1Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

T.C. Memo. 2008-234

UNITED STATES TAX COURT

GERRY MORRIS GRIGGS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20664-06. Filed October 21, 2008.

Gerry Morris Griggs, pro se.

Portia N. Rose, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: Respondent determined a deficiency of $7,239

in petitioner’s Federal tax for 2002, as well as a penalty of

$1,447.80 under section 66621, and additions to tax of $325.76
- 2 -

2Respondent has conceded the additions to tax determined

under sec. 6651(a)(1) and (2).

and $253.37 under section 6651(a)(1) and (a)(2), respectively. 

After concessions,2 the issues left for decision are: (1)

Whether petitioner is entitled to a casualty loss deduction of

$2,783; (2) whether petitioner is entitled to claimed cost of

goods sold in the amount of $30,220 related to one of the

activities for which he filed a Schedule C, Profit or Loss From

Business; (3) whether petitioner is entitled to deductions

related to another Schedule C activity; (4) whether petitioner is

entitled to a capital loss carryforward of $3,000; and (5)

whether petitioner is liable for the section 6662 penalty.

On the basis of the analysis explained herein, we find (1)

the casualty losses and the capital loss carryforward are not

allowable for lack of substantiation, (2) the costs of goods sold

and various Schedule C deductions are allowed in part based on

the evidence presented, and (3) the section 6662 penalty is

applicable.

FINDINGS OF FACT

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

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference. Petitioner resided in

Texas at the time his petition was filed.
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3Although petitioner used the word partners to describe

these ventures, petitioner testified that these were not

partnerships in a legal sense, but a loose association of people

trying to put these deals together.

Petitioner describes himself as a merchant banker. 

Petitioner received wages and a Form W-2, Wage and Tax Statement,

for tax year 2002. In addition, during 2002 petitioner

maintained two activities referred to as “Management and

Consulting Services” (MCS) and “MTEM” on respective Schedules C

filed with his Form 1040, U.S. Individual Income Tax Return, for

the 2002 tax year.

MCS

MCS is a business and consulting company responsible for

“putting together deals”. During 2002 MCS was involved in three

primary transactions: (1) An attempt by petitioner and his

partners3 (which petitioner collectively referred to as Cooling

Technologies Group (CTG)) to acquire a thermal container business

owned by Coleman Co. (Coleman) on behalf of a third party, Kodiak

Technologies, Inc. (Kodiak), a company petitioner helped

establish in 1997; (2) an attempt by petitioner and his partners

to set up a small business investment company (SBIC) on behalf of

the National Veterans Business Development Corp. (NVBDC); and (3)

pursuing, as part of CTG, various transactions on behalf of

Kodiak. At various times since its founding, petitioner has been

an owner, director, creditor, or employee of Kodiak. 
- 4 -

During 2002 petitioner, as a member of CTG, was engaged in

an attempt to purchase a unit of Coleman, which would then be

used to further Kodiak’s business line. Petitioner pursued this

activity on behalf of Kodiak based on two facts: (1) That Kodiak

was engaged in a nonseasonal business; and (2) that Coleman was

primarily a seasonal business with excess capacity during

downtime. The benefit of the deal appeared to be that Kodiak

could take advantage of Coleman’s excess capacity in order to

develop and produce temperature-sensitive shipping containers in

a more cost-efficient manner.

This attempt to purchase Coleman did not come to fruition. 

Instead of CTG entering into an agreement with Coleman, Kodiak

and Coleman later attempted to enter into an agreement directly. 

This venture is described in more detail below and occurred after

petitioner returned to Kodiak in late 2002.

Petitioner’s activities relating to Kodiak began prior to

the year at issue. Kodiak was a company formed to explore

possible ways to improve the shipping of temperature-sensitive

products. Kodiak initially targeted the pharmaceutical industry

as one industry that would benefit from commercial-quality

shipping containers that did not require the use of regular or

dry ice. Petitioner was one of the founders of Kodiak and was an

employee through 2001. Petitioner left Kodiak and was given a

year of severance pay which ran into 2002. These wages paid in
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2002 resulted in the wage income petitioner reported on his 2002

income tax return. In December 2002 petitioner was brought back

in to help manage the company because existing management was

having problems. During 2002 petitioner was also engaged in

pursuing a number of ventures on behalf of Kodiak. This included

the Coleman acquisition discussed below.

Once petitioner returned to Kodiak as an employee in 2002,

CTG stopped pursuing the Coleman venture described above. 

Instead, Kodiak attempted to enter into an agreement directly

with Coleman.

Another activity petitioner engaged in during 2002 was an

attempt to set up a small business investment company (SBIC) on

behalf of NVBDC. The goal of setting up an SBIC would be to

provide assistance to veterans who were interested in starting

their own businesses. Petitioner’s attempts to set up a SBIC on

behalf of NVBDC ended when the Small Business Administration

imposed a moratorium on granting licenses to new SBICs. 

Petitioner filed a Schedule C for MCS showing gross receipts

or sales of $7,000. Petitioner claimed the following deductions:
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Item Amount

Car and Truck Expense $400 

Depreciation and Section 179 expense deduction 600 

Legal and professional services 175 

Office expense 6,000 

Rent or lease

 Vehicles, machinery, and equipment 730 

 Other business property 636 

Supplies 1,427 

Other expenses 1,231 

 Total 11,199 

After deductions, petitioner’s Schedule C showed a loss of

$4,200.

MTEM

In 2002 MTEM’s main function was the purchase and resale of

tickets for the use of a luxury suite at Minute Maid Park, home

stadium of the Major League Baseball Houston Astros. Petitioner

began this venture in 2000 and it continues to the present. Each

year, petitioner would purchase the right to use a luxury box at

Minute Maid Park. Petitioner would then resell the tickets to

use the luxury box. During the first years he owned the luxury

box, petitioner would enter into contracts with larger corporate

clients in order to mitigate his financial risk. During 2002

petitioner entered into agreements with two corporations, Nabisco

and Chicago Title, with each agreeing to purchase one-third of

the tickets. This left petitioner with 27 tickets or one-third

of the season to sell on his own. Petitioner was unable to sell

tickets to every game. Individuals who purchased the use of the
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luxury box were also able to purchase additional tickets directly

from the Houston Astros’ offices.

Petitioner reported gross receipts of $19,782 on the MTEM

Schedule C. Petitioner testified that he sold about 15 game

tickets of the 27 remaining for use of the luxury box. 

Petitioner claimed a cost of goods sold of $30,220 and expenses

of $636 for meals and entertainment and $1,272 for “Other

expenses”, resulting in a net loss of $12,346. 

Petitioner also initially claimed a $3,000 capital loss

carryforward on his return, but after completing the return

decided that he did not want to use the carryforward. Petitioner

indicated his desire not to claim a capital loss carryforward by

inserting a handwritten footnote on his return prior to filing

it. At trial, petitioner revisited this issue and stated that if

this Court decides that respondent’s determinations were correct

and as a result he has a higher income, he would like to apply

the carryforward to offset a portion of that income.

Petitioner also claimed on his return for 2002 casualty

losses relating to four properties he owned: (1)Damage sustained

by his car during a flood; (2) damage to a fence that was hit by

a car; and (3) the loss of two lithographs.

Petitioner timely requested and was granted an extension of

time to file his 2002 income tax return. The return was due on

or before October 15, 2003. Respondent examined petitioner’s
- 8 -

return and on July 13, 2006, sent petitioner a notice of

deficiency that: (1) Disallowed all costs of goods sold and

deductions related to petitioner’s Schedule C activities; (2)

disallowed petitioner’s claimed $3,000 loss carryforward; (3)

disallowed petitioner’s claimed casualty losses; (4) imposed

self-employment tax; (5) adjusted the amount of petitioner’s

itemized deductions based on petitioner’s increased income; and

(6) imposed an accuracy-related penalty pursuant to section 6662. 

At trial, respondent’s position was that petitioner had not

proven: (1) That either of the Schedule C activities was

conducted for profit; (2) that the costs of goods sold and

expenses have been paid, or if paid, are allowable in determining

gross income or as ordinary and necessary business expenses; and

(3) that petitioner had not substantiated the other losses

claimed on his return.

On October 11, 2006, petitioner timely petitioned this Court

for a redetermination of his tax liability. A trial was held on

October 24, 2007, in Houston, Texas.

OPINION

Burden of Proof

The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving, by a preponderance of the evidence, that these

determinations are incorrect. Rule 142(a)(1); Welch v.
- 9 -

Helvering, 290 U.S. 111, 115 (1933). Tax deductions are a matter

of legislative grace, and a taxpayer has the burden of proving

that he is entitled to the deductions claimed. Rule 142(a)(1);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The

burden of proof on factual issues that affect a taxpayer’s

liability for tax may be shifted to the Commissioner where the

“taxpayer introduces credible evidence with respect to * * * such

issue.” Sec. 7491(a)(1). Petitioner does not claim that the

burden of proof shifts to respondent under section 7491(a). In

any event, petitioner has failed to establish that he has

satisfied the requirements of section 7491(a)(2). On the record

before us, we find that the burden of proof does not shift to

respondent under section 7491(a). 

Deductions

A taxpayer may deduct ordinary and necessary expenses paid

or incurred during the taxable year in carrying on any trade or

business. See sec. 162. To do so, a taxpayer must demonstrate

that he was involved in the activity on a continuous and

regular basis and that his purpose for engaging in the activity

was for income or profit. See Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987); Wittstruck v. Commissioner, 645 F.2d 618, 619

(8th Cir. 1981), affg. T.C. Memo. 1980-62; Jasionowski v.

Commissioner, 66 T.C. 312, 320-322 (1976); Gentile v.
- 10 -

Commissioner, 65 T.C. 1, 4 (1975); sec. 1.183-2(a), Income Tax

Regs. 

For certain kinds of expenses otherwise deductible under

section 162(a), a taxpayer must satisfy substantiation

requirements as set forth in section 274(d) before such expenses

will be allowed as a deduction. Section 274(d) disallows

deductions for travel expenses, gifts, meals, and entertainment,

as well as for listed property defined by section 280F(d)(4),

unless the taxpayer substantiates by adequate records or by

sufficient evidence corroborating the taxpayer’s own statements: 

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

travel or entertainment, or the date and description of the gift;

(3) the business purpose of the expense; and (4) the business

relationship to the taxpayer of the persons entertained. 

Profit Motive

Whether the required profit objective exists is determined

on the basis of all the facts and circumstances of each case.

See Hirsch v. Commissioner, 315 F.2d 731, 737 (9th Cir. 1963),

affg. T.C. Memo. 1961-256; Golanty v. Commissioner, 72 T.C. 411,

426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981); sec. 1.183-2(a), Income Tax Regs. While a reasonable

expectation of profit is not required, the taxpayer’s objective

of making a profit must be bona fide. See Wittstruck v.

Commissioner, supra at 619; Elliott v. Commissioner, 84 T.C. 227,
- 11 -

236 (1985), affd. without published opinion 782 F.2d 1027 (3d

Cir. 1986). The Court gives greater weight to objective factors

in making the factual determination than to a taxpayer’s mere

statement of intent. See Indep. Elec. Supply, Inc. v.

Commissioner, 781 F.2d 724 (9th Cir. 1986), affg. Lahr v.

Commissioner, T.C. Memo. 1984-472; Dreicer v. Commissioner, 78

T.C. 642, 645 (1982), affd. without published opinion 702 F.2d

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

The Court generally considers nine nonexclusive factors

for determining whether taxpayers engaged in an activity for

profit. Sec. 1.183-2(b), Income Tax Regs. The nine factors are:

(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 activities for profit; (6) the taxpayer’s history of

income or losses with respect to the activity; (7) the amount of

occasional profits, if any, which are earned; (8) the financial

status of the taxpayer; and (9) elements of personal pleasure or

recreation. Id. We will take each entity in turn.

MCS

Petitioner has proven his profit motive in searching out

deals for his management company. Petitioner and his witness,
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who was a business partner in many of petitioner’s ventures and

also served in a management role at Kodiak, both testified

credibly as to the manner in which they pursued deals and that

these types of deals were both petitioner’s and his witness’s

main source of income. Petitioner’s witness further testified

that it was their general practice to expend their own funds

individually in trying to put these deals together with the

possibility of reimbursement if the deal went through. 

Petitioner and his witness both testified that although the risks

were great, any profits they might earn could be substantial,

either through salaries paid by the resulting entity or any

resulting equity interest they might procure. Petitioner and his

witness explained that their goal in putting together these deals

was trifold. If a deal was successful, petitioner, his witness,

and various other partners could profit in any of three ways: 

(1) Petitioner would become an equity owner of the resulting

entity; (2) petitioner would become a salaried executive of the

resulting entity; and/or (3) petitioner would be paid a monetary

fee for helping to put the deal together.

In support of his argument that petitioner had a business

purpose in MCS, petitioner submitted a number of documents,

including a draft of a letter of intent between Kodiak and

Coleman, which related to the venture started after petitioner

returned to a management role at Kodiak in 2002. The letter of
- 13 -

intent is dated November 20, 2002. Included with this letter was

a fax cover sheet from Coleman to petitioner’s witness.

Petitioner and his witness testified credibly that they both

entered into these transactions with a profit motive. 

Accordingly, we find that petitioner had a valid business purpose

for the expenses he claimed on his MCS Schedule C. We will now

take each expense in turn and determine whether petitioner has

provided the required substantiation.

1. Car and Truck Expenses

Petitioner claimed, and respondent disallowed, a deduction

for car and truck expenses of $400. Subsequently, after filing

his petition, petitioner submitted a Schedule C showing car and

truck expenses of $623. 

Petitioner’s passenger automobile is listed property under

section 280F(d)(4)(A)(i), and is subject to the substantiation

requirements of section 274(d). 

The only evidence petitioner submitted in support of this

deduction is a chart that purports to list the dates, miles, and

purposes of what appear to be trips petitioner took. Of the

eight trips listed, only three appear to be related to the

ventures petitioner testified to pursuing: (1) A trip of 566

miles from Houston to Washington, D.C., and surrounding areas

regarding the NVBDC deal; (2) what appears to be a return trip of

480 miles from Washington, D.C., back to Houston, Texas; and (3)
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a trip of 220 miles from Houston to Brehham, Texas, and back for

a visit regarding “Coleman/Tundra”. The remaining five only list

generic travel descriptions or reference people and locations

petitioner did not address in his testimony. 

The amount petitioner claimed for car and truck expenses was

listed as $623.16, which coincides with the amount claimed on

petitioner’s updated Schedule C, indicating that it was prepared

in advance of trial. Evidence prepared closer in time to the

events generating the deduction is given more weight. See sec.

1.274-5T(c)(1), Temporary Income Tax Regs, 50 Fed. Reg. 46016

(Nov. 6, 1985). Evidence submitted which was prepared long after

events giving rise to the expense is therefore accorded less

weight. See id. Petitioner has not provided any contemporaneous

evidence regarding this claimed deduction. The travel log

petitioner submitted was prepared almost 5 years after the costs

at issue were allegedly incurred, and petitioner’s testimony was

vague and imprecise as to the dates, times, and purposes of the

trips. Accordingly, petitioner is not entitled to a deduction

for car and truck expenses.

2. Depreciation and Section 179 Expense Deduction

Petitioner claimed, and respondent disallowed, a $600

deduction for depreciation and section 179 expense. Section 179

provides that a taxpayer may elect to treat the cost of any

section 179 property as an expense which is not chargeable to a
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capital account. If a taxpayer makes this election, the cost

shall be allowed as a deduction for the taxable year in which the

section 179 property is placed in service. Sec. 179(a). Section

179 property is defined in pertinent part as “tangible property”,

which is section 1245 property (as defined in section

1245(a)(3)), and which is acquired by purchase for use in the

active conduct of a trade or business. Sec. 179(d)(1).

Section 179 has its own substantiation and election

requirements. The taxpayer must maintain records reflecting how

and from whom the section 179 property was acquired and when it

was placed in service. Sec. 1.179-5(a), Income Tax Regs. A

section 179 election must be made on the taxpayer’s first income

tax return for the taxable year the property is placed in

service, whether or not the return is timely, or on an amended

return filed within the time prescribed by law (including

extensions) for filing the original return for such year. Sec.

179(c)(1)(B); sec. 1.179-5(a), Income Tax Regs. The section 179

election must specify the total section 179 expense deduction

claimed and enumerate the portion of that deduction allocable to

each specific item. Sec. 179(c)(1); sec. 1.179-5(a)(1) and (2),

Income Tax Regs.

The election is normally made by attaching Form 4562,

Depreciation and Amortization, to the taxpayer’s return. Visin

v. Commissioner, T.C. Memo. 2003-246, affd. 122 Fed. Appx. 363
- 16 -

(9th Cir. 2005); see 2002 Instructions for Schedule C, Profit or

Loss From Business, Specific Instructions, Part II. Expenses. 

A taxpayer who fails to make the election is denied the

benefits of section 179. See Patton v. Commissioner, 116 T.C.

206 (2001); Visin v. Commissioner, supra; Verma v. Commissioner,

T.C. Memo. 2001-132; Fors v. Commissioner, T.C. Memo. 1998-158;

Starr v. Commissioner, T.C. Memo. 1995-190, affd. without

published opinion 99 F.3d 1146 (9th Cir. 1996).

Petitioner has failed to meet the election or substantiation

requirements of section 179. Petitioner did not file a Form 4562

with his Form 1040. Petitioner instead included with his Form

1040 a typewritten sheet stating “Taxpayer hereby elects: To

deduct all designated expenditures as Sec. 179 expenses

deductible in the current year.” Petitioner did not testify

about this expense. The only evidence petitioner submitted

consisted of an invoice from the Baseball Hall of Fame and copies

of checks he had written. Even if we were to accept petitioner’s

purported section 179 election, the only evidence petitioner

submitted does not include records reflecting how and from whom

the section 179 property was acquired and when it was placed in

service. Accordingly, petitioner is not entitled to the section

179 deduction.
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3. Legal and Professional Services

Petitioner claimed, and respondent disallowed, a $175

deduction for legal and professional services on his management

and consulting business Schedule C. At trial petitioner

submitted an additional Schedule C showing a deduction of $185

for legal fees.

In general, legal fees are deductible under section 162 only

if the matter with respect to which the fees were incurred

originated in the taxpayer’s trade or business and only if the

claim is sufficiently connected to that trade or business. See

United States v. Gilmore, 372 U.S. 39 (1963); Kenton v.

Commissioner, T.C. Memo. 2006-13. 

Petitioner testified that the legal fees were paid in

conjunction with a lawsuit he commenced against his former

employer in which petitioner attempted to collect on an

employment agreement with that employer. Petitioner submitted

three checks totaling $1,500 which he claimed were payments for

legal fees incurred during the lawsuit. Petitioner did not

testify as to the discrepancy between the $185 claimed on his

updated Schedule C (or the $175 claimed on his original Schedule

C) and the $1,500 shown on the three checks. Nor did petitioner

testify as to how these legal fees were related to his Schedule C

business. Because petitioner testified that these legal fees

were paid for the cost of a lawsuit connected with his individual
- 18 -

employment contract, and not with a Schedule C business of his

own, the MCS legal fees cannot be deducted.

4. Office Expense

Petitioner claimed, and respondent disallowed, a deduction

for office expenses of $6,000. Petitioner did not testify in

regard to this expense. Petitioner, however, did submit certain

documents which he believes show that he is entitled to a

deduction of $6,000 for office expenses. These documents

include: (1) Houston Astros ticket and food invoices; (2) an

invoice from Day-Timers, Inc.; (3) an invoice from Hammacher

Schlemmer for assorted desk lamps, a dry-erase board, and a

shelving system; and (4) a number of illegible canceled checks. 

The Houston Astros ticket invoices appear to be invoices for

tickets purchased in addition to petitioner’s ownership of the

luxury suite. Petitioner did not provide any evidence showing

how these ticket purchases are related to his MCS business. The

Houston Astros food invoices are discussed below. The DayTimer’s, Inc. invoice is discussed below. As to the other

documents petitioner submitted, petitioner has not substantiated

his claimed deduction for office expenses. Petitioner also has

not shown that these costs were ordinary and necessary business

expenses and not personal expenditures. Accordingly, petitioner

is not entitled to the office expense deduction.
- 19 -

5. Rent or Lease

Petitioner claimed, and respondent disallowed, a deduction

for rent or lease expense. Petitioner’s original Schedule C for

MCS, filed with his 2002 return, included a deduction of

$1,365.60. This figure consisted of $729.60 for the rent or

lease of vehicles, machinery, and equipment, and $636 for the

rent or lease of other business property. These amounts were

higher than those shown on petitioner’s updated Schedule C. The

updated amounts were $732.51 for vehicles, machinery, and

equipment, and $595 for other business property.

In support of his claimed deduction for rental or lease

costs of vehicles, machinery, and equipment, petitioner submitted

the following documents: (1) An invoice from Jones McClure

Publishing, Inc., for a book about civil trial procedure in

Texas; (2) an invoice from Sam’s Club for what appear to be

building materials, and (3) an illegible canceled check.

Petitioner is not entitled to a deduction for the cost of

rental or leasing of vehicles, machinery, and equipment. The

only evidence petitioner submitted suggests that the items on the

receipts were purchased, not rented or leased. Neither the

receipts nor the check petitioner submitted include any type of

lease terms or any evidence whatsoever to indicate that the

amounts relate to rent or lease payments.
- 20 -

Petitioner’s argument in support of a claimed deduction for

rental or lease of other business property also fails because

petitioner failed to establish a business purpose for the

expenses. Accordingly, petitioner is not entitled to a deduction

for a rental or lease expense of other business property. 

6. Supplies

Petitioner claimed a deduction of $1,427.60 for supplies on

his original Schedule C. This amount increased to $1,736.04 on

his updated Schedule C. Petitioner did not testify in regard to

this deduction. In support of his claim, petitioner submitted

the following documents: (1) Houston Astros ticket and food

invoices; (2) assorted canceled checks; and (3) assorted

invoices, including invoices from Day-Timers, Inc., Hammacher

Schlemmer, and Circuit City, which have already been claimed in

other sections of petitioner’s return.

The Houston Astros ticket invoices are similar to those

claimed as a deduction for office expense. Accordingly, the

invoices provided as substantiation for supplies fail for the

same reason. The ticket invoices are illegible, and do not show

the parties involved or mention any possible business purpose. 

Petitioner has not alleged that these are the tickets used for

holding MCS meetings at the luxury box owned as part of

petitioner’s MTEM business. Nor has petitioner argued that these

costs should have been claimed on the MCS Schedule C. 
- 21 -

Petitioner also has not argued that the exception contained in

section 274(e)(8) applies. Petitioner has not shown that these

tickets were sold in a bona fide transaction for an adequate and

full consideration in money or money’s worth. The Houston Astros

food invoices petitioner submitted are discussed below. 

The amounts claimed on the other invoices have already been

claimed elsewhere on his return. The Hammacher Schlemmer invoice

is discussed above, while the Day-Timers, Inc., and Circuit city

invoices are discussed below. The canceled checks are illegible

and do not include the business purpose behind any alleged

expenditures. Accordingly, petitioner is not entitled to a

deduction for supplies. 

7. Other Expenses 

Petitioner claimed a $1,231.25 deduction for other expenses

on his original Schedule C. This amount increased to $3,796.92

on his updated Schedule C. Petitioner testified and submitted

documents in support of this deduction. 

Petitioner testified that $623.16 of the total claimed

deduction for other expenses was for mileage, but that amount was

already claimed as car and truck expenses on the same Schedule C. 

We discussed this claimed deduction above, finding that

petitioner is not entitled to a deduction for car and truck

expenses.
- 22 -

The remainder of petitioner’s evidence for this deduction

consisted of: (1) Houston Astros ticket stubs and food invoices;

(2) an invoice from Day-Timers, Inc. (for a binder costing $69.99

and a camera costing $99.99); (3) an invoice for $169 showing the

purchase of what is labeled a briefbag; (4) an invoice from

Circuit City Stores, Inc., for the purchase of a camera

accessory; and (5) an invoice from Marshall Field’s for the

purchase of an architect’s desk costing $84.15. 

Petitioner is not entitled to a deduction for the cost of

the Houston Astros ticket stubs and invoices. As discussed

above, the ticket invoices fall short of the substantiation

petitioner was required to submit in order to prove his

entitlement to the deduction. The Houston Astros food invoices

will be discussed below. 

Petitioner is entitled to a deduction in the amount of

$69.99 for the Day-Timers, Inc., binder, which he has established

had a business purpose. Petitioner is not entitled to a

deduction for the cost of the camera and camera accessory because

he has not shown a business purpose for these purchases.

Petitioner is also entitled to a deduction for the cost of

the briefbag. Petitioner has shown the business purpose for this

expenditure.

Petitioner is also entitled to a deduction for the cost of

the architect’s desk. Petitioner has shown that the purchase of
- 23 -

4The 2004 Major League Baseball All-Star game was played in

Houston, Texas at Minute Maid Park.

an architect’s desk was an ordinary and necessary business

expense related to his business. 

MTEM

1. Business Purpose

We now consider petitioner’s other Schedule C activity,

MTEM. Respondent argues that petitioner has not shown a business

purpose for MTEM. Petitioner’s and his witness’s testimony have

convinced us that petitioner had an ongoing profit motive while

engaged in this activity. Petitioner’s witness testified that

petitioner offered him, but he declined, an opportunity to join

in this venture. Petitioner testified credibly that although he

often broke even on the sale of regular season games, there was a

much higher profit potential for sale of the luxury box for the

Major League Baseball All-Star Game4 and for sale during Houston

Astros home playoff games when they made the playoffs. 

Petitioner’s witness also testified as to petitioner’s belief

that he would earn substantial profits if the Houston Astros were

to advance far into the playoffs or make it to the World Series. 

Petitioner testified that he was able to sell or rent the luxury

box for about 15 of the remaining 27 games. At trial, petitioner

testified that the luxury box was occasionally used in relation

to his business conducted under MSM. Petitioner’s witness
- 24 -

corroborated this testimony, stating that the luxury box was used

for the business of MSM because it was the most convenient place

to get everyone involved together. Petitioner’s witness also

testified about a meeting held at petitioner’s luxury box

regarding the NVBDC; however, petitioner did not provide any

documentation relating to that meeting. Since 2002 petitioner

has continued this business and claimed to have made a profit on

the sale of the use of the luxury box in 2004, 2005, 2006, and

2007. Accordingly, we find that petitioner has met his burden of

showing a profit motive for this venture.

2. Cost of Goods Sold

Section 61(a) defines gross income as “all income from

whatever source derived”. In determining gross income, however,

taxpayers may offset gross receipts by the cost of goods sold. 

Sec. 1.61-3(a), Income Tax Regs. Taxpayers must maintain

adequate books and records of their income and other items in

order to substantiate amounts claimed. Sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

Petitioner entered into contracts with both Chicago Title

and Nabisco to sell each company one-third of the season tickets. 

Petitioner was thus left to sell the remaining one-third, 27

games, himself. Petitioner testified that he did not use the

luxury box on nights when he was unable to lease it out because

he had his own personal tickets in addition to the luxury box. 
- 25 -

5If a season ticket holder purchases playoff tickets but the

team does not advance to the playoffs, the cost of the unused

playoff tickets is often credited towards the purchaser’s next

season ticket purchase.

Petitioner, however, did not provide any evidence concerning

these alternate tickets, and we find his testimony unconvincing. 

Petitioner has provided a number of documents in support of his

claim for cost of goods sold, including an invoice from the

Houston Astros baseball club showing a cost of $27,316.67 and a

total amount (due after credits of $3,475 from prior year’s

playoff tickets) of $23,841.675 (for an average cost of $883 per

game), a copy of a check, signed by petitioner payable to the

Houston Astros for $8,841.67, and what purports to be a receipt

showing a cash payment of the $15,000 difference. 

Petitioner has also provided catering invoices issued to him

by the Houston Astros that list the food items consumed in the

luxury box and its associated costs. These catering invoices

include information on the companies using the luxury box that

night and indicate that Frexie, Kodiak, and Chicago Title all

used the luxury box at some point during the 2002 baseball

season.

Petitioner conceded that some of the food costs claimed on

MTEM’s Schedule C should have been claimed on the MCS Schedule C. 

We will address these costs below.
- 26 -

Petitioner did not testify to or provide any documents to

support the $3,475 credit and it is unclear whether he claimed a

cost of goods sold including that credited amount in the prior

year. In addition, petitioner testified that on three occasions

he used the luxury box for MCS business meetings, leaving 24

games petitioner sold or attempted to sell as part of the

business of MTEM. Petitioner testified that he was able to sell

tickets to about 15 of the remaining 24 games. However,

petitioner has failed to establish a business purpose for the use

of the luxury box on the remaining dates or provide any evidence

to substantiate that the luxury box on the remaining dates was

not used for personal purposes. Accordingly, petitioner is

entitled to claim a cost of goods sold in the amount of $13,245

or $883 per game for the 15 games he was able to sell. 

3. Food and Entertainment

On petitioner’s Schedule C for MTEM, he claimed a deduction

of $1,272 for food and entertainment. Respondent disallowed this

deduction in its entirety. At trial, petitioner testified that

some portion of this cost should have been included on the

Schedule C for MCS because the food and entertainment was

consumed during a MCS meeting. As stated above, meetings

relating to MCS were held at the luxury box that formed the basis

for MTEM. Petitioner’s witness also credibly testified that

meetings related to MCS were held at petitioner’s luxury box and
- 27 -

that the witness had in fact attended those meetings. Petitioner

and his witness both credibly testified that the parties to the

attempted Coleman transaction met one to two times at

petitioner’s luxury box at Minute Maid Field. Petitioner’s

witness also testified that the parties to the deal spent most of

their time at the luxury box discussing the proposed deal and

trying to finalize it. 

Petitioner must meet the substantiation requirements of

section 274(d) before he can deduct the cost of meals and

entertainment on the Schedule C for MCS. Section 1.274-2(c)(7),

Income Tax Regs., provides that expenditures for entertainment,

even if connected with a taxpayer’s trade or business, will

generally be considered not directly related to the active

conduct of the taxpayer’s trade or business if the entertainment

occurred under circumstances where there was little or no

possibility of engaging in the active conduct of trade or

business. A meeting or discussion at a sporting event is

generally considered a circumstance where there is little or no

possibility of engaging in the active conduct or a trade or

business. See sec. 1.274-2(c)(7)(ii)(a), Income Tax Regs. 

However, section 1.274-2(d)(1)(i), Income Tax Regs., provides

that any expenditure for entertainment which is not directly

related to the active conduct of the taxpayer’s trade or business

will not be allowable as a deduction unless it was associated
- 28 -

with the active conduct of a trade or business as defined in

section 1.274-2(d)(2), Income Tax Regs. An expenditure for

entertainment shall be considered associated with the active

conduct of a taxpayer’s trade or business if the taxpayer

establishes that he had a clear business purpose in making the

expenditure, such as to obtain new business or to encourage the

continuation of an existing business relationship. Sec. 1.274-

2(d)(2), Income Tax Regs. 

Petitioner, in support of this deduction, submitted four

invoices for catering at Minute Maid Park. Each invoice included

the suite number, the customer name, the company, the date and

time, an itemized list of the food served, and its total cost.

The first invoice is dated March 29, 2002, and lists Chicago

Title as the company. The total cost was $948.44. Petitioner

has not provided any evidence to support that he paid this amount 

nor has he testified or provided any evidence relating to the

business purpose of this expense, or his relationship to the

other parties involved, as required by section 274(d). 

Petitioner also did not argue that the exception provided in

section 274(e)(8) applies. Petitioner is not entitled to this

deduction for $948.44. 

The second invoice is dated July 26, 2002, and lists

petitioner as the contact and Frexie as the company. The total

cost was $322.61. Petitioner failed to provide any evidence
- 29 -

concerning the business purpose of this expense or the

relationship to other parties involved. Petitioner is not

entitled to this deduction.

The third invoice is dated August 23, 2002, and lists Kodiak

as the company, with a total cost of $577.49. The fourth invoice

is dated August 30, 2002, and lists Kodiak as the company, with a

total cost of $423.93. 

Petitioner and his witness both credibly testified that

meetings related to Kodiak were held at petitioner’s luxury box

to discuss potential business deals on behalf of MCS. Petitioner

and his witness both credibly testified as to the business

purpose of these two meetings and the invoices provided by

petitioner indicate the date, time, and amount of the cost

incurred. Petitioner and his witness also testified that

meetings were held at the luxury box because it was the only

available location to get all of the interested parties together. 

Petitioner’s and his witness’s testimony taken together show that

petitioner had a clear business purpose in making these

expenditures. Accordingly, petitioner has satisfied his burden

under section 1.274-2(d)(2), Income Tax Regs., and is entitled to

a deduction for these costs as associated entertainment expenses. 

Because petitioner does not fit within any of the exceptions

contained in section 274(n)(2), his deduction will be limited to

50 percent of the allowable amount. Sec. 274(n)(1). 
- 30 -

Petitioner has met his burden under section 274(d) only as

to the third and fourth invoices, and he has provided sufficient

evidence of the business purpose of the meetings. Accordingly,

petitioner is entitled only to a deduction of $1,001 for food and

entertainment.

Casualty Loss

Section 165(a) allows a taxpayer a deduction for losses

sustained during the taxable year and not compensated for by

insurance or otherwise. Section 165(h)(1) provides that any loss

of an individual described in section 165(c)(3) is allowed only

to the extent that the amount of the loss arising from each

casualty exceeds $100. Section 165(h)(2) provides that if the

personal casualty losses for a taxable year exceed the personal

casualty gains for the year, the losses are allowable only to the

extent of the sum of the personal casualty gains for that taxable

year, plus so much of the excess as exceeds 10 percent of

adjusted gross income for that taxable year. Thus, where there

are no personal casualty gains for a taxable year, personal

casualty losses (in excess of $100 per casualty) are allowable to

the extent that they exceed 10 percent of adjusted gross income

for that taxable year.

In the case of an item held for personal use, the amount

deductible is governed by section 1.165-7(b)(1), Income Tax

Regs., which provides that the amount of the loss to be taken
- 31 -

into account for purposes of section 165(a) shall be the lesser

of: (1) The amount which is equal to the fair market value of

the property immediately before the casualty reduced by the fair

market value of the property immediately after the casualty, or

(2) the amount of the adjusted basis for determining the loss

from the sale or other disposition of the property involved. For

individuals, section 165(c)(3) allows a taxpayer to deduct a loss

from theft.

Petitioner claimed the following casualty loss deductions:

Item Amount

 Damage to automobile $1,192 

 Damage to fence 1,728 

 Lithograph 1 1,500 

 Lithograph 2 1,100 

 Total 5,520 

1. Automobile

Petitioner claimed a casualty loss for damage to his car and

certain possessions of his that were inside the automobile during

a flood in Texas. Petitioner submitted two documents in support

of this deduction. The first is a handwritten list of items

damaged in the flood and other losses incurred, including shoes,

clothes, the use of the vehicle, and ruined water, with what

purports to be their values. The list also states “deductible-

$500”. The second was an invoice from an automobile repair shop

in the amount of $9,360. At trial, petitioner conceded that he

was reimbursed $9,360 by his insurance company. Pursuant to
- 32 -

section 165(a), petitioner is not entitled to a deduction for the

amount reimbursed by his insurance company. As to the other

expenses, petitioner has not met his burden of substantiation. 

Petitioner did not provide any evidence of the fair market values

of the allegedly damaged property either before or after the

damage from the flood was incurred. Nor did petitioner provide

evidence of the adjusted bases of the property involved and any

evidence as to whether that property was sold or otherwise

disposed of. Because petitioner did not provide any of the

evidence required by section 1.165-7(b)(1), Income Tax Regs., in

order to substantiate his loss, petitioner is not entitled to a

deduction for damage sustained by flood.

2. Fence

Petitioner claimed a casualty loss of $1,728 for damage to

his fence incurred when it was hit by a car. Petitioner

calculated this figure by multiplying $8.50 (the lowest estimate

he received for fixing the fence) by 170 feet. Petitioner

claimed that he reported the incident to the police, but failed

to provide a police report. Petitioner’s evidence consists of a

single sheet of paper listing what he alleges to be a case number

and the name of an alleged sergeant with the police force. 

Section 1.165-7(a)(2)(ii), Income Tax Regs., provides that

the cost of repairs to the property damaged is acceptable as

evidence of the loss of value if the taxpayer shows that (a) the
- 33 -

repairs are necessary to restore the property to its condition

immediately before the casualty, (b) the amount spent for such

repairs is not excessive, (c) the repairs made are not for more

than the damage suffered, and (d) the value of the property after

the repairs does not as a result of the repairs exceed the value

of the property immediately before the casualty.

Petitioner has not substantiated this loss. Petitioner has

failed to provide any evidence as required by section 1.165-

7(a)(2)(ii), Income Tax Regs., and is therefore not entitled to a

deduction for any damage sustained by his fence. 

3. Lithographs

Petitioner claimed on his Form 1040 casualty losses of

$1,500 and $1,100 related to the loss or theft of one lithograph,

and another lithograph petitioner referred to as missing. At

trial, petitioner only testified and submitted evidence as to one

lithograph, which he claims he ordered and paid for but never

received from the seller. Petitioner testified that although the

company claimed it was delivered and signed for, he never

received it and that his signature was forged on the FedEx

paperwork.

Theft losses claimed under section 165(a) are calculated in

the same manner as provided in section 1.165-7, Income Tax Regs. 

See sec. 1.165-8(c), Income Tax Regs.
- 34 -

The only evidence petitioner provided was a handwritten

letter petitioner sent to the seller and the seller’s response,

which included a FedEx proof of delivery sheet. Petitioner’s

handwritten letter claims that the lithograph was paid for by

check, but petitioner did not submit the check as evidence. In

his posttrial brief, however, petitioner claims to have submitted

credit card statements to respondent indicating the price for the

lithograph. Petitioner failed to submit these credit card

invoices as evidence. 

Accordingly, petitioner is not entitled to a casualty loss

deduction for either lithograph because he has not provided

sufficient substantiation.

Capital Loss Carryforward

As stated above, petitioner included a $3,000 capital loss

carryforward on his tax return, but later decided that he did not

wish to claim it. This was indicated by the inclusion of a

handwritten footnote on the front page of his Form 1040. At

trial, he reserved the right to claim this loss if we were to

agree with respondent’s determinations and increase his income

accordingly.

Generally, losses generated by the sale or exchange of

capital assets are allowed only to the extent allowed in sections

1211 and 1212. Sec. 165(f). Section 1211(b) requires a

noncorporate taxpayer to first offset capital losses against
- 35 -

capital gains. If aggregate capital losses exceed aggregate

capital gains, up to $3,000 of the excess may be deducted against

ordinary income. Id. If a noncorporate taxpayer has

capital losses exceeding the limitations of section 1211(b), the

unused losses may only be carried forward to subsequent tax

years, not back. See sec. 1212(b).

Petitioner did not produce any evidence at trial

substantiating this capital loss carryforward and failed to

provide returns for any other year showing that he incurred a

loss which could be carried forward to the 2002 tax year. 

Therefore, petitioner is not entitled to the $3,000 capital loss

carryforward deduction.

Employment Tax

Respondent also argues that petitioner is liable for selfemployment tax. Section 1401 imposes a percentage tax on selfemployment income of every individual. See Baker v.

Commissioner, T.C. Memo. 2001-283. Self-employment income is

defined as “the net earnings from self-employment derived by an

individual * * * during any taxable year”. Sec. 1402(b). The

term “net earnings from self-employment” is defined as “the gross

income derived by an individual from any trade or business

carried on by such individual, less the deductions * * * which

are attributable to such trade or business”. Sec. 1402(a).

Respondent determined self-employment taxes on the basis of
- 36 -

petitioner’s income from his Schedule C businesses. Petitioner

is also entitled, if subject to self-employment tax, to a

deduction for one-half of the amount of self-employment tax

imposed. If in a Rule 155 calculation petitioner has income of

$400 or more from either business, he will be liable for selfemployment tax.

Section 6662 Penalty

We next consider whether petitioner is liable for

accuracy-related penalties pursuant to section 6662(a). Pursuant

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

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

due to negligence or disregard of rules or regulations. The term

“negligence” in section 6662(b)(1) includes any failure to make a

reasonable attempt to comply with the Internal Revenue Code; this

may include a failure to keep adequate books and records or to

substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs. Negligence has also been defined as the failure

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

person would do under the circumstances. See Allen v.

Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348, 353 (9th

Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985). The

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

disregard. Sec. 6662(c).

The Commissioner has the burden of production with respect
- 37 -

to accuracy-related penalties. Sec. 7491(c). To meet that

burden, the Commissioner must produce sufficient evidence

indicating that it is appropriate to impose the penalty. See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the

Commissioner meets his burden of production, the taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect. Rule 142(a); see Higbee v.

Commissioner, supra at 446-447. The taxpayer may meet this

burden by proving that he or she acted with reasonable cause and

in good faith. See sec. 6664(c)(1); sec. 1.6664-4(a), Income

Tax Regs.

Respondent determined a $1,447.80 accuracy-related penalty

under section 6662(a) for taxable year 2002. Respondent

determined that petitioner’s 2002 underpayment of tax was

attributable to negligence or disregard of rules and regulations.

Petitioner testified credibly as to the profit motive behind

his attempted ventures and has convinced the Court that he was a

legitimate businessman. However, petitioner’s records were

insufficient to substantiate the majority of his claimed

deductions, and petitioner failed to keep adequate books and

records. Therefore respondent has met the burden of production

with respect to the penalty for negligence, and petitioner,

having failed to show reasonable cause or other basis for
- 38 -

reducing the underpayment on which the penalty is imposed, is

liable for the section 6662(a) penalty for 2002.

To reflect the foregoing,

Decision will be entered

under Rule 155.