1 These cases were consolidated for purposes of trial,

briefing, and opinion. 

T.C. Memo. 1997-562

UNITED STATES TAX COURT

MOHAN ROY, M.D., INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

MOHAN AND VIMAL ROY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 6966-96, 8728-96.1 Filed December 23, 1997.

Mohan Roy (an officer), for petitioner in docket No. 

6966-96.

Mohan and Vimal Roy, pro sese in docket No. 8728-96.

Edwin A. Herrera, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge: Respondent determined the following

deficiencies, additions, and penalties with respect to petitioners'

Federal income taxes:

Mohan Roy, M.D., Inc., Docket No. 6966-96:

 Additions to Tax & Penalties

 Sec. Sec. 

Year Deficiency 6651(a)(1) 6662

1991 $20,613 --- $4,123

1992 9,060 $3,967 ---

1993 8,933 --- 1,787

1994 14,535 --- 2,907

Mohan and Vimal Roy, Docket No. 8728-96:

 Penalties

 Sec. 

Year Deficiency 6662

1991 $137,927 $27,585

1992 62,449 12,490

1993 218,464 43,693

1994 48,036 9,607

These consolidated cases involve two physicians, Mohan and

Vimal Roy (hereinafter sometimes referred to as the Roys or as the

individual petitioners), and their professional corporation, Mohan

Roy, M.D., Inc. (hereinafter referred to either as Roy, Inc. or the

corporate petitioner). During the years in issue, Roy, Inc. owned

or leased two luxury automobiles, a 1990 Silver Spur II Rolls

Royce and a Mercedes Benz S-500.

After concessions by respondent and petitioners, the primary

issue that remains concerns the Rolls Royce automobile.
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2 The corporate petitioner also raises as an issue its

entitlement to alter its depreciation method under the Modified

Accelerated Cost Recovery System (MACRS) with respect to the

Rolls Royce. Because we hold that the corporate petitioner

failed to prove its entitlement to any deduction for the Rolls

Royce expenses, we need not decide whether it can change

depreciation methods.

Specifically, we must determine (1) with respect to the corporate

petitioner, whether the expenses associated with the Rolls Royce

are deductible,2 and (2) with respect to the individual

petitioners, whether the use of the Rolls Royce by Mohan Roy

constitutes a constructive dividend. In addition, we must

determine whether the corporate and individual petitioners are

liable for the accuracy-related penalty pursuant to section 6662.

All section references are to the Internal Revenue Code as in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

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 of the filing of the petitions, Roy, Inc.'s

principal place of business was located in Anaheim, California, and

Mohan and Vimal Roy, husband and wife, resided in Newport Beach,

California.

Mohan Roy is a cardiovascular surgeon; Vimal Roy is an

anesthesiologist. The Roys conduct their respective medical
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practices through the corporate petitioner, a California

corporation. The stock of Roy, Inc. is owned 50 percent by Mohan

Roy and 50 percent by Vimal Roy.

During the years in issue, Mohan Roy performed hundreds of

open-heart surgical operations at four different hospitals in

Orange County, California; namely at Fountain Valley Medical

Center, Anaheim Memorial Hospital, Western Medical Center, and La

Mirada Hospital. Besides open-heart surgeries, he performed

vascular and thoracic surgeries at six other hospitals. In the

course of operative and postoperative management of patients, he

had to travel to and between the various hospitals. Mohan Roy

worked between 13 and 14 hours a day, approximately 300 days a

year, and traveled approximately 60-100 miles a day for business.

During the years in issue, Vimal Roy performed medical

services at three different hospitals, namely at Fountain Valley

Medical Center, Anaheim Memorial Hospital, and Newport Surgicenter.

She traveled approximately 100 miles a week, 50 weeks a year, for

business.

From the corporate office of Roy, Inc., Fountain Valley

Medical Center is approximately 10 miles, Western Medical Center is

approximately 5 miles, and La Mirada Hospital is approximately 20

miles. The corporate office of Roy, Inc. is next to Anaheim

Memorial Hospital. The distance between the Roys' residence in

Newport Beach to the corporate office of Roy, Inc., is
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3 The purpose of having the Range Rover as well as the

Rolls Royce and two other vehicles on Roy, Inc.'s insurance

policy was to obtain a multiple-car discount on the premiums. 

approximately 17 miles. The record does not reveal the distance

between the corporate office of Roy, Inc., and the other hospitals

to which Mohan Roy traveled.

During the years in issue, Roy, Inc. owned a 1990 Silver Spur

II Rolls Royce. It also owned a 1988 Mercedes Benz S-500 until

1993, at which time that automobile was traded in connection with

the corporation's leasing a new Mercedes Benz S-500.

Because they worked at different hospitals at different times,

the Roys were not able to travel together. During the years in

issue, Vimal Roy generally drove the Mercedes Benz S-500. The

parties agree that the Roys' personal use of the Mercedes Benz S500 owned by Roy, Inc., during each of the years in issue was 28

percent and that the individual petitioners received constructive

dividends as a result of such use during each of the years in

issue.

The Roys personally owned three automobiles: A 1990 Lexus

400, a Range Rover, and a General Motors pickup truck. The Range

Rover was insured under Roy, Inc.'s policy but was primarily used

by the Roys' son who was in medical school.3 
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4 The Rolls Royce was purchased for $159,837.19, which

was paid in part by trading in a 1979 Rolls Royce and receiving a

$38,000 credit.

Roy, Inc. purportedly acquired the Rolls Royce4 as a

promotional tool to obtain referral business from cardiologists and

hospitals. However, because of the downturn in the economy during

the early 1990's, it was determined that it would be inappropriate

to "showcase the Rolls Royce" while seeking referrals from doctors

who had declining income. Consequently, the Roys decided that Roy,

Inc. should dispose of the Rolls Royce, although the corporate

petitioner did not do so during the years in issue. 

The Rolls Royce was driven sparingly by Mohan Roy during the

years in issue. The odometer readings on the Rolls Royce on

various dates were as follows: 

 Date Odometer Reading

July 21, 1990 150

Oct. 1, 1991 2,023

July 13, 1993 4,581

July 22, 1994 5,152

Nov. 17, 1994 5,226

Occasionally Mohan Roy used the Rolls Royce for commuting to work

from home, attending hospitals to visit patients or perform

surgeries, or having the car serviced (twice per year) or generally

maintained. When not in use, the Rolls Royce was garaged at the

Roys' residence. 

Mohan Roy generally drove the Lexus 400 to commute to work and

to perform medical services. The tax returns for the individual
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petitioners do not indicate that any automobile expenses were

claimed for business use. The record does not reveal whether the

Roys were reimbursed by Roy, Inc. for using their personal

automobiles for business use.

Roy, Inc. reported gross income on Form 1120, U.S. Corporation

Income Tax Return, of $2,468,996 for 1991, $1,882,154 for 1992,

$1,423,110 for 1993, and $1,430,828 for 1994. Roy, Inc. paid and

deducted automobile expenses (insurance, vehicle registration fees,

maintenance and repair expenses, and gasoline) relating to the

Rolls Royce as follows: 

Year Automobile Expenses

1991 $5,157.00

1992 4,992.80

1993 4,546.80

1994 4,034.40

Roy, Inc. reported depreciation expense deductions using the double

declining balance method under the Modified Accelerated Cost

Recovery System (MACRS) for the Rolls Royce in the following

amounts: 

Year Depreciation Expenses

1991 $4,200

1992 2,550

1993 1,475

1994 1,475

The Roys filed jointly and reported adjusted gross income on

Form 1040, U.S. Individual Income Tax Return, of $1,397,422 for

1991, $906,187 for 1992, $164,377 for 1993, and $503,599 for 1994.
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They did not report as income the value of their use of the Rolls

Royce during the years in issue. 

OPINION

Issue 1. Roy, Inc.'s Rolls Royce Expenses

The first issue for decision is whether the corporate

petitioner is entitled to deductions pursuant to section 162 for

the expenses incurred for the use and operation of the Rolls Royce

during the years in issue. Roy, Inc. claims that the expenses were

entirely for business purposes and that they were "ordinary and

necessary". Respondent disagrees, asserting that not only did Roy,

Inc. fail to substantiate the business use of the Rolls Royce but

that it also failed to show that the expenses associated with the

Rolls Royce were ordinary and necessary. 

Section 162 allows as a deduction all ordinary and necessary

expenses paid or incurred during the taxable year in carrying on a

trade or business. An expense is ordinary if it is common or

frequently occurs in the context of the particular business

involved. Deputy v. duPont, 308 U.S. 488, 495 (1940). An expense

is necessary if it is appropriate and helpful to the taxpayer's

trade or business. Commissioner v. Heininger, 320 U.S. 467, 471

(1943). The taxpayer must show that there is a proximate

relationship between the claimed expense and the operation of the

taxpayer's trade or business. Henry v. Commissioner, 36 T.C. 879,

884 (1961).
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The corporate petitioner claims that the Rolls Royce was an

ordinary and necessary tool for obtaining business referrals. In

this regard, Mohan Roy testified that he knew of many other doctors

who drove Rolls Royces for a similar purpose. As evidence of the

promotional value of the Rolls Royce, the individual petitioners

point to Roy, Inc.'s gross income during the years in issue

(ranging from $1.4 million to $2.4 million). Respondent counters

by noting that Mohan Roy decided to limit his use of the Rolls

Royce during the years in issue to avoid discouraging patient

referrals due to the declining economy.

The instant case is similar to Connelly v. Commissioner, T.C.

Memo. 1994-436, affd. without published opinion 99 F.3d 1154 (11th

Cir. 1996). In Connelly, a plastic surgeon was the sole officer

and shareholder of a medical corporation for which he provided the

medical services. Allegedly to promote and advertise his services,

the corporation leased a Rolls Royce Silver Shadow which the

shareholder purportedly used to attend medical conventions or for

other business purposes. We held in Connelly that the medical

corporation was not entitled to deduct the Rolls Royce expenses

because the corporation failed to show a proximate relationship

between the expenses paid and the promotion of the medical

practice. We therein stated:

We believe that the proposition that the leasing of the

Rolls Royce enhances petitioner's skill, usefulness, or

reputation as a physician is at best, dubious. In

addition, petitioners have failed to offer any evidence
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5 Roy, Inc.'s former office manager testified that she

was unaware of any patients referred to Roy, Inc. because of

Mohan Roy's use of the Rolls Royce. 

of any patients who were attracted to * * * [the] medical

practice by virtue of the leasing of the Rolls Royce. 

Id.

With regard to the instant case, the corporate petitioner has

not established that the Rolls Royce resulted in patient referrals.

In this regard, there was no testimony from any referring physician

that business was sent to Roy, Inc. because of the Rolls Royce.5

See Henry v. Commissioner, supra at 884. Additionally, Mohan Roy's

testimony that he thought the Rolls Royce would discourage patient

referrals and thus sought to sell it at an appropriate time

undermines any claim that the automobile was an ordinary and

necessary expense to Roy, Inc. The limited use of the Rolls Royce

(about 5,000 miles during 4 years) and the fact that the vehicle

was principally garaged at the Roys' personal residence also

defeats the corporate petitioner's claim that the expenses were

ordinary and necessary.

Further, the corporate petitioner has not substantiated the

business use of the Rolls Royce, pursuant to section 274(d), for

the years in issue. To satisfy the substantiation requirements,

taxpayers must produce records that detail the use of automobiles

for business purposes through mileage logs or other business

records which corroborate the taxpayers' own testimony. Sec.
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1.274-5T(c), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov.

6, 1985). Here, that was not done.

 We are mindful that the individual petitioners concede that

Mohan Roy occasionally used the Rolls Royce to commute to work, a

nondeductible personal expense under section 262. See Fausner v.

Commissioner, 413 U.S. 838 (1973); Commissioner v. Flowers, 326

U.S. 465 (1946). We are also mindful that the insurance policy

renewal notice indicates that the Rolls Royce is for "pleasure use

or under 30 miles weekly to and from work or school". 

Petitioners request us to consider certain Internal Revenue

Service (IRS) audit papers which they claim indicate that the

revenue agent was willing to allow an 80-percent business use of

the Rolls Royce. We will not consider what the agent might have

done to settle this case because of our well-established rule that

this Court generally will not look behind the notice of deficiency

and consider actions or determinations of a revenue agent. See

Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324 (1974).

To conclude, we hold that the corporate petitioner has failed

to substantiate that the expenses paid or incurred relating to the

Rolls Royce were ordinary and necessary business expenses.

Consequently, none of the Rolls Royce expenses are deductible by

Roy, Inc.
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Issue 2. Constructive Dividends

The second issue for decision is whether the individual

petitioners must include in income as a constructive dividend the

value of Mohan Roy's use of the Rolls Royce. The individual

petitioners contend that the Rolls Royce was used solely for

business purposes, and thus they should not realize income from

Mohan Roy's sparse use of the Rolls Royce. 

Distributions of property from a corporation to a shareholder

with respect to its stock constitute dividends to the extent of the

corporation's earnings and profits. Secs. 301(c), 316(a).

Dividends may be formally declared or they may be constructive.

Noble v. Commissioner, 368 F.2d 439, 442 (9th Cir. 1966), affg.

T.C. Memo. 1965-84. Nondeductible expenditures made by a

corporation for the personal benefit of a shareholder constitute a

constructive dividend to that shareholder. Meridian Wood Prods.

Co. v. United States, 725 F.2d 1183, 1191 (9th Cir. 1984);

Falsetti v. Commissioner, 85 T.C. 332, 356-358 (1985); Challenge

Manufacturing Co. v. Commissioner, 37 T.C. 650, 663 (1962).

Dividends are includable in the shareholder's gross income. Sec.

61(a)(7). In the instant case, as discussed supra, we have found

that the expenses associated with the Rolls Royce are not ordinary
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and necessary business expenses (nor did Roy, Inc. substantiate a

business purpose for such expenses). 

Even if, as the individual petitioners contend, some business

purpose existed for Mohan Roy's use of the Rolls Royce (such as

driving to hospitals to visit patients or perform surgeries), we

cannot find any evidence in the record to support an estimate of

the amount of business use as opposed to personal use. Cf. Henry

Schwartz Corp. v. Commissioner, 60 T.C. 728, 744 (1973). Moreover,

Mohan Roy received a personal and economic benefit from driving a

luxury automobile for commuting purposes. Cf. Erickson v.

Commissioner, 598 F.2d 525, 530-531 (9th Cir. 1979), affg. in part

and revg. in part T.C. Memo. 1976-147. Consequently, we hold that

the individual petitioners received constructive dividends from

Roy, Inc. as a result of Mohan Roy's use of the Rolls Royce

automobile. See Connelly v. Commissioner, T.C. Memo. 1994-436;

Royce C. McDougal, M.D., Inc. v. Commissioner, T.C. Memo. 1985-64;

William N. Smith, M.D., P.C. v. Commissioner, T.C. Memo. 1983-426;

Tyson v. Commissioner, T.C. Memo. 1979-122.

We must next decide the amount of constructive dividends

received by the individual petitioners. Mohan Roy testified that
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6 Mohan Roy reached this figure by estimating the annual

cost of a 3-year lease on a $188,000 1997 Rolls Royce and

dividing that by 365 days. 

the fair rental value of the Rolls Royce was $85 to $98 per day.6

However, his testimony in this regard was self-serving and

uncorroborated, and he failed to specify how many days he drove the

automobile. Likewise, respondent failed to present any evidence as

to the fair rental value of the Rolls Royce. In this regard, at

trial, we rejected (as not relevant) the testimony of respondent's

expert witness regarding the fair rental value of a Rolls Royce in

1997 because the years in issue were 1991 through 1994. Thus, the

record is completely devoid of the fair market value of the Rolls

Royce for the years at issue. Therefore, we will rely on the

actual operating expenses paid by the corporate petitioner to

maintain the Rolls Royce to determine the amount of constructive

dividends paid to the individual petitioners. See Ross v.

Commissioner, T.C. Memo. 1990-23; see also Cirelli v. Commissioner,

82 T.C. 335, 352 (1984); Tyson v. Commissioner, supra.

Mohan Roy testified that the insurance premiums paid by Roy,

Inc. with respect to the Rolls Royce were included in his salary as

a Roy, Inc. employee. The accountant who prepared the 1994 Federal

income tax returns for both Roy, Inc. and the Roys also testified

that insurance premiums paid by Roy, Inc. were included in Mohan
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7 No evidence was introduced to show that the 1994

insurance premium payments were meant to serve as compensation

even though we found they were included in Mohan Roy's salary. 

The payments are deductible only if the corporation intended them

to be compensation for services rendered. See Electric & Neon,

Inc. v. Commissioner, 56 T.C. 1324, 1340-1342 (1971), affd.

without published opinion 496 F.2d 876 (5th Cir. 1974); see also

Goldstein v. Commissioner, 298 F.2d 562, 566 (9th Cir. 1962),

affg. T.C. Memo. 1960-276. As a result, Roy, Inc. is not

entitled to deduct the amount of the 1994 insurance premium

payments as reasonable compensation under sec. 162.

Roy's salary. We find the testimony of Mohan Roy and the

accountant credible on this point. Thus, we hold that the

constructive dividends do not include the amount of insurance

premiums paid by Roy, Inc. for 1994 only (there was no

corroboration with respect to the other years in issue).7

Neither Mohan Roy nor his accountant testified with respect to

any other operating expenses (vehicle registration fees,

maintenance and repairs, and gasoline) paid by Roy, Inc. relating

to the Rolls Royce. Respondent conceded on brief that the

depreciation expenses did not constitute constructive dividends to

the Roys. 

On the basis of the record before us, we hold that the amount

of constructive dividends paid by Roy, Inc. to the individual

petitioners is the amount of operating expenses paid by Roy, Inc.

for the use of the Rolls Royce during the years in issue, excluding

depreciation, and less the insurance premiums paid in 1994.
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Because no evidence was introduced relating to the earnings

and profits of Roy, Inc., the entire amount of the expenses paid by

Roy, Inc. constitutes constructive dividends. Rule 142(a).

Issue 3. Accuracy-Related Penalties

The final issue for decision is whether the corporate and/or

the individual petitioners are liable for the accuracy-related

penalty, pursuant to section 6662, for negligence or disregard of

rules or regulations or substantial understatement of tax.

Respondent determined a penalty for the corporate petitioner for

1991, 1993, and 1994, and a penalty for the individual petitioners

for each of the years in issue. Petitioners generally assert a

reasonable cause defense. 

Section 6662 imposes a penalty equal to 20 percent of the

amount of the underpayment attributable to negligence or disregard

of rules or regulations or substantial understatement of tax.

"Negligence" means any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and

"disregard" means any careless, reckless, or intentional disregard.

Sec. 6662(c). A substantial understatement of tax means an

understatement of tax which exceeds the greater of 10 percent of

the tax required to be shown on the tax return or $5,000. Sec.

6662(d)(1)(A).
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No accuracy-related penalty is imposed with respect to any

portion of the understatement as to which the taxpayer acted with

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

At trial, when questioned about discrepancies between figures

in the tax returns and the amounts the parties stipulated, Mohan

Roy claimed that he relied on his accountant to prepare the Federal

tax returns--presumably referring to both the corporate and

personal returns. However, reliance on an accountant to prepare

tax returns is not sufficient by itself to establish reasonable

cause. See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662

(1987). The taxpayer must also show that: (1) The taxpayer

provided the return preparer with complete and accurate information

from which the tax return could be properly prepared; (2) an

incorrect return was the result of the preparer's mistakes; and (3)

the taxpayer in good faith relied on the advice of a competent tax

return preparer. Jackson v. Commissioner, 86 T.C. 492, 539-540

(1986), affd. 864 F.2d 1521 (10th Cir. 1989); Hotel Continental,

Inc. v. Commissioner, T.C. Memo. 1995-364, affd. without published

opinion 113 F.3d 1241 (9th Cir. 1997).

Both the corporate and the individual petitioners have failed

to prove that they acted with reasonable cause and in good faith.

Rule 142(a). Thus, we hold that the corporate petitioner is liable
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for the accuracy-related penalty, pursuant to section 6662, for

1991, 1993, and 1994, and that the individual petitioners are

liable for the accuracy-related penalty for each of the years in

issue.

To reflect the foregoing and the concessions of the parties,

Decisions will be entered

under Rule 155.