                         T.C. Memo. 2004-32



                       UNITED STATES TAX COURT



             ADRIAN D. TROUTMAN, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12449-01.              Filed February 6, 2004.


     Adrian D. Troutman, Jr., pro se.

     Julie L. Payne, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined an income tax

deficiency of $22,270 and a penalty pursuant to section 6662(a)1




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

of $4,454 for 1999.       After concessions,2 the issues for decision

are:       (1) Whether Adrian D. Troutman, Jr. (petitioner), is

entitled to a deduction pursuant to section 162(a)(1) for alleged

additional compensation paid to his employee;3 and (2) whether

petitioner is entitled to a deduction for costs associated with

the construction of a logging road on his property.

                             FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.       At the time he filed the

petition, petitioner resided in Winlock, Washington.

       During 1999, petitioner operated three sole proprietorships:

T-Foil Enterprises, A & J Insulation Contractors (Washington),

and A & J Insulation Contractors (Oregon).       T-Foil Enterprises

manufactured insulation, while A & J Insulation Contractors

installed the insulation manufactured by T-Foil Enterprises.       The

insulation manufactured by T-Foil Enterprises was also sold to

third parties.




       2
        Respondent has conceded all issues identified in the
notice of deficiency for 1999 and allowed a previously unclaimed
deduction for a charitable contribution of $6,405 for 1999.
       3
        This issue was not included in the statutory notice of
deficiency or in the petition. We find that the issue was tried
by consent pursuant to Rule 41(b)(1), and we consider it to be
before the Court.
                               - 3 -

Petitioner’s Employee Amy Novak-O’Farrell

     Beginning in 1986, and for part of 1999, T-Foil Enterprises

employed Amy Novak-O’Farrell “off and on”.   During 1999, Ms.

Novak-O’Farrell was also employed by Premier Productions, LLC,

and All Platinum Spinners, two businesses which she owned.

T-Foil Enterprises employed Ms. Novak-O’Farrell as an office

manager.   Ms. Novak-O’Farrell’s duties included purchasing

business items and office supplies for T-Foil Enterprises,

picking up mail, reviewing bills, paying bills, depositing

business receipts, collecting rent on property owned by

petitioner, depositing rent collected, and performing

miscellaneous tasks as necessary.   Ms. Novak-O’Farrell also

purchased personal items for petitioner and his family.

Petitioner often worked away from the office for 7 to 10 days at

a time, and he would pick up the purchased items when he returned

to the office.   With approval from petitioner, Ms. Novak-

O’Farrell also purchased personal items for herself using

petitioner’s credit card.

     Ms. Novak-O’Farrell recalled earning $1,000 per month in

wages from petitioner.   Checks from T-Foil Enterprises indicate

that Ms. Novak-O’Farrell received approximately $300 per week in

gross wages, and $254.10 per week in net take-home pay.

Petitioner also agreed to pay Ms. Novak-O’Farrell’s monthly car

payment and gasoline expenses as additional compensation.
                                - 4 -

     Ms. Novak-O’Farrell made purchases for T-Foil Enterprises in

one of two ways.    Sometimes she purchased items with an American

Express card.   The American Express card had her name on it, but

the charges incurred on that card were billed to petitioner.        On

other occasions, Ms. Novak-O’Farrell purchased business items

with her own funds or her own credit card.      When she purchased

business items with her own funds or credit card, petitioner

would reimburse her, or she would write a T-Foil Enterprises

check to herself.   Petitioner periodically reviewed the American

Express bills and canceled checks.      There is no evidence that

petitioner objected to these practices during 1999.

     During 1999, Ms. Novak-O’Farrell and petitioner were friends

in addition to their employer-employee relationship.

     From October 1998 to March 2001, Ms. Novak-O’Farrell rented

a house from petitioner.    The parties did not execute a written

lease.    Ms. Novak-O’Farrell agreed to pay between $900 and $950

per month in rent, which petitioner raised to $1,200 sometime in

1999.    In or about July 1999, Ms. Novak-O’Farrell injured herself

and did not work.   From August 1999 through December 1999,

petitioner and Ms. Novak-O’Farrell orally agreed that she would

pay only half the rent due (approximately $450 to $475).

Petitioner’s Logging Road

     During 1999, Sherwood Trucking & Bulldozing installed a

logging road onto wooded land owned by petitioner.
                                 - 5 -

                                OPINION

A.   Alleged Additional Compensation to Ms. Novak-O’Farrell

     Petitioner argues that he is entitled to a deduction for

additional compensation paid to his employee, Ms. Novak-

O’Farrell, over and above those claimed on his Form 1040 for

1999, because of certain purchases that she made.

     Deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to the deductions

claimed.4    See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435

(1934).     Taxpayers are required to maintain records that are

sufficient to enable the Commissioner to determine their correct

tax liability.     See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

In addition, the taxpayer bears the burden of substantiating the

amount and purpose of the item for the claimed deduction.     See

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976).

     Ordinarily, a taxpayer is permitted to deduct the ordinary

and necessary expenses that he pays or incurs during the taxable

year in carrying on a trade or business.     See sec. 162(a)(1).     An

expense is ordinary for purposes of this section if it is normal

or customary within a particular trade, business, or industry.

See Deputy v. du Pont, 308 U.S. 488, 495 (1940).     An expense is

     4
        Petitioner does not contend that sec. 7491(a) is
applicable to this case.
                               - 6 -

necessary if it is appropriate and helpful for the development of

the business.   See Commissioner v. Heininger, 320 U.S. 467, 471

(1943).

     A taxpayer may deduct payments for compensation if the

amount paid is reasonable and for services actually rendered for

the payor in or before the year of payment.     See sec. 162(a)(1);

Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 119 (1930).    The

reasonableness of compensation is a question of fact that must be

answered by comparing each employee’s compensation with the value

of services that he or she performed in return.    See RTS Inv.

Corp. v. Commissioner, 877 F.2d 647, 650 (8th Cir. 1989), affg.

per curiam T.C. Memo. 1987-98; Charles Schneider & Co. v.

Commissioner, 500 F.2d 148, 151 (8th Cir. 1974), affg. T.C. Memo.

1973-130; Estate of Wallace v. Commissioner, 95 T.C. 525, 553

(1990), affd. 965 F.2d 1038 (11th Cir. 1992).

     Generally, payments are deductible if they are made with an

intent to compensate. Paula Constr. Co. v. Commissioner, 58 T.C.

1055, 1058 (1972), affd. 474 F.2d 1345 (5th Cir. 1973); see also

UAL Corp. v. Commissioner, 117 T.C. 7, 10 (2001); Elec. & Neon,

Inc. v. Commissioner, 56 T.C. 1324, 1340 (1971). “Whether such

intent has been demonstrated is a factual question to be decided

on the basis of the particular facts and circumstances of the

case.” Paula Constr. Co. v. Commissioner, supra.

     1.   Purchases Made by Ms. Novak-O’Farrell

     Petitioner argues that the purchases made by Ms. Novak-

O’Farrell were additional compensation to her.    We disagree.
                               - 7 -

     Ms. Novak-O’Farrell credibly testified that her duties

included purchasing office supplies and business items.

Petitioner’s authorization of her business purchases is evident

from the fact that petitioner added her to his American Express

account and gave her an American Express card in her name.     It is

also evident from the fact that petitioner reimbursed her for

purchases made with her own funds and credit card.   Ms. Novak-

O’Farrell also testified that petitioner asked her to purchase

personal items for him and his family as part of her duties.    Ms.

Novak-O’Farrell did not identify any additional agreed-upon

compensation.

     Petitioner has not established that Ms. Novak-O’Farrell’s

personal purchases, made with petitioner’s permission and on his

credit card, were intended as compensation.   Petitioner did not

report additional compensation for alleged personal purchases as

income to Ms. Novak-O’Farrell on a Form W-2, Wage and Tax

Statement, for 1999, the year the purchases were made.    We

conclude that Ms. Novak-O’Farrell’s agreed-upon compensation from

T-Foil Enterprises was her weekly wages, plus car payments and

gasoline.   Petitioner’s payments of additional, sporadic personal

purchases, if any, were likely based on his friendship with Ms.

Novak-O’Farrell.   They were not additional fixed compensation for

services rendered.   See Anaheim Paper Mill Supplies, Inc. v.

Commissioner, T.C. Memo. 1978-86; cf. Commissioner v. Duberstein,

363 U.S. 278, 285-286 (1960) (transfer of Cadillac to business
                                - 8 -

acquaintance for names of potential customers held to be

compensation).

     Petitioner has not established that he is entitled to a

deduction for compensation pursuant to section 162(a)(1) for any

of the purchases of personal items made by Ms. Novak-O’Farrell.

     2.     Reduced Rent Paid by Ms. Novak-O’Farrell

     Petitioner argues that the amount of rent Ms. Novak-

O’Farrell did not pay during 1999 (approximately $450 to $475 per

month) was compensation to her.    We disagree.

     Petitioner and Ms. Novak-O’Farrell were friends when she

rented petitioner’s house.    Petitioner permitted her to pay less

rent in 1999 because she injured herself and could not work.5

Other than his self-serving testimony, petitioner presented no

evidence to show that he forgave the additional rent owed with an

intent to compensate Ms. Novak-O’Farrell.    Petitioner issued no

Form W-2 to Ms. Novak-O’Farrell for this alleged additional

compensation.    Additionally, petitioner wrote a letter to Ms.

Novak-O’Farrell, which he submitted as evidence in this case,

which indicates that he seeks to collect the rent that she

previously did not pay.

     Petitioner has not established that he is entitled to a

deduction for compensation pursuant to section 162(a)(1) for Ms.

Novak-O’Farrell’s reduced rent.




     5
          Ms. Novak-O’Farrell’s injury was not incurred at work.
                                - 9 -

B.   Deduction for Road Construction

     At trial, petitioner raised, for the first time, the issue

of an additional deduction for costs associated with building a

logging road on his property.   Petitioner’s petition does not

address this issue.   Petitioner did not amend his petition to

raise this issue.   Petitioner did not exchange documentary

evidence related to the logging road with respondent before the

trial, as directed by the Court’s pretrial order dated October

16, 2002.

     Ordinarily, we will not consider issues that are raised for

the first time at trial or on brief.    See Foil v. Commissioner,

92 T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th Cir. 1990);

Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).   This Court

has held on numerous occasions that it will not consider issues

which have not been pleaded.    See, e.g., Estate of Mandels v.

Commissioner, 64 T.C. 61 (1975); Estate of Horvath v.

Commissioner, 59 T.C. 551, 556 (1973); Frentz v. Commissioner, 44

T.C. 485, 490-491 (1965), affd. by order 375 F.2d 662 (6th Cir.

1967).

     At trial, the Court did not allow petitioner to raise this

issue.   Further, the Court sustained respondent’s objection to

the admission of evidence related to the logging road.   In his

posttrial brief, petitioner again attempts to raise the issue of

deduction of expenses associated with the construction of the

logging road.   This issue is not before the Court.
                             - 10 -

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
