                   T.C. Summary Opinion 2007-3



                     UNITED STATES TAX COURT



                 GERRY M. GRIGGS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 839-04S.               Filed January 3, 2007.



     Gerry M. Griggs, pro se.

     Portia N. Rose, for respondent.




     COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

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

and this opinion should not be cited as authority.


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

     Respondent determined a deficiency of $23,709 in

petitioner’s Federal income tax for the year 2000, an addition to

tax under section 6651(a)(1) in the amount of $5,334.53, an

addition to tax under section 6651(a)(2), and an addition to tax

under section 6654 in the amount of $1,275.16.   In the answer,

respondent conceded the section 6651(a)(2) addition to tax and,

pursuant to section 6214(a), claimed an increase in the section

6651(a)(1) addition to tax of $592.72.   In a trial memorandum,

respondent conceded the section 6654 addition to tax.2

     The issues for decision are:   (1) Whether petitioner is

entitled to claim a deduction for miscellaneous legal expenses on

Schedule A, Itemized Deductions, in an amount exceeding what was

allowed by respondent; (2) whether petitioner is entitled to

claim deductions for various trade or business expenses

disallowed by respondent for two business activities of

petitioner reported on separate Schedules C, Profit or Loss From


     2
       At the time the notice of deficiency was issued,
petitioner had not filed his Federal income tax return for the
year at issue. The notice of deficiency is based upon
information returns filed by third-party payers for nonemployee
compensation, wages, and interest paid to petitioner. Petitioner
does not challenge these determinations. After the notice of
deficiency was issued, as stated in respondent’s brief,
“petitioner provided respondent with his individual income tax
return for the 2000 taxable year.” Respondent further stated on
brief: “Petitioner has never provided an explanation as to why
his return was filed late.” That statement appears to indicate
that petitioner’s return was processed as a filed return.
Petitioner does not challenge the income determinations in the
notice of deficiency, and the issues essentially involve two
trade or business activities and itemized deductions.
                               - 3 -

Business; (3) whether petitioner is entitled to a Schedule A

deduction for the writeoff of unsold inventory that belonged to a

discontinued trade or business activity; and (4) whether

petitioner is liable for the section 6651(a)(1) addition to tax.

     Some of the facts were stipulated, and those facts are so

found.   At the time the petition was filed, petitioner was a

legal resident of Houston, Texas.3

     Although petitioner was an employee during the year at

issue, the principal issues in this case arise from two self-

employed trade or business activities petitioner was engaged in

that year.   Petitioner claimed losses from both of these

activities that respondent challenges.

     Petitioner has an M.B.A. degree from Harvard University and

is a certified public accountant.    Since 1983, he has been

involved in various business ventures as an investment and



     3
       Sec. 7491(a) shifts the burden of proof to the
Commissioner with regard to any factual issue relevant to
ascertaining the taxpayer’s liability. Sec. 7491(a)(2) limits
application of this rule to an issue or issues for which the
taxpayer has complied with the requirements for substantiation of
any item, has maintained all records with respect to such items,
and has cooperated with reasonable requests by the Secretary for
witnesses, information, documents, and interviews, etc.,
regarding matters at issue. In this case, the burden of proof
does not shift to respondent because petitioner’s failure to
cooperate with respondent’s counsel in submitting records as to
the matters at issue resulted in the issuance of an order by the
Court on Oct. 6, 2004, ordering the parties to stipulate and
exchange documents with each other to enable this case to proceed
to trial. As to the additions to tax, the burden of production
is on respondent. Sec. 7491(c).
                               - 4 -

merchant banker.   In 1985, petitioner was employed by Advanced

Energy Technologies (AET) as vice president and chief financial

officer (CFO).   He was also on the board of directors of AET

until January 1989.   AET terminated petitioner from his position

as CFO in September 1988.   In May 1989, petitioner returned to

AET as CFO and was again terminated in January 1990.

     The first issue is petitioner’s claim to Schedule A

deductions of $11,981.54 for miscellaneous legal expenses.

Petitioner paid legal fees in connection with litigation against

his former employer, AET, for breach of his employment contract

and for the recovery of retirement benefits.   Petitioner also

paid legal fees in connection with litigation against two other

corporations over the purchase of certain film rights and assets.

Another legal action involved a malpractice claim against one of

his former attorneys.

     Of the $11,981.54 claimed by petitioner for miscellaneous

legal expenses on Schedule A of his return, respondent concedes

petitioner’s entitlement to a deduction of $5,000 for legal

expenses, leaving at issue $6,981.54.

     Based on the evidence presented at trial, the Court is

satisfied that petitioner is entitled to an additional deduction

of $5,501.86 for legal expenses.   This consists of $3,000, which

is shown as a credit on a statement presented at trial from one

of the law firms that represented petitioner, and $2,501.86,
                               - 5 -

represented by three checks payable to one of the other law firms

that represented petitioner. Therefore, of the $11,981.54 claimed

by petitioner as miscellaneous legal expenses on his return,

petitioner is entitled to a deduction of the $5,000 conceded by

respondent and $5,501.86 based on the evidence presented at

trial.   This leaves a balance of $1,479.68, which the Court finds

has not been substantiated and, therefore, holds is not allowable

as a deduction.

     As stated earlier, the income tax return submitted by

petitioner at trial included two Schedules C with respect to

trade or business activities engaged in by petitioner.   One of

these activities was described as “Media Content and

Entertainment and Songs” with a business name of “Kirshner

Content and related entities”.4   The Schedule C reported gross

income of zero and various expenses.   The activity was described

at trial as an activity of petitioner and another individual,

Robert Thurmond (Thurmond), as partners.   Petitioner and Thurmond

referred to their affiliated activity as the Equisource Group.5




     4
       Petitioner’s other Schedule C involves an activity called
“Frexie”. Respondent made adjustments to that activity, and
those adjustments are addressed later in this opinion.
     5
       Since Kirshner Content was represented to be an activity
of petitioner and Thurmond, the Court assumes that the numbers on
the Schedule C represent petitioner’s allocable portion of the
expenses.
                               - 6 -

     Sometime in 1993, petitioner and Thurmond were approached by

Don Kirshner (Kirshner), a noted song publisher, entertainment

promoter, and agent, to exploit rights Kirshner had to various

entertainment assets.   Kirshner had been the host and creator of

a weekly rock concert program on national television called “Don

Kirshner’s Rock Concert” (Rock Concert) from 1972 to 1983 and

possessed rights to about 185 to 200 hours of programming from

the Rock Concert as well as “Don Kirshner’s Comedy Hour” that had

never been rebroadcast or licensed.

     Petitioner, Thurmond, and Kirshner agreed to establish

business entities that would obtain a license from Kirshner to

exploit rights to “Don Kirshner’s Rock Concert”, the name “Don

Kirshner”, and his likeness, together with extensive

entertainment memorabilia.   These tangible and intangible

properties were collectively known as the Kirshner properties.

     Beginning with the license from Kirshner for the Kirshner

properties as a base, the various Kirshner entities were also

envisioned as a base for acquiring, managing, producing, and

distributing entertainment software in various forms.6

     On or about May 12, 1995, Kirshner and the Equisource Group

(petitioner and Thurmond) signed a venture agreement to form



     6
       According to petitioner, the various Kirshner entities
were known collectively as “Kirshner Content”, which is not to be
confused with the Don Kirshner Content, Inc., one of the
entities. See infra.
                               - 7 -

Kirshner Global, Inc. (Kirshner Global).    Kirshner and Equisource

were listed as “Founding Partners”.    Under the terms of the

venture agreement, Equisource was to obtain interim financing of

$1 million within a 60-day period or Kirshner would have the

option of terminating the agreement.    Similar terms were also

provided for permanent financing within a 120-day period.    The

interim financing proceeds would have been used, in part, to pay

the “Founding Partners” for out-of-pocket expenses incurred on

Kirshner Global’s behalf prior to the interim financing.7

     Under the venture agreement, the execution of other

documentation within a 15-day period subject to interim financing

was also required.   The documents included an employment

agreement, a stockholders’ agreement, an Equisource financial

advisory agreement, a licensing agreement, and a subscription

agreement.   Once this was accomplished and Kirshner Global was

formed, petitioner and Thurmond would be named as directors on

Kirshner Global’s board of directors.

     On or about February 21, 1996, the Don Kirshner Content Co.,

Inc. (Kirshner Content) was formed with the specific intention of

acquiring the Rock Concert license from Kirshner and maintaining

an aggressive plan of strategic acquisitions of other

entertainment assets.   As the managing director of the Equisource



     7
       As noted, petitioner and Thurmond would be entitled to
reimbursement as “Founding Partners”, only through Equisource.
                               - 8 -

Group, petitioner was listed as a member of the support team

responsible for organizing and obtaining financing for Kirshner

Content.

     On or about February 22, 1996, State Street Capital Markets

Corp. offered a confidential private placement memorandum for the

purpose of raising capital for Kirshner Content.   Investors would

invest a maximum of $1.5 million for 30 units, which would be

convertible into a promissory note, common stock, and common

stock purchase warrants in Kirshner Content.   Petitioner was

listed as the executive vice president, chief financial officer,

treasurer, and director of Kirshner Content.

     On or about April 17, 1996, in connection with an attempt to

obtain interim financing, Kirshner Content issued a promissory

note in the amount of $279,440 to C&C Partners, LLC, a New York

limited liability company,8 which petitioner and Thurmond

personally guaranteed.   Petitioner and Thurmond’s guaranties were

subject to four separate conditions.   Another guaranty was made

on April 24, 1996, by Martin Licht, secretary and counsel for

Kirshner Content.9   Under the terms of the promissory note, it




     8
       The record sometimes refers to “C&C Investments” in
connection with the promissory note. For this purpose, C&C
Investments and C&C Partners, LLC, are treated as one and the
same.
     9
       Although not specified in the record, Licht apparently was
a business associate of Kirshner.
                               - 9 -

was payable together with interest no later than June 17, 1996.

Kirshner Content defaulted on the promissory note.10

     In a confidential business plan dated July 1996, Kirshner

Content proposed the issuance of stock in a public offering for

at least $25 million.   As the managing director of Equisource,

petitioner was named as a member of the support team

participating in the organization and financing of Kirshner

Content.

     On or about March 7, 1997, C&C Partners filed suit in Texas

against petitioner and Thurmond for payment of the $279,440

promissory note due to Kirshner Content’s default.     Petitioner

and Thurmond retained the law firm Baker & Botts, L.L.P., in

Houston to represent them in the ensuing litigation.11

     As previously stated on the Schedule C that petitioner

submitted with respect to Kirshner Content, petitioner reported

zero gross income for the activity and claimed deductions for

various expenses related to the activity:   (1) A bad debt in the

amount of $7,118; (2) legal and professional fees in the amount



     10
       On or about Sept. 18, 1996, C&C Partners, LLC, filed suit
in New York State court against petitioner, Thurmond, and Licht,
the three guarantors, and, a month later, the case was removed to
Federal District Court. With respect to petitioner and Thurmond,
the case was removed to Texas. The case against Licht in New
York continued. In that court proceeding, judgment was entered
in favor of C&C Partners, LLC, in November 1997.
     11
       The record is not clear with respect to the ultimate
resolution of the Texas case involving petitioner and Thurmond.
                              - 10 -

of $18,508; (3) supplies of $139.50; (4) travel expenses of

$1,050; and (5) deductible meals and entertainment of $347.65.

The Schedule C listed the “Kirshner Content and related entities”

as the business name and the activity was listed as “Media

Content and Entertainment and Songs”.   Respondent did not agree

to deductions for these expenses.

     Petitioner argues he is entitled to claim the $7,118 as a

bad debt deduction as it relates to various expenses that were

incurred in 1994, 1995, and 1996, in connection with the

attempted financing for the various Kirshner entities.   The

expenses were for travel, meals, and entertainment.   Although not

explicitly stated, as the Court understands, petitioner believed

he had a contractual right to be reimbursed for these expenses

from Kirshner Global, Kirshner Content, and/or other Kirshner

entities.   Since he was never reimbursed for these expenses,

petitioner contends his claim for reimbursement is an

uncollectible bad debt.

     Respondent contends the expenses were not created or

incurred in connection with a trade or business and questions

whether petitioner had the right to be reimbursed for such

expenses, and, if so, whether the debts became uncollectible in

2000.

     Section 166 allows a taxpayer a deduction for any business

debt which becomes wholly or partially worthless during the
                                - 11 -

taxable year.    Sec. 166(a), (d)(1)(A).   A bona fide debt is one

that arises from a debtor-creditor relationship based upon a

valid and enforceable obligation to pay a fixed or determinable

sum of money.    Sec. 1.166-1(c), Income Tax Regs.

       A business bad debt deduction is allowable if the taxpayer,

among other requirements, establishes:     (1) He was engaged in a

trade or business, and (2) the acquisition or worthlessness of

the debt was proximately related to the conduct of such trade or

business.    United States v. Generes, 405 U.S. 93 (1972); sec.

1.166-5(b), Income Tax Regs.    For a debt to be considered a

business debt, it must have a proximate relation to the

taxpayer’s trade or business.    In determining whether a proximate

relationship exists, the proper measure is the taxpayer’s

dominant motivation for incurring the debt.    A significant

motivation is not sufficient.    United States v. Generes, supra at

103.

       Petitioner bears the burden of proving that the amounts in

question constituted business debts and that such debts became

worthless in 2000, the year in which the deduction is claimed.

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

       At the outset, respondent disputes that expenses were

incurred in connection with petitioner’s trade or business.

Petitioner argues that he was in the trade or business of
                              - 12 -

investment and merchant banking.   The facts support petitioner on

that argument.

     Petitioner and Thurmond credibly testified that they were in

the trade or business of investment and merchant banking.      The

totality of the circumstances shows that they sought to obtain

financing in return for obtaining a percentage interest in

various Kirshner entities.   Multiple Kirshner documents show that

petitioner was described as the managing director of Equisource

Group and responsible for obtaining financing as well as pursuing

possible acquisitions.

     Petitioner was also slated to be on the board of directors

of Kirshner Global once financing was completed.   He was listed

as executive vice president, chief financial officer, treasurer,

and director of Kirshner Content in the February 22, 1996,

confidential private placement memorandum.   The Court concludes

that these activities were not merely investment activities or

the management of petitioner’s investment but were part and

parcel of petitioner’s trade or business.    Thus, the Court finds

that petitioner was engaged in a trade or business with respect

to these expenses.

     With respect to the claimed bad debts, petitioner must

establish that the debts had some value at the beginning of 2000

and became worthless by the end of the year.    Milenbach v.

Commissioner, 106 T.C. 184, 204 (1996), affd. in part, revd. in
                               - 13 -

part on other grounds, and remanded 318 F.3d 924 (9th Cir.

2003).    The issue rests on the particular facts and circumstances

of each case, although, generally, “the year of the worthlessness

is fixed by identifiable events that form the basis of reasonable

grounds for abandoning any hope of recovery.”     Id. at 204-205;

see also Estate of Mann v. United States, 731 F.2d 267, 276 (5th

Cir. 1984); Dallmeyer v. Commissioner, 14 T.C. 1282, 1291-1292

(1950).

     Petitioner argues that, under the venture agreement for the

formation of Kirshner Global, he was entitled to reimbursement

for out-of-pocket costs.   Petitioner testified that the venture

agreement was one of several such agreements that provided for

the formation of Kirshner entities.     According to petitioner,

these Kirshner entities received interim financing.     In addition,

petitioner contends he submitted a claim for reimbursement, and

it was approved by Kirshner.

     Petitioner contends that his business relationship with

Kirshner and the Kirshner-related entities “effectively ended” in

2000, thus entitling him to a bad debt deduction for that year.

Respondent strongly disagrees with that contention and instead

argues the relationship ended in 1995 or 1996.     Petitioner

testified:


     When Kirshner decided not to do business any more with
     us and go on and do business with someone else then
                              - 14 -

     there was no hope of getting paid.   It was over.   And
     that was in the year 2000.


Petitioner contends that all activity on the Kirshner deal ended

in the year 2000 due to litigation against Kirshner by an outside

investor who had been brought in by petitioner.    Up to that

point, petitioner contends, he had continued to try to raise

capital, reform Kirshner Content, and repay the outstanding debt.

     Petitioner offered the testimony of his business partner,

Thurmond, with respect to the claimed deduction.    However,

Thurmond was uncertain when the business relationship

definitively ended.   He admitted that the actual attempt to fund

and operate Kirshner Content ended “a long time ago” but was

unable to fix an exact date, other than it was in the late 1990s.

At trial, Thurmond stated it was either in 1999 or 2000.12      While

Thurmond believed that several Kirshner entities received interim

financing, he could not positively state that Kirshner Global

received any interim financing.   Thurmond’s testimony does not

convince the Court that the business relationship ended in the

year 2000.

     Moreover, the Court is not satisfied from the evidence that

there even was a bona fide debt, much less a debt that became

wholly worthless in 2000 for the following reasons.


     12
       Thurmond also stated at one point that it was in 2002 but
immediately corrected himself to provide that it was “either 2000
or before”.
                              - 15 -

     Respondent argues that there was no “debt” that would

qualify for the bad debt deduction.    In particular, respondent

contends that petitioner did not show that he was entitled to

reimbursement for the various expenses at issue.

     Respondent asserts that a precondition for obtaining out-of-

pocket expenses from Kirshner Global was not fulfilled in that

petitioner failed to show that he obtained interim financing

within the time period specified in the 1995 venture agreement.

At trial, petitioner claimed that his entitlement to

reimbursement for expenses was not contingent on obtaining

interim financing.

     The totality of the record satisfies the Court that

respondent is correct.   There is no documentation or other

evidence that establishes the existence of a bona fide debt owing

to petitioner by either Kirshner Global or Kirshner Content

(petitioner’s Schedule C activity) that qualified for a bad debt

deduction.   Also, there is no evidence to support a finding that

petitioner was contractually entitled to be reimbursed for the

various Kirshner expenses that are characterized as a bad debt on

Schedule C of petitioner’s tax return.

     With respect to Kirshner Global, the language of the venture

agreement supports respondent’s position.    In a subsection

entitled “Interim Financing”, Kirshner Global was required,

through the Equisource Group, to obtain interim financing that
                              - 16 -

would be used to pay, among other things, out-of-pocket costs of

the “Founding partners”; i.e., Equisource and Kirshner.      Thus,

obtaining interim financing was a precondition to petitioner’s

entitlement to reimbursement for his out-of-pocket expenses.

     Petitioner did not establish that interim financing was

obtained, that Kirshner Global was formed, or that he became a

director on Kirshner Global’s board of directors.    While

petitioner claimed that licensing, employment, and financial

advisory agreements were executed in connection with Kirshner

Global, there is no evidence that this came about.    Thus, the

Court cannot conclude that petitioner had a right of

reimbursement through Kirshner Global for reimbursement of his

expenses.

     The record shows that Kirshner Content had a more tangible

existence because it apparently obtained interim financing from

C&C Partners.   However, Kirshner Content, as well as petitioner,

Thurmond, and Licht, all became involved in a lawsuit after

Kirshner Content defaulted on the promissory note.    Receipt of

the interim financing and the corporate default both occurred in

1996.   Kirshner Content does not appear to have been active after

that year other than to participate in various lawsuits.

Petitioner’s witness, Thurmond, confirmed that the financing for

Kirshner Content had not been completed.   Moreover, there is no
                              - 17 -

evidence that Kirshner Content contractually agreed to reimburse

petitioner’s expenses.

     Petitioner points to the existence of an August 11, 1996,

reimbursement form signed by Kirshner as proof that petitioner

was entitled to reimbursement.   The Court disagrees.   The

document is indicative, at most, that Kirshner approved

petitioner’s expenses related to “identifying

acquisition/investment opportunities for Kirshner Content et al.”

that were incurred in 1996.   Without any corporate identification

on the reimbursement form or an identification of petitioner’s

status as a person requesting reimbursement, the record does not

support a finding that petitioner had the contractual right to

reimbursement with respect to Kirshner Content and/or any other

Kirshner-related entity.   Thus, the Court cannot conclude that

there was an actual bona fide debt with respect to the $7,118

claimed as a bad debt on Schedule C of petitioner’s income tax

return.

     The Court further notes that petitioner incurred these

expenses over a 3-year period and did not seek reimbursement

during that time.   The claimed expenses were still outstanding 4

years later.   There is nothing in the record that adequately

explains petitioner’s delay in seeking reimbursement, if, in

fact, petitioner had incurred such expenses and was entitled to

reimbursement.
                               - 18 -

     Even if petitioner was entitled to reimbursement for

expenses but was, in fact, not reimbursed, he is not allowed a

deduction for such expenses.   A taxpayer is not entitled to a

deduction for expenses to the extent that the taxpayer is

entitled to reimbursement where the taxpayer does not claim

reimbursement.   Levy v. Commissioner, 212 F.2d 552, 554 (5th Cir.

1954), affg. a Memorandum Opinion of this Court; Universal Oil

Prods. Co. v. Campbell, 181 F.2d 451, 475 (7th Cir. 1950); see

also Lucas v. Commissioner, 79 T.C. 1, 7 (1982); Kennelly v.

Commissioner, 56 T.C. 936, 943 (1971), affd. without published

opinion 456 F.2d 1335 (2d Cir. 1972); Stolk v. Commissioner, 40

T.C. 345, 356 (1963), affd. per curiam 326 F.2d 760 (2d Cir.

1964); Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); Roach v.

Commissioner, 20 B.T.A. 919, 925-926 (1930).

     Moreover, if there was a bona fide debt owing to petitioner,

he provided no evidence that the debt became worthless during the

year at issue.   Sec. 1.166-2, Income Tax Regs.   Petitioner

offered only his unsupported opinion as to when the debt became

worthless.   A taxpayer’s unsupported opinion that a debt became

worthless in a particular year by itself will not normally be

accepted as proof of worthlessness.     Dustin v. Commissioner, 53

T.C. 491, 501-502 (1969), affd. 467 F.2d 47 (9th Cir. 1972).

Respondent is sustained on this issue.
                              - 19 -

     Another deduction claimed on Schedule C of petitioner’s

income tax return for 2000 was $18,508 for legal and professional

services.   This amount represented a payment by petitioner on

August 28, 2000, to a Houston, Texas, law firm, Baker & Botts.

The memorandum line on the check issued for payment of these

services indicates that the payment was for “C&C Litigation”.

Respondent does not dispute that petitioner paid the legal

expenses but contends there is no evidence that the payments were

related to petitioner’s trade or business.   Respondent argues

that the expenses should, instead, be claimed as an itemized

deduction on Schedule A of petitioner’s return.

     The record shows that the litigation expenses related to C&C

Partners arose out of the default on the debt of Kirshner Content

that petitioner had guaranteed.   As a result, petitioner,

Thurmond, and Licht were all required to satisfy guarantees that

they had given in connection with the interim financing for

Kirshner Content.   Petitioner and Thurmond credibly testified

that the litigation continued until at least 2000 and that they

still owed money to the law firm.   Accordingly, the Court finds

that the litigation was proximately related to petitioner’s trade

or business and holds that the fees for legal and professional

services are allowable as a business expense deduction and not as

a Schedule A deduction.   Petitioner is sustained on this issue.
                              - 20 -

     Petitioner testified that, until the first half of 2000, he

was “still trying to raise other funds, get other investors, get

Kirshner back in the fold, deal with this investor that was

having an issue with Kirshner”.   According to petitioner, these

expenses, consisting of office supplies, meals, and travel, were

all incurred on behalf of the entire Kirshner enterprise during

the year 2000.

     Petitioner’s Schedule C of his 2000 Federal income tax

return included the following other expenses:


     Supplies                           $     139.50
     Travel                                 1,050.00
     Meals and entertainment
          (deductible portion)              347.64
       Total                             $1,537.14


     As to meals, entertainment, and travel expenses, section

274(d) imposes stringent substantiation requirements for

deductions related thereto.   For travel expenses, including meals

and lodging, a taxpayer must substantiate:     (1) The amount of

such expense; (2) the time and place such expense was incurred;

and (3) the business purpose for which such expense was incurred.

Sec. 1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).   Section 274(d) specifically bars a

taxpayer from claiming a deduction on the basis of any

approximation or the unsupported testimony of the taxpayer.     Sec.

1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.
                               - 21 -

6, 1985).   Thus, section 274(d) overrides Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930), which allows the Court, in

some circumstances, to estimate a deductible expense.    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., supra.

     Although petitioner offered into evidence numerous receipts

in support of his travel, meals, and entertainment expenses, he

did not provide the additional documentation necessary to

substantiate these expenses.   In particular, the receipts did not

show the business purpose behind the trips or meals.     In short,

there was no documentation or rationale behind such expenses

other than petitioner’s unsupported testimony that the Court

declines to accept.   Sec. 1.274-5T(a), Temporary Income Tax

Regs., supra.   Respondent is sustained on this issue.

     On a separate Schedule C of petitioner’s 2000 income tax

return, petitioner claimed a deduction for expenses relating to

another activity called “Frexie”.   This was the name petitioner

ascribed to his purchase of the right to use a luxury suite at

Minute Maid Park in Houston, Texas, the home field for the

Houston Astros major league baseball team, for a 3-year period

for $250,000.   The Frexie activity involved the selling or

letting by petitioner of the use of the suite during Houston

Astros baseball games.   In exchange for a commitment to purchase
                                - 22 -

or use time in the suite, petitioner offered pricing incentives

to two corporations, Nabisco and Chicago Title.    The two

companies agreed to the deal with petitioner.    The sole expense

at issue in this case is a claimed deduction of $889.52 relating

to the activity.13

       It appears that the expense in question was incurred at one

event, which was attended by petitioner and representatives of

Nabisco and Chicago Title.    The evidence satisfies the Court that

the representatives of Nabisco and Chicago Title who attended the

game were not there for purposes of entertainment but were there

solely for their evaluation and consideration of how the facility

would be used to further the business interests of Nabisco and

Chicago Title, and petitioner was there to show the facility and

address whatever questions the corporate representatives may have

had.    Petitioner paid for the food and beverages consumed at the

event, which amounted to $889.52.

       While conceding that petitioner substantiated the expenses

and was entitled to claim the $889.52 paid for food and beverages

on Schedule C of his return as a business expense, respondent

contends that the expense was subject to the 50-percent

limitation of section 274(n).    Petitioner argued that section


       13
       Petitioner claimed the $889.52 item as “Returns and
Allowances” on Schedule C for the trade or business activity
“Frexie”. At trial, petitioner clarified that the item was
mischaracterized and was properly a claimed business expense of
the Schedule C “Frexie” activity.
                              - 23 -

274(n) was inapplicable because the expenditure was not incurred

for entertainment.   Petitioner claims that the $889.52 was

expended as performance on a contract with Nabisco and Chicago

Title in that he was required to pay for catering services

regardless of whether business was discussed in the luxury suite.

Thus, the Court construes petitioner’s argument to be that the

50-percent limitation for food and beverages found in section

274(n) does not apply to the expense at issue because the $889.52

represented goods and services sold by petitioner in a bona fide

consideration for an adequate and full consideration in money or

money’s worth.   Sec. 274(e)(8).   Accordingly, petitioner argues

he was not entertaining guests.

     Under section 274(n)(1)(A), any amount allowable as a

deduction for “any expense for food or beverages” in connection

with a trade or business activity is generally limited to 50

percent of the amount of the expense that would otherwise be

allowable.   However, section 274(e)(8) provides an exception to

the 50-percent limitation of section 274(n)(1) for “Expenses for

goods or services * * * which are sold by the taxpayer in a bona

fide transaction for an adequate and full consideration in money

or money’s worth.”   Sec. 274(n)(2).

     Section 1.274-2(f)(2)(ix), Income Tax Regs., provides:


     Any expenditure by a taxpayer for entertainment (or for
     use of a facility in connection therewith) to the
     extent the entertainment is sold to customers in a bona
                             - 24 -

     fide transaction for an adequate and full consideration
     in money or money’s worth is not subject to the
     limitations on allowability of deductions provided for
     in paragraphs (a) through (e) of this section. Thus,
     the cost of producing night club entertainment (such as
     salaries paid to employees of night clubs and amounts
     paid to performers) for sale to customers or the cost
     of operating a pleasure cruise ship as a business will
     come within * * * [the section 274(e)(8)] exception.


Thus, despite the fact that a facility might meet the definition

of an entertainment facility and be subject to the general rule

of section 274(a)(1)(A), expenses relating to its operation will

not constitute “entertainment” expenses if that facility is

legitimately involved in “selling” entertainment.

     Additionally, section 1.274-2(e)(3)(iii), Income Tax Regs.,

provides that expenses (exclusive of operating costs and other

expenses referred to in section 1.274-2(e)(3)(i), Income Tax

Regs.) incurred at the time of an entertainment activity, even

though in connection with the use of a facility for entertainment

purposes, such as expenses for food and beverages, or expenses

for catering, or expenses for gasoline and fishing bait consumed

on a fishing trip, shall not be considered to constitute

expenditures with respect to a facility used in connection with

entertainment.

     In Churchill Downs, Inc. v. Commissioner, 115 T.C. 279

(2000), affd. 307 F.3d 423 (6th Cir. 2002), this Court held that

a racetrack operator’s expenses for hosting press parties,

winners’ parties, and other entertainment events did not qualify
                               - 25 -

for the section 274(e)(8) exception to the 50-percent limitation

rule of section 274(n) because the expenses were not part of

producing the taxpayer’s entertainment product and the taxpayer

provided the parties free of charge to its guests.

     The Court agrees with petitioner that the $889.52 expense at

issue is excluded from section 274(n)(1) by virtue of section

274(e)(8).    The guests entertained by petitioner were

representatives of two corporations that had contracts with

petitioner in a bona fide transaction for adequate and full

consideration for the subsequent business uses of these

corporations.

     Petitioner incurred the expenses in question as part of his

business.    Respondent agrees that the claimed expenses were

substantiated.    Thus, the Court holds that the food and beverages

were sold in a bona fide transaction for adequate and full

consideration in money or money’s worth.    Sec. 274(e)(8); see

also secs. 1.274-2(f)(2)(ix), 1.274-2(e)(3)(iii), Income Tax

Regs.   Accordingly the Court holds that the $889.52 expense is

not subject to the 50-percent limitation of section 274(n) and is

fully deductible.

     At trial, petitioner claimed other expenses in connection

with the Frexie activity.    He presented a number of receipts for

ticket purchases, FedEx deliveries, and miscellaneous items such

as programs, scorecards, a baseball cap, and a T-shirt.    There
                              - 26 -

were also other receipts related to food from Aramark in the

amount of $67, Mission Burritos Carillon for $13.21, and Frankie

B. Mandola’s for $26.26.   Some of the receipts had no dollar

figures, and the connection of these expenses, if any, with

Frexie is largely unexplained.   The Court holds that these

expenses have not been adequately substantiated and, therefore,

are not deductible.

     On Schedule A for the year 2000, petitioner claimed a

deduction of $3,218 for the writeoff of old inventory.

Petitioner testified that he had been in the water filter

business in prior years.   After the business was discontinued, he

had on hand an inventory of unsold water filter units.

Petitioner presented at trial a copy of a 1989 Schedule C

relating to the activity that reflected an inventory valuation of

$3,218 in connection with an environmental equipment sales

business.   Petitioner testified that he reported his income and

expenses from that activity on Schedule C of his 1989 income tax

return.

     Petitioner testified that the business languished for a long

period of time and was discontinued, presumably sometime after

1989.   He had inventory remaining from the business that was

never sold.   He had received an offer to sell the inventory in

November 1999 for “50 cents on the dollar”, which he declined.
                              - 27 -

Petitioner testified that, in the year 2000, the water filters

became inoperable and thus were of no value.

     Respondent contends that petitioner provided no

documentation to show that he purchased, utilized, and disposed

of the water filter inventory.   Respondent further contends that

petitioner’s Schedule C for petitioner’s 1989 tax year standing

alone is insufficient to demonstrate that petitioner was in a

business activity for the sale of environmental equipment.

Respondent further argues that there is no proof that petitioner

filed a return for 1989.

     The record does not show that petitioner either purchased or

held a water filter inventory and, if he did, what was the cost

of that inventory.   The Court rejects petitioner’s entitlement to

a deduction on this issue.

     The Court next addresses the addition to tax under section

6651(a)(1) for failure to file a timely 2000 income tax return.

     Section 6651(a)(1) provides for an addition to tax for

failure to file a timely Federal income tax return unless the

taxpayer shows that such failure was due to reasonable cause and

not willful neglect.   United States v. Boyle, 469 U.S. 241, 245

(1985); Baldwin v. Commissioner, 84 T.C. 859, 870 (1985); Davis

v. Commissioner, 81 T.C. 806, 820 (1983), affd. without published

opinion 767 F.2d 931 (9th Cir. 1985).
                               - 28 -

     The addition to tax under section 6651(a)(1) is based on

respondent’s determination that petitioner failed to file an

income tax return for 2000.

     Petitioner’s income tax return was due to be filed on or

before April 15, 2001.    He had requested timely and was granted

an extension to file his 2000 tax return by August 15, 2001.    He

never filed the return until the statutory notice of deficiency

was issued.   At trial, petitioner claimed that he had filed his

2000 tax return timely.   No evidence, however, was presented to

support that claim.   Respondent is sustained on this issue.

     Petitioner’s Federal income tax return for 2000 that was

submitted at trial included a Schedule D, Capital Gains and

Losses, on which petitioner claimed a $5,938.46 short-term

capital loss and a long-term capital loss of $248,643.20.    On the

stipulation of facts that was filed by the parties, a basis for

settlement was agreed to with regard to petitioner’s Schedule D.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                          Decision will be entered

                                     under Rule 155.
