                        T.C. Memo. 1997-223



                      UNITED STATES TAX COURT



        SCOTT C. AND PATRICIA A. SIMPSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23537-95.                       Filed May 12, 1997.



     Scott C. and Patricia A. Simpson, pro sese.

     Bryan E. Sladek, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notice dated August 17, 1995, respondent

determined deficiencies in petitioners' Federal income taxes and

an accuracy-related penalty as follows:

                                                       Penalty
          Year              Deficiency              Sec. 6662(a)

          1992              $11,255                     $108
                                 - 2 -

             1993            16,342                         --

Unless otherwise indicated, 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.

     After concessions by petitioners, the issues for decision

are as follows:

     1.    Whether petitioners, pursuant to section 162(a), are

entitled to deduct certain expenses as ordinary and necessary

business expenses.     We hold that petitioners are not so entitled.

     2.    Whether petitioners, pursuant to section 6662(a), are

liable for an accuracy-related penalty.       We hold that petitioners

are liable.

                           FINDINGS OF FACT

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

the time the petition was filed, petitioners resided in Antioch,

California.

     During the years in issue, petitioners operated a day-care

service in their home.     In addition to their own children,

petitioners cared for one child in 1992 and four children in

1993.     During 1993, petitioners also operated from their home

Simpson & Associates, a business that marketed Amway Corp.

products, and Equity Investments, a business that sold mortgage

reduction plans.     During the years in issue, Scott Simpson was
                               - 3 -

also employed as a technical specialist for American Stores, a

chain of grocery stores.

     Petitioners filed their 1992 and 1993 Federal income tax

returns in a timely manner.   On the returns, petitioners attached

Schedule C (Profit or Loss From Business) and reported on those

schedules gross income of $321 for 1992 and $7,348 for 1993.

Petitioners also reported, on those schedules, expenses relating

to advertising, car and truck expenses, insurance, interest,

legal and professional services, office expenses, rent or lease

payments, repairs and maintenance, supplies, taxes and licenses,

travel, meals and entertainment, and utilities.    These expenses

totaled $42,600 for 1992 and $63,733 for 1993.

     Petitioners deducted supply expenses of $10,994 for 1992 and

$16,697 for 1993.   These expenses included:   $2,159.90 for a

wide-screen television and an extended warranty; $1,975 for a

satellite television system; $344.68 for a television sound

system; $658 for a video cassette recorder (VCR) and an extended

warranty; $848.95 for a cross-country ski machine; over $7,000

for groceries; and numerous payments to wineries.

     Petitioners deducted legal and professional service expenses

of $5,018 for 1992 and $9,048 for 1993.   These expenses included

the cost of several home improvements (e.g., landscaping, a deck,

and a fence around a swimming pool) and the cost of items

relating to the satellite television system, a water purifier,

and pest control.
                               - 4 -

     Petitioners deducted car and truck expenses of $8,127 for

1992 and $3,836 for 1993.   These expenses related to mileage,

insurance, and repairs for three vehicles.    With respect to one

of the vehicles, petitioners also deducted lease payments of

$4,088 for 1992 and $4,088 1993.

     Petitioners deducted meal and entertainment expenses of

$6,474 for 1992 and $14,130 for 1993.    These expenses included

the cost of personal meals and trips (e.g., a trip to the

amusement park Pixieland), as well as $2,000 for video rentals.

     Petitioners deducted repair and maintenance expenses of

$1,079 for 1992 and $56 for 1993.   These expenses related to

television repairs, VCR repairs, pool chemicals, lawnmower parts,

and the cost of building a stairwell gate.

     Petitioners deducted utility expenses of $4,038 for 1992 and

$4,328 for 1993.   These expenses related to cable television,

gas, electricity, telephone service, garbage removal, and water.

     Respondent disallowed all of the deductions relating to

legal and professional, rent or lease, supply, and meal and

entertainment expenses.   Respondent also disallowed the 1992

deductions for car and truck, repair and maintenance, and utility

expenses, as well as the 1993 deductions for interest and travel

expenses.   The deductions disallowed by respondent totaled

$39,818 for 1992 and $52,656 for 1993.    Respondent determined

that petitioners were liable for deficiencies of $11,255 for 1992

and $16,342 for 1993.   Respondent also determined that for 1993
                                 - 5 -

petitioners were liable, pursuant to section 6662(a), for an

accuracy-related penalty of $108.




                              OPINION

I.   Trade or Business Expense Deductions

      Section 162(a) permits the deduction of expenses paid or

incurred during the taxable year in carrying on a trade or

business.   To be deductible, the expenditure must be an ordinary

and necessary expenditure of the business.    Sec. 162(a); Welch v.

Helvering, 290 U.S. 111, 113 (1933).     An expense is ordinary if

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

industry.   Deputy v. Du Pont, 308 U.S. 488, 495 (1940).    An

expense is necessary if it is appropriate and helpful for the

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

Section 262 disallows deductions for personal, living, or family

expenses.   Petitioners bear the burden of proving their

entitlement to the deductions.    Rule 142(a); New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934).

      During the years in issue, petitioners' day-care service

generated $7,669 in revenue while incurring $106,333 in expenses.

On the whole, it is readily apparent that petitioners have used

their day-care service as a means to deduct virtually all of

their personal expenses.   For example, petitioners in 1993

deducted the cost of 632 meals as business expenses.    Mr. Simpson
                                - 6 -

testified about petitioners' practice of deducting the cost of

meals as "planning" sessions.    He stated that petitioners went to

restaurants to plan their weekly activities for the day-care

service.   He also testified that petitioners ate alone during a

majority of these meals.    Petitioners also deducted the cost of

personal meals as client "prospecting" activities.      Mr. Simpson

provided the Court with the following explanation for such

deductions:

          THE WITNESS: Meals and entertainment was
     basically that; we entertained people. We went -- we
     would go to parks and see people with the children. We
     would walk up to and start talking to them, become --
     just be friendly, Your Honor, and we would, you know,
     take them out to dinner and discuss -- in '92,
     especially, basically, what they were looking for in a
     child care so we could better cater to the needs of
     what people wanted in child care, because we basically
     didn't have any idea, you know.

     *        *         *         *        *        *        *

          THE COURT: $6,000 worth of meals in '92, and
     $14,000 worth of meals in '93?

          THE WITNESS: Well, $14,000 is -- we added
     something to it instead of just meals, Your Honor.
     It's also meals and entertainment, and we'd line itemed
     in there I think it's approximately $2,000 worth of
     video rentals for the year of '93, for, you know,
     watching Disney and the things that we had to rent
     movies and things of that nature.

           THE COURT:   You rented $2,000 worth of videos?

           THE WITNESS: Yes, Your Honor, it goes pretty
     fast. You know, you rent two or three videos a day or
     every other day, it adds up over a year's time, yes.
     * * *

     *        *         *         *        *        *         *
                               - 7 -

          THE COURT: Seems to me it would have been cheaper
     to go out and buy the videos, than to spend $2,000
     renting them.

          THE WITNESS: Well, we ended up going out and
     buying them, too, Your Honor.

     In addition to the cost of the 632 meals, petitioners in

1993 deducted as supplies $7,000 worth of groceries.   To justify

this deduction, Mr. Simpson testified that petitioners provided

children in their care with four meals a day.   Mr. Simpson

admitted, however, that his family consumed some of the

groceries.   Furthermore, Mr. Simpson stated that petitioners did

not maintain records delineating the groceries that were

exclusively used for the day-care service.   Therefore, even if

some of the groceries were attributable to the day-care service,

petitioners cannot establish the amount devoted to that purpose.

In essence, petitioners want the Government to subsidize their

daily food consumption.

     Petitioners' pattern of deducting personal expenditures was

not limited to meals and entertainment.   Petitioners also

deducted supply expenses of $10,994 for 1992 and $16,697 for

1993.   These deductions included expenditures for a VCR, a wide-

screen television, a satellite television system, and a cross-

country ski machine.   Petitioners contend that these expenses

were necessary startup costs associated with the day-care

service.   Petitioners have failed, however, to establish a
                                - 8 -

sufficient nexus between their day-care service and these

supplies.

     Petitioners also deducted the cost of several home

improvements, including landscaping, a deck, and a fence around

their pool.    Petitioners have failed, however, to establish that

these expenditures were ordinary and necessary for their

businesses.    Even if petitioners could establish that these

expenditures were ordinary and necessary, they are not currently

deductible.    Instead, the expenditures, pursuant to section

263(a), would have to be capitalized.

     Petitioners also deducted expenses relating to cable

television, gas, electricity, telephone service, garbage removal,

and water.    The deduction for telephone service is expressly

prohibited by section 262(b).    The remaining utility expenses are

deductible, subject to the limitations of section 280A(c)(4).

Section 280A(a) generally prohibits deductions attributable to a

dwelling unit that is used as a residence.    Section 280A(c)(4)

provides an exception for the trade or business of providing day-

care services.    The exception is limited, however, by a special

allocation formula.    See sec. 280A(c)(4)(C).   Petitioners have

failed to provide sufficient evidence to make the allocation

required by section 280A(c)(4).    Therefore, the remaining utility

expenses are not deductible.

     In essence, petitioners have failed to establish that any of

the disallowed expenditures were ordinary and necessary for their
                               - 9 -

businesses.   Accordingly, we hold that petitioners are not

entitled to deduct the expenses as ordinary and necessary

business expenses.

II.   Accuracy-Related Penalty for Negligence

      Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of any underpayment to which the section

applies.   The section applies to, among other items, the portion

of an underpayment attributable to negligence or disregard of the

rules or regulations.   Sec. 6662(b)(1).    Petitioners did not at

trial or in their brief dispute their liability for the accuracy-

related penalty for negligence.   As a result, petitioners have

failed to carry their burden of proof and are liable for the

penalty.

      We have considered the other arguments made by the parties

and found them to be either irrelevant or without merit.

      To reflect concessions by the parties,



                                            Decision will be entered

                                       under Rule 155.
