RS Tyson & Associates, Inc., Petitioner

B(cid:127) T .C . Memo . 2009-17 6 UNITED STATES TAX COUR T ROB AND SHIRLEY TYSON, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t RS TYSON AND ASSOCIATES, INC ., Petitioner v COMMISSIONER OF INTERNAL REVENUE, Responden t Docket Nos . 6879-07 , 6880 -07 . Filed July 29, 2009 .

Kathryn E . Barnhill , for petitioners .

Catherine S . Tyson , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N VASQUEZ, Judge : In these consolidated-cases responden t determined the following deficiencies in and penalties o n petitioners' 20 .03 Federal income taxes :

SERVED Jul 29 2009 Rob and'Shirley Tyson, docket No . 6879-0 7 Deficiency Sec . 6662(a ) Penalty $5,199 $1, 039 .8 0 RS Tyson & Associates, Inc ., docket No . 6880-0 7 Deficiency Sec . 6662(a ) Penalty $8,027 $1,605 .4 0 Pursuant to a joint motion, these cases have been consolidate d trial, briefing, and opinion . The following issues remai n forgrdecision regarding 2003 :1 (1) Whether RS Tyson & Associates , Inc ° ~ .RS Tyson ), is entitled-to deductions-claimed for alleged business expenses ; :(2) whether Rob and Shirley Tyson (Mr . and .MrsLL Tyson) are entitled to deductions claimed for allege d expenses on Schedule E, Supplemental Income and Loss ; (3) whether Mr . and Mrs . Tyson received constructive dividends from RS Tyson ; and (4 ) whether petitioners are liable for accuracy -related penalties pursuant to section 6662 ( a) . 2 ` Mr . and Mrs . Tyson deducted on Schedule E, Supplemental Income'and Loss, interest of $6,176 and depreciation of $12,611 for 2003 . In their brief (they did not file a reply brief), they failed to .address the disallowance of those deductions . Accordingly, we conclude that they have abandoned these issues . See Petzoldt v . . Commissioner ,, 92 T .C . 661, 683 .(1989) .

.2 All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure .

FINDINGS OF FAC T Some of the facts have been stipulated and are so` found .

The stipulation of facts, the supplemental stipulation'of facts, and the attached exhibits are - incorporated, herein by thi s reference . At the .time they filed the .petitions, .Mr . and Mrs .

Tyson resided in Oklahoma, and RS Tyson had its, . principal plac e of business in Oklahoma .

I .

RS Tyso n During 2003 RS Tyson, a C corporation, had two busines s activities : Tyson Painting and a Shaklee distributorship. .3 Mr .

and-,,Mrs . Tysoneach .owned 50 percent of the outstanding shares of RS Tyson . Mrs . Tyson sold Shaklee products on behalf of R S Tyson .'

Mr . and Mrs . Tyson were not employees of RS Tyson .' Mr . and Mrs . Tyson reported $89 of wages and salaries from Southern Hills Baptist Church on their 2003 return . They reported no'" othe r wages or salaries on that return . RS Tyson did not report (1 )

3 See Chaney v . Commissioner , T .C . Memo . 2009-55 (Shaklee distributors sell nutritional and cleaning products from Shaklee Corp .) .

4 Respondent concedes that Mrs . Tyson conducted an active trade or business as (cid:127)a distributor of Shaklee products .

It is .unclear from'the record whether Mr . and ;,Mrs . Tyson were independent contractors of RS Tyson or worked for RS Tyson in'some other capacity: { any compensation to officers or (2) .salaries or wages to any employees .

, For°:2003 RS . Tyson deducted the. following expenses (cid:127)onjit s Form 1120, U .S . Corporation(cid:127)Income Tax .Return :

Expense Amoun t 'Rent of Mr . and . Mrs . Tyson's home, $24,000, ,Lease of equipment 12,000 Employee benefit program 8,919 Laundry 1,893 'Travel 4,209 Meals and entertainment 1,119 Automobile 8,69 5 Respondent :disallowed these deductions .

Rent of Mr . and Mrs . Tyson's Home and Equipment Leasin g Expense Schedule E, Mr . and Mrs . Tyson reported $36,000 of rent s received from RS Tyson . They reported that the $36,000 consisted of $24,000 for the use of Mr . and Mrs . Tyson's home for Shakle e business purposes and $12,000 for the lease of office and .

painting equipment .

RS Tyson deducted as a business expense alleged rent of $12,000 paid to Mr . and Mrs . Tyson to lease Mr . and Mrs . Tyson's office equipment and painting equipment . The record is silent .as to .what specific equipment was leased . , RS Tyson deducted as a business expense alleged rent o f $24,000 paid toMr . and Mrs . Tyson tolease space in Mr' .-.and Mrs .

Tyson's home . RS Tyson allegedly rented space in Mr .,and,~,Mrs .

Tyson's home for $2,000 per month .

Mr . and Mrs . Tyson arrived at this rental amount after . estimating the-number of -hours per month RS Tyson would need to rent meeting space (100 hours per month) and after taking into account the hourly rates of local establishments that rented meeting space/rooms(cid:127)by the hour . Th e local Marriott Hotel and other places that rented meeting space/rooms were,called, and Mr . and Mrs . Tyson learned that the rates these establishments received for rental of meeting space/rooms were-between $75-and $100 per hour . Mr . and Mrs .

Tyson decided that .RS Tyson should rent meeting space in thei r home at a cost of $20 per hour :

Petitioners .claimed that Mr .=and Mrs . Tyson's living room was the meeting room, the dining room was where training and .

makeovers took place, the kitchen,was where Mrs . Tyson made "Shaklee . shakes", and the bathroom by the office alsowas used for makeovers : The-dining room wasn where'Mr . and Mrs :` Tyson ate dinner .

In a notice of deficiency issued to RS Tyson, responden t disallowed the total deductions of $36,000 . In a notice of deficiency issued to Mr .rand Mrs . Tyson, respondent "determined that the Schedule E listed did not exist during the tax year ended December 31,-2003" decreased rents received by4$36,000 , and increased constructive dividends received by $36,000 .

B .

Employee'Benefit Program - 6 : ;!RS Tyson deducted $8,919 as employee benefit program expenses . Mr . and Mrs . Tyson each-signed a document entitled "Corporate Resolution Establishing Self-Insured, Medical Payment Plan" which established the employee benefit program of RS Tyson .

The plan provided that : RS Tyson would pay or reimburse, directly or indirectly, certain . medical and dental expenses of its, employees . The employee benefit program . was intended to qualify as one under which payments to employees are excludable from their gross income under section 105(b) .

.Under the employee benefit program'the medical and dental expenses . . to be paid. or reimbursed would be . those for which the employee . was not compensated by insurance or otherwise and which would be treated as medical expenses under section 213 . The amount that would be paid or reimbursed was limited to $10,000 per person per calendar year . The employee benefit program covered reimbursements for medical or medical-related insurance , medical .or medical-related services, life insurance, disability insurance, dental or dental-related services, and chiropractic . or chiropractic-related services, . .

:During 2003 RS Tyson paid the following amounts : -$2 ;276 for term .life insurance for Mr . Tyson,,$626 for term life ; insurance for Mrs . Tyson, and $3,091 to Christian Care Medi-Share for "Affordable, Biblical Healthcare" for Mr . and Mrs . Tyson . During 2003 RS Tyson made reimbursements as follows : $1,578"to Mr .

Tyson for medical expenses and $1 , 324 to Mrs . Tyson fo r medica l expenses .

Laundry Expenses - RS Tyson deducted $1,893 as laundry expenses . RS Tyson deducted the cost of laundering the uniforms that Mr . ",,;Tyson used` for painting . To~substantate this expense petitioners submitte d receipts and payments for the purchase of Mr . Tyson'sapainting uniforms, including the purchase of shirts, boots, and socks, and one check for $36 that contained "alter'paint(cid:127)pants=" in the mem o section of the check .

D .

Travel Expense s RS Tyson deducted $4,209 as(cid:127)travel`expenses . RSTyson .

deducted the cost-of a trip by Mr . and Mrs .' Tyson to Disneyland and a personal trip for Mr . and Mrs . Tyson .to Branson, ."Missouri .

Mr . and Mrs . .Tyson took their son,'daughter-in-law, and grandson with them on`the trip to Disneyland .

E . ` Meals and Entertainment Expenses ' RS Tyson deducted $1,119 as meals and entertainment expenses . RS Tyson deducted the cost of meals .to celebrate Mr ., and Mrs . Tyson's daughter's graduation and Mrs . Tyson';s birthday .

Additionally, RS Tyson deducted the cost of numerous meals tha t Mr . and Mrs . Tyson had with their family . RS Tyson also deducted j - 8 the cost of a small number of meals with Shaklee business ;!

clients .

To substantiate the meals and entertainment expens e deductions, petitioners submitted photocopies of receipts' from ..

restaurants . ., ''The receipts contained notations identifying th e persons,who consumed the meals and indicating that ; the purpose,of the meals regarded Shaklee business such .as discussing various Shaklee products, Shaklee business plans and strategy, Shakle e business volume, or .the,layout of Shaklee . advertisements .

F .

Automobile Expense s RS Tyson deducted $8,695 as automobile expenses . To .

substantiate this expense, RS Tyson submitted a spreadsheet listing "car charge" .and insurance ; a document from Shaklee entitled "bonus-statement" that listed "car program activity" ; R S Tyson' .s,bank,statements ; photocopies-of toll receipts ;. a spreadsheet,-for "gas, repairs, insurance, and, lease, etc .': ; gas , receipts, many of which are . illegible ;, and copies of insurance, payment schedules . RS Tyson kept track of only the personal use mileage of the automobiles .

II .,' Mr . and Mrs .Tyson .

For .2003 Mr . and Mrs .

.. Tyson deducted the following expense s on their Schedule E :- Expense Amoun t Legal and professional fees $350 Insurance 502 Repairs 32 Taxes 982 Utilities 1,36 1 Respondent disallowed these deductions .

A .

Legal and Professional Fee s Mr . and Mrs . Tyson deducted legal and professional fees of $350 for 2003 . The record does not contain any information about this . deduction .

B .

Insurance , Repairs , Taxes , . and Utility Expense s Mr . and Mrs . Tyson deducted insurance expenses of $502, repair expenses of $32, taxes of $982, and utility expenses of $1,361 . These expenses arose from .the alleged rental arrangement .

for their home . The record does not contain any further information about these deductions .

C .

Constructive Dividends : Automobile Purchas e In December 2003 RS Tyson paid $15,000 to Reliable Toyota .

The $15,000 was a deposit on a vehicle purchased for,Mr . and Mrs .

Tyson . Mr . and Mrs . Tyson got a loan .for the balance of the cost of the vehicle .

OPINION

The Commissioner's determinations are generally presume d correct, and the taxpayer bears the burden of proving the determinations erroneous .6 Rule 142(a) . The taxpayer bears the burden of proving that he is entitled to the deduction claimed,, and this includes the burden of substantiation .

. Id .

; Hradesky V .

Commissioner , 65 T .C . 87, 90 (1975), affd . per curiam 540 F .2d 821 (5th Cir . 1976) . A taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish he or she is entitled to the deductions . Sec . 6001 .

Section 162(a) provides a deduction for certain business expenses . In order to qualify for the deduction under section 162(a), "an item must (1) ..be . `paid or incurred during the taxable year,' (2) be for `carrying on any trade or business,' (3) be an `expense,' (4) be a `necessary' expense, and (5) be an `ordinary' expense ."

Commissioner v . Lincoln Say . & Loan Association , 403 U .S : 345, 352 (1971) ; see also Commissioner v . Tellier , 383 U .S .

687, 689 (1966) (the term "necessary" imposes "only the minimal requirement that the expense be `appropriate and helpful' for `the development of the [taxpayer's] business" (quoting Welch v .

Helvering, 290 U .S . 111, 113 (1933))) ; Deputy v . du Pont , 308 U .S ."488, 495 (1940) (to qualify as "ordinary", the expense must relate to a transaction "of common or frequent occurrencein the type of the business involved") . Whether an expense is ordinary is determined by time, place, and circumstance .

Welch v .

Helverina , supra at 113-114 . Respondent has, not challenged th e existence of a trade or business . ' Ifa taxpayer establishes that he or she paid or incurred a deductible business expense but does not establish the+ .amount of the expense, we may approximate the amount-of the allowabl e deduction, bearing heavily against the taxpayer whose .

;' inexactitude is of his or her own making . Cohan v . Commissioner , 39 .F .2d 540, 543-544,( .2d Cir . 1930) . However, for the ; Cohan rule to apply, there must be sufficient evidence in the .record .to provide, a basis for the estimate . ' Vanicek v . Commissioner , 85 T .C . 731, 7,43 (1985) . Certain expenses may not be estimated because of the strict substantiation requirements of sectio n 274(d) . See sec . 280F(d)(4)(A) ; Sanford v . Commissioner , 50 T .C .

823, 827 (1968), affd . per curiam 412 F .2d 201 (2d Cir . 1969) .

1 .

Rent of Mr . and Mrs . Tyson's Home RS Tyson deducted rental expenses for the use of .Mr . and Mrs . Tyson's home of $24,000 for 2003 . 'RS Tyson claims that during 2003 it rented most of Mr . and Mrs . Tyson's home for Shaklee business purposes . Supposedly, Mr . and Mrs . Tyson's .

living room was the meeting room, the dining room waswhere training and makeovers took place, the, kitchen was whetire Mrs .

Tyson made "Shaklee shakes", and the bathroom by the office als o ' In other words, respondent concedes that both .1Tyson Painting and the Shaklee distributorship were legitimate businesses carried on by RS Tyson .

was used for makeovers . The dining room was where Mr . and Mrs .

Tyson ate dinner .

"A close relationship between a lessor and lesse e [requires] a careful examination of the circumstances surrounding the arrangement to determine whether the payments are, in fact, for the rental of the property ."

Feldman v . Commissioner , 84 T .C . 1, 5 (1985), affd . 791 F .2d 781 (9th Cir . 1986) . There is a lack of proof of a bona fide rental . See Chaney v . Commissioner , T .C . Memo . 2009-55 . The amount claimed as rent was a guesstimate--both as to the cost and as to the amount of time RS Tyson used the property . The purported rental agreement has little reality beyond tax planning . See id .

The-purported rental was not at . arm's length, and we disregard it for lack o f economic substance .' Accordingly, we sustain respondent's determination on this issue .

2 .

Employee Benefit Progra m RS Tyson deducted employee benefit program expenses of $8,919 for 2003 . Mr . and Mrs . Tyson each signed up for the employee benefit program offered by RS Tyson .

"The deductibility of employee benefit plan expenses generally requires proof, in the first instance, of a n s Additionally, Mr . and Mrs . Tyson made personal use of the alleged rented space . Furthermore, we note that respondent reduced Mr . and Mrs . Tyson's rental income to zero in the notice . of deficiency .

employer-employee relationship ."

Francis v . Commissioner , T .C .

Memo . 2007-33 . Mr . and Mrs Tyson reported $89 of wages and salaries from Southern Hills Baptist Church on their 2003 return .

They reported no other wages or salaries on that return . RS Tyson did not report (1) any compensation to officers,or (2) salaries or wages to any employees . No evidence of an employment agreement was presented . Mr . and Mrs . Tyson were not employees of RS Tyson . See Haeder v . Commissioner , T .C . Memo . 2001-7 .

Accordingly, we sustain respondent's determination disallowing the employee benefit plan expense deduction .

3 .

Laundry Expense s RS Tyson deducted laundry expenses of $1,893 for,'2003 . This allegedly consisted of the cost of laundering the uniforms Mr .

Tyson painted in . The evidence petitioners presented consisted of receipts and payments for the purchase of Mr . Tyson's painting uniforms including the purchase of'shirts, boots, and socks .

Petitioners also :submitted one for $36 with "alter paint pants" in the memo section of the check .

RS Tyson must prove that the laundry-expenses claimed for the year in issue were ordinary and necessary expenses . Sec .

162(a) ; see Deputy v . du Pont , supra at 495 (deductibility under section 162(a) is dependent upon the taxpayer's establishing that an expense is "normal, usual or customary" in the taxpayer's trade or business) ; see also sec . 1 .162-1(a), Income Tax Regs .

14 - (expenditures must be "directly connected with or pertaining to the taxpayer's trade or business") . In order to satisfy that burden in this instance, . RS Tyson must establish that Mr . Tyson was a bona fide employee-of RS Tyson for the year in issue . See .

Haeder v . Commissioner , supra ; see also Neonatology Associates , P .A . v . Commissioner , 115 T .C . 43, 93 (2000) ("Neonatology contributed money to the Neonatology Plan for the benefit of Mr .

Mall . Mr . Mall was neither an employee of Neonatology nor an individual who was eligible to participate in Neonatology's Plan .

We conclude that these contributions served no business purpose of Neonatology, and, hence, that they were not ordinary and necessary expenses paid to carry on Neonatology's business ."), affd . 299 F .2d 221 (3d Cir . 2002) ; Love Box Co . v . Commissioner , T .C . Memo . 1985-13, .("`before expenses will be considered ordinary and necessary under section 162, it must be established that they bear a proximate and direct relationship to the taxpayer's trade or business .'" (quoting Carroll v . Commissioner ,

4 .

Travel Expense s RS Tyson deducted travel expenses of $4,209 for 2003 . "A deduction is allowed for ordinary and necessary traveling expenses while away from home in the pursuit of a trade or business . Sec . 162(a)(2) . If a taxpayer travels to a destination at which he engages in both business . and personal activities, the traveling expenses to and from the destination are deductible only if the trip is related primarily to the taxpayer's trade or business . Sec . 1 .162-2(b)(1), Income Tax Regs . If the trip is primarily personal, the traveling expenses to and~from the destination are not deductible .

Id . ; see also sec . 262 .

In addition to satisfying the criteria for deductibility under section 162, certain categories of expenses also must satisfy the strict substantiation requirements of section 274(d) in order for a 'deduction to be allowed . The expenses to which section 274(d) applies include, among other things, travel expenses (including meals and lodging while away from home) .

Sec . 274(d)(1) . We may not use the Cohan doctrine toestimate expenses covered by section 274(d) . See Sanford v . Commissioner ,

50 T .C . at 827 ; sec . 1 .274-5T(a), Temporary Income Tax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) . To substantiate a deduction attributable to travel, a taxpayer must maintain adequate records or present corroborative evidence . to . show the following : (1)` The amount of the expense ; (2) the time and place of the travel ; (3) the business purpose of the expense ;, and .(4) the business" relationship to the taxpayer. . :, Sec . . 274(d) (flush language) . "To meet 'the `adequate records' requirements of .section 274(d), a taxpayer shall maintain an account book, diary, log, statement o f expense , trip sheets, or similar record * *, and documentar y evidence" ., Sec . 1 .274-5T(c)(2)(i), Temporary Income Tax Regs .,

S Tyson deducted the cost of .(cid:127)a family trip for Mr . and Mrs .

Tyson to Disneyland and a personal trip for Mr . and Mrs . Tyson t o Branson, Missouri, as . travel expenses . For traveling expenses t o be deductible, they must be in pursuit of the trade or business . .

Secs .' 162-1 (_a) , 162-2, Income Tax . .Regs . Sectio n 1 .274-5T(b),(2) (iv) and (c)(2) (ii) (B),, Temporary Income .Tax Regs .,

,.RS Tyson has not established how the cost of a family trip, for Mr . and Mrs . . Tyson to Disneyland and a personal trip for Mr .

and Mrs . Tyson to Branson,,Missouri, were ordinary or necessar y to its businesses ., Furthermore, RS Tyson has failed to substantiate the claimed travel expense .s,in accordance with sections 162 and 274 .

Accordingly , we sustain respondent's determination on=this issue .

5 .

Meals and Entertainment Expense s RS Tyson deducted mealsand .entertainment expenses of $1,119 for 2003' .

Section 162 permits the deduction of food and beverage expenses if they are ordinary , necessary , and reasonable expenses incurred by the taxpayer in its business .

No deduction i s allowed with respect to personal , living, or family expenses .

Sec . 262 .

In addition to satisfying the criteria for deductibilit y under section 162, this category . of expenses also must satisfy the strict substantiation requirements of section 274(d) in order for a deduction to be allowed . This includes establishing the business purpose of the expenditure or use and the business relationship to the taxpayer of the persons entertained . See sec . 1 .274-5T(a) and (b), Temporary Income Tax Regs ., 50 Fed .

.Reg . 46014 (Nov . 6, 1985) .

Section 274(a) further restricts the deduction of business food and beverage expenses . An(cid:127)expenditure must be directly related to-the conduct of the taxpayer's trade or business or associated with the active conduct of the taxpayer's trade or business . Sec . 274(a)(1)(A) . An expenditure is considered associated with' the active conduct of the taxpayer's trade or, business if the taxpayer establishes that he had a clear business 18 - 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 . In order to establish a substantial and bona fide business discussion,, : it must be shown that the taxpayer actively engaged in a business meeting, negotiation discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining income or other specific,trade or business benefit .

Sec . 1 .274-2(d)(3)(i)(a), Income Tax Regs . Additionally, it must be established that this business meeting, . negotiation, discussion, or transaction was substantial in relation to the entertainment .

Id .

RS Tyson deducted numerous meals Mr . and Mrs . Tyson had with their family . For example, RS Tyson deducted meals for Mr . and Mrs . Tyson's daughter's graduation and Mrs . Tyson's birthday celebration . RS Tyson has not established how these expenditures were ordinary or necessary to its businesses . Additionally, some of the receipts are redundant, and many of the receipts are illegible other than Mrs . Tyson's notes and/or re-creation of the amounts spent . Furthermore, RS Tyson has failed to substantiate the claimed meals and entertainment expenses in accordance with sections .162 and 274 . See sec . 1 .274-5T(b)(3)(iv) and (v), Temporary Income Tax Regs ., 50 Fed . Reg .,46015 (Nov . 6, 1985)(cid:127) (requiring .proof ._of the name, title, or other. designation of the 19 - persons entertained sufficient to establish the business relationship to the taxpayer) .

.

After eliminating the aforementioned nondeductible food and beverage expenses claimed by RS Tyson, a few legible receipts remain . : These are :

Date Amount Client ('s ) 4/27/03 9/9/03 9/18/03 9/23/03 10/8/03 11/6/03 11/11/03 12/2/03 12/4/03 12/20/03 Total $122 .52 20 .18 18 .06 28 .68 6 .49 8 .23 14 .74 . 12 .98 12 .32 29 .89 174 .0 9 Claude and Janet Wes t Charles Amo s Kathy Huffma n Jeanette Carte r Dan Crame r Sandy Brow n Charles Amo s Charles Amo s Karen Anderso n Jeanette and Charles Amo s Each of the listed persons was a Shaklee business client of RS Tyson . During each of these meals Shaklee business matters and discussions were held . Mrs . Tyson and the other person(s ) present discussed various Shaklee products, Shaklee business plans and strategy, Shaklee business volume, and/or the layout of Shaklee advertisements . Accordingly, we conclude that the costs of buying meals for these specific .clients,were ordinary and necessary business expenses .

Further, we conclude that these meals were associated with the active conduct of RS Tyson's Shaklee business and that .the meals directly preceded or followed substantial and bona fide business discussions . The meals :purchased were associated with the active conduct of RStTyson's,Shaklee--business because there was a clear business purpose in purchasing the meals for the clients . . RS Tyson had an existing business relationship with these individuals, and meals were used to discuss the sale of Shaklee products to customers and to encourage and .increase the distribution of Shaklee products . Further, at each meal, substantial and bona fide business discussions occurred . At the top of each receipt Mrs . Tyson listed what sort of business discussion and transactions occurred at the meal .

Accordingly, we allow RS Tyson a deduction of $87 .05 for meals and entertainment-expenses . Sec . 274(n)(1) (the amount of the deduction for allowable food and beverages expenses shall not exceed 50 percent of the amount of such expense) .

. ' 6 .

Automobile Expense s RS Tyson deducted automobile-expenses of $8,695 for 2003 .

In addition to satisfying the criteria for deductibility unde r section 162, this category'of expenses also,must satisfy the strict substantiation requirements of section 274(d) in order for a deduction to be allowed . Sec.s(cid:127) . .274(d)(4), 280F(d)(4)(A)(i) and (ii) (automobiles are listed property) . To substantiate a deduction attributable to listed property, a taxpayer,must maintain adequate records or .present corroborative evidence t o ' Total meals and entertainment expenses of $ .174 .09 divided by 2 equals $8.7 .05 .

show the following : (1) The amount of the expense ; (2) the time and place of use of the listed property ; and (3) the business purpose of the use . Sec . 1 .274-5T(b)(6), Temporary Income Tax Regs ., 50 Fed . Reg . 46016 (Nov . 6, 1985) .

RS Tyson neither kept a diary, log, trip sheet, or similar record regarding the business use of the listed property nor established the time and place of the business use of the listed property ; i .e ., RS Tyson did not submit a business mileage log to establish the amount of business miles driven . See id . ; sec .

1 .274-5T(c)(2), Temporary Income .Tax Regs ., 50 Fed . Reg . 46017 (Nov . 6, 1985) . Mrs . Tyson explained :

most of the time that we're in the car, we're doing business, because every .time we go -- I shouldn't say .every time we go and drop our grandchild off at mother's day out or go to church, we're usually handing out our catalog . We're always prospecting .

So when we're out and about, we're in business .

RS Tyson failed to establish the time and place of business use of the listed property and the business purpose of the use of the listed property . RS-Tyson has failed to substantiate the claimed automobile expenses in accordance with sections 162 and 274 . Accordingly, we sustain respondent's determination on this issue .

7 .

Equipment Leasing Expense s RS Tyson deducted $12,000 for amounts paid to Mr . and Mrs .

Tyson to allegedly lease Mr . and Mrs . Tyson's office equipment - 2 2 and painting equipment for 2003 . .

.Section 1 .62 al-lows a deduction as an ordinary and necessary business expense for "rentals or other payments required to be made as a condition,to :the continued . use or possession,, for purposes of the trade orw business, of property-to which the taxpayer has not taken or is not taking-title .or .in which he . has no equity ." Sec . 162(a)(3) .

To substantiate~this-expense RS .Tyson introduced bank .statements .

The Court reviewed the bank statements and found no checks or other evidence indicating that this amount was paid to lease equipment . RS Tyson has failed to substantiate a,deduction for the claimed lease of equipment expenses . . Accordingly, we sustain respondent's determination on this issue .

8 .

Legal and Professional Fee s A taxpayer may deduct under section 162 legal fees paid in obtaining legal advice ..with respect to the taxpayer's trade or business .' Levenson & Klein, Inc . v . Commissioner , 67 T .C : 694, 720-721 (1977) . : Mr . and Mrs . Tyson deducted legal an d professional fees of_$350 .for 2003 . To substantiate this ..expense they"introduced bank statements . The Court reviewed-the bank statements .and found no checks or other information related to legal and professional fees . Mr . and Mrs . Tyson have failed to substantiate this amount . Accordingly, we sustain respondent's determination on this issue .

9 .

Insurance, Repairs, Taxes, 'and Utility Expenses .

These expenses (insurance expenses of $502,repai,r expenses .

of $32, taxes 'of $982, and utility expenses of $1,361) ; are ,related -to the alleged rental . of Mr . and Mrs . Tyson' .s ;residence to RS Tyson . As we previously'determined, there is a lack of proof of :a bona fide rental. . ._ See supra p . 12 .

.The .purported rental agreement has little reality beyond tax planning . Th e purported rental was not at arm's length,' and we disregard it for,, a lack of economic substance .10 Accordingly, wesustain .

respondent's disallowance of .a deduction for the insurance , repairs , taxes ,11 and utility expenses .

; 10 .

. Constructive Dividend s Respondent determined Mr . and Mrs . Tyson received $ 61, 812- in, constructive dividends from RS Tyson . This . amount consisted o f alleged rent expenses of $.24,000, ..-lease expenses of $12,000, image¹² expenses of $1,893, employee benefit plan- expenses of $8,919, and an automobile downpayment expense of $15,000 .

Generally, where a shareholder diverts corporate'funds t his own use, those funds constitute constructive dividends to hi m

.

- 2 4 and are ordinary . income to the extent of the corporation's earnings and profits . See secs . 301(c), 316 ; Truesdell v .

Commissioner , 89 T .C . 1280, 1295 (1987) . "Where a corporation provides an economic benefit to a shareholder with no expectation of reimbursement, the benefit is a `constructive dividend' and is taxable income ."

Benson v . Commissioner , 560 F .3d 1133, 1134 (9th Cir . 2009) (citation omitted), affg . T .C . Memo . 2004-272 and T .C . Memo . 2006-55 .

Mr . and Mrs . Tyson each owned 50 percent of RS Tyson . When individuals are in substantial control of a corporation, special scrutiny of their transactions with the corporation may b e necessary .

Haber v . Commissioner , . 52 T .C . 255, 266 (1969), affd .

422 F .2d 198 (5th Cir . 1970) ; Roschuni v . Commissioner , 29 T .C .

1193, 1202 (1958), affd . 271 F .2d 267 (5th Cir . 1959) ; see Tulia Feedlot, Inc . v . United States , 513 F .2d 800, 805 (5th Cir . 1975) ("Transactions between related taxpayers or between a close corporation and its principals * * * must be subject to close scrutiny ." (citing United States v . Ragen, 314 U .S . 513 (1942))) .

RS Tyson paid $15,000 to Reliable Toyota in December 2003 .

This money was a deposit on a vehicle purchased for Mr . and Mrs .

Tyson . Mrs . Tyson admitted that "all the money is in RS Tyson" .

She testified that she has a tendency to write . checks out of that account for personal items . The evidence establishe d distributions from RS Tyson to Mr . and Mrs . Tyson or on behalf of Mr . and Mrs . Tyson including the $15,000 RS Tyson paid as a downpayment-on Mr . and Mrs . Tyson's car . Petitionersthave failed to prove that any of the $61,812 in question was not diverted from RS Tyson ; for . Mr . and Mrs . Tyson's own use . Accordingly, respondent's determination regarding .the constructive dividends is sustained .l 3 11 .

Accuracy-Related Penalty for Mr . and Mrs . Tyso n Section 7491(c) provides that the Commissioner will bear the burden of production with respect to'the liability of any individual for . additions to tax andpenalties . "The Commissioner's burden of production under section 7491(c) is to produce evidence that it is appropriate(cid:127)to=impose the relevant penalty, addition to tax, or additional amount" .

Swain v .

Commissioner , 118 T .C . 358, 363 (2002) ; see Higbee v . .

Commissioner , 116 T .C . 438, 446 (2001) . The Commissioner, however, does not have the obligation to introduce .evidence regarding reasonable cause or substantial authority .

Higbee v .

Commissioner , supra at 446-447 .

Respondent determined that RS Tyson and Mr . and Mrs . Tyson are liable for the section 6662 penalty for 2003 . Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer may be liable fo r

a penalty of 20 percent on the portion of an underpayment of tax due to negligence or disregard of rules or .-regulations or a substantial understatement of income tax . Negligence "includes any failure to make a reasonable attempt to comply with the provisions of this title", and disregard "includes any careless, reckless, or intentional disregard ." Sec . 6662(c) . "Negligence" includes any failure by the-taxpayer to keep adequate books and records or to substantiate items properly . Sec . 1 .6662-3(b)(1), Income Tax Regs . Respondent met his burden of production as to Mr . and Mrs . Tyson¹⁹ as they failed to substantiate the expenses claimed .15 See sec . 6001 ; sec . . 1 .6662-3(b)(1), Income Tax Regs .

RS Tyson .overstated expenses by deducting personal expenses of Mr . and Mrs . Tyson . RS Tyson also failed to substantiate expenses (e .g ., laundry expenses, travel expenses, meals and entertainment expenses, and automobile expenses) . See sec . 6001 ; sec . 1 .6662-3(b)(1), Income Tax Regs .

Id .

.

- 2 7 The accuracy-related penalty is not imposed with respect to any portion of the underpayment as,to which the taxpayer acte d with reasonable cause and in good faith . Sec . 6664(c)(1) . The decision as to whether the taxpayer acted with reasonable cause and in good .faith depends upon all the pertinent facts an d circumstances . Sec . 1 .6664-4(b)(1), Income Tax Regs .

Mr . and Mrs . Tyson attempted to use RS Tyson as a vehicle to turn their nondeductible personal expenses into deductible business expenses . Petitioners' tax return preparer was not called as ,a witness . We infer that his testimony would not have been favorable to petitioners . See Wichita Terminal Elevator Co .

v . Commissioner , 6 T .C . 1158, 1165 (1946), affd . 162 F .2d 513 (10th Cir . 1947) . Petitioners have failed to prove that they acted with reasonable cause and in good faith- . See sec .

6664(c)(1) . Accordingly, we sustain the section 6662(a) penalty against RS Tyson and Mr . and Mrs . Tyson .

In reaching our holdings herein, we have considered al l arguments made by the parties, and to the extent not mentione d above, we find them to be irrelevant or without merit .

To reflect the foregoing, Decision will be entered for respondent in docket No .

6879-07 .

Decision will be entered under Rule 155 in docket No . 6880-07 .

6. Petitioners have not established that they satisfied the requirements of sec . 7491(a) . Accordingly, the burden of proof does not shift to respondent .
10. Additionally, Mr . and Mrs . Tyson made personal use of the alleged rented space .
11. The taxes related to Mr . and Mrs . Tyson's residence may be deductible as expenses on Schedule A, Itemized Deductions .
12. Mrs . Tyson testified that the image expense was for the cost of purchasing and laundering Mr . Tyson' .s uniforms .
13. We note . that respondent did .not`argue that RS Tyson did not deserve to be recognized .as a separate taxpaying entity,'and petitioners do not argue that RS Tyson's earnings and profits were insufficient to cover the constructive dividends, .
14. Sec . 7491(c) imposes on the Commissioner a burden of production respecting "the liability of any individual " (emphasis added) for a penalty, addition to tax, or additional amount . Accordingly, respondent has no burden of production with respect to RS Tyson .
15. Additionally, as we have sustained all of respondent's deficiency determinations against Mr . and Mrs . Tyson, there is a "substantial understatement of income tax" . See sec . 6662(d)(1)(A) .and (B) . A "substantial understatement" exists if the understatement exceeds the greater of (1) 10 percent of the tax required to be shown on the return for a taxable year or (2) $5,000 ($10,000 in the case of a corporation) .
50. Fed . Reg . 46017 (Nov . .6, 1985) .
51. T .C . 213, 218 (1968), affd . 418 F .2d 91 (7th Cir . 1969)), affd . 842 F .2d 1213 (10th Cir . 1988) . Mr . Tyson was not an employee of RS Tyson . Accordingly, these were not proper expenses of RS Tyson, and we sustain respondent's determination disallowing the laundry expenses .