                       T.C. Memo. 1998-353



                     UNITED STATES TAX COURT



                   SUBHENDU DAS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 18435-96, 27179-96.      Filed October 5, 1998.


     Subhendu Das, pro se.


     Linette Angelastro, for respondent.


                       MEMORANDUM OPINION


     NAMEROFF, Special Trial Judge:    These consolidated cases

were heard pursuant to the provisions of section 7443A(b)(3) and

Rules 180, 181, and 182.1    Respondent determined deficiencies in

and penalties on petitioner's Federal income taxes as follows:

     1
        Unless otherwise indicated, all 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 -




         Year1            Deficiency         Sec. 6662(a)

         1993               $3,043                 $609
         1994                2,227                  445
         1995                   84                  -0-
    1
         Docket No. 18435-96 pertains to 1994, and docket No.

27179-96 pertains to 1993 and 1995.

    After concessions by petitioner,2 the issues for decision

are: (1) Whether petitioner is entitled to deduct business

expenses on Schedule C for 1993 and 1994 or whether the

deductions belong to his corporation; (2) if we hold that he is

entitled to deduct the business expenses, whether petitioner has

substantiated the expenses; and (3) whether petitioner is liable

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

negligence or disregard of rules or regulations.

     Some of the facts have been stipulated, and they are so

found.   The stipulation of facts and the attached exhibits are

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

petition, petitioner resided in Chatsworth, California.

Background


     2
        In the notice of deficiency for 1993, respondent
determined that petitioner had an unreported capital gain of
$1,128. In the notice of deficiency for 1995, respondent
disallowed a claimed capital loss on the ground that petitioner
did not prove that the stock was worthless in that year.
Petitioner conceded both issues at trial.
                                - 3 -


     Trial of this case began on January 28, 1998.   At trial,

petitioner conceded the capital gain and loss issues for 1993 and

1995.   However, petitioner was not prepared to go forward with

his case concerning the claimed business expenses on Schedule C

for 1993 and 1994.    We continued the case to March 17, 1998, and

instructed petitioner to be prepared to present the facts of his

case along with the necessary documents and records.   Despite the

Court’s warning, petitioner was not prepared to discuss the

substantiation issue, although some documents were stipulated

without explanation or elaboration.

     Petitioner has a Ph.D. in electrical engineering.    In 1993,

he quit his job as an aerospace engineer in order to pursue his

invention of a computer-controlled nozzle sprinkler system

(sprinkler system).   The sprinkler system consisted of a

computer-driven rotating watering device for gardens and lawns.

     Also in 1993, petitioner created a California corporation

called Computer Control Systems, Inc. (CCSI).   CCSI filed its

articles of incorporation on April 6, 1993.   Petitioner and his

wife were the only shareholders.   According to petitioner, CCSI’s

business was to produce the sprinkler system to sell to

customers.   Petitioner was named the vice president of

engineering, and his wife was named president of CCSI.    A

separate checking account was opened in CCSI’s name.
                                - 4 -


     Thereafter, petitioner expended $4,634.59 for several items

in connection with his invention, such as a lathe with various

attachments and a computer with accessories.    Petitioner

testified that the equipment was transferred to the corporation.

Petitioner filed for a patent, which was eventually obtained in

his name.    The filing cost for the patent was $585.    There was no

formal agreement between petitioner and CCSI for use of the

patent.    During 1993 and 1994, petitioner was primarily engaged

in obtaining investors for the product.    Neither CCSI nor

petitioner had any product for sale.

     On Schedule C for 1993 under the name of Computer Controlled

Systems, petitioner reported no income and claimed deductions of

$16,628 for business expenses and $1,002.11 for a home office.

On Schedule C for 1994 under the name of CCSI, petitioner claimed

deductions of $12,900 for business expenses and $882.31 for home

office.    In 1994, petitioner reported $1,600 in gross receipts

and $600 for cost of goods sold resulting in gross income of

$1,000.3    The Schedule C expenses consisted of:



                                1993              1994
  Car and truck                 $280              $200
  Sec. 179 deduction1         15,648            12,000
  Insurance                      150               150

     3
        Petitioner stated at trial that, to date, the sprinkler
system has not been ready for sale. Therefore, we assume the
gross receipts reported in 1994 were not related to the sprinkler
system.
                               - 5 -


  Office expenses                50               50
  Utilities                     500              500
                             16,628           12,900
  Home office2                1,002              882
     Total                   17,630           13,782
  1
      The 1993 amount of $15,648 consists of a $585 patent fee,
$10,000 for the valve prototype, and $4,938 for a lathe,
computer, and tools. The 1994 amount of $12,000 consists of
$2,000 for an IBM PS1 and $10,000 for a second prototype. The
record contains no evidence as to the basis for the prototype
costs.
   2
     Amounts shown are rounded to the nearest dollar. The
computations for the home office deductions included amounts for
insurance and utilities.


      For the home office expenses, the following documents were

stipulated:   A Notice of Assessed Value Change for petitioner’s

residence dated February 11, 1989; an annual real estate tax and

interest statement for 1993; an amended declaration page for a

homeowner’s insurance policy; one page of a telephone bill from

1993; one gas bill; and one electric bill.

      Petitioner did not file a Schedule C with his 1995 joint

return.   Petitioner testified that he filed tax returns for CCSI

in 1994, 1995, and 1996.   He claimed expenses on CCSI’s return

only when CCSI reported income.   CCSI reported income when

petitioner did contract work on behalf of CCSI.4

      Petitioner presented a brochure reflecting an undated

business plan statement describing the sprinkler system.   In this


      4
        Petitioner did not elaborate on what type of contract
work he was doing on behalf of CCSI, but we assume that it was
unrelated to the sprinkler system.
                                 - 6 -


brochure, the name of petitioner’s corporation was shortened to

Systems, Inc. (SI).    The brochure states that SI designed and

produced the sprinkler system.

     Respondent disallowed all Schedule C expenses for both years

and contended that the claimed expenses belong to CCSI and not

petitioner.

Discussion

     Pursuant to section 162, a deduction is allowed for “all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.    In order to

be deductible, business expenses generally must be the expenses

of the taxpayer claiming the deduction.     Gantner v. Commissioner,

91 T.C. 713, 725 (1988), affd. 905 F.2d 241 (8th Cir. 1990);

Hewett v. Commissioner, 47 T.C. 483, 488 (1967).    For tax

purposes, a corporation is treated as a separate entity from its

shareholders.   Moline Properties, Inc. v. Commissioner, 319 U.S.

436, 438-439 (1943).    Furthermore, a shareholder is not entitled

to a deduction from his individual income for his payment of

corporate expenses.    Deputy v. duPont, 308 U.S. 488, 494 (1940);

Gantner v. Commissioner, supra.     Shareholders cannot deduct as

personal expenses such expenses that further the business of the

corporation.    Leamy v. Commissioner, 85 T.C. 798, 809 (1985).

     Petitioner stated that he paid all the claimed expenses.

Petitioner is an officer and shareholder of CCSI, and both
                                 - 7 -


parties agree that CCSI was an active corporation during the

years at issue.    CCSI was created to produce and market the

sprinkler system, and petitioner transferred all equipment

related to the sprinkler system to CCSI.      Thus every expense

related to the sprinkler system is an expense of CCSI, even if

petitioner paid the expense.

     Furthermore, the fact that the expenses were deducted on

CCSI’s return when CCSI had income shows that the expenses are

those of CCSI.     Petitioner cannot shift expenses back and forth

depending on where the income was.       CCSI is an entity separate

from petitioner.     Moline Properties, Inc. v. Commissioner, supra.

Since petitioner did not file a Schedule C with his 1995 joint

return, we assume that 1995 was the year for which CCSI claimed

expenses on its return.

     Petitioner held out CCSI as the producer of the sprinkler

system, and, by incurring these expenses, petitioner was

furthering the business of CCSI.     Leamy v. Commissioner, supra.

Therefore, we find that the expenses properly belong to CCSI and

not petitioner.5


     5
        Respondent has not raised the issue of whether any of the
expenses were nondeductible, preopening expenses. Richmond
Television Corp. v. United States, 345 F.2d 901, 907 (4th Cir.
1965), vacated and remanded per curiam on other grounds 382 U.S.
68 (1965). Given that neither CCSI nor petitioner had sufficient
investors, any plans or facilities for manufacturing the product,
nor any staff for sales of the product, this issue would
otherwise seem to be applicable.
                                - 8 -


     In light of our conclusion that the expenses are those of

CCSI and not petitioner, we do not consider the issue of

substantiation.

     However, we now consider whether petitioner, as an employee

of CCSI, is entitled to deduct home office expenses on Schedule A

as unreimbursed employee expenses.      Section 280A(a), in general,

provides that no deduction is allowed with respect to the

business use of a taxpayer’s personal residence.        Section 280A(c)

contains some limited and explicit exceptions to this rule.6

     For a deduction to be allowed under section 280A(c)(1), a

taxpayer who is an employee must establish that a portion of his

dwelling unit is: (1) Exclusively used, (2) on a regular basis,

(3) for the purpose enumerated in section 280A(c)(1)(A), and (4)

that the taxpayer maintained the office for the convenience of

his employer.    Moreover, deductions allowed under section


     6
        SEC. 280A(c). Exceptions for Certain Business or Rental
Use; Limitation on Deductions for Such Use.--

          (1) Certain business use.-- Subsection (a) shall
     not apply to any item to the extent such item is allocable
     to a portion of the dwelling unit which is exclusively used
     on a regular basis--

               (A) [as] the principal place of business for any
          trade or business of the taxpayer,

     *       *         *        *          *        *          *

     In the case of an employee, the preceding sentence shall
     apply only if the exclusive use referred to in the preceding
     sentence is for the convenience of his employer.
                               - 9 -


280A(c)(1) may not exceed the excess of the gross income derived

from such use over the deductions allocable to such use which are

allowable regardless of the usage (such as property taxes).     See

sec. 280A(c)(5).

      There is no evidence in the record that petitioner

maintained a home office for the convenience of CCSI.    Petitioner

was not prepared to testify or present documents substantiating

the home office deduction.   The few documents that were

stipulated were provided without meaningful testimony.     Moreover,

there was no gross income from petitioner’s business as an

employee of CCSI in 1993 or 1994.   Therefore, petitioner has not

overcome the prohibition of section 280A(c)(5), and he is not

entitled to deduct home office expenses on Schedule A.

      However, we do note that in 1993 petitioner allocated a

portion of his real estate taxes deductible on Schedule A to the

home office computation on Form 8829 for deduction on Schedule

C.7   Of a total amount of $2,285.78, $155.43 was allocated to the

home office deduction, and the remaining $2,130.34 was claimed on

Schedule A.   Based on our holding that petitioner is not entitled

to deduct Schedule C expenses, the $155.43 that petitioner



      7
        Petitioner claimed 100 percent of his mortgage interest
expense in 1993 and 1994 and 100 percent of his real estate taxes
in 1994 as itemized deductions on his Schedules A. In addition,
however, petitioner claimed an alleged business portion of these
items on the Schedules C.
                              - 10 -


allocated to that schedule is deductible on line 6 of Schedule A

for 1993.

Accuracy-Related Penalty

     Respondent determined an accuracy-related penalty under

section 6662(a).   Section 6662(a) imposes a penalty of 20 percent

on any portion of an underpayment of tax that is attributable to

negligence or disregard of rules or regulations.    Sec. 6662(a)

and (b)(1).   “Negligence” is defined as any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and the term “disregard” includes any careless,

reckless, or intentional disregard.    Sec. 6662(c).   A position

with respect to an item is attributable to negligence if it lacks

a reasonable basis.   Sec. 1.6662-3(b)(1), Income Tax Regs.

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment, if it

is shown that there was reasonable cause for the taxpayer’s

position with respect to that portion and that the taxpayer acted

in good faith with respect to that portion.    Sec. 6664(c)(1).

The determination of whether a taxpayer acted with reasonable

cause and good faith within the meaning of section 6664(c)(1) is

made on a case-by-case basis, taking into account all the

pertinent facts and circumstances.     Sec. 1.6664-4(b)(1), Income

Tax Regs.
                               - 11 -


     At trial and on brief, petitioner did not address the

section 6662(a) penalty.    Petitioner prepared the joint returns

for the years at issue.    We find that petitioner is liable for

the accuracy-related penalty for failing to report a capital gain

and for improperly claiming expenses that are not allowable.

Accordingly, respondent is sustained on this issue.

     To reflect the foregoing,




                                     Decisions will be entered

                                 under Rule 155.
