1 Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years at issue. All Rule

references are to the Tax Court Rules of Practice and Procedure. 

T.C. Memo. 1996-245

UNITED STATES TAX COURT

REZA AND CONNIE M. REZAZADEH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 15510-94, 6896-95. Filed May 28, 1996.

Reza Rezazadeh, pro se.

James E. Schacht, for respondent.

MEMORANDUM OPINION

COUVILLION, Special Trial Judge: These consolidated cases

were heard pursuant to section 7443A(b)(3)1 and Rules 180, 181,

and 182.
- 2 -

2 Petitioners claimed, on their 1990 and 1991 Federal income

tax returns, deductions for unreimbursed employee expenses in the

amounts of $7,093.04 and $10,274.90, respectively. In the notice

of deficiency, respondent disallowed $3,165 and $8,111 of the

amounts claimed, respectively. In a stipulation of settled

issues (stipulation), petitioners conceded the entire

disallowance for 1990 and $6,585.68 of the disallowance for 1991. 

Accordingly, with respect to the deduction claimed for 1991,

$1,525.32 of the disallowance remains at issue, which is issue

number (2) above.

On their 1991 return, petitioners also claimed a deduction

of $466.25 for sales taxes paid on an automobile. In the notice

of deficiency, respondent disallowed the deduction in its

entirety. In the stipulation, petitioners conceded this

adjustment.

Respondent determined the following deficiencies in

petitioners' Federal income taxes and penalties:

 Penalty 

 Year Deficiency Sec. 6662(a)

1990 $3,161 $632

1991 6,003 943

1992 5,284 288

After concessions by the parties,2 the issues remaining for

decision are: (1) Whether petitioners are entitled to a business

bad debt deduction for 1989 under section 166(a) for unpaid loans

to a corporation in which Reza Rezazadeh (petitioner) was an

employee/shareholder and for attorney's fees incurred in attempts

to collect the loan; (2) whether petitioners are entitled to

deductions under section 162(a)(2) for travel expenses incurred

by Connie M. Rezazadeh (Mrs. Rezazadeh) during 1991; (3) whether

petitioners' deduction for 1992 under section 162(a) of inventory
- 3 -

storage space is subject to the provisions of section 280A; and

(4) whether petitioners are liable for the accuracy-related

penalties under section 6662(a) for negligence or disregard of

rules or regulations for the 3 years at issue. The remaining

adjustments in the notices of deficiency for 1990 and 1992

relating to the taxable portion of petitioners' Social Security

income is computational and will be resolved by the Court's

holdings on the contested issues.

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. Petitioners, husband and wife, were legal residents

of Platteville, Wisconsin, at the time their petitions were

filed.

Petitioner is highly educated, possessing degrees in

aeronautical engineering and European and Islamic laws, a juris

doctorate, a master of laws in international law and economics, a

doctorate of juridical science in comparative law, and a

doctorate of philosophy in political science and economics. 

Petitioner speaks five languages.

 Since 1961, petitioner has been employed, in various

political science-related positions, by the University of

Wisconsin-Platteville (the University) at Platteville, Wisconsin. 

During the years 1975 through 1983, petitioner was chairman of

the political science department at the University. In 1983,
- 4 -

petitioner relinquished the chairmanship but remained employed as

a full-time professor. In 1993, petitioner retired as professor

emeritus.

By the mid-1970's, petitioner was disenchanted with academic

life, felt that he was "highly underemployed", and was utilizing

only a "small fraction of his knowledge in teaching political

science courses." In 1975, petitioner decided to look for an

"executive position" with several international corporations,

with the expectation that he could use his multidisciplinary

background to achieve higher employment status and a higher

salary. While the corporations petitioner contacted were

impressed with his background, petitioner was unable to secure

employment because he was approaching the age of 60. By 1977,

petitioner decided to form his own corporation in an effort to

achieve his goals.

In March 1977, petitioner and another individual, Peter

Takos, Jr. (Mr. Takos), formed International Management and

Investment Corp. (the corporation), an Iowa corporation, to find

"appropriate properties in the United States for overseas

investors". Investors would be charged commissions and fees for

the services rendered. Petitioner and Mr. Takos contributed

$20,000 each as initial corporate capital. Petitioner was

executive vice president and secretary of the corporation, while

Mr. Takos served as president and treasurer.
- 5 -

Petitioner and Mr. Takos agreed that the day-to-day

management of the corporation would be handled by Mr. Takos,

since he was locally based as a real estate agent in Dubuque,

Iowa. These duties required only a nominal portion of Mr. Takos'

time. Petitioner was responsible for carrying out the basic

functions of the corporation. His services to the corporation

included: Traveling twice to Europe, in 1977 and 1978, to

conduct a market study regarding the aims of the corporation and

establishing a process for finding appropriate clients or

investors; establishing contacts with reputable real estate

agencies throughout the United States toward seeking and

selecting appropriate properties; visiting selected properties,

making feasibility studies, and preparing a portfolio for sales

presentations; traveling to Europe for consultations and sales

presentations with selected agents and customers; and resolving a

variety of international problems relating to each client, such

as visas, immigration, commercial treaties, etc. Petitioner

generally worked about 20 hours per week for the corporation

during the academic year and 50-60 hours per week during the

summer months. Petitioner maintained his employment with the

University as a professor.

During petitioner's first trip to Europe in 1977, it became

clear that the Europeans would not deal with the corporation

unless the corporation established creditworthiness. When the
- 6 -

corporation was unable to borrow from any of the local banks,

petitioner loaned $50,000 to the corporation so that the

corporation would have adequate working capital and could

establish credit. The loan was evidenced by an "investment

certificate", dated May 23, 1977, showing an initial maturity

date of May 23, 1978, with a right of renewal, and for the

payment of interest at 7 percent per annum. Petitioner made two

additional advances to the corporation, $11,000 on October 25,

1977, and $50,000 on January 1, 1978, as it became necessary to

sustain and expand the corporation's property transactions. Both

of these advances were also evidenced by "investment

certificates", which provided initial maturity dates of 1 year

after the date of the certificate, a renewal option, and interest

at 7 percent per annum. In all, petitioner advanced $111,000 to

the corporation through the "investment certificates". 

Petitioner and Mr. Takos decided that, until the corporation was

financially able to establish regular salaries for the two

officers, each officer would receive, in place of a stated

salary, 50 percent of the net proceeds from commissions and fees

received annually by the corporation, up to a maximum of $20,000

per year per officer.

From 1977 to 1979, the corporation enjoyed some success. 

The total commissions and fees received during these 3 years were

$8,865, $32,340, and $79,712, respectively. Petitioner received,
- 7 -

as his 50 percent of the net proceeds, $4,000 in 1977, $12,000 in

1978, and $20,000 in 1979. No payments were made by the

corporation on the $111,000 "investment certificates".

Sometime in 1980, upon his return from a European business

trip, petitioner discovered that Mr. Takos had sold all of the

corporation's inventory of local properties and absconded to the

State of Florida with the proceeds and most of the corporate

records. Petitioner filed a shareholder's derivative suit

against Mr. Takos on behalf of the corporation. On October 22,

1984, a State court in Iowa rendered a judgment against Mr. Takos

and his wife (judgment debtors) in favor of the corporation for

$203,948.42 in actual damages, $125,000 in punitive damages, and

reasonable attorney's fees. Pursuant to Iowa law, a receiver was

appointed to collect the assets of the corporation, including the

judgment against Mr. Takos and his wife, and to liquidate the

corporation. The receiver soon determined, by January 1985, that

there were no assets of the judgment debtors in the State of

Iowa, nor did the judgment debtors have any significant assets in

Florida on which the judgment could be satisfied. Furthermore,

the attorney in Florida who had been employed to examine the

judgment debtors stated: "I don't believe that further

collection efforts will be worthwhile." In his Application to

Terminate Receivership and Final Report, dated January 11, 1985,

the receiver reported that there were no corporate assets in the
- 8 -

corporation other than the judgment and that, in his opinion, the

judgment was virtually worthless. Upon the receiver's

recommendation, the receiver was discharged and the judgment of

the corporation was transferred to petitioner in consideration of

petitioner's payment of all attorney's fees related to the suit,

the receivership, and the collection efforts made in Florida. 

From 1981 to 1987, petitioner paid a total of $11,682.75 in

attorney's fees to the law firm that handled the suit and also

served as the receiver.

Once the judgment was transferred to petitioner, he retained

the same counsel in Florida to continue efforts to collect the

judgment. In 1989, the Florida attorney informed petitioner that

the judgment was not collectible because the judgment debtors had

no assets. There is no evidence in the record to show that there

was ever any likelihood of collection of the judgment between

1985 and 1989. At this point, petitioner was out $122,682.75,

consisting of the $111,000 "investment certificates" and the

$11,682.75 he spent in attorney's fees to have the judgment

transferred to him and to attempt collection against the debtors.

Petitioner concluded, in 1989, that the $122,682.75 constituted a

worthless business debt. Therefore, beginning in 1989 and

through the years at issue, petitioners claimed on their Federal

income tax returns, as business bad debts, an amount that would

reduce their Federal income tax for the respective years to
- 9 -

nearly zero. More specifically, petitioners deducted $32,000 in

1989, $22,418 in 1990, $28,629.05 in 1991, and $24,340 in 1992. 

Petitioners intended to continue claiming bad debt deductions on

their Federal income tax returns until the deductions equaled the

$122,682.75.

Respondent did not audit petitioners' 1989 return. In the

notices of deficiency, respondent disallowed the claimed bad debt

deductions for tax years 1990 through 1992. Respondent

determined that the deductions were not allowable "because it has

not been established that you incurred these losses as business

bad debts. If it should be determined that you did incur these

bad debt losses in the respective years, then you would be

entitled to non-business bad debts only." The facts relating to

other adjustments that remain at issue are discussed later in

this opinion.

The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden of proof is on

the taxpayer to show that the determinations are incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

In general, section 166(a) allows a deduction for any debt

that becomes worthless during the taxable year. To qualify for a

worthless debt deduction, the taxpayer must show that a debtorcreditor relationship was intended between the taxpayer and the

debtor, that a genuine debt in fact existed, and that the debt
- 10 -

3 At trial, counsel for respondent asserted, for the first

time, that petitioner's advances of $111,000 constituted capital

contributions to the corporation. The Court rejects that

contention. The Court is satisfied that the "investment

certificates" constituted loans and were not capital

contributions. With respect to the $11,682.75 in legal expenses

paid by petitioner, the Court concludes that those expenses were

so closely related to the advances petitioner made to the

corporation that such expenses "assume identical characteristics"

as the $111,000 advances, so that the two components of

petitioner's claimed deductions are accorded identical treatment. 

See Blauner v. Commissioner, T.C. Memo. 1967-156; see also Ander

v. Commissioner, 47 T.C. 592 (1967).

became worthless within the taxable year. Sec. 1.166-1(c),

Income Tax Regs.; Andrew v. Commissioner, 54 T.C. 239, 244-245

(1970). The Court is satisfied that there was a debtor-creditor

relationship and that the corporation owed a genuine debt to

petitioner.3

The first question is the year in which the $122,682.75 debt

became worthless. Respondent contends that the debt became

worthless in 1985. Petitioner contends the debt became worthless

in 1989. The Court agrees with respondent. In 1985, the

corporate receiver reported there were no assets of the judgment

debtors upon which the judgment could be collected and that

collection efforts would not be worthwhile. The receiver was of

the opinion that the judgment was virtually worthless. Based on

the receiver's opinion, the receivership was terminated, and the

judgment was transferred to petitioner. The Court finds that,

when the receiver established, in 1985, that the corporation had

no assets other than the worthless judgment, the debt owing by
- 11 -

the corporation to petitioner also became worthless. At that

time, it was clear that the debt to petitioner would never be

repaid. Petitioner argues that the debt became worthless in 1989

when the Florida attorney informed him that the judgment was not

collectible because of lack of assets held by the judgment

debtors. However, petitioner did not present any evidence to

demonstrate what circumstances, if any, existed between 1985 and

1989 to suggest that there was any chance of recovering the

judgment. Accordingly, the Court holds that the debt of

$122,682.75 owed to petitioner became worthless in 1985.

The second question is whether the indebtedness to

petitioner was a business or a nonbusiness indebtedness. Section

166 distinguishes between business bad debts and nonbusiness bad

debts. Sec. 166(d); sec. 1.166-5(b), Income Tax Regs. Business

bad debts may be deducted against ordinary income and are

deductible whether such debts become wholly or partially

worthless during the year. Nonbusiness bad debts may be deducted

only as short-term capital losses and only if the debts become

wholly worthless in the year claimed. Sec. 166(d). A bad debt

is characterized as business rather than nonbusiness if the debt

bears a proximate relationship to the taxpayer's trade or

business. Sec. 1.166-5(b), Income Tax Regs. In determining

whether such relationship exists, the proper measure is the
- 12 -

taxpayer's dominant motivation; a significant motivation is not

sufficient. United States v. Generes, 405 U.S. 93, 103 (1972).

The relationship between a debt and the taxpayer's trade or

business is a question of fact. B.B. Rider Corp. v.

Commissioner, 725 F.2d 945, 948 (3d Cir. 1984), affg. in part and

vacating in part T.C. Memo. 1982-98. In other words, the

determination of the taxpayer's dominant motive is a factual one. 

Hough v. Commissioner, 882 F.2d 1271, 1276 (7th Cir. 1989), affg.

T.C. Memo. 1986-229. The question of dominant motive is

ascertained as of the time the loan or guaranty is made. Harsha

v. United States, 590 F.2d 884, 886 (10th Cir. 1979). The loss

from a direct loan to a corporation or from the guaranty of a

loan is evaluated under the same dominant motive standard. B.B.

Rider Corp. v. Commissioner, supra at 948.

When the creditor or guarantor of a corporate debt is a

shareholder/investor and also an employee, mixed motives for the

loan and guaranty are present, and the critical issue becomes

which motive is dominant. United States v. Generes, supra at

100. Investing is not a trade or business. Whipple v.

Commissioner, 373 U.S. 193, 202 (1963). The rewards of investing

are "expectative"; that is, the rewards result from appreciation

and earnings on the investment rather than from personal effort

or labor. United States v. Generes, supra at 100-101. One's

role or status as an employee is a business interest. Id. at
- 13 -

101. Its typical nature is the exertion of effort and labor in

exchange for a salary. Id. Therefore, in order to show that a

loss is created or acquired in connection with a trade or

business, the taxpayer must show that the loan was made either to

protect the employment of the taxpayer or as part of an

established business of financing corporations. Bernstein v.

Commissioner, T.C. Memo. 1989-422 (citing Raymond v. United

States, 511 F.2d 185, 189 (6th Cir. 1975)).

In determining the dominant business or nonbusiness motive

of a shareholder lending money to a corporation in which the

shareholder is also an employee, courts look primarily to three

objective factors: The amount of the loan with the taxpayer's

investment in the corporation, the amount of the taxpayer's

after-tax salary, and other sources of gross income available to

the taxpayer at the time of the loan. United States v. Generes,

supra; Scifo v. Commissioner, 68 T.C. 714, 723 (1977); Shinefeld

v. Commissioner, 65 T.C. 1092 (1976). The larger the taxpayer's

investment, the smaller his salary, and the larger his other

sources of gross income, the more likely the courts are to find a

dominant nonbusiness motive for the loan. United States v.

Generes, supra.

On this issue, as to whether the debt constituted a business

or nonbusiness bad debt, the record is clear that petitioner was

not in the business of lending money to corporations. Therefore,
- 14 -

in order to deduct the loans to the corporation as a business bad

debt, petitioner had to show that the dominant motive in making

the loans was to protect his employment, as opposed to an

investment in the corporation.

Petitioner made a significant contribution to the

corporation. As a result of his efforts, it appears the

corporation was on its way to becoming a successful venture. The

total commissions and fees earned by the corporation from 1977 to

1979 were $8,865, $32,340, and $79,712, respectively. While

petitioner received, in 1977 and 1978, approximately 50 percent

of these net proceeds, in lieu of a stated salary, in 1979,

petitioner received only $20,000 as "salary" because petitioner

and Mr. Takos decided to limit the amount they received from the

corporation to $20,000 each until the corporation was

successfully established. The Court does not believe that

petitioner would have been able to survive financially on this

limited "salary" if petitioner had not maintained his full-time

job at the University during the years 1977 to 1979. Considering

the limited "salary" petitioner received from the corporation,

the fact that petitioner received a full-time salary from the

University while the corporation was in business, and the fact

that petitioner made a significant initial capital contribution

of $20,000 to the corporation, the Court concludes that, at the

time petitioner made the loans to the corporation, the dominant
- 15 -

motive in making the loans was to protect petitioner's

investment. United States v. Generes, 405 U.S. 93 (1972). While

the Court is satisfied that petitioner's ultimate goal was for

the corporation to earn sufficient income whereby he could retire

from the University and have a higher standard of living, at the

time the loans were made, petitioner was in the process of

nurturing the corporation. Had petitioner not made the loans to

the corporation, the corporation would not have survived, and

petitioner's substantial investment of $20,000 would have been at

risk. Although petitioner had a significant motive for

protecting his employment, the dominant motive was to protect and

enhance his investment in the corporation.

Petitioner argued on brief that the $203,948.42 judgment

rendered by the Iowa court in favor of the corporation

represented a trade or business asset of the corporation, and,

since the judgment was transferred to petitioner, the trade or

business characteristics of that judgment also transferred to

petitioner. Thus, petitioner argues, the "debt" was a business

bad debt. The Court rejects that argument. The tax

characteristics of the judgment are not before the Court. The

tax characteristics of petitioner's advances to the corporation

are at issue. In the transfer, petitioner received an asset, a

judgment, which unfortunately turned out to have no value. The

debt owing to petitioner from the corporation always remained as
- 16 -

a debt, and its characteristic was not changed by the transfer of

the judgment to petitioner.

In support of his argument that the debt was a business

debt, petitioner cited numerous cases in which advances to

corporations by employees and/or shareholder-employees were found

to constitute business bad debts: Fitzpatrick v. Commissioner,

T.C. Memo. 1967-1; Litwin v. United States, 67 AFTR 2d 91-1098,

91-1 USTC par. 50,229 (D. Kan. 1991), affd. 983 F.2d 997 (10th

Cir. 1993); Baldwin v. Commissioner, T.C. Memo. 1993-433; Trent

v. Commissioner, 291 F.2d 669 (2d Cir. 1961), revg. 34 T.C. 910

(1960); Lundgren v. Commissioner, 376 F.2d 623 (9th Cir. 1967),

revg. T.C. Memo. 1965-314; Kelson v. United States, 73-2 USTC

par. 9565 (C.D. Utah 1973), Stratmore v. United States, 292 F.

Supp. 59 (D. N.J. 1968), revd. 420 F.2d 461 (3d Cir. 1970); Jaffe

v. Commissioner, T.C. Memo. 1967-215; Litterio v. Commissioner,

T.C. Memo. 1992-524, affd. without published opinion 21 F.3d 423

(4th Cir. 1994). The Court has considered these cases and

concludes these cases are not inconsistent with the holding in

this case. The cases cited by petitioner recite the same

principles set forth in this opinion: that a debt will be

characterized as a business debt rather than as a nonbusiness

debt if the debt bears a proximate relationship to the taxpayer's

trade or business and that the determination of such a

relationship is a question of fact. This Court is satisfied that
- 17 -

4 The case of Stratmore v. Commissioner, 292 F. Supp. 59 (D.

N.J. 1968), revd. 420 F.2d 461 (3d Cir. 1970), relied on by

petitioner on brief, was the opinion of the U.S. District Court

that held that the debt in question was a business bad debt. 

Interestingly, that holding was reversed by the Court of Appeals

for the Third Circuit. Petitioner did not cite nor discuss the

Court of Appeals' reversal. 

the facts of this case are distinguishable from the facts of the

cases relied on by petitioner.4

The second issue relates to travel expenses incurred by Mrs.

Rezazadeh during 1991. Petitioner was scheduled to present, in

his capacity as a political science professor at the University,

a paper on local government in the nation of Colombia in October

1991 at the Third World Studies 14th National Conference held at

the University of Nebraska at Omaha, Nebraska. Preparing such a

paper required extensive research in Bogota, Colombia. Due to

other commitments, petitioner was unable to travel to Bogota to

conduct the necessary research. Petitioner asked his wife, Mrs.

Rezazadeh, who is of Colombian origin, to travel to Bogota to do

the research for the paper. Mrs. Rezazadeh has a doctoral degree

in psychology (degree). Having written an extensive dissertation

to complete the degree, Mrs. Rezazadeh was knowledgeable of the

research process. Furthermore, being of Colombian origin and

having relatives in Bogota, Mrs. Rezazadeh was very familiar with

local offices and institutions in Colombia. Mrs. Rezazadeh

traveled to Bogota on May 27, 1991, and returned to the United

States on July 25, 1991, for a total travel period of 60 days. 
- 18 -

Her research was used by petitioner at the Omaha, Nebraska,

conference.

On their 1991 Federal income tax return, petitioners claimed

unreimbursed employee business expenses of $1,525.32 for the

travel expenses incurred by Mrs. Rezazadeh for her research trip

to Bogota. More specifically, the expenses claimed included the

standard mileage rate for automobile travel from petitioners'

home in Platteville to the airport in Chicago, Illinois, and back

to Platteville, the round-trip airfare from Chicago to Bogota,

miscellaneous meals and lodgings in Chicago, parking at the

Chicago airport, meals in Bogota, and the Bogota Airport

departure tax. Expenses for lodging in Bogota were not claimed

because Mrs. Rezazadeh stayed with her relatives. In the notice

of deficiency, respondent disallowed the claimed employee

business expenses, determining that the primary purpose of the

trip was for pleasure, not business. At trial, respondent

acknowledged that Mrs. Rezazadeh did spend some time doing

research while she was in Bogota.

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

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business. Such deductions include

traveling expenses incurred while away from home in the pursuit

of a trade or business, including amounts expended for meals and

lodging. Sec. 162(a)(2). If travel expenses are incurred for
- 19 -

both business and other purposes, the travel expenses are

deductible only if the travel is primarily related to the

taxpayer's trade or business. Sec. 1.162-2(b)(1), Income Tax

Regs. If a trip is primarily personal in nature, the travel

expenses are not deductible even if the taxpayer engaged in some

business activities at the destination. Id. Whether travel is

related primarily to the taxpayer's trade or business or is

primarily personal is a question of fact. Sec. 1.162-2(b)(2),

Income Tax Regs. The amount of time during the period of the

trip that is spent on personal activity, compared to the amount

of time spent on activities directly relating to the taxpayer's

trade or business, is an important factor in determining whether

the trip is primarily personal. Id. The taxpayer must prove

that the trip was primarily related to the trade or business. 

Rule 142(a).

At trial, petitioners presented evidence indicating that

Mrs. Rezazadeh spent 50 of the 60 days she was in Bogota,

including weekends and holidays, doing research, which included

collecting, studying, organizing, and tabulating over 700 pages

of material. While Mrs. Rezazadeh did spend some time visiting

relatives while she was in Bogota, the Court is satisfied that

her trip to Bogota was primarily for business and not personal

purposes. Accordingly, petitioners are entitled to deduct those
- 20 -

business-related travel expenses that have been properly

substantiated.

Generally, with respect to the substantiation of expenses,

if the record provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the amount of the deduction to which he

or she is otherwise entitled, the Court may estimate the amount

of such expense and allow the deduction to that extent. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, in

the case of travel expenses, including meals and lodging while

away from home, section 274(d) overrides the so-called Cohan

rule. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd.

per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

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

Under section 274(d), no deduction may be allowed for

expenses incurred for travel on the basis of any approximation or

the unsupported testimony of the taxpayer. Section 274(d)

imposes stringent substantiation requirements to which taxpayers

must strictly adhere. Thus, that section specifically proscribes

deductions for travel expenses in the absence of adequate records

or sufficient evidence corroborating the taxpayer's own

statement. At a minimum, the taxpayer must substantiate: 

(1) The amount of such expense; (2) the time and place such
- 21 -

5 Sec. 274(c)(1) provides generally that, in the case of an

individual who travels outside the United States away from home

in pursuit of a trade or business or an activity under sec. 212,

no deduction shall be allowed under sec. 162 or sec. 212 for that

portion of the expenses of such travel otherwise allowable under

such sections that, under regulations prescribed by the

Secretary, is not allocable to such trade or business or to such

activity. Sec. 274(c)(2) provides certain exceptions to the

applicability of sec. 274(c)(1), one of which is where the

portion of the time of travel outside the United States away from

home that is not attributable to the taxpayer's trade or business

or a sec. 212 activity is less than 25 percent of the total time

on such travel. In this case, the travel time spent by Mrs.

Rezazadeh on activities not attributable to petitioner's trade or

business was considerably less than 25 percent of her total

travel time. Moreover, the record does not show that any of the

expenses incurred by Mrs. Rezazadeh not attributable to

petitioner's trade or business would have otherwise been

allowable under sec. 162. Consequently, the provisions of sec.

274(c)(1) are not applicable to this issue. 

expense was incurred; and (3) the business purpose for which such

expense was incurred.

At trial, the only evidence petitioners presented was a copy

of Mrs. Rezazadeh's round-trip airline ticket to Bogota. The

ticket indicated the dates and destination of travel and the

$901.28 cost of the round-trip flight. Petitioners have properly

substantiated their entitlement to a travel expense deduction for

the amount of the flight. With respect to the other expenses

claimed, petitioners have not satisfied the strict substantiation

requirements of section 274(d) and, therefore, are not entitled

to deduct the remaining travel expenses claimed.5

With respect to the third issue, petitioner has authored and

published several books, conducting this activity in a portion of
- 22 -

petitioners' personal residence. On their 1992 Federal income

tax return, petitioners filed a Schedule C in which the income

and expenses of this activity were reported as a trade or

business. Among the expenses claimed were expenses related to an

office in the home in which petitioners claimed one-eighth of the

expenses of their home as being attributable to this business

activity. The one eighth portion of the home office expenses

claimed were the following:

$218.89 Utilities

 222.54 Property taxes

 360.00 House depreciation

$801.43 Total

Petitioners claimed only $435.53 of this amount as a deduction,

pursuant to section 280A(c), which limits the home office

deduction to the amount of income from the activity that, in

petitioners' case, was $435.53 for 1992. However, petitioners

additionally claimed a deduction of $801.43 that is described on

the Schedule C as "Storage of Inventory Cost, one-eighth of the

total space, calculated as above." In the notice of deficiency,

respondent did not question petitioners' entitlement to a

deduction of expenses for an office in the home but disallowed

the $801.43 claimed for "Storage of Inventory Cost" because the

claimed storage expenses related to the same business activity,

the writing and publishing of books, and was also subject to
- 23 -

section 280A(c). The substantiation of the amounts claimed is

also not at issue.

As previously stated, section 162(a) allows a taxpayer to

deduct all the ordinary and necessary expenses paid or incurred

in carrying on any trade or business. Section 280A, in general,

denies deductions with respect to the use of a dwelling unit that

is used by the taxpayer during the taxable year as a residence. 

Section 280A(c)(1), however, allows the deduction of expenses

allocable to that portion of a dwelling unit that is exclusively

used on a regular basis as "the principal place of business" for

any trade or business of the taxpayer. Sec. 280A(c)(1)(A). 

Furthermore, section 280A(c)(2) allows the deduction of expenses

allocable to the portion of the dwelling unit used on a regular

basis as a storage unit for the inventory of the taxpayer held

for use in the taxpayer's trade or business of selling products

at rental or wholesale, but only if the selling unit is the sole

fixed location of such trade or business.

Respondent determined, in the notice of deficiency, that

section 280A(c)(5) limits the deductibility of the amount claimed

for both the home office and inventory storage to the amount of

income earned by the activity. Accordingly, respondent

determined that, of the total of $1,602.86 claimed by petitioners

on their 1992 return for the home office and inventory storage

($801.43 + $801.43), the deduction is limited to the $435.53
- 24 -

income earned by the activity. Petitioners contend that,

pursuant to Internal Revenue Service Publication 587, Business

Use of Your Home, only the deductibility of the portion of the

home used as a home office is limited by section 280A(c)(5), and

there is no limitation on the deduction for inventory storage. 

Accordingly, petitioners claim they are entitled to deduct their

inventory storage costs regardless of the amount of income

generated by the activity during the taxable year.

Section 280A(c)(5) specifically limits the deduction for

both an office in the home and for inventory storage to the

"gross income derived from such use for the taxable year". Since

petitioners used the home office and inventory storage for the

same business activity, petitioners' total deduction for both of

these spaces in their residence is limited to $435.53, the income

earned from the activity during 1992.

With respect to petitioners' reliance on Publication 587,

while the publication is not completely clear with respect to the

applicability of the section 280A(c)(5) income limitations to

deductions for inventory storage, regardless of the

interpretations or conclusions reached by petitioners from this

publication, it is well settled that authoritative tax law is

contained in statutes, regulations, and judicial decisions and

not in informal publications. Zimmerman v. Commissioner, 71 T.C.

367, 371 (1978), affd. without published opinion 614 F.2d 1294
- 25 -

(2d Cir. 1979); Green v. Commissioner, 59 T.C. 456, 458 (1972). 

Internal Revenue Service Publications, like the one on which

petitioners relied, are merely guides published by the Service to

aid taxpayers. Dixon v. United States, 381 U.S. 68, 73 (1965). 

Petitioners may not rely on such publications to the extent the

information in them conflicts with the law. Respondent is

sustained on this issue.

The final issue for decision is whether petitioners are

liable for the section 6662(a) accuracy-related penalties for

negligence or disregard of rules or regulations. Section 6662(a)

provides for an addition to tax equal to 20 percent of the

portion of the underpayment to which the section applies. Under

section 6662(c), "'negligence' includes any failure to make a

reasonable attempt to comply with the provisions of this title,

and the term 'disregard' includes any careless, reckless, or

intentional disregard." Negligence is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances. Neely v. Commissioner, 85 T.C.

934, 947 (1985). However, under section 6664(c), the penalty

under section 6662(a) shall not be imposed with respect to any

portion of an underpayment if it is shown that there was

reasonable cause for the underpayment, and the taxpayer acted in

good faith.
- 26 -

Respondent determined that, for tax years 1990 and 1991,

petitioners were liable for the section 6662(a) penalty with

respect to the claimed business bad debt deductions. For tax

year 1992, the penalty relates only to unreported taxable Social

Security income in the amount of $9,409. With respect to the

claimed bad debt deductions for 1990 and 1991, since facts and

circumstances determine whether an indebtedness is business or

nonbusiness, the Court finds that petitioner, in good faith,

believed that the debts were appropriately characterized as

business bad debts and that the debts became worthless in 1989. 

The Court holds, on this record, that petitioners did not claim

the bad debt deductions in a negligent manner. Accordingly, with

respect to the section 6662(a) penalties for 1990 and 1991,

petitioners are sustained.

With respect to the negligence penalty related to the

unreported Social Security income for 1992, the Court holds for

petitioners. As evidenced by their calculation on the worksheet

accompanying their income tax materials, as to the amount of

taxable Social Security benefits for 1992, petitioners concluded

that the $21,517 in Social Security benefits received by them

during 1992 was nontaxable. Upon concluding that none of the

Social Security benefits received in 1992 was taxable,

petitioners reported, on line 21b of their 1992 return "0.00" as

the taxable amount of the Social Security benefits. Petitioners
- 27 -

failed to report on the face page of their tax return the actual

amount of Social Security benefits they received that year. 

Based on their reported income and expenses, petitioners properly

calculated that none of the Social Security benefits received in

1992 was taxable. The worksheet, however, is not filed and is

not part of the tax return. The Court does not find that

petitioners' failure to report on the face of their return the

amount of Social Security benefits received constitutes

negligence or represents a disregard of rules or regulations. 

Accordingly, with respect to the penalties for 1992, petitioners

are sustained.

Decisions will be entered

under Rule 155.