                      T.C. Summary Opinion 2011-8



                        UNITED STATES TAX COURT



     RODGER L. GAMBLIN AND KATHLEEN J. BURCH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 21480-09S.            Filed January 31, 2011.



        Rodger L. Gamblin and Kathleen J. Burch, pro sese.

        Archana Ravindranath, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.     Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the years at
                               - 2 -

issue, and Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $15,221 for 2004, $12,886 for 2005, and $3,859

for 2006.   Respondent also determined that petitioners are liable

for accuracy-related penalties under section 6662(a) of $3,044.20

for 2004 and $2,577.20 for 2005.

     The parties agree that during the years 2004, 2005, and

2006, Rodger L. Gamblin (Dr. Gamblin) received gross Social

Security benefits of $16,663, $17,108, and $17,809,

respectively.1   The parties also agree that petitioners are not

entitled to deduct:   (1) The $3,764 advertising expense claimed

on Kathleen J. Burch’s (Dr. Burch) Schedule C, Profit or Loss

From Business, for 2004; (2) Dr. Gamblin’s Schedule C legal and

professional expenses of $1,077 for 2004; (3) Schedule C office

expenses for Dr. Gamblin for 2004 in excess of those respondent

allowed; and (4) Schedule C other expenses for Dr. Burch for 2004

and 2006 in excess of those respondent allowed.

     Petitioners offered no evidence and made no argument with

respect to deductions claimed on their Schedules A, Itemized

Deductions, and Schedules C for:   (a) Dr. Burch’s legal and


     1
      Adjustments to the taxable amount of Dr. Gamblin’s Social
Security benefits and to petitioners’ itemized deductions, self-
employment tax deductions, and self-employment taxes are
computational and will be resolved consistent with the Court’s
decision.
                                - 3 -

professional services expense for 2006; and (b) self-employed

health insurance expenses for 2004 and 2006.    Petitioners also

failed to offer any evidence or argument to contest respondent’s

determination that Dr. Gamblin had no gross receipts or sales for

2006.    Thus, petitioners are deemed to have conceded these

issues.    See, e.g., Bradley v. Commissioner, 100 T.C. 367, 370

(1993); Sundstrand Corp. & Subs. v. Commissioner, 96 T.C. 226,

344 (1991); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988);

Money v. Commissioner, 89 T.C. 46, 48 (1987); Leahy v.

Commissioner, 87 T.C. 56, 73-74 (1986).

     The parties further agree that petitioners are entitled to

deduct on Dr. Burch’s Schedule C:    $3,439.83 of expenses for

legal and professional services for 2004, and an additional $739

for 2004 over the amount respondent allowed for insurance (other

than health).

     The issues remaining for decision are whether petitioners

are entitled to deduct on their respective Schedules C amounts in

addition to those respondent allowed, and whether petitioners are

liable for accuracy-related penalties for 2004 and 2005.

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

The stipulation of facts, supplemental stipulation of facts, and

the exhibits received in evidence are incorporated herein by

reference.    Petitioners resided in Ohio when the petition was

filed.
                                 - 4 -

                             Background

     Dr. Gamblin is, and was, during the years at issue, an

inventor and “tinkerer” who holds 36 U.S. patents.    Dr. Gamblin

is currently working on a printing process involving “publication

gravure inks”.   This printing process uses a special ink which is

designed for use in a high-speed and high-quality printing

process and is especially suited for printing large quantities of

the same item.   Dr. Gamblin is working on a formulation of this

special ink that is both biodegradable and cheaper to use than

current ink types.

     In the 1990s Dr. Gamblin developed a device called a

“cyclobelt” or “cyclomill”, which is a grinding device that is

unique in that a relatively cheap grinding medium rather than the

machine itself is degraded during the grinding process.     The

cyclomill is also capable of grinding things that are “very

hard”, like diamonds, and it grinds them to “lower levels” than

can be reached by other means.    According to Dr. Gamblin,

however, the Russians developed a process that “was a lot

cheaper” than his process, and his “business kind of dried up.”

     Dr. Gamblin was able to rent a cyclomill to a company in

Fairfield, Ohio, for $5,000 contingent on a review of its patent

status.   Dr. Gamblin retained a Cincinnati law firm, Wood,

Herring, and Evans, to prepare a patent opinion document for the

company’s review.    He received a rental payment of $5,000 in
                                - 5 -

2004.    Petitioners, however, failed to report the $5,000 rental

payment on their Federal income tax return for 2004.

     During the years at issue Dr. Gamblin worked primarily on

the gravure printing and other ink types.    He also developed a

hair shampoo which is a soap rather than a detergent so it will

not dry out hair.    Because soaps do not work well in hard water,

Dr. Gamblin added a chemical agent to remove calcium from hard

water.

     Dr. Burch holds a Ph.D. in clinical psychology and was a

sole practitioner from 1989 until her retirement in 2005.    Dr.

Burch practiced psychotherapy, but her main focus was

psychological and neuropsychological assessment.    She did a lot

of work for defense attorneys and has taught neuropsychology at

the University of Dayton.    Dr. Burch maintained, for seeing

patients, an office suite separate from her home consisting of

two rooms, a waiting room and a “consulting room” that contained:

(1) Two upholstered chairs; (2) one sofa; (3) a desk and chair

set; (4) coffee and end tables; (5) a small bookcase; and (6) a

small filing cabinet for current patient clinical files.

     Dr. Burch saw patients at her office suite because she

perceived it to be too dangerous to see patients in her home.

However, she did all of her administrative work, insurance claim

filing, billing, and report writing at home on weekends.    The
                                - 6 -

psychological assessments she prepared required lots of paperwork

and references.

     Dr. Gamblin and Dr. Burch used overlapping portions of the

home for their respective businesses.    Two bedrooms of the home

were used for business.    The bedroom on the third floor contained

a bed, but the bed was used for laying out in-process insurance

forms for Dr. Burch’s practice; it also contained a computer.

Outside of the third-floor bedroom in the hall were filing

cabinets full of files.    In the “big” room on the second floor,2

which had no bed, was Dr. Gamblin’s “mail place” for his

business, where there were a fax machine, a copier, lots of books

and catalogs for his supplies, and references, as well as Dr.

Burch’s technical books.    In addition, there were stacks of boxes

filled with insurance files and filing cabinets containing

professional literature.

     There was also a garage apartment where Dr. Burch wrote her

reports and kept a technical library.    The garage apartment was

about 21 by 17 feet and contained a computer and a “big plotter”

that Dr. Gamblin used in his engineering pursuits.    The basement

was used as Dr. Gamblin’s “laboratory”.    It had a microscope, a



     2
      While Dr. Gamblin testified that the   “big” bedroom was on
the second floor, Dr. Burch inconsistently   testified that the big
bedroom they used was on the third floor.    The Court will treat
Dr. Burch’s testimony as having been given   mistakenly.
                                - 7 -

“K-proofer” (a machine used to test prints), bottles of dyes,

colorants, reagents, and more boxes of files.

     Petitioners each filed Schedules C with their Federal income

tax returns for 2004, 2005, and 2006.      Dr. Gamblin filed a

Schedule C for the “Dayton Tinker Company” and Dr. Burch filed

her Schedule C as “Kathleen J. Burch, Psy. D.”

                            Discussion

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

of proving that those determinations are erroneous.      See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).      In some

cases the burden of proof with respect to relevant factual issues

may shift to the Commissioner under section 7491(a).     Petitioners

did not argue or present evidence that they satisfied the

requirements of section 7491(a).   Therefore, the burden of proof

does not shift to respondent.

Other Income

     Section 6001 requires a taxpayer to maintain sufficient

records to allow for the determination of the taxpayer’s correct

tax liability.   Petzoldt v. Commissioner, 92 T.C. 661, 686

(1989).   If a taxpayer fails to maintain or does not produce

adequate books and records, the Commissioner is authorized to

reconstruct the taxpayer’s income.      Sec. 446(b); Petzoldt v.

Commissioner, supra at 686-687.    Indirect methods may be used for
                                 - 8 -

this purpose.   Holland v. United States, 348 U.S. 121 (1954).

The Commissioner’s reconstruction need only be reasonable in

light of all the surrounding facts and circumstances.      Petzoldt

v. Commissioner, supra at 687; Giddio v. Commissioner, 54 T.C.

1530, 1533 (1970).

     Respondent determined through a bank deposits analysis that

petitioners had unreported income for 2004 of $8,405 and for 2006

of $3,774.   Bank deposits constitute prima facie evidence of

income.   Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).     The

bank deposits method of determining income assumes that all the

money deposited into a taxpayer’s bank account during a specific

period constitutes taxable income.       Price v. United States, 335

F.2d 671, 677 (5th Cir. 1964).    The Commissioner, however, must

take into account any nontaxable source or deductible expense of

which he has knowledge.    Id.   The method employed is not

invalidated even if the calculations of the Commissioner are not

completely correct.    DiLeo v. Commissioner, 96 T.C. 858, 868

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

     Dr. Gamblin testified that he rented a cyclomill to a

company in Fairfield, Ohio, for $5,000 contingent on a review of

its patent status.    Dr. Gamblin testified that he received his

$5,000 payment in 2004.    Petitioners, however, failed to report

the rental earnings on their return for 2004.
                               - 9 -

     Dr. Gamblin testified that “if you take that five thousand

dollars out”, and “depending on which day you closed it out * * *

it is going to vary from year to year by two or three thousand

dollars.”   Regarding 2005, Dr. Gamblin explained that “you know,

there was more money that came out of the account than went in,

the whole thing over the three year period pretty much balances

out.”   Petitioners, however, offered the Court no other evidence

to show that respondent’s bank deposits analysis is incorrect.

Respondent’s determination on this issue is sustained.

Trade or Business Expenses

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Generally, no deduction is

allowed for personal, living, or family expenses.   See sec. 262.

The taxpayer must therefore show that any claimed business

expenses were incurred primarily for business rather than

personal reasons.   See Rule 142(a); Walliser v. Commissioner, 72

T.C. 433, 437 (1979).

     To show that the expense was not personal, the taxpayer must

establish that the expense was incurred primarily to benefit his

business, and there must have been a proximate relationship

between the claimed expense and the business.   See Walliser v.

Commissioner, supra at 437.   Taxpayers are required to maintain

sufficient records to establish the amounts of their income and
                                - 10 -

deductions.    Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440

(2001); sec. 1.6001-1(a), Income Tax Regs.     Petitioners,

therefore, must produce evidence that they are entitled to the

deductions they claim.

     Where a taxpayer has established that he has incurred a

trade or business expense, failure to prove the exact amount of

the otherwise deductible item may not always rule out a

deduction.     Generally, unless precluded by section 274, we may

estimate the amount of such an expense and allow the deduction to

that extent.     See Finley v. Commissioner, 255 F.2d 128, 133 (10th

Cir. 1958), affg. 27 T.C. 413 (1956); Cohan v. Commissioner, 39

F.2d 540, 544 (2d Cir. 1930).    We cannot, however, estimate

deductible expenses unless the taxpayer presents evidence

sufficient to provide some rational basis upon which estimates

may be made.    See Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).

     Office Expenses for Dr. Gamblin

     Dr. Gamblin testified that he “didn’t have receipts for

every little thing” making up his office expenses.     Dr. Gamblin

supplied respondent with canceled checks, Quicken sheets, and

credit card billing records showing various expenditures.       He

offered, however, no receipts to show that the expenditures were

his office expenses for either 2004 or 2005.
                              - 11 -

     Because there is insufficient evidence on which to base an

estimate of Dr. Gamblin’s office expenses, respondent’s

determination on this issue is sustained.

     Office Expenses for Dr. Burch

     Dr. Burch deducted on Schedule C $3,467 for 2004, $3,341 for

2005, and $4,066 for 2006 as office expenses for her psychology

practice.   Of those deductions respondent disallowed $488 for

2004, $784 for 2005, and $2,460 for 2006.   Petitioners provided

canceled checks drawn to various payees but did not offer any

evidence other than their own testimony that they are entitled to

office expense deductions in excess of those respondent allowed.

     Expenses for Supplies for 2004 and 2006

     Dr. Gamblin deducted $2,945 as expenses for supplies on his

2004 Schedule C of which respondent disallowed $788.   For 2006,

Dr. Gamblin deducted supplies expenses of $4,528 of which

respondent disallowed $73.   Dr. Burch deducted expenses for

supplies of $4,866 on her 2006 Schedule C all of which respondent

disallowed.   Petitioners offered as evidence their own testimony

and canceled checks payable to credit card companies, MBNA, GE

Money Bank Credit Card, and Discovery.   Petitioners have not

shown that they are entitled to deduct expenses for supplies in

excess of those respondent allowed.
                               - 12 -

     Expenses for Insurance (Other Than Health)

     Dr. Burch deducted $3,358 of expenses for insurance (other

than health) on her 2004 Schedule C.    Respondent disallowed

$2,860 of the deduction.   Petitioners provided canceled checks,

bank statements, and withdrawals for multiple lines of insurance

totaling $3,357.88.   Petitioners, however, failed to provide

copies of the insurance policies.   Respondent agrees that

petitioners are entitled to an additional deduction of $739 for

2004.   Petitioners have not shown that they are entitled to

deduct insurance (other than health) expenses in excess of the

amount respondent agreed to.

     “Contract Labor” Expenses of Dr. Burch Treated as Schedule C
     “Income” of Dr. Gamblin

     Dr. Burch deducted on her 2005 Schedule C $67,000 of

“contract labor” expenses from her $82,479 gross income.     Dr.

Gamblin reported on his Schedule C for 2005 gross receipts and

gross income of $67,000.   Respondent adjusted petitioners’ tax

return, disallowing the deduction on Dr. Burch’s Schedule C and

removing the income in the same amount from Dr. Gamblin’s

Schedule C.

     Petitioners allege that Dr. Burch paid Dr. Gamblin for

performing administrative duties for her business.    Dr. Gamblin

testified that the payment was related to his research and

development for his inventions because he “would not be able to

carry on except for the amount of money that was being furnished
                                - 13 -

by Dr. Burch’s practice.    I mean, she financed my operations”.

Dr. Burch testified that “we do work together.    I work for Roger-

-well, I was a partner in his business, and he works for me.”

     There was no written contract for services between

petitioners.   Dr. Gamblin helped Dr. Burch with administrative

duties in 2004 and assisted with “a few little things” in 2006

but did not report gross income for those years from Dr. Burch,

nor did she claim deductions.    Petitioners kept no records of the

work that Dr. Gamblin performed for Dr. Burch, and Dr. Burch

could not recall the rate at which she paid her husband.    She was

vague in her testimony as to how she determined the total amount

to be paid to him.   Petitioners offered no documentary evidence

that Dr. Burch paid Dr. Gamblin $67,000 in 2005 or, if she did,

that the amount was compensation for Dr. Gamblin’s services.

     On the other hand, Dr. Gamblin’s testimony that he received

money from his wife related to his research and development and

that she “financed” his operations and Dr. Burch’s testimony that

she was “a partner in his business” leads the Court to conclude

that any payments Dr. Burch may have made to Dr. Gamblin in 2005

were in the nature of capital expenditures rather than

compensation for services.    Generally, no deduction is allowed

for capital expenditures.    Sec. 263(a).   Taxpayers may not deduct

the costs of creating an intangible, like a patent or trademark,

or of acquiring an interest in a partnership unless some
                              - 14 -

exception applies.   Sec. 263(a)(1)(B); sec. 1.263(a)-4(b),

(d)(1), (2), (5), Income Tax Regs.3    “Capital expenditures are

subsequently recovered through depreciation, amortization, cost

of goods sold, as an adjustment to basis, or otherwise, at such

time as the property to which the amount relates” is used, sold,

or disposed of by the taxpayer.   Sec. 1.263(a)-1(b), Income Tax

Regs.

     Because petitioners have not shown that the contested

$67,000 was paid, was paid as compensation to Dr. Gamblin, or was

expended for Dr. Gamblin’s business, respondent’s determinations

on these issues are sustained.

     Home Office Expenses

     Drs. Gamblin and Burch each filed Forms 8829, Expenses for

Business Use of Your Home, and claimed on their respective

Schedules C home office expense deductions for all 3 years at

issue. Respondent disallowed all of the home office expenses

deducted by Dr. Gamblin and almost all of the home office

expenses deducted by Dr. Burch.

     Generally, section 280A(a) prohibits a taxpayer from

deducting expenses for the use of a dwelling unit that is the



        3
      Sec. 174(a)(1) allows a taxpayer to deduct certain research
and experimental expenditures without consent of the Secretary
for his first taxable year beginning after Dec. 31, 1953, and
ending after Aug. 16, 1954, or at any time with consent of the
Secretary. Sec. 174(a)(2). Petitioners’ expenditures do not
qualify for deduction under either provision.
                                - 15 -

taxpayer’s residence.     But the prohibition on deductions does not

apply to an item of expense allocable to a portion of the

dwelling that is used “exclusively” and “on a regular basis” as

the principal place of business of the taxpayer’s trade or

business.    Sec. 280A(c)(1)(A).

     Assuming that a taxpayer has a qualifying trade or business,

allowable home office deductions are strictly limited under the

statute.    Home office expense deductions are limited to the

amount of gross income from the use of the dwelling for a trade

or business, reduced by the sum of the deductions allocable to

the dwelling regardless of its use as the location of a trade or

business and the allocable business expense deductions not

related to the use of the dwelling itself.    See sec. 280A(c)(5).

Amounts not allowable on account of the limitation may be carried

over to the succeeding taxable year subject to the limitation of

that taxable year.    Id.

            Dr. Gamblin

     The Court has sustained respondent’s determination that Dr.

Gamblin did not receive gross income from his inventing activity

reportable on Schedule C for 2005, and he is deemed to have

conceded that he had no Schedule C gross income for 2006.

Because Dr. Gamblin had no gross income from business in 2005 and

2006, his home office expense deduction for each of those years

is zero.    See id.
                                - 16 -

     Although Dr. Gamblin reported no gross income on Schedule C

for 2004, the Court has found that he received gross income from

business of $5,000 for the rental of his cyclomill.    But

respondent has allowed him as business deductions:    (1) Car and

truck expenses of $1,280 ($3,690 deducted less an adjustment of

$2,410); (2) office expenses of $3,663 ($4,303 deducted less an

adjustment of $640); (3) expenses for the rent or lease of other

business property of $3,430 ($3,130 deducted plus an adjustment

of $300); (4) supplies expenses of $2,157 ($2,945 deducted less

an adjustment of $788); (5) travel expenses of $1,724 ($2,650

deducted less an adjustment of $926); and (6) meals and

entertainment expenses of $140.    After reduction of Dr. Gamblin’s

gross income of $5,0004 for Schedule C expenses described in

section 280A(c)(5)(B), his allowable home office expense

deduction is zero, and the Court so holds.    Respondent’s

determination on this issue is sustained.

          Dr. Burch

     Dr. Burch deducted as home office expenses on her Schedule C

$44,514 for 2004, $2,798 for 2005 and $11,103 for 2006.

Respondent disallowed $44,097 for 2004, $2,211 for 2005, and

$10,286 for 2006.     Respondent, by allowing Dr. Burch a portion,


     4
      Although respondent determined that petitioners had
unreported income of $8,405 for 2004 as determined by a bank
deposits analysis, there is no evidence that all of it was earned
by Dr. Gamblin. In any event, the total of Dr. Gamblin’s sec.
280A(c)(5)(B)(ii) expenses alone exceeds $12,000.
                               - 17 -

albeit small, of the home office expenses that she deducted, has

tacitly admitted that she qualifies for the deduction under

section 280A and that only the amount is in question.

     The Court finds that Dr. Burch’s Forms 8829 overstate the

home office expense deductions to which she is entitled.    Some of

the more prominent reasons include her calculation of home office

expenses for 2004 to include a $28,346 “Carryover of operating

expenses from 2003” for which she offered no evidence.    Dr.

Gamblin testified that when he entered Dr. Burch’s home office

expenses for 2004 into the tax return preparation software, the

software “immediately took the accumulated back charges, and gave

them to her.”   Dr. Burch also included in her calculations

$13,223 for “Carryover of excess casualty losses and depreciation

from 2003” for which she offered no evidence.

     Dr. Burch’s claimed deduction of $67,000 of contract labor

expenses for 2005 was disallowed by respondent, and the

disallowance is sustained by the Court.   She will therefore have

no carryover of operating expenses from 2005 to 2006.

     Petitioners used overlapping portions of their home for

their respective businesses.   And both Dr. Burch and Dr. Gamblin

deducted home office expenses on their Schedules C, claiming a

combined use of 27.85 percent of their 6,570-square-foot home, or

1,830 square feet, for their respective businesses for 2004 2005,

and 2006.   Petitioners, as support for their deductions,
                                  - 18 -

submitted photographs of the interior of their home (including

the garage apartment), a diagram of the basement without

dimensions, and diagrams with dimensions of the garage apartment

and the first, second, and third floors of their home.

     There is no evidence from which the Court can determine the

area of the basement, most of which seems to have been used by

Dr. Gamblin.      The area of the third-floor bedroom is 104 square

feet.       The Court has no evidence on which to base a determination

of the square footage of the hallway outside the third-floor

bedroom that was used for file storage.      According to the diagram

that petitioners submitted, the area of the garage apartment is

367.5 square feet, and the area of the large bedroom on the

second floor is 264 square feet.      The total area of the three

rooms used by both petitioners for business for which the Court

has dimensions is 735.5 square feet.5

     Dr. Burch, however, used only a portion of each of the rooms

for her business.      Petitioners did not provide the Court with

evidence sufficient to determine the area of their respective

portions of the rooms used for their businesses.      The Court will

estimate that Dr. Burch used 50 percent of the garage apartment

and the two bedrooms, or 367.75 square feet for her business.



        5
      Expenses attributable to use of a home office in conducting
two or more separate businesses may be deductible where they each
meet the requirements of sec. 280A(c)(1). Hamacher v.
Commissioner, 94 T.C. 348 (1990).
                                - 19 -

See Cohan v. Commissioner, 39 F.2d at 544.    Any inexactitude in

the estimate by the Court is of petitioners’ own making and due

to their failure to maintain proper business records.    See id.

As 367.75 square feet represents 367.75/6,570, or about 6 percent

of the total area of the home, Dr. Burch is entitled to 6 percent

of her allowable expenses allocable to her use of a portion of

her home as an office.6    See sec. 280A(c)(1); see also Culp v.

Commissioner, T.C. Memo. 1993-270; Hefti v. Commissioner, T.C.

Memo. 1988-22, affd. without published opinion 894 F.2d 1340 (8th

Cir. 1989).

     Car and Truck Expenses and Travel, Meals, and Entertainment
     Expenses

     Certain business deductions described in section 274 are

subject to strict rules of substantiation that supersede the

doctrine in Cohan v. Commissioner, supra at 543-544.    See sec.

1.274-5T(c), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov.

6, 1985).   Section 274(d) provides that no deduction shall be

allowed with respect to:    (a) Any traveling expense, including

meals and lodging away from home; (b) any item related to an

activity of a type considered to be entertainment, amusement, or

recreation; or (c) the use of any “listed property”, defined in



     6
      It appears respondent’s adjustments to increase
petitioners’ “home interest expense” deduction for each year will
result in an increase in Dr. Burch’s allowable home office
expense deductions for each year. The Court will leave the exact
calculation for the Rule 155 computation.
                              - 20 -

section 280F(d)(4)(A)(i) to include any passenger automobile,

unless the taxpayer substantiates certain elements.

     For an expense described in one of the above categories, the

taxpayer must substantiate by adequate records or sufficient

evidence to corroborate the taxpayer’s own testimony:    (1) The

amount of the expenditure or use; (2) the time and place of the

expenditure or use; (3) the business purpose of the expenditure

or use; and in the case of entertainment,(4) the business

relationship to the taxpayer of each expenditure or use.    See

sec. 274(d).

     To meet the adequate records requirements of section 274, a

taxpayer must maintain some form of records as well as

documentary evidence that in combination are sufficient to

establish each element of an expenditure or use.   See sec. 1.274-

5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,

1985).   “Documentary evidence” includes receipts, paid bills, or

similar evidence.   Sec. 1.274-5(c)(2)(iii), Income Tax Regs.     A

contemporaneous log is not required, but corroborative evidence

to support a taxpayer’s reconstruction of the elements of

expenditure or use must have “a high degree of probative value to

elevate such statement” to the level of credibility of a

contemporaneous record supported by sufficient documentary

evidence.   Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50

Fed. Reg. 46016-46017 (Nov. 6, 1985).
                              - 21 -

     Dr. Gamblin’s car and truck, travel, meal, and entertainment

expense deductions, including meals and lodging away from home,

are subject to section 274(d) and the regulations thereunder.

The Court allowed petitioners to confer with respondent after

trial in order to present any additional documentary evidence

they might have that would be susceptible to stipulation.

     Dr. Gamblin, in preparation for the posttrial meeting with

respondent, created a travel log for his car and truck expenses

and a log for his travel, meal, and entertainment expenses that

he deducted on his Schedules C for 2004, 2005, and 2006.    Dr.

Gamblin testified at trial that he did not keep a log of each

individual trip but instead at the end of the year he “would go

off and check the mileage, and write it down on a slip of paper

in the glove box.”   Nevertheless, the travel log lists apparent

departure dates, destinations, a very brief “purpose of trip” and

“nights” and “days”, apparently away from home.   Dr. Gamblin’s

log of travel, meal, and entertainment expenses lists an alleged

check number and the costs of three instances of “air travel” and

calculates per diem amounts based on the travel log.

     Petitioners failed to provide copies of receipts, paid

bills, or similar evidence.   The Court finds that petitioners did

not offer corroborative evidence to support their reconstruction

of the elements of expenditure or use having “a high degree of

probative value to elevate such statement” of events that
                               - 22 -

happened in 2004, 2005, and 2006 to the level of credibility of a

contemporaneous record supported by sufficient documentary

evidence.    Respondent’s determination on these issues is

sustained.

Accuracy-Related Penalties

     Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax.    Higbee v.

Commissioner, 116 T.C. at 446; Trowbridge v. Commissioner, T.C.

Memo. 2003-164.    In order to meet the burden of production under

section 7491(c), the Commissioner need only make a prima facie

case that imposition of the penalty or the addition to tax is

appropriate.    Higbee v. Commissioner, supra at 446.

     Respondent determined that for both 2004 and 2005

petitioners’ underpayments of portions of their income taxes were

due to negligence or intentional disregard of rules or

regulations.    Section 6662(a) imposes a 20-percent penalty on the

portion of an underpayment of tax attributable to any one of

various factors, including negligence or disregard of rules or

regulations and a substantial understatement of income tax.    See

sec. 6662(b)(1) and (2).    “Negligence” includes any failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue Code, including any failure to keep adequate

books and records or to substantiate items properly.    See sec.
                               - 23 -

6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.   A “substantial

understatement” includes an understatement of tax that exceeds

the greater of 10 percent of the tax required to be shown on the

return or $5,000.   See sec. 6662(d)(1)(A); sec. 1.6662-4(b)(1),

Income Tax Regs.

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion.    The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year.    Id.

     Petitioners appear to have substantial understatements of

income tax for 2005 and 2006 since the understatement amounts

will exceed the greater of 10 percent of the tax required to be

shown on the return or $5,000.    Petitioners also failed to keep

adequate books and records or to substantiate items properly,

claimed itemized deductions and business expenses to which they

were not entitled, and failed to report portions of their income.

The Court concludes that respondent has produced sufficient
                              - 24 -

evidence to show that the accuracy-related penalties under

section 6662 are appropriate for both years.

     The accuracy-related penalties will apply unless petitioners

demonstrate that there was reasonable cause for the underpayments

and that they acted in good faith with respect to the

underpayments.   See sec. 6664(c).   Section 1.6664-4(b)(1), Income

Tax Regs., specifically provides:    “Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,

knowledge and education of the taxpayer.”

     Petitioners, both of whom are highly educated, did not show

that their underreporting of income and claiming of deductions

were actions taken with reasonable cause and in good faith.

Respondent’s determinations of the accuracy-related penalties

under section 6662(a) for 2004 and 2005 are sustained.

     The Court has considered the other arguments of the parties,

and they are either without merit or not necessary in view of our

resolution of the issues in this case.

     To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.
