Perry H. Kay, Sr. - Page 3

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               During 1998, petitioner also operated PK Production and                
          Management (PK Production), a small business providing music                
          entertainment services.  Petitioner managed and played in a band            
          for compensation.  For the year at issue, the band only                     
          participated in four or five paid engagements.                              
               With respect to PK Production, petitioner claimed that on              
          January 1, 1998, he placed in service a 1995 Dodge Caravan (van),           
          which was purchased in 1997.  During the year at issue,                     
          petitioner used the van to transport musical equipment to and               
          from the band’s engagements.  Petitioner testified that during              
          1998 the van was used primarily for PK Production business                  
               On Schedule C, petitioner claimed various business expense             
          deductions in the operation of PK Production.  Petitioner’s                 
          claimed expense deductions that are at issue include:  (1) A                
          section 179 expense deduction of $7,000 for the van; (2) expenses           
          in connection with the van for business-related travel of $4,182;           
          (3) production and management fees of $999.20; and (4) music                
          educator and professional convention expenses of $333.95.                   
               During 1998, petitioner owned a three-bedroom ranch-type               
          house located at 5134 Heatherbrook Drive, Houston, Texas.  On               
          September 11, 1998, a rain and wind storm damaged the roof and              
          several rooms of petitioner’s house.  Petitioner reported the               
          incident to the State Farm Insurance Company (State Farm), with             

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