                       T.C. Memo. 2001-132



                     UNITED STATES TAX COURT



                  ANAND K. VERMA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2707-00.                       Filed June 6, 2001.


     Anand K. Verma, pro se.

     Innessa Glazman, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PANUTHOS, Chief Special Trial Judge:    Respondent determined

deficiencies in petitioner’s Federal income taxes of $1,583 and

$2,278 for taxable years 1996 and 1997, respectively.    Unless

otherwise indicated, 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 -

After concessions,1 the issues for decision are:   (1) Whether the

corporate form of Export USA, Inc., should be disregarded; and

(2) whether petitioner2 is entitled to deductions on Schedule C,

Profit or Loss From Business, in excess of the amounts allowed by

respondent.

                        FINDINGS OF FACT

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

The stipulated facts and the related exhibits are incorporated

herein by this reference.   At the time of filing the petition,

petitioner resided in Rockville, Maryland.




     1
          Petitioner reported gross receipts of $700 and claimed
cost of goods sold of $580 on Schedule C for 1996. At trial,
petitioner conceded that both items should have been reported as
zero.

     For 1996, respondent disallowed deductions of $37 for
supplies and $170 for repairs and maintenance. Petitioner did
not present evidence as to these expenses. As a result,
petitioner is deemed to have conceded these issues. See Rules
142(a), 149(b); Burris v. Commissioner, T.C. Memo. 2001-49.
     2
          Respondent also determined deficiencies for Vandana
Srivastava, petitioner’s former wife. Ms. Srivastava was
initially captioned as a party in this case. At trial,
petitioner stated that he signed the petition for Ms. Srivastava
without consulting with her. Petitioner has not had contact with
his former wife since 1998, and the petition in this case was
filed on Mar. 8, 2000.

     Respondent moved to dismiss for lack of jurisdiction as to
Ms. Srivastava. There being no indication that Ms. Srivastava
intended to file a timely petition, we granted respondent’s
motion. See Rule 13(a), (c); Abeles v. Commissioner, 90 T.C.
103, 106-109 (1988).
                                - 3 -

A.   Pre-Incorporation Activities

     During 1996 and 1997, petitioner worked for the District of

Columbia government as an unemployment compensation claims

examiner.    In an effort to increase his income, petitioner

started a business in the living room of his 880-square-foot,

one-bedroom apartment in Silver Spring, Maryland.    The purpose of

the business was to sell American manufactured products abroad.

Petitioner contacted business counselors in Hong Kong and India

for advice in an effort to energize his business.    A business

counselor advised petitioner to incorporate to add credibility to

his business.    Petitioner was unsuccessful in his sales efforts

in 1996.

B.   Post-Incorporation Activities

     On October 4, 1996, petitioner incorporated his business in

Maryland under the name Export USA, Inc. (Export).    According to

the articles of incorporation, the corporate purpose was to “sell

U.S. products abroad and towards that end, to negotiate price and

enter into purchase agreements with manufacturers and

distributors.”    Export’s address was petitioner’s apartment in

Silver Spring, Maryland.    Petitioner was listed as the director

of Export.

     Petitioner held himself out to the public as the president

of Export.    Petitioner, on Export’s letterhead, corresponded with

various sellers and buyers in China, India, Indonesia, the
                                 - 4 -

Netherlands, Thailand, and Turkey.       Export placed advertisements

in Indonesia and India either in magazines or on the Internet.

Petitioner took one business trip to India, although he did not

conduct business meetings in India.

     Export was unsuccessful in attracting business.      Export had

one sale in 1996, which was subsequently canceled.      In this

transaction, petitioner received $700, and he concedes that the

funds were returned to the buyer.    Export had no sales in 1997.

Export did not have a separate bank account, nor did it file a

corporate return.    Export continued its correspondence with

vendors through at least 1998.

C.   Tax Returns

     As indicated, Export did not file corporate income tax

returns.   Petitioner, on his 1996 and 1997 Federal income tax

returns, claimed the following deductions on Schedule C:

                    Expense                  19961          1997

     Advertising                       $758                 $850
     Car and truck2                   1,080                  990
     Insurance (other than health)    1,100                1,125
     Office expense                   5,150                3,998
     Taxes and licenses                  85                   40
     Travel, meals, and entertainment 1,600                1,890
     Utilities                          880                  770
     Business use of home             13,642              13,642
     1
        Although petitioner reported total expenses of $24,615 on
Schedule C, he reported only $13,642 on Form 1040, U.S.
Individual Income Tax Return.
     2
        On his 1996 return, petitioner reported 15,000 miles (of
a total of 15,450) as business use of his automobile. On his
1997 return, petitioner reported 14,050 miles (of a total of
14,700) as business use of his automobile.
                                 - 5 -

D.   Notice of Deficiency

     Respondent, in his notice of deficiency, disallowed all

expenditures made after October 4, 1996 (including the 1997

expenses), on the basis that the expenditures were the expenses

of Export rather than petitioner.

     As to the pre-incorporation expenses, respondent disallowed

deductions for advertising, insurance, office expenses, and taxes

and licenses.   Respondent allowed petitioner a depreciation

deduction of $138 for part of the office expenses.   Additionally,

respondent disallowed $216 for travel and $705 for utilities.

Respondent disallowed the pre-incorporation expenses on the basis

that petitioner failed to establish that the expenses incurred

before the date of incorporation were ordinary and necessary

expenses or actually expended.

     Petitioner argued at trial that this Court should disregard

Export’s corporate form so that Export’s expenses may be claimed

on petitioner’s Schedule C.   Further, petitioner asserts that he

expended the amounts claimed, and that the deductions constituted

business expenses.   Respondent counters that this Court should

uphold the corporate form and deny all expenses in excess of the

amounts allowed by respondent in his notice of deficiency.

                              OPINION

     We first consider the disallowed Schedule C expenses which

represent post-incorporation expenditures.   We then consider the
                                 - 6 -

disallowed Schedule C expenses which represent pre-incorporation

expenditures.

A.   Disregarding the Corporate Entity

     Generally, an individual is not entitled to deductions for

business expenses of a corporation because the trade or business

of a corporation is considered separate and distinct from the

trade or business of the individual.     See Moline Properties, Inc.

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

308 U.S. 488, 495 (1940); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 442 (1934).     Petitioner argues that this Court should

disregard Export’s corporate form.

     A taxpayer is generally free to organize his affairs as he

chooses, but a taxpayer must accept the tax consequences of those

choices.   See Commissioner v. National Alfalfa Dehydrating &

Milling Co., 417 U.S. 134 (1974).    Once a taxpayer has made his

bed, he must lie in it.    See Hagist Ranch, Inc. v. Commissioner,

T.C. Memo. 1960-206, affd. 295 F.2d 351 (7th Cir. 1961).    “Where

the taxpayer, for business purposes of his own, adopts the

corporate form for carrying on a business, the choice of

corporate advantage to do business requires acceptance of the tax

disadvantages.”   Skarda v. Commissioner, 250 F.2d 429, 434 (10th

Cir. 1957), affg. 27 T.C. 137 (1956).

     We will not disregard the corporate entity so long as the

corporation has a valid business purpose or the corporation
                                 - 7 -

engaged in business activity.    See Moline Properties, Inc. v.

Commissioner, supra at 437.     If either factor of the test is

satisfied, we will uphold the corporate form.      See Noonan v.

Commissioner, 52 T.C. 907 (1969), affd. per curiam 451 F.2d 992

(9th Cir. 1971); Shannon v. Commissioner, 29 T.C. 702 (1958).

However, we will disregard the corporate form where the

corporation is a sham or unreal.    See Moline Properties, Inc. v.

Commissioner, supra at 439.

     The degree of business activity required to uphold the

corporate form is “extremely low”.       See Strong v. Commissioner,

66 T.C. 12, 24 (1976), affd. without published opinion 553 F.2d

94 (2d Cir. 1977); accord Ogiony v. Commissioner, 617 F.2d 14, 16

(2d Cir. 1980), affg. and remanding T.C. Memo. 1979-32; Lukins v.

Commissioner, T.C. Memo. 1992-569.       “[W]hether or not a

corporation is deemed to engage in a business activity does not

depend upon the quantum of business activity but simply whether

the entity engaged in some business activity.”       Martin v.

Commissioner, T.C. Memo. 1999-193.

     We will not disregard the corporate form merely because a

corporation did not file a tax return.      See Kessler v.

Commissioner, T.C. Memo. 1977-117; Kubik v. Commissioner, T.C.

Memo. 1974-62.

     It appears that Export had a valid business purpose for 1996

and 1997.   Petitioner incorporated Export so that it would appear
                                - 8 -

that Export was a strong, sturdy business.    Further, according to

the articles of incorporation, Export was formed to sell American

manufactured products abroad and to enter into agreements with

manufacturers and distributors.

     We are further satisfied that Export engaged in a sufficient

level of business activity.    Petitioner held himself out to the

public as the president of Export, and petitioner attempted to

secure sales and purchases under the corporate name.    Petitioner

sent several letters to various distributors and purchasers on

the Export letterhead in an effort to create business.    In fact,

Export had one sale, although the sale was subsequently

cancelled.   Export’s level of business activity for 1996 and 1997

was such that we will not disregard the corporate form.

     Petitioner contends that the corporate form should be

disregarded because he spent only 3 to 4 hours per week on the

business.    Petitioner, now recognizing it is advantageous to

disregard the corporate entity, testified that he engaged in

little or no sales activity, which is inconsistent with the

position in his Federal tax returns.    For example, petitioner

claimed on those returns that he drove a total of almost 29,000

miles in 1996 and 1997 for business purposes.    We are not

required to rely upon petitioner’s self-serving testimony.    See

Niedringhaus v. Commissioner, 99 T.C. 202, 219-220 (1992);
                                - 9 -

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).    We do not find

petitioner’s testimony to be credible regarding this issue.

     Petitioner relies on the following cases for the proposition

that Export’s corporate form should be disregarded because of the

lack of corporate activity:    Barker v. Commissioner, T.C. Memo.

1993-280; Lukins v. Commissioner, supra; Czvizler v.

Commissioner, a Memorandum Opinion of this Court dated Apr. 9,

1953; and Bystry v. United States, 596 F. Supp. 574 (W.D. Wis.

1984).    Petitioner’s reliance on these cases is misplaced.

Unlike the corporations in Barker, Czvizler, and Bystry, Export

held itself out to the public as a corporation, and petitioner

held himself out to the public as the president of Export.     The

present case is also distinguishable from all of the cases he

cites because Export engaged in business activity and had a valid

business purpose during 1996 and 1997.

     Even if we disregarded Export’s corporate form, petitioner

would not prevail regarding the post-incorporation deductions.

Petitioner failed to meet the requirements of sections 162(a) and

274(a).   Therefore, we sustain respondent’s determination.

B.   Pre-Incorporation Schedule C Expenses

     1.   Sections 162(a) and 274(a)

     Section 162(a) permits a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   To be deductible under that
                               - 10 -

section, an expense must be directly connected with, or

proximately result from, a trade or business of the taxpayer.

See Kornhauser v. United States, 276 U.S. 145, 153 (1928);

O’Malley v. Commissioner, 91 T.C. 352, 361 (1988).    Personal

expenses are generally not allowed as deductions.    See sec.

262(a).   Deductions are a matter of legislative grace, and

taxpayers must comply with the specific requirements for any

deduction claimed.    See INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934).

     A taxpayer is required to maintain records sufficient to

establish the amount of his income and deductions.    See sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.   A taxpayer must

substantiate his deductions by maintaining sufficient books and

records to be entitled to a deduction under section 162(a).

     When a taxpayer establishes that he has incurred a

deductible expense but is unable to substantiate the exact

amount, we are, in some circumstances, permitted to estimate the

deductible amount.    See Cohan v. Commissioner, 39 F.2d 540, 543-

544 (2d Cir. 1930).   We can estimate the amount of the deductible

expense only when the taxpayer provides evidence sufficient to

establish a rational basis upon which the estimate can be made.

See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
                               - 11 -

     Section 274(d) supersedes the general rule of Cohan v.

Commissioner, supra, and we cannot estimate the taxpayer’s

expenses with respect to certain items.     See Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969).    Section 274(d) imposes strict substantiation

requirements for listed property, travel, entertainment, and meal

expenses.    See sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985).   Listed property can include

computers and peripheral equipment.     See sec. 280F(d)(4)(iv).   To

obtain a deduction for a listed property, travel, or meal

expense, a taxpayer must substantiate by adequate records or

sufficient evidence to corroborate the taxpayer’s own testimony

the amount of the expense, the time and place where it was

incurred, and the business purpose of the expense.     See sec.

274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.

Reg. 46016 (Nov. 6, 1985).   If a taxpayer is unable to fulfill

the requirements of section 274(d), he is not entitled to the

deduction.

     2.   Advertising and Insurance

     Petitioner generally testified that he placed advertisements

either in magazines or on the Internet.     Petitioner also deducted

amounts for insurance that was likely related to his personal

automobile.   He did not provide receipts evidencing the
                                - 12 -

expenditures, nor did he testify as to the amount he may have

paid for the advertisements and insurance.

     We are unable to estimate an amount for the advertisements

and insurance because petitioner failed to provide evidence upon

which we can make a rational estimate.    See Vanicek v.

Commissioner, supra at 743.     We hold for respondent as to these

expenses.

     3.   Utilities

     Petitioner deducted amounts for Internet and telephone

expenses.   Petitioner produced bills from U.S. Billing, Inc., and

Sprint.   The telephone bills do not indicate the purpose of the

various calls, nor did petitioner testify as to whether each call

was personal or business.

     We are not convinced the utility expenses were incurred in

the normal course of petitioner’s trade or business.    Further, we

are unable to estimate an amount for the utilities because

petitioner failed to provide evidence upon which we can make a

rational estimate.    See id.   Therefore, petitioner cannot deduct

utilities in excess of the amount allowed by respondent.

     4.   Taxes and Licenses

     Petitioner deducted $85 in 1996 in licensing and taxes

related to the incorporation of Export.    Fees paid to a State for

incorporation are organization costs, which are generally

considered capital expenditures.    See FMR Corp. & Subs. v.
                               - 13 -

Commissioner, 110 T.C. 402, 422 (1998); sec. 1.248-1(b)(2),

Income Tax Regs.    Generally, expenditures incurred in connection

with organizing a business are not currently deductible.      See

INDOPCO, Inc. v. Commissioner, supra at 89-90; E.I. du Pont de

Nemours & Co. v. United States, 432 F.2d 1052, 1058 (3d Cir.

1970); Skaggs Cos. v. Commissioner, 59 T.C. 201, 206 (1972).

Therefore, petitioner is not entitled to currently deduct the

fees paid to Maryland in connection with the      incorporation of

Export.

     5.   Business Use of the Home

     Generally, an individual taxpayer may not deduct expenses

arising from the use of a dwelling unit which the taxpayer uses

as a residence.    See sec. 280A(a).    The general rule does not

apply where the taxpayer uses a portion of the residence

exclusively and regularly as the principal place of business for

a trade or business of the taxpayer or as a place of business

which the taxpayer uses to see clients or customers, or hold

meetings in the normal course of his trade or business.      See sec.

280A(c)(1)(A) and (B).3

     Petitioner and his wife resided in a one-bedroom apartment.

Petitioner claims that he ran his business in his living room,

devoting 500 of the apartment’s 880 square feet to Export.



     3
          The exception provided in sec. 280A(c)(1)(C) is
inapplicable, as petitioner resided in an apartment.
                               - 14 -

Petitioner testified that his small television was located in his

bedroom, and he and his wife ate their meals in the kitchen or

bedroom.    Petitioner asserts that he conducted his business on a

“sporadic basis”.    He stated at trial that “on a weekly basis,

Your Honor, I may have spent three or four hours” on the

business.

     The record is clear that petitioner did not exclusively use

part of his residence to conduct his trade or business.    It

defies logic that petitioner segregated over half of his one-

bedroom apartment for a business he now characterizes as a

sporadic frolic.    Therefore, petitioner is not entitled to deduct

expenses of $13,642 relating to the use of his personal

residence, and we sustain respondent’s determination.4

     6.    Office Expenses and Depreciation

     Petitioner deducted $5,150 for office expenses.     The office

expenses included amounts for two computers, a laser printer, a

dot matrix printer, and two facsimile machines.    We shall first

discuss whether petitioner may deduct the cost of the two

computers and two printers.




     4
          Even if petitioner satisfied the requirements of sec.
280A(c)(1), petitioner would not be entitled to the deduction, as
the deduction is limited by the gross income arising from the use
of the dwelling in the trade or business. See sec. 280A(c)(5).
Petitioner did not derive any income from his business before the
incorporation of Export.
                                - 15 -

       Typically, computers and peripheral equipment are listed

properties under section 280F(d)(4)(A)(iv).     However, computers

and peripheral equipment used exclusively at a regular business

establishment will not constitute listed property.     A personal

residence will qualify as a regular business establishment if the

requirements of section 280A(c)(1) are satisfied.     See sec.

280F(d)(4)(B).    For the reasons set forth above, petitioner

failed to satisfy the requirements of section 280A(c)(1).

Therefore, the computers and peripheral equipment are listed

properties and subject to the strict substantiation requirements

of section 274(d).

       At trial, petitioner presented a one-page list of claimed

office expenses.    Petitioner did not present receipts or testify

as to the date of purchase and purchase price of the computers

and printers.    Nor did petitioner prove the time and place where

the expenses were incurred and the business purpose of the

expenses.    See sec. 274(d).   Therefore, petitioner is not

entitled to a deduction for the computers and printers.

       Generally, the acquisition costs of machinery and equipment,

such as facsimile machines, must be capitalized.     See sec.

263(a); sec. 1.263(a)-2(a), Income Tax Regs.     A taxpayer is

entitled to depreciation deductions pursuant to sections 167 and

168.    For 1996, to the extent that the total expenditures do not

exceed $17,500, a taxpayer can elect to currently deduct the cost
                                - 16 -

of the personal property acquired for use in an active trade or

business.     See sec. 179(b)(1), (c), and (d)(1).   To qualify as a

valid section 179 election, the election must specify the items

to which the election applies, and the election must be made on

the taxpayer’s return.     See sec. 179(c)(1).   “Entitlement to the

benefits of section 179 is not automatic.     It requires an

affirmative election be attached to the original return or to a

timely filed amended return.”     Starr v. Commissioner, T.C. Memo.

1995-190, affd. without published opinion 99 F.3d 1146 (9th Cir.

1996); see Patton v. Commissioner, 116 T.C. 206 (2001); Shores v.

Commissioner, T.C. Memo. 1998-193; sec. 1.179-5(a), Income Tax

Regs.     Petitioner failed to make a section 179 election on his

return, and, therefore, he is not entitled to a current deduction

for his facsimile machines.5

     7.    Travel and Meals

     Petitioner deducted $1,600 in 1996 for travel and meals.

Petitioner testified that these expenses related to a trip to

India on which he conducted business but did not have business

meetings.     Petitioner did not provide receipts or additional

facts regarding the trip to India.



     5
          Respondent allowed a depreciation deduction of $138 for
1996 for the facsimile machines. Petitioner did not present any
evidence challenging the amount of the allowed deduction or the
depreciation schedule. As a result, petitioner is deemed to have
conceded this issue. See Rules 142(a), 149(b); Burris v.
Commissioner, T.C. Memo. 2001-49.
                               - 17 -

     Petitioner failed to provide any evidence as to the amounts

of the expenses, the times and places where they were incurred,

and their business purposes.     See sec. 274(d).   Therefore,

petitioner is not entitled to a deduction in excess of the amount

allowed by respondent.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent.
