*214 At the time of the transfer all parties involved acknowledged that there were other liabilities not accurately reflected in the records of the partnership. These unrecorded liabilities included excise and unemployment tax deficiencies and additions to tax in the following amounts: (1) $ 45,500.82 (deficiency) and $ 19,561.77 (additions) for the periods July 1, 1978 through September 30, 1978, and April 1, 1979 through March 31, 1981; (2) $ 38,421.34 (deficiency) and $ 27,956.56 (additions) for period April 1, 1979 through September 30, 1979. These tax liabilities were covered by an agreement entered into by the corporation and the partnership. The agreement provided that these liabilities remained the liabilities of the partnership and would be paid as funds became available to the corporation and transferred to the partnership. By the end of the first year of operations after the transfer of the business to the corporation, the financial condition of the airline improved. Revenues increased from $ 1.5 million to just under $ 12 million. The losses incurred by the partnerships were deducted by each partner, including Airway, and petitioners claimed their distributive share of the losses through Airway. On their Federal income tax returns for the years 1980, 1981 and 1982 petitioners deducted their distributive share of the partnership losses in the following amounts: 1980 -- $ 64,465; 1981 -- $ 64,465; and 19982 -- $ 4,034. Also, on their 1982 return petitioners deducted employee business expenses in the amount of $ 3,533, and a $ 200 tax credit. The employee business expenses include expenditures made for meals and lodging, telephone, copying, postage, automobile mileage and travel. Respondent disallowed the losses, business expense deductions, Issue #1 - Deduction of Losses
The determination of whether petitioner may deduct losses incurred by the partnership, and if so in what amount, is made more complicated because of the tiered interest petitioner held in the partnership as a shareholder in Airway, a Subchapter S (Sub S) corporation. *216 is not entitled to deduct any part of the partnership's losses because both Airway and petitioner were limited by their respective tax bases. Respondent argues that because Airway's basis in its partnership interest was exhausted for the years in issue, Airway could not deduct any part of Trans Western's losses, thereby precluding any of the losses from being available to petitioner through the interest he held in Airway. We must determine, therefore, what portion of Trans Western's losses are deductible by Airway, and in turn, what portion of Airway's losses are deductible by petitioner. Our task has been made more difficult because of the poor quality of the record in this case and the parties' inability to stipulate to or submit evidence on the necessary events and aspects of the partnership operations. Respondent does not dispute that the partnership incurred large losses during the years in issue.
Initially, we must determine what portion of the partnership losses can be claimed by Airway for the years in issue, and thus may be available for Airway's shareholders. Before we can make this determination, we must trace the computation of Airway's basis beginning with earlier years of the activity. We note at the outset that Airway's deductible share of the losses is limited by its basis in its partnership interest and the "at risk" rules. See sections 704(d) and 465. sections 722 and 752, and section 1.752-1(e), Income Tax Regs.Section 722 provides, in relevant part, that the basis of a partner's interest acquired by contribution of money or property is the amount of such money or the adjusted basis of such property. This initial basis is adjusted for any increases or decreases in partnership liabilities. Sec. 752(a) and (b). Under section 752(a), an increase in a partner's share of partnership liabilities is considered a contribution of money for purposes of section 722. Conversely, under section 752(b), any decrease in the partner's share of the partnership liabilities is treated as distribution of money by the partnership to the partner. For purposes of section 752(a) the allocation of a partnership's liabilities is governed by section 1.752-1(e), Income Tax Regs., which provides:
A partner's share of partnership liabilities shall be determined in accordance with his ratio for sharing losses under the partnership agreement. In the case of a limited partnership, a limited partner's share of partnership liabilities shall not exceed the difference between his actual contribution credited to him by the partnership and the total contribution which he is obligated to make under the limited partnership agreement. However, where none of the partners have any personal liability with respect to a partnership (as in the case of a mortgage on real estate acquired by the partnership without assumption by the partnership or any of the partners of any liability on the mortgage), then all partners, including limited partners, shall be considered as sharing such liability under section 752(c) in the same proportion as they share the profits. * * *
Each partner's adjusted basis, at the end of each taxable year, is adjusted further as follows: Increased by, among other things, the partner's distributive share of the taxable income of the partnership, and decreased by, among other things, the partner's distributive share of the partnership losses. Sec. 705(a). *220 Section 704(a) states as a general rule that a partner shall determine his distributive share of income, gains, loss, deduction or credit according to the partnership agreement. Section 704(d) allows a partner to deduct his distributive share of the partnership loss only to the extent of his adjusted basis in the partnership at the end of the year in which the loss took place. section 464*221 deductibility of losses arising from any activity engaged in by a taxpayer in carrying on a trade or business or for the production of income, with certain exceptions. Sec. 465(a)(c). These exceptions are not applicable in this case. Under section 465, a taxpayer's deduction of losses is further limited to the amount for which the taxpayer is at risk in such activity, at the close of the taxable year. As a general rule, a taxpayer is considered at risk for the amount of money (or basis of property) that he has contributed to the activity, as well as amounts borrowed with respect to the activity. Sec. 465(b)(1). Section 465(b)(2) defines the term "borrowed amounts," for purposes of section 465, as (1) an amount borrowed for use in the activity, and (2) which created an obligation for which the taxpayer is personally liable, or has pledged assets not used in the activity as collateral for the borrowed funds. A taxpayer is not considered at risk for any amount borrowed from any person with an interest in the activity other than an interest as a creditor. Sec. 465(b)(3)(A) and (B)(i).
Respondent contends that Airway was not entitled to deduct any losses after the close of its 1978 fiscal year because its basis in Trans Western was exhausted at this point. Respondent further contends that petitioner's basis in Airway was exhausted by the end of his 1979 calendar year, therefore, petitioner was precluded in any event from deducting any portion of the losses claimed by Airway.
Respondent's determination with respect to a taxpayer's basis in a partnership interest or a Sub S corporation is presumptively correct. See J. M. Perry & Co. v. Commissioner,120 F.2d 123">120 F.2d 123 (9th Cir. 1941), affg. a Memorandum Opinion of this Court. Petitioner has the burden of proving that: (1) Airway had adequate basis in its partnership interest to permit Airway to claim its proportionate share of the loses, and (2) he had sufficient basis in his interest in Airway to permit a deduction of his proportionate share of the losses claimed by Airway. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).
In 1978, Airway contributed $ 17,373.80 for its interest in and made a $ 6,117.18 *224 One-third of these liabilities ($ 55,461.57) was Airway's proportionate share. sections 722, 752 and 1.752-1(e), Income Tax Regs.
Pursuant to section 704(a) Airway's proportionate share of the $ 253,218.51 loss incurred by the partnership for its taxable year ending March 31, 1978, was $ 84,406.17. However, section 704(d) limits Airway's deductible portion of this loss to its basis in the partnership, or $ 78,952.55. Therefore, pursuant to sections 704(d) and 705(a)(2)(A) Airway's basis was reduced to zero by its allowable share of the partnership loss. The "at risk" provisions of section 465, however, limit the amount of loss Airway could claim, and pass through to its shareholders. Because Airway's contribution and loan of $ 23,490.98 was the only portion of its basis in the partnership interest for which it was "at risk" within the meaning of section 465, only $ 23,490.98 of the $ 84,406.17 loss allocated to Airway, for its taxable year ending March 31, 1978, could be allowed to pass through Airway to its shareholders. The excess of Airway's proportionate share of the loss over the amount claimed by Airway in the amount of $ 55,461.57 ($ 78,952.55 - $ 23,490.98) is subject to the carryover provisions of section 465(a)(2). This section permits such losses to be carried over to the succeeding taxable years. These losses will be deductible when the taxpayer injects more funds into the activity.
At the beginning of its taxable year ending March 31, 1979, Airway's carryover basis in its partnership interest was zero. During that year the partnership had an increase in liabilities of $ 175,819.88 ($ 342,204.60 - $ 166,384.72), *226 ($ 43,954.97) was allocated to Airway and treated, pursuant to section 752(a), as an additional contribution by Airway. Accordingly, at the end of its taxable year ending March 31, 1979, Airway's basis in Trans Western was $ 43,954.97.
The total loss incurred by the partnership for its 1979 taxable year was $ 613,377.14, of which $ 153,344.28 (one-fourth) was Airway's proportionate share. Under sections 704(d) and 705(a)(2)(A) Airway's basis was reduced to zero by its allowable share of the partnership losses. section 465(a)(2) carryover losses for its taxable year ending March 31, 1979, were $ 43,954.97.
At the beginning of its taxable year ending March 31, 1980, Airway's basis in its partnership interest was zero. During this taxable year the liabilities of Trans Western increased by $ 122,789.81 ($ 464,994.41 - $ 342,204.60), of which $ 30,697.45 (one-fourth) was Airway's proportionate share. Pursuant to section 752(a), Airway's basis in TransWestern increased to $ 30,697.45 at the end of the taxable year ending March 31, 1980.
The total loss incurred by the partnership for its 1980 taxable year was $ 439,212.27, of which $ 109,803.07 (one-fourth) was Airway's proportionate share. Under sections 704(d) and 705(a)(2)(A) Airway's allowable loss was $ 30,697.45, which decreased its basis in the partnership interest to zero. Airway was limited, however, in the amount of the 1980 loss it could claim because its basis in the partnership was composed solely of amounts attributable to the nonrecourse liabilities of the partnership. These amounts did not constitute amounts for which Airway was "at risk" within the meaning of section 465 because they were not amounts contributed to the activity by Airway, nor were they amounts borrowed for which Airway was liable. Therefore, the amount of the 1980 loss which could be claimed by Airway, and passed through to its shareholders, was limited to zero. Airway's carryover losses, pursuant to section 465(a)(2), for its taxable year ending March 31, 1980, were $ 30,697.45.
At the beginning of its taxable year ending March 31, 1981, Airway's carryover basis in its interest in Trans Western was zero. During that taxable year the partnership liabilities increased by $ 177,460.85 ($ 642,455.26 - $ 464,994,41), of which $ 44,365.21 section 705(a)(2)(A)) consisted solely of amounts attributable to nonrecourse liabilities of Trans Western, for which Airway was not "at risk," no portion of the 1981 loss allowable to Airway could be claimed by Airway and passed through to its shareholders. Airway's section 465 carryover losses for the taxable year ending March 31, 1981, totaled $ 6,955.21.
We are cognizant that the partnership operations were transferred to the corporation on April 1, 1981. *230 deduction of any portion of the losses generated by the partnership is governed, in large part, by section 1374*231 Although Airway's deduction of the losses incurred by Trans Western during the taxable years in issue was governed, in large part, by sections 704, 722, 752 and 465, the business form through which petitioner chose to hold his interest in Trans Western will require the application of a different set of rules to petitioner. After losses are claimed by Airway, they become available for deduction by Airway's shareholders, including petitioner, subject to the provisions governing the treatment of Sub S corporations and their shareholders.
Section 1374(b), as in effect for the years in issue, provided that a shareholder of a Sub S corporation may deduct his pro rata share of the corporation's net operating loss. Section 1374(c)(2) limited this deduction to the sum of (1) the adjusted basis of the shareholders's stock in such corporation, and (2) the adjusted basis of any indebtedness of the corporation to the shareholder. Therefore, the portion of the partnership losses petitioner can deduct for his taxable years depends on Airway's net operating loss, produced by deducting its share of the partnership losses, and petitioner's basis in his Airway interest at the end of each taxable year.
Airway, through its participation in the partnership, incurred a deductible loss of $ 23,490.98, for its taxable year ending March 31, 1978. Petitioner, as an owner of 58 percent interest in Airway, was entitled to deduct his proportionate share of Airway's loss in the amount of $ 13,624.77. sections 704(d) and 465, Airway was unable to claim any part of the losses available to it for the taxable years ending March 31, 1979, 1980 and 1981. Consequently, Airway had no net operating losses for its taxable years 1979, 1980 and 1981. Therefore, no loss was available to petitioner, through Airway, for his 1979, 1980 and 1981 taxable years. We uphold respondent's disallowance of petitioner's deduction of partnership losses for his 1980 and 1981 taxable years.
Petitioner admits that he made no direct contributions to Airway other than his initial contribution of $ 17,373.80 and the loan of $ 6,117.18. He contends, however, that he should be allowed deductions both for amounts he purportedly loaned directly to the partnership and the liabilities of the partnership which he guaranteed. Sec. 1374(c).
Among the amounts petitioner claimed he loaned Trans Western is $ 10,000 in either 1978 or 1979. This loan is not reflected in the partnership's nor petitioner's records. Furthermore, even if established, such a loan could not be considered as part of petitioner's basis in Airway because the loan would not have been transacted directly between petitioner and the partnership.section 1374(c)(2) threshold. Under section 1374(c)(2) the shareholder can obtain the benefit of indebtedness added to his basis in the interest he holds in the corporation, but the indebtedness must run directly from the corporation, but the indebtedness must run directly from the corporation to the shareholder. See Frankel v. Commissioner,61 T.C. 343">61 T.C. 343, 349 (1973), affd. without published opinion 506 F.2d 1051">506 F.2d 1051 (3d Cir. 1974). Therefore, the $ 10,000 loan, even if found to be made, cannot be considered a part of petitioner's basis in Airway.
Also, we are unable to agree that the amounts representing service accounts guaranteed by petitioner should be considered part of petitioner's basis in Airway. As respondent correctly argues, petitioner must make actual disbursements on the corporation's indebtedness before he can increase his basis for purposes of deducting his proportionate share of Airway's net operating loss. Brown v. Commissioner,706 F.2d 755">706 F.2d 755 (6th Cir. 1983), affg. a Memorandum Opinion of this Court. It is well-settled that a shareholder's guaranty of a debt, even where such shareholder is primarily liable, does not give rise to indebtedness from the corporation to the shareholder, within the meaning of section 1374(c)(2)(B). Raynor v. Commissioner,50 T.C. 762">50 T.C. 762, 770-771 (1968). See also Borg v. Commissioner,50 T.C. 257">50 T.C. 257, 264 (1968). Where there is indirect borrowing involved the shareholder can secure such borrowing as an increase in his basis only by paying part or all of the obligation. Upon payment, the amount paid gives rise to an increase in the shareholder's basis for purposes of deducting his proportionate share of the corporation's loss. Estate of Leavitt v. Commissioner,90 T.C. 206">90 T.C. 206, 211 (1988) (Court reviewed). See also Putman v. Commissioner,352 U.S. 82">352 U.S. 82 (1956); Underwood v. Commissioner,535 F.2d 309">535 F.2d 309 (5th Cir. 1976), affg. 63 T.C. 468">63 T.C. 468 (1975); Raynor v. Commissioner,50 T.C. 762">50 T.C. 762 (1968).
Furthermore, even if petitioner had made payments on the accounts he guaranteed, such payments could not be used to increase petitioner's basis under section 1374(c)(2)(B) because petitioner acted in his individual capacity when he guaranteed these debts. The debts were not petitioner's, nor did petitioner, at any time, act in his capacity as a shareholder or officer of Airway. *237 as a shareholder of Airway, to accept petitioner's argument would require us to disregard the Airway corporate entity and imply petitioner's actions directly from him to the partnership as a first-tier partner. This we cannot do.
For tax purposes a corporate form is usually respected, but may be disregarded in rare instances where it is found that the corporation is a sham or unreal. See Moline Properties v. Commissioner,319 U.S. 436">319 U.S. 436 (1943); Higgins v. Smith,308 U.S. 473">308 U.S. 473, 477-478 (1940); Gregory v. Helvering,293 U.S. 465">293 U.S. 465 (1935). We see no reason to disregard the corporate form in this case. Although Airway was a Sub S corporation and its shareholders treated like partners for tax purposes, Airway is a viable corporate entity. Airway had a business purpose and was created by petitioner for his advantage. It had a special function in the structure and operation of the airline. The corporate entity chosen by petitioner must be recognized even where the tax consequences are unfavorable to petitioner.
We recognize that petitioner acted out of business exigencies in his dealings with the partnership and many of its creditors. Petitioner, however, held his interest in Trans Western through Airway, and therefore, can derive tax benefits from the losses incurred by Trans Western only through Airway. Because petitioner guaranteed many of the partnership's accounts in his individual capacity and not as a shareholder of or officer for Airway, and because Airway cannot be ignored as a valid corpoorate entity, we hold that none of the amounts guaranteed by petitioner for the partnership can be considered part of his basis in Airway. The total deduction of losses generated by Trans Western which can be deducted by petitioner is limited to his basis in Airway of $ 23,490.98 ($ 17,373.80 + 6,117.18).
Petitioner contends that even if we find that his basis in Airway was not increased by amounts owed by Trans Western on the accounts he guaranteed, he must be considered to be "at risk" within the meaning of section 465 for the approximate monthly expenses of the partnership. Should we accept petitioner's argument on this point, petitioner will seek to deduct the losses disallowed by respondent based upon petitioner's indirect relationship with the partnership.
The monthly service expenses of the partnership averaged approximately $ 50,000. Petitioner argues that this was the extent of his financial exposure for any given month of the years in issue. Petitioner contends that the liability for these amounts rested squarely on his shoulders. Petitioner has failed, however, to show how these liabilities were incurred by him in a manner sufficient to meet the standards of section 465.
A taxpayer is generally considered to be "at risk" as to any amounts borrowed for use in an activity with respect to which the taxpayer has personal liability for payment from his personal assets. Sec. 465(b)(2). Respondent does not dispute the fact that petitioner executed guarantees for many of the service related credit lines of the partnership. On the contrary, respondent argues that although petitioner has shown that he guaranteed these accounts, petitioner has failed to show that he personally borrowed such sums or that he was personally liable for the repayment of these amounts. The credit accounts were all established in the name of the partnership. In all instances, the credit was extended to the partnership and the liabilities created through these accounts were paid by the partnership. section 465 for the amounts for which he executed guarantees.
Petitioner contends that he should be considered "at risk" under the "ultimate liability" test set forth in Smith v. Commissioner,84 T.C. 889">84 T.C. 889 (1985). Petitioner's reliance on Smith is misplaced. In Smith the "ultimate liability" test was applied to adjustments of the partner's basis in his partnership interest. Although a similar test was applied to the "at risk" provisions in Abramson v. Commissioner,86 T.C. 360">86 T.C. 360 (1986), a case upon which petitioner also relies, Abramson states that a taxpayer is not "at risk" with respect to a guarantee if he is protected against economic loss. See also S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 87.
In the instant case petitioner could seek indemnification from any one of the four general partners of Trans Western for any amounts he was required to pay on the behalf of the partnership. *242 We hold, therefore, that because petitioner was protected against economic loss for any amounts he could be called upon to pay on the behalf of the partnership that the "ultimately liability" test applied in Abramson is not applicable to the instant case.
Issue #2 - Gain Recognition
Respondent concedes, with one exception, that the April 1, 1981, transfer of the partnership's assets and liabilities to the corporation qualifies under section 351(a). Section 351(a) provides nonrecognition treatment for property transferred solely in exchange for stock or securities of a controlled corporation. section 357(c) for the assumption of liabilities. *244 Respondent argues that because the liabilities assumed exceeded the total adjusted basis of the property transferred, the partnership must recognize gain pursuant to section 357(c). We agree with respondent.
For purposes of computing Airway's gain pursuant to section 357(c), we treat the partnership interest as the property Airway transferred to the corporation. *245 However, for purposes of section 465, deductions allocable to an activity which are otherwise allowable are deductible to the extent that income is received or accrued from the activity. Income received or accrued from an activity includes gain recognized upon the disposition of the activity or an interest in the activity. section 357(c) is income Airway contributed to the activity for purposes of section 465. Therefore, Airway is considered to have $ 123,203.82 "at risk" in the partnership. The section 465 suspended losses for the taxable years ending March 31, 1978, 1979, 1980 and 1981, up to the amount of $ 123,203.82, can be claimed by Airway in its taxable year ending March 31, 1982. Airway's suspended losses totaled $ 137,069.20 ($ 55,461.57 + 43,954.97 + 30,697.45 + 6,955.21). Therefore, Airway can deduct in its taxable year ending March 31, 1982, section 465 suspended losses in the amount of $ 123,203.82. The deduction of these losses eliminates any gain that would have been otherwise taxable to Airway for its taxable year ending March 31, 1982. Consequently, any gain that would otherwise flow through to Airway's shareholders, including petitioner, is eliminated. No part of the gain resulting from the transfer of the partnership's assets and liabilities is taxable to petitioner.
During petitioner's 1982 taxable year the operations of the partnership were conducted by the corporation; therefore, both Airway and petitioner are precluded from deducting any part of the losses incurred by the corporation after April 1, 1981. Losses incurred by the corporation did not flow through to its shareholders. Airway was allowed losses in the amount of $ 123,203.82 for its 1982 taxable year. However, these losses were offset against the gain Airway recognized under section 357(c). Therefore, Airway did not have any operating loss during 1982 which flowed through to its shareholders, including petitioner. Petitioner has a basis in his interest in Airway of $ 9,866.21. Section 752 deems as a distribution of money any decreases in a partner's share of the partnership liabilities. Section 733 requires a partner to decrease his basis (but not below zero) by the amount of any money distributed to such partner. If such distribution exceeds the adjusted basis of the partner's interest, determined immediately before the distribution, section 731(a)*248 At the time of the transfer, Airway's adjusted basis in its partnership interest was $ 37,410. Because Airway had recognized gain of $ 123,203.82, pursuant to section 357(c), Airway must increase its basis by such gain, pursuant to section 705. Airway's basis is increased to $ 160,613.82 ($ 37,410 + $ 123,203.82). Under section 752, Airway is deemed to have received a distribution of $ 160,613.82. Consequently, Airway must decrease its basis (but not below zero) by the amount of the distribution. Pursuant to section 733, Airway's basis is decreased to zero with no resulting excess distribution for purposes of section 731(a). Airway had no gain pursuant to section 731(a).
Issue #3 - Deduction of Business Expenses
Respondent disallowed business expenses claimed by petitioner on his 1982 tax return in the amount of $ 3,533. These expenses included expenditures made for meals and lodging, telephone, copying, postage, automobile mileage and travel. Petitioner testified that the travel expenses were incurred by him through his efforts to leverage the purchase of another airline (Hawaiian Airlines), and his investment in a geothermal pump project. Respondent contends that petitioner has failed to demonstrate that the expenses involved herein were "ordinary and necessary" within the meaning of section 162.
Whether the amounts disallowed by respondent constituted ordinary and necessary expenses incurred in the operation of petitioner's trade or business is a question of fact to be determined from the evidence presented, with the burden being on petitioner to overcome the presumed correctness of respondent's determination. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).
Section 162(a) provides, in pertinent part, as follows;
(a) IN GENERAL. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including --
* * *
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business, * * *
To qualify as an allowable deduction the expenses must be both "ordinary" and "necessary" within the meaning section 162. In Deputy v. du Pont,308 U.S. 488">308 U.S. 488, 495 (1940), the Supreme Court held that the word "ordinary" as used in section 162 has "the connotation of normal, usual, or customary." In Commissioner v. Tellier,383 U.S. 687">383 U.S. 687, 689 (1966), the Supreme Court held that the term "necessary," as used in the contest of section 162, has been consistently construed to impose "only the minimal requirement that the expense be 'appropriate and helpful' for the development of the [taxpayer's] business."
At trial petitioner presented summary sheets which listed the disallowed expenses by category and amount. Petitioner testified with specificity with respect to each of the disallowed amounts for postage, copying, telephone and automobile milage expenses. We hold that petitioner's testimony along with the evidence presented carries his burden of proof with respect to these expenses. Consequently, petitioner may deduct expenses for postage, copying, telephone and automobile mileage.
With respect to the expenses incurred for travel, including meals and lodging, section 1.162-2(a), Income Tax Regs., provides as follows:
Traveling expenses include travel fares, meals and lodging, and expenses incident to travel such as expenses for sample rooms, telephone and telegraph, public stenographers, etc. Only such traveling expenses as are reasonable and necessary in the conduct of the taxpayer's business and directly attributable to it may be deducted. If the trip is undertaken for other than business purposes, the travel fares and expenses incident to travel are personal expenses and the meals and lodging are living expenses. If the trip is solely on business, the reasonable and necessary traveling expenses, including travel fares, meals, and lodging, and expenses incident to travel, are business expenses. * * *
Whether a trip is related primarily to the taxpayer's business depends upon the facts and circumstances in each case. Sec. 1.162-2(b)(2), Income Tax Regs. Petitioner has the burden of proving that these travel expenses were related primarily to his business of operating the airline.
Additionally, section 274(d) imposes more stringent substantiation requirements on the deduction of travel expenses. Section 274(d) provides that no deduction is allowed under section 162 for any travel expense (including meals and lodging while away from home) unless the taxpayer substantiates these expenses with adequate records or sufficient evidence corroborating his own testimony.
Petitioner testified that the travel expenses herein involved were incurred as a result of his efforts to leverage the purchase of another airline to help the failing financial condition of the partnership. Although we recognize that petitioner's motives were for business, we find that he failed to adequately substantiate his travel expenses for purposes of section 274(d). Therefore, respondent's disallowance of these expenses will be sustained.
Issue #4 - Availability of Research Tax Credit
On his 1982 tax return petitioner claimed a credit in the amount of $ 200 pursuant to section 44F. *253 of the credit and contends that petitioner has not shown that he qualifies for such credit. Respondent's determination is presumptively correct. Petitioner bears the burden of proof with respect to his entitlement to the disallowed credit. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142.
Generally, a taxpayer is entitled to a research tax credit, pursuant to section 44F, in an amount equal to 25 percent of the excess of the qualified research expenses for the year over the average base period research expenses for the relevant preceding tax years. As pertinent herein, section 44F requires the taxpayer to show that he has incurred expenses for "in-house" research, *254 for "qualified services" performed by the employee. section 44F, petitioner must demonstrate that (1) he engaged in research or experimental activities, *255 Petitioner testified that the research credit was claimed in connection with his investment in a geothermal pump project. Petitioner testified that he was the principal in a small company which owned an interest in a major geothermal resource, a producing well, in Utah. He claimed that one of the problems they encountered in this project was the pumping of fluid out of the well with a pump that would last for a long time. To solve this problem, he and some other members of the firm came up with an idea for a geothermal pump which they had patented. Petitioner testified that he paid a pro rata share of the costs for the parts for the working model of the pump and a pro rata share of the patent attorney's expense. *256 he separated into two categories -- patent attorney's expenses and costs for components for the pump. Respondent contends that this information is insufficient to meet petitioner's burden. We agree.
Petitioner's testimony and the evidence presented on this issue is insufficient to meet his burden of showing that the expenses were incurred in the actual conduct of a research or experimental activity. Moreover, petitioner has failed to provide sufficient information on the base period research expenses. These research expenses are a necessary component of the computation of the research tax credit, and could act as a limitation upon an otherwise available credit.
Petitioner argues, in the alternative, that should we determine that the research credit is unavailable to him that the expenses incurred in connection with this project should be allowed as a deduction pursuant to section 162. *257 Petitioner has failed to establish that these expenses were paid or incurred in a trade or business that was being carried on at the time the expenses were paid, and that these expenses were directly related to such trade or business. Decision will be entered under Rule 155.
Document Info
Docket Number： Docket No. 363-85.
Filed Date： 4/21/1988
Precedential Status： Non-Precedential
Modified Date： 11/20/2020
