T.C. Memo. 2006-272



                        UNITED STATES TAX COURT



         W. BRADFORD DAVIS AND TEDDE M. RINKER, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6313-04.                  Filed December 26, 2006.



     W. Bradford Davis, pro se.

     Bruce C. Janke, for petitioner Tedde M. Rinker.1

     Christian A. Speck, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:     Respondent determined a deficiency of

$40,109 in petitioners’ 1999 Federal income tax as well as an


     1
        Dr. Tedde M. Rinker was represented at trial by Kenneth
P. Fehl. Mr. Janke entered an appearance in this case after the
close of trial, at which point the Court granted Dr. Rinker’s
motion for an order granting leave to withdraw Mr. Fehl’s
appearance on her behalf.
                                - 2 -

$8,022 section 6662 penalty.2   After concessions by both parties,

the issues that remain for decision are:   (1) Whether petitioners

are deemed to have admitted the statements in respondent’s

requests for admission by not timely responding to those

requests, (2) whether petitioners are entitled to deduct expenses

claimed on Schedule C, Profit or Loss From Business, in amounts

greater than respondent allowed for petitioner Tedde M. Rinker’s

(Dr. Rinker) medical practice, (3) whether petitioners are

entitled to deduct personal medical expenses incurred in 1999 and

claimed on Schedule A, Itemized Deductions, (4) whether

petitioners may deduct prepaid interest paid in 1999 in excess of

the amounts conceded at trial by respondent, (5) whether

petitioners may deduct amounts allegedly contributed to a SEP-IRA

account in 1999, and (6) whether petitioners are liable for the

penalty imposed under section 6662.3




     2
        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.
     3
        Petitioner W. Bradford Davis attached to his pretrial
memorandum a Form 8857, Request for Innocent Spouse Relief. Mr.
Davis did not file any briefs with the Court, and the petition
makes no reference to sec. 6015 relief. The record does not
establish that he ever filed a Form 8857 with respondent.
Therefore, assuming that Mr. Davis has even raised the issue, we
find that he has abandoned his claim for sec. 6015 relief. See
Petzoldt v. Commissioner, 

, 683 (1989).
                               - 3 -

      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 they filed

their petition, petitioners resided in California.

      For convenience, we have consolidated our findings of fact

and opinion.

      During 1999, petitioners were married.   In 1999, Dr. Rinker

carried on a medical practice in Burlingame, California.     During

1999, W. Bradford Davis (Mr. Davis) worked for three employers,

earning $104,583 in wages.   At some point in 1999, Mr. Davis

ended his employment with the last of those three employers, a

company called Wind River, and was not employed by another

concern for the rest of the year.   Mr. Davis and Dr. Rinker have

since divorced.

I.   Deemed Admissions

      On December 13, 2004, respondent served requests for

admission on Mr. Davis and Dr. Rinker.   Respondent filed the

requests with the Court on December 14, 2004.   The requests asked

petitioners to admit two facts:   (1) That Mr. Davis’s 1999

photography activity was not entered into for profit, and (2)

that the gross receipts of Dr. Rinker’s medical practice were

$120,531 in 1999.
                               - 4 -

     The parties do not dispute that neither Mr. Davis nor Dr.

Rinker timely responded to respondent’s requests for admission.

Counsel for Dr. Rinker did eventually serve a response to the

requests for admission.   The response was, as Dr. Rinker

admitted, untimely.

     Under Rule 90, a party may serve upon an opposing party a

written request to admit the truth of any matters that relate to

statements or opinions of fact or of the application of law to

fact.   Estate of Allensworth v. Commissioner, 

(1976);

Hersch v. Commissioner, T.C. Memo. 1992-222.    Each matter is

deemed admitted unless the party to whom the request is directed

serves a response on the requesting party within 30 days after

the date of service of the request, or within such shorter or

longer time as the Court may allow.    Rule 90(c).   When a matter

is admitted, whether deemed admitted or actually admitted, it is

conclusively established for the purposes of the pending case

unless the Court on motion permits withdrawal or modification of

the admission.   Rule 90(f).

     In her posttrial brief, Dr. Rinker argued that the Court

should extend petitioners’ time for responding to respondent’s

requests.   Dr. Rinker argued that the Tax Court traditionally

looks to the Federal Rules of Civil Procedure when interpreting

its own Rules of Practice and Procedure and that under the

Federal rules the period otherwise prescribed for responding to a
                               - 5 -

document is extended by 3 days if the document is served by mail.

See Fed. R. Civ. P. 6(e).4

     This Court does consult the Federal Rules of Civil Procedure

when there is no applicable Tax Court Rule.    Rule 1(a).   When a

Tax Court Rule has been derived from a Federal Rule of Civil

Procedure, we also look to the principles enunciated by the

Federal courts in the interpretation and application of the

Federal Rules of Civil Procedure.   See Evans Publg., Inc. v.

Commissioner, 

, 249 (2002); Estate of Fulmer v.

Commissioner, 

, 309 (1984).     But Congress enacted

section 7453 to authorize the Tax Court to “prescribe” “rules of

practice and procedure”, and we have acted on that authority by

promulgating and applying the Tax Court Rules of Practice and

Procedure.   Those Rules, and not the Federal rules, apply to all

cases and proceedings before this Court.    Rule 1(a).   Indeed, we

have responded to the concerns underlying rule 6(e) of the

Federal Rules of Civil Procedure with Rule 25(a).    That Rule

provides that if service is made by mail, then a period of time

computed with respect to the service shall begin on the day after

the date of mailing.   Applying our Rules, it is clear that Dr.




     4
        In support of this argument, Dr. Rinker also cited the
California Code of Civil Procedure, which contains a similar
provision. The California Code is not an authority with respect
to the Tax Court’s Rules of Practice and Procedure.
                                - 6 -

Rinker did not timely respond to respondent’s requests for admission.

      Dr. Rinker also argues that respondent’s first request for

admission--that Mr. Davis’s photography activities were not

entered into for profit--is improper because it requests

admission of a matter of law, not fact.    That is not correct.

Whether a taxpayer is primarily engaged in an activity for profit

is a question of fact to be resolved from all relevant facts and

circumstances.    King v. Commissioner, 

, 205 (2001);

Golanty v. Commissioner, 

, 426 (1979), affd. per

curiam without published opinion 

(9th Cir. 1981).

      At no point did petitioners request that the Court extend

the time for responding to respondent’s requests.    Nor did either

petitioner move to withdraw or modify the deemed admissions

despite ample opportunity to do so.     The matters in respondent’s

requests for admission are therefore deemed admitted.5

II.   Business Deductions for Dr. Rinker

      A.   Generally

      Petitioners claimed $102,265 of business expenses for Dr.

Rinker’s medical practice on Schedule C of their 1999 return.



      5
        We do note, however, that in the notice of deficiency,
respondent allowed $5,700 of deductions for Mr. Davis’s
photography expenses--an amount which fully offset his claimed
income from photography. Respondent also adjusted Dr. Rinker’s
gross receipts to the amount in the requests for admission solely
on the basis of records created and maintained by Dr. Rinker.
                                - 7 -

Respondent disallowed $60,509 of the claimed deductions because

petitioners were unable to substantiate the existence and

business purpose of most of the deductions.

     Preliminarily, we note that several issues in the dispute

regarding these deductions revolve around petitioners’ inability

to produce the source documents on which their 1999 income tax

return was allegedly based.   Petitioners engaged Howard Hertz

(Mr. Hertz) to prepare their 1999 return.   Mr. Hertz also

represented petitioners during the subsequent examination of the

1999 return.   Dr. Rinker alone assisted Mr. Hertz in preparing

the 1999 return and in gathering documents for the subsequent

examination of that return.   Dr. Rinker claimed that she gave the

documents which substantiated many of the figures on petitioners’

1999 tax return to Mr. Hertz after Dr. Rinker, Mr. Hertz, and Dr.

Rinker’s assistant organized the records at Dr. Rinker’s home one

evening in 2002.   Dr. Rinker claims that Mr. Hertz then lost the

documents while the examination was being reviewed by

respondent’s Appeals officer.   Mr. Hertz testified that he never

left Dr. Rinker’s home with the source documents after their

meeting in 2002.   Respondent takes the position that petitioners,

and not Mr. Hertz, lost the records, or that they never

maintained the records to begin with.

     As was true in Diaz v. Commissioner, 

, 564

(1972):
                                - 8 -

           This case epitomizes the ultimate task of a trier
     of the facts--the distillation of truth from falsehood
     which is the daily grist of judicial life. He must be
     careful to avoid making the courtroom a haven for the
     skillful liar or a quagmire in which the honest
     litigant is swallowed up. Truth itself is never in
     doubt, but it often has an elusive quality which makes
     the search for it fraught with difficulty. That this
     is so is clearly illustrated by the situation herein.
     * * *

     We decide whether a witness is credible on the basis of

objective facts, the reasonableness of the testimony, and the

demeanor of the witness.    Quock Ting v. United States, 

, 420-421 (1891); Wood v. Commissioner, 

, 605 (9th

Cir. 1964), affg. 

(1964); Dozier v. Commissioner,

T.C. Memo. 2000-255.

     From our observation of petitioners at trial, we found Dr.

Rinker’s testimony on this point to be credible, sufficiently

detailed, and reasonable.    Dr. Rinker’s demeanor on the stand was

forthright and earnest.    While petitioners at times lacked

detailed memories of some of their financial activities in 1999,

Dr. Rinker recalled her meeting with Mr. Hertz at her house in

2002 with relative precision.    She testified that at the

conclusion of that meeting, she gave Mr. Hertz a box containing

the bulk of her source documents, and that she never saw them

again.

     Mr. Hertz testified that he gave the box of records back to

Dr. Rinker at the conclusion of that meeting.    According to Mr.

Hertz’s testimony, the entire purpose of the meeting was to
                                - 9 -

organize documents for Mr. Hertz to present to respondent’s

Appeals officer.   However, Mr. Hertz admitted that he may have

kept the box of documents after his meeting with respondent’s

Appeals officer.

     In contradistinction to Dr. Rinker’s, Mr. Hertz’s testimony

was not persuasive.    Mr. Hertz testified that he showed the

source documents, which were voluminous, to the revenue agent

conducting the exam.    Yet the revenue agent recalled seeing only

a few receipts and canceled checks.     Mr. Hertz lacked any

detailed memory of when he last possessed petitioners’ source

documents and was unable to recall basic facts of the chronology

and events of his representation of petitioners.

     We therefore find that Mr. Hertz, and not petitioners, lost

the box of petitioners’ original documents.

     Petitioners prayed that the Court excuse their inability to

produce most of their contemporaneous records on the grounds that

Mr. Hertz, and not petitioners, lost most of their records.

Petitioners asked the Court to allow deductions for Dr. Rinker’s

business expenses on the basis of Dr. Rinker’s testimony and the

documents that they were able to produce at trial under the rule

in Cohan v. Commissioner, 

, 543-544 (2d Cir. 1930).

They also argue that they should be allowed to deduct business

expenses to which section 274 applies because they have satisfied

the substantiation requirements of section 1.274-5T(c)(5),
                             - 10 -

Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985),

which allow taxpayers to reasonably reconstruct their business

expenses when original documents are lost or destroyed through no

fault of the taxpayers.

     Respondent argues that petitioners failed to present

credible evidence to substantiate that they incurred business

expenses in excess of the amount allowed by the notice of

deficiency, and that petitioners have not provided the Court with

a sufficient basis on which to make a Cohan estimation.     Also,

respondent argues that several of the claimed deductions were for

nondeductible, personal expenses.    Finally, respondent argues

that petitioners have not met the heightened substantiation

burden imposed by section 274 for those deductions to which

section 274 applies.

     At trial, petitioners managed to produce a smattering of

canceled checks, receipts, and other records from 1999.

Petitioners also presented exhibits containing reconstructions of

various categories of expenditures for 1999 that Dr. Rinker made

with the computer program Quicken (Quicken reports).    In their

testimony, petitioners related to the Court their memories of

their financial activities during 1999, the transactions

underlying the source documents, and the way they arrived at the

amounts contained in their 1999 return and in the exhibits they

prepared in anticipation of trial.
                               - 11 -

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   Generally, no deduction is

allowed for personal, living, or family expenses, nor is

deduction proper for expenditures that are properly categorized

as capital expenditures.   See secs. 262 and 263.   The taxpayer

bears the burden of proving that he or she is entitled to the

deduction.    See Rule 142(a); Welch v. Helvering, 

(1933).6

     When a taxpayer establishes that he or she has incurred

deductible expenses but is unable to substantiate the exact

amounts, we can estimate the deductible amount, but only if the

taxpayer presents sufficient evidence to establish a rational

basis for making the estimate.   See Cohan v. 

at 543-544; Vanicek v. Commissioner, 

, 742-743 (1985).

 In estimating the amount allowable, we bear heavily upon the

taxpayer where the inexactitude of the record is of his or her

own making.   See Cohan v. 

at 544.

     It is well established that the Tax Court may permit a

taxpayer to substantiate deductions through secondary evidence

where the underlying documents have been unintentionally lost or

destroyed.    Boyd v. Commissioner, 

, 320-321 (2004);


     6
        Petitioners do not contend, nor have they shown, that
sec. 7491(a), which shifts the burden of proof to the
Commissioner in some circumstances, applies to this case.
                               - 12 -

Malinowski v. Commissioner, 

, 1125 (1979); Furnish v.

Commissioner, T.C. Memo. 2001-286; Joseph v. Commissioner, T.C.

Memo. 1997-447; Watson v. Commissioner, T.C. Memo. 1988-29.

Moreover, even though Congress imposed heightened substantiation

requirements for some business deductions by enacting section

274, the regulations under that section allow a taxpayer to

substantiate a deduction by reasonable reconstruction of his or

her expenditures when records are lost through no fault of the

taxpayer.   Sec. 1.274-5T(c)(5), Temporary Income Tax 

.

     Generally, we found Dr. Rinker’s testimony honest,

forthright, and credible.    Although Dr. Rinker seemed somewhat

unfamiliar with financial matters, her testimony fundamentally

corresponded with the original documentation and reconstructions

that petitioners provided.    She testified credibly as to the

existence and business purpose of many of the deductions claimed

on petitioners’ 1999 return with respect to her medical practice.

For some of those deductions, Dr. Rinker was also able to recall

the approximate amounts of her expenses, but for many of them,

Dr. Rinker lacked any independent recollection of the amounts of

the claimed deductions.

     Where Dr. Rinker’s testimony provided a sufficient basis for

the Court to estimate the amounts of her expenditures, we have

done so, weighing against petitioners’ inexactitude where
                                - 13 -

appropriate.    Where petitioners presented contemporaneous

documents, we have allowed the claimed amounts after adjusting

for any disparities between the documents and Dr. Rinker’s

testimony and for computational errors.       Similarly, where the

original documents were lost by Mr. Hertz, but where petitioners

presented credible reconstructions of their expenses which carry

their burden of proof, we have allowed the claimed amounts after

adjusting for minor errors and discrepancies.

     B.    Particular Deductions

           1.   Office Liability Insurance

     Dr. Rinker testified that she paid for tort liability

insurance for her medical office.       Dr. Rinker testified that

during 1999 her expenses for liability insurance may have been

about $250.     Premiums paid for business liability insurance are

deductible business expenses.      Sec. 1.162-1(a), Income Tax Regs.

Under Cohan v. 

at 544, we allow a deduction

of $125.

           2.   Malpractice Insurance

     Dr. Rinker submitted a receipt for medical malpractice

insurance in the amount of $2,385.       The receipt was marked as

“paid” and dated January 31, 1999, and the policy apparently

covered February 1, 1999, through February 1, 2000.       Medical

malpractice insurance premiums are deductible business expenses.

Sec. 1.162-1, Income Tax Regs.     Although the year-long insurance
                                  - 14 -

contract extends through a small portion of the next taxable

year, petitioners as cash method taxpayers may nonetheless

currently deduct the entire expenditure.       Kauai Terminal, Ltd. v.

Commissioner, 

(1937); sec. 1.461-1(a)(1), Income

Tax Regs.       Petitioners are therefore entitled to a deduction of

$2,385 for Dr. Rinker’s medical malpractice insurance premiums.

           3.     Disability Insurance

     Dr. Rinker testified that she carried a disability insurance

policy on herself.      She testified that the reason she carried the

policy was to keep her practice afloat should she become unable

to see her patients for an extended period, and that the policy

amount would cover only the most basic expenses of her business.

     This Court has long held that a taxpayer may not deduct his

or her disability insurance premium payments as business expenses

when no limitation is placed on the use of proceeds from the

policy.    Blaess v. Commissioner, 

(1957); Ferris v.

Commissioner, T.C. Memo. 1986-32; Andrews v. Commissioner, T.C.

Memo. 1970-32.       A taxpayer’s “mere declaration of his intent” to

apply potential proceeds from a disability insurance policy

towards office expenses in the event of the taxpayer’s disability

does not convert an otherwise personal expenditure into a

deductible business expense.       Blaess v. 

at

715-716.    We therefore deny petitioners a deduction for

disability insurance premium payments.
                                 - 15 -

         4.     Payments to Employees and Contractors

     Petitioners submitted exhibits with copies of canceled

checks written by Dr. Rinker to several payees in 1999.        Dr.

Rinker testified that the checks represented payments from her to

several people for legal, accounting, bookkeeping, and

secretarial services rendered in connection with her medical

practice.     Some of the payments were made in exchange for

secretarial and bookkeeping expenses which related directly to

Dr. Rinker’s practice at that time; others were made in exchange

for legal and business advice on a future venture proposed to Dr.

Rinker by another doctor.     According to Dr. Rinker’s

uncontradicted testimony, the proposed venture never materialized

and she ceased pursuing it.     In her testimony, Dr. Rinker

admitted that some of the checks in the exhibits were not for

professional services at all and were mistakenly included.        In

addition, Dr. Rinker also admitted that she engaged the same

people to do her personal and business bookkeeping and

accounting.

                a.   Fees for Advice on the Proposed Venture

     We conclude that Dr. Rinker’s payments to financial and

legal advisers were not ordinary and necessary expenses of Dr.

Rinker’s medical practice as it stood in 1999.     The evidence does

not establish that the proposed venture was related to Dr.

Rinker’s current business.     Petitioners are therefore not
                               - 16 -

entitled under section 162 to deductions for these payments as

ordinary and necessary expenses incurred in carrying on Dr.

Rinker’s medical practice.    See Hagman v. Commissioner, T.C.

Memo. 1999-42.    Nor does the record establish that Dr. Rinker

abandoned her pursuit of the proposed venture during 1999.     Her

payments to financial and legal advisers are therefore not

deductible in that year pursuant to section 165.    See sec.

165(c)(2); Hagman v. 

.

             b.    Payments to Secretaries and Bookkeepers

     Dr. Rinker testified that she engaged several people for

temporary secretarial work, bookkeeping, and accounting in 1999.

At trial, Dr. Rinker was unable to recall how much she paid her

secretaries, except that in most cases she believed she paid each

of them less than $600.    Dr. Rinker did recall, however, that she

hired bookkeepers for $25 an hour, and that they usually worked 6

or 7 hours per week.    On cross-examination, Dr. Rinker admitted

that she engaged the same people to perform bookkeeping and tax

accounting services for both her business and personal needs.

     Petitioners presented canceled checks written by Dr. Rinker

in 1999 made out to the people about whom she testified.     In the

memo section of most of those checks, Dr. Rinker had written

notes identifying the services underlying the payments, such as

“12.5 hours bookkeeping” or “temp. office” or “sec. services.”

However, Dr. Rinker admitted that one of the checks in the
                                 - 17 -

exhibits was mistakenly included and did not represent a payment

for professional or office services.

       The checks for secretarial services related to Dr. Rinker’s

medical practice amount to $1,442.        Petitioners are entitled to a

deduction under section 162 for that amount.

       The checks for bookkeeping and accounting services add up to

$2,582.    Dr. Rinker testified that she paid some of these amounts

for services performed for her medical practice, but petitioners

offered no evidence as to what portion of the payments related to

services performed for her in her personal capacity.       On the

basis of Dr. Rinker’s testimony, we believe that at least half of

the fees related to Dr. Rinker’s medical practice.       Under Cohan

v. 

, we allow a deduction of $1,291.

           5.   Medical Management Solutions

       Dr. Rinker testified that she engaged an outside billing

service called Medical Management Solutions to collect and manage

payments from medical insurance companies.       At trial, petitioners

presented an exhibit listing payments to Medical Management

Solutions.      Petitioners also presented an additional check made

out by Dr. Rinker to the company which was not included in the

exhibit.    The payments to Medical Management Solutions for

billing services are deductible business expenses under section

162.    We therefore allow a deduction for the amounts shown by the

exhibit and the additional check, totaling $11,300.
                                - 18 -

         6.   Office Rent

     Dr. Rinker testified that she paid office rent to two

different sublessors in 1999.    She estimated that she paid the

first of those sublessors between $790 and $800 a month from

January through September 1999, and that she paid the second

sublessor between $800 and $1,000 per month for the rest of 1999.

     Office rent is a deductible expense.     Sec. 162(a)(3).   Under

Cohan, we allow a deduction of $9,600.

         7.     Repairs

     Dr. Rinker testified about two expenditures for alleged

repairs she incurred in maintaining her medical office in 1999.

Dr. Rinker hired a technician two times to fix her office

computers in 1999, paying approximately $400 for each visit.

Also, Dr. Rinker hired Levi Moore, a builder, to construct

countertops and cupboards in her office.     Dr. Rinker testified

that the construction work cost $2,500.

     Petitioners argue that payments to Levi Moore for the

construction of countertops and cupboards in Dr. Rinker’s office

are deductible expenses.    That argument is incorrect.   Generally,

under section 263, no deduction is allowed for capital

expenditures.    Capital expenditures include any amount paid for

permanent improvements or betterments made to increase the value

of any property.    Sec. 263(a)(1).   Particularly, the cost of

constructing furniture and fixtures or similar property having a
                                - 19 -

useful life substantially beyond the taxable year is a capital

expenditure.    Sec. 1.263(a)-2(a), Income Tax Regs.   Petitioners

are therefore not entitled to a deduction for payments to Levi

Moore.    Petitioners have not raised--and we do not address--

whether Dr. Rinker is entitled to capitalize and depreciate the

cost of the improvements made by Levi Moore.

     Petitioners also argue that payments to the computer

technician were deductible repair expenses.    Under section 1.162-

4, Income Tax Regs.,

     The cost of incidental repairs which neither materially
     add to the value of the property nor appreciably
     prolong its life, but keep it in an ordinarily
     efficient operating condition, may be deducted as an
     expense * * *. Repairs in the nature of replacements,
     to the extent that they arrest deterioration and
     appreciably prolong the life of the property, shall
     either be capitalized and depreciated in accordance
     with section 167 or charged against the depreciation
     reserve if such an account is kept.

     Petitioners have not provided the Court with sufficient

evidence to determine whether the work done by the technician

should be deducted as a current expense or capitalized into the

cost of Dr. Rinker’s office computer and depreciated.    Therefore,

petitioners are not entitled to a deduction for the technician’s

fees.    See Rule 142(a).   Petitioners have not raised the issue of

whether they are entitled to a deduction for depreciation or

amortization with respect to the equipment.    We therefore do not

address it.
                                 - 20 -

         8.    Supplies

     Petitioners presented an exhibit listing expenses for

patient supplies incurred in connection with Dr. Rinker’s medical

practice.     The exhibit contained some of Dr. Rinker’s financial

records, invoices from a company named MedQuest Pharmacy, and two

checks written by Dr. Rinker.      The exhibit showed total

expenditures of $8,117.80.      Dr. Rinker testified that the records

related to purchases of drugs and hormones for her patients.       At

trial, Dr. Rinker admitted that one of the two checks in the

exhibit was miscategorized and actually represented a personal

medical expenditure.      The other check appears to duplicate a

payment recorded on one of the invoices.

     A doctor’s expenditures for her patients’ medical supplies

are deductible under section 162.      Sec. 1.162-6, Income Tax Regs.

Eliminating the payment for personal medical supplies and the

duplicate payment, we allow a deduction of $6,801.11 for Dr.

Rinker’s purchases from MedQuest.

     Petitioners also presented an exhibit purporting to

substantiate office expenditures Dr. Rinker incurred during 1999.

This exhibit contained canceled checks that Dr. Rinker wrote out

to various payees, including consumer retailers such as Costco

and Office Depot, during 1999.      The checks contained the

following information:
                                - 21 -

 No.            Payee             Amount               Memo

  2001      Victoria Pickett       $6.00      Palm pilot case
  2093      Giovane               148.60      Supplies reimbursement
  8087      Cost Plus             702.27      Office furniture
  8234      Fry’s Electronics     625.38      Offc equipment fax
                                                printer
  8259      Andy Musgrave         202.50      (Illegible)
  8332      Labels Dept 6657       11.90      Labels stionary (sic)
  9002      Office Max             39.34      Writing pads, pens
  9035      Computerware           97.39      USB cable
  9061      Costco                411.86      Food, office $50.89 for
                                                ofc suppl.
  9108      Office Depot           83.73      Supplies, fax, etc.
  9167      Price Costco          472.59      $188.50 Supplies Costco
                                                member supplies &
                                                gifts

       Dr. Rinker testified that the checks related to purchases of

office supplies for her medical practice, but that in several of

the transactions she had also purchased items for personal use as

well.    In the “memo” section of some of those checks, Dr. Rinker

specified the portion of the payment that represented a business

expenditure, but on other checks, the “memo” section was blank or

illegible, or did not specify the purpose and nature of the

purchase.

       All of the retail payees listed in the exhibit sell goods

that can be used for both business and personal purposes.

Moreover, for those checks written to individuals, the items that

Dr. Rinker purchased can be used for both business and personal

purposes.

       As 

, no deduction is generally allowed for

personal, living, or family expenses.      Sec. 262.    To show that an
                                 - 22 -

expense was not personal, the taxpayer must show that the expense

was incurred primarily to benefit his business and that there was

a proximate relationship between the claimed expense and the

business.     Walliser v. Commissioner, 

, 437 (1979).

     Dr. Rinker testified as to the business purpose of some of

the expenditures, and the notes on the checks set forth an

adequate basis for allowing some deduction for purchases of

office supplies.     At least two of the checks written to Fry’s

Electronics for $625.38 and to Cost Plus for $702.27 represent a

purchase of assets the cost of which should be capitalized, not

deducted.     See sec. 1.263(a)-2(a), Income Tax Regs.   We therefore

allow petitioners deductions for the full amount of check No.

2093, as well as for portions of check Nos. 9061 and 9167, which

represent deductible business expenditures.     These amount to

deductions of $387.99 in total.

            9.   Child Care Expenses

     At trial and on the brief, petitioners asserted that they

paid $8,951 for day care expenses of Dr. Rinker’s two children.

Dr. Rinker testified that she would not have been able to conduct

her medical practice without placing her children in day care.

Petitioners argued that the day care expenditures were deductible

business expenses.

     We have consistently held that two-earner married couples

may not deduct, as a business expense under section 162, the cost
                                 - 23 -

of care for their child during working hours.     See, e.g.,

O’Reilly v. Commissioner, T.C. Memo. 1974-261 (and cases cited

therein).    Congress has enacted a separate credit for child care

expenses, which is currently embodied in section 21.     Indeed,

petitioners took advantage of that provision to claim a $30

credit on their 1999 tax return in addition to their Schedule C

deductions.      However, the rule set forth in O’Reilly still

stands, and petitioners may not deduct the costs of child care as

section 162 expenses.

           10.    Bank Charges

       Dr. Rinker testified that she incurred charges for the

processing of patients’ credit card payments and for maintaining

her business checking accounts.     Petitioners provided no evidence

of the amounts of those bank charges.     At trial, Dr. Rinker was

unable even to estimate the bank charges she incurred in 1999.

We therefore lack a sufficient basis upon which to estimate an

appropriate deduction.     See Cohan v. 

.

           11.    Dues

       Dr. Rinker testified that she paid dues and licensing fees

to several organizations related to her medical practice in 1999.

Dr. Rinker was unable to recall the precise amounts, but she

estimated that her State medical license fee for 1999 was $500

and that she paid dues to several medical colleges and
                                - 24 -

associations of approximately $1,185.       On their 1999 return,

petitioners deducted $700 for “Taxes and licenses” on the

Schedule C for Dr. Rinker’s medical practice.       Respondent allowed

this amount in full.    It appears likely that petitioners included

the cost of Dr. Rinker’s medical license fee in the deduction for

“Taxes and licenses.”    Petitioners have therefore not established

that they paid any amount relating to Dr. Rinker’s medical

license in excess of the amount respondent allowed.       See Rule

142(a); Welch v. Helvering, 

(1933).

     Dues to professional organizations are generally deductible

under section 162.     Sec. 1.162-6, Income Tax Regs.    Pursuant to

Cohan v. 

at 544, we allow a deduction of $550

for the remaining expenditures for Dr. Rinker’s professional

dues.

          12.   Internet Services

     Dr. Rinker testified that she paid approximately $24 per

month for Internet access in 1999.       She testified that she

maintained the account so that she could communicate with

patients via e-mail, but that she also used the account for

personal purposes.     Dr. Rinker also testified that she paid

another charge in connection with her business use of the

Internet, but she could not recall whether she incurred the

charge in 1999 or 2000.
                                   - 25 -

     Petitioners did not offer evidence to demonstrate any

allocation of Dr. Rinker’s Internet fees between personal and

business uses.    Petitioners have therefore not provided the Court

with an adequate basis upon which to make a Cohan estimation, and

we allow petitioners no deduction for the claimed expenditures.

See Cohan v. 

at 544.

         13.     Office Cleaning

     On their Schedule C for Dr. Rinker’s medical practice for

1999, petitioners claimed a deduction of $598 for cleaning

services.   Dr. Rinker testified that she engaged a cleaning

service company to clean both her office and her home during

1999, and that her total payments to the cleaning service

exceeded $5,000.     Dr. Rinker testified that she based the $598

figure on the number of times the service visited her office and

the amount of the weekly payments she made to the company in

1999.

     Dr. Rinker’s expenditures for office cleaning were ordinary

and necessary expenditures directly connected with her medical

practice.   See sec. 1.162-1, Income Tax Regs.    We therefore allow

a deduction of $598.
                                - 26 -

          14.   Deductions to Which Section 274 Applies

                a.   Car and Truck Expenses

     On their 1999 Schedule C for Dr. Rinker’s medical practice,

petitioners claimed deductions for car and truck expenses of

$6,077.    Respondent disallowed the deduction.

     Certain business deductions described in section 274 are

subject to strict rules of substantiation that supersede the

doctrine in Cohan v. 

at 544.     See sec. 1.274-

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

1985).    Section 274(d)(4) disallows deductions with respect to

“listed property” unless the taxpayer satisfies the section 274

substantiation requirements.    Under section 280F(d)(4)(A)(i),

“listed property” includes, among other items, passenger

automobiles.    If a taxpayer cannot satisfy the substantiation

burden imposed by section 274(d) with respect to a deduction to

which it applies, he fails to carry his burden of establishing

that he is entitled to deduct that expense, regardless of any

equities involved.    Sec. 274(d); Nicely v. Commissioner, T.C.

Memo. 2006-172; sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985).     Generally, taxpayers must

substantiate each required element of an expenditure or use.

Sec. 1.274-5T(b)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).    For deductions stemming from uses of

listed property, the elements that must be substantiated include
                              - 27 -

the amount of each business use (using mileage or other approved

measures) as well as the total use of the listed property for the

taxable period; the date of the use; and the business or

investment purpose of the use.   Sec. 1.274-5T(b)(6), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

     Where section 274 applies, a taxpayer must substantiate the

expenditure by “adequate records” or by “sufficient evidence

corroborating the taxpayer’s own statement”.   Sec. 274(d); sec.

1.274-5T(c)(1), Temporary Income Tax Regs.   The “adequate

records” requirement is generally satisfied where a taxpayer

presents documentary evidence, such as receipts, paid bills, or

similar evidence sufficient to support deduction of an

expenditure.   Sec. 1.274-5(c)(2)(iii), Income Tax Regs.   For

deductions relating to uses of listed property, a taxpayer may

also satisfy the “adequate records” requirement by maintaining an

account book, diary, log, statement of expense, trip sheets, or

similar record, and documentary evidence which, in combination,

are sufficient to establish each required element of an

expenditure or use to which section 274(d) applies.    Sec. 1.274-

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

6, 1985).

     If a taxpayer has not substantially complied with the

“adequate records” standard, he may substantiate an element of an

expenditure by presenting “sufficient evidence corroborating the
                              - 28 -

taxpayer’s own statement.”   Sec. 274; sec. 1.274-5T(c)(1) and

(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,

1985).   That requirement is satisfied where a taxpayer presents

both his own statement containing specific information in detail

as to the element, as well as other corroborative evidence

sufficient to establish the element.    Sec. 1.274-5T(c)(3)(i),

Temporary Income Tax 

.     Generally, the corroborative

evidence must be direct evidence, such as a statement in writing

or the oral testimony of witnesses involved in the deductible

event, or documentary evidence such as described in section

1.274-5T(c)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46020

(Nov. 6, 1985).   In proving the business purpose of an

expenditure, the corroborative evidence may be circumstantial

evidence.   Sec. 1.274-5T(c)(3)(i), Temporary Income Tax 

.

     In lieu of substantiating the actual amount of an

expenditure relating to the business use of a passenger

automobile, a taxpayer may use a standard mileage rate

established by the Internal Revenue Service.    See sec. 1.274-

5(j)(2), Income Tax Regs.; Rev. Proc. 98-63, 1998-2 C.B. 818.

Use of the standard mileage rate establishes the amount deemed

expended with respect to the business use of a passenger

automobile, but such use does not relieve a taxpayer of his

burden of substantiating the other elements required by section
                               - 29 -

274 and the regulations issued thereunder.    Sec. 1.274-5(j)(2),

Income Tax Regs.

     At trial, Dr. Rinker testified that she used her car to

travel to various business appointments and business-related

events in 1999.    Dr. Rinker testified that she documented her

business travel mileage in her appointment book, which also

contained the names of her patients.    However, Dr. Rinker did not

think it prudent to offer her 1999 appointment book as evidence

because she was concerned that doing so might violate her duty of

confidentiality towards her patients.    Instead, petitioners

presented a computer report that Dr. Rinker prepared in

connection with the examination of the return which purported to

summarize the contents of her 1999 appointment book.    That

document purported to show that Dr. Rinker traveled 3,740 miles

in connection with her medical practice.

     Petitioners have not satisfied the “adequate records”

standard.   Petitioners have not presented documentary evidence

such as receipts, paid bills, or other direct evidence of the

required elements.    Petitioners have not presented a log book or

other similar record made at or near the time of the expenditures

at issue.   Nor may the Court excuse petitioners’ failure to

produce Dr. Rinker’s appointment book because of Dr. Rinker’s

concern for her clients’ confidentiality.    Section 1.274-

5T(c)(2)(ii)(D), Temporary Income Tax Regs., 50 Fed. Reg. 46019
                                - 30 -

(Nov. 6, 1985), provides a way to maintain the confidentiality of

information when recording the elements of business mileage in a

log book or similar document:

          Confidential information.--If any information
          relating to the elements of an expenditure or
          use, such as place, business purpose, or
          business relationship, is of a confidential
          nature, such information need not be set
          forth in the account book, diary, log,
          statement of expense, trip sheet, or similar
          record, provided such information is recorded
          at or near the time of the expenditure or use
          and is elsewhere available to the district
          director to substantiate such element of the
          expenditure or use.

As respondent noted--albeit in another context--petitioners could

have satisfied this requirement by photocopying Dr. Rinker’s

appointment book and redacting her clients’ names.    Petitioners

failed to do so.

     Petitioners have not presented any evidence to corroborate

Dr. Rinker’s statements regarding her business mileage.    They

have therefore failed to substantiate any such expenses.    We

allow no deduction for business mileage.

             b.    Business Travel Away From Home

     Petitioners deducted $7,018 for business travel away from

home and $988 for business meals and entertainment.   Respondent

disallowed all but $362 of the claimed deductions for travel.

Respondent made no adjustment to petitioners’ deduction for meals

and entertainment of $988.
                              - 31 -

     The heightened substantiation requirements of section 274

apply to deductions for travel expenditures.    Sec. 274(d)(1).

Under section 274(d)(1), the elements that must be substantiated

to deduct such expenses generally include the amount of each

separate expenditure, the dates of departure and return for each

trip away from home and the number of days away from home spent

on business, the destinations or places to which the taxpayer

traveled, and the business purpose of the travel.    Sec. 1.274-

5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).   As with other deductions to which section 274 applies,

taxpayers must generally substantiate deductions for business

travel away from home with “adequate records” or “sufficient

evidence corroborating the taxpayer’s own statement”, discussed

supra.   Sec. 1.274-5T(c)(1), Temporary Income Tax 

.

     Petitioners attempted to substantiate a portion of the

claimed business travel deductions in 1999.    Petitioners

presented a Quicken report containing Dr. Rinker’s travel

expenditures in 1999, and Dr. Rinker testified that some of the

travel expenditures on the report related to business trips that

she took to attend various medical conferences.    In her

testimony, Dr. Rinker specified which trips on the report were

business travel and detailed the business activities she engaged

in during those trips.
                              - 32 -

     Petitioners have not met the generally applicable

substantiation requirements of section 274.   Petitioners have not

presented documentary evidence such as receipts, paid bills, or

other direct evidence of the required elements.     Petitioners

failed to present any independent corroboration of Dr. Rinker’s

statements which would substantiate the required elements of Dr.

her business travel deductions.   Petitioners have therefore

failed to substantiate the claimed deductions with either

“adequate records” or “sufficient evidence corroborating the

taxpayer’s own statement.”   However, petitioners argue that

because Mr. Hertz lost their tax records for 1999, they should be

allowed to substantiate Dr. Rinker’s business travel expenses

under section 1.274-5T(c)(5), Temporary Income Tax 

.

We agree.

     Section 1.274-5T(c)(5), Temporary Income Tax 

,

provides taxpayers with a method of substantiating their section

274 deductions when their records have been lost because of

circumstances beyond their control.    Where a taxpayer establishes

that the failure to produce adequate records is due to the loss

of those records through circumstances beyond the taxpayer’s

control, the taxpayer may substantiate a deduction by reasonable

reconstruction of his expenditures or use.

unavailable, the Court may, although it is not required to do

so, accept the taxpayer’s testimony to substantiate the
                                    - 33 -

deduction.      See Boyd v. Commissioner, 

; Watson v.

Commissioner, T.C. Memo. 1988-29.

       Petitioners have shown that they at one time possessed

adequate documentation to establish the required elements for

deducting Dr. Rinker’s business travel expenditures.            Petitioners

have also shown that their failure to produce those records

stemmed from circumstances beyond their control; namely, that Mr.

Hertz lost the records.     Petitioners have also provided a

reasonable reconstruction of some of Dr. Rinker’s expenditures

for business travel away from home in 1999.          We therefore allow

petitioners’ deductions for which petitioners have provided

adequate reconstructions of Dr. Rinker’s deductible business

travel expenditures.

       Deductible traveling expenses include travel fares, meals

and lodging, and expenses incident to travel.          Sec. 1.162-2(a),

Income Tax Regs.      From the record before us, petitioners have

reconstructed the following deductible travel expenses:

          Nature of
Date     Expenditure    Destination          Business Purpose      Amount

2/2      Fuel           Las Vegas        American Academy      $19.46
                                           of Anti-Aging
                                           Medicine conference
4/26     Hotel          Fresno           University pharmacy    77.28
                                           conference
4/27     Car rental     Fresno           University pharmacy    22.20
                                           conference
4/27     Hotel          Fresno           University pharmacy   219.02
                                           conference
6/11     Hotel          San Francisco    Psychiatry            285.36
                                           conference
                                    - 34 -

10/25       Car rental    San Francisco   American Osteopathic    103.97
                                           Association
                                            convention
11/17       Hotel         San Francisco   American Osteopathic    109.00
                                            Association
  Total                                                          $836.29

We therefore allow a deduction for $836.29.

III.       Schedule A Deductions

       A.     Personal Medical Expenditures

       On their 1999 tax return, petitioners claimed medical and

dental expenditures of $18,659, of which $11,693 was allegedly

deductible.7        Respondent denied the deduction.

       At trial, petitioners offered another Quicken report which

purported to contain their medical expenses for 1999.        The report

showed several payments from petitioners’ bank accounts, the

amounts of the payments, the payees, and some details about the

payments and their purposes.        Dr. Rinker testified that while she

and Mr. Davis had medical insurance for their family in 1999

through Mr. Davis’s employers, the report included only those

medical expenses which were not reimbursed through their medical

insurance policy.        Many of the entries on the Quicken report

contain notes such as “not covered”, “co pay”, or “copayment”.

       Section 213(a) generally allows a deduction for expenses paid

during a taxable year, not compensated for by insurance or



       7
        As discussed below, sec. 213 allows a deduction for
medical or dental expenses to the extent that they exceed 7.5
percent of adjusted gross income.
                               - 35 -

otherwise, for medical care of the taxpayer, his or her spouse, or

dependents, to the extent that such expenses exceed 7.5 percent of

adjusted gross income.

     As noted above, taxpayers bear the burden of proving that

they are entitled to any deductions claimed on their return, see

Rule 142(a); INDOPCO, Inc. v. Commissioner, 

, 84

(1992), and taxpayers must substantiate amounts claimed as

deductions by maintaining the records necessary to establish such

entitlement.8   See sec. 6001; Hradesky v. Commissioner, 

(1975); sec. 1.6001-1(a), Income Tax Regs.   To substantiate

medical and dental expenses under section 213, the taxpayer must

furnish the name and address of each person to whom payment was

made and the amount and date of each such payment.   See sec.

1.213-1(h), Income Tax Regs.   If requested by the Commissioner,

the taxpayer must also furnish an itemized invoice which

identifies the patient, the type of service rendered, and the

specific purpose of the expense.   See

fails

to provides adequate substantiation, the Court may uphold the

Commissioner’s determination denying a deduction for medical and

dental expenses.   See Hunter v. Commissioner, T.C. Memo. 2000-249;

Nwachukwu v. Commissioner, T.C. Memo. 2000-27.




     8
        Petitioners do not argue, and we do not find, that sec.
7491(a) applies. See supra note 6.
                               - 36 -

     Petitioners’ evidence regarding their medical expenses is

confusing, contradictory, and incomplete, and we are not convinced

that the expenditures in petitioners’ Quicken report represent

deductible medical expenses.   Mr. Davis, who required hearing aids

during 1999, testified that his expenses for hearing aids were

reimbursed by a special fund set up by his employer--yet, judging

from the Quicken report, over $800 of the medical expenses went

towards Mr. Davis’s hearing aids.   Petitioners claim to have had

employer-provided medical insurance in 1999, yet they reported

over $18,000 in unreimbursed medical expenses on their tax return

and showed only $357 of insurance reimbursements at trial.     Dr.

Rinker attempted to explain this by testifying that she excluded

from the Quicken report those medical expenses which were

reimbursed by insurance.   But both the report itself and Mr.

Davis’s testimony indicate otherwise.    The Quicken report includes

entries for insurance reimbursements, and Mr. Davis testified that

petitioners’ insurance covered all expenditures for prescription

drugs except a minimal copayment.   Contrary to Dr. Rinker’s

testimony, the Quicken report includes several entries for

prescription medications costing hundreds of dollars each.

     Moreover, several of the expenditures on the Quicken report

appear to relate to procedures that may have been cosmetic in

nature or to purchases of vitamins and nonprescription drugs.

Those expenditures are not deductible.   Sec. 213(d)(9)(A) and (B),
                                   - 37 -

(b).       Finally, the Quicken report, even when coupled with

petitioners’ testimony, does not satisfy the requirements imposed

by section 1.213-1(h), Income Tax Regs.9        We therefore disallow the

deduction for medical expenses for 1999.

       B.     Personal Interest

       Petitioners deducted $20,903 of interest related to the

refinancing of their home mortgage.         Respondent denied the

deduction.

       Petitioners refinanced a preexisting home mortgage loan on

December 17, 1998.       The terms of the December 17, 1998, refinance

loan (the 1998 loan) required petitioners to pay a $7,500 “loan

origination fee” at the inception of the 1998 loan.         The stated

term of the 1998 loan was apparently 30 years.         However, on

March 28, 2000, petitioners again refinanced their home and paid

off the 1998 loan in its entirety.

       At trial, petitioners attempted to revive only $5,862 of the

$20,903 deducted on their return.       They argued that the loan

origination fee constituted prepaid interest, and that because the

1998 loan lasted only 467 days, the bulk of the loan origination




       9
        It is unclear whether the dates on the report indicate
the date of payment, as required, or the date on which
petitioners entered the data into their computer. The Quicken
report also fails to adequately substantiate the address of any
payees as required by the regulation.
                                - 38 -

fee is deductible in 1999.    Petitioners calculate that to equal

$5,862.10

     Respondent apparently concedes that the “loan origination

fee” represents prepaid interest, and that such interest

constitutes “home equity indebtedness with respect to * * * [a]

qualified residence” under section 163(h)(3)(A)(ii).11   However,

respondent argues that the proper method of allocating prepaid

interest requires a taxpayer to look to the stated term of the

loan--in this case, 30 years--to determine the amount attributable

to a particular tax year.    Respondent argues that the effect of a

subsequent refinancing is that a taxpayer may deduct in the year

of the refinancing any prepaid interest not previously deducted.

Respondent accordingly conceded that petitioners are entitled to a

deduction of $250 for prepaid interest in 1999.12

     Respondent’s approach to the deductibility of prepaid

interest is correct.   Section 461(g)(1) provides:




     10
        $7,500 divided by the 467-day existence of the loan,
multiplied by the 365 days of 1999.
     11
        In some instances, “loan origination fees” may include
charges for services, and not prepaid interest. See, e.g.,
Goodwin v. Commissioner, 

, 440-442 (1980), affd.
without published opinion 

(3d Cir. 1982); Lange v.
Commissioner, T.C. Memo. 2005-176; Rev. Proc. 87-15, 1987-1 C.B.
624.
     12
        For interest of $7,500 on a loan with a stated term of
360 months, the interest allocable to 12 months is $250.
                                - 39 -

     In general.--If the taxable income of the taxpayer is
     computed under the cash receipts and disbursements
     method of accounting, interest paid by the taxpayer
     which, under regulations prescribed by the Secretary,
     is properly allocable to any period–-

                (A) with respect to which the interest
           represents a charge for the use or forbearance of
           money, and

                (B) which is after the close of the taxable
           year in which paid,

     shall be charged to capital account and shall be
     treated as paid in the period to which so allocable.

     The parties do not dispute that petitioners prepaid interest

in 1998.   Nor, apparently, do the parties dispute that the

prepaid interest should be amortized over the life of the loan.13

The only dispute is whether the period to which the interest

relates should be determined by the terms of the loan when it was

entered into--in this case, 30 years--or the actual life of the

loan, foreshortened as it was by petitioners’ subsequent

refinancing of March 2000.

     The interest which petitioners prepaid “[represented] a

charge for the use or forbearance of money” for the entire

contractual term of the loan.    For 1999, petitioners are


     13
        Under certain circumstances, points paid in connection
with the purchase or improvement of a principal residence may be
deductible. Sec. 461(g)(2). Petitioners have not alleged, and
we do not find, that they paid the loan origination fee in
connection with the purchase or improvement of their principal
residence. We therefore find that the exception of sec.
461(g)(2) does not apply. See, e.g., Kelly v. Commissioner, T.C.
Memo. 1991-605; Fox v. Commissioner, T.C. Memo. 1989-232, affd.
without published opinion 

(9th Cir. 1991).
                                - 40 -

therefore entitled to deduct only that portion of the points

allocable to 1999 as a portion of the 30-year loan.     Cf. Square D

Co. & Subs. v. Commissioner, 

, 194 nn.21 & 22 (2003).

From the record before us, that amounts to $250.

     C.   SEP-IRA Contributions

     At trial, Dr. Rinker testified that she made contributions

to three different SEP-IRA funds in 1999, and petitioners argued

that they should be allowed a deduction for the 1999

contributions.   Petitioners did not claim a deduction for the

contributions on their 1999 return because, on the basis of the

Schedule C income shown on the return, no deduction was

permissible.   However, petitioners argued that, on the basis of

respondent’s adjustments and petitioners’ concessions with regard

to the Schedule C income, such a deduction would now be allowable

and appropriate.

     Even if the Court accepts Dr. Rinker’s uncorroborated

assertions that she contributed money to retirement accounts,

petitioners have failed to provide the Court with any evidence

that Dr. Rinker made the contributions under plans that meet the

qualifications for SEP-IRA’s.     See secs. 219, 401, 408.   We

therefore conclude that petitioners are not entitled to a

deduction for the contributions in 1999.
                                - 41 -

IV.   Penalties

      A.   Section 6662(a)

      Respondent determined an accuracy-related penalty under

section 6662(a) of $8,021.80.     Respondent determined that the

entire underpayment of tax for 1999 was attributable to

negligence or disregard of rules or regulations, a substantial

understatement of income tax, and/or a substantial valuation

misstatement.14 Petitioners argue that the underpayments for 1999

were caused by their reasonable reliance on Mr. Hertz in

preparing their return. This reliance, petitioners argue,

qualifies as “reasonable cause and good faith”, and under section

6664(c)(1), the penalty should not be sustained.

           1.   Burden of Production

  Section 7491(c) provides that the Commissioner will bear the

burden of production with respect to the liability of any

individual for additions to tax and penalties.     “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”.     Swain v.

Commissioner, 

, 363 (2002); see also Higbee v.



      14
        Although the notice of deficiency includes “substantial
valuation overstatement” (sic) as a basis for applying the
accuracy-related penalty, it appears that respondent did not
determine any tax deficiency based on a valuation overstatement.
We therefore do not address the aspects of the accuracy-related
penalty which relate to a substantial valuation overstatement.
                                - 42 -

Commissioner, 

, 446 (2001).    Once the Commissioner

has done so, the burden of proof is upon the taxpayer to

establish reasonable cause and good faith.     Higbee v.

at 449.

           2.   Section 6662(a) Penalty

     Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax

(1) attributable to a substantial understatement of tax or (2)

due to negligence or disregard of rules or regulations.    Sec.

6662(b).    The term “understatement” means the excess of the

amount of tax required to be shown on a return over the amount of

tax imposed which is shown on the return, reduced by any rebate

(within the meaning of section 6211(b)(2)).    Sec. 6662(d)(2)(A).

Generally, an understatement is a “substantial understatement”

when the understatement exceeds the greater of $5,000 or 10

percent of the amount of tax required to be shown on the return.

Sec. 6662(d)(1)(A).    The term “negligence” in section 6662(b)(1)

includes any failure to make a reasonable attempt to comply with

the Code.    Sec. 6662(c).   Negligence has also been defined as the

failure to exercise due care or the failure to do what a

reasonable person would do under the circumstances.    See Allen v.

Commissioner, 

, 12 (1989), affd. 

, 353 (9th

Cir. 1991); Neely v. Commissioner, 

, 947 (1985).       The
                                - 43 -

term “disregard” includes any careless, reckless, or intentional

disregard.     Sec. 6662(c).

          3.    Analysis

     Respondent has met the burden of production imposed on him

by section 7491(c).     Respondent has shown that the underpayments

of petitioners’ 1999 taxes exceeds the greater of $5,000 or 10

percent of the tax required to be shown on the return, and is

therefore due to a “substantial understatement”.      Sec.

6662(d)(1)(A).     To avoid application of the penalty, petitioners

must therefore demonstrate that the underpayments of tax for 1999

were due to reasonable cause and good faith.15     See Higbee v.

at 449.

     Whether applied because of a substantial understatement of

tax or negligence or disregard of rules or regulations, the

accuracy-related penalty is not imposed with respect to any

portion of the underpayment as to which the taxpayer acted with

reasonable cause and in good faith.      Sec. 6664(c)(1).    The

decision as to whether a taxpayer acted with reasonable cause and

in good faith depends upon all the pertinent facts and

circumstances.     Sec. 1.6664-4(b)(1), Income Tax Regs.     Relevant

factors include the taxpayer’s efforts to assess his proper tax

liability, including the taxpayer’s reasonable and good faith



     15
        There is no claim or proof that petitioners may reduce
the amount of the understatement under sec. 6662(d)(2)(B).
                               - 44 -

reliance on the advice of a professional such as an accountant.

See

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.

     At the time the return was prepared, Mr. Hertz was an

enrolled agent.    Petitioners had engaged Mr. Hertz to prepare

their income tax returns for 1 or 2 years before 1999.

              a.   Deductions Relating to Mr. Davis’s Photography
                   Activities

     Petitioners honestly misunderstood Mr. Davis’s photography

expenditures to be deductible business expenses.    Although

petitioners are both highly educated in fields that do not relate

to taxation, we find that their misunderstanding was reasonable.

We therefore conclude that petitioners had reasonable cause and

acted in good faith as to the underpayments resulting from

deductions of photography-related expenditures.

              b.   Gross Receipts and Deductions of Dr. Rinker’s
                    Medical Practice

     Petitioners credibly testified that they provided Mr. Hertz

with all of the necessary records and information with which to

determine the gross receipts and allowable deductions for Dr.

Rinker’s medical practice, and that they relied on Mr. Hertz to

determine the proper figures on their return.    We conclude that

for 1999 petitioners had reasonable cause and acted in good faith
                               - 45 -

as to the underpayments resulting from Dr. Rinker’s claimed gross

receipts and business deductions.

             c.    Deductions for Home Mortgage Points

     The record also indicates that petitioners relied on Mr.

Hertz to determine the proper amount of their deduction for

personal interest.   Dr. Rinker testified that she gave Mr. Hertz

all of the records relating to her home mortgage and relied on

him to determine the proper deduction because she had “no idea,

looking at mortgage papers, what is tax-deductible and what

isn’t.   And I just told * * * [Mr. Hertz] to figure it out.”        We

therefore conclude that petitioners had reasonable cause and

acted in good faith as to the underpayment attributable to

petitioners’ erroneous deduction of home mortgage points.

             d.    Deductions for Personal Medical Expenditures

     The record does not reveal that petitioners had reasonable

cause and acted in good faith with respect to their claimed

$11,693 in deductible medical expenses.     Regardless of whether

the erroneous deductions were results of Mr. Hertz’s negligence

or otherwise, petitioners had significant “warning signs” that

their deductions for medical expenditures were improper.     As

noted above, petitioners carried employer-provided medical

insurance, and many of the claimed expenditures were covered by

the terms of the insurance policy.      See Allen v. 

.   We therefore sustain respondent’s application
                             - 46 -

of the section 6662 penalty as it applies to the portion of the

deficiency attributable to claimed deductions for personal

medical expenses.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.