                          T.C. Memo. 1999-230



                        UNITED STATES TAX COURT



            CHARLES A. AND CAROL M. WILLITS, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent


        Docket No. 15559-97.                      Filed July 13, 1999.


        Dan S. Maccabee, for petitioners.

        Lisa Primavera, for respondent.


                          MEMORANDUM OPINION


        NAMEROFF, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        Respondent determined deficiencies in petitioners’ 1992 and

1993 Federal income taxes in the amounts of $3,570 and $8,526,


        1
        Unless otherwise specified, all section references are to
the Internal Revenue Code in effect for the years in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

respectively, and an accuracy-related penalty under section

6662(a) in the amount of $714 for 1992.

     The issues for decision are:   (1) Whether Charles A. Willits

(petitioner) is entitled to deductions relating to the Sky

Shuttle activity; (2) whether petitioner Carol M. Willits (Mrs.

Willits) substantiated the expenses claimed for her day care

business for 1993;2 and (3) whether petitioners are liable for

the accuracy-related penalty under section 6662(a) for 1992.

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time their

petition was filed, petitioner resided in Washington, D.C., and

Mrs. Willits resided in Huntington Beach, California.

Sky Shuttle Activity

     Petitioner has degrees in civil engineering and

architecture.   During the years at issue, petitioner worked for

the National Aeronautics and Space Administration (NASA) on

projects involving aviation.   Before the aviation projects,

petitioner worked on the architecture of the space station.



     2
        In the notice of deficiency, respondent contended that
Mrs. Willits’ day care activity was not entered into for profit.
At trial respondent conceded that issue. Because of our holdings
on the issues, there will be computational adjustments for self-
employment tax (and the self-employment tax deduction) and
itemized deductions.
                                - 3 -

     Petitioner has long been interested in mass transportation

problems.   In the 1970's, he was involved in a project that

involved mass transit technology.   It is unclear what sort of

role petitioner had in this project, but his participation put

him in contact with other people who were involved with mass

transit technology.   That specific project never materialized,

but petitioner stayed in contact with certain individuals (the

group) who petitioner stated “shared the same vision” with him

about mass transit.

     Petitioner and the group3 are advocates for a suspended

light rail transit system called Sky Shuttle.   Sky Shuttle, Inc.,

was incorporated in 1977, and petitioner was the sole shareholder

and director.   Sky Shuttle, Inc., did not have any assets or bank

accounts.   Petitioner testified that the corporation was set up

to hold the name and for status when associating with other

companies and in dealing with major corporations.

     The corporation paid the yearly State franchise tax fee.

Sky Shuttle, Inc., filed corporate tax returns for 1992 and 1993

reporting no income and claiming the franchise tax fee as an

expense.    During 1992 and 1993, petitioner claimed that the Sky



     3
        Members of this group included Michael Williams, who
worked with petitioner in aerospace, and Gerald McMurry, who was
a specialist in suspension systems. It appears that others were
involved as well, although petitioner did not name them.
                                - 4 -

Shuttle activity was conducted as a sole proprietorship, and all

related expenses were deducted on petitioner’s Schedule C.

     Petitioner and the other members of the group did not form a

partnership, nor was there any sort of formal agreement among

them.   There were no arrangements with manufacturers or any

government organizations.    Petitioner’s role in the Sky Shuttle

project was to market the idea of a suspended light rail transit

system.   If the Sky Shuttle concept was sold, then the group

would enter into an agreement among themselves to determine their

respective shares and what each person would do.   Even though

petitioner stressed that he was the sole proprietor of Sky

Shuttle, he often referred to “our technology”, “our material”,

or what “we” did with regard to Sky Shuttle activities.

     According to petitioner, transportation projects are very

politically driven.   In order to build a transit system, or be

accepted to build one, many preliminary steps must be taken.     The

Federal Government must recognize the type of transportation

system (i.e., monorail, trolley, suspended light rail, etc.), and

funding must be available and allocated by the Federal, State,

county, or city government.   This requires political contacts and

political clout with a Member of Congress who will propose the

system.   Petitioner testified that there was no funding available

during the years at issue.
                               - 5 -

     In 1992, a proposal was submitted to the Federal Transit

Administration by John G. Milliken, secretary of transportation

for Virginia’s Department of Transportation, in concert with

Virginia Polytechnic Institute, the State University of

Blacksburg, Virginia, and Sky Shuttle Corp.,4 which is listed as

the technology parent along with the Sky Shuttle Group of firms

and their technologies (the Virginia proposal).   Petitioner is

referred to as the director of Sky Shuttle Corp., and petitioner

testified that four or five people, including himself, organized

the Virginia proposal.   According to the Virginia proposal, Sky

Shuttle Corp. lists two staff members (neither of whom is

petitioner or a named member of his group), and the Sky Shuttle

Group consists of 10 other companies or corporations that would

contribute their technologies or expertise.   It appears from the

Virginia proposal that Sky Shuttle Corp. was a participant in

this endeavor.

     During the years at issue, petitioner and the group also had

contacts with the staff of the office of Congressman Bud Shuster

(who was a minority member of the Department of Transportation

committee in the House of Representatives), with Aluminum Co. of

America (a metal manufacturer), and with other contractors.

Petitioner incurred expenses with regard to meetings and


     4
        We find that Sky Shuttle Corp. and Sky Shuttle, Inc., are
one and the same.
                                - 6 -

telephone calls to these people or groups.    No agreements were

entered into between any of the parties.    Petitioner also

attended trade shows and conferences related to mass transit

during the years at issue.   Petitioner maintained a journal of

these meetings and events.   Petitioner also noted in his journal

different cities that were considering a transportation system.

When meeting with members of the group, petitioner referred to

them in his journal as staff.

     There is evidence of one agreement with another individual.

Exhibit 14-R is an agreement, typed on Sky Shuttle, Inc.

stationery, between Allen Beishline and Sky Shuttle, Inc./Charles

Willits in which Mr. Beishline grants to Sky Shuttle, Inc., and

petitioner the rights to Mr. Beishline’s wheel-hub motor design

for use in transit vehicles.    The agreement was dated June 25,

1979, and was to expire in 10 years.    It appears from the

Virginia proposal and petitioner’s journal that Sky Shuttle was

still using the wheel-hub motor design.    Petitioner testified

that if the wheel-hub motor design was used, Mr. Beishline would

receive a fee.

     On Schedule C filed with the 1992 joint return, petitioner

reported $500 in gross income5 and claimed $12,347 in expenses

for a net loss of $11,847.   On Schedule C filed with the 1993


     5
        It is not clear from the record the nature of this income
or whether it was even related to the Sky Shuttle activity.
                                - 7 -

joint return, petitioner reported no income and claimed $11,250

in expenses.   Petitioner earned $75,813 and $78,912 from his

employment at NASA in 1992 and 1993, respectively.

     In the notice of deficiency, respondent disallowed

petitioner’s claimed losses for lack of profit objective and

failure to substantiate.   At trial, respondent contended that the

expenses petitioner claimed did not properly belong to him, but

belonged to the corporation.    Respondent also contends that

petitioner’s expenses, if not those of the corporation, were in

the nature of preopening expenses.

     Pursuant to section 162(a), a deduction is allowed for “all

the ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.    In order to

be deductible, business expenses generally must be the expenses

of the taxpayer claiming the deduction.    See Gantner v.

Commissioner, 91 T.C. 713, 725 (1988), affd. 905 F.2d 241 (8th

Cir. 1990); Hewett v. Commissioner, 47 T.C. 483, 488 (1967).      For

Federal tax purposes, a corporation will be recognized as a

separate taxable entity from its stockholders if either:    (1) The

formation of the corporation was based on a legitimate business

purpose; or (2) after formation, the corporation conducted a

business activity.   See Moline Properties, Inc. v. Commissioner,

319 U.S. 436, 438-439 (1943).    A shareholder generally is not

entitled to a deduction from his individual income for his
                                 - 8 -

payment of corporate expenses.    See Deputy v. duPont, 308 U.S.

488, 494 (1940); Gantner v. Commissioner, supra.    Shareholders

cannot deduct on their personal returns those expenses that have

a primary purpose of furthering the business of the corporation.

See Leamy v. Commissioner, 85 T.C. 798, 809 (1985).

     It appears from the Virginia proposal that Sky Shuttle,

Inc., was a participant.    Petitioner testified that it was

beneficial to have a corporation in order to associate with other

firms and major corporations with regard to the Sky Shuttle

activity.    From the Virginia proposal, it is evident that Sky

Shuttle, Inc., was expected to provide the technology.

Petitioner stated that the other corporations were aware that Sky

Shuttle, Inc., was only a paper corporation, but this is

contradicted by his testimony that it was important to have the

status of a corporation in order to deal with the other

companies.

     We find that Sky Shuttle, Inc., served its intended business

function.    Petitioner used Sky Shuttle, Inc., to promote the Sky

Shuttle activity, and it appears that others regarded Sky

Shuttle, Inc., as a participating corporation in the Virginia

proposal.    See Moline Properties, Inc. v. Commissioner, supra at

438-439.    Therefore, any expenses incurred by petitioner on the

corporation’s behalf in connection with the Sky Shuttle activity
                                - 9 -

during the years at issue properly belong to the corporation and

not petitioner.

       Moreover, those expenses were nondeductible, preopening

expenses.    See sec. 195; Richmond Television Corp. v. United

States, 345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded

per curiam on other grounds 382 U.S. 68 (1965).    Startup

expenditures generally cannot be deducted or amortized except as

allowed by section 195(a), which permits an election to amortize

them over a period of 60 months, starting with the month in which

an active business begins.    Startup expenditures are defined as

amounts paid or incurred in connection with:    (1) Investigating

the creation or acquisition of an active trade or business; (2)

creating an active trade or business; or (3) any activity engaged

in for profit in anticipation of the activity’s becoming an

active trade or business.    See sec. 195(c)(1)(A).   Startup costs

include advertising, travel, and other expenses incurred in

lining up prospective distributors, suppliers, or customers, and

salaries or fees paid or incurred for executives, consultants,

and similar professional services which are incurred after a

decision is made to establish a business and before the business

begins.    See H. Rept. 96-1278, at 10, 11 (1980), 1980-2 C.B. 709,

712.

       Petitioner acknowledged that there were no investors and no

income, the parties did not have any plans or facilities for
                               - 10 -

manufacture, and the parties did not have any agreements or

contracts (which would only be arranged upon being hired), and it

appears they were merely surveying potential mass transit areas.

It seems that petitioner and the group were searching for

business that might or might not materialize.    The fact that

petitioner and the group submitted a proposal does not mean that

the activity rose to the level of an active trade or business.

See Kennedy v. Commissioner, T.C. Memo. 1973-15 (“the ability to

transact business does not satisfy the ‘carrying on’ requirement

of [section 162]”); see also Richmond Television Corp. v. United

States, supra.

       In light of our holding that petitioner is not entitled to

deduct any expenses related to the Sky Shuttle activity for the

reasons stated, we need not address the section 183 or

substantiation issues.

Day Care Expenses

       Mrs. Willits has been a State-licensed day care provider

since 1979.    She was allowed a maximum of four infants and two

school-age children (who would come after school).    Mrs. Willits

would care for the infants until they reached 18 to 20 months of

age.    Mrs. Willits started her day care activities at 7 a.m.    She

would make sure the areas in her home were prepared for the

arrival of the children by 7:30 a.m.    The children usually left

around 5 p.m.    On weekends, Mrs. Willits cleaned the house and
                              - 11 -

yard, did laundry, and shopped for food and supplies for the day

care activity.   Mrs. Willits would operate the day care for about

48 weeks per year, allowing herself time for vacation.

     During 1993, Mrs. Willits cared for three infants.    She

charged $100 per week for each child.    The kitchen, family room,

and backyard were allocated to the day care activity.     When the

children napped, they would do so in the den, the spare bedroom,

and the master bedroom.   The children would play in the enclosed

backyard where there were toys and playground equipment.    Mrs.

Willits hired a gardener to maintain the yard.

     On her Schedule C, filed with petitioners’ joint return for

1993, Mrs. Willits reported $14,200 in gross receipts and claimed

the following expenses:

                 Expense                  Amount
          Advertising                      $165
          Car and truck                     987
          Depreciation                      217
          Insurance                         600
          Legal & profl.                    300
          Office                            350
          Supplies                          450
          Dues and pubs.                    140
          Laundry and cleaning            1,200
          Business gifts                    250
          Diapers/baby supplies             945
          Food                            2,700
          Yard maint.                     1,250
          Telephone                         390
            Total                         9,944

     Mrs. Willits also claimed a deduction of $3,437 for business

use of home on attached Form 8829.     Mrs. Willits’ net profit from
                              - 12 -

the day care activity was $819.   Respondent disallowed all of the

claimed expenses for lack of substantiation.

     Both petitioner and Mrs. Willits testified that they

maintained records of their expenses and that they turned these

records and receipts over to their accountant.     However, the

accounting firm with which the accountant had been associated

split apart, and as a result, records were lost.     None of the

records were reconstructed.   Mrs. Willits was able to

substantiate only certain expenses by her testimony, but for the

most part Mrs. Willits’ testimony lacked detail, and she had

difficulty with her recollection of the expenses.

     Section 162(a) allows the deduction of “ordinary and

necessary” expenses paid or incurred during the taxable year in

carrying on any trade or business.     Whether an expenditure is

ordinary and necessary is a question of fact.     See Commissioner

v. Heininger, 320 U.S. 467, 475 (1943).     An ordinary and

necessary expense is one which is appropriate and helpful to the

taxpayer’s business and which results from an activity which is a

common and accepted practice in the business.     See Boser v.

Commissioner, 77 T.C. 1124, 1132 (1981), affd. without published

opinion (9th Cir., Dec. 22, 1983).

     Deductions are a matter of legislative grace.     See INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992).     Taxpayers must

keep sufficient records to establish deduction amounts.       See sec.
                               - 13 -

6001; Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

Generally, except as otherwise provided by section 274(d), when

evidence shows that a taxpayer incurred a deductible expense, but

the exact amount cannot be determined, the Court may approximate

the amount.   See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930).   The Court, however, must have some basis upon which

an estimate can be made.   See Vanicek v. Commissioner, 85 T.C.

731, 742-743 (1985).

     A strict substantiation requirement exists under section

274(d)(3) and (4) for gifts and for certain property listed under

section 280F(d)(4), which includes passenger automobiles.

Taxpayers must substantiate by adequate records the following

items in order to claim deductions:      (1) The amount of such

expense or other item; (2) the time and place of the travel, or

use of the facility or property, or the date and description of

the gift; (3) the business purpose of the expense or other item;

and (4) the business relationship.      See sec. 274(d).

     To substantiate a deduction by adequate records, a taxpayer

must maintain an account book, diary, log, statement of expense,

trip sheets, and/or other documentary evidence which, in

combination, are sufficient to establish each element of

expenditure or use.    See sec. 1.274-5T(c)(2)(i), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).
                               - 14 -

     In respondent’s posttrial opening brief, respondent

“accepts” petitioners’ computation of a 48-percent use of the

home for the day care business and states:    “The Court should

allow [Mrs. Willits] deductions for expenses pursuant to the

Cohan rule.”

     In respondent’s posttrial reply brief, respondent states:

          Notwithstanding the foregoing, however, respondent
     would suggest that petitioners be allowed a deduction for
     expenses for the day care business (including business use
     of the home) in the total amount of $10,000. That amount
     consists of $7,385 in total expenses, plus $2,615 for
     business use of their home. Respondent bases these figures
     on the deductions claimed on [Mrs. Willits’] Schedule C
     attached to petitioners’ 1992 return.

We believe respondent has therefore conceded that petitioners are

entitled to business expense deductions of $10,000 for 1993, and

we so hold.    Furthermore, after careful consideration of the

record, we hold that petitioners have not established that they

are entitled to any deduction in excess of what respondent

generously conceded.

Accuracy-Related Penalty

     The final issue is whether petitioners are liable for the

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

intentional disregard of rules or regulations for the 1992 tax

year.   Section 6662(a) provides that, if it is applicable to any

portion of an underpayment in taxes, there shall be added to the

tax an amount equal to 20 percent of the portion of the

underpayment to which section 6662 applies.    Section 6662(b)(1)
                              - 15 -

provides that section 6662 shall apply to any underpayment

attributable to negligence or disregard of rules or regulations.

“Negligence” is defined as any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, and the term “disregard” includes any careless, reckless,

or intentional disregard.   Sec. 6662(c).   A position with respect

to an item is attributable to negligence if it lacks a reasonable

basis.   See sec. 1.6662-3(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 with respect to that portion and that the taxpayer acted

in good faith with respect to that portion.   The determination of

whether a taxpayer acted with reasonable cause and good faith

within the meaning of section 6664(c)(1) is made on a case-by-

case basis, taking into account all the pertinent facts and

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

     Generally, the duty of filing an accurate return cannot be

avoided by placing the responsibility on a tax return preparer.

See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987).

Although a taxpayer remains liable for a deficiency attributable

to a return prepared by an accountant, a taxpayer who supplies a

qualified tax return preparer with all relevant information and

who reasonably and in good faith relies on the preparer’s advice
                               - 16 -

is not negligent and has not disregarded rules or regulations,

even if the advice is incorrect and results in a deficiency.    See

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

     Petitioners’ 1992 return was prepared by an accountant.

Petitioner testified that he relied on his return preparer to

fill out petitioners’ joint return properly.   However,

petitioners did not call their accountant to testify on their

behalf, nor did petitioners demonstrate that they provided the

accountant with all relevant facts and information with respect

to the Sky Shuttle activity.   Therefore, we hold that petitioners

are liable for the accuracy-related penalty pursuant to section

6662(a).

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
