                       T.C. Memo. 1999-390



                     UNITED STATES TAX COURT


    DANÉ MARIE SMILEY AND RICHARD DEAN SMILEY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 13712-98.                   Filed December 1, 1999.


     Dané Marie Smiley and Richard Dean Smiley, pro se.

     Reid M. Huey, for respondent.


                       MEMORANDUM OPINION

     POWELL, Special Trial Judge:    Respondent determined

deficiencies in petitioners' 1995 and 1996 Federal income taxes

and accuracy-related penalties under section 6662(a)1 as follows:

                                                   Penalty
          Year      Deficiency                 Section 6662(a)

          1995       $3,875                         $771
          1996        2,505                          501



     1
         Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue.
                                - 2 -

     The issues are whether petitioners are entitled to

deductions for alleged expenses incurred in the construction of a

home for the mother of petitioner Richard Dean Smiley

(petitioner) and whether petitioners are liable for the section

6662(a) penalties.

     The facts may be summarized as follows.    Petitioners resided

in Blaine, Minnesota, at the time the petition was filed.    Before

1984 petitioner had manufactured bedroom furniture.    In 1984,

petitioner sold the business and began constructing single unit

houses.   In 1991, petitioner quit that business and became a

"house husband".    In 1994, petitioner entered into an agreement

with his mother whereby he agreed to construct a house for her in

Detroit Lakes, Minnesota.    According to petitioner, his mother

owned a lot in Detroit Lakes that she quit-claimed to him.    On

August 3, 1994, petitioner and his mother entered into a written

contract whereby petitioner sold the lot and a "house built new"

to her for $200,000.    The closing date specified was February 1,

1995.

     Petitioner commenced construction on the house in August

1994.   Sometime in November 1994, the partially built house was

severely damaged in a storm.    Petitioner allegedly had insurance

on the house; the insurance company, however, has not paid for

the storm damage.    Apparently, petitioner continued to work on

the house.   On April 28, 1995, petitioner and his mother executed
                               - 3 -

another document called a "bid", whereby petitioner estimated

that the storm damage would cost $64,900 to repair.   Petitioner

has no workups either of the original cost of constructing the

house or of the estimated repair expenses.   Petitioner did not

have any documentation for the subcontracting work.   According to

petitioner, he estimated the following expenses:   Materials

($120,000), employee wages ($50,000), and travel, meals, and

lodging ($10,000).   Petitioner is not licensed as a contractor,

plumber, or electrician.

     It is unclear when the house was completed or, if in fact

the property had been conveyed to him, when petitioner reconveyed

the property to his mother.   Petitioner testified that over the

years 1994 to 1997 his mother paid him $200,000, but he did not

know how much or when the payments were made.   Petitioners did

not report any of these payments on their Federal income tax

returns for the years in issue.   On January 5, 1998, petitioner

filed a mechanic's lien against the property in the amount of

$64,900.

     Petitioner allegedly drove from his home to Detroit Lakes

each week.   On Schedules C filed with the 1995 and 1996 returns,

petitioners reported no income and claimed the following

expenses:
                               - 4 -

                               1995             1996

     Car & truck expenses   $11,625          $7,007
     Legal expenses           1,956           3,000
     Office expenses            235             235
     Repairs & maintenance     -0-            1,000
     Travel                   4,200           2,450
     Meals & entertainment1   3,250           1,896
     Utilities                 -0-              400
     Other expenses           2,023             700
                             23,289          16,688
     1
      For 1995 and 1996, petitioner claimed total meal expenses
of $6,500 and $3,792, respectively, and reduced those figures by
50 percent. See sec. 274(n).

     With regard to the car and truck expenses, petitioner

allegedly drove a 1985 Chrysler automobile to and from the

construction site.   He computed the mileage between his home and

Detroit Lakes and multiplied that figure by the number of trips

he made each year.   He then added the mileage he estimated was

incurred while working in Detroit Lakes.   Petitioner did not

maintain contemporaneous logs or records of his mileage.   The

meal expenses were also estimated, and petitioner has no records

of these expenses.   The travel expenses were presumably for

lodging while in Detroit Lakes.   Petitioner has no receipts,

canceled checks, or other documentation of these expenses.

     The legal expenses allegedly were incurred in seeking advice

concerning petitioner's suit against the insurance company to

recover damages from the November 1994 storm.    Petitioner has no

documentation of these expenses and claims that the attorneys

with whom he consulted would not provide corroborating evidence.
                               - 5 -

With respect to the utility expenses, petitioner produced

telephone bills in the name of his mother (Helen Smiley) for

telephone service at Detroit Lakes from February through July

1995.   There is no information as to who paid these expenses or

when they were paid.   There is no documentation concerning the

other expenses claimed.

     Respondent disallowed the expenses for lack of

substantiation and also contends that the claimed expenses were

not incurred in an activity entered into for profit.

                            Discussion

     Section 162(a) allows deductions for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

Under section 274(d), however, a taxpayer may not deduct the use

of a passenger vehicle and lodging and meal expenses unless he or

she substantiates the amount of the expense, the time and place

of the travel, and the business purpose of the travel with

adequate records or sufficient evidence corroborating his or her

statement.   See Miner v. Commissioner, T.C. Memo. 1999-358.

Generally, "to meet the 'adequate records' requirements of

section 274(d), a taxpayer shall maintain an account book, diary,

log, statement of expense, trip sheets, or similar record".    Sec.

1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017
                               - 6 -

(Nov. 6, 1985).   Petitioner did not maintain any such records2

and he has not otherwise properly substantiated the expenses

claimed for car and truck, travel, and meals.

     With regard to the other Schedule C expenses claimed there

is also no substantiation.   As far as the explanation that the

attorneys he consulted would not provide receipts, etc., it is

unpersuasive.   Similarly there are no substantiating receipts,

canceled checks, etc., with regard to the other expenses claimed.

Respondent's determinations are sustained.

     It also should be noted that generally expenses associated

with the building or improvement of a house must be capitalized

if incurred in a profit-seeking activity.    See Homes By Ayres v.

Commissioner, 795 F.2d 832, 835 (9th Cir. 1986), affg. T.C. Memo.

1984-475; W.C. & A.N. Miller Dev. Co. v. Commissioner, 81 T.C.

619 (1983); see also sec. 263A.   These expenses, if in fact they

were incurred by petitioner, were directly attributable to the

construction of the house.   Since the sale of the house to

petitioner's mother did not occur during either of the years

before the Court, even if the claimed expenses had been

substantiated, they would not be allowable as ordinary and




     2
        Petitioner provided a so-called mileage log that he
constructed just before the trial allegedly based on receipts
that he did not produce. This does not meet the adequate records
requirement.
                               - 7 -

necessary expenses of a trade or business during the years in

issue.

     In light of the above, we find it unnecessary to explore

whether or not petitioner's home building activity was entered

into for profit.   We note, however, that there is a strong

suggestion that petitioner's primary motivation seems to have

been the building of a house for his mother rather than making a

profit.

     Respondent also determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for 1995 and

1996 for negligence.   Section 6662(a) provides that "there shall

be added to the tax an amount equal to 20 percent of the portion

of the underpayment to which this section applies."    Section 6662

applies to "the portion of any underpayment which is attributable

to", inter alia, negligence or disregard of rules or regulations.

Sec. 6662(b)(1).   Negligence "includes 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).

     Petitioners argue that they employed a qualified tax return

preparer and any errors were due to the return preparer.    In some

circumstances reliance upon a qualified return preparer may

alleviate a taxpayer's liability for penalties.    See Ewing v.

Commissioner, 91 T.C. 396, 423-424 (1988), affd. without
                                 - 8 -

published opinion 940 F.2d 1534 (9th Cir. 1991); sec. 1.6664-

4(b)(1), Income Tax Regs.   The taxpayer must advise the preparer

of all facts that are relevant to the tax treatment of an item.

See sec. 1.6664-4(c)(1)(i), Income Tax Regs.; see also Ellwest

Stereo Theatres, Inc. v. Commissioner, T.C. Memo. 1995-610.       The

advice must not be based upon unreasonable factual or legal

assumptions.   See sec. 1.6664-4(c)(1)(ii), Income Tax Regs.

     There is nothing in this record indicating that petitioners

advised the return preparer of all the facts and circumstances

surrounding the expenses claimed.    Moreover, petitioner's

recordkeeping was nonexistent.    We sustain respondent's

determinations as to the penalties under section 6662(a).

                                              Decision will be entered

                                         for respondent.
