other equipment to the dental practice, or lease

any equipment to any other individual or entity during the years

at issue.    In 2002 and 2003, DEL reported a loss.   On their 2002


     3
      The amount claimed, $11,648, less the amount allowed,
$4,192, leaves $7,456 disallowed by respondent. Respondent,
however, disallowed individual amounts of $1,500 and $6,074,
which total $7,574. This amount is $118 more than the total
amount claimed by petitioners. It is unclear what created this
discrepancy; however, respondent does not seek to disallow the
$118 difference between the total amount reported on the S
corporation’s return, and the total amount disallowed by
respondent.
     4
      This machine is used to make dental implants.
                                - 9 -

and 2003 Federal income tax returns, petitioners deducted losses

from the lease of the dental equipment of $13,119 for 2002 and

$27,628 for 2003, from the income received from the rental of the

condominium.   Respondent disallowed these claimed loss

deductions.

III. Nu-E World Lexxus International

     During tax years 2002 and 2003, petitioners worked part-time

as salespersons and marketers with a company known as Nu-E World

Lexxus International (Nu-E World).      Petitioners reported expenses

from their work with Nu-E World on Schedule C, Profit or Loss

From Business, on their 2002 and 2003 income tax returns.     On

their 2002 income tax return, petitioners reported that their

work for Nu-E World caused them to incur expenses for travel,

meals and entertainment, sales aides, dues, and purchases.     On

their 2003 income tax return, petitioners reported that their

work for Nu-E World caused them to incur expenses for

depreciation and dues.   In the notice, respondent disallowed the

expense deductions claimed for both years on grounds that

petitioners failed to substantiate the amounts claimed, and

failed to establish that the amounts were ordinary and necessary

business expenses.   After the notice was issued, petitioners

provided some receipts for meals as well as copies of credit card

statements.    In light of these disclosures, respondent conceded

that petitioners may claim expenses to the extent of income
                              - 10 -

reported.   Petitioners reported sales income of $1,080 for 2002,

and zero income for 2003.   There are no records indicating which

items were sold, or the volume or dates of sale.

     On their 2002 income tax return, petitioners reported that

they incurred expenses in connection with their work for Nu-E

World for meals and travel, including hotel rooms for themselves

and their son and daughter-in-law, and meals for individuals who,

in the Nu-E World structure, ranked both above and below

petitioners.   According to their list of expenses, petitioners

also purchased two computers to be used in their work for Nu-E

World; one from Dell in the amount of $1,497 on April 15, 2002,

and the other from Gateway in the amount of $902 in January of

2002.   Petitioners claimed depreciation on their 2002 and 2003

returns for one of these computers, though it is impossible to

tell which computer from the evidence available to the Court.

Petitioners also purchased window blinds costing $541 for the

meeting room in their home.   Petitioners claim that it was

necessary to purchase the blinds to make the meeting room look

more professional to potential Nu-E World clients.   Petitioners’

records consist of summaries of expenses and receipts for meals

with handwritten notes with respect to the individuals whose

meals they paid for.

     Petitioners thought that Nu-E World would be a good source

of income based upon their research of the history of the
                              - 11 -

individuals running the company.   According to petitioners, these

individuals had a proven record of success in very similar

industries, and thus petitioners believed that Nu-E World would

also be very successful.

     Petitioners networked with people and attempted to sell them

products that Nu-E World marketed or produced, such as a product

called “Noni Juice”.   Petitioners often gave out free samples of

products provided by Nu-E World, in the hope that the free

samples would generate purchases from customers.   Petitioner wife

performed the role of salesperson for Nu-E World’s products.     She

found individuals she believed might be interested in these

products, brought the individuals to her home’s meeting room, and

gave these individuals a sales-pitch on the benefits of various

Nu-E World products.

IV. Laurel Valley Properties, L.L.C.

     In 2003, petitioners purchased 149 acres of land near

Stuart, Virginia for the purpose of starting an organic farm.

The property was titled in petitioners’ names; however, the

farming operation was operated as a limited liability company

called Laurel Valley Properties, L.L.C. (Laurel Valley).   Laurel

Valley filed a Form 1065, U.S. Return of Partnership Income, for

2003.   Petitioners were each issued a Schedule K-1, Partner’s

Share of Income, Credits, Deductions, etc., from Laurel Valley

for 2003.   Petitioners reported on their individual 2003 income
                               - 12 -

tax return a flowthrough loss from Laurel Valley, of $68,660.

Of that amount, $42,684 was for depreciation on two all-terrain

vehicles petitioners purchased, and $19,417 was for mortgage

interest on the farm.    Respondent disallowed the claimed loss on

the ground that this endeavor was not entered into as a business

activity engaged in for profit.

     Laurel Valley had no bank account in 2003, and some of the

expenditures for which petitioners claimed deductions were made

with checks from petitioner husband’s dental practice, while

others were made with petitioners’ personal checks.

     In 2003, petitioners purchased chickens that were to be used

for egg production and sale, but the chickens were eaten by

predators.    Petitioners have since built a chicken coop to house

the chickens.    Petitioners determined that they would be able to

sell the chicken eggs to a nearby restaurant as well as to local

individuals.    Petitioners devoted all of their weekends,

holidays, and vacation time to working on the farm.    Petitioners

made improvements to the farm such as building a storage shed.

     Petitioner wife was born on a farm, and lived on a farm

until she was 38 years old.    She had owned a farm with her

father, and had owned cows, tractors, and milking equipment in

the past.    Petitioner wife’s father was a dairy farmer.

Petitioner husband worked on petitioner wife’s father’s farm

after petitioners married.    Petitioner husband worked
                              - 13 -

continuously on the farm until the farm was sold, at which point

petitioner husband went to dental school.   Petitioner wife has

been a member of the North Carolina Farm Bureau, an independent

farming trade group, since 1965.

V. Banks Deposits (Loan to Ryan Willock)

     Respondent analyzed petitioners’ bank deposits and

determined that petitioners had understated their 2002 and 2003

income of $61,899 and $184,537 respectively.   After respondent

issued the notice, petitioners presented respondent with certain

documentation in an attempt to justify the understatement.5

Based upon these documents, respondent conceded all but $8,500

for 2002, and the entire amount for 2003.   Petitioners claim that

the bank deposits of $8,500 remaining in dispute for 2002 were

received in repayment of a loan they made to their son, Ryan

Willock, so that he could purchase a used pickup truck from

Michael Hickman, a used car salesman.   Petitioners therefore

claim that the bank deposits of $8,500, which respondent included

in their income, had a nontaxable source, i.e., loan repayments

from their son.   Petitioners’ documentary evidence supporting

this claim consists of (1) a carbon copy of a check for $7,200

from the bank account of “M. Ryan Willock” dated April 16, 2002,

(2) a copy of a deposit slip for petitioners’ bank account which


     5
      The Court is not privy to the reason petitioners did not
present this information to respondent before the notice was
issued.
                              - 14 -

reflects a $7,200 deposit on April 17, 2002, and (3) copies of

two checks, one for $8,000 and the other for $500, both dated

April 16, 2002, and both made payable to Michael Hickman.

Petitioners did not present any documentation to support their

claim that the additional deposit of $1,300 into their bank

account was from their son in satisfaction of his loan debt.

     Petitioners lent $8,500 to their son Ryan Willock so that he

could purchase a used pickup truck.     The truck was offered for

sale by Michael Hickman for $8,500.     Petitioner wife happened

upon the sale of the vehicle and asked her son whether he was

interested in purchasing it for the sale price.     Her son informed

her that he was interested, but could not come to the vehicle’s

location at that time because of his work schedule.     Petitioner

wife asked Hickman to hold the vehicle for her son.     Hickman

agreed to do so only after receiving a $500 deposit check from

petitioner wife.   Petitioner wife paid the remaining $8,000 to

Hickman by check upon sale.

                              OPINION

I. Dental Practice Items

     Respondent determined that the returns underreported the

dental practice’s gross receipts by reference to bank deposits,

and disallowed or reduced some of the deductions claimed by the

practice for tax years 2002 and 2003.     The parties agree that the

dental practice’s gross receipts for 2002 and 2003 should be
                              - 15 -

increased by $87,744 and $7,271, respectively.   However,

remaining in dispute are petitioners claimed deductions for car

and truck expenses, section 179 expenses, travel expenses,

professional fees, and fees for janitorial services.

     A. Car and Truck Expenses

     Section 162(a) allows deductions for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including operating expenses

of automobiles used in the trade or business.    Sec. 1.162-1(a),

Income Tax Regs.   A taxpayer is entitled to deduct transportation

expenses incurred in carrying on a trade or business.   Commuting

expenses, however, incurred in going from a taxpayer’s residence

to his or her place of business and returning are nondeductible

personal expenses.   See, e.g., Fausner v. Commissioner, 413 U.S.

838 (1973).   When a taxpayer uses a car for personal as well as

for business purposes, he or she must allocate expenses between

personal and business use.   See sec. 1.274-5T(d)(2)(i), Temporary

Income Tax Regs., 50 Fed. Reg. 46025 (Nov. 6, 1985).    Petitioners

did not allocate their expenses.

     The Code and the regulations thereunder require that

sufficient records be maintained to establish the amount of any

deduction claimed.   See sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.   Any taxpayer seeking to deduct expenses related to the

business use of a car must provide the Commissioner with certain
                               - 16 -

information.   A taxpayer must indicate mileage, including total

business, commuting, and other personal mileage, percentage of

business use, date placed in service, use of other vehicles,

after-work use, whether the taxpayer has evidence supporting

claimed business use, and whether or not the evidence is written.

Sec. 1.274-5T(d)(2)(i), Temporary Income Tax Regs., supra.

Petitioners have not provided this information to respondent or

the Court.

     Section 274(d)(4) provides that no deduction is allowed for

listed property as defined by section 280F(d)(4) unless the

taxpayer substantiates by adequate records or corroborative

evidence (1) the amount of such expense, (2) the time and place

of use, (3) the business purpose of the expense, and (4) the

business relationship of the taxpayer to the persons using the

property.    Pursuant to section 280F(d)(4) listed property

includes, with certain exceptions, “any passenger automobile” or

“other property used as a means of transportation”.    Sec.

280F(d)(4)(A)(i) and (ii).

     Petitioners deducted car and truck expenses $23,705 and

$22,899 for 2002 and 2003, respectively.     Respondent denied

these deductions, claiming that petitioners failed to adequately

substantiate the expenses or provide information that the amounts

were incurred as ordinary and necessary business expenses.    In

order to substantiate the expenses petitioners offered cancelled
                               - 17 -

checks and credit card bills for various items such as repairs

and gas.    Additionally, petitioners offered a series of

handwritten calendars that detail their daily work schedules, but

not the particular use of the vehicles for which expenses were

claimed.    Petitioners used their cars for personal as well as

business purposes; however, petitioners claim all use was

business related because each vehicle had a license plate holder

that displayed the name of the dental practice.    Petitioners

contend that even when the vehicles were being used for personal

reasons they provided a valuable advertising service to the

dental practice.   Petitioners did not maintain records allocating

personal and business use of their cars.    Petitioners also

commuted to the dental practice from their home daily, but did

not make an allocation for any commuting to and from the dental

practice.

     Petitioners failed to prove that the vehicles were used in

the conduct of a trade or business as defined under section 162.

Further, petitioners failed to maintain adequate records to

substantiate the use of their vehicles under section 274.

Respondent’s determination is sustained.

     B. Section 179 Expense Deductions

     A taxpayer may elect to deduct as a current expense the cost

of any section 179 property, with certain dollar limitations,

that is acquired by purchase in the active conduct of a trade or
                                - 18 -

business and placed in service during the taxable year.    Sec.

179(a), (b), (d)(1); sec. 1.179-4(a), Income Tax Regs.    Placed in

service is defined to mean “the time that property is first

placed by the taxpayer in a condition or state of readiness and

availability for a specifically assigned function, whether for

use in a trade or business, for the production of income, in a

tax-exempt activity, or in a personal activity.”    Sec. 1.179-

4(e), Income Tax Regs.

     The dental practice claimed section 179 deductions for tax

years 2002 and 2003 of $20,301 and $38,630, respectively.

Respondent concedes petitioners may deduct $20,301 for tax year

2002.   However, respondent disallowed the section 179 deduction

claimed in 2003 for the GMC Envoy petitioners claim was used

solely for business purposes for the dental practice.    On the

dental practice’s return, petitioners reported that the GMC Envoy

was placed in service on November 18, 2003, and that it was used

solely for business purposes.    Petitioner wife testified that

petitioners purchased the GMC Envoy after the lease for the Land

Rover expired.   However, petitioner wife also testified that

petitioners’ lease on the Land Rover ended sometime after 2003.

It therefore appears that petitioners retained the Land Rover

lease through 2003 and thus purchased the GMC Envoy after 2003.

     It is unclear whether petitioners placed the item in service

in 2003 or in 2004 after the lease on the Land Rover expired.
                               - 19 -

Petitioners have not offered any other evidence to corroborate

their claimed placed-in-service date.    Under section 179 and the

regulations thereunder, the Court must sustain respondent’s

determination as to the GMC Envoy.

     C. Travel and Entertainment Expenses

     A taxpayer may claim a deduction for travel and

entertainment expenses if the taxpayer establishes, among other

things, that the expenditure was directly related to the active

conduct of the taxpayer’s trade or business or, in the case of an

expenditure directly preceding or following a substantial and

bona fide business discussion, that the expenditure was

associated with the active conduct of the taxpayer’s trade or

business.   Sec. 1.274-2(a)(1), Income Tax Regs.   Petitioners

claimed travel expenses of $10,196 for tax year 2002, of which

$5,082 remains in dispute after respondent’s partial concession.

Petitioners claim they incurred these expenses for a trip to

Hawaii for a dental seminar.    Petitioners have not offered any

probative evidence to substantiate their attendance at the

seminar, nor have they offered any probative evidence to support

the business purpose of the trip.    Petitioners presented the

Court an invoice for the purchase of dental equipment which they

claim was made in Hawaii during the dental conference.    The

invoice, however, states only when the equipment was purchased,

not where it was purchased.    Petitioners produced no evidence
                              - 20 -

supporting any of the expenses claimed, which include meals,

first-class airline tickets, and taxi fees.   Petitioners have

failed to substantiate that their claimed expenses were in any

way related to their dental practice.

     Respondent’s determination is sustained as to the amount of

the travel expenses remaining in dispute and not conceded by

respondent.

     D. Professional Fees Expense

     Petitioners claimed a deduction for professional fees for

tax year 2002 of $10,080.50, which they claimed was paid to Ron

Lewis for consulting services in the form of networking and

marketing instruction to petitioner wife.   Petitioners presented

to the Court copies of Forms 1096 and 1099-MISC, which

petitioners prepared, in support of these claimed expenses for

consulting.   No Social Security number is listed for Ron Lewis on

either form, nor is there any proof that these forms were ever

delivered to him.   Petitioner wife initially testified that she

borrowed the money used to pay Ron Lewis by issuing to him checks

written against a Chase line of credit, thus incurring finance

charges.   She later testified that she paid Ron Lewis with

“mostly cash”.   It is unclear from the evidence whether Ron Lewis

was ever paid any amount by petitioners.
                               - 21 -

      Because petitioners have not met their burden of

substantiating these expenditures, respondent’s determination

must be sustained.

     E. Janitorial Services Expense

     Respondent reduced the dental practice’s claimed janitorial

expenses for both 2002 and 2003, and a portion of these

expenses remains in dispute.    With respect to 2002, the dental

practice claimed janitorial expenses of $20,226.    The only

expenses remaining in dispute are certain expenses of $12,208 in

connection with payments claimed to have been made to the

“Sotelos”, a landscaping service.     Petitioners testified that

these expenses were reported on their 2002 income tax return, and

represented expenses incurred for landscaping services provided

to the dental practice.    All of the invoices from the Sotelos

were addressed to petitioners at their home address, and were not

addressed to the dental practice, or sent to the dental practice

address.

     With respect to tax year 2003, petitioners claimed

janitorial expenses of $11,648, of which respondent allowed

$4,192.    Of the disallowed amount, $1,500 represents an amount

petitioners claim to have paid to their son Ryan Willock on

behalf of the condominium association where the dental office is

located.    Petitioners testified that they paid their son to

provide landscaping upgrades to the dental practice.     Petitioners
                              - 22 -

claim that the landscaping had not been updated in several years,

and that such work was necessary to present a professional

appearance to new and existing dental practice patients.

However, petitioners presented no documentation supporting this

claimed expense.   The remaining $6,074 reflects a payment to Ryan

Willock, as evidenced by a Form W-2 petitioners generated.

Petitioners provided no evidence of the services which their son

purportedly provided for this amount.

     Petitioners have failed to substantiate that these claimed

expenses had a business purpose or that the services were even

provided to their business, rather than to them personally.

Respondent’s determination is sustained.

II. Dental Practice Leases

     DEL leased one CEREC milling machine to the dental practice,

but did not lease any other equipment to any other individual or

entity during the years at issue.   DEL reported losses for 2002

and 2003.   Petitioners, on their 2002 and 2003 income tax

returns, attempted to deduct the passive losses of DEL from the

income derived from their rental of the condominium to the dental

practice, claiming both were passive activities.   Respondent

disallowed the deduction on the grounds that the rental activity

was not passive because petitioner husband actively participated

in the dental practice.   Petitioners argued during the trial that

the equipment leasing and condominium leasing were both
                               - 23 -

nonpassive activities, thus allowing for the loss of one to

offset the income of the other.

     Generally, under section 469, an individual, closely held C

corporation, or personal services corporation may not deduct

losses from passive activities against nonpassive income.

Passive activity is defined to include (1) a trade or business in

which the taxpayer is not a material participant or, (2) any

rental activity.   See sec. 469(c).     Though section 469(c)(2)

generally includes rental activities in the definition of passive

activity, the “self-rental rule” provides that a taxpayer’s net

income from a rental of property to a trade or business activity

in which the taxpayer materially participates is treated as

nonpassive income, whereas a loss from such rental is treated as

a passive loss.    See sec. 1.469-2(f)(6), Income Tax Regs.; see

also Krukowski v. Commissioner, 114 T.C. 366, 369 (2000) (holding

that the Secretary was authorized to prescribe section

1.469-2(f)(6), Income Tax Regs., and that the regulation is valid

law), affd. 279 F.3d 547 (7th Cir. 2002).      Therefore, if

petitioner husband’s dental practice constitutes a trade or

business activity in which he materially participates, under the

self-rental rule any income from the condominium rental or

equipment rental would be nonpassive and any losses from these

activities would be treated as passive.      If this is the case,

then respondent’s determination would be sustained because losses
                                 - 24 -

from one passive activity can be deducted against income from

other passive activities, but passive losses may not be deducted

from nonpassive income.    See sec. 469(a).

     An individual participates materially in a trade or business

if his or her involvement “in the operations of the activity” is

“regular”, “continuous”, and “substantial”.     Sec. 469(h)(1).      In

an effort to make the material participation test objective, the

regulations identify seven situations in which an individual’s

participation in a trade or business is material.       See sec.

1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb.

25, 1988).   Fulfilling the criteria in any of the seven will

cause the participation to be deemed active.      Id.   Petitioner

husband may meet the criteria for several of the situations, but

most notably meets the “500 hour test”.     Under this test an

individual who participates in an activity for more than 500

hours during a taxable year is a material participant in the

activity for the year.     Id.   “Participation” generally means any

work done in an activity by an individual who owns an interest in

the activity.    Sec. 1.469-5(f)(1), Income Tax Regs.     Generally,

all hours of work in connection with the activity are counted as

participation.    Id.

     Petitioner husband worked full-time at the dental practice

during 2002 and 2003.     By petitioner husband’s own admission he

worked more than 500 hours at the dental practice each year.         The
                                - 25 -

dental practice was clearly materially participated in by

petitioner husband during 2002 and 2003.    Under the self-rental

property rule, the income petitioners received from the rental of

the condominium is nonpassive income.    Moreover, under this rule,

the losses petitioners may have incurred from the rental of the

CEREC machine to the dental practice are passive.

     Under section 469, petitioners are prohibited from deducting

the passive losses of DEL from the nonpassive income of the

condominium rental.    The Court sustains respondent’s

determination.

III. Section 183 and Activities Engaged in for Profit

     The Court must determine whether petitioners’ Nu-E World

sales and marketing activities and Laurel Valley farming

activities were “engaged in for profit” within the meaning of

section 183.     Section 183(a) provides that if an activity engaged

in by an individual is not engaged in for profit, no deduction

attributable to that activity shall be allowed except as provided

in section 183(b).    Section 183(b) allows in the case of

activities not engaged in for profit:    (1) Deductions which would

be allowable under the Code without regard to whether such

activity was engaged in for profit; and (2) a deduction equal to

the amount of the deductions which would be allowable under the

Code only if such activity were engaged in for profit, but “only

to the extent that the gross income derived from such activity
                              - 26 -

for the taxable year exceeds the deductions allowable by reason

of [the first exception]”.   Section 183(c) defines an activity

not engaged in for profit as “any activity other than one with

respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212.”

     Section 162 allows a deduction for all ordinary and

necessary expenses paid or incurred in carrying on any trade or

business.   Section 212 allows a deduction for all ordinary and

necessary expenses paid or incurred for the production or

collection of income, or for the management, conservation, or

maintenance of property held for the production of income.

Whether deductions are allowable under section 162 or 212

depends, inter alia, on whether the taxpayer engaged in the

activity with the objective of making a profit.   See sec. 183(a).

     The regulations under section 183 establish an objective

test for determining whether a taxpayer is engaging in an

activity for profit.   The regulations state:

       The determination whether an activity is
       engaged in for profit is to be made by
       reference to objective standards, taking into
       account all of the facts and circumstances of
       each case. Although a reasonable expectation of
       profit is not required, the facts and
       circumstances must indicate that the taxpayer
       entered into the activity, or continued the
       activity, with the objective of making a
       profit. * * * In determining whether an
       activity is engaged in for profit, greater
       weight is given to objective facts than to the
       taxpayer’s mere statement of his intent.
                                 - 27 -

Sec. 1.183-2(a), Income Tax Regs.     The regulations provide a

nonexclusive list of nine factors that “should normally be taken

into account” when making the determination whether the activity

was engaged in for profit.     Sec. 1.183-2(b), Income Tax Regs.

The nine factors are:     (1) The manner in which the taxpayer

carried on the activity; (2) the expertise of the taxpayer or his

advisors; (3) the time and effort spent by the taxpayer on the

activity; (4) the expectation that assets used in the activity

might appreciate in value; (5) the taxpayer’s success in carrying

on similar or dissimilar activities; (6) the taxpayer’s record of

income or losses attributable to the activity; (7) the amount of

profits earned; (8) the taxpayer’s financial status; and (9) the

personal pleasure or recreation derived from the activity by the

taxpayer.   Id.

     As explained by the regulations, no single factor is

controlling.      Sec. 1.183-2(b), Income Tax Regs.   To simplify the

analysis, several factors can be grouped together for purposes of

analyzing the facts and circumstances applicable to this case.

     The first factor involving whether the taxpayer acted in a

businesslike manner in connection with the undertaking is defined

under section 1.183-2(b)(1), Income Tax Regs., as follows:

       The fact that the taxpayer carries on the
       activity in a businesslike manner and maintains
       complete and accurate books and records may
       indicate that the activity is engaged in for
       profit. Similarly, where an activity is carried
       on in a manner substantially similar to other
                             - 28 -

       activities of the same nature which are
       profitable, a profit motive may be indicated. A
       change of operating methods, adoption of new
       techniques or abandonment of unprofitable
       methods in a manner consistent with an intent
       to improve profitability may also indicate a
       profit motive.


     Section 1.183-2(b)(2), Income Tax Regs., explains the second

factor regarding the expertise of the taxpayer and his advisors:

       Preparation for the activity by extensive study
       of its accepted business, economic, and
       scientific practices, or consultation with
       those who are expert therein, may indicate that
       the taxpayer has a profit motive where the
       taxpayer carries on the activity in accordance
       with such practices. Where a taxpayer has such
       preparation or procures such expert advice, but
       does not carry on the activity in accordance
       with such practices, a lack of intent to derive
       profit may be indicated unless it appears that
       the taxpayer is attempting to develop new or
       superior techniques which may result in profits
       from the activity.

     The time and effort expended by the taxpayer in carrying on

the activity, which is the third factor, is defined by section

1.183-2(b)(3), Income Tax Regs., as follows:

       The fact that the taxpayer devotes much of his
       personal time and effort to carrying on an
       activity, particularly if the activity does not
       have substantial personal or recreational
       aspects, may indicate an intention to derive a
       profit. A taxpayer’s withdrawal from another
       occupation to devote most of his energies to
       the activity may also be evidence that the
       activity is engaged in for profit. The fact
       that the taxpayer devotes a limited amount of
       time to an activity does not necessarily
       indicate a lack of profit motive where the
       taxpayer employs competent and qualified
       persons to carry on such activity.
                                - 29 -

     With respect to the fifth factor dealing with the success of

the taxpayer in carrying on other similar or dissimilar

activities, section 1.183-2(b)(5), Income Tax Regs., provides:

         The fact that the taxpayer has engaged in
         similar activities in the past and converted
         them from unprofitable to profitable
         enterprises may indicate that he is engaged in
         the present activity for profit, even though
         the activity is presently unprofitable.


     A. Nu-E World

     The Court is not convinced that petitioners conducted this

activity in a businesslike manner.       See sec. 1.183-2(b)(1),

Income Tax Regs.     Petitioners purchased two computers supposedly

for use in this activity; however, there is no evidence before

the Court of what purpose these computers served.       Additionally,

petitioners’ records consist of summaries of expenses and

receipts for meals with handwritten notes with respect to the

individuals whose meals they paid.       Petitioners claim that they

served as salespersons for Nu-E World.       Nu-E World sells consumer

products such as “Noni Juice”.    Petitioners claim that they did

in fact sell some Nu-E World products.       Petitioners, however, did

not maintain any records indicating which, if any, items they

sold on behalf of Nu-E World or the volume or dates of such

sales.   Petitioners similarly did not use certain fundamental

business practices that would be expected of individuals

undertaking an activity for profit, such as keeping detailed
                                - 30 -

records of business telephone charges, commercial bank account

records, detailed invoices of products received from Nu-E World,

and postage expenses records.    See Ogden v. Commissioner, T.C.

Memo. 1999-397, affd. 244 F.3d 970 (5th Cir. 2001).      To the

Court’s knowledge, petitioners did not maintain a written

business plan or a projected profit and loss statement.

Petitioners have no prior experience in selling or maintaining an

inventory of retail products.

     The Court determines that petitioners are not entitled to

deduct the losses from their Nu-E World activity for the years at

issue.

     B. Laurel Valley

     Petitioners purchased a parcel of land in Virginia with the

goal of transforming it into an organic farm.      Petitioners

operated the farm in a businesslike manner consistent with that

of farms being operated for profit.      See sec. 1.183-2(b)(1),

Income Tax Regs.   To this end, petitioners made improvements to

the land, such as building a storage shed, purchasing farming

machinery to clear and work the land, and building a chicken

coop.    Petitioners purchased chickens that were to be used for

egg production and sale.    Through research, petitioners

determined that the eggs could be sold to a nearby winery and

restaurant, as well as to other local consumers.      These are

activities conducted in any successful farming activity.
                               - 31 -

Petitioners devoted all of their weekends, holidays, and vacation

time to working on the farm.   See sec. 1.183-2(b)(3), Income Tax

Regs.

     Petitioner wife was born on a farm and lived on a farm until

she was 38 years old.   She had at one time owned a profitable

farm with her father and had also owned livestock and farming

equipment.   Petitioner husband worked on petitioner wife’s

father’s farm after petitioners were married.   Petitioner husband

worked continuously on that farm until the farm was sold.

Petitioner wife has been a member of the North Carolina Farm

Bureau since 1965.   See sec. 1.183-2(b)(5), Income Tax Regs.

     It is important to note that the year at issue, 2003, was

the very first year petitioners engaged in this activity.     This

fact makes the determination whether the activity was engaged in

for profit more difficult.   Though petitioners’ recordkeeping

certainly could be improved, and no profit was made, by all

indications petitioners were working hard to make this a

successful farm from which goods could be sold to local

restaurants and individuals.

     The Court determines that petitioners engaged in the farming

activity with the motivation of making a profit and are entitled

to the claimed deductions.
                                - 32 -

IV. Loan to Ryan Willock

     Section 61(a) specifies that “Except as otherwise provided”,

gross income includes “all income from whatever source derived”.

Respondent used the bank deposits method of proof to reconstruct

petitioners’ income and determined that unexplained deposits

totaling $8,500 should be included as income.     “Deposits in a

taxpayer’s bank account are prima facie evidence of income, and

the taxpayer bears the burden of showing that the deposits were

not taxable income but were derived from a nontaxable source.”

Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), affg.

T.C. Memo. 1998-121.    “The bank deposits method assumes that all

money deposited in a taxpayer’s bank account during a given

period constitutes taxable income, but the Government must take

into account any nontaxable source or deductible expense of which

it has knowledge.”     Clayton v. Commissioner,   102 T.C. 632,

645-646 (1994) (citing DiLeo v. Commissioner,      96 T.C. 858, 868

(1991), affd. 959 F.2d 16 (2d Cir. 1992)).

     Petitioners claim that the $8,500 deposited in their bank

account for 2002 is not income but instead the repayment of a

loan made to their son, Ryan Willock, so that he could purchase a

used pickup truck.   Petitioners further claim that the $8,500

comprises two deposits; one of $7,200, and the other of $1,300.

In support of their claim that the deposited amounts were loan

repayments and not income, petitioners submitted to the Court (1)
                               - 33 -

a carbon copy of a check for $7,200 from the bank account of “M.

Ryan Willock” dated April 16, 2002, (2) a copy of a deposit slip

for petitioners’ bank account which reflects a $7,200 deposit on

April 17, 2002, and (3) copies of two checks, one for $8,000 and

the other for $500, both dated April 16, 2002, and both made

payable to Michael Hickman, a used car salesman.     Petitioners did

not present any documentation to support their claim that the

additional deposit of $1,300 into their bank account was from

their son in satisfaction of his loan debt.     Instead, petitioners

presented copies of two statements from a Charles Schwab

custodial account for Michael R. Willock which do not seem to

address this deposit at all.

     Petitioner wife testified that she lent $8,500 to her son

Ryan Willock so that he could purchase a used pickup truck.     The

truck was offered for sale by Michael Hickman for $8,500.

Petitioner wife testified that she happened upon the sale of the

vehicle and asked her son whether he was interested in purchasing

it for the sale price.   Her son informed her that he was

interested but could not come to the vehicle’s location at that

time because of his work schedule.      Petitioner wife asked Hickman

to hold the vehicle for her son.   Hickman agreed to do so only

after receiving a check for $500 as a deposit from petitioner

wife.   Petitioner wife testified that the remaining $8,000 was

paid to Michael Hickman by check upon sale.
                                - 34 -

     Petitioners claim that the deposits of $7,200 and $1,300

were from their son in repayment of the loan.    Petitioners claim

that Ryan Willock asked to repay the loan in two separate

installments because he could not afford to immediately pay the

loan principal in its entirety.

     The Court finds petitioners’ explanation of this matter to

be credible.   Petitioners offered to the Court a carbon copy of a

check for $7,200 from the bank account of “M. Ryan Willock” dated

April 16, 2002.   This amount appears to be contemporaneous with

petitioners’ April 17, 2002, deposit slip in the amount of

$7,200.   Petitioners argue that their son paid the balance of the

loan on November 3, 2002.     Petitioners’ banking records reflect a

deposit to their account made on November 3, 2002, in the amount

of $1,300.

     The Court determines that the two deposits at issue were

loan repayments made by petitioners’ son, and are not includable

as income.

V. Accuracy-Related Penalty

     Respondent determined that petitioners are liable for each

of their taxable years for the accuracy-related penalty under

section 6662(a) because of:    (1) Negligence or disregard of rules

or regulations under section 6662(b)(1); or (2) a substantial

understatement of tax under section 6662(b)(2).
                                 - 35 -

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment to which section 6662 applies.

Section 6662 applies to the portion of any underpayment which is

attributable to, inter alia, (1) negligence or disregard of rules

or regulations, sec. 6662(b)(1), or (2) a substantial

understatement of income tax, sec. 6662(b)(2).

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code.

See sec. 6662(c).   Negligence has also been defined as a failure

to do what a reasonable and prudent person would do under the

circumstances.   See Leuhsler v. Commissioner, 963 F.2d 907, 910

(6th Cir. 1992), affg. T.C. Memo. 1991-179; Antonides v.

Commissioner, 91 T.C. 686, 699 (1988), affd. 893 F.2d 656 (4th

Cir. 1990).    The regulations further state that negligence is

strongly indicated where there is a tax treatment of an item that

a reasonable and prudent person would find “too good to be true”

under the circumstances.      Sec. 1.6662-3(b)(1)(ii), Income Tax

Regs.   “‘Negligence’ also includes any failure by the taxpayer to

keep adequate books and records or to substantiate items

properly.”    Sec. 1.6662-3(b)(1), Income Tax Regs.    The term

“disregard” includes any careless, reckless, or intentional

disregard.    Sec. 6662(c).

     An understatement of income tax exists if the actual tax

exceeds the tax reported on the return, sec. 6662(d)(2)(A), and
                                - 36 -

an understatement will be treated as substantial in the case of

an individual if it exceeds the greater of $5,000 or 10 percent

of the tax required to be shown on the return, sec.

6662(d)(1)(A).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.     Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and

circumstances, including the taxpayer’s effort to assess the

proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Respondent has the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662.    To meet that burden, respondent must come forward

with sufficient evidence showing that it is appropriate to impose

the accuracy-related penalty.    See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).    Although respondent bears the burden of

production with respect to the accuracy-related penalty that

respondent determined for each of petitioners’ taxable years,

respondent “need not introduce evidence regarding reasonable

cause, substantial authority, or similar provisions[,] * * *
                              - 37 -

[because] the taxpayer bears the burden of proof with regard to

those issues.”   Id.

     The parties made substantial concessions prior to the start

of trial, and the Court did not sustain some of the items in the

notice of deficiency.   The Court finds that in the event the

computations under Rule 155 establish that there is an

understatement of income tax as a result of the Court’s holding

and the parties’ concessions that is greater than 10 percent of

the tax required to be shown in petitioners’ joint returns or

$5,000, see sec. 6662(d)(1)(A), then petitioners have

substantially understated their income tax and are liable for

such penalty under section 6662(d).

     Petitioners were negligent in their treatment of the

remaining items in the notice of deficiency that the Court

sustained, as described below.   Generally, the Court finds that

petitioners failed to show that they (1) made a reasonable

attempt to comply with, and did not intentionally disregard, the

Code and the regulations thereunder, and (2) acted with due care

and did what reasonable people would do under the circumstances.6


     6
      For example, petitioners’ claimed deductions for the dental
practice items, i.e., the license plate advertisements, are
reminiscent of those claimed by the taxpayer in Henry v.
Commissioner, 36 T.C. 879 (1961), which treatment was similarly
“too good to be true”. See sec. 1.6662-3(b)(1)(ii), Income Tax
Regs. In Henry, the taxpayer, a tax lawyer and accountant,
allocated 100 percent of expenses incurred in maintaining his
yacht as a business deduction on his Federal income tax return.
                                                   (continued...)
                                  - 38 -

             1. Car and Truck Expenses

        The crux of petitioners’ argument is that all use of their

vehicles, whether otherwise personal or not, may be claimed as

business use because of the license plate holders on each vehicle

that advertise the dental practice.        Petitioners have offered no

authority to support this position, nor could the Court find any

supportive law.     The idea that a license plate holder somehow

transforms all personal use into business use is clearly “too

good to be true”.

             2. Section 179 Expense

     Petitioners failed to substantiate that the GMC Envoy was

purchased and placed in service in 2003, the year for which the

expense deduction was claimed under section 179.       Petitioners are

negligent in failing to keep adequate books and records to

substantiate this deduction.      See sec. 1.6662-3(b)(1), Income Tax

Regs.

             3. Travel Expenses

        Petitioners failed to provide any probative evidence to the

Court that their trip to Hawaii related to petitioner husband’s

dental practice or otherwise served a business purpose.


        6
      (...continued)
The taxpayer purchased a yacht on which he flew a pennant with
the numerals “1040” on it, purportedly to provoke inquiries and
thus promote his business by giving him contacts with people in
yachting circles who might become clients. The Commissioner
disallowed the deduction, and the Court upheld the Commissioner’s
determination.
                                - 39 -

            4. Professional Fees Expenses

     Petitioners failed to substantiate that the amount claimed

as an expense was a legitimate business expense or was ever paid.

            5. Janitorial Services

     Petitioners failed to substantiate that these claimed

expenses had a business purpose or that the services were even

provided to their business, rather than to them personally.

            6. Nu-E World

     Petitioners failed to substantiate that the amounts deducted

as expenses were legitimate business expenses.

     Petitioners maintain that they are not liable for any

penalties under section 6662(a) and (b)(1) because they had

reasonable cause for, and acted in good faith in taking, their

reported positions because they relied on the advice of their tax

preparer.

     The decision as to whether the taxpayer acted with

reasonable cause and in good faith depends upon all the pertinent

facts and circumstances.    See sec. 1.6664-4(b)(1), Income Tax

Regs.   Relevant factors include the taxpayer’s efforts to assess

his proper tax liability, including the taxpayer’s reasonable and

good-faith reliance on the advice of a professional, such as an

accountant.    See id.   “[A]n honest misunderstanding of fact or

law that is reasonable in light of all of the facts and

circumstances, including the experience, knowledge and education
                                  - 40 -

of the taxpayer” may indicate reasonable cause and good faith.

See id.

     The Court sustained respondent’s determination regarding the

dental leasing equipment largely because of the “self-rental

rule”.     See sec. 1.469-2(f)(6), Income Tax Regs.    This rule is

complex and could very easily perplex even a sophisticated

taxpayer.     The Court does not find petitioners’ treatment of both

leasing activities as passive for income and loss to be “too good

to be true”.     The Court finds that under section 6662(c)

petitioners did make “a reasonable attempt to comply with the

provisions of [the Code]”.       Petitioners were not negligent in

their reporting of this item and have met the reasonable cause

exception for the portion of the underpayment relating to this

item.     See sec. 6664(c)(1).

     Petitioners have failed to carry their burden of

establishing that they acted with reasonable cause and in good

faith on all the other items sustained by the Court.       Petitioners

have failed to provide the Court with any evidence that they

received advice from a tax preparer or that they followed such

advice.     Petitioners have fallen short of convincing the Court

that they are entitled to relief under section 6664(c).

     Accordingly, with the exception of the dental equipment

leasing item, petitioners are liable for a 20-percent
                             - 41 -

accuracy-related penalty on underpayments relating to the notice

of deficiency items that the Court sustained.

Conclusion

     In reaching the conclusions stated herein, the Court has

considered all arguments made, and, to the extent not mentioned

above, finds them to be moot, irrelevant, or without merit.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
