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Petitioners tried to show that payments of these expenses
are capital contributions to Cost Less. Bailey testified that he
credited the estimated amount of the payments to petitioner's
equity account in the corporation. Bailey did not say when or
how he credited petitioner's equity account. Bailey did not
begin doing accounting work for Cost Less until 1993, which is
after the years in issue. Petitioners offered no accounting
records into evidence. We are not convinced that the expenses
were capital contributions to Cost Less.
The result would be no different even if petitioners had
shown that the expenses were capital contributions to Cost Less.
Petitioners have not substantiated the expenses or shown that
those expenses were ordinary and necessary expenses of Cost Less
as required under section 162. To the extent that petitioner
paid for meals, petitioners have failed to show that they
complied with section 274(d).
We conclude that neither Cost Less nor petitioners may
deduct these amounts.
E. Negligence
Petitioners contend that they are not liable for the
addition to tax for negligence under section 6653(a)(1) for 1988
and section 6662 for 1989 and 1991 because they relied on Bailey.
Respondent contends that petitioners may not rely on Bailey
because, in retaining Bailey and following his advice,
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