                          T.C. Memo. 1999-261



                        UNITED STATES TAX COURT



             TAE M. KIM AND YOUNG J. KIM, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 15447-97.                    Filed August 4, 1999.



        Tae M. Kim and Young J. Kim, pro sese, and Jee H. Kim

(specially recognized), for petitioners.

        Cheryl M.D. Rees and Timothy B. Heavner, for respondent.


                          MEMORANDUM OPINION


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

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

182.1


        1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
                              - 2 -

     Respondent determined deficiencies in petitioners' Federal

income taxes for 1993 and 1994 in the amounts of $4,972 and

$5,465, respectively, and accuracy-related penalties pursuant to

section 6662(a) in the amounts of $873 and $1,093, respectively.

     The issues for decision are:   (1) Whether petitioners are

entitled to trade or business expense deductions for 1993 and

1994 in excess of the amounts allowed and conceded by respondent;

(2) whether petitioners are entitled to a medical expense

deduction for 1993 in excess of the amounts allowed and conceded

by respondent; and (3) whether petitioners are liable for the

section 6662(a) accuracy-related penalties for 1993 and 1994.

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Bowie, Maryland, on the date the petition was filed in this case.

All references to petitioner in the singular are to Tae M. Kim.

     Petitioner is licensed to practice professional engineering

by the State of Maryland, Department of Licensing and Regulation,

Board for Professional Engineers.   During 1993 and 1994,

petitioner operated an engineering business under the business

name of Advance Design Engineering (ADE).   He kept an office in

petitioners' condominium unit for which respondent has allowed


     1
      (...continued)
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

certain deductions.   Petitioner wife was employed by the Federal

National Mortgage Association as an analyst during 1993 and 1994.

     The first issue for decision is whether petitioners are

entitled to trade or business expense deductions for 1993 and

1994 in excess of the amounts allowed and conceded by respondent.

     On a Schedule C attached to petitioners' 1993 return,

petitioner reported gross income in the amount of $900 and

claimed expenses in the total amount of $21,642.46 with respect

to ADE.   In the statutory notice of deficiency, respondent

disallowed any deductions for the claimed expenses.   After

concessions by respondent, the following amounts remain in issue:

       Expense                Claimed   Concessions   In Issue

     Advertising              $420.00      - 0 -       $420.00
     Car & truck             9,504.00      - 0 -      9,504.00
     Depreciation              - 0 -       521.85       - 0 -
     Insurance                 829.40      - 0 -        829.40
     Interest                  - 0 -       528.09       - 0 -
     Legal services            295.00      - 0 -        295.00
     Office expense          1,487.22      100.01     1,387.21
     Rent or lease of
        business property      936.00      383.13       552.87
     Repairs                 3,200.00      - 0 -      3,200.00
     Supplies                  490.84       32.15       458.69
     Taxes & licenses          280.00      976.89       - 0 -
     Travel                  1,560.00      - 0 -      1,560.00
     Meals & entertainment     960.00      - 0 -        960.00
     Utilities               1,680.00      351.67     1,328.33

     In addition to the amounts claimed on the 1993 Schedule C,

petitioners claimed Schedule A employee business expenses for

1993 in the total amount of $3,324, listed as follows:
                                   - 4 -

                Vehicle expenses                $2,408
                Parking fees & tolls               382
                Lodging                            120
                Other business expenses             70
                Meals & entertainment              344

     In the statutory notice of deficiency, respondent disallowed

any deduction for these expenses.          Petitioners allege that these

expenses were paid for petitioner wife's activities on behalf of

ADE during 1993.

     On a Schedule C attached to petitioners' 1994 return,

petitioner reported gross income in the amount of $4,750 and

claimed expenses in the total amount of $33,748.65 with respect

to ADE.   In the statutory notice of deficiency, respondent

allowed deductions for $5,550 of the claimed expenses.            After

concessions by the parties, the following amounts remain in

issue:

  Expense                Claimed       Allowed      Concessions    In Issue

Advertising              $208.40      $208.40          - 0 -         - 0 -
Car & truck             7,420.80       - 0 -           - 0 -       7,420.80
Depreciation            6,135.18       - 0 -         3,782.62      2,352.56
Insurance                 854.30       - 0 -           - 0 -         854.30
Interest                4,763.73       - 0 -         4,529.46        234.27
Office expense          1,265.45       845.47          - 0 -         419.98
Rent or lease of
   business property    2,818.46     2,814.84              3.62      - 0 -
Repairs & maintenance   1,240.30       - 0 -             - 0 -     1,240.30
Supplies                  250.18       - 0 -             - 0 -       250.18
Taxes & licenses        1,690.88     1,680.88             10.00      - 0 -
Travel                  4,980.40       - 0 -             - 0 -     4,980.40
Meals & entertainment   1,640.12       - 0 -             - 0 -     1,640.12
Utilities                 480.45       - 0 -             480.45      - 0 -

     Section 162(a) allows a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in
                               - 5 -

carrying on a trade or business.   An "ordinary" expense is one

that 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), and a "necessary" expense is one that is

"appropriate and helpful for the development of the petitioner's

business", Welch v. Helvering, 290 U.S. 111, 113 (1933).      Whether

an expenditure is ordinary and necessary is a question of fact.

See Commissioner v. Heininger, 320 U.S. 467, 475 (1943).

     We are convinced that petitioner carried on an engineering

business under the business name of ADE during the taxable years

in issue.   We are left to decide whether petitioners have

substantiated what petitioner claims to have paid for ordinary

and necessary trade or business expenses during 1993 and 1994 in

excess of the amounts allowed and conceded by respondent.

     Taxpayers must generally keep sufficient records to

establish the amounts of claimed deductions.   See sec. 6001;

Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).      To be

entitled to a deduction under section 162(a), a taxpayer is

required to substantiate his expenses through the maintenance of

books and records.   With certain exceptions, in the event that a

taxpayer establishes that a deductible expense has been paid but

is unable to substantiate the precise amount, we may estimate the

amount of the deductible expense, bearing heavily against the

taxpayer whose inexactitude in substantiating the amounts of the
                                 - 6 -

expenses is of his own making.    See Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).    We cannot estimate deductible

expenses, however, 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, 743

(1985).   Furthermore, section 274(d) provides that no deduction

is allowable under section 162 for any traveling expenses,

including meals and lodging while away from home, or for any

entertainment expenses, or with respect to any listed property,

defined in section 280F(d)(4) to include passenger automobiles,

unless the taxpayer complies with strict substantiation rules.

See sec. 274(d)(1), (2), (4).    The taxpayer must substantiate the

amount, time, place, and business purpose of these expenses by

adequate records or by sufficient evidence corroborating his own

statement.   See sec. 274(d); sec. 1.274-5T(b) and (c), Temporary

Income Tax Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985).

These substantiation rules of section 274(d) supersede the Cohan

doctrine.    See Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

     Petitioners submitted various records and documents to

substantiate the claimed business expenses.2   We will separately


     2
          After the trial, respondent requested that his Exhibit
D in evidence be stricken from the record, and the Court informed
                                                   (continued...)
                                - 7 -

address this evidence, infra, as it relates to each of the

claimed expenses.

Advertising for 1993 and 1994

     We find that petitioners have established that petitioner

paid $403.67 for flyers, cards, envelopes, and stamps during 1993

to promote ADE.    Respondent allowed the claimed advertising

expense deduction for 1994.    We hold that petitioners are

entitled to deductions for advertising expenses for 1993 and 1994

in the amounts of $404 and $208, respectively.

Car & Truck for 1993 and 1994

     The nature of ADE's business required petitioner to travel

frequently to the offices of real estate agents and to

contracting sites.    We find that petitioners have substantiated

28,715 business miles for 1993 and 24,520 business miles for

1994.    At the business standard mileage rates of 28 and 29 cents

per mile, petitioners are entitled to business mileage expenses

for 1993 and 1994 of $8,040.20 and $7,110.80, respectively.     See

Rev. Proc. 93-51, sec. 5.01, 1993-2 C.B. 593, 594; Rev. Proc. 92-

104, sec. 5.01, 1992-2 C.B. 583, 585.    We also find that

petitioners have substantiated petitioner's claimed expenses for

tolls and parking for 1993 and 1994.    We hold that petitioners




     2
      (...continued)
respondent that his request was granted.
                                 - 8 -

are entitled to deductions for car and truck expenses for 1993

and 1994 in total amounts of $8,650 and $7,421, respectively.

Depreciation for 1993 and 1994

     For 1993, the parties stipulated that petitioners are

entitled to a deduction in the amount of $521.85 for depreciation

of their condominium unit.   For 1994, the parties stipulated that

petitioners are entitled to a deduction in the amount of

$3,726.60 for depreciation of their condominium unit.    Respondent

conceded at trial that petitioners are entitled to an additional

depreciation deduction for 1994 for three chairs in the total

amount of $56.02.   Petitioners submitted several depreciation

worksheets on which they recorded the information relevant to the

claimed depreciation deductions for 1994.   We find these

worksheets reliable.   With respect to the 5-year property, we

allow depreciation deductions for the printer, computer,

facsimile machine, typewriter, calculator, laptop computer, and

monitor in the total amount of $1,226.05.   We do not allow

deductions for the fan or the television.   With respect to the

7-year property, we allow depreciation deductions for the desk,

computer desk, book cases, drawing desk, and carpeting in the

total amount of $485.65.   We do not allow deductions for the

other items of 7-year property listed on the worksheet, other

than for the three chairs as conceded by respondent.    We also

allow depreciation deductions for petitioner's library in the
                                - 9 -

total amount of $1,315.41.    We hold that petitioners are entitled

to depreciation deductions for 1993 and 1994 in the total amounts

of $522 and $6,810, respectively.

Insurance for 1993 and 1994

       Petitioners claimed insurance expense deductions for 1993

and 1994 for amounts paid for their automobile insurance

policies.    However, petitioners claimed and we have held that

they are entitled to deductions for car and truck expenses based

on the business standard mileage rates for 1993 and 1994, which

are claimed in lieu of operating and fixed costs such as

gasoline, oil, depreciation, maintenance and repairs, insurance,

and registration fees.    See Rev. Proc. 93-51, sec. 5.03, 1993-2

C.B. 593, 594; Rev. Proc. 92-104, sec. 5.03, 1992-2 C.B. 583,

585.    Accordingly, we hold that petitioners are not entitled to

any insurance expense deductions for 1993 and 1994.

Interest for 1993 and 1994

       The parties stipulated that petitioners are entitled to

deductions for interest paid during 1993 and 1994 on amounts

borrowed to purchase the condominium unit.    Petitioners presented

no evidence that they paid any deductible business interest

during 1993 and 1994 other than the stipulated amounts.    We hold

that petitioners are entitled to interest expense deductions for

1993 and 1994 in the amounts of $528 and $4,529, respectively.
                               - 10 -

Legal Services for 1993

     The legal services claimed by petitioners for 1993 were part

of the settlement costs of the purchase of their condominium

unit.   These legal services constitute a capital expenditure

which is added to petitioners' cost basis in the condominium

unit.   To the extent the condominium unit is used for business

purposes, a portion of these legal services is deductible as part

of the depreciation deductions for the condominium unit.    We hold

that petitioners are not entitled to any deduction for 1993 for

legal services.

Office Expense for 1993 and 1994

     We find petitioners' records of their office expenses for

1993 reliable.    For 1994, respondent disallowed only the portion

of the claimed office expense deduction which was claimed for a

computer monitor.   This item was also claimed by petitioners on

one of their depreciation worksheets.   Based on the record, we

sustain petitioners' claimed deduction for 1993 and respondent's

disallowance for 1994.    We hold that petitioners are entitled to

office expense deductions for 1993 and 1994 in the amounts of

$1,487 and $845, respectively.

Rent or Lease of Business Property for 1993 and 1994

     The parties have agreed that the amounts allowed and

conceded by respondent for 1993 and 1994 with respect to the

claimed rental expenses represent petitioners' condominium
                               - 11 -

owners' association fees, which are more accurately described and

deducted as commissions and fees.   We therefore hold that

petitioners are not entitled to any deductions for 1993 and 1994

for the rental or lease of business property.    In accordance with

the parties' stipulations, we hold that petitioners are entitled

to deductions for 1993 and 1994 for commissions and fees in the

amounts of $383 and $2,815, respectively.

Repairs & Maintenance for 1993 and 1994

     We find that petitioners paid for a number of repairs to

petitioner's home office during 1993 and 1994.   After examining

the records of the costs of such repairs, we hold that

petitioners are entitled to deductions for 1993 and 1994 for

repairs and maintenance in the total amounts of $2,087 and

$1,168, respectively.

Supplies for 1993 and 1994

     For 1993 and 1994, petitioners claimed deductions for

supplies in the amounts of $490.84 and $250.18, respectively.

Respondent conceded $32.15 of the amount claimed for 1993.   We

find petitioners' records of the supplies purchased during 1993

and 1994 reliable.   We hold that petitioners are entitled to

deductions for 1993 and 1994 for supplies in the total amounts of

$491 and $250, respectively.
                              - 12 -

Taxes & Licenses for 1993 and 1994

     For 1993, the parties stipulated that petitioners are

entitled to a deduction in the amount of $976.89 for taxes paid

on their condominium unit.   For 1994, respondent allowed

petitioners a deduction in the amount of $1,680.88 for taxes paid

on their condominium unit.   Petitioners did not dispute these

amounts at trial.   Petitioner also produced a check which shows

that he paid $20 for his professional engineering license during

1994.   We therefore hold that petitioners are entitled to

deductions for 1993 and 1994 for taxes and licenses in the

amounts of $977 and $1,701, respectively.

Travel for 1993 and 1994

     Petitioner traveled to Korea for business purposes during

1993 and 1994.   We find that petitioners have substantiated only

the costs of petitioner's airfares to and from Korea.   We find

that petitioner's testimony and supporting records with respect

to his other claimed travel expenses do not meet the

substantiation requirements of section 274(d).   We hold that

petitioners are entitled to deductions for 1993 and 1994 for

travel expenses in the amounts of $1,172 and $820, respectively.

Meals and Entertainment for 1993 and 1994

     We find that petitioners have failed to substantiate the

meals and entertainment expenses claimed for 1993 and 1994.     We
                               - 13 -

hold that petitioners are not entitled to any deductions for

meals and entertainment expenses for 1993 and 1994.

Utilities for 1993 and 1994

       For 1993, the parties stipulated that petitioners are

entitled to a utility expense deduction in the amount of $351.67

for telephone expenses.    Based on the record, we conclude that

petitioners are entitled to a utility expense deduction for their

other utilities for 1993 in the amount of $500.    For 1994, the

parties stipulated that petitioners are entitled to deductions

for telephone expenses in the amount of $225.74 and gas and

electric expenses in the amount of $254.71.    We hold that

petitioners are entitled to deductions for 1993 and 1994 for

utility expenses in the total amounts of $852 and $480,

respectively.

Employee Business Expenses for 1993

       Petitioners argue that petitioner wife's claimed employee

business expenses should have been claimed as additional Schedule

C trade or business expenses of ADE.    Petitioner generally

testified that petitioner wife visited several locations to look

for potential clients and to buy materials for ADE.    Petitioner

wife did not testify with respect to her activities on behalf of

ADE.    Petitioners' records of these expenses show the names of

towns and cities which petitioner wife visited but not the

business purpose of the listed trips.    Based on the record, we
                                - 14 -

find that petitioners have failed to substantiate the business

purpose of petitioner wife's claimed expenses.    We hold that

petitioners are not entitled to any deductions for 1993 for

petitioner wife's claimed expenses.

     The second issue for decision is whether petitioners are

entitled to a medical expense deduction for 1993 in excess of the

amounts allowed and conceded by respondent.

     On a Schedule A attached to their 1993 return, petitioners

claimed medical expenses in the amount of $10,668.36.    After

accounting for the section 213(a) limitation, petitioners claimed

a medical expense deduction for 1993 in the amount of $7,032.51.

In the statutory notice of deficiency, respondent determined that

petitioners did not establish that they paid more than $8,978 for

medical expenses during 1993.     Respondent allowed petitioners a

medical expense deduction in the amount of $3,724, after

accounting for his adjustments to their adjusted gross income and

the section 213(a) limitation.3    At trial, respondent conceded

that petitioners are entitled to deduct an additional $20 of

medical expenses.   This concession leaves $1,670.36 of the

claimed medical expenses in issue, which approximates the amount




     3
          Respondent's adjustments to petitioners' medical
expense deductions for 1993 and 1994, to the extent based on his
adjustments to petitioners' adjusted gross income and sec. 213
limitations for 1993 and 1994, are computational and will be
resolved by the Court's holding on the first issue in this case.
                               - 15 -

claimed by petitioners and disallowed by respondent for certain

acupuncture treatments.

     Section 213(a) allows as a deduction the expenses paid

during the taxable year, not compensated for by insurance or

otherwise, for medical care of the taxpayer, his spouse, or a

dependent, to the extent that such expenses exceed 7.5 percent of

adjusted gross income.    Medical care includes amounts paid for

the diagnosis, cure, mitigation, treatment, or prevention of

disease, or for the purpose of affecting any structure or

function of the body.    See sec. 213(d)(1)(A).   Medical care also

includes amounts paid for transportation primarily for and

essential to medical care listed above.    See sec. 213(d)(1)(B).

     Petitioner testified that he received acupuncture treatments

to relieve nerve pain in his neck and back while in Korea from

May 27, 1993, to July 2, 1993,    Petitioner's 1993 weekly minder,

which he used while in Korea, has 12 entries for acupuncture

treatments in June 1993.    Petitioner testified that he paid $120

for each of the 12 acupuncture treatments and approximately $20

for transportation to and from such treatments.

     We find petitioner's testimony with respect to his

acupuncture treatments credible.    We hold that petitioners are

entitled to a deduction for 1993 for the medical expenses claimed

on their 1993 return to the extent that such expenses exceed the

section 213(a) limitation.
                               - 16 -

     The third issue for decision is whether petitioners are

liable for the section 6662(a) accuracy-related penalties for

1993 and 1994.

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

of an underpayment attributable to any one of various factors,

one of which is negligence or disregard of rules or regulations.

See sec. 6662(b)(1).    "Negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws or to exercise ordinary and reasonable care in the

preparation of a tax return.    See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.    It also includes any failure to

keep adequate books and records or to substantiate items

properly.   See sec. 1.6662-3(b)(1), Income Tax Regs.    "Disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations.   See sec. 6662(c); sec. 1.6662-3(b)(2),

Income Tax Regs.

     Section 6664(c)(1), however, provides that the section

6662(a) penalty 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 of the

underpayment 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
                              - 17 -

circumstances.   See 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.   See id.

     Based on the record, we find that petitioners have proved

that their underpayments were due to reasonable cause and that

they acted in good faith.   Petitioners were able to substantiate

most of the expenses claimed on their returns and disallowed by

respondent.   We hold that petitioners are not liable for the

section 6662(a) accuracy-related penalties for 1993 and 1994.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
