Danvis S. and Sheryl S. Smith - Page 7




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               1995        1996                                                       
               Vehicle expense                                    $2,949      $2,520  
               Parking fees, tolls, and transportation                24          32  
               Other expenses                                                         
               “Business auto loan interest”                      698                 
               “Office rent”                                    4,800                 
               “Postage and express”                               64                 
               “Office supplies”                                   80                 
               “Grading services”                               7,513                 
               Unspecified                                                  3,647     
               Less reimbursements by employer                      (653)       (168) 
               Total (adjusted for rounding errors)               15,474       6,031  
          Respondent disallowed the deductions with respect to expenses of            
          $13,011 in 1995 and $3,166 in 1996.3                                        
               For taxable year 1995, petitioner filed a Schedule C, Profit           
          or Loss From Business, for a sole proprietorship known as “Smith            
          Table Pads”.  The schedule listed the principal business of the             
          proprietorship as “distributor of custom fitted table pads and              
          teaching”.  On the schedule, petitioners claimed deductions for,            
          among others, the following:  interest expense of $2,163; rent              
          expense of $5,800; travel expense of $2,642; and meal and                   
          entertainment expense of $680.  Respondent disallowed each of               
          these deductions in full, except with respect to interest expense           
          of $731.                                                                    
               During both of the years in issue, petitioners resided in              
          residences owned by petitioners in their own names.                         
               In 1995, petitioner organized a corporation under Colorado             
          law known as Smith Corporation.  The articles of incorporation              


          3Respondent’s additional adjustment to the total of the 1995                
          miscellaneous itemized deductions, which was based on a change in           
          petitioners’ adjusted gross income, is computational and will be            
          resolved by the Court’s holding on the issues in this case.                 



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