                       T.C. Memo. 1999-198



                     UNITED STATES TAX COURT



                    LINDA KLYCE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 20651-93, 12686-97.              Filed June 17, 1999.


     Linda Klyce, pro se.

     Allan D. Hill, for respondent.



                        MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   These consolidated cases
                                             1
were heard pursuant to section 7443A(b)(3)       and Rules 180, 181,

and 182.




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

                                  2
     In notices of deficiency,        respondent determined the

following deficiencies in petitioner's Federal income taxes,

additions to tax, and penalties:


                                    Additions to Tax              Penalties
     Year       Deficiency   Sec. 6651(a)(1)   Sec. 6654(a)      Sec. 6662(a)

     1988        $3,132        $783.00          $200.08             --
     1989           529         132.25             --               --
     1990         1,764         441.00           116.00             --
     1991         1,084         271.00             --              $217
     1992           859         215.00             --               172
     1993         1,691           --               --               338


     Most of the adjustments in the notices of deficiency have

been settled by the parties.      The settled issues and stipulated

facts are set forth in a Stipulation of Facts, a Stipulation of

Agreed Adjustments, a Second Stipulation of Agreed Adjustments,

and a Supplemental Stipulation of Facts.         These settled

adjustments are not repeated here but are referred to, where

pertinent, in connection with the consideration of a disputed

issue.   The disputed issues for decision are:         (1) Whether

petitioner is entitled, for her 1988, 1989, and 1990 tax years,

to deductions for net operating loss carryforwards from her 1985,

1986, and 1987 tax years; (2) whether petitioner is entitled to

deductions for trade or business expenses for the years 1990,

1991, 1992, and 1993 in amounts greater than amounts that were


2
     Respondent issued a separate notice of deficiency for each
of the years 1988, 1989, and 1990 and one notice of deficiency
for 1991, 1992, and 1993.
                                - 3 -


allowed by respondent; (3) whether, as respondent determined for

the years 1992 and 1993 through an indirect method, petitioner

received unreported gross income from two trade or business

activities petitioner was engaged in; (4) whether an S

corporation in which petitioner was a shareholder is entitled to

an expense deduction under section 179 for the year 1993 in an

amount greater than that allowed by respondent; (5) whether

petitioner is entitled, for her 1988, 1989, and 1990 tax years,

to deductions for net operating loss carrybacks from her 1991,

1992, and 1993 tax years; and (6) whether petitioner is liable

for the additions to tax and penalties shown above.

     The facts, as stipulated by the parties, along with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petitions were filed, petitioner's

legal residence was Oakland, California.

     Petitioner had been employed by the U.S. Postal Service for

several years.   In the course of her employment, she sustained

injuries that ultimately resulted in her retirement from the

Postal Service on disability.   Thereafter, petitioner became

engaged in several business activities along with three of her

sisters, Barbara J. Wilson, Faye W. Oatis, and Marian Wilson.

These activities are briefly described as follows:

     (1) Klyce Day Care.    This was a child day care service that

petitioner began in 1979.   It was a general partnership
                                - 4 -


comprising petitioner, Barbara J. Wilson, and Marian Wilson, each

owning a one-third interest.

     (2) Special Occasions.    This was also a general partnership

organized in 1983 and consisting of petitioner, Marian Wilson,

and Barbara J. Wilson, who each owned a 32-percent partnership

interest, and Faye W. Oatis, who owned a 4-percent interest.

Special Occasions specialized in custom tailoring, including

designs, of clothing and accessories, such as wedding and party

dresses, for what was described as "full-figured" women.

     (3) Special O, Inc.   This was an S corporation that was

organized in 1990 by petitioner, Marian Wilson, and Barbara J.

Wilson, who each owned one-third of the stock in the corporation

(Special O).   The other sister, Faye W. Oatis, had no interest in

Special O.   Marian Wilson was president of Special O, Barbara J.

Wilson was vice president, and petitioner was secretary-

treasurer.   Special O was organized to conduct sales of the

clothing prepared or manufactured by Special Occasions.    In

addition, Special O sold related merchandise.   The activities of

Special Occasions and Special O were conducted in the same rented

building that was located in Oakland, California.

     (4) Sweets 'N' Things.    This was a sole proprietorship owned

by petitioner, which was a catering activity.   The only issue as

to this activity is whether, for 1991 and 1992, petitioner is
                                - 5 -


entitled to larger expense deductions than the amounts allowed by

respondent.

     During the years at issue, Special Occasions and Special O

shared the same bank account, titled in the name of Special

Occasions.    The partners of Special Occasions and the

shareholders of Special O failed to keep accurate books and

records of the income and expenses of the two entities.    This

problem was compounded by the fact that not only the entities

used the same bank account but also that the books and records

failed to properly track the deposits and expenditures of each

separate entity.

     Klyce Day Care did not file partnership information returns

for the tax years 1987 through 1993.    Special Occasions did not

file partnership returns for the tax years 1987 through 1991 but

filed returns for 1992 and 1993.    Special O filed Forms 1120S,

U.S. Income Tax Return for an S Corporation, for 1991, 1992, and

1993.

     Petitioner did not file individual Federal income tax

returns for 1988, 1989, and 1990.    However, in the stipulations

referenced earlier, petitioner and respondent agreed to

petitioner's income and certain other related items for these

years, leaving at issue only those items discussed hereafter.

Petitioner's taxable income for these years, respectively, was
                                - 6 -


stipulated to be $24,240, $8,623, and $16,347 (before deduction

of any net operating loss carryovers).

     Petitioner filed her Federal income tax returns for 1991 and

1992 on October 1, 1993.    These returns were not timely filed.

Petitioner timely filed her Federal income tax return for 1993.

On her Federal income tax returns for 1991, 1992, and 1993,

petitioner reported Schedule E losses in the following amounts

from Special Occasions, Klyce Day Care, and Special O:


     Partnership/S Corp           1991      1992      1993

     Special Occasions          ($ 1,967) ($ 2,816) ($ 2,689)
     Klyce Day Care             ( 4,898) ( 4,898) ( 3,200)
     Special O                  ( 6,875) ( 9,895) ( 13,777)

       Total losses             ($13,740) ($17,609) ($19,666)


Petitioner reported no income or loss from Sweets 'N' Things for

1991, 1992, or 1993.

     In August 1996, petitioner filed Forms 1040X, Amended U.S.

Individual Income Tax Return (amended returns), for her 1991,

1992, and 1993 tax years.    On these amended returns petitioner

claimed Schedule C losses from Sweets 'N' Things of $3,910,

$5,254, and $569, respectively, for 1991, 1992, and 1993.

     Prior to issuing the notice of deficiency for 1991, 1992,

and 1993, respondent issued separate Revenue Agent's Reports

(RAR) to Special Occasions and Special O in which respondent made

adjustments in income and deductions.    Respondent used the bank
                                 - 7 -


deposits method to make the relevant income adjustments.

Proportionate shares of these adjustments with respect to

petitioner's interests in these entities were reflected in the

notice of deficiency issued to petitioner.

     In the notice of deficiency for 1991, 1992, and 1993,

respondent made the following adjustments to petitioner's income:


     Adjustment to Income
     (Increase/(Decrease))                 1991       1992        1993

     Special Occasions                   $ 1,967    $ 5,888     $ 6,285
     Klyce Day Care                        4,989      1,989       3,200
     Special O income                     10,237     10,374      14,866
     Sec. 179 depreciation1                 --         --          (211)
     Sweets 'N' Things                    (1,833)    (1,586)       (998)
     Self-employment tax ded.2              --         (105)       (184)

     Net increase in income              $15,360    $16,560     $22,958
     1
         Allowed in connection with Special O.
     2
       Respondent determined that petitioner was liable for
     self-employment taxes of $210 for 1992 and $367 for 1993.


     Prior to trial, the parties stipulated to each item of

income and expense in connection with Sweets 'N' Things for 1991,

1992, and 1993, with the exception of a supply and equipment

expense deduction for 1991 and a food expense deduction for 1992.

With respect to Special Occasions, the parties stipulated that

Special Occasions did not sustain a loss for 1991.           The parties

further stipulated each item of income and expense in connection

with Special Occasions for 1992 and 1993, with the exception of
                               - 8 -


(1) the correct amount of gross income for 1992 and 1993, and (2)

interest expense deductions for 1992 and 1993.   Finally, the

parties stipulated each item of income and expense in connection

with Special O for 1991, 1992, and 1993, with the exception of

(1) travel expense deductions for 1991, 1992, and 1993; (2)

interest expense deductions for 1991, 1992, and 1993; (3) the

correct amount of gross income for 1992 and 1993; and (4) a

section 179 expense deduction for 1993.   At trial, petitioner

conceded the interest expense deductions for 1991, 1992, and

1993, with respect to Special O and the interest expense
                                                     3
deductions of Special Occasions for 1992 and 1993.

     Section 61 defines gross income as all income from whatever

source derived.   With respect to a partnership, each partner

shall take into account separately his or her distributive share

of the partnership's taxable income or loss.   See secs.



3
     Notices of deficiency were issued by respondent to each of
petitioner's sisters, making adjustments to income and deductions
that flowed through to them from the entities in which they were
involved with petitioner. Each of the sisters filed a petition
with this Court. Their cases, the years involved, and the
opinions of the Court are referenced as follows:

     Johnny and Faye W. Oatis, docket No. 17068-96S, 1992 and
     1993, T.C. Summary Opinion 1998-88

     Barbara J. Wilson, docket No. 17067-96S, 1992 and 1993, T.C.
     Summary Opinion 1998-99

     Marian Wilson, docket No. 12687-97, 1991, 1992, and 1993,
     T.C. Memo. 1999-141
                                - 9 -


61(a)(13), 702(a)(8).    With respect to an S corporation, a

shareholder shall take into account his or her pro rata share of

the corporation's losses and deductions to the extent that the

total losses and deductions do not exceed the sum of the adjusted

basis of the shareholder's stock and the shareholder's adjusted

basis of any indebtedness of the S corporation to the

shareholder.   See sec. 1366(d)(1).

     The first issue is whether petitioner is entitled to net

operating loss carryforwards from her 1985, 1986, and 1987 tax

years to her 1988, 1989, and 1990 tax years.    Petitioner reported

negative taxable income amounts of $9,771 and $17,928 on her

Federal income tax returns for 1985 and 1986, respectively.      On

her 1986 return, petitioner claimed a $9,771 net operating loss

carryover from 1985.    On her 1987 return, petitioner reported

adjusted gross income of $3,269 and zero taxable income.    On

September 12, 1989, petitioner filed an amended return for 1987

claiming a $27,699 net operating loss carryover from 1986, plus a

$14,750 loss from an unidentified partnership, for a total loss
           4
of $39,180.




4
     The $27,699 loss carried over from 1986 to 1987 results from
the $9,771 loss reported for 1985 plus the $17,928 loss reported
for 1986. The $39,180 total loss claimed for 1987 results from
the $27,699 loss carried over from 1986 plus the $14,750
unidentified partnership loss reported for 1987, minus the $3,269
adjusted gross income previously reported for 1987.
                              - 10 -


     Respondent determined, and petitioner agrees, that

petitioner had adjusted gross income amounts of $24,420, $8,623,

and $16,347 for 1988, 1989, and 1990, respectively.   Petitioner

contends that she should be allowed to carry forward her

cumulative losses from 1985, 1986, and 1987 to her 1988, 1989,

and 1990 tax years in the amounts of $39,180, $14,758, and

$6,134, respectively.   Respondent contends that petitioner is not

entitled to carry forward her losses from these years because

petitioner failed to make an irrevocable election on her returns

for each of these years, as required by section 172(b)(3)(C), to

relinquish the 3-year carryback period provided in section

172(b)(1)(A).

     In general, section 172 allows a deduction for an amount

equal to the aggregate of the net operating loss carryover to a

taxable year plus the net operating loss carryback to that year.

See sec. 172(a).   Section 172(b), as in effect for the years at

issue, required that a net operating loss first be carried back

to each of the 3 previous taxable years and, if it was unabsorbed

by those years, that the remaining portion be carried forward to

the 15 following taxable years.   See sec. 172(b)(1) and (2).

     Section 172(b)(3)(C), however, provides that a taxpayer may

elect to relinquish the entire carryback period and carry forward

the loss to the taxable years following the loss year. That

section further provides:
                              - 11 -



       (C) * * * Such election shall be made in such manner
     as may be prescribed by the Secretary, and shall be
     made by the due date (including extensions of time) for
     filing the taxpayer's return for the taxable year of
     the net operating loss for which the election is to be
     in effect. Such election, once made for any taxable
     year, shall be irrevocable for that taxable year.


The regulations, in accord with the statute, provide that the

"election must be made by the later of the time, including

extensions thereof, prescribed by law for filing income tax

returns for such taxable year or March 8, 1977."   Sec. 7.0(b)(1),
                                                                5
Temporary Income Tax Regs., 42 Fed. Reg. 1469 (Jan. 7, 1977),

which regulation is entitled Various Elections Under the Tax

Reform Act of 1976.   As to the manner in which the election is to

be effected, section 2, Temporary Income Tax Regs., 42 Fed. Reg.

1470 (Jan. 7, 1977), provides:


       (d) Manner of making election. Unless otherwise
     provided in the return or in a form accompanying a
     return for the taxable year, the elections described
     * * * shall be made by a statement attached to the
     return (or amended return) for the taxable year. The
     statement required when making an election pursuant to
     this section shall indicate the section under which the
     election is being made and shall set forth information
     to identify the election, the period for which it
     applies, and the taxpayer's basis or entitlement for
     making the election. [Emphasis added.]




5
     The regulation was redesignated in 1992 as sec. 301.9100-
12T, Temporary Income Tax Regs., 57 Fed. Reg. 4393 (Sept. 23,
1992).
                               - 12 -


     The Court analyzed these requirements in Young v.

Commissioner, 83 T.C. 831 (1984), affd. 783 F.2d 1201 (5th Cir.

1986).    In Young, the taxpayers sustained a net operating loss in

1976.    On their 1976 Federal income tax return, the taxpayers

reported their taxable income as "None."    On a Form 4625,

Computation of Minimum Tax, attached to that return, the

taxpayers entered on line 11 the amount of their 1976 net

operating loss carryover to 1977.    That return contained no other

information concerning the taxpayers' 1976 net operating loss or

net operating losses from other years.    See id. at 832.     On

December 2, 1980, respondent received from the taxpayers an

amended Federal income tax return for 1976; the taxpayers

attached a statement thereto entitled Net Operating Loss

Computation.    That statement contained a recalculation of the

taxpayers' 1976 net operating loss and the following declaration:


                              ELECTION

     In accordance with regulation section 7.0(d) taxpayer
     elects or has previously elected to forgo the carry
     back period of the 1976 net operating loss deduction.


Id. at 833.    On these facts, the Court concluded in Young that

the taxpayers neither literally nor substantially complied with

the election requirements of the regulations at section 7.0(d),

Temporary Income Tax Regs., 42 Fed. Reg. 1470 (Jan 7, 1977).

Young v. Commissioner, supra at 836.
                               - 13 -


     In Young, the Court held that a taxpayer is required to

attach a separate statement with the requisite information to the

return itself.    The Court held further that the taxpayers' lack

of taxable income for the return year did not constitute such a

separate statement.    The Court stated:


     That petitioners reported no taxable income for 1976
     indicates nothing concerning either the existence or
     the extent of a net operating loss for that year, or
     any intention to carry the net operating loss forward
     or backward. * * * [Fn. ref. omitted.]


Id. at 837.    The Court stated further that the taxpayers' entry

on the Form 4625 attached to the 1976 return "[indicated] nothing

with respect to the amount of a 1976 net operating loss, or [the

taxpayers'] intent to relinquish the carryback period for such

loss."   Id.

     Here, petitioner did not comply with the express

requirements of section 172, and the regulations thereunder, for

1985, 1986, and 1987 to relinquish the carryback of the net

operating losses sustained for these years.   Petitioner did not

attach a separate statement to either her 1985, 1986, or 1987

return, or to her amended return for 1987, for the required
                                        6
election under section 172(b)(3)(C).


6
     Moreover, even if the 1987 amended return contained an
election, the election would be ineffective or invalid. In Young
v. Commissioner, supra, this Court concluded that the taxpayer's
                                                   (continued...)
                               - 14 -


       This Court further stated in Young v. Commissioner, supra at

839:


       as an absolute minimum, the taxpayer must exhibit in
       some manner, within the time prescribed by the statute,
       his unequivocal agreement to accept both the benefits
       and burdens of the tax treatment afforded by that
       section. * * *


The rationale for the required election, as explained by the

Court, is to prevent the taxpayer from being allowed to wait and

see how a net operating loss can best be utilized; in making the

election irrevocable, the statute forecloses the taxpayer from

later claiming that he never intended to make the election.      See

Young v. Commissioner, supra, 83 T.C. at 839.    None of the

relevant returns in the present case clearly expresses an

intention on the part of petitioner to forgo the carryback of a


6
 (...continued)
"amended return is irrelevant" in determining substantial
compliance with the election requirements. Young v.
Commissioner, supra, 83 T.C. at 840-841. In rejecting the
taxpayer's argument that sec. 7.0(d), Temporary Income Tax Regs.,
42 Fed. Reg. 1469 (Jan 7, 1977), provides that an election may be
made in an amended return, the Court explained:

       This is true; however, in order to square the
       regulation with the directive of the statute, an
       election made in a subsequently filed return can only
       be effective if the subsequently filed return is filed
       before the due date of the return.

Young v. Commissioner, supra, 83 T.C. at 841 n.9. In this case,
petitioner's 1987 amended return was filed more than 1 year after
the due date of the original return, and there was no evidence in
the record with respect to any extensions for filing.
                                  - 15 -


net operating loss.       On this record, the Court holds that

petitioner did not make a valid election under section

172(b)(3)(C) for 1985, 1986, or 1987.

     Under section 172(b)(2), in the event a proper election is

not made under section 172(b)(3)(C), a carryforward of any net

operating loss is allowable only to the extent that the loss

exceeds the taxable income for the years of a carryback,

regardless of whether a carryback was in fact claimed.        Lone

Manor Farms, Inc. v. Commissioner, 61 T.C. 436, 441-442 (1974),

affd. without published opinion 510 F.2d 970 (3d Cir. 1975); sec.

1.172-4(b)(1) and (2), Income Tax Regs.        Petitioner did not offer

any evidence to show that the claimed 1985, 1986, and 1987 net

operating losses would not have been absorbed through the
                                       7
operation of the 3-year carryback.         Consequently, the Court

holds that petitioner is not entitled to carry over her claimed

net operating losses from 1985, 1986, and 1987 to her 1988, 1989,
                      8
and 1990 tax years.       Respondent is sustained on this issue.




7
     The record reflects that petitioner reported $17,774 in
adjusted gross income and $7,751 in taxable income for 1982 and
$10,362 in adjusted gross income and $4,022 in taxable income for
1983. The record does not reflect petitioner's income for 1984.
8
     Petitioner argues, in the alternative, that she should be
allowed to carry back her claimed losses for 1985, 1986, and 1987
to her 1982, 1983, and 1984 tax years; however, these tax years
are not presently within the jurisdiction of this Court. Thus,
the Court is unable to consider such an argument in this case.
                               - 16 -


     The second issue relates to several expenses petitioner

claimed in the various activities in which she was engaged,

described earlier.

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

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business".     Sec. 162(a).   An expense

must be both ordinary and necessary within the meaning of section

162(a).   See Deputy v. duPont, 308 U.S. 488, 495 (1940).     Whether

an amount in question constitutes an ordinary and necessary

expense incurred in the operation of the taxpayer's trade or

business is a question of fact to be determined from the evidence

presented.    See Welch v. Helvering, 290 U.S. 111 (1933); Allen v.

Commissioner, T.C. Memo. 1988-166.

     The first expense item is $948, which petitioner claims she

is entitled to deduct as expenses incurred in connection with her

Klyce Day Care activity during 1990.

     In substantiation of this item, petitioner presented

photocopies of the following 10 canceled checks, which bore an

imprinted address of "Klyce Day Care, 1828 Rosedale Ave.,

Oakland, CA   94601":
                                    - 17 -


     Ck. No.     Date           Payee                    Amount

     2295        1/12/90        O.L.D.C.O.A.-B.B.        $ 39.05
     2301        1/22/90        Pacific Gas & Electric    237.62
     2302        1/22/90        Oakland Scavenger Co.      64.18
     2303        1/26/90        Standard Brands            11.99
     2306        2/09/90        Pacific Bell               64.00
     2308        2/12/90        E.B.M.U.D.                 59.89
     2316        3/22/90        AT&T                       41.01
     2317        3/22/90        Oakland Scavenger Co.      32.09
     2318        3/22/90        Pacific Bell               84.18
     2319        3/22/90        Pacific Gas & Electric    314.14

         Total                                           $948.15


Petitioner failed to identify O.L.D.C.O.A.-B.B. and E.B.M.U.D.;

thus, the Court has no way of surmising to whom these checks were

paid and for what purpose.         Petitioner further failed to provide

evidence as to the identity of Oakland Scavenger Co. or Standard

Brands and the purpose for which the aforementioned checks were

paid thereto.

     Petitioner admits that the claimed expenses were incurred

solely for the care of one child between January and March 1990;

however, petitioner provided no details surrounding the operation

of Klyce Day Care during this time; i.e., location, hours of

operation, services provided, existence of employees, and so

forth.    The Court is not persuaded that monthly gas and electric

bills of $237.62 and $314.14, as well as monthly telephone bills
                        9
of $64 and $125.19,         were attributable to the care of only one


9
     On Mar. 22, 1990, checks were written to AT&T in the amount
                                                   (continued...)
                                  - 18 -


child.   The record does not disclose the number of phone calls,

if any, made in those months in connection with a day care

activity for the care of only one child, nor does the record show

that it was necessary to incur significant long-distance

telephone charges in connection with the care of that child.

These expenses were more likely personal expenses of petitioner

that were paid out of an account in the name of Klyce Day Care

and, as such, are not deductible as trade or business expenses
                        10
under section 162(a).

     The next item is supply and equipment expense and food

expense deductions for 1991 and 1992, respectively, in connection

with Sweets 'N' Things.       Petitioner contends she is entitled to a

deduction for the food expenses in amounts greater than that

allowed by respondent.       On her 1991 amended return, petitioner

claimed $3,568 for supply and equipment expenses.       The entire

amount was disallowed by respondent.       Petitioner did not present

evidence to satisfy the Court that she is entitled to a supply




9
 (...continued)
of $41.01 and Pacific Bell in the amount of $84.18, totaling
$125.19.
10
     Sec. 262(a) provides generally that no deduction shall be
allowed for personal, living, or family expenses. Sec. 262(b)
provides further that, for purposes of subsec. (a), in the case
of an individual, any charge for basic local telephone service
with respect to the first telephone line provided to any
residence of the taxpayer shall be treated as a personal expense.
                                - 19 -


and equipment expense deduction for any amount for 1991.     The

Court sustains respondent's disallowance of this expense.

     On her 1992 amended return, petitioner claimed $4,290 for

food expenses that was disallowed by respondent.    In the

stipulation, respondent conceded that petitioner was entitled to

a $922 food expense deduction in connection with Sweets 'N'

Things for 1992.   Petitioner did not present evidence to satisfy

the Court that she is entitled to a food expense deduction

greater than the amount conceded by respondent.    The Court holds

that petitioner is not entitled to a deduction in excess of the

amount conceded by respondent.

     The next item is whether petitioner is entitled to travel

expense deductions for 1991, 1992, and 1993 in connection with

Special O.   Respondent disallowed travel expenses claimed by

Special O in the amounts of $740.81, $2,497, and $1,529 for 1991,

1992, and 1993, respectively.    Petitioner contends that travel

expenses were incurred by Special O for various trips taken by

petitioner and the other shareholders during 1991, 1992, and

1993.

     A taxpayer is required to maintain records sufficient to

establish the amount of his or her income and deductions.     See

sec. 6001.   Under certain circumstances, where a taxpayer

establishes entitlement to a deduction but does not establish the

amount of the deduction, the Court is allowed to estimate the
                              - 20 -


amount allowable.   See Cohan v. Commissioner, 39 F.2d 540 (2d

Cir. 1930).   However, there must be sufficient evidence in the

record to permit the Court to conclude that a deductible expense

was incurred in at least the amount allowed.    See Williams v.

United States, 245 F.2d 559, 560 (5th Cir. 1957).     In estimating

the amount allowable, the Court bears heavily against the

taxpayer whose inexactitude is of his or her own making.     See

Cohan v. Commissioner, supra at 544.

     However, as to travel expenses, specifically including meals

and lodging while away from home, as well as in the case of

entertainment expenses and expenses with respect to listed

property, section 274(d) overrides the so-called 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).    Section

274(d) imposes stringent substantiation requirements for

deductions related to travel, entertainment, gifts, and "listed

property (as defined in section 280F(d)(4))".    Passenger

automobiles are listed property under section 280F(d)(4)(i).

Section 274(d) denies these deductions unless:


     the taxpayer substantiates by adequate records or by
     sufficient evidence corroborating the taxpayer's own
     statement (A) the amount of such expense or other item,
     (B) the time and place of the travel, entertainment,
     amusement, recreation, or use of the facility or
     property, or the date and description of the gift, (C)
                               - 21 -


     the business purpose of the expense or other item, and
     (D) the business relationship to the taxpayer of
     persons entertained, using the facility or property, or
     receiving the gift. * * *


Thus, under section 274(d), deductions for automobile expenses,

travel expenses, and meals and entertainment expenses may not be

estimated.    Instead the taxpayer must provide adequate records or

corroborate testimony with other evidence.

     If a taxpayer travels to a destination and, while at such

destination, engages in both business and personal activities,

traveling expenses to and from such destination are deductible

only if the trip is primarily related to the taxpayer's trade or

business.    See sec. 1.162-2(b)(1), Income Tax Regs.   If a trip is

primarily personal in nature, traveling expenses to and from the

destination are not deductible even if the taxpayer engaged in

some business activities at the destination.    See id.   However,

expenses while at the destination that are properly allocable to

the taxpayer's trade or business are deductible even though the

traveling expenses to and from the destination are not

deductible.    See id.

     Whether travel is related primarily to the taxpayer's trade

or business, or is primarily personal, is a question of fact.

See sec. 1.162-2(b)(2), Income Tax Regs.; see also Holswade v.

Commissioner, 82 T.C. 686, 698, 701 (1984).    The amount of time

during the period of the trip that is spent on personal activity,

compared to the amount of time spent on activities directly
                              - 22 -


relating to the taxpayer's trade or business, is an important

factor in determining whether the trip is primarily personal.

See sec. 1.162-2(b)(2), Income Tax Regs.

     Petitioner claims that she traveled to San Diego,

California, and Mexico during 1991 in an effort to purchase less

expensive garments and materials for the manufacture of garments.

During 1992, petitioner contends she traveled to Los Angeles to

attend a clothing market for the wholesale purchase of various

garments for resale in the retail market.   Petitioner also claims

that she traveled to New Orleans, Louisiana, during 1992 for the

purpose of attending the Black Expo, at which she maintained a

booth and dispensed information and merchandise to attendees

there. The testimony at trial indicated that another purpose for

attending the Black Expo was to develop a mail-order business for

Special O.   Petitioner contends further that she made another

garment and fabric-purchasing trip during 1993 to San Diego,

California, and Yuma, Arizona.

     Petitioner testified that, during her 1991 trip to Mexico,

she visited Tijuana and purchased jewelry and a purse, but she

produced no evidence to show that these items were purchased for

a business purpose rather than for her own personal use.

Petitioner admitted that the majority of her 1992 trip to New

Orleans was spent visiting relatives at Baton Rouge, Louisiana.

Petitioner also admitted that, during the Black Expo, she stayed
                              - 23 -


with her relatives in Baton Rouge and rented a van to drive to

New Orleans each day for the expo.     With respect to the 1993 trip

to Yuma, Arizona, petitioner claims she visited several fabric

stores but was unable to provide the names or locations of any

such stores or produce any evidence that she made purchases at

such stores.

     The Court is not satisfied that petitioner, on behalf of

Special O, engaged in any business travel during 1991 or 1993.

Moreover, even if the Court were to hold that petitioner made

business trips (as opposed to trips for personal pleasure) to

Mexico, San Diego, and Yuma during 1991 and 1993, or engaged in

any other business travel during those years, the strict

substantiation requirements of section 274(d) have not been

satisfied with respect to any such travel.    On the entire record,

the Court holds that no travel expenses are deductible by Special

O for 1991 or 1993.

     The Court is satisfied, however, that petitioner attended

the Black Expo in New Orleans during 1992 for a proper business

purpose in connection with Special O.    However, the Court is

likewise convinced that the primary purpose for petitioner's trip

in this regard was the personal purpose of visiting relatives in

Baton Rouge.   Thus, only those expenses properly allocable to the

business of Special O would be deductible but the travel to and

from New Orleans would not be deductible.
                               - 24 -


       Petitioner produced a photocopy of a $325 money order,

purchased on June 3, 1992, by one of the other shareholders of

Special O, Marian Wilson, with the payee listed as Black Expo

USA.    Petitioner failed to produce evidence sufficient to show,

within the strict substantiation parameters of section 274(d),

that any other expenses were incurred in connection with the New
                                                      11
Orleans trip that would be deductible by Special O.        In

connection with the $325 payment to Black Expo USA, in order for

petitioner to be entitled to a deduction for her allocable share

of such expense (derivatively through the net profit or loss of

Special O), the expense must have been incurred by Special O.

The record shows that the $325 was paid by Marian Wilson, one of

the shareholders of Special O.   The record does not show whether

Special O reimbursed Marian Wilson the $325.   A corporation is

not entitled to deduct unreimbursed shareholder expenses.       See

Lang Chevrolet Co. v. Commissioner, T.C. Memo. 1967-212.        Special

O, therefore, could not have claimed a deduction for this item

unless Special O reimbursed the expense to the shareholder who


11
     Petitioner produced a rental car contract from Audubon Rent-
A-Car in Baton Rouge, Louisiana, signed by one of the other
Special O shareholders, showing a $289.71 payment for rental of a
vehicle (the type of which is unidentifiable on the face of the
contract) from Nov. 27 through Nov. 30, 1992. Although the Court
is satisfied that this vehicle was rented during the relevant New
Orleans trip, the Court is not convinced that this expense is
primarily related to or properly allocable to Special O. Even if
viewed as a "travel to and from a destination" expense, it is not
deductible. Sec. 1.162-2(b)(1), Income Tax Regs.
                               - 25 -


incurred the expense.    Petitioner, therefore, has failed to

establish that the $325 was a deductible expense incurred by
            12
Special O.

       The third issue is the proper amount of gross income

attributable to Special Occasions and Special O for 1992 and

1993.    Because Special Occasions and Special O did not maintain

adequate books and records, respondent used the bank deposits

method to reconstruct the income of both entities.    The use of

the bank deposits method to reconstruct income is well

established and has been sanctioned by the courts.    See DiLeo v.

Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978).

       The Commissioner is required to take into account any

nontaxable sources of deposits or deductible expenses of which

the Commissioner is aware.    See DiLeo v. Commissioner, supra at

868.    The testimony of a taxpayer unsupported by documentary

evidence may be insufficient to cast doubt upon the




12
     In Wilson v. Commissioner, T.C. Memo. 1999-141, involving
the 1992 tax year of Marian Wilson, who was the shareholder in
Special O who paid the $325 in question, it was stipulated that
the travel expenses claimed by Special O had been paid from the
personal funds of the shareholders of Special O. In the subject
case, the Court held that Marian Wilson had not established that
such travel expenses had been reimbursed to her, and, therefore,
travel expenses paid for in the manner stipulated were not
deductible by Special O.
                                - 26 -


Commissioner's determination.    See Alvarez v.Commissioner, T.C.

Memo. 1995-414.

     The parties stipulated that nontaxable deposits were made

into the shared bank account of Special Occasions and Special O.

Respondent conceded that the total dollar amounts of unexplained

bank deposits from the shared bank account should be reduced to

$610 and $1,362 for 1992 and 1993, respectively, and that these

amounts should be divided equally between Special Occasions and

Special O.

     Petitioner presented no evidence to show that any other

unexplained bank deposits into the shared account were nontaxable

deposits.    Petitioner failed to introduce cash register receipts,

canceled checks, credit card statements, or bank deposit receipts

to substantiate the source of unexplained bank deposits.

Moreover, petitioner failed to convince the Court of any

impropriety concerning respondent's equal division of taxable

bank deposits between Special Occasions and Special O.   As noted

earlier, the funds of Special Occasions and Special O were

commingled.   Consequently, on this record, the Court sustains the

amount of income determined (after concessions) by respondent in

connection with Special Occasions and Special O for 1992 and

1993.

     The fourth issue is whether petitioner is entitled to a

section 179 expense deduction for 1993 in connection with Special
                                 - 27 -


O in an amount greater than that allowed by respondent.      For

1993, Special O claimed a section 179 expense deduction of

$10,570 for computers and related equipment.      In the RAR for

Special O, respondent disallowed this deduction, in part, due to

lack of documentation to substantiate the cost of computer and
                        13
other such equipment.        Respondent determined that Special O

failed to substantiate entitlement to any additional section 179

expense deduction for 1993.      Alternatively, respondent contends

that Special O is not entitled to any additional section 179

expense deduction for 1993 under section 179(b)(3)(A) because

Special O's taxable income for 1993 did not exceed the section

179 amount that was allowed.

     Section 179 allows a taxpayer to elect to treat the cost of

section 179 property as a current expense in the year such

property is placed in service, within certain dollar limitations.

See sec. 179(a).   An election under section 179 must be made on

the taxpayer's original return for the taxable year or an amended

return filed timely.     See sec. 179(c)(1)(B); sec. 1.179-5(a),

Income Tax Regs.   Once made, this election may not be revoked

"except with the consent of the Secretary."      Sec. 179(c)(2); sec.



13
     In the notice of deficiency, respondent allowed petitioner a
$211 expense deduction under sec. 179 in connection with Special
O for 1993. The record does not reflect the specific property
for which this deduction was allowed, nor does the record reflect
respondent's reasons for allowing the deduction.
                               - 28 -


1.179-5(b), Income Tax Regs.   Moreover, the taxpayer shall

maintain records that permit specific identification of each

piece of section 179 property and that reflect how and from whom

such property was acquired and when such property was placed in

service.   See sec. 1.179-4(a), Income Tax Regs.   The expense

deduction under section 179(a) for any tax year "shall not exceed

the aggregate amount of taxable income of the taxpayer for such

taxable year which is derived from the active conduct by the

taxpayer of any trade or business during such taxable year";

however, any amount disallowed may be carried forward to later

taxable years.   See sec. 179(b)(3)(A) and (B).

     Petitioner submitted photocopies of various invoices and

receipts to support her contention that Special O placed in

service during 1993 a word processor, an awning with lettering, a

computer, a laser printer, and two telephones, having a total

cost of $7,656.99.

     After examining the submitted invoices and receipts, the

Court is not satisfied that Special O purchased the subject

property in the claimed amounts during 1993.   Moreover, for any

property that the Court is satisfied was purchased during 1993,

the Court is not convinced that such property was purchased by,

or on behalf of, Special O in connection with the business of

Special O and was not used for personal purposes of the

shareholders.    The evidence fails to satisfy the Court that, with
                                - 29 -


respect to the asserted items of property, Special O has

satisfied the requirements of section 179 in order to claim a

greater expense deduction for 1993 than that allowed by

respondent.   Moreover, even if the Court were to conclude that

Special O purchased the property in question, it can only be

expensed to the extent of the aggregate taxable income for the

taxable year.   Respondent has allowed Special O a sec. 179

deduction for $211, and petitioner has not shown that Special O's

taxable income for 1993 exceeded $211.    Therefore, even if the

purchase of the property in question had been established, there

could be no additional sec. 179 expense deduction allowed for

1993.   Respondent is sustained on this issue.

     The fifth issue is whether petitioner is entitled to net

operating loss carrybacks from her 1991, 1992, and 1993 tax years

to her 1988, 1989, and 1990 tax years.    The Court's various

holdings herein establish that petitioner failed to show that she

sustained net operating losses for 1991, 1992, and 1993 to carry

back to 1988, 1989, and 1990.    Because of the absence of net

operating losses for 1991, 1992, and 1993, her claim to

carrybacks is denied.

     The final issue is whether petitioner is liable for

additions to tax and penalties.    The first is the addition to tax

under section 6651(a)(1) for failure to file timely Federal

income tax returns for 1988, 1989, 1990, 1991, and 1992.    Section
                               - 30 -


6651(a)(1) imposes an addition to tax for a taxpayer's failure to

file timely returns, unless the taxpayer can establish that such

failure "is due to reasonable cause and not due to willful

neglect".   Petitioner did not file Federal income tax returns for

1988, 1989, and 1990.   Petitioner's 1991 and 1992 Federal income

tax returns were due to be filed on or before April 15, 1992, and

1993, respectively.    These returns were filed in October 1993.

     Petitioner did not establish that her failure to file timely

Federal income tax returns for 1988 through 1993 was due to

reasonable cause and not due to willful neglect.    Petitioner's

position is that she did not file income tax returns for 1988,

1989, and 1990 because she believed that the net operating loss

carryforwards from prior years would have negated any income tax

liabilities for the years 1988 through 1990.    Petitioner

conceded, however, that she realized gross income in these 3

years.    Her erroneous belief that no taxes are due does not

constitute reasonable cause for the failure to file an income tax

return.   Krieger v. Commissioner, T.C. Memo. 1993-347.

Petitioner advanced no reasons why her income tax returns for

1991 and 1992 were not filed timely.    Respondent, therefore, is

sustained on the addition to tax under section 6651(a)(1).

     The next addition to tax is under section 6654(a) for

failure to pay estimated taxes for 1988 and 1990.    Section

6654(a) provides for an addition to tax "in the case of any
                               - 31 -


underpayment of estimated tax by an individual".     There is no

exception contained therein relating to reasonable cause and lack

of willful neglect.   Subject to certain exceptions provided by

statute, this addition to tax is otherwise automatic if the

amounts of the withholdings and estimated tax payments do not

equal statutorily designated amounts.     See Niedringhaus v.

Commissioner, 99 T.C. 202, 222 (1992).     Petitioner made no

prepayments of taxes for 1988 and 1990.

     In the reply brief, respondent agrees that, with respect to

petitioner's 1988 tax year, the section 6654(a) addition to tax

is not applicable and conceded this addition to tax for that

year.   Section 6654(e)(2) provides an exception to the section

6654(a) addition to tax if, among other conditions that

petitioner has met, the taxpayer did not have any liability for

tax for the preceding taxable year.     Respondent agrees that

petitioner's Federal income tax return for 1987 did not reflect

any tax liability.    Therefore, petitioner is not liable for the

section 6654(a) addition to tax for 1988; however, respondent is

sustained on this issue for 1990.

     Respondent determined that petitioner was liable for

accuracy-related penalties under section 6662(a) for negligence

or disregard of rules or regulations for 1991, 1992, and 1993.

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

of an underpayment in taxes, there shall be added to the tax an
                              - 32 -


amount equal to 20 percent of the portion of the underpayment to

which section 6662 applies.   Section 6662(b)(1) provides that

section 6662 shall apply to any underpayment attributable to

negligence or disregard of rules or regulations.

     Section 6662(c) provides that the term "negligence" includes

any failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws, and the term "disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations.   Negligence is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances.    See Neely v. Commissioner, 85

T.C. 934, 947 (1985).

     However, under section 6664(c), no penalty shall be imposed

under section 6662(a) with respect to any portion of an

underpayment if it is shown that there was a reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion.   The determination of whether a taxpayer

acted with reasonable cause and in good faith depends upon the

facts and circumstances of each particular case.    See sec.

1.6664-4(b)(1), Income Tax Regs.    Relevant factors include the

taxpayer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and reliance on the

advice of a professional, such as an accountant.    See Drummond v.

Commissioner, T.C. Memo. 1997-71, affd. in part, revd. in part
                              - 33 -


without published opinion 155 F.3d 558 (4th Cir. 1998).    However,

the most important factor is the extent of the taxpayer's effort

to determine the taxpayer's proper tax liability.    See sec.

1.6664-4(b)(1), Income Tax Regs.   An honest misunderstanding of

fact or law that is reasonable in light of the experience,

knowledge, and education of the taxpayer may indicate reasonable

cause and good faith.   See Remy v. Commissioner, T.C. Memo. 1997-

72.

      In the notice of deficiency, respondent applied the section

6662(a) penalty to all adjustments for 1991, 1992, and 1993.    For

all 3 years, the underpayments resulted from respondent's

adjustments to the income and expenses of Klyce Day Care, Sweets

'N' Things, Special Occasions, and Special O.

      On this record, the Court finds that petitioner negligently

or intentionally disregarded rules or regulations with regard to

the adjustments in the notice of deficiency for 1991, 1992, and

1993.   Petitioner did not exercise due care in maintaining

adequate records of her income and expenses.    As to two of the

activities in which petitioner was engaged, her books and records

were so inaccurate that respondent was compelled to use an

indirect means of determining what her gross income was.    Very

few of petitioner's claimed expenses were substantiated.    Some of

her expenses were for personal purposes.   Accordingly, the
                             - 34 -


imposition of the accuracy-related penalty under section 6662(a)

for 1991, 1992, and 1993 is sustained.




                                         Decisions will be entered

                                   under Rule 155.
