                        T.C. Memo. 2003-324



                      UNITED STATES TAX COURT



   RONALD D. WEELDREYER AND SUZANNE WEELDREYER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

                DREYER FARMS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 4676-01, 4679-01.       Filed November 25, 2003.



     Douglas Bleeker, for petitioners.

     Douglas Polsky and Charles Berlau, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   These cases have been consolidated for

trial, briefing, and opinion.   In separate notices of deficiency,

respondent determined deficiencies in petitioners’ Federal income
                                - 2 -

tax and accuracy-related penalties under section 66621 for 1995,

1996, and 1997 as follows:

Ronald & Suzanne Weeldreyer, Docket No. 4676-01:

                                            Penalty
          Year           Deficiency       Sec. 6662(a)

          1995               $2,393           --
          1996                3,011           --
          1997                4,619           --

Dreyer Farms, Inc., Docket No. 4679-01:

           Year                             Penalty
           Ended         Deficiency       Sec. 6662(a)

          11/30/95           $2,368         $473.60
          11/30/96            3,213          642.60
          11/30/97            3,264          652.80

     The issues for decision are:

     (1) Whether amounts paid by Dreyer Farms, Inc. (Dreyer Farms

or the corporation), to provide medical care, food, and lodging

to its shareholders, Ronald D. Weeldreyer (Mr. Weeldreyer) and

Suzanne Weeldreyer (Mrs. Weeldreyer) (collectively the

Weeldreyers), and their children are (a) constructive dividends,

as respondent maintains, or (b) employee medical care expenses

and/or reimbursed employee expenses that are excluded from the

Weeldreyers’ gross income and deductible by Dreyer Farms as

ordinary and necessary business expenses, as petitioners

maintain; and


     1
      All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 3 -

     (2) whether Dreyer Farms is liable for the accuracy-related

penalty under section 6662(a) for the taxable years ended

November 30, 1995, 1996, and 1997.

                          FINDINGS OF FACT

     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.

     When the petitions were filed in these cases, the residence

of the Weeldreyers, as well as the principal place of business of

Dreyer Farms, was in Bridgewater, South Dakota.

A.   The Weeldreyers

     The Weeldreyers are husband and wife; they have two sons.

Between September 1975 and April 1991, the Weeldreyers acquired

three contiguous tracts of land--two 80-acre tracts, one of which

included a house2 (the farmhouse), and a 160-acre tract.    The

three tracts are referred to collectively as the Weeldreyer farm.

     The Weeldreyers raise corn and soybeans on the Weeldreyer

farm.    Their farming activities entail the planting, cultivation,

harvesting, drying, storage, and sale of corn and soybeans.




     2
        The Weeldreyers have resided in the farmhouse since 1975.
                               - 4 -

B.   Dreyer Farms

     On April 28, 1995, Dreyer Farms was incorporated under the

laws of the State of South Dakota.3    Dreyer Farms was organized

primarily (1) to buy, distribute, sell, lease, and deal in all

kinds of farmland and real estate and (2) to carry on the

business of farming.

     On August 3, 1995, the Weeldreyers conveyed to Dreyer Farms

the Weeldreyer farm, including the farmhouse.    Dreyer Farms

thereafter assumed the mortgage on the property.    After the

conveyance, the Weeldreyers no longer individually owned any

farmland.

     The Weeldreyers have been the sole shareholders, officers,

and directors of Dreyer Farms since its incorporation.    Mr.

Weeldreyer has been president, treasurer, and a director, and

Mrs. Weeldreyer has been secretary and a director, of Dreyer

Farms.

     The first meeting of the shareholders of Dreyer Farms was

held on May 18, 1995.   At that meeting, the shareholders adopted

corporate bylaws.   Article IV, section 10, of the bylaws

provides:

          SECTION 10. Repayment of Disallowed Expenses.
     Any expense paid by the Corporation which is finally
     determined as a personal expense of any officer or


     3
      Douglas Bleeker, counsel for petitioners, prepared the
articles of incorporation, bylaws, minutes of meetings, and other
corporate documents for Dreyer Farms.
                               - 5 -

     employee and disallowed as Corporation expense shall be
     repaid by the officer or employee to the Corporation
     within Twenty-four (24) months of the final
     determination by the Internal Revenue Service with
     interest at Three (3%) below the New York Prime Rate on
     the date of final determination.

     A similar repayment obligation was set forth in a resolution

adopted by the board of directors of Dreyer Farms at the

directors’ first meeting held on May 18, 1995.   At that meeting,

the directors also adopted the following resolution:

          RESOLVED that the corporation [sic] officers and
     employees shall be required to live at the worksite of
     the corporation to ensure security for the corporation
     property and operations. The officers and employees
     shall be required to live on the worksite to supervise
     the care and feeding of the livestock of the
     corporation. The corporation shall supply said
     officers and employees all of their food and lodging
     while living at said worksite. That all officers and
     employees shall be considered on duty when at the
     worksite and therefore entitled to such benefits.

     In addition, at their first meeting, the directors adopted a

medical reimbursement plan covering all “employees and officers

executing management responsibilities” and their spouses and

dependents.   The medical reimbursement plan provides for the

payment of all medical expenses “deductible on Form 1040”,

including expenses for drugs, doctor, hospital, and eyeglasses,

to the extent not compensated by insurance or otherwise.   Under

the plan, each participant is entitled to a maximum reimbursement

of $15,000 per year.

     Dreyer Farms also paid the premiums on a health insurance

policy covering the Weeldreyers and their children.    The health
                               - 6 -

insurance policy had been in effect before Dreyer Farms was

incorporated.   Mrs. Weeldreyer was the named insured;4 Mr.

Weeldreyer and the children were insured as her dependents.

Dreyer Farms paid the insurance premiums directly to the

insurance company and paid the medical expenses directly to the

medical providers.

C.   Farm Leases

     1.   Weeldreyer Farm

     During 1996 and 1997, Dreyer Farms leased the Weeldreyer

farm to the Weeldreyers under a “share-crop” arrangement.5

Pursuant to that arrangement the gross proceeds from the sale of

all crops grown on the farm, as well as all payments received

under Federal conservation programs (or any other Federal, State,

or local governmental programs), were to be divided 40 percent to

Dreyer Farms and 60 percent to the Weeldreyers.   Dreyer Farms was

to retain title and possession of all crops grown on its land

until the 40/60 division had been made.   Dreyer Farms and Mr.

Weeldreyer agreed that on a respective 40/60 basis each would

supply the fertilizer, chemicals, and seed.   The Weeldreyers

agreed (1) to farm the land; (2) to provide all labor and other


     4
      The insurance company issued policies to the oldest person
in the household. Mrs. Weeldreyer was named the insured because
she is a few months older than Mr. Weeldreyer.
     5
      The farm leases, dated Mar. 1, 1996 and 1997, erroneously
named the Weeldreyers as the lessor and Dreyer Farms as the
lessee.
                                    - 7 -

items required in producing, harvesting, and marketing the crops;

(3) to furnish all tools, farm implements, machinery, and hired

help necessary to cultivate and manage the farm; (4) to protect

the crops from injury and waste; (5) to till the land after

harvesting the crops; and (6) to rotate the crops from year to

year.        Dreyer Farms agreed to furnish all necessary materials,

and the Weeldreyers agreed to supply all necessary labor, to

maintain all fences and other improvements on the farm.

        2.      Bleeker Enterprises, Inc. and Alfred Tammen Leases

        During 1996 and 1997, Dreyer Farms leased farmland from

Bleeker Enterprises, Inc.6 (Bleeker Enterprises), on a share-crop

basis.       Pursuant to these farm leases, Dreyer Farms received 60

percent, and Bleeker Enterprises received 40 percent, of the

crop.       Mr. Weeldreyer, as an employee of Dreyer Farms, did the

actual farming of the Bleeker Enterprises farm.        The Bleeker

Enterprises farm was located approximately 5 miles from the

Weeldreyer farm.

     In addition to leasing the Bleeker Enterprises farm, Dreyer

Farms leased farmland from Alfred Tammen (the Tammen farm) on a

cash-rent basis.7




        6
      Bleeker Enterprises, Inc., is owned by petitioners’ counsel
(Douglas Bleeker) and his family.
        7
         Mr. Tammen is Mr. Weeldreyer’s cousin.
                               - 8 -

D.   Mr. Weeldreyer’s Separate Farming Activity

     During the years at issue, Mr. Weeldreyer individually (and

not as an employee of Dreyer Farms) farmed at least three

additional properties.8   One of these farms was located across

the road from the Weeldreyer farm.     The other farms were located

2 to 5 miles away.   The grain from these other farms was stored

on the Weeldreyer farm and commingled with the grain belonging to

Dreyer Farms.

E.   Compensation and Payment of Food, Lodging, and Medical
     Expenses

     Mr. Weeldreyer was the sole employee of Dreyer Farms.9

Dreyer Farms paid Mr. Weeldreyer, as an officer/employee, $750 in

1995 and 1996 and $1,000 in 1997.

     Following the transfer of the Weeldreyer farm to Dreyer

Farms, the Weeldreyers continued to use the farmhouse as their

residence.   Dreyer Farms paid for (1) the food consumed by the

Weeldreyers and their children, (2) the utilities, property tax,

insurance, remodeling, landscaping, and repairs and maintenance

for the farmhouse, and (3) the telephone used by the Weeldreyers.

In addition, Dreyer Farms paid for all the medical care expenses

of the Weeldreyers and their children.



     8
      In addition, in 1995, Mr. Weeldreyer did custom hire work
for which he received $1,175.
     9
      Although the Weeldreyers’ two sons were not employees of
Dreyer Farms, they helped with the farming chores.
                               - 9 -

     Dreyer Farms did not pay dividends for fiscal years ended

November 30, 1995, 1996, and 1997.

F.   Income Tax Returns

     Mr. Bleeker (petitioners’ counsel) prepared the Weeldreyers’

joint Forms 1040, U.S. Individual Income Tax Return, and Dreyer

Farms’ Forms 1120, U.S. Corporation Income Tax Return, for the

years at issue.

     1.    Dreyer Farms

     Dreyer Farms filed timely its Forms 1120 for the taxable

years ended November 30, 1995, 1996, and 1997.    On these returns

Dreyer Farms reported total income and total deductions as

follows:

                          11/30/95      11/30/96         11/30/97

     Total income         $32,327       $56,694         $61,823
     Total deductions      23,651        51,368          44,841
       Taxable income       8,676         5,326          16,982

     Included in the total expenses deducted by Dreyer Farms were

the following items for food, lodging, and medical expenses

provided to the Weeldreyers:
                                - 10 -

                                   11/30/95   11/30/96    11/30/97
  Food & Lodging
    Property tax--house             $1,283     $1,567      $1,401
    Property insurance--house          540      1,042       1,289
    Food for employees               4,406      7,179       7,712
    Utilities--house                 1,694      2,362       2,235
    Depreciation--house              2,357      3,219       3,326
    Landscaping                        256        216         --
    Remodeling costs                 1,729        --          --
    Repairs and maintenance            --          82         --
    Telephone                          –-         –-          338
     Food & lodging expenses        12,265     15,667      16,301
  Medical
    Health insurance                 3,007      3,331       3,058
    Medical expenses                   509        --          --
    Medical doctor                     --         876       2,378
    Dental                             --       1,544         --
    Prescriptions                      –-         –-           20
     Medical costs                   3,516      5,751       5,456

     2.   The Weeldreyers

     The Weeldreyers timely filed their joint income tax returns

for 1995, 1996, and 1997.   On these returns, the Weeldreyers

reported Mr. Weeldreyer’s wages from Dreyer Farms.       They reported

farming income (including their 60-percent share of the

Weeldreyer farm crop) as self-employment income.    They did not

report any income attributable to their food, lodging-related,

and medical expenses paid by Dreyer Farms.    On Schedules F,

Profit or Loss from Farming, the Weeldreyers reported gross

income, total expenses, and net profit from their separate

farming activities for 1995, 1996, and 1997 as follows:
                              - 11 -

                                1995        1996        1997
          Gross income        $102,251    $138,137    $161,651
          Total expenses        82,533     114,258     120,196
            Net profit          19,718      23,879      41,455

G.   Notices of Deficiency

     On January 8, 2001, respondent timely mailed to the

Weeldreyers a statutory notice of deficiency for 1995, 1996, and

1997 (the Weeldreyer notice of deficiency).   Also on January 8,

2001, respondent timely mailed to Dreyer Farms a statutory notice

of deficiency for its fiscal years ended November 30, 1995, 1996,

and 1997 (the Dreyer Farms notice of deficiency).

     In the Dreyer Farms notice of deficiency, respondent

disallowed the food, lodging, and medical expenses deducted by

Dreyer Farms, totaling $15,781 for 1995, $21,418 for 1996, and

$21,757 for 1997.   Respondent determined that (1) Dreyer Farms

failed to establish that the food and lodging expenses were

ordinary and necessary business expenses under section 162 and

(2) those items are the Weeldreyers’ personal expenses.

Respondent further determined that Dreyer Farms was liable for

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

     In the Weeldreyer notice of deficiency, respondent

determined that payments by Dreyer Farms of the Weeldreyers’

food, lodging, and medical expenses resulted in constructive

dividends as follows:
                              - 12 -

                               11/30/95   11/30/96   11/30/97

     Food & lodging1           $12,433    $19,919    $19,573
     Medical                     3,516      5,751      5,456
      Total dividends           15,949     25,670     25,029
           1
           The record does not explain why the amounts of
     dividends for food and lodging expenses included in the
     Weeldreyers’ income exceed the amounts disallowed as
     deductions to Dreyer Farms.

                              OPINION

Issue 1.   Expenses Incurred by Dreyer Farms To Provide Medical
           Benefits, Food, and Housing to the Weeldreyers in 1995,
           1996, and 1997

A.   Positions of the Parties10

     Respondent disallowed deductions taken by Dreyer Farms for

medical costs (health insurance premiums and other medical care

expenses), food, lodging (including property insurance, property

taxes, remodeling, landscaping, maintenance and repair,

telephone, and utilities for the farmhouse), and depreciation of

the farmhouse.   Respondent asserts that the medical costs, food,


     10
      Under certain circumstances, sec. 7491 places the burden
of proof or production on the Commissioner. Sec. 7491 applies to
court proceedings arising in connection with tax examinations
beginning after July 22, 1998. Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(a), 112 Stat. 726. Petitioners timely filed their returns
for the years at issue. Hence, all of the returns were filed on
or before Apr. 15, 1998. The record does not disclose when the
examination of petitioners’ tax returns began, and it is possible
that the examination began before July 23, 1998. Petitioners do
not contend that sec. 7491 applies in these cases, and they have
not otherwise asserted that respondent has the burden of proof or
production with respect to any issue presented in these cases.
We therefore conclude that sec. 7491 does not apply, and
petitioners have the burden of proof and production.
                              - 13 -

and lodging expenses are the Weeldreyers’ personal, family, and

living expenses and that payments of these expenses by Dreyer

Farms constitute constructive dividends to the Weeldreyers.    On

the other hand, petitioners assert that all the expenditures are

reasonable and necessary business expenses, deductible by Dreyer

Farms and excluded from the Weeldreyers’ income.

     Petitioners contend that the medical costs are employee

benefits, deductible by the employer and excludable from the

employee’s income under sections 105 and/or 106.   Petitioners

further maintain that Dreyer Farms provided food and lodging to

Mr. Weeldreyer in his capacity as an employee and that such was

done for the convenience of Dreyer Farms.   Consequently,

petitioners assert that the food and lodging expenses are

employer-provided “meals and lodging”, the costs for which are

excluded from the Weeldreyers’ income under section 119 and

deductible by Dreyer Farms.   Petitioners further assert that, as

owner and lessor of the farmhouse, Dreyer Farms is entitled to

deduct (1) the expenditures for insurance, remodeling,

landscaping, and repairs and maintenance as reasonable and

necessary business expenses under section 162, (2) the property

taxes under either section 162 or 164, and (3) the depreciation

of the farmhouse under section 167.    Petitioners posit that these

latter expenses are not the Weeldreyers’ personal expenses

because they are not the owners of the property.
                              - 14 -

B.   Medical Expenses

     We first shall decide whether the payments by Dreyer Farms

of the medical expenses are excludable from the Weeldreyers’

gross income under sections 105 and 106 and deductible by the

corporation as ordinary and necessary business expenses under

section 162(a).

     Under section 106, “an employee’s gross income does not

include employer-provided coverage (e.g., accident and health

insurance premiums) under an accident and health plan.”    Rugby

Prods. Ltd. v. Commissioner, 100 T.C. 531, 535 (1993).    The

employer may provide coverage under an accident or health plan by

paying the premium (or a portion of the premium) on an accident

or health insurance policy covering one or more employees or by

contributing to a separate trust or fund.   Sec. 1.106-1, Income

Tax Regs.

     Under the general rule of section 105(a), amounts received

by an employee through accident and health insurance for personal

injury or sickness, to the extent attributable to nontaxed

employer contributions, are includable in the employee’s gross

income.   Amounts received under an accident or health plan for

employees are treated as amounts received through accident or

health insurance.   Sec. 105(e).   An exception to the general rule

allows an employee to exclude from gross income amounts received

to reimburse the employee for expenses incurred by the employee
                              - 15 -

for the medical care (as defined in section 213(d)11) of the

employee and the employee’s spouse and dependents.    Sec. 105(b).

     For the reasons set forth below, we agree with petitioners

that pursuant to sections 105 and/or 106 payments by Dreyer Farms

for medical expense reimbursements and health insurance premiums

need not be included in the Weeldreyers’ gross income for 1995,

1996, and 1997.

     Section 105(e) requires first, that the benefits be received

under a “plan,” and second, that the plan be “for employees”,

rather than for some other class of persons such as shareholders

and their relatives.   Larkin v. Commissioner, 48 T.C. 629, 635

(1967), affd. 394 F.2d 494 (1st Cir. 1968).    After giving due

consideration to the record before us, we conclude that Dreyer

Farms’ medical plan (payment of health insurance premiums and

medical expense reimbursements) satisfies both the “plan” and

“for employees” requirements of section 105(e).

     Section 1.105-5(a), Income Tax Regs., provides guidelines as

to what constitutes an accident or health plan.    A plan may cover

one or more employees, and different plans may be established for

different employees or classes of employees.    Id.   The

regulations do not require that there be a written plan or that

there be enforceable employee rights under the plan, so long as



     11
      Sec. 213(d)(1)(D) includes amounts paid for medical
insurance in the definition of medical care.
                              - 16 -

the participant has notice or knowledge of the plan.       Wigutow v.

Commissioner, T.C. Memo. 1983-620.

     In the instant cases, a plan (as defined in section

1.105-5(a), Income Tax Regs.) existed.    Dreyer Farms adopted a

written medical reimbursement plan identifying who was eligible

to participate, what expenses would be reimbursed, and how

participants were to make claims for reimbursement.       The plan was

adopted at the first meeting of the board of directors.

     Mr. Weeldreyer had knowledge of the medical reimbursement

plan as well as the health insurance policy.    Moreover, there is

no doubt that the medical reimbursements provided under the

written plan were intended to complement benefits provided by

health insurance.   Thus, the corporation’s medical plan included

health insurance as well as the medical reimbursements.      And

finally, we are satisfied that the corporation’s medical plan was

for Mr. Weeldreyer’s benefit as an employee of Dreyer Farms, and

not for his benefit as one of the corporation’s shareholders.

     Plans limited to employees who are also shareholders are not

per se disqualified under section 105(b).     Larkin v.

Commissioner, supra at 635 n.5.    In this regard, we have

sustained plans for corporate officers who were also shareholders

because those officers had central management roles in conducting

the business of the corporation.     Wigutow v. Commissioner, supra;

Epstein v. Commissioner, T.C. Memo. 1972-53; Seidel v.
                              - 17 -

Commissioner, T.C. Memo. 1971-238; Smith v. Commissioner, T.C.

Memo. 1970-243; Bogene, Inc. v. Commissioner, T.C. Memo.

1968-147.

     Respondent has stipulated that during the years at issue Mr.

Weeldreyer was an employee of Dreyer Farms.   Indeed, Mr.

Weeldreyer was the corporation’s only employee.   And without Mr.

Weeldreyer’s involvement, Dreyer Farms could not have conducted

its farming operations.

     Mr. Weeldreyer’s compensation for services rendered to

Dreyer Farms was his salary and employee benefits.   Respondent

does not contend that Mr. Weeldreyer received excessive

compensation.   Indeed, respondent contends that Mr. Weeldreyer

was undercompensated for his services.

     Although Mrs. Weeldreyer did not work for Dreyer Farms,

payment of her medical expenses was based on her status as Mr.

Weeldreyer’s spouse.   Likewise, payment of the medical expenses

for the Weeldreyers’ children was based on their status as Mr.

Weeldreyer’s dependents.   The derivative participation of Mr.

Weeldreyer’s spouse and dependents is plainly contemplated both

by the medical plan and by section 105(b).

     On the basis of the record before us, we conclude that

medical payments made for the benefit of the Weeldreyers and

their children were made under a plan for employees and not for

shareholders.   Accordingly, during the years at issue, the
                                - 18 -

medical payments made by Dreyer Farms pursuant to its medical

plan (the insurance premiums and other medical care expenditures)

are excludable from the Weeldreyers’ gross income under section

105(b).

     Section 162(a) permits a taxpayer to deduct all ordinary and

necessary expenses incurred during the taxable year in carrying

on the taxpayer’s trade or business.     An expense is ordinary if

it is customary or usual within a particular trade, business, or

industry or relates to a transaction “of common or frequent

occurrence in the type of business involved.”     Deputy v. du Pont,

308 U.S. 488, 495 (1940).   An expense is necessary if it is

appropriate and helpful for the development of the business.     See

Commissioner v. Heininger, 320 U.S. 467, 471 (1943).

     When payments for medical care are properly excludable from

an employee’s income because they are made under a “plan for

employees”, they are deductible by the employer as ordinary and

necessary business expenses under section 162(a).    Sec.

1.162-10(a), Income Tax Regs.    Consequently, Dreyer Farms is

entitled to deduct the insurance premiums and medical

reimbursement payments under section 162(a).
                              - 19 -

C.   Food, Property Insurance, Property Taxes, Remodeling,
     Landscaping, Maintenance and Repair, Utilities, Telephone,
     and Depreciation

     1.   Section 119:   Employer-Provided Meals and Lodging

     We next decide whether the food and lodging expenses are

employer-provided meals and lodging expenses, excludable from the

Weeldreyers’ income under section 119 and deductible by Dreyer

Farms under section 162.

     Meals and lodging furnished to an employee by his employer

are excluded from the employee’s gross income under section 119

if the meals and lodging are provided for the convenience of the

employer on the premises of the employer.   In the case of

lodging, the employee must be required to accept the lodging on

the business premises of his employer as a condition of

employment.

     Meals and lodging are furnished for the “convenience of the

employer” if there is a direct nexus between the meals and

lodging furnished and the asserted business interests of the

employer served thereby.   McDonald v. Commissioner, 66 T.C. 223,

230 (1976).   Petitioners assert that Mr. Weeldreyer, as the

corporation’s sole employee, was required to be available for

duty 24 hours a day.

     Dreyer Farms leased the Weeldreyer farm to the Weeldreyers.

Dreyer Farms contracted with Mr. Weeldreyer as a tenant, not as

its employee, to perform all necessary work.
                              - 20 -

     It is well settled that “Ordinarily, taxpayers are bound by

the form of the transaction they have chosen; taxpayers may not

in hindsight recast the transaction as one that they might have

made in order to obtain tax advantages.”   Framatome Connectors

USA Inc. v. Commissioner, 118 T.C. 32, 70 (2002) (citing Estate

of Leavitt v. Commissioner, 875 F.2d 420, 423 (4th Cir. 1989),

affg. 90 T.C. 206 (1988), and Grojean v. Commissioner, 248 F.3d

572, 576 (7th Cir. 2001), affg. T.C. Memo. 1999-425).    Here,

inasmuch as Mr. Weeldreyer farmed the Weeldreyer farm as a

tenant, and not as an employee of Dreyer Farms, the food and

lodging in question were not furnished to Mr. Weeldreyer as a

corporate employee for the convenience of his employer.    Thus,

the food and lodging expenses at issue are not section 119(a)

meals and lodging expenses.

     2.   Deductibility of Expenses Related to the Leasing of the
          Weeldreyer Farm

     During the years at issue, Dreyer Farms’ business activities

included leasing the Weeldreyer farm.   It leased the farm,

including the farmhouse, to the Weeldreyers and received rent in

the form of 40 percent of the crops grown on the farm.

Therefore, we look to the terms of the farm leases to determine

whether expenses for maintenance and repair, remodeling,

landscaping, insurance, telephone, utilities, depreciation, and

taxes are the expenses of Dreyer Farms or the Weeldreyers.
                                - 21 -

           a.     Maintenance and Repair, Remodeling, and
                  Landscaping

     Necessary expenses incurred to maintain property used in a

trade or business in efficient operating condition ordinarily are

deductible.     Sec. 162(a); Jacks v. Commissioner, T.C. Memo.

1988-237; Gilles Frozen Custard, Inc. v. Commissioner, T.C. Memo.

1970-73.   Likewise, the cost of repairs “which neither materially

add to the value of the property nor appreciably prolong its

life, but keep it in an ordinarily efficient operating condition,

may be deducted as an expense”.    Sec. 1.162-4, Income Tax Regs.

Also, under appropriate circumstances, landscaping expenses may

be deductible when the expenses legitimately are connected with

the taxpayer’s trade or business and the requirements for

deductibility otherwise are met.     Hefti v. Commissioner, T.C.

Memo. 1988-22, affd. 894 F.2d 1340 (8th Cir. 1989); Rhoads v.

Commissioner, T.C. Memo. 1987-335.

     Dreyer Farms deducted repair and maintenance expenses of

$82 in 1996, remodeling expenses of $1,729 in 1995, and

landscaping expenses of $256 in 1995 and $216 in 1996.

Petitioners have not described or explained the maintenance and

repair, the landscaping, or the remodeling.    Dreyer Farms treated

the remodeling as a repair (by deducting the cost rather than

capitalizing it), and we shall do likewise.

     The farmhouse is an improvement on the leased property.

Under the terms of the farm leases, Dreyer Farms agreed to
                              - 22 -

furnish all necessary materials to maintain all improvements on

the property, and the Weeldreyers agreed to supply all necessary

labor.

     Petitioners have offered no evidence to show that the

expenditures for maintenance and repair, the landscaping, or the

remodeling were costs for materials (Dreyer Farms’ obligation),

as opposed to costs for labor (the Weeldreyers’ obligation).

Although that portion of these expenditures allocable to

materials would be the corporation’s obligation (and would be

deductible by it under section 162(a)), from the record before us

we are unable to reasonably apportion the expenditures between

the costs of labor and materials.    While it is within the purview

of this Court to estimate the amount of allowable deductions

where there is evidence that deductible expenses were incurred,

Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we must have

some basis upon which to make the estimate, Williams v. United

States, 245 F.2d 559 (5th Cir. 1957).    Because we have no such

evidence, we hold that the deductions taken for repair and

maintenance, remodeling, and landscaping are not allowable.

           b.   Property Insurance

     Dreyer Farms deducted $540 in 1995, $1,042 in 1996, and

$1,289 in 1997 for property insurance.    “Certain business-related

insurance expenses unquestionably are deductible under section

162(a).”   Metrocorp, Inc. v. Commissioner, 116 T.C. 211, 245
                               - 23 -

(2001) (citing section 1.162-1(a), Income Tax Regs.).    The farm

leases do not require the Weeldreyers to provide property

insurance covering the farmhouse or other improvements on the

property.    The property insurance is an ordinary and necessary

business expense of Dreyer Farms (the owner of the property) and

not a personal, family, or living expense of the Weeldreyers.      We

hold, therefore, Dreyer Farms is entitled to deduct the insurance

expenses as claimed in each of the years at issue.

            c.   Utilities and Telephone

     Dreyer Farms deducted utilities expenses of $1,694 in 1995,

$2,362 in 1996, and $2,235 in 1997 and telephone expenses of $338

in 1997.    Utilities and telephone expenses may be deductible

under section 162(a) if the expenses incurred are ordinary and

necessary in carrying on a trade or business.    Vanicek v.

Commissioner, 85 T.C. 731, 742 (1985); Sengpiehl v. Commissioner,

T.C. Memo. 1998-23; Green v. Commissioner, T.C. Memo. 1989-599.

     Here, the farm leases did not contain any provisions

regarding the utilities or telephone for the farmhouse.

Petitioners did not produce any utility or telephone bills,

canceled checks, or testimony to identify that, if any, portion

of the utility and telephone expenses related to the

corporation’s business.    We have no basis for making any

allocation of the expenses.    Thus, petitioners have failed to
                                 - 24 -

establish that Dreyer Farms is entitled to any deduction for

utilities or telephone expenses.

           d.    Depreciation

     Dreyer Farms deducted $2,357 in 1995, $3,219 in 1996, and

$3,326 in 1997 for depreciation of the farmhouse.      Section 167(a)

allows a depreciation deduction from gross income for property

used in the taxpayer’s trade or business or held for the

production of income.      Ordinarily, depreciation or amortization

is available to an owner of an asset with respect to the owner’s

basis in the asset.      Dreyer Farms owned the Weeldreyer farm,

including the farmhouse.      One of the business activities of

Dreyer Farms was the leasing of the Weeldreyer farm, including

the farmhouse.   Thus, the farmhouse is property used in the

corporation’s trade or business.

     We hold that Dreyer Farms is entitled to a deduction for

depreciation of the farmhouse for each of the years at issue as

claimed.

           e.    Taxes

     Dreyer Farms deducted property taxes of $1,283 in 1995,

$1,567 in 1996, and $1,401 in 1997 attributable to the farmhouse.

Dreyer Farms owned the Weeldreyer farm.      Section 164(a)(1) allows

the owner of property a deduction for real property taxes.        We

hold, therefore, that Dreyer Farms may deduct property taxes as

claimed in the years at issue.
                               - 25 -

            f.   Summary of Food and Lodging Expenses

     To summarize, Dreyer Farms may deduct the following expenses

for the years at issue:

                                 11/30/95      11/30/96   11/30/97

  Property tax--house             $1,283        $1,567     $1,401
  Property insurance--house          540         1,042      1,289
  Depreciation--house              2,357         3,219      3,326
    Total                          4,180         5,828      6,016

     Dreyer Farms may not deduct the following food and lodging

expenses:

                                 11/30/95      11/30/96   11/30/97

  Food for employees              $4,406        $7,179     $7,712
  Utilities--house                 1,694         2,362      2,235
  Landscaping                        256           216        --
  Remodeling costs                 1,729           --         --
  Repairs and maintenance            --             82        --
  Telephone                          –-            –-         338
    Total                          8,085         9,839     10,285

     3.     Inclusion of Payments in the Weeldreyers’ Gross Income

     When a corporation makes an expenditure that primarily

benefits the corporation’s shareholders, the amount of the

expenditure may be taxed to the shareholders as a constructive

dividend.    Hood v. Commissioner, 115 T.C. 172 (2000); Magnon v.

Commissioner, 73 T.C. 980, 993-994 (1980); Am. Insulation Corp.

v. Commissioner, T.C. Memo. 1985-436.      We have found that

expenses for food, repair and maintenance, remodeling,

landscaping, utilities, and telephone paid by Dreyer Farms are

the Weeldreyers’ expenses.    Petitioners contend that the payments
                              - 26 -

are not constructive dividends because Mr. Weeldreyer was

required to repay any amounts that Dreyer Farms could not deduct

for Federal income tax purposes.    Petitioners cite Cepeda v.

Commissioner, T.C. Memo. 1993-477, to support their position.

Cepeda, however, is inapposite.    In that case, the taxpayers

claimed that advances made by the corporation were loans rather

than employee compensation or constructive dividends.

Petitioners do not contend that the corporate payments of Mr.

Weeldreyer’s expenses were loans.

     For Federal income tax purposes, a transaction will be

characterized as a loan if there was “an unconditional obligation

on the part of the transferee to repay the money, and an

unconditional intention on the part of the transferor to secure

repayment.”   Haag v. Commissioner, 88 T.C. 604, 616 (1987), affd.

without published opinion 855 F.2d 855 (8th Cir. 1988).     In the

instant cases, when the payments were made there was no

unconditional obligation on the part of Mr. Weeldreyer to repay a

specific dollar amount to the corporation.    His obligation to

repay any of the payments was in general terms.    The amount of

repayment could not be determined when the payments were made.

Any obligation to repay any amount could not arise before

respondent disallowed the deduction for the expenses; i.e, when

the Dreyer Farms notice of deficiency was issued in January 2001.

Thus, the payments were not loans.     Since the payments when made
                              - 27 -

by Dreyer Farms did not constitute business expenses of the

corporation or loans to the Weeldreyers, the conclusion is

inescapable that the payments constituted distributions by Dreyer

Farms to the Weeldreyers.

     In N. Am. Oil Consol. v. Burnett, 286 U.S. 417, 424 (1932),

the Supreme Court stated:

     If a taxpayer receives earnings under a claim of right
     and without restriction as to its disposition, he has
     received income which he is required to return, even
     though it may still be claimed that he is not entitled
     to retain the money, and even though he may still be
     adjudged liable to restore its equivalent. * * *

It is clear, therefore, under the claim of right doctrine, the

amounts paid by Dreyer Farms in 1995, 1996, and 1997 were taxable

to the Weeldreyers in those years.     See Pahl v. Commissioner, 67

T.C. 286, 289 (1976).

     If a taxpayer is required to repay income recognized under

the claim of right doctrine in an earlier tax year, section 1341

permits the taxpayer, in effect, to elect to compute his taxes

for the year of repayment in a manner that gives the taxpayer the

equivalent of a refund (without interest) of tax for the earlier

year.   Specifically, section 1341(a)(5) permits the tax for the

year of repayment to be reduced by the amount of the tax paid for

the year of receipt that was attributable to the inclusion of the

repaid amount in that year’s gross income.     United States v.

Skelly Oil Co., 394 U.S. 678, 682 (1969).    Section 1341, however,

requires actual repayment, restoration, or restitution.     Chernin
                               - 28 -

v. United States, 149 F.3d 805, 816 (8th Cir. 1998); Kappel v.

United States, 437 F.2d 1222, 1226 (3d Cir. 1971); Estate of

Smith v. Commissioner, 110 T.C. 12 (1998).

     Although the bylaws of Dreyer Farms require Mr. Weeldreyer

to repay amounts for which the corporation is disallowed a

deduction, Mr. Weeldreyer does not claim that he has repaid the

disallowed amounts.    Indeed, there is no evidence in the record

to show that he did.   Therefore, section 1341 does not apply.   We

hold that Dreyer Farms’ payment of the Weeldreyers’ food, repair

and maintenance, remodeling, landscaping, utilities, and

telephone expenses constitutes income to the Weeldreyers.

     Petitioners argue that the expenses are meals and lodging

expenses excludable under section 119.   We have found to the

contrary.

     Further, although the repair and maintenance, remodeling,

and landscaping expenses were incurred by the Weeldreyers as

tenants under the farm lease, those expenses relate to the use of

the farmhouse, not to the raising of the crops.   Thus, those

expenses, as well as the food, utilities, and telephone expenses,

are the Weeldreyers’ personal living expenses.

     Personal, family, or living expenses are not deductible

except as otherwise expressly permitted.   Sec. 262.   A taxpayer’s

expenses for his or her own meals and lodging are personal

because they would have been incurred whether or not the taxpayer
                                - 29 -

had engaged in any business activity.       Christey v. United States,

841 F.2d 809, 814 (8th Cir. 1988); Moss v. Commissioner, 80 T.C.

1073, 1078 (1983), affd. 758 F.2d 211 (7th Cir. 1985).        In order

for personal living expenses to qualify as a deductible business

expense under section 162(a), the taxpayer must demonstrate that

the expenses were different from, or in excess of, what he would

have spent for personal purposes.       Sutter v. Commissioner, 21

T.C. 170, 173 (1953).    Petitioners did not produce any bills,

canceled checks, or testimony to substantiate any portion of the

expenses that relates to Mr. Weeldreyer’s separate farming

business.    Thus, petitioners have failed to establish that the

Weeldreyers are entitled to a deduction for any portion of the

expenses under section 162.12

     4.     Rental Value of Residence

     The Weeldreyers leased the Weeldreyer farm, including the

farmhouse, from Dreyer Farms.    Dreyer Farms received rent in the

form of 40 percent of the crops grown on the farm.      The



     12
      Except as otherwise provided, an individual is not allowed
a deduction with respect to the use of a dwelling unit that is
used by the individual as a residence. Sec. 280A(a). The
individual may, however, deduct expenses allocable to portions of
the dwelling that are exclusively used for business purposes.
Sec. 280A(c). The Weeldreyers did not argue that their housing
expenses are deductible under sec. 280A. Therefore, we do not
address the question of whether certain portions of their housing
expenses may be deductible under that section. We note, however,
that the Weeldreyers have made no showing that the farmhouse, or
any portion thereof, was used exclusively for business purposes.
                                  - 30 -

Weeldreyers included only their 60 percent of the crop revenues

in their income.    They excluded the entire 40 percent paid to

Dreyer Farms as rent, including the portion attributable to the

farmhouse.    In effect, they deducted the portion of the rent paid

for the farmhouse.    The rent of the farmhouse is their personal

expense and is not deductible.          See sec. 262.

     The farm leases do not specify that portion of the rent to

be paid for use of the farmhouse.          Nor have the Weeldreyers

provided any evidence to show that portion of the rent properly

attributable to the farmhouse.

     The amount of the constructive dividends respondent

determined in the Weeldreyer notice of deficiency exceeds the

amount of deductions disallowed in the Dreyer Farms notice of

deficiency.   The record does not explain that excess.              Moreover,

since the depreciation respondent disallowed as a deduction to

Dreyer Farms was not an expenditure, we assume that adjustments

in the Weeldreyer notice of deficiency did not include the

depreciation.

     We have computed the fair rental value of the farmhouse that

was included in respondent’s adjustment to the Weeldreyers’

income as follows:

                                               11/30/95   11/30/96    11/30/97
Dreyer Farms notice of deficiency
 Disallowed food & lodging deductions          $12,265    $15,667     $16,301
 Less depreciation on residence                  2,357      3,219       3,326
 Food & lodging expenditures                     9,908     12,448      12,975
                                  - 31 -

                                               11/30/95    11/30/96     11/30/97
Weeldreyer notice of deficiency adjustment
 for food & lodging provided by Dreyer Farms   $12,433     $19,919      $19,573
Food & lodging expenditures                      9,908      12,448       12,975
Adjustment for rental value of residence         2,525       7,471        6,598

     The Weeldreyers have not shown that the portion of the rent

attributable to the farmhouse is less than the amounts for the

years at issue, as computed above.         We therefore hold that those

amounts are properly included in the Weeldreyers’ income for the

years at issue.

     5.    Summary of Adjustments to Weeldreyers’ Income

     The Weeldreyers’ income from farming is increased by $2,525

in 1995, $7,471 in 1996, and $6,598 in 1997 to reflect the

disallowance of deductions for the rental value of the farmhouse.

In addition, the following personal expenses paid by Dreyer Farms

are included in the Weeldreyers’ income as constructive dividends

for the years at issue:

                                       1995              1996         1997

  Food                               $4,406          $7,179           $7,712
  Utilities                           1,694           2,362            2,235
  Landscaping                           256             216              --
  Remodeling costs                    1,729             --               --
  Repairs and maintenance               --               82              --
  Telephone                             –-              –-               338
    Total                             8,085           9,839           10,285

Issue 2.   Accuracy-Related Penalty Under Section 6662(a)

     Respondent determined that Dreyer Farms is liable for the

accuracy-related penalty under section 6662(a).             As pertinent

here, section 6662(a) imposes a 20-percent penalty on the portion
                              - 32 -

of an underpayment attributable to negligence or disregard of

rules or regulations.   Sec. 6662(b)(1).   Negligence includes any

failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.   Sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.

     The penalty under section 6662(a) does not apply to any

portion of an understatement of tax 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.     Sec.

6664(c)(1).   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/her proper tax liability for the year.    Id.   The good faith

reliance on the advice of an independent, competent professional

as to the tax treatment of an item may meet this requirement.

Sec. 1.6664-4(b), Income Tax Regs.

     Despite the fact that petitioners have the burden of proof,

see supra note 10, petitioners have made no showing that they

made an attempt to comply with the tax rules and regulations with

regard to those deductions taken by Dreyer Farms for the years at

issue which have been disallowed.    Hence, with respect to those

deductions, petitioners have failed to show that Dreyer Farms was
                               - 33 -

not negligent.    Nor have petitioners showed that they acted in

good faith with respect to, or that there was reasonable cause

for, the position they took.

     Further, petitioners do not claim that they relied on Mr.

Bleeker or any other professional as to the tax treatment of the

expenses for food and lodging.13   Petitioners simply assert that

the accuracy-related penalty does not apply because Dreyer Farms

properly claimed the deductions under section 162(a) and the

Weeldreyers properly excluded the payments under section 119.      We

have found to the contrary.

     Under these circumstances, we are compelled to hold that

Dreyer Farms is liable for the accuracy-related penalty for the

years at issue.

     To reflect the foregoing,

                                               Decisions will be

                                          entered under Rule 155.




     13
      Before the trial in these cases, respondent filed a motion
to disqualify Mr. Bleeker from his representation of petitioners.
Respondent’s motion was based, in part, on the premise that, if
petitioners contend that they reasonably relied on Mr. Bleeker’s
advice with respect to the proper tax treatment of the payments
at issue, then Mr. Bleeker would be required to testify as a
witness in the trial of these cases. The Court held a telephone
conference call with Mr. Bleeker and counsel for respondent to
discuss respondent’s motion. During that call, Mr. Bleeker
informed the Court that petitioners did not intend to raise
reasonable reliance on a tax professional as a defense to the
accuracy-related penalties.
