                        T.C. Memo. 2002-155



                      UNITED STATES TAX COURT



       HENRY C. BOLER AND SHERRY M. BOLER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

               AIM CONSTRUCTION, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10729-99, 10733-99.     Filed June 18, 2002.



     Elliot G. Mestayer, for petitioners.

     Linda J. Wise, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax and accuracy-related penalties as

follows:
                                   - 2 -

                Henry C. Boler and Sherry M. Boler

                                           Accuracy-related
                                                penalty
               Year    Deficiency            sec. 6662(a)

               1994       $1,563                $313
               1995          945                 189
               1996          630                 126

                       AIM Construction, Inc.

                                           Accuracy-related
                                                penalty
               Year    Deficiency             sec. 6662(a)

               1994       $10,417              $2,083
               1995         5,132               1,026
               1996         6,888               1,378

AIM Construction, Inc. (AIM), is petitioner’s wholly

owned corporation.1

     After concessions, the issues for decision are:

     1.   Whether amounts AIM paid to Henry C. Boler (petitioner)

($16,599 in 1994, $21,460 in 1995, and $9,640 in 1996) are

interest, as petitioners contend, or constructive dividends, as

respondent contends.   We hold that those payments are

constructive dividends.

     2.   Whether AIM may deduct $14,900 in 1996 as a bad debt.

We hold that it may.




     1
        Section references are to the Internal Revenue Code in
effect for the applicable years. Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 3 -

     3.   Whether AIM’s cost of goods sold for 1994 is $103,415,

as petitioners contend, or $85,883, as respondent contends.      We

hold that it is $85,883.

     4.   Whether AIM may deduct $442 in 1994, $40 in 1995, and

$243 in 1996 for reimbursement of petitioner’s payments to high

school students for work they performed for AIM.    We hold that it

may, and that these payments are not constructive dividends to

petitioner.

     5.   Whether AIM may deduct $236 in 1995 and $369 in 1996 for

reimbursement of petitioner’s golf expenses.    We hold that it may

not, and that these payments are constructive dividends to

petitioner.

     6.   Whether AIM may deduct $288 in 1994, $390 in 1995, and

$322 in 1996 for reimbursement of petitioners’ payments of

employee meal expenses.    We hold that it may, and that those

amounts are not constructive dividends to petitioner.

     7.   Whether AIM may deduct $4,200 in 1994 for Sherry M.

Boler’s (Mrs. Boler) travel expenses.    We hold that it may not.

     8.   Whether AIM may deduct the following reimbursements paid

to petitioner in 1995:    $1,254 recorded in AIM’s journal as GJ1

18308, $600 recorded as GJ1 00172, and $480 recorded as GJ1
                                - 4 -

00174.    We hold that it may not, and that the $1,254 payment is a

constructive dividend to petitioner.2

     9.   Whether petitioners are liable for the accuracy-related

penalty for negligence under section 6662(a).    We hold that they

are to the extent described below.

                          FINDINGS OF FACT

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

A.   Petitioners

     Petitioner and Mrs. Boler (the Bolers) are married and

resided in Mississippi when they filed the petition.

     AIM’s principal place of business was in Mississippi when

the petition was filed.    AIM was incorporated in 1990.

Petitioner has been the sole shareholder of AIM since December

31, 1990.    AIM began doing business in February 1992.    AIM is a

calendar-year, accrual basis taxpayer.    The Bolers were the only

members of AIM’s board of directors from 1992 through the date of

trial.    The Bolers sometimes paid AIM’s expenses with their

personal funds and received reimbursements from AIM.      Mrs. Boler

maintained records of the amount of reimbursements AIM owed to

the Bolers.




     2
        Respondent concedes that the $600 and $480 payments are
not constructive dividends.
                                - 5 -

     AIM’s primary business is metal fabrication.    AIM performs

work at the facility on the Whittington property (described below

at paragraph B) and at its customers’ locations.

     AIM paid its employees once a week.   AIM reported income on

the basis of bills it submitted to customers.

     AIM fabricated and installed metal components for Morton

International, one of AIM’s customers.   In October, November, and

December 1994, AIM paid a total of $1,739.50 for materials and

$15,792.40 to its employees for labor that they had performed for

Morton International.   In January 1995, AIM completed the job and

sent bills to Morton International for $17,532.

B.   The Whittington Property

     On March 6, 1978, petitioner bought about 2.75 acres (the

Whittington property) from D.L. Whittington.

     On January 1, 1992, AIM’s board of directors (i.e., the

Bolers) held a meeting to accept the transfer of real property,

equipment and tools, and associated liabilities from petitioner.

The record is silent as to whether AIM’s board of directors

accepted the proposed transfers from petitioner.    On March 11,

1992, petitioner signed a quitclaim deed which stated that he had

transferred the Whittington property to AIM on January 1, 1992.

AIM did not record the quitclaim deed.
                                - 6 -

C.   The Promissory Note

     On December 31, 1992, petitioner signed a promissory note on

behalf of AIM which stated that AIM would pay $121,596 to

petitioner on demand, with interest to be paid annually at

10 percent beginning on December 31, 1994, and ending December

31, 2000.

     AIM reported on its 1992 income tax return that it had

$121,596 in loans from stockholders.    AIM did not report any

loans from stockholders on its 1990 or 1991 return.

D.   References to the Whittington Property and Related Debt in
     AIM’s Financial Statements

     1.     Application to the Mississippi Board of Contractors

     On May 26, 1992, John C. Trussell III (Trussell), one of

petitioners’ certified public accountants, prepared a balance

sheet for AIM.    It stated that, on February 29, 1992, AIM owned

real estate worth $89,862 and owed $30,000 for “loans due to

stockholder.”    The balance sheet did not state that AIM owed

money to petitioner relating to the Whittington property.    On May

29, 1992, AIM applied to the Mississippi State Board of

Contractors for a certificate of responsibility.    AIM included in

its application the balance sheet and a financial statement

prepared by Trussell that contained the information shown on the

balance sheet.
                               - 7 -

     2.    Applications to the Alabama Licensing Board for General
           Contractors

     Around May 29, 1992, AIM applied to the Licensing Board for

General Contractors for the State of Alabama (Alabama Board) for

a license.   AIM included with its license application a financial

statement which listed assets of $130,929, including real estate

worth $90,000, a $30,000 liability for a “stockholder loan-

working capital”, and a net worth of $100,929.   A licensee may

bid on contracts up to 10 times the licensee’s net worth.    The

Alabama Board licensed AIM to bid on contracts worth $1,009,290.

     Petitioner applied to renew AIM’s license in December 1993.

He enclosed a balance sheet as of December 31, 1992, that showed

that AIM had assets of $135,339, including real estate worth

$90,000, shareholder liabilities of $37,046, and a net worth of

$96,877.

     AIM did not report that it owed money to petitioner related

to AIM’s acquisition of the Whittington property.

     3.    Citizens National Bank

     Petitioner submitted five loan applications to Citizens

National Bank from March 19, 1989, to November 11, 1992.    AIM

submitted three loan applications to Citizens National Bank

during that period.   On the Bolers’ application dated November

11, 1992, petitioner listed a $20,317 real estate mortgage

liability, which he explained as follows:   “assets transferred to
                                - 8 -

AIM Corp.   Clay Boler retained liability of mortgage”.          On AIM’s

application dated November 11, 1992, petitioner listed a $30,000

liability for “Loans due Clay Boler” and assets of $188,788,

including the Whittington property worth $90,000.       The

application indicated that the Whittington property had been

transferred to AIM and that AIM had not paid anything for it.

Petitioner signed financial statements which were submitted with

each of those loan applications.       None of the financial

statements showed that AIM owed petitioner for the purchase of

the Whittington property.

E.   AIM’s Payments to James Scott

     Petitioner and James Scott (Scott) had been friends for many

years before the years in issue.       Scott began working for AIM

around June 1992, as a supervisor and cost estimator.         He was

also the liaison for AIM’s largest customer.

     AIM paid the following amounts to Scott in addition to his

wages because he had some unforeseen personal needs:

     Date        Description on check    Description in books      Amount

Aug. 15, 1994    Loan to James Scott     Loans to shareholder      $1,000
Sept. 23, 1994   Employee loan           Loans to shareholder       1,000
Oct. 4, 1994     Employee loan           Loans to shareholder       2,200
Nov. 4, 1994     Employee loan           Loans to shareholder       1,000
May 9, 1995      Employee loan           Accts. rec’ble--other      1,500
Aug. 10, 1995    Employee loan           Accts. rec’ble--other      2,200
Aug. 21, 1995    Employee loan           Accts. rec’ble--other      6,000
                                           Total                   14,900
                                 - 9 -

Petitioner and Scott did not discuss whether Scott was required

to pay interest.    Scott left AIM early in 1996 without repaying

any of the $14,900.    When he left AIM, Scott told petitioner that

Scott considered the $14,900 to be compensation for work he had

done for AIM.    AIM did not deduct the $14,900 as compensation

paid to Scott.

     Petitioner did not sue Scott because litigation is

expensive, and Scott had been a friend.    In October 1996,

petitioner asked Rebecca Hennesey, one of petitioners’ certified

public accountants, for advice about whether AIM could deduct the

$14,900.   She advised petitioner to contact Scott to try to

collect the $14,900.    One of Scott’s sisters gave petitioner an

address for Scott.    On December 18, 1996, petitioner sent a

certified letter to Scott at that address asking him to repay the

loans.   The letter was returned unclaimed.   AIM deducted the

$14,900 as a bad debt in 1996.

F.   Labor Performed by High School Students

     Some high school students maintained the lawn and premises

at the Whittington property in the summers of the years in issue.

Petitioner paid them $442 in 1994, $40 in 1995, and $243 in 1996.

AIM reimbursed petitioner and deducted those amounts.
                               - 10 -

G.   Other Payments by AIM

     AIM reimbursed petitioner $144 in 1994, $195 in 1995, and

$161 in 1996 for the cost of providing meals to AIM employees.

Neither petitioner nor Mrs. Boler ate any of those meals.

     Petitioner did not play golf often, and he played only with

clients.    Petitioner submitted claims to AIM for reimbursement

for one-half of the golfing fees he paid.    He received $236 for

1995 and $369 for 1996.

     Mrs. Boler used her car to run errands for AIM.    In 1994,

AIM deducted $4,200 more than respondent allowed for travel

expenses by AIM employees.    The record is silent as to whether

any AIM employees incurred travel expenses in 1994.

     In 1995, AIM reimbursed petitioner $1,254, which is coded in

an AIM journal as GJ1 18308, $600 coded as GJ1 00172, and $480

coded as GJ1 00174.    Petitioners did not indicate the purpose of

the payments.    AIM deducted these amounts in 1995 as business

expenses.

     AIM deducted interest expense of $24,416 for 1994, $24,840

for 1995, and $13,020 for 1996, and the Bolers reported those

amounts as interest income.    Respondent disallowed interest

deductions of $16,599 in 1994, $21,460 in 1995, and $9,640 in

1996.
                              - 11 -

                              OPINION

A.   Whether Amounts That AIM Paid to Petitioner Are Interest or
     Dividends

     Respondent contends that the payments in dispute, that is,

$16,599 for 1994, $21,460 for 1995, and $9,640 for 1996 (the

interest at issue), are not deductible as interest by AIM and are

constructive dividends to petitioner because there was no genuine

debt on which AIM could accrue interest.   Petitioners contend

that these amounts are interest that AIM paid to petitioner and

not constructive dividends.

     A taxpayer may deduct interest paid or accrued in a taxable

year on bona fide indebtedness.   Sec. 163(a); Knetsch v. United

States, 364 U.S. 361 (1960); In re W. Tex. Mktg. Corp., 54 F.3d

1194 (5th Cir. 1995).   Thus, we must decide whether the interest

at issue was paid or accrued on bona fide indebtedness.   The

essence of bona fide indebtedness is an unconditional and legally

enforceable obligation for the payment of money.   Linder v.

Commissioner, 68 T.C. 792, 796 (1977).

     Petitioners contend that AIM accrued the interest at issue

on a loan from petitioner the proceeds of which AIM used to buy

the Whittington property from petitioner in early 1992.

Petitioners bear the burden of proof on this issue.3

     3
        Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998.     The
revenue agent’s report is dated before July 22, 1998. Thus,
petitioners bear the burden of proof. Rule 142(a)(1).
                                - 12 -

Rule 142(a)(1).    We apply special scrutiny because petitioner had

unfettered control over AIM.     See Elec. & Neon, Inc. v.

Commissioner, 56 T.C. 1324, 1338-1339 (1971), affd. without

published opinion 496 F.2d 876 (5th Cir. 1974); Haber v.

Commissioner, 52 T.C. 255, 266 (1969), affd. 422 F.2d 198 (5th

Cir. 1970).

     Petitioners contend that the December 31, 1992, promissory

note is evidence of the alleged loan for the Whittington property

and establishes a bona fide debt.     We disagree.

     The promissory note does not establish the existence of a

bona fide debt, especially where, as here, there is documentary

evidence (discussed below) in conflict with the note.     See In re

Lane, 742 F.2d 1311, 1315 (11th Cir. 1984); Stinnett’s Pontiac

Serv., Inc. v. Commissioner, 730 F.2d 634, 638 (11th Cir. 1984),

affg. T.C. Memo. 1982-314; Tyler v. Tomlinson, 414 F.2d 844, 849

(5th Cir. 1969).     Petitioner signed the note both as borrower and

lender; there is no evidence that there were arm’s-length

negotiations.     The note provides no fixed payment schedule or

maturity date.     It provides for annual payment of interest at a

rate of 10 percent per year payable from December 31, 1994, to

December 31, 2000.     There is no evidence that petitioner and AIM

had a written loan agreement or discussed security for the

alleged loan, or that AIM maintained records of the alleged debt

or recorded it on its books.     There is no evidence that the note
                               - 13 -

was created when petitioner transferred any assets, including the

Whittington property to AIM.    We find that the promissory note

does not establish that there was a genuine debt.    In re Lane,

supra; Stinnett’s Pontiac Serv., Inc. v. Commissioner, supra;

Tyler v. Tomlinson, supra.

       The balance sheets submitted by AIM to the Mississippi and

Alabama licensing boards in 1992 and to Citizens National Bank

show that shareholders had lent only $30,000 to AIM.    Similarly,

a balance sheet that AIM submitted to the Alabama licensing board

in December 1993 shows that shareholders had lent only $37,406 to

AIM.    The only documents that state that AIM owed $121,596 to

petitioner are the promissory note and AIM’s 1992 tax return.

AIM’s 1992 return does not establish that AIM owed petitioner

that amount because tax returns do not establish the truth of the

facts stated in them.    Lawinger v. Commissioner, 103 T.C. 428,

438 (1994); Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979);

Roberts v. Commissioner, 62 T.C. 834, 837 (1974).    In deciding

whether petitioner and AIM created a bona fide debt, we give more

weight to the balance sheets than to the promissory note because

the balance sheets were AIM’s official representations of its

assets and liabilities to Government agencies and to its bank.

       Petitioners contend that we should ignore the balance sheets

and statements that conflict with the note because petitioner was

not knowledgeable about financial documents when they were
                                - 14 -

prepared.    We disagree.   AIM was licensed to bid on larger

contracts because it did not disclose the alleged loan from

petitioner to AIM in the financial statements AIM submitted to

the Mississippi and Alabama licensing boards.     Petitioner

represented to Citizens National Bank that AIM had not paid

anything to own the Whittington property.     Petitioner’s

representation enhanced AIM’s ability to borrow funds from

Citizens National Bank.     We do not ignore the balance sheets and

statements that conflict with the note.

     We conclude that petitioner and AIM did not create a bona

fide debt.    Thus, AIM’s payments to petitioner of $16,599 in

1994, $21,460 in 1995, and $9,640 in 1996 are constructive

dividends to petitioner and not deductible by AIM as interest.

B.   Whether AIM May Deduct as a Bad Debt $14,900 It Paid to
     Scott

     1.      Whether the $14,900 That AIM Paid to Scott Was a Loan

     AIM deducted as a bad debt in 1996 the $14,900 it paid to

Scott.    Respondent points out that there was no promissory note

or provision for repayment and contends that the $14,900 was not

a loan.     We disagree.

     A taxpayer may deduct a debt that becomes worthless in the

taxable year.     Sec. 166(a)(1); sec. 1.166-1(c), Income Tax Regs.

Petitioner credibly testified that the $14,900 AIM paid to Scott

was a loan.     The notations on the checks and some of the entries
                               - 15 -

in AIM’s books corroborate petitioner’s testimony.4    Scott was a

valuable employee of AIM who needed help.    Petitioner believed

Scott would repay the $14,900.   We conclude that the $14,900 AIM

paid to Scott was a loan.

     2.   Whether the $14,900 Debt Became Worthless in 1996

     To prevail, petitioners must identify some event or facts

which prove that the debt became worthless in 1996.     United

States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 401

(1927); Dallmeyer v. Commissioner, 14 T.C. 1282, 1291-1292

(1950).   Respondent contends that petitioners did not show that

the $14,900 debt became worthless in 1996.     We disagree.

     Disappearance of the debtor is a factor that can show that a

debt has become worthless.    Cole v. Commissioner, 871 F.2d 64, 67

(7th Cir. 1989), affg. T.C. Memo. 1987-228; Briant v.

Commissioner, T.C. Memo. 1982-397; Acree v. Commissioner, T.C.

Memo. 1976-187.   Scott disappeared in 1996.   Petitioner tried

unsuccessfully to find him.   Further evidence that the debt

became worthless in 1996 is that Scott told petitioner when Scott




     4
        Petitioner described the payments to Scott as “Loans to
shareholder” or “Accts. rec’ble - other” in AIM’s books. The
four entries that state “Loans to shareholder” are at odds with
petitioners’ position. However, the three entries that state
“Accts. rec’ble - other” are consistent with the contemporaneous
notations petitioner wrote on the checks and petitioner’s
testimony that AIM lent money to Scott.
                                - 16 -

left AIM in 1996 that Scott considered the $14,900 to be

compensation.     These facts show that the loan became worthless in

1996.

     Respondent points out that petitioner did not sue Scott.

However, to prove that a debt is worthless, a taxpayer is not

required to sue to obtain repayment if, as here, the

circumstances indicate that a lawsuit to enforce payment would

probably not result in satisfaction of a judgment.     Exxon Corp.

v. United States, 785 F.2d 277, 279 (Fed. Cir. 1986); sec. 1.166-

2(a) and (b), Income Tax Regs.     We conclude that AIM may deduct

the $14,900 as a bad debt in 1996.

C.   Whether AIM Had Cost of Goods Sold of $103,415 in 1994

        Petitioners contend that AIM’s cost of goods sold for 1994

was $103,415.     Respondent contends that it was $85,883.   The

difference of $17,532 relates to labor and material expenses AIM

incurred for work it did for Morton International in 1994 and

1995.     AIM paid those expenses in December 1994 and, in January

1995, completed the job and billed Morton International.

        Deductions under the accrual method of accounting are

allowable for the taxable year in which all events have occurred

that establish the fact of the liability, the amount of the

liability can be determined with reasonable accuracy, and

economic performance has occurred with respect to the liability.
                              - 17 -

Sec. 461(h); secs. 1.446-1(c)(1)(ii)(A), 1.461-1(a)(2)(i), Income

Tax Regs.   Petitioners contend that AIM properly included the

$17,532 in its cost of goods sold for 1994 because AIM was an

accrual method taxpayer and the requirements of section 461(h)

were satisfied in that all events establishing the fact and

amount of the liability had occurred, and economic performance,

i.e., AIM’s payment of the $17,532, occurred in 1994.

     Petitioners’ contention that AIM’s inclusion of $17,532 in

cost of goods sold in 1994 satisfies section 1.461-1(a)(2)(i),

Income Tax Regs., does not take into account section 263A.

Section 1.461-1(a)(2)(i), Income Tax Regs., provides that, under

section 263A, a liability that relates to the creation of an

asset having a useful life extending substantially beyond the

close of the taxable year must be capitalized in the taxable year

incurred.   Section 263A requires the capitalization of all direct

and certain indirect costs properly allocable to property

produced or acquired for resale.   Sec. 263A; sec. 1.263A-1(e)(1),

Income Tax Regs.   The term “produce” means “construct, build,

install, manufacture, develop, or improve.”   Sec. 263A(g)(1); see

sec. 1.263A-2(a)(1)(i), Income Tax Regs.   AIM produced property

for Morton.   “Direct costs” include “direct material costs and

direct labor costs.”   Sec. 1.263A-1(e)(2)(i), Income Tax Regs.

In 1994, AIM had direct costs of $15,795.40 for labor and

$1,739.50 for materials.   Thus, AIM must capitalize as direct
                              - 18 -

costs under section 263A its costs of $17,532 for labor and

materials, and it may not reduce gross income by $17,532 in 1994.

We conclude that AIM had cost of goods sold of $85,883 for 1994.5

D.   Labor by High School Students

     Respondent contends that petitioner had constructive

dividends of $442 in 1994, $40 in 1995, and $243 in 1996 and that

AIM may not deduct these amounts because petitioners did not

substantiate the amounts petitioner paid to high school students

to maintain the lawn and premises at the Whittington property in

the summers of the years in issue.     We disagree.   Petitioner

credibly testified, and corroborated by contemporaneous records,

that he paid high school students $442 in 1994, $40 in 1995, and

$243 in 1996 to maintain AIM’s premises.

     Respondent points out that in Park v. Commissioner, T.C.

Memo. 1994-343, we held that the taxpayer could not deduct labor

expenses because he had no records to substantiate those

payments.   We distinguish Park because, here, the contemporaneous

expense reports that petitioner used to claim reimbursement

corroborate his testimony.   The issue in Park was whether to

estimate under Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.

1930), the amount the taxpayer paid for office help.      Here, we

know the exact amounts of the labor expenses because petitioners


     5
        Respondent concedes that AIM may reduce its 1995 gross
receipts by $17,532 for costs of goods sold.
                               - 19 -

have records.   Thus, there is no need to estimate amounts under

Cohan.

     We conclude that AIM may deduct $442 in 1994, $40 in 1995,

and $243 in 1996 for reimbursing petitioner for high school

student labor expenses.    Those amounts are not constructive

dividends to petitioner.

E.   Golf Expenses

     AIM reimbursed petitioner for one-half of the expenses that

he incurred for golf in 1995 and 1996.    Petitioners contend that

AIM properly deducted AIM’s reimbursement to petitioner of golf

expenses of $236 for 1995 and $369 for 1996.    We disagree.

     Expenses of recreation and entertainment generally are

nondeductible unless the taxpayer substantiates by adequate

records, or by sufficient evidence corroborating his or her own

testimony:   (1) The amount of the expense; (2) the time and place

of the expense; (3) the business purpose of the expense; and (4)

the business relationship to the taxpayer of the persons

entertained.    Sec. 274(d); sec. 1.274-5T(c)(3), Temporary Income

Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).    Petitioners

offered no evidence showing the place, the persons entertained,

the business purpose, or the business relationship to AIM of the

persons entertained.   Petitioners had no receipts.   Thus,

petitioners have not met the requirements of section 274(d).
                               - 20 -

We conclude that AIM may not deduct its reimbursements to

petitioner for golf expenses he paid in 1995 and 1996.

     Petitioners contend that AIM’s reimbursements to petitioner

for golf expenses are not constructive dividends to petitioner.

We disagree.    A shareholder receives a constructive dividend to

the extent of the corporation’s earnings and profits if the

corporation pays a personal expense of its shareholder or the

shareholder uses corporate property for a personal purpose.

Secs. 301, 316; Falsetti v. Commissioner, 85 T.C. 332, 356-357

(1985); Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 743-

744 (1973).    Petitioners did not show that petitioner’s golf

expenses were not primarily personal.    Thus, AIM’s golf

reimbursements to petitioner are constructive dividends.

Petitioner testified that he played golf only with clients and

that he was reimbursed by AIM for only one-half of the golf

expenses.   However, petitioners have not shown that the amounts

petitioner was reimbursed were for clients’ golf expenses.6




     6
        Petitioners bear the burden of proving that AIM had
insufficient earnings and profits to support the constructive
dividend treatment. United States v. Bok, 156 F.3d 157, 163 (2d
Cir. 1998); Pittman v. Commissioner, 100 F.3d 1308, 1318 (7th
Cir. 1996), affg. T.C. Memo. 1995-243; Hagaman v. Commissioner,
958 F.2d 684, 695 n.16 (6th Cir. 1992), affg. and remanding T.C.
Memo. 1987-549. Petitioners did not contend and did not offer
any evidence showing that AIM had insufficient earnings and
profits to support constructive dividend treatment.
                                - 21 -

We conclude that AIM’s reimbursements to petitioner for golf

expenses in 1995 and 1996 are constructive dividends to

petitioner.

F.   Meal Expenses

     Petitioner paid meal expenses for AIM employees of $288 in

1994, $390 in 1995, and $322 in 1996.    AIM reimbursed those

amounts to petitioner and deducted one-half, or $144 in 1994,

$195 in 1995, and $161 in 1996.    Respondent contends that AIM is

not entitled to the deductions and that those amounts are

constructive dividends to petitioner.    We disagree.

     A taxpayer may deduct meal expenses under section 162 if

they are ordinary and necessary business expenses and if he or

she meets the substantiation requirements of section 274(d).

Moss v. Commissioner, 758 F.2d 211, 212 (7th Cir. 1985), affg. 80

T.C. 1073 (1983).    Petitioners have met these requirements.

Petitioner paid these expenses for meals eaten by AIM’s employees

working overtime at jobsites.    Thus, AIM may deduct its

reimbursement to petitioner of $288 in 1994, $390 in 1995, and

$322 in 1996 for meal expenses.    Those amounts are not

constructive dividends to petitioner.

G.   Travel Expenses

     AIM deducted $4,200 more than respondent allowed for 1994

for travel expenses by AIM employees.    Petitioners contend that

AIM properly deducted the $4,200 because Mrs. Boler incurred
                              - 22 -

travel expenses running errands for AIM.    We disagree that AIM

may deduct Mrs. Boler’s travel expenses.    A taxpayer may not

deduct travel expenses unless the taxpayer substantiates by

adequate records or sufficient evidence corroborating the

taxpayer's own statement, the amount, time and place, and

business purpose of the expense.    Sec. 274(d)(4).   Petitioners

offered no evidence of the amount, time, place, and business

purpose of Mrs. Boler’s travel expenses on behalf of AIM.     Thus,

petitioners have not complied with section 274(d)(4) as to the

claimed deduction in 1994 based on Mrs. Boler’s travel expenses.7

H.   Reimbursements Based on Undescribed Journal Entries

     Petitioners contend that AIM may deduct the following

expenses coded in AIM’s journals:    $1,254 as GJ1 18308, $600 as

GJ1 00172, and $480 as GJ1 001740 (the coded expenses at issue),

and reimbursed to petitioner in 1995.    Petitioners contend that

Scott incurred, and petitioner paid the coded expenses at issue

as, travel expenses relating to a job that Scott did for AIM in

Pine Hill, Alabama.   However, petitioners offered no evidence to

support that contention.   Petitioners offered no evidence of the

time, place, or business purpose of the alleged travel expenses.




     7
        Respondent did not determine and does not contend that
the $4,200 amount is a constructive dividend to petitioner.
                                - 23 -

Thus, petitioners have not met the requirements of section

274(d).    Thus, we conclude that AIM may not deduct the coded

expenses of $1,254, $600, and $480.

     Respondent conceded that the coded expenses of $600 and $480

are for lodging expenses of AIM’s employees other than the Bolers

and thus are not constructive dividends to petitioner.     However,

we conclude that the coded expense of $1,254 is a constructive

dividend to petitioner because petitioners have not shown

otherwise.

I.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty Under Section 6662(a) for Negligence

     Petitioners contend that they are not liable for the

accuracy-related penalty for negligence under section 6662(a)

because they reasonably relied on their accountants.     They also

contend that they had an honest misunderstanding of the law as to

all issues.

     Petitioners are not liable for the accuracy-related penalty

for negligence with respect to matters on which they prevailed

here.     They are also not liable for the accuracy-related penalty

with respect to the $17,532 AIM claimed as costs of goods sold

because they are inexperienced in tax accounting matters and they

reasonably relied on the advice of two accountants on this issue.

We conclude, however, that petitioners were negligent with

respect to:     (1) The disallowed interest deductions; (2) the
                               - 24 -

disallowed deductions for reimbursements of expenses for which

petitioners lacked substantiation; (3) the constructive dividends

to petitioner; and (4) the items they conceded.    The Bolers did

not show good faith with regard to the claimed interest payments

because they offered no records or other documentary evidence

(other than the promissory note) of petitioner’s alleged loan to

AIM.    There is no evidence about what information they gave their

accountants or how the accountants advised them to treat the

claimed interest payments or other items on which they did not

prevail.    Petitioners did not show that their reliance on their

accountants explains their failure to keep adequate records for

AIM or the fact that AIM claimed business deductions for its

reimbursement of some of the Bolers’ personal expenses.

       To reflect the foregoing,

                                               Decisions will be

                                          entered under Rule 155.
