LANG HER & v. COMMISSIONER

POWELL, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 ¹ of the Internal Revenue Code in effect at the time the petition was filed. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.

Respondent determined deficiencies of $ 10,696 and $ 9,657 in petitioners' 2000 and 2001 Federal income taxes, respectively. After concessions by the parties, ² the issue is whether petitioners are entitled to deduct certain business expenses on Schedule C, Profit or Loss*120 From Business, for an activity participated in by petitioner Lang Her (petitioner) for the years in issue. At the time the petition was filed petitioners resided in Brown Deer, Wisconsin.

Background

In 1995, Michael C. Cooper (Mr. Cooper) founded and incorporated a multilevel marketing company called Renaissance, The Tax People, Inc. ³ (Renaissance) in the State of Nevada, which was operated out of Topeka, Kansas. At its core, Renaissance was a pyramid scheme. ⁴ Its only product, the "Tax Advantage System" or "The Tax Relief System", was a fraudulent "home-based" business package designed to sell tax deductions of personal expenses through misleading representations*121 regarding tax return preparation, tax advice, and alleged audit protection. Those who purchased this product were called Independent Marketing Associates (IMA). IMAs earned commissions by recruiting others to join Renaissance.

Renaissance was an illegal pyramid scheme and in 2001 was permanently enjoined from conducting business and selling its product. Mr. Cooper and other Renaissance leaders currently face Federal criminal charges including conspiracy to defraud the Internal*122 Revenue Service, assisting in the preparation of false tax returns, mail fraud, wire fraud, and money laundering, all stemming from their involvement in Renaissance. Petitioner does not dispute these facts.

Petitioner operated his own insurance business as a sole proprietor, and petitioner Ka Moua worked as a secretary for a healthcare corporation. ⁵ Petitioner became involved with Renaissance as an IMA in 1999, and continued his relationship with Renaissance in 2000 and 2001. His involvement in Renaissance ended sometime in November 2001.

During his first year with Renaissance, petitioner drove his personal automobile to St. Paul, Minnesota, twice a month for training. By the second year, he traveled to Minnesota once a month. As he began to recruit new members, petitioner had meetings once every 2 weeks in his home. ⁶ The meetings were held in the basement of petitioners' home which was furnished with a conference table, a telephone, a*123 computer, and a freestanding chart board. The basement was not used by petitioners for anything other than Renaissance meetings.

On Schedules C petitioners claimed deductions for business expenses totaling $ 79,676 and $ 54,182 for 2000 and 2001, respectively, for petitioner's insurance business activity. No Schedule C for either year was filed for expenses relating to the Renaissance activities, rather the expenses for Renaissance were commingled with the insurance business expenses. Both returns were prepared by a tax return preparer referred to petitioners by Renaissance.

Respondent determined that various expenses were not substantiated, were not shown to be ordinary and necessary to petitioner's business, or were personal in nature and therefore not deductible.

Discussion

Section 162 allows a deduction for all ordinary and necessary expenses incurred in carrying on a trade or business if the taxpayer maintains records or*124 other proof sufficient to substantiate the expenses. ⁷Secs. 162(a), 6001; sec. 1.6001-1(a), Income Tax Regs. To be engaged in a trade or business the taxpayer must be involved in the activity with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit. Sec. 162; see Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C. 686 (1988).

Renaissance has been found to be an illegal pyramid scheme that offered no product or service other than the dissemination of fraudulent tax advice. The parties have stipulated the deductions claimed with regard to the Renaissance activity; however, respondent contends that the Renaissance activity was not a trade or business.

*125 It is dubious at best to say that petitioner's participation in this pyramid scheme was conducted with the continuity and regularity of a trade or business, and that the claimed expenses were ordinary and necessary for the production of income. His Renaissance activities did not go beyond attending a meeting once a month and holding a meeting once every 2 weeks at his home. There is nothing in the record that provides a connection between the deductions claimed and a trade or business.

But, even if the Renaissance activity was a trade or business, petitioners face other problems. First, many of petitioner's claimed business expenses included family medical bills, clothing, and home mortgage interest. ⁸*126 "It is a fundamental policy of Federal income tax law that a taxpayer should not be entitled to a deduction for 'personal' expenses, such as the ordinary expenses of everyday living." Dobra v. Commissioner, 111 T.C. 339, 348 (1998); see sec. 262(a). The introductory materials of Renaissance's The Tax Relief System blatantly state that the taxpayer can convert "former ordinary home expenses into substantial business tax deductions immediately." ⁹

*127 Second, we note that irrespective whether the Renaissance activity was a trade or business, the disallowed travel and car expenses were not substantiated as required by sections 274(d) and 280F(d)(4) applicable to so-called listed property including passenger automobiles. See sec. 1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg. 46037 (Nov. 6, 1985). Petitioner's travel and car expenses were related to the use of his personal automobile. Petitioner has no records pertaining to the use of his automobile for the Renaissance activity.

Third, with respect to the disallowed expenses relating to the insurance business activity, petitioner lacked substantiation and had difficulty explaining how various items appearing on the Schedules C were incurred. For example, on the 2000 and 2001 tax returns petitioner deducted $ 12,864 and $ 6,000, respectively, for wages, but he had no evidence to substantiate these expenses. Of the total disallowed expenses relating to the insurance business activity, the parties stipulated that petitioner was entitled to a deduction of $ 1,330 for supplies for 2001. With the exception of the agreed item, respondent's*128 disallowance of the claimed expenses on both the 2000 and 2001 Schedule C is sustained.

Furthermore, generally no deductions are allowed with respect to the use of a dwelling unit which is used by the taxpayer as a residence. Sec. 280A(a). A taxpayer may be excepted from this general rule if a portion of the dwelling unit is exclusively used on a regular basis "as the principal place of business for any trade or business of the taxpayer". Sec. 280A(c)(1)(A).

Even assuming that petitioner's Renaissance activities were those of a trade or business and that petitioner's basement was used as the principal place of business, expenses incurred for incidental or occasional use of a home office are not deductible. See, e.g., Cally v. Commissioner, T.C. Memo. 1983-203; Roth v. Commissioner, T.C. Memo. 1981-699. Petitioners' basement was allegedly used for meetings only once every 2 weeks during the second year of petitioner's involvement with Renaissance. From this record, it does not appear that petitioner devoted substantial time and energy to any business activity that involved the regular use of his basement. Petitioners have not established that the exception*129 to section 280A(a) applies, and respondent's disallowance of the deductions for utilities and other expenses claimed for the home office is sustained.

Reviewed and adopted as the report of the Small Tax Case Division.

Decision will be entered under Rule 155.