T.C. Memo. 2010-6



                     UNITED STATES TAX COURT



            JOHNNY AND JENNIFER ROSSER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

              ROSSER ENTERPRISES, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 6540-08, 6541-08.     Filed January 6, 2010.



    Johnny Rosser, pro se.

    Johnny Rosser (an officer), for petitioner in docket No.

6541-08.

    Lynette Mayfield, for respondent.
                                 - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     DAWSON, Judge:   In these consolidated cases respondent

determined the following Federal income tax deficiencies and

accuracy-related penalties:

                                                         Accuracy-
                                                      Related Penalty
   Petitioners            Year           Deficiency    Sec. 6662(a)

Johnny & Jennifer         2004             $11,453       $2,290
 Rosser                   2005               2,790          558
Rosser Enterprises,       2005               4,370
 Inc.

     After concessions,1 the issues remaining for decision are:

     (1) Whether Rosser Enterprises Inc. (the corporation), is

entitled to various claimed business expense deductions in excess

of those respondent allowed in the notice of deficiency for 2005;

     (2) whether Johnny and Jennifer Rosser (petitioners)

received constructive dividend income from the corporation in

2004 and 2005;

     (3) whether petitioners made cash charitable contributions

for 2004 and 2005 in excess of the amounts allowed by respondent;




     1
      Petitioners concede that their mortgage interest deduction
for 2004 is limited to $3,818. Petitioners also concede that
Jennifer Rosser received unreported gross receipts of $1,138 from
Mary Kay Cosmetics sales in 2004. Respondent concedes that
petitioners did not receive unreported interest income of $3,617
in 2004 from Webb Group Financial Services.
                               - 3 -

     (4) whether petitioners or the corporation are entitled to

deduct a claimed loss in 2005 with respect to investments placed

with Webb Group Financial Services; and

     (5) whether petitioners are liable for accuracy-related

penalties pursuant to section 6662(a)2 for 2004 and 2005.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

in our findings by this reference.     The record consists of the

stipulation of facts with attached exhibits, additional exhibits

admitted at trial, and the testimony of Johnny Rosser

(petitioner) and James Clark, an unenrolled tax return preparer

who prepared the Federal income tax returns for petitioners and

the corporation for the years in issue.

     Petitioners resided in Tennessee when they filed their

petition.   The corporation was organized in Tennessee and was

doing business as a dry cleaning establishment in three locations

in Knoxville, Tennessee, at the time its petition was filed.

Petitioner is the corporation’s president and sole shareholder.

     Petitioners timely filed their joint Federal income tax

returns on Form 1040, U.S. Individual Income Tax Return, for 2004



     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended and in effect for the years
in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 4 -

and 2005; and the corporation timely filed its Form 1120, U.S.

Corporation Income Tax Return, for 2005.

     On January 28, 2008, respondent issued a notice of

deficiency to petitioners with respect to their taxable years

2004 and 2005.   On the same date respondent issued a notice of

deficiency to the corporation with respect to its taxable year

2005.   No notice of deficiency was issued to the corporation with

respect to its taxable year 2004 because respondent determined

upon audit that there was no deficiency for that year.

     Petitioners reported $7,895 on line 21 of their Form 1040

for 2004 as “personal property rental income”.   No personal

property rental transaction appears under “Equipment Rental” on

the corporation’s Profit and Loss Detail for 2004, and

petitioners filed no Schedule E, Supplemental Income and Loss,

with their 2004 Federal income tax return.

     During 2004 and 2005 the corporation paid $2,832 and $1,995,

respectively, in personal insurance premiums for petitioners.

     During 2004 and 2005 the corporation paid petitioners’

personal medical expenses of $1,216 and $631, respectively.

     The corporation paid petitioners’ personal credit card

expenses for 2004 and 2005, as follows:

Credit Card       Date                 Payee                Amount

Amer. Exp.       2-25-04     Aeronaves de Mexico           $150.00
Chase            3-24-04     Tsuen May Trading, Miami       115.00
Amer. Exp.        4-1-04     Four Winds Mfg.              3,600.00
Chase            4-28-04     MyPaySystems.Com               154.00
                              - 5 -

Chase           5-13-04     Dillards                       38.24
Chase           5-24-04     Pellissippi State Cash        295.00
Chase           7-21-04     MyPaySystems.Com              152.72
Discover        7-30-04     Derm. Assoc. Knoxville         30.00
Chase           8-23-04     MTSU online registr.        1,202.50
Chase          10-14-04     Banana Republic                34.99
Chase          10-19-04     AMZ Superstore                 15.96
Amer. Exp.     11-18-04     Biltmore Est. Tickets          90.00
  2004 Total                                            5,878.41


Credit Card      Date                 Payee               Amount

Chase           1-14-05     Tickets Unlimited            $136.50
Chase           1-31-05     HMICZ Ring & Gifts              4.99
Chase           1-31-05     Target-Knoxville               33.51
Amer. Exp.      2-11-05     Blockbuster Video              10.91
Amer. Exp.      3-11-05     Blockbuster Video              10.91
Chase           3-29-05     Etix.com                       27.96
Chase            4-7-05     MBM Limoges Jewelry            19.96
Amer. Exp.      4-10-05     Blockbuster Video              16.38
Chase           4-26-05     AMZ Amazon Paymts.             12.22
Amer. Exp.      5-11-05     Blockbuster Video              16.38
Chase           5-29-05     Paypal                         26.48
Chase            6-7-05     Target                         43.19
Chase           6-28-05     Free Watch                     11.90
Chase            7-1-05     Dermatology Assoc.             30.00
Chase            8-8-05     Dermatology Assoc.             30.00
Chase            8-9-05     Mullins Family Dentistry      163.00
Chase           8-20-05     USAirways                     562.15
Chase           8-20-05     USAirways                     562.15
Chase           8-23-05     Dermatology Assoc.             30.00
Chase           8-30-05     Atlantic Jet Sports            34.71
Chase            9-7-05     EBay S Half Com               137.42
Chase           9-22-05     Mullins Family Dentistry       60.00
Chase          10-26-05     Berman Investments              2.95
Chase          11-11-05     Bargain Mart Classifieds       18.00
Chase          11-14-05     Bargain Mart Classifieds       20.00
Chase          11-16-05     Paypal CarlosM                 38.27
Chase          11-21-05     WCB Grill Parts                33.82
Chase          11-25-05     Berman Investments             99.90
  2005 Total                                            2,193.66

     The corporation made two cash payments of $2,000 each to

petitioner in 2004 which were not reported as wages.
                               - 6 -

     The corporation made payments in the total amounts of $4,943

and $4,550 for 2004 and 2005, respectively, to Fifth Third Bank

on a loan for a 2001 Ford van titled in petitioner’s name but

used entirely for the corporation’s dry cleaning deliveries.

     During 2004 and 2005 petitioners operated two automobiles, a

2001 Mitsubishi Eclipse and a 2004 Toyota Solara, primarily for

their personal use.   Both automobiles were owned by the

corporation.

     On December 31, 2003, petitioner, as president and sole

shareholder of the corporation, wrote, signed, and received

corporate check No. 6190 for $20,200 payable to himself, which

was deposited to his personal bank account on January 6, 2004.

In the notice of deficiency for 2004 respondent determined that

the $20,200 was a constructive dividend includable in the total

dividends petitioners received in 2004.

     Petitioners claimed deductions on their Federal income tax

returns for cash charitable contributions of $10,993 in 2004 and

$11,381 in 2005 made to Ridgeview Baptist Church.   Of those

amounts, petitioners themselves actually paid $3,168 for 2004 and

$3,731 for 2005.   The remainder of the contributions to the

church was paid by the corporation in the amounts of $7,825 in

2004 and $7,650 in 2005.   The church acknowledged that it

received all the contributions.   Respondent determined that

petitioners’ charitable contribution deductions for the amounts
                               - 7 -

paid to the church were limited to $3,168 for 2004 and $3,731 for

2005.

     By agreement dated September 24, 2004, the corporation

acquired the assets of Old Capitol Cleaners (OCC) for a total

price of $34,000, with the closing to be effective as of the end

of business on September 25, 2004.     The corporation made a

downpayment of $10,000 at the time OCC was purchased.     During

November and December 2004 the corporation began making regular

payments of $2,000 per month on the balance of the debt incurred

for the OCC purchase.

     The OCC assets acquired by the corporation in 2004

consisted, inter alia, of “the entire right, title, and interest

in and to the Business, as a going concern” and thus were placed

in service in 2004.

     On its income tax return for 2005 the corporation claimed a

depreciation deduction of $26,141.     Of that amount, $20,500 was

claimed as a section 179 expense with respect to the

corporation’s purchase of OCC in 2004, and $5,691 was claimed for

ongoing depreciation of dry cleaning equipment and the

corporation’s 2000 Ford van.   Respondent allowed the depreciation

on the dry cleaning equipment but reduced the depreciation

claimed on the Ford van by $238 because of the application of the

accelerated cost recovery system (ACRS).     Respondent also

disallowed $20,500 claimed as a section 179 expense in 2005
                               - 8 -

because the corporation did not purchase OCC’s assets in that

year but rather in 2004, for which the expense was previously

allowed.

     On its “Other Deductions Statement” to its 2005 income tax

return, the corporation claimed as deductions the following

reimbursement amounts:   (1) Automobile reimbursements--Rosser

($3,933); (2) other reimbursements--Rosser ($8,646); and (3)

additional section 263A costs--reimbursements ($6,569), for a

total of $19,148.   Respondent determined in the notice of

deficiency issued to the corporation for 2005 that only $10,138

of the reimbursements was substantiated and that $9,010 was

unsubstantiated and therefore disallowed.

     On its “Other Deductions Statement” to its income tax

return, the corporation claimed insurance expenses of $6,601 paid

in 2005.   Included in that amount was $1,995 the corporation paid

for petitioners’ personal insurance.   Respondent disallowed

$1,995 and allowed the balance of $4,606.

     On its “Other Deductions Statement” to its income tax

return, the corporation claimed medical expenses of $631 paid in

2005.   That amount was for petitioners’ personal medical

expenses, and respondent disallowed it.

     During 2004 petitioners and the corporation made investments

with Webb Group Financial Services (Webb Group).   As early as May

2005 the Webb Group investors were notified that their
                               - 9 -

investments might be in some financial jeopardy but a class

action had been filed.   On April 16, 2006, a receiver was

appointed in the Superior Court of Forsyth County, North

Carolina.   On May 22, 2006, the court entered an order

authorizing the receiver to make some payments of attorney’s fees

and distributions.   On or about June 15, 2006, petitioner and the

corporation filed proofs of claim with the receiver.   The

corporation received a letter dated January 10, 2007, from the

receiver that informed it, in part, as follows:

          The Receiver has asked the Court for permission to
     distribute on a pro rata basis $900,000 from the
     Receiver’s Trust Account to the Webb/Franklin/Disciple
     Creditors. The amount of distribution you are
     receiving on the enclosed check in the amount of
     $533.45 is based upon a simple “cash in less cash out”
     calculation for each Creditor account, and by comparing
     Proof of Claim forms submitted by each Creditor with
     the financial records the Receiver obtained for each
     Webb/Franklin/Disciples Creditor account that is
     subject to participation in the Settlement
     Distributions (see the distribution calculation sheet
     enclosed).
          For this account, records indicate that you loaned
     Webb/Franklin total principal amount(s) of $14,114.29,
     and did not receive any distributions in the form of
     interest paid or principal withdrawals, leaving a Net
     Creditor Account Balance subject to pro rata
     distribution in the amount of $14,114.29.

          Your Net Creditor Account Balance is equal to a
     pro rata distribution of 0.07563 percent of the
     aggregate Webb/Franklin Net Creditor Account Balances,
     which total $18,662,611.81. The portion of the
     $900,000 being distributed from the Receiver’s Trust
     Account that is earmarked for Webb/Franklin Creditors
     is $705,357, which when multiplied by your pro rata
     distribution percentage factor equals the amount of the
     enclosed check of $533.45.
                               - 10 -

      On or about September 29, 2008, petitioner received a final

settlement check of $13,573.99, after payments of attorney’s fees

and costs, and the corporation received a check for $37,185.93 as

a final net payment.   The payments petitioner and the corporation

received partially reimbursed them for their losses through the

Webb Group.

                               OPINION

I.   Burden of Proof

      Generally, the Commissioner’s determinations are presumed

correct, and taxpayers bear the burden of proving that those

determination are erroneous.   Rule 142(a); Welch v. Helvering,

, 115 (1933).   Deductions and credits are a matter of

legislative grace, and taxpayers bear the burden of proving

entitlement to any deduction or credit claimed.     Rule 142(a);

INDOPCO, Inc. v. Commissioner, 

, 84 (1992); Deputy v.

du Pont, 

, 493 (1940); New Colonial Ice Co. v.

Helvering, 

, 440 (1934).     Taxpayers also bear the

burden of substantiating the amount and purpose of any claimed

deduction.    See Hradesky v. Commissioner, 

(1975),

affd. per curiam 

(5th Cir. 1976).

      Under section 7491(a)(1), the burden of proof may shift from

taxpayers to the Commissioner if taxpayers, in addition to

satisfying other requirements, produce credible evidence with

respect to any factual issue relevant to ascertaining their
                                 - 11 -

liabilities.    Petitioners have not alleged that section 7491(a)

applies, nor did they introduce the requisite evidence to invoke

that section.    Therefore, the burden of proof remains on

petitioners.

       Section 7491(c) provides that the Commissioner bears that

burden of production with respect to a penalty or addition to

tax.    To meet this burden, the Commissioner must introduce

evidence indicating that it is appropriate to impose the relevant

penalty or addition to tax.      Higbee v. Commissioner, 

, 446 (2001).     Once the Commissioner meets this burden, the

taxpayer bears the burden to produce evidence regarding

reasonable cause.

   Corporate Expense Deductions Disallowed

       A.   Depreciation

       A reasonable allowance for the exhaustion, wear, and tear of

property used in a trade or business may be deducted on a

corporation’s return.      Sec. 167.   A corporation may elect to

expense certain depreciable business assets.       Sec. 179.   However,

the election must be made on the tax return for the year in which
                              - 12 -

the property is placed in service.3    Sec. 179(c)(1)(B); Patton v.

Commissioner, 

, 208-209 (2001).

     The corporation claimed a total depreciation deduction of

$26,141 on its 2005 income tax return.    Respondent disallowed

$20,783, which consisted of $20,500 claimed as a section 179

expense for the corporation’s purchase in 2004 of the OCC assets

as a going concern and a $238 depreciation reduction under ACRS

for its 2000 Ford van.

     On September 24, 2004, the corporation entered into an

agreement to purchase all of the OCC assets.    There was a $10,000

downpayment made on that date.   The purchase agreement was

effective at the close of business on September 25, 2004, and the

corporation was required to make monthly payments on the balance

of the purchase price.   The corporation began making $2,000

monthly payments to OCC during 2004.    Because the OCC assets were

purchased as a going concern and thus placed in service during

2004, we hold that the corporation is not entitled to the $20,500

claimed section 179 expense deduction in 2005.4


     3
      It is noted that for tax years after 2002 the statute and
the regulations have been amended so that a taxpayer may make,
modify, or revoke an election without the Commissioner’s consent
on an amended return filed after the due date of the original
return. Sec. 179(c)(2); sec. 1.179-5(c), Income Tax Regs.
However, the amendments are of no use to the corporation because
it had already been allowed to expense the cost of the OCC assets
for the year (2004) during which they were placed in service.
     4
      As previously indicated, respondent allowed the corporation
                                                   (continued...)
                                 - 13 -

     The corporation’s Form 4562, Depreciation and Amortization,

contains a $238 error in its claimed 2005 depreciation of its

2000 Ford van.   The error relates to an incorrect calculation of

third-year depreciation under ACRS.       That amount is disallowed

and should be reflected in the Rule 155 computations.

     B.   Other Reimbursements

     As reflected in our findings of fact, respondent disallowed

for lack of substantiation $9,010 for other reimbursements

claimed by the corporation as 2005 business expense deductions.

Petitioners offered no evidence on this issue, and therefore they

failed to carry their burden of proof.       We reject their

contention that it was respondent’s burden to substantiate the

claimed deductions on the basis of “an unsigned, unattributed

Form 4549 with addendums”.     Clearly, the Form 4549, Income Tax

Examination Changes, is a vital part of the notice of deficiency,

which was signed and contained respondent’s determinations, which

are presumed correct.   Accordingly, we decide this issue for

respondent.

     C.   Insurance Expenses

     The corporation paid $1,995 of petitioners’ personal

insurance expenses in 2005.     Petitioners offered no evidence that

the claimed deduction was a deductible corporate business


     4
      (...continued)
a sec. 179 expense deduction in the full amount ($34,000) of the
OCC purchase price in 2004.
                                - 14 -

expense.    Respondent contends that the corporation’s payment of

the personal insurance expenses benefited only petitioners and

not the corporation, and therefore the corporation is not

entitled to the $1,995 deduction.     We recognize that payments by

an employer to defray personal expenses of an employee, including

payments for life, accident, and health insurance covering an

employee, though of benefit primarily to the employee, may be

deducted by the employer under section 162(a) in appropriate

circumstances.    For example, such payments may be deducted with

the requisite intent to compensate for services actually rendered

and in an amount that is reasonable when added to the rest of the

employee’s compensation package.     Cf. Paula Constr. Co. v.

Commissioner, 

, 1058 (1972), affd. per curiam 

(5th Cir. 1973); Francis v. Commissioner, T.C. Memo.

2007-33.     If the payment, in the case of a reimbursement of an

employee’s medical expenses, is to be excludable from the

employee’s income under section 105(b) as well as deductible to

the employer under section 162(a), it generally must be paid in

accordance with a “benefit plan” to a payee who receives it in

the capacity of an employee rather than in the capacity of a

shareholder.     Cf. Estate of Leidy v. Commissioner, T.C. Memo.

1975-340, affd. without published opinion 

(4th Cir.

1976).     There is no evidence in this record showing the

corporation had an insurance plan of any type covering its
                                  - 15 -

employees, although its income tax return for 2005 claimed a

deduction for salaries and wages of $156,313 paid to employees

and compensation of $13,000 paid to petitioner as its only

shareholder.    Accordingly, we hold petitioners failed to prove

that the corporation is entitled to deduct the claimed insurance

expenses paid on their behalf for 2005.        The payment was a

constructive dividend to them.      See Benson v. Commissioner, T.C.

Memo. 2004-272.

       D.   Medical Expenses

       The corporation claimed a deduction for medical expenses of

$631 on its 2005 income tax return.        Respondent disallowed it.

Petitioners admitted that the corporation paid their personal

medical expenses.     The corporation’s payment of such expenses

benefited petitioners and not the corporation.        Therefore, we

hold that the corporation is not entitled to the deduction.        In

addition, the payment constituted a constructive dividend to

petitioners.

III.    Constructive Dividends

       Respondent asserts that constructive dividend income should

be imputed to petitioners for amounts paid by the corporation to

them or on their behalf.       Petitioners dispute that they received

the constructive dividends determined by respondent.        We agree

with respondent that petitioners received numerous constructive

dividends but not all of those determined.
                                  - 16 -

       A constructive dividend arises when a corporation confers an

economic benefit upon a shareholder without expectation of

repayment and the corporation on the date of the deemed

distribution had current or accumulated earnings and profits.

Crosby v. United States, 

, 1388 (5th Cir. 1974);

Truesdell v. Commissioner, 

, 1295 (1987).

Constructive dividends are includable in a taxpayer’s gross

income under section 61(a)(7).       Gross income includes income

realized in any form, whether in money, property, or services.

Sec. 1.61-1(a), Income Tax Regs.

       A greater potential for constructive dividends exists in

closely held corporations where dealings between stockholders and

the corporation are characterized by informality.        Benson v.

; Zhadanov v. Commissioner, T.C. Memo. 2002-

104.       Where, as here, the sole shareholder uses corporate

property for a personal benefit which is not proximately related

to corporate business, the shareholder must include the value of

the benefit as a constructive dividend to the extent of the

corporation’s earnings and profits.5       Furthermore, to be a

constructive dividend to the shareholder, a payment of money or

property does not need to be made by the corporation directly to

the shareholder.       Benson v. 

.   It is also well



       5
      The corporation had accumulated earnings and profits of at
least $142,973 in 2004 and 2005.
                               - 17 -

settled that nondeductible payments made by a corporation to a

third party on behalf of or for the economic benefit of its

shareholders may constitute dividends taxable to those

shareholders under section 301.    Proctor v. Commissioner, T.C.

Memo. 1981-436.

     The testimony and documentary evidence in this record

establish that petitioners did not separate their personal

transactions and expenses from those of the corporation.    They

paid personal expenses with corporate checks.     They paid personal

credit card expenses with corporate funds.    They used corporate

property for their personal use.    Consequently, they received

constructive dividends in the amounts of corporate funds spent

for them and in the amounts of the lease value of corporate

property used by them.    Clearly, petitioners received economic

benefits for items not deductible by the corporation, and those

constructive dividends constitute gross income to them for 2004

and 2005.

     We hold that the following expense items paid or provided by

the corporation constitute petitioners’ constructive dividends

for the years in issue:

     (1)    Personal Insurance Premium Payments

     The corporation paid petitioners’ personal insurance

premiums of $2,832 in 2004 and $1,995 in 2005.    Petitioners
                               - 18 -

presented no evidence showing the insurance payments gave rise to

a deductible corporate business expense.

     (2)    Personal Medical Expense Payments

     The corporation paid petitioners’ personal medical expenses

of $1,216 in 2004 and $631 in 2005.     These payments benefited

petitioners, and no evidence was presented showing they were a

deductible corporate business expense.     See Estate of Leidy v.

.

     (3)    Personal Credit Card Charges

     The corporation made payments of petitioners’ American

Express and Chase credit card charges of $5,878.41 in 2004 and

$2,193.66 in 2005.    A corporation’s payment of a shareholder’s

personal credit card charges may give rise to a constructive

dividend to the shareholder.    Beck v. Commissioner, T.C. Memo.

2001-270.    Petitioner admitted at trial that the personal credit

card charges were paid with corporate funds.     Petitioners

benefited from the payments, and they were not deductible

corporate business expenses.

     (4)    Two Corporate Checks Payable to Petitioner

     At trial, petitioner admitted that two payments of $2,000

each were made to him by corporate checks Nos. 6330 and 6690 in

2004.   He contends that these were rental payments for equipment

he personally owned before the corporation was organized.

However, there is no evidence in the record of any written rental
                               - 19 -

agreement for the equipment.   In fact, the check amounts do not

agree with the rental income reported on line 21 of petitioners’

Federal income tax return for 2004.     Moreover, there is no

Schedule E reporting rental income on their income tax return for

2004 or 2005, and the alleged rental was not shown on the

corporation’s Profit and Loss Detail for 2004.     In view of these

facts, we conclude that petitioner received a total cash benefit

of $4,000 in 2004 for which there was no corporate purpose, thus

resulting in a constructive dividend to petitioner.

     (5)   Personal Use of Corporate Automobiles

     The parties stipulated and petitioner admitted at trial that

petitioners used two vehicles, a 2004 Toyota Solara and a 2001

Mitsubishi Eclipse, owned by the corporation, for their personal

use during the years at issue.   A taxpayer realizes constructive

dividends in connection with personal use of a corporate

automobile in the amount of the fair rental value of the

automobile.    Sec. 301(b)(1); Proctor v. 

.

Respondent determined that during the years at issue the annual

fair market lease value of the Toyota was $7,250 per year and the

annual fair market lease value of the Mitsubishi was $6,350 per

year.   Petitioner offered no evidence of corporate use of the

automobiles and did not contest the reasonableness of the annual

lease values.   In fact, both automobiles were used primarily by

petitioners.    Accordingly, we conclude that petitioners received
                               - 20 -

constructive dividends from the corporation of $7,250 and $6,350

in the years 2004 and 2005, respectively.

     Contrary to respondent’s determination and the contentions

and arguments made in his briefs, we hold that the following two

items are not taxable as constructive dividends to petitioners.

     (1)    Corporate Payments on Loan for Van Purchased in
            Petitioner’s Name

     The corporation made total payments to Fifth Third Bank of

$4,943 in 2004 and $4,550 in 2005 on a loan on a 2001 Ford van

purchased and titled in petitioner’s name but used exclusively by

the corporation as a dry cleaning delivery vehicle.     The van did

not benefit petitioner personally.      It was used only for business

purposes.    We conclude that for financing reasons petitioner

purchased the vehicle in his name, and he held title to it as a

nominee for the corporation.    Therefore, we hold that the

payments are not includable in petitioners’ income in 2004 and

2005.

     (2)    Corporate Check No. 6190

     As stated in our findings of fact, petitioner wrote, signed,

and delivered to himself corporate check No. 6190 dated December

31, 2003, for $20,200.    It was deposited in his personal bank

account on January 6, 2004.    Respondent determined in his notice

of deficiency that the $20,200 was a constructive dividend

petitioner received in 2004.    Respondent strongly suggests in his

brief that petitioner may have backdated the corporation’s check
                                 - 21 -

and that it was possibly written on or after January 2, 2004.

Petitioner denies it.   We are not persuaded by respondent’s

analysis.   For many years this Court has favored and followed the

cash-equivalent-upon-receipt rule enunciated in Kahler v.

Commissioner, 

, 33-35 (1952), holding that a cash basis

taxpayer realized income in 1946 from a check dated and received

on December 31, 1946, but not cashed by him until January 2,

1947.   In that and similar situations, the date of payment has

been related back to the date of receipt.    See Bright v. United

States, 

, 385-387 (5th Cir. 1991); Estate of Kamm v.

Commissioner, 

, 955 (3d Cir. 1965), affg. T.C. Memo.

1963-344; Stephens v. Commissioner, T.C. Memo. 1956-284.    We find

and conclude that petitioner received the $20,200 as income in

2003, a year not before us and over which we lack jurisdiction.

Accordingly, we hold that petitioner did not receive constructive

dividend income in that amount in 2004.

IV.   Charitable Contributions

      Petitioners and the corporation made charitable

contributions to Ridgeview Baptist Church of $10,993 in 2004 and

$11,381 in 2005.   Petitioners paid $3,168 in 2004 and $3,731 in

2005 and the corporation paid the remaining amounts of $7,825 and

$7,650, respectively, for those years.    As set forth in

respondent’s notice of deficiency issued to petitioners, they

were allowed the amounts they actually paid to the church in
                              - 22 -

those years and were disallowed the amounts the corporation paid.

In the notice of deficiency issued to the corporation for 2005,

respondent allowed the $7,650 the corporation paid the church in

that year, which was apparently reduced to $3,237 because of “the

taxable income limitations to which corporations are subject”.

Sec. 170(b)(2).   Petitioner offered nothing at trial that

contradicts the evidence of record.    Accordingly, we hold that

petitioners are entitled only to deductions for charitable

contributions paid to the church of $3,168 in 2004 and $3,731 in

2005.6

V.   Claimed Loss on Investments With Webb Group

      Petitioners and the corporation allege in their respective

petitions that a loss was incurred in 2005 with respect to

investments they placed through the Webb Group.

      Section 165 provides that there shall be allowed as a

deduction any loss sustained during the taxable year and not

compensated for by insurance or otherwise.    See also sec. 1.165-

1(a), Income Tax Regs.   A loss is not sustained during the

taxable year if there is a reasonable prospect of recovery.    Sec.

1.165-1(d)(2), Income Tax Regs.   Filing a lawsuit may indicate a



      6
      Petitioner has not asserted that the corporation was not
allowed a charitable contribution deduction of $7,825 made to the
church in 2004. Furthermore, we note that the corporation’s
Profit and Loss Detail for 2004 shows that a charitable
contribution of that amount was paid and claimed in that year and
apparently not disallowed by respondent.
                              - 23 -

reasonable prospect for reimbursement.    Bacon v. Commissioner,

T.C. Memo. 1989-90.   To be allowable, a loss must be evidenced by

closed and completed transactions that are fixed by identifiable

events.   Sec. 1.165-1(d)(1), Income Tax Regs.

     As reflected in our factual findings, no loss could be

determined in 2004 or 2005.   The stipulated documents show that

the Webb Group investors were informed that a class action would

be filed and that a substantial recovery was anticipated.    On May

23, 2006, petitioner and the corporation were informed that a

written settlement agreement had been approved that would return

a significant portion of the investors’ principal investment.      On

January 10 and May 29, 2007, petitioners and the corporation

received partial payments on their investments made through Webb

Group Financial Services.   Finally the litigation ended, and on

September 29, 2008, petitioner received a final settlement check

for $13,573.99 and the corporation received a final settlement

check for $37,185.93.

     The stipulated documents and petitioner’s testimony show

that there was no fixed and identifiable event that established a

deductible loss for petitioners or the corporation during the

years at issue and that there was during those years a

significant prospect of recovery of the Webb Group loss through

both litigation and the settlement agreement, which were

concluded after the years at issue.    Accordingly, we hold that
                              - 24 -

neither petitioners nor the corporation are entitled to a

deduction in 2005 for a loss regarding their investments with the

Webb Group.

VI.   Accuracy-Related Penalties

      Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for 2004 and

2005.   Respondent argues that petitioners are liable for the

section 6662(a) accuracy-related penalties attributable to

negligence or disregard of rules or regulations or to substantial

understatements of income tax.

      As previously stated, section 7491(c) provides that the

Commissioner bears the burden of production with respect to the

liability of any individual for penalties.   Respondent has

satisfied his burden of production by producing evidence

establishing that petitioners were negligent in disregarding

substantiation requirements for some of their claimed deductions,

for omitting some taxable income, for using corporate funds for

their own personal expenses, for commingling their own and

corporate funds, and for using corporate property for personal

use without properly accounting for the benefits they received.

      Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b), including

negligence or disregard of rules or regulations and substantial
                                - 25 -

understatement of income tax.      “Negligence” includes any failure

to make a reasonable attempt to comply with the provisions of the

internal revenue laws and is the failure to exercise due care or

the failure to do what a reasonable and prudent person would do

under the circumstances.    Sec. 6662(c); Neely v. Commissioner, 

, 947 (1985); sec. 1.6662-3(b)(1), Income Tax Regs.

“Disregard” includes any careless, reckless, or intentional

disregard of rules or regulations.       Sec. 6662(c); sec. 1.6662-

3(b)(2), Income Tax Regs.   An “understatement” of income tax is

the difference between the amount of tax required to be shown on

the return and the amount of tax actually shown on the return.

Sec. 6662(d)(2)(A).   A “substantial understatement” exists if the

understatement exceeds the greater of 10 percent of the tax

required to be shown on the return for a taxable year or $5,000.

Sec. 6662(d)(1)(A).

     The section 6662(a) accuracy-related penalty does not apply

with respect to any portion of an underpayment if the taxpayer

proves that there was reasonable cause for such portion and that

he acted in good faith with respect thereto.       Sec. 6664(c)(1).

The determination of whether the taxpayer acted with reasonable

cause and in good faith depends on the pertinent facts and

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

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability.

     Petitioners conceded some items in the notice of deficiency,

such as a failure to report gross receipts and an incorrect

mortgage interest deduction.   Petitioner presented at trial no

evidence that he used due care in claiming deductions that were

subsequently adjusted in the notice of deficiency or in failing

to report items as constructive dividends.     He also failed to

keep corporate expenses and funds separate from his own or to

keep adequate tax records to assist in the proper preparation of

petitioners’ income tax returns for 2004 and 2005.     Petitioners

failed to prove that they had reasonable cause for what they did

or that they acted in good faith.

     In their briefs petitioners contend that the accuracy-

related penalties should not be imposed because they provided

sufficient information to and relied on their tax return

preparer, Mr. Clark, to prepare correct income tax returns for

them and the corporation.   We disagree.

     Petitioner had a responsibility to keep adequate records and

to substantiate items properly.   Sec. 1.6662-3(b)(1), Income Tax

Regs.   The negligence penalty has been imposed for failure to

keep accurate records as required.      Benson v. Commissioner, T.C.

Memo. 2004-272.   Petitioner admitted at trial that he lacked

certain records necessary to substantiate his positions, and he

was unable to produce records supporting his positions.     Thus
                               - 27 -

petitioners were negligent in failing to keep accurate records

and to substantiate items as required.

     Section 6664(c) provides an exception to the accuracy-

related penalty where there is reasonable cause for the

underpayment and the taxpayer acted in good faith with respect to

the portion of the underpayment for which there was reasonable

cause.   Petitioners have failed to show reasonable cause for the

underpayments on their returns, nor have they shown that they

acted in good faith with respect to any portion of the

underpayments.    They simply seek relief from the penalties by

casting all responsibility on their tax return preparer.

However, the ultimate responsibility for a correct return lies

with the taxpayer, who must furnish the necessary information to

his agent who prepared his return.      Benson v. 

.   The taxpayer has the burden of establishing that he at

least provided the correct information to his tax return preparer

and that the incorrect returns were the result of the preparer’s

mistakes.

bears in some circumstances the

consequences of any negligent errors committed by his agent.

     Generally, the duty of filing accurate returns cannot be

avoided by placing the responsibility on a return preparer.

Loftus v. Commissioner, T.C. Memo. 1992-266.     In limited

situations, however, reasonable cause for negligence due to

return preparer mistakes may be established if the taxpayer
                              - 28 -

shows:   (1) That he provided the return preparer with complete

and accurate information from which the tax return could be

properly prepared; (2) that an incorrect return was the result of

the return preparer’s mistakes; and (3) that the taxpayer in good

faith relied on the advice of a competent return preparer.

taxpayer established the above elements of a preparer

error, the taxpayer still has a duty to read and review the

return and make sure that all income items are included.

established the elements for relief from

penalties on account of the return preparer’s errors.7

     On the basis of this record, we hold that petitioners are

liable pursuant to section 6662(a) for the accuracy-related

penalties with respect to the resulting income tax deficiencies

for 2004 and 2005.

     In reaching our holdings herein, we have considered all

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

we conclude they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                      Decisions will be entered

                                 under Rule 155.



     7
      We note that in some respects petitioners may have been
misguided by their return preparer’s advice because he is not an
attorney, a certified public accountant, an accountant, an
enrolled agent, or a tax professional. See Martin v.
Commissioner, T.C. Memo. 2009-234.