T .C . Summary Opinion 2007-49

T .C . Summary Opinion 2007-49

UNITED STATES TAX COURT

JAMES A . AND JOAN H . SOHOLT, Petitioners v .

COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket No . 143-06S .

Filed

March

28,

2007 .

James A . and Joan H . Soholt, pro sese .

Melissa Hedtke , for respondent .

KROUPA,

Judge : This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

effect at the time the petition was filed . Pursuant to section

7463(b), the decision to be entered is not reviewable by an y

'All section and Code references are to the Internal Revenue

Code in effect for the year at issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure, unles s

otherwise indicated .

SERVED MAR 2 8 2007

- 2 other court, and the opinion shall not be treated as precedent

for any other case .

Respondent determined a $3,360 deficiency in petitioners'

Federal income tax for 2003 . After concessions,2 we are asked to

decide whether petitioners are entitled to deductions for various

expenses . We find that petitioners are entitled to deduct some

of the expenses they claimed on their returns .

Background

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

Petitioners resided in Minneapolis, Minnesota, at the time they

filed the petition .

Mr . Soholt's Business Activitie s

Petitioner Mr . Soholt was a financial adviser and retirement

planner for Metropolitan Life Insurance Company (MetLife) in

2003 . He provided financial advisory services and products to

various clients and groups . Mr . Soholt used his car to meet with

clients and prospective clients at locations convenient to them .

Sometimes he would take clients or prospective clients out for

coffee or a light meal or snack .

Mr . Soholt worked from a home office set up in the basement

that constituted approximately 18 percent of petitioners' hom e

2Petitioners concede that they are not entitled to deduct a

portion of their personal property taxes and that they are not

entitled to deduct expenses for professional publications .

Respondent concedes that petitioners are entitled to deduct their

expenses for continuing education and licensing .

- 3 based on square footage . MetLife leased him a laptop computer

through which he could connect to the MetLife network from home .

The home office also included a desk, filing cabinets, and

storage space for marketing and informational materials .

Although Mr . Soholt kept a few de minimis personal papers in the

filing cabinets, the family living area was located on another

floor of the home and the home office was not used for family

activities . Mr . Soholt insured the home office (including its

materials and equipment) against flood and other catastrophes .

Petitioners installed a second telephone line to the house for

Mr . Soholt to use for business . Mr . Soholt used calling cards to

dial clients long distance . He also had a cellular phone .

Petitioners subscribed to the Sunday Star Tribune . Mr .

Soholt read the business section each week to learn about

business news in the area and to be prepared in case a client

asked him a question about a particular news story . Both

petitioners read other sections of the newspaper for personal

reasons .

Mrs . Soholt's Business Activitie s

Petitioner Mrs . Soholt was a flight attendant for Northwest

Airlines (NWA) during 2003 . She was on sporadic leave from

January through May, however . The sporadic leave program,

instituted during the airline's economic crisis brought on by the

2001 terrorist attacks, allowed NWA employees to take time off

4 from work on a month-to-month basis without being fired or laid

off . Mrs . Soholt and the other employees in the sporadic leave

program could be recalled at any time . NWA recalled Mrs . Soholt

in June 2003, and she resumed her normal NWA duties, flying about

15 to 20 days per month for the remainder of the year .

Mrs . Soholt was assigned to reserve status on certain days .

Although she was not scheduled to fly on a reserve status day,

she could be summoned to fly if the airline needed her . NWA

required Mrs . Soholt to have a telephone and, when on reserve

status, to respond to phone calls within 20 minutes so that she

could get to the airport for the assigned flight .

Mrs . Soholt used the Internet from home periodically to

check her flight schedule and NWA e-mail as well as to submit

bids for future flight schedules . She subscribed to Compuserve

for this purpose because it was the only Internet service

provider NWA authorized . Mrs . Soholt periodically drycleaned the

uniforms NWA required her to wear .

Petitioners donated clothing and other items to charity and

also made cash contributions during 2003 . Petitioners had a

growing family and periodically contributed items they no longer

needed to charity .

Petitioners' Retur n

Petitioners claimed certain expenses on Form 1040, Schedule

A, Itemized Deductions, on their joint return for 2003 . They

- 5 claimed they were entitled to deduct charitable contributions as

well as unreimbursed employee business expenses . The

unreimbursed employee business expenses petitioners claimed

included expenses for the business use of their home, cell phone,

Internet, equipment, automobile, hospitality, insurance,

publications, telephone, and uniform cleaning .

Respondent examined petitioners' return for 2003 and issued

petitioners a deficiency notice in which he disallowed many of

the expenses for lack of substantiation . Petitioners timely

filed a petition .

Discussion

This is primarily a substantiation case . The partie s

resolved many of the disputed expenses before trial . We are

asked to determine whether petitioners are entitled to deduct the

remaining expenses . We begin by outlining basic fundamental tax

principles involving substantiation . First, the Commissioner's

determinations are generally presumed correct, and the taxpayer

bears the burden of proving that these determinations are

erroneous .3 Rule 142(a) ;

79, 84 (1992) ;

INDOPCO, Inc . v . Commissioner , 503 U .S .

Welch v . Helvering,

290 U .S . 111 (1933) . Second,

deductions are a matter of legislative grace, and the taxpaye r

3Petitioners do not claim the burden of proof shifts to

respondent under sec . 7491(a) . Petitioners also did not

establish they satisfy the requirements of sec . 7491(a)(2) . We

therefore find that the burden of proof remains with petitioners .

- 6 has the burden to prove he or she is entitled to any deduction

claimed . Rule 142(a) ;

Deputy v . du Pont , 308 U .S . 488, 493

(1940) ;

New Colonial Ice Co . v . Helvering,

(1934) ;

Welch v . Helvering, supra . This includes the burden o f

substantiation .

292 U .S . 435, 440

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 ;

Hradesky v . Commissioner ,

supra . The taxpayer shall keep such permanent records or books

of account as are sufficient to establish the amount of

deductions claimed on the return . Sec . 6001 ; sec . 1 .6001-1(a),

(e), Income Tax Regs . The Court need not accept a taxpayer's

self-serving testimony when the taxpayer fails to present

corroborative evidence .

Beam v . Commissioner , T .C . Memo . 1990-

304 (citing Tokarski v . Commissioner , 87 T .C . 74, 77 (1986)),

affd . without published opinion 956 F .2d 1166 (9th Cir . 1992) .

We shall now proceed to consider whether petitioners are

entitled to deduct the claimed expenses, beginning with

petitioners' charitable contributions of cash and property .

Charitable Contribution s

Petitioners claimed they contributed $6,897 of cash to

charitable organizations in 2003, and respondent allowed all but

$232 based on receipts from donee organizations as well as

- 7 canceled checks . Petitioners also claimed they contributed

property worth $3,492 to charitable organizations in 2003, and

respondent allowed $89 .

Charitable contributions a taxpayer makes are generally

deductible under section 170(a) . No deduction is allowed,

however, for any contribution of $250 or more unless the taxpayer

substantiates the contribution by a contemporaneous written

acknowledgment of the contribution by the qualified donee

organization .' Sec .

170 (f) (8) (A) .

The deduction for

contributions of property equals the fair market value of the

property on the date contributed . Sec . 1 .170A-1(c)(1), Income

Tax Regs .

A taxpayer claiming a charitable contribution is generally

required to maintain for each contribution a canceled check, some

communication from the donee organization acknowledging receipt

of a contribution and showing the date and amount of the

contribution, or other reliable written records showing the name

of the donee, along with the date and amount of the contribution .

Sec . 1 .170A-13(a)(1)(i) to (iii), Income Tax Regs .

'There are now stricter requirements for contributions of

money . Sec . 170(f)(17) . No deduction for a contribution of

money in any amount is allowed unless the donor maintains a bank

record or written communication from the donee showing the name

of the donee organization, the date of the contribution, and the

amount of the contribution .

Id .

This new provision is effective

for tax years beginning after Aug . 17, 2006 . Pension Protection

Act of 2006, Pub . L . 109-280, sec . 1217, 120 Stat . 1080 .

- 8 We first consider petitioners' cash contributions . They

were able to substantiate all cash contributions except $232 .

They failed to introduce any receipts or cancelled checks for the

remaining $232 cash contributions they claim they made in 2003 .

Petitioners are therefore not entitled to deduct the additional

$232 for cash contributions .

We next turn to petitioners' contributions of property .

Petitioners introduced receipts indicating they donated clothing

and other miscellaneous goods eight times in 2003 . These

receipts do not list the specific items contributed and simply

note that petitioners donated a certain number of bags .

Petitioners also introduced a worksheet they prepared when

preparing their tax return that purports to list and value more

specifically the items petitioners contributed . Mr . Soholt

testified that petitioners estimated the value of the clothing

they donated at one-half the original cost but also admitted he

did not think used clothing was worth half as much as it was

worth new . Petitioners did not introduce any evidence supporting

their estimated value or regarding the quality of the donated

items that would permit us to estimate its value .

While we are convinced that petitioners donated property to

charity in 2003, petitioners have failed to provide any reliable

evidence of the items they donated or their values . Petitioners

are therefore not entitled to deduct any additional amount for

- 9 charitable contributions of property other than the $89

respondent allowed .

Unreimbursed Employee Business Expense s

We next consider the unreimbursed employee business expenses

petitioners claimed on Schedule A . We begin by outlining the

general rules to claim business expenses . In general, all

ordinary and necessary expenses paid or incurred in carrying on a

trade or business during the taxable year are deductible . Sec .

162(a) . Services performed by an employee constitute a trade or

business .

O'Malley v . Commissioner , 91 T .C . 352, 363-364 (1988) ;

sec . 1 .162-17(a), Income Tax Regs . An expense is ordinary for

these purposes if it is normal or customary within a particular

trade, business, or industry .

Deputy v . du Pont , 308 U .S . at

495 . An expense is necessary if it is appropriate or helpful for

the development of the business .

Commissioner v . Heininger,

320

U .S . 467, 471 (1943) . Personal, living, or family expenses, on

the other hand, are not generally deductible . Sec . 262 .

If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the deduction, we may approximate the amount of the allowable

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) . For the

Cohan

rule to

apply, however, a basis must exist on which this Court can make

- 10 an approximation .

Vanicek v . Commissioner , 85 T .C . 731, 742-743

(1985) . Without such a basis, any allowance would amount to

unguided largesse .

Williams v . United States , 245 F .2d 559, 560

(5th Cir . 1957) .

Certain business expenses may not be estimated because of

the strict substantiation requirements of section 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) . For such

expenses, only certain types of documentary evidence will

suffice .

Unreimbursed Employee Business Expenses Not

Substantiatio n

Subject to Strict

We first consider the unreimbursed employee business

expenses not subject to the strict substantiation requirements .

We then examine those employee business expenses that are subject

to the additional strict substantiation requirements .

Business Use of the Home

Petitioners claimed $4,190 miscellaneous expenses for

business use of their home during 2003 . Expenses for business

use of a taxpayer's home are deductible only under very limited

circumstances . The taxpayer must show that the portion of the

home purported to be used for business was exclusively used on a

- 11 regular basis as the taxpayer's principal place of business .

Sec . 280A(c) (1) . 5

Petitioners introduced pictures of their home and prepared a

rough sketch of the home layout including square footage . Mr .

Soholt also described the layout of his home office and explained

the setup of his work area, filing cabinets, and storage space

for his MetLife marketing materials . Mr . Soholt admitted that he

kept a few personal documents in the filing cabinet such as

wills, copies of tax returns and similar documentation, but the

family living area was located on another floor of the home and

the office area was not used for anything other than Mr . Soholt's

business activities . The home office constituted 18 percent of

petitioners' home based on square footage .

We have carefully examined the parties' exhibits and Mr .

Soholt's testimony on this issue . We find his testimony on this

issue to be credible and the documents reliable . We conclude

that 18 percent of petitioners' home was regularly and

exclusively used as the principal place of business for Mr .

Soholt's MetLife affairs . Petitioners are therefore entitled t o

'There is an additional requirement that the home office be

for the convenience of the employer . Sec . 280A(c)(1) (flush

language) . The record is unclear whether the parties dispute

this issue . Unreimbursed business expenses are subject to the 2percent limitation of sec . 67 .

- 12 deduct 18 percent of certain energy expenses' petitioners

incurred during 2003 .

Notwithstanding that 18 percent of petitioners' home was

used as Mr . Soholt's principal place of business, we cannot

accept certain documentation petitioners introduced that appear

to be expenses for remodeling their kitchen . We must disregard

these kitchen remodeling costs because the kitchen was not part

of the home used exclusively for Mr . Soholt's business .

Petitioners are therefore entitled to deduct only 18 percent of

the energy expenses, which equals $467 . '

Internet Access Expense s

Petitioners claimed $317 for Internet access expenses during

2003 . We have previously characterized Internet expenses as

utility expenses .

Verma v . Commissioner , T .C . Memo . 2001-132 .

Strict substantiation therefore does not apply, and we may

estimate the business portion of utility expenses under the Cohan

rule . See

Pistoresi v . Commissioner , T .C . Memo . 1999-39 .

The parties stipulated that petitioners paid $317 for

Compuserve in 2003 . Mrs . Soholt provided credible testimon y

'The parties stipulated that petitioners paid $1,180 .30 to

Center Point Energy, $833 .84 to Xcel Energy, and $580 .09 to the

City of Minneapolis Utility Billing office in 2003, an d

petitioners are entitled to deduct 18 percent of these expenses .

7We note that the deduction we permit for petitioners'

business use of the home would be subject to the income

limitations of sec . 280A(c)(5) .

13 regarding her need for and business use of the Internet . Mrs .

Soholt subscribed to Compuserve because that was the only

Internet service provider that NWA authorized for access to the

NWA system . She used the Internet to check her NWA work

schedule, use her NWA e-mail, and submit her bids for her flight

schedule . The record does not reflect that any family member

used the Compuserve account for personal matters . We are

convinced that the Compuserve account was used primarily for Mrs .

Soholt's business needs and that petitioners are thus entitled to

deduct the $317 they paid for Compuserve .

Insurance Expense s

Petitioners claimed $101 of insurance expenses . Mr . Soholt

testified that he bought an additional business policy .: through

their home insurance to cover equipment in the home and to

provide a source of income if he were unable to work due to a

catastrophe or flood in the basement . Petitioners introduced a

balance due notice from State Farm indicating that Mr . Soholt was

the insured on a "business policy ." The balance due notice was

prepared on September 25, 2002, and notes that full payment will

continue coverage until August 19, 2003 . We find Mr . Soholt's

testimony to be credible and conclude that petitioners have

adequately substantiated their insurance expense for the year .

Accordingly, petitioners are entitled to deduct $101 of insurance

expenses .

- 14 Publications

Petitioners claimed $91 of publication expenses .

Petitioners paid $98 .80 for the Sunday Star Tribune for the year

at issue . Mr . Soholt read the business section of the paper to

familiarize himself with area business news as well as to be

prepared in the event a client asked him about a particular

business article, although both petitioners read other parts of

the Sunday paper for personal use .

The cost of a daily newspaper of general circulation is

generally nondeductible .

Wheeler v . Commissioner , T .C . Memo .

1984-425 . Petitioners testified that they each read parts of the

Sunday paper for reasons unrelated to Mr . Soholt's business .

Petitioners' use of the Sunday Star Tribune was not confined to

the business section . Petitioners have not offered a method for

us to estimate reliably how much of Mr . Soholt's use of the

Sunday newspaper was for business . Petitioners are therefore not

entitled to any deduction for publications in 2003 .

Telephone Expense s

Petitioners claimed $912 of telephone expenses . The parties

stipulated that petitioners paid $462 .69 to Qwest for 2003 .

Petitioners introduced documentation showing that they incurred

$39 .64 in telephone charges from PowerNet Global Communications,

3 cents from TTI, and $55 for MCI calling cards, but they did not

explain the PowerNet Global Communications or TTI charges . Mr .

- 15 Soholt testified that they calculated the business portion of

their telephone expenses by determining the cost of the second

telephone line for their home that Mr . Soholt used for business .

Petitioners then added the cost of certain features on their

personal telephone line, such as call waiting, caller ID, and

voice messaging . Mr . Soholt used the calling cards to call

clients long distance .

The parties' stipulation and petitioners' substantiation and

testimony regarding this issue do not fully explain how

petitioners derived the $912 of telephone expenses they claimed

for 2003 . Petitioners' documentation and testimony regarding the

amount of charges attributable to the business telephone line is

unclear . Although we are permitted to estimate the business

portion of the telephone expenses under the

Cohan rule,

petitioners have given us no basis for such an estimate . The

only thing petitioners have established is that Mr . Soholt used

calling cards to call clients long distance, and we find their

substantiation credible on this point . Petitioners are therefore

entitled to deduct $55 for calling cards .

Uniform Cleaning Expense s

Petitioners claimed $303 for cleaning expenses for Mrs .

Soholt's NWA uniforms . Expenses for uniforms are deductible if

the uniforms are of a type specifically required as a condition

of employment, the uniforms are not adaptable to general use as

- 16 ordinary clothing, and the uniforms are not worn as ordinary

clothing .

Yeomans v . Commissioner , 30 T .C . 757, 767-769 (1958) ;

Beckey v . Commissioner , T .C . Memo . 1994-514 .

Petitioners introduced the portion of the NWA Flight

Attendant agreement requiring Mrs . .Soholt to wear a uniform .

Mrs . Soholt worked 15 to 20 days per month for the 7 months that

she was not on sporadic leave . Mrs . Soholt testified that she

did not dry clean her uniform each time she wore it and that she

often had to clean it herself due to the short time between

trips . Petitioners also introduced receipts from dry cleaners

amounting to $122 .59 in cleaning costs for the year, although the

receipts do not specifically indicate that the cleaning charges

were for Mrs . Soholt's uniforms .

We are convinced that Mrs . Soholt incurred some expenses

during the year to clean her uniforms . We may estimate the

amount of uniform expenses under the Cohan rule . We estimate

that Mrs . Soholt dry cleaned her uniform once per month for the 7

months she worked at NWA and is therefore entitled to deduct $105

for uniform expenses during 2003 .

Expenses Subject to Strict Substantiation Requirement s

We now consider those expenses that are subject to the

additional strict substantiation requirements under section

274(d) . Strict substantiation requires the taxpayer to generally

introduce records or evidence showing the amount of the expense,

- 17 the time and place of the expense, the business purpose of the

expense, and the business relationship to the taxpayer of the

persons involved in the expense . Sec . 274(d) . Expenses subject

to strict substantiation may not be estimated under the

rule .

Cohan

Sanford v . Commissioner , 50 T .C . at 827 .

Cellular Phone Expense s

Petitioners claimed $880 of cellular phone expenses for

2003 . Cellular phones are included in the definition of "listed

property" for purposes of section 274(d)(4) and are thus subject

to the strict substantiation requirements . Sec .

280F(d)(4)(A)(v) ;

Gaylord v . Commissioner , T .C . Memo . 2003-273 .

A taxpayer must establish the amount of business use and the

amount of total use for the property to substantiate the amount

of expenses for listed property .

Nitschke v . Commissioner , T .C .

Memo . 2000-230 ; sec . 1 .274-5T(b)(6)(i)(B), Temporary Income Tax

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

Petitioners introduced their cellular phone records at trial

and acknowledged which calls were personal . Mr . Soholt testified

that he used his cellular phone to call home to check his voice

mail, speak to his wife, and also to call MetLife message centers

as well as make other business calls . Mrs . Soholt used her

cellular phone when she was on reserve status so that she could

respond to NWA within the required 20-minute period .

- 18 We have examined petitioners' cellular phone records in

detail . Petitioners paid a flat fee for their cellular phones as

long as phone usage was within a certain limit per month and used

the phones for both personal and business calls . Petitioner s

therefore did not incur any expenses to use their cellular phones

for business purposes in addition to those they would have

incurred had they used their cellular phones only for personal

reasons . Further, any approximation or estimation of cell phone

expenses attributable to business use is prohibited under section

274(d) . Petitioners are therefore not entitled to deduct any

cellular phone expenses for 2003 .

Equipment Expense s

Petitioners claimed $795 of equipment expenses to rent and

maintain the laptop computer MetLife required Mr . Soholt to have

for his business . Computers and peripheral equipment are "listed

property" and are therefore subject to the strict substantiation

requirements . Sec . 280F(d)(4)(A)(iv) .

Petitioners introduced a MetLife Human Capital Management

System report indicating that a total of $795 was deducted from

his pay during 2003 for the laptop . Mr . Soholt testified that he

was required to have $15 deducted from each paycheck for the use

of the laptop and any necessary maintenance . Petitioners

introduced a pay stub showing a $15 deduction from Mr . Soholt's

pay for the period ending December 28, 2003 . Petitioners also

- 19 introduced a letter from the MetLife Regional Marketing Director

indicating that Mr . Soholt was not reimbursed for laptop charges .

We find that the evidence petitioners introduced on this issue,

taken together, satisfies the strict substantiation requirements .

Accordingly, petitioners are entitled to deduct $795 of equipment

costs for the laptop .

Automobile Expense s

Petitioners claimed $6,112 of automobile expenses for 2003 .

Passenger automobiles are listed property under section 280F and

strict substantiation is therefore required . Sec . 274(d) . No

deduction is allowed for any travel expense unless the taxpayer

substantiates by adequate records or by sufficient evidence

corroborating the taxpayer's own statement the amount of the

expense, the mileage for each business use of the automobile and

the total mileage for all use of the automobile during the

taxable period, the date of the business use, and the business

purpose for the use . Sec . 1 .274-5T(b)(6), Temporary Income Tax

Regs .,

supra . Adequate records include the maintenance of an

account book, diary, log, statement of expense, trip sheets,

and/or other documentary evidence, which, in combination, are

sufficient to establish each element of expenditure or use . Sec .

1 .274-5T(c)(2)(i), Temporary Income Tax Regs ., 50 Fed . Reg . 46017

(Nov . 6, 1985) .

- 20 Taxpayers may use a standard mileage rate established by the

Internal Revenue Service in lieu of substantiating the actual

amount of the expenditure . See sec . 1 .274-5(j)(2), Income Tax

Regs . The standard mileage rate is generally multiplied by the

number of business miles traveled . See Rev . Proc . 2002-61, 20022 C .B . 616 (in effect for transportation expenses incurred during

2003) . The use of the standard mileage rate establishes only the

amount deemed expended with respect to the business use of a

passenger automobile . Sec . 1 .274-5(j)(2), Income Tax Regs . The

taxpayer must still establish the actual mileage, the time, and

the business purpose of each use .

Nicely v . Commissioner , T .C .

Memo . 2006-172 ; sec . 1 .274-5(j)(2), Income Tax Regs .

Petitioners introduced an appointment calendar for 2003 to

support their business mileage deductions . Mr . Soholt kept the

calendar in his car during 2003 and made handwritten notations of

the total mileage incurred on days when he had to travel for

business . Mr . Soholt calculated the mileage by determining the

difference on the odometer from the beginning of the day to the

end of the day . Mr . Soholt acknowledged, however, that the daily

odometer readings also possibly included non-business trips he

made during the day .

Although we recognize the efforts Mr . Soholt made to record

his daily mileage, we are constrained to find that petitioners

failed to satisfy the strict substantiation requirements .

- 21 Petitioners' documentation does not establish the portion of the

mileage each day attributable to personal travel and is simply a

notation of the total daily odometer readings . Moreover,

petitioners' log does not sufficiently describe the business

purpose of each meeting . Often, just a name or group is

identified . We therefore find that petitioners are not entitled

to any automobile expense deduction for 2003 .

Hospitality Expense s

Petitioners claimed $1,411 of hospitality expenses for 2003 .

Mr . Soholt testified he incurred these expenses when he treated

clients or potential clients to meals or coffee during their

meetings .

Entertainment expenses such as entertaining clients or

prospective clients at restaurants and coffee shops are subject

to the strict substantiation requirements . See sec . 274(d)(2) ;

Gaylord v . Commissioner , T .C . Memo . 2003-273 ; sec . 1 .274-2(a),

Income Tax Regs . The taxpayer must show the expense was directly

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

as well as substantiate the amount, time and place, business

purpose, and business relationship to the taxpayer of the persons

- 22 entertained .8 Sec . 274(a), (d) ; sec . 1 .274-2(a), Income Tax

Regs .

Petitioners introduced various restaurant and coffee shop

receipts to substantiate the entertainment expenses . Mr . Soholt

added notations on the receipts after the year at issue and

before trial . Some of these notations include the name of a

person or a vague description such as "Answering Questions . "

We find Mr . Soholt's testimony on this issue to be

thoughtful and credible . Unfortunately, the evidence petitioners

submitted to substantiate their hospitality expenses does not

meet the requirements of section 274 . Petitioners do not have

records indicating the business purposes of the expenses, Mr .

Soholt's business relationship to the persons entertained or any

other information that would comply with the strict

substantiation requirements . The notations on the receipts, made

after the year at issue, are simply too vague to meet the

required standard . Petitioners are therefore not entitled to

deduct any hospitality expenses .

'For expenses incurred directly before or after a

substantial and bona fide business discussion, the taxpayer must

show the expense was associated with, rather than directly

related to, the active conduct of the trade or business . Sec .

274(a), (d) ; sec . 1 .274-2(a), Income Tax Regs .

- 23 To reflect the foregoing and the concessions of the parties ,

Decision will be entere d

under Rule 155 .