                         T.C. Memo. 1999-227



                      UNITED STATES TAX COURT



      ROBERT L. BOEHM AND WINONA J. MOWREY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          CRESTMARK MORTGAGE SERVICES, INC., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 14355-97, 14356-97.     Filed July 12, 1999.


     Allen R. Weed, for petitioners.

     Alvin A. Ohm, for respondent.


                         MEMORANDUM OPINION

     THORNTON, Judge:    These cases were consolidated for trial,

briefing, and opinion.

     Pursuant to separate notices of deficiency, respondent

determined the following deficiencies, penalties, and additions

to tax:
                                - 2 -


              Robert L. Boehm and Winona J. Mowrey
                       Docket No. 14355-97

                                                         Penalty
Taxable Year Ended             Deficiency               Sec. 6662

 December 31, 1993               $30,974                  $6,195


                  Crestmark Mortgage Services, Inc.
                          Docket No. 14356-97

                                                      Addition to Tax
Taxable Year Ended              Deficiency               Sec. 6651

  July 31, 1994                   $8,781                  $2,195

     After concessions, the issues for decision are:     (1) Whether

petitioners Robert L. Boehm and Winona J. Mowrey (the individual

petitioners) are entitled to a deduction of $103,056 for a “Real

Estate & Mortgage Rate Market Fee” claimed on their Schedule A

for taxable year 1993; (2) whether the individual petitioners are

liable for section 6662(a) accuracy-related penalties; and (3)

whether petitioner Crestmark Mortgage Services, Inc. (Crestmark)

is entitled to a deduction for business expenses claimed on its

corporate income tax return for the year ended July 31, 1994.1


     1
       Respondent determined that Crestmark should have included
in taxable income interest imputed under sec. 7872 on the unpaid
balance of certain loans that Crestmark made to petitioners.
Respondent also asserted an addition to tax against Crestmark for
failure to file a timely return. Petitioners failed to present
any evidence with regard to these issues at trial. On opening
brief, petitioners listed both issues but failed to argue them.
Respondent dealt with both issues in his brief in answer.
Petitioners did not address either issue in their brief in reply.
We treat petitioners’ failure to argue as, in effect, a
concession of these issues. See Rule 151(e)(4) and (5);
Sundstrand Corp. & Subs., Inc. v. Commissioner, 96 T.C. 226, 344
                                                   (continued...)
                                 - 3 -


     Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect for the years in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

                              Background

     The parties have stipulated some of the facts, which are so

found.     The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.     When they filed their

petition, the individual petitioners were married and resided in

Dallas, Texas.

     Crestmark is a corporation formed under the State laws of

Texas.     When it filed its petition, Crestmark’s principal office

was located in Dallas, Texas.

         Since 1976, Winona Mowrey (Mowrey) has been employed in the

mortgage banking business as a loan officer.     During the year in

issue, Mowrey was employed as loan officer and manager of a

branch office of Fort Worth Mortgage Corp. and Colonial Savings,

F.A. (Fort Worth Mortgage), and reported wage income of


     1
      (...continued)
(1991); Money v. Commissioner, 89 T.C. 46, 48 (1987); Grossman v.
Commissioner, T.C. Memo. 1996-452, supplemented by T.C. Memo.
1997-451, affd. __ F.3d __ (4th Cir., June 28, 1999). On brief,
respondent indicates that because of a miscalculation, the amount
of imputed interest income was overstated in the notice of
deficiency. We expect respondent to give Crestmark the benefit
of the revised computation in the Rule 155 computation, and in
accordance with representations in respondent’s trial memorandum
and opening statements at trial, to make appropriate adjustments
to Crestmark’s taxable income with respect to the income
reassigned from Crestmark to the individual petitioners.
                                - 4 -


$1,231,786.   She supervised more than 30 employees.   In addition

to her managerial duties, she originated loans, made accounting

for income produced by the loans, and prepared budget projections

for the branch office.   The income she received from Fort Worth

Mortgage was determined at least in part by the profitability of

her branch office.   To increase the profitability of her branch

office and thereby increase her income, Mowrey would arbitrage

loans originated in her branch office to take advantage of

interest rate fluctuations in the secondary mortgage market.

     Robert Boehm (Boehm) was also employed in the mortgage

banking business as a loan officer.     During the year in issue, he

was employed by NationsBank of Texas and reported wage income of

$43,518.   In addition, Boehm assisted Mowrey in her employment.

Each month, he helped her audit loan files to determine how much

income was being produced and to compare it against the projected

budget for the branch office.   Occasionally, Boehm picked up

packages for Mowrey and took photographs for the use of

appraisers.   He also “kept up with” daily mortgage interest rates

and would advise Mowrey on whether or not to sell loans in the

secondary mortgage market.

     During the year in issue, Boehm was president and sole

officer, shareholder, director, and employee of Crestmark.

Crestmark came into existence on December 1, 1989, as the result

of a name change of a predecessor corporation, identified in the

record only as JAWIN.    Boehm testified that JAWIN “was previously
                                - 5 -


owned, though it never did any business, by * * * [Mowrey’s]

father.”     Crestmark has never had any office outside the

individual petitioners’ personal residence, nor a telephone

number other than the individual petitioners’.

     On November 17, 1993, Boehm deposited $102,955 into an

account established in the name of Crestmark at NationsBank of

Texas.    Prior to this deposit, the account had a balance of

$34.65.    This was the only account in the name of Crestmark

during 1993.    The November 1993 deposit was the only money

received by Crestmark during its fiscal year ended July 31, 1994.

     Petitioners allege that the $102,955 deposited into

Crestmark’s account represented payment for services performed

for Mowrey by Boehm, in his capacity as sole employee of

Crestmark.    No written contract existed between Crestmark and

Mowrey.    Neither Boehm nor Crestmark at any time provided Mowrey

with any documents or records stating what services were

performed, the date or time any services were performed, or who

performed any services.

     On their Schedule A attached to their 1993 joint Federal

income tax return, petitioners claimed a deduction of $103,0562



     2
       The record contains no explanation of the apparent
discrepancy between the $102,955 November 1993 deposit, and the
$103,056 that petitioners have claimed as a deduction.
                                - 6 -


for a “Real Estate & Mortgage Rate Market Fee” paid to Crestmark.

Respondent disallowed the deduction in its entirety.

     On June 23, 1995, Crestmark untimely filed its Short-Form

Income Tax Return for its fiscal year ending July 31, 1994.     On

its late-filed return, Crestmark reported the November 1993

deposit of $102,955 as its sole gross receipts for the year.    It

reported no compensation of officers, no salaries, and no wages.

On its return, Crestmark deducted $9,509 in business expenses for

the year.   The claimed expenses consisted of $2,600 for taxes and

licenses, $1,267 for interest, $2,286 for depreciation and $3,356

for other deductions that included sums paid for meals,

petitioners’ country club dues, and improvements to petitioners’

residence at Lake Kiowa, Texas, such as a room addition, garage,

and landscaping.   Respondent disallowed the claimed business

deductions in their entirety.

                            Discussion

Petitioners’ Deduction for Amounts “Paid” to Crestmark

     Section 162(a)(1) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including “a reasonable

allowance for salaries or other compensation for personal

services actually rendered.”    The test of deductibility for

compensation payments is “whether they are reasonable and are in

fact payments purely for services.”     Sec. 1.162-7(a), Income Tax
                                 - 7 -


Regs.     Deductions are a matter of legislative grace, and

taxpayers bear the burden of proving that they are entitled to

any deductions claimed.     See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

         Respondent disallowed petitioners’ claimed deduction for

the $102,995 deposited by Boehm to Crestmark’s account on grounds

that petitioners have failed to establish that services were ever

performed by Crestmark.     Respondent argues that the arrangement

with Crestmark was a sham intended to divert wage income to their

wholly owned corporation.3    Petitioners counter that “The record

has ample evidence to support the finding that the services were

in fact performed by Mr. Boehm in his capacity as an officer of

Crestmark.”

     Petitioners have failed to establish that the amounts

ostensibly paid to Crestmark were reasonable or purely for

services that Boehm provided.     Apart from petitioners’ self-

serving testimony, the only evidence that petitioners have

produced to support the claimed deduction is a single unsigned

and undated document, captioned “Invoice”, that states in its




     3
       Respondent has not raised, and therefore we do not
consider, any issue as to whether the amounts paid to Crestmark
represented ordinary and necessary expenses of carrying on
Mowrey’s business as a commission-basis employee for Forth Worth
Mortgage.
                                 - 8 -


entirety, “Winona J. Mowrey, FOR SERVICES RENDERED FOR YEAR ENDED

1993      $102,955.33”.   The document bears no letterhead and

contains no reference to Crestmark.      This purported invoice sheds

little light on what services the $102,955 deposit compensated.

       The record is devoid of any evidence to suggest that the

fees purportedly paid to Crestmark were the result of arm’s-

length bargaining.    There was no contract between the individual

petitioners or between Mowrey and Crestmark spelling out the

nature and terms of services to be provided by Boehm.      The

individual petitioners’ testimony on the method of compensation

was vague and inconsistent.     Mowrey testified that fees paid to

Crestmark were based on a percentage of “less than 10 percent of

total income”, and that the amount varied “on budget preparation

time and that type of thing”.     Boehm testified:   “I charge

whatever I want to.”

       Even assuming, arguendo, that the claimed deduction

represented a reasonable allowance for services performed by

Boehm, petitioners have not established that Boehm performed

these services in his capacity as an employee of Crestmark,

rather than in his own capacity.     This consideration implicates

the “first principle of income taxation:     that income must be

taxed to him who earns it.”     Commissioner v. Culbertson, 337 U.S.

733, 739-740 (1949) (citing Lucas v. Earl, 281 U.S. 111 (1930)).

       Generally, a corporation constitutes a separate taxable

entity and will not be ignored for Federal income tax purposes if
                               - 9 -


it is created for business purposes or actually conducts business

after incorporation.   See Moline Properties, Inc. v.

Commissioner, 319 U.S. 436 (1943).     Where a corporation relies

upon personal services of an employee to produce income, the

question arises whether it is the employee or the corporation

that is actually conducting the business.    The relevant test is

who controls the earning of the income.    See Haag v.

Commissioner, 88 T.C. 604, 610-611 (1987), affd. without

published opinion 855 F.2d 855 (8th Cir. 1988); Johnson v.

Commissioner, 78 T.C. 882, 890 (1982), affd. without published

opinion 734 F.2d 20 (9th Cir. 1984); Vercio v. Commissioner, 73

T.C. 1246, 1254-1255 (1980).   In Johnson v. Commissioner, supra,

this Court articulated two requirements that must be met before a

corporation, rather than its service-performer employee, will be

considered the controller of income and therefore taxable on it:

     First, the service-performer employee must be just
     that--an employee of the corporation whom the
     corporation has the right to direct or control in some
     meaningful sense. Second, there must exist between the
     corporation and the person or entity using the services
     a contract or similar indicium recognizing the
     corporation’s controlling position. [Johnson v.
     Commissioner, supra at 891; citations omitted.4]


     4
       In cases involving members of religious orders obligated
to turn over outside income to the order, some courts have
rejected the two-part test used in Johnson v. Commissioner, 78
T.C. 882 (1982), in favor of a flexible facts and circumstances
approach. See Kircher v. United States, 872 F.2d 1014 (Fed. Cir.
1989); Schuster v. United States, 800 F.2d 672 (7th Cir. 1986);
                                                   (continued...)
                              - 10 -


     Petitioners fail both requirements of this test.    First,

there is no evidence that Crestmark directed or controlled Boehm

in any meaningful sense.   To the contrary, it is obvious that

Crestmark was Boehm’s alter ego, with no employees other than

Boehm and no office other than petitioners’ personal residence.

There is no evidence that during the year at issue, Crestmark had

any activity apart from receiving funds from and disbursing funds

on behalf of the individual petitioners.

     Second, there is no evidence of the existence between Mowrey

and Crestmark of any contract or similar indicium recognizing

Crestmark’s controlling position with regard to Boehm.

Accordingly, we conclude that Boehm, rather than Crestmark,

actually controlled the earning of the amounts allegedly paid to

Crestmark with respect to Boehm’s services.

     Because petitioners have filed a joint income tax return,

their tax is computed on their aggregate income.   See sec.


     4
      (...continued)
Fogarty v. United States, 780 F.2d 1005 (Fed. Cir. 1986). We
need not reconcile any differences in the legal tests, as we
would reach the same result under either test. See Haeri v.
Commissioner, T.C. Memo. 1989-20.

     In the context of determining the identity of a taxpayer’s
employer, this Court has also held that it is necessary to
examine all the facts and circumstances, distinguishing cases
such as Johnson that--like the instant case--involve the issue of
whether compensation paid by the recipient of personal services
is income to the individual workers or their personal service
corporations. See Leavell v. Commissioner, 104 T.C. 140, 148-155
(1995).
                               - 11 -


6013(d)(3).    Both allowable deductions and taxable income are

determined on an aggregate basis.    See sec. 1.6013-4(b), Income

Tax Regs.    Where a joint income tax return is filed, “it is

treated as the return of a taxable unit and the net income

disclosed by the return is subject to [tax] * * * as though the

return were that of a single individual.”      Helvering v. Janney,

311 U.S. 189, 192 (1940) (quoting Sol. Op. 90 (1921), 4 C.B.

236).    The amounts “paid” by Mowrey to Boehm have not left

petitioners’ taxable unit, and accordingly no deduction is

allowable.

     Mowrey testified that petitioners had “a prenuptial

agreement that says that all of our income would be sole and

separate.”    Using this testimony as their springboard,

petitioners argue on brief that respondent’s sham theory is

therefore inapplicable.    Petitioners have introduced no

prenuptial agreement into evidence.      Whether or not there is a

prenuptial agreement, however, is immaterial.      Having filed a

joint income tax return, petitioners must aggregate their income,

prenuptial agreement or no.

        We sustain respondent's determination on this issue.


Section 6662 Penalty

     Section 6662(a) imposes a penalty equal to 20 percent of the

portion of an underpayment of taxes attributable to negligence or

disregard of rules or regulations.      Negligence includes any
                               - 12 -


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.   Sec. 6662(c).   Negligence is the lack of

due care or failure to do what a reasonable and ordinarily

prudent person would do under like circumstances.    See, e.g.,

Allen v. Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg.

92 T.C. 1 (1989); Neely v. Commissioner, 85 T.C. 934, 947 (1985).

     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 and that the taxpayer acted in good

faith.   See sec. 6664(c).   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.    The burden of proof is

upon the taxpayer.   See Rule 142(a).

     The individual petitioners have not established that their

underpayment was due to reasonable cause or that they acted in

good faith.   To the contrary, the record is clear that

petitioners engaged in a scheme to divert substantial sums of

their wage income to Crestmark, which then claimed business

expenses for their personal living expenses, such as home

improvements, country club dues, and meals.
                               - 13 -


     On brief, the individual petitioners argue that they should

not be liable for the negligence penalty because “the

Commissioner at least impliedly approved a similar deduction on

their 1990 individual income tax return.”    The record does not

establish that respondent either implicitly or expressly approved

a similar deduction in 1990.    The only pertinent evidence apart

from Mowrey’s vague and self-serving testimony5 is respondent’s

no-change letter from 1990 and a revenue agent’s report which

indicates that the only items questioned in the 1990 audit were a

charitable contribution deduction and a deduction for investment

expenses.    There is no evidence that the revenue agent was even

aware of, much less approved, petitioners’ diversion of income to

Crestmark.

     In support of their position, the individual petitioners

cite Matthews v. Commissioner, 92 T.C. 351 (1989), affd. 907 F.2d



     5
         On direct examination, Mowrey testified as follows:

            Q.   Did you pay Crestmark that year, 1990, for the
                 same type of services that you later paid them in
                 1993?

            A.   Yes, sir.

            Q.   In the audit, do you know what the outcome of the
                 audit was?

            A.   Well, I don’t know all these fancy words that he
                 was talking about, but the bottom line is, to me,
                 was the IRS said, you know, This is not a problem;
                 this is fine, you know.
                              - 14 -


1173 (D.C. Cir. 1990), and Brown v. Commissioner, T.C. Memo.

1989-89, affd. without published opinion 916 F.2d 710 (4th Cir.

1990).   These cases are distinguishable.   Unlike the taxpayers in

Matthews, petitioners have taken a position that is untenable and

have failed to establish that they made full disclosure of their

position to respondent.   Unlike Brown, this is not a case where

respondent failed to act over a period of years when fully

informed of the facts.

     We sustain respondent’s determination on this issue.


Crestmark’s Claimed Business Deductions

     Respondent disallowed Crestmark’s claimed business expenses

on the grounds that it had failed to establish that these were

ordinary and necessary business expenses and that they were

expended for the purpose designated.   With respect to the meals

and entertainment expenses, respondent also determined that

Crestmark failed to meet the substantiation requirements of

section 274.

     On brief, Crestmark concedes that the meals and

entertainment deductions have not been substantiated.   We

conclude that Crestmark has also failed to establish the validity

of its other claimed deductions.

     Section 162 generally allows a deduction for all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business.   The

determination of whether an expenditure satisfies the
                              - 15 -


requirements of section 162 is a question of fact.    See

Commissioner v. Heininger, 320 U.S. 467, 475 (1943).

     Because petitioners have failed to establish that Crestmark

carried on any trade or business during the year at issue, a

fortiori the amounts claimed as deductions do not constitute

ordinary and necessary costs of carrying on a trade or business,

and thus are not deductible under section 162.   Even if we were

to assume, arguendo, that Crestmark was carrying on a trade or

business, it has not met its burden of proof with respect to

these deductions.   It presented no canceled checks, receipts, or

other evidence establishing that any claimed business expenses

were ever paid, the amount of the payments, or any other evidence

that any part of the claimed expenses were paid for the purposes

designated.   The only witness to testify about the claimed

deductions was Boehm.   His testimony was vague, conclusory, and

self-serving, and we are not required to accept it.    See

Niedringhaus v. Commissioner, 99 T.C. 202, 219 (1992).

Consequently, we uphold respondent's disallowance of Crestmark’s

deductions.

     To reflect the foregoing and concessions by the parties,


                                    Decisions will be entered

                               under Rule 155.
