1 Unless otherwise indicated, all section references are

to the Internal Revenue Code in effect for the taxable year in

issue. All Rule references are to the Tax Court Rules of

(continued...)

T.C. Memo. 1998-238

UNITED STATES TAX COURT

NICHOLAS M. ROMER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8352-97. Filed July 2, 1998.

Howard S. Kleyman, for petitioner.

Tracy A. Martinez and Jonathan Decatorsmith, for respondent. 

MEMORANDUM OPINION

DINAN, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1
- 2 -

 

1(...continued)

Practice and Procedure.

Respondent determined a deficiency in petitioner's Federal

income tax for 1993 in the amount of $5,398.

The issues for decision are: (1) Whether petitioner is

entitled to exclude from gross income certain per diem payments

which he received during 1993; (2) whether petitioner's horse

selling and leasing activity was an activity not engaged in for

profit within the meaning of section 183; (3) whether certain

expenses paid by petitioner in connection with his aviation

activity are deductible as ordinary and necessary business

expenses; and (4) whether petitioner is entitled to Schedule A

itemized deductions which exceed his claimed standard deduction.

Some of the facts have been stipulated and are so found. 

The stipulations of fact and attached exhibits are incorporated

herein by this reference. Petitioner claimed he resided in

Antioch, Tennessee, on the date the petition was filed in this

case.

Petitioner has been a certified public accountant since

1972. He founded an accounting firm in Minneapolis, Minnesota,

in 1974 which, sometime prior to 1993, was incorporated under the

laws of Minnesota as a professional corporation called Romer &

Company, P.C. (Romer). During 1993, petitioner was an 8-percent

shareholder and the president of Romer. Derf Bistodeau, Romer's

vice president, owned the remaining 92 percent of Romer's shares.
- 3 -

Prior to 1991, petitioner resided at 2100 Pillsbury Avenue

in Minneapolis and worked as an accountant out of Romer's office

in Minneapolis. In March 1991, he began working as a pilot for

American Airlines, Inc. in Nashville, Tennessee. He established

his residence in Antioch, Tennessee, located near Nashville,

shortly after he began working as a pilot. He took steps to sell

his former residence in Minneapolis including the execution of a

sales contract.

In January 1993, respondent's Criminal Investigation

Division (CID) initiated an investigation into Romer's return

preparation practice and seized all of Romer's clients' files. 

With the height of the tax season approaching and their files in

CID's possession, petitioner and Mr. Bistodeau were not certain

that Romer would survive the year. After considering the

severity of the situation, it was agreed that petitioner would

begin to regularly travel to Minneapolis from Nashville to help

Romer represent itself in the investigation and to reassure its

clients. It was also agreed that petitioner would not be paid

any salary for his services until after it was determined that

Romer would survive respondent's investigation. It was arranged,

however, for petitioner to be reimbursed for his traveling

expenses incurred in connection with working for Romer in

Minneapolis at the Federal standard per diem rate for lodging,

meals, and incidental expenses of $85 per day. At that time,

petitioner also abandoned the sale of his former Minneapolis
- 4 -

residence. He eventually sold the residence to a different buyer

in 1994.

As a result of the foregoing events, petitioner divided his

time during 1993 between Nashville and Minneapolis. He reduced

his pilot rank from captain to first officer co-pilot and took a

reduction in salary which enabled him to travel more easily to

Minneapolis. His regular flight schedule during 1993 involved a

short flight from Nashville to Paducah, Kentucky, in the evening,

staying overnight in Paducah at the airline's expense, and a

short flight back to Nashville the following morning. He would

repeat this round trip to and from Paducah three evenings and

three mornings in a row. On the last morning of his weekly

flight schedule, petitioner would take a 3-hour flight to

Minneapolis where he would work for 2 or 3 days for Romer.

During his spare time in Tennessee, petitioner spent a few

hours per week training a horse. He had played polo as a hobby

for many years prior to his relocation to Nashville and believed

that several wealthy polo players in the Nashville area would be

willing to pay at least $40,000 for a properly trained horse. 

Petitioner had a horse shipped to Nashville from Minnesota in

January 1993. He did not attempt to train this horse but he did

lease it to other individuals. In May 1993, he purchased a

second horse for $1,300 which he attempted to train as a polo

horse. This horse did not prove to have the athletic ability

required to present it for sale. Petitioner's records show that
- 5 -

he abandoned the activity in September 1993. He has not leased

or trained any horses since that time.

The first issue for decision is whether petitioner is

entitled to exclude from his gross income the per diem payments

that he received from Romer during 1993.

Petitioner submitted three invoices to Romer on which he

claimed that he worked in Minnesota for four days in mid-January

1993 and 2-l/2 days per week for the following 49 weeks for a

total of 126-1/2 days for the year. Romer issued three checks to

him during 1993 in the total amount of $10,752. Petitioner did

not report the $10,752 on his 1993 return. In the statutory

notice of deficiency, respondent determined that the payments

must be included in gross income.

Section 61(a) includes in gross income all income from

whatever source derived. Commissioner v. Glenshaw Glass Co., 348

U.S. 426 (1955). However, section 1.62-2(c)(4), Income Tax

Regs., provides:

Amounts treated as paid under an accountable plan are

excluded from the employee's gross income, are not

reported as wages or other compensation on the

employee's Form W-2, and are exempt from the

withholding and payment of employment taxes * * *

[FICA, FUTA, RRTA, RURT, and income tax]. * * * 

Section 1.62-2(c)(2)(i), Income Tax Regs., provides that in

order for amounts paid under an arrangement to be treated as paid

under an accountable plan the arrangement must satisfy a business

connection requirement, a substantiation requirement, and a
- 6 -

return of excess requirement. Sec. 1.62-2(d)-(f), Income Tax

Regs. If an arrangement meets these three requirements, all

amounts paid under the arrangement are, in general, treated as

paid under an accountable plan and are excluded from the

employee's gross income.

Respondent conceded on brief that petitioner was an employee

of Romer during 1993. Respondent argues, however, that the

arrangement does not satisfy the business connection and the

substantiation requirements set out in section 1.62-2(d), Income

Tax Regs., and section 1.62-2(e), Income Tax Regs., respectively.

Business Connection Requirement

Section 1.62-2(d)(1), Income Tax Regs., provides that an

arrangement satisfies the business connection requirement if it:

provides advances, allowances (including per diem

allowances * * *), or reimbursements only for business

expenses that are allowable as deductions by Part VI

(section 161 and the following), subchapter B, chapter

1 of the Code, and that are paid or incurred by the

employee in connection with the performance of services

as an employee of the employer. * * *

Section 162(a) allows a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business, including the trade or business

of being an employee. Commissioner v. Flowers, 326 U.S. 465

(1946). Section 162(a)(2) allows a deduction for traveling

expenses if the expenses are: (1) Ordinary and necessary; (2)

paid or incurred while away from home; and (3) paid or incurred

in pursuit of a trade or business. Bochner v. Commissioner, 67
- 7 -

T.C. 824, 827 (1977). The purpose behind the deduction for

expenses paid or incurred while a taxpayer is away from home is

to ease the burden on the taxpayer who incurs additional and

duplicate living expenses. Rosenspan v. United States, 438 F.2d

905, 912 (2d Cir. 1971); Tucker v. Commissioner, 55 T.C. 783, 786

(1971).

Based on the record, we find that the arrangement in issue

meets the business connection requirement. The arrangement

provided a per diem allowance for petitioner's ordinary and

necessary traveling expenses incurred while away from his

Tennessee residence, which are allowed as a deduction under

section 162(a)(2). The amounts paid under the arrangement were

directly connected to petitioner's trade or business as Romer's

employee because he received the per diem allowance only for the

days on which he worked for Romer in Minneapolis.

Substantiation Requirement

Section 1.62-2(e)(1), Income Tax Regs., provides that an

arrangement satisfies the substantiation requirement if it

requires each business expense to be substantiated to the

employer within a reasonable period of time. In the case of

business expenses governed by section 274(d), section 1.62-

2(e)(2), Income Tax Regs., provides that an arrangement meets the

substantiation requirement if information sufficient to satisfy

the substantiation requirements of section 274(d) and the

regulations thereunder is submitted to the employer.
- 8 -

Section 274(d)(1) provides that no deduction is allowable

under sections 162 or 212 for any traveling expenses, including

meals and lodging while away from home, unless the taxpayer

complies with strict substantiation rules. In particular, the

taxpayer must substantiate the amount, time, place, and business

purpose of the expenses by adequate records or by sufficient

evidence corroborating his own statement. Sec. 274(d); sec.

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

46014, 46016 (Nov. 6, 1985).

Pursuant to his authority provided for in section 

1.274(d)-1, Income Tax Regs., the Commissioner issued Rev. Proc.

92-17, 1992-1 C.B. 679, and Rev. Proc. 93-21, 1993-1 C.B. 529,

which provide rules under which the amount of ordinary and

necessary business expenses of an employee for lodging, meal,

and/or incidental expenses will be deemed substantiated when an

employer provides a per diem allowance under a reimbursement or

other expenses allowance arrangement to pay for such expenses. 

Section 3.01 of each of the revenue procedures defines a "per

diem allowance" as:

a payment under a reimbursement or other expense

allowance arrangement that meets the requirements

specified in section 1.62-2(c)(1) of the regulations

and that is

(1) paid with respect to ordinary and

necessary business expenses incurred, or

which the * * * [employer] reasonably

anticipates will be incurred, by an employee

for lodging, meal, and/or incidental expenses

for travel away from home in connection with
- 9 -

 

2 Since the arrangement provides for a per diem

allowance, it is treated as satisfying the sec. 1.62-2(f), Income

Tax Regs., return of excess requirement for an accountable plan. 

See sec. 1.62-2(f)(2), Income Tax Regs. 

the performance of services as an employee of

the employer,

(2) reasonably calculated not to exceed

the amount of the expenses or the anticipated

expenses, and

(3) paid at the applicable Federal per

diem rate, a flat rate or stated schedule, or

in accordance with any other Servicespecified rate or schedule. [Rev. Proc. 

93-21, 1993-1 C.B. at 530; Rev. Proc. 92-17,

1992-1 C.B. at 680.]

We find that the arrangement in this case meets the

definition of "per diem allowance" provided in the Commissioner's

revenue procedures. It was reasonable for Romer to anticipate

that petitioner would incur lodging, meal, and incidental

expenses as its employee while he was away from his Tennessee

residence. It was also reasonable for Romer to estimate that the

applicable Federal per diem rate for Minneapolis would not exceed

petitioner's anticipated expenses. We find that the amount of

petitioner's traveling expenses is deemed substantiated under the

per diem allowance method.2

With respect to the time, place, and business purpose of

traveling expenses, section 1.274-5T(c)(1), Temporary Income Tax

Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985), generally provides that

a taxpayer must substantiate these elements of an expenditure by

adequate records or by sufficient evidence corroborating his own
- 10 -

statement. In addition to petitioner's and Mr. Bistodeau's

testimony, the record contains a handwritten log of petitioner's

activities with respect to respondent's criminal investigation of

Romer and with respect to Romer's clients. In addition, Karen

Coon, a certified public accountant who was associated with Romer

as an independent contractor, testified that petitioner generally

worked in the Minneapolis office 2 or 3 days each week during

1993. She also verified that he posted a monthly schedule in the

Minneapolis office which showed when he would be working in the

office. We find that this corroborative evidence is sufficient

to establish the time, place, and business purpose elements of

petitioner's traveling expenses and conclude that the arrangement

satisfies the section 1.62-2(e), Income Tax Regs., substantiation

requirement.

We have also considered respondent's broad assertion that

petitioner and Mr. Bistodeau conspired to label petitioner's

compensation from Romer as reimbursements under the arrangement

in order for petitioner to avoid income tax liability and for

Romer to avoid employment tax liability on the amount paid to him

during 1993. Based on our review of the record, we find that a

bona fide arrangement existed between petitioner and Romer during

1993. We reject respondent's conspiracy theory because he

offered absolutely no evidence in support of the alleged tax

avoidance scheme.
- 11 -

We conclude that the amounts paid under the arrangement

between petitioner and Romer are properly treated as paid under

an accountable plan. Accordingly, we hold that petitioner is

entitled to exclude from his gross income the $10,752 in per diem

payments which he received from Romer during 1993.

The second issue for decision is whether petitioner's horse

selling and leasing activity was an activity not engaged in for

profit within the meaning of section 183.

On a Schedule C attached to his 1993 return, petitioner

reported gross income from his horse selling and leasing activity

in the amount of $600, claimed expenses in the total amount of

$6,136, and claimed a net loss in the amount of $5,536. In the

statutory notice of deficiency, respondent disallowed the net

loss on the ground that the activity was not engaged in for

profit.

Section 183(a) disallows any deduction attributable to an

activity not engaged in for profit except as provided in section

183(b). For purposes of section 183, the term "activity not

engaged in for profit" means any activity other than one with

respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212. 

Sec. 183(c).

Section 162(a) provides for the deduction of all ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business. Where an activity does not
- 12 -

constitute a trade or business, section 212 allows as a deduction

all the ordinary and necessary expenses paid or incurred during

the taxable year for the production or collection of income, or

the management, conservation, or maintenance of property held for

the production of income. Sec. 212(1) and (2).

Whether a taxpayer engaged in an activity with the objective

of making a profit is a question of fact. Dreicer v.

Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion

702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs. 

While a reasonable expectation of profit is not required, the

taxpayer's profit objective must be bona fide. Taube v.

Commissioner, 88 T.C. 464, 478-479 (1987). In making this

determination, the Court gives more weight to objective facts

than to a taxpayer's mere statement of intent. Dreicer v.

Commissioner, supra at 645; sec. 1.183-2(a), Income Tax Regs.

Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of factors to be considered in deciding whether

an activity is engaged in for profit. These factors include: 

(1) The manner in which the taxpayer carried on the activity; (2)

the expertise of the taxpayer or his advisers; (3) the time and

effort expended by the taxpayer in carrying on the activity; (4)

the expectation that the assets used in the activity may

appreciate in value; (5) the success of the taxpayer in carrying

on other similar or dissimilar activities; (6) the taxpayer's

history of income or losses with respect to the activity; (7) the
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amount of occasional profits, if any, which are earned; (8) the

financial status of the taxpayer; and (9) whether elements of

personal pleasure or recreation are involved.

After considering the above factors, we find that petitioner

has not proved that he was engaged in his horse selling and

leasing activity with the requisite profit objective necessary to

support deductions under sections 162 or 212(1) and (2). We are

not convinced that petitioner's experience in training horses

ever involved more than his use of them for his own personal

recreation. He admits that he spent only a few hours each week

on this activity and that part of this time was spent

demonstrating his competence as a polo player to the members of

the Nashville Polo Club. Although he testified that his

intention was to make a profit by selling horses, we find that

the objective facts in this case show that he never made the kind

of commitment to the activity that would have given him a

reasonable chance to make a profit.

We hold that petitioner is not entitled to a business loss

deduction with respect to his horse selling and leasing activity. 

Respondent's determination on this issue is sustained.

The third issue for decision is whether expenses paid by

petitioner in connection with his aviation activity are

deductible as ordinary and necessary business expenses.

On a single Schedule C attached to his 1993 return,

petitioner labeled his various aviation activities, other than
- 14 -

his piloting for American Eagle, as "PILOT/FLIGHT

INSTRUCTOR/ANTIQUE AIRCRAFT EXPERT/A/C DEALER". He reported

gross receipts in the amount of $3,394 and claimed the following

expenses:

Car & truck expenses $455

Legal & professional services 1,235

Rent 780

Travel 260

Dues & subscriptions 556

Books 25

Total $3,311

Respondent concedes that petitioner has substantiated all of

the claimed expenses but did not allow deductions for the car and

truck expenses, rent, travel, and dues and subscriptions. 

Respondent's position is that the disallowed expenses are

nondeductible personal expenses which are not related to the

gross receipts reported on the Schedule C.

Petitioner admits that the $3,394 which he reported on the

Schedule C was received by him for commercial flying services

which he performed for a company called Hills-Gilbertson prior to

1993. He also admits that the disallowed expenses were not

related to the services he provided to Hills-Gilbertson.

The disallowed expenses were related, however, to

petitioner's involvement with an organization called Confederate

Air Force, Inc. (CAF) which is dedicated to the preservation of

World War II combat aircraft. Based on the record, we find that

his involvement with CAF during 1993 did not constitute the type

of activity that entitles him to deductions for his claimed
- 15 -

expenses under sections 162 or 212. Furthermore, we reject his

alternate argument that the disallowed expenses are deductible as

charitable contributions. We are not convinced that his activity

benefited CAF in any way. The record does not show that he

participated in any of CAF's air shows. Rather, the record shows

that during 1993 petitioner was paying CAF for his use of its

aircraft in order to learn how to fly World War II planes. We

conclude that these expenses were personal in nature and are not

deductible pursuant to section 262. We sustain respondent's

determination on this issue.

The fourth issue for decision is whether petitioner is

entitled to Schedule A itemized deductions which exceed his

claimed standard deduction for 1993.

Petitioner prepared his own return for 1993 and claimed a

standard deduction in the amount of $3,700 as an individual with

a filing status of single. Petitioner now contends that he is

entitled to itemized deductions in the total amount of $13,078. 

After carefully reviewing the record, we find that petitioner is

entitled to the following itemized deductions:

Minnesota individual income taxes $3,000

Real estate taxes 1,348

Personal property taxes 121

 Total taxes paid $4,469

Computer donated to CAF $1,000

Sponsorship of CAF's "Miss Mitchell" 175

 Total gifts to charity 1,175

 Total itemized deductions $5,644
- 16 -

Although we also find that petitioner paid for certain

deductible employee business expenses in connection with his

position at American Airlines, Inc., the total amount of such

deductible expenses does not exceed 2 percent of his adjusted

gross income, as determined in accordance with our holdings on

the other issues in this case. Therefore, petitioner is not

entitled to a deduction for such expenses. Sec. 67(a).

Accordingly, we hold that petitioner is entitled to itemized

deductions for 1993 in the total amount of $5,644.

To reflect the foregoing,

Decision will be entered

under Rule 155.