MEMORANDUM FINDINGS OF FACT AND OPINION

WILBUR, Judge: Respondent has determined deficiencies in the petitioners' Federal income tax as follows:

Due to concessions by the parties, the following issues remain for decision:

1. Whether the pension trust created pursuant to section 401(a)¹ by petitioners' wholly-owned Subchapter S corporation has sufficient economic reality to be recognized for tax purposes.

2. Whether petitioners incurred interest expense in the amounts of $2,080 and $1,000 in 1969 and 1970, respectively.

3. Whether petitioners have adequately substantiated travel expenses; and

4. Whether expenses incurred in 1969 and 1970 in connection with an automobile owned by the corporation are deductible in excess of the amount allowed1976 Tax Ct. Memo LEXIS 91">*94 by respondent.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioners, Harry E. Lansing and Jean A. Lansing, husband and wife, resided in East Lansing, Michigan, at the time the petition was filed in this case. Petitioners filed joint Federal income tax returns for the years in issue with the district director of internal revenue at Cincinnati, Ohio.

Petitioners owned and operated a music store under the name of Campus Music Shop near Michigan State University. In 1964 petitioners began publishing and selling college course outlines for the use of the University students. Eventually, petitioners prepared, published and sold 50 different outlines.

In order to facilitate preparation, publication and sale of the outlines petitioners in 1965 organized a corporation under the laws of the state of Michigan known as Beagle Enterprises, Inc., (Beagle or the corporation). Beagle issued 500 shares of capital stock to each petitioner. At all times during the corporation's existence, ² petitioners were the sole stockholders and the sole employees. Harry E. Lansing was the corporation's president and Jean A. Lansing was the secretary-treasurer. 1976 Tax Ct. Memo LEXIS 91">*95

On April 1, 1965 Beagle elected to be treated as a small business corporation for income tax purposes. In 1966 Beagle executed a trust agreement creating the Beagle Enterprises, Inc. Employees Pension Trust (the Trust) and designating petitioners as trustees. Petitioners as trustees were notified on December 14, 1966, that the Trust was a qualified trust under section 401(a) and exempt from income tax under section 501. On March 29, 1972, the exemption of the Trust was revoked retroactively as of the date of the initial favorable qualification.

The trust agreement directed the trustees to use the funds of the Trust for contracts on the lives of the participants and also to make deposits into an auxiliary fund. Under the agreement the auxiliary fund was to be used to purchase "additional" annuities at retirement to provide (when added to the basic annuity purchased on behalf of the employee during his working years) the retirement benefits provided for by the plan. A terminated employee was provided "a fully vested interest in each contract issued and in effect for his benefit" but it was specifically1976 Tax Ct. Memo LEXIS 91">*96 provided that "in no event shall such terminated Participant have any vested interest in the Auxiliary Fund." No contributions were required from the employees.

Annuity contracts were purchased from Equitable Life Assurance Society of America, (Equitable). Premium payments on the annuity contracts were made to Equitable as follows:

In 1970 the Trustees cancelled the annuity contracts and the Trust received the cash surrender value of $9,778.69. After the cancellation of the annuity contracts, which resulted in a loss of $10,816.95, the auxiliary fund was the only funding medium of the Trust and an actuary was engaged to determine the amounts required to be paid into the Trust.

The Trust also contained the following provisions relating to the investments, management, and accounting of the funds of the Trust:

15.3 * * * The Trustees are further authorized and empowered to invest any and all funds in the Auxiliary Fund in any manner as an ordinary prudent investor which is acceptable to the Internal Revenue Service for the investment of qualified1976 Tax Ct. Memo LEXIS 91">*97 pension trust funds, or to enter into the Auxiliary Fund agreement with the issuing insurance company for the placing of such funds at interest with the insurer.

* * *

15.8 The Trustees shall keep minutes of their proceedings and complete records of the administration of the Trust, which minutes and records may be examined at any reasonable time on behalf of the Employer by any officer or employee (not necessarily as defined in Article II) designated in writing by the Employer. The Trustees shall make available to the Participants, Retired Participants and Terminated Participants and to their Beneficiaries, for examination at any reasonable time, such records as pertain to the person examining.

15.9 Within 90 days following the close of the fiscal year of the Trust, the Trustees shall furnish the Employer a written statement of account and the Employer shall promptly notify the Trustees in writing of its approval or disapproval thereof. Failure by the Employer to disapprove within 90 days after receipt of any such statement shall be considered an approval thereof. The approval by the Employer of any statement of account shall be binding, as to all matters embraced in1976 Tax Ct. Memo LEXIS 91">*98 the statement, on all parties to this agreement and on all Participants, Retired Participants, and Terminated Participants, to the same extent as if the account of the Trustees had been settled by judgment or decree in an action for a judicial settlement of their accounts in a court of competent jurisdiction in which the Trustees, the Employer and all persons having or claiming any interest in the trust fund were parties; provided, however, that nothing herein contained shall deprive the Trustees of their right to have their accounts judicially settled if they so desire.

15.10 The Trustees shall use ordinary care and reasonable diligence in the exercise of their powers and the performance of their duties hereunder.

* * *

18.4 It is understood that no part of the corpus of income hereunder shall ever be used or diverted to purposes other than for the exclusive benefit for participants, Retired Participants, and Terminated Participants, or their Beneficiaries.

A checking account was maintained in the First National Bank of East Lansing (First National) in the name of "Beagle Enterprises, Inc., Employees Pension Trust, Harry and Jean Lansing." Additionally, a savings account1976 Tax Ct. Memo LEXIS 91">*99 was maintained at East Lansing Savings and Loan Association (the Savings and Loan) under the name "Beagle Enterprises, Inc. Employees Pension Fund."

Funds of Beagle and the Trust were extensively commingled in the savings account of the Trust from which large withdrawals were made on several occasions of funds allegedly belonging to Beagle. However, the statements of the savings account do not specifically identify the funds belonging to Beagle, funds that represent current contributions to the Trust by Beagle, or funds belonging to the Trust from previous contributions.

Beagle maintained no financial records of its own, and such financial records pertaining to Beagle that are available are incorporated in the financial journal of Campus Music Shop. These financial records contain no information concerning the deductions Beagle, Inc., claimed for contributions to the Trust. Substantiation of the deductions rests primarily on efforts to correlate entries in the statements of the savings account with third party payments by Beagle and a series of notes and unrecorded mortgages underlying the following bewildering series of transactions.

Petitioners in their individual capacity1976 Tax Ct. Memo LEXIS 91">*100 purchased a lot in Whitehills Estate (the Whitehills lot) in East Lansing for $13,500. Checks dated December 29, 1966 and December 30, 1966 in the amounts of $2,000 and $1,500, respectively, were drawn to the order of Whitehills Development Company (Development Company) on account of the Trust in partial payment for the Whitehills lot. In 1966, petitioners also paid $7,000 to the Development Company that they had borrowed from the Trust, bringing the total payments in 1966 to $10,500. During 1967 the Trust paid an additional $3,000 to the Development Company for the Whitehills lot, paying off the $13,500 that petitioners paid for their lot.

On March 15, 1967, petitioners executed a mortgage (described therein as a "temporary indenture") on the Whitehills lot to the trust to secure repayment at 7 percent in 1 year or on demand of the $10,500 advanced in 1966.³ The mortgage was not recorded. Subsequently, a warranty deed dated May 11, 1967 was executed by the Development Company conveying the Whitehills lot to petitioners. The deed was recorded on May 22, 1967. A promissory note dated March 15, 1968, was at some point in time executed by petitioners to the Trust for $13,5001976 Tax Ct. Memo LEXIS 91">*101 which incorporated the $10,500 withdrawal in 1966 and the $3,000 advance from the Trust in 1967.

In 1968 petitioner commenced construction of a building for use as a personal residence and as an office for Beagle on the Whitehills lot. A number of direct or indirect withdrawals of funds ostensibly belonging to the Trust were made in order to complete construction of the Whitehall property, represented by the following:

1976 Tax Ct. Memo LEXIS 91">*102 Petitioners executed a contract to sell their residence on Hagadorn Road (the Hagadorn property) to John Shrank for $27,500 on September 15, 1969. Five thousand dollars was paid at the time the contract was signed and the balance with interest was payable in installments of $200 each. Petitioners were to convey the title to the Hagadorn property only upon performance of the purchaser's covenants. The Shrank land contract was not recorded.

At the time of the Shrank contract petitioners had an unpaid balance on a loan from the Savings and Loan secured by a first mortgage on the Hagadorn Road property. For a consideration of $22,500 petitioners executed and assigned a second mortgage on the Hagadorn Road property to the Trust on September 15, 1969. Neither the second mortgage nor the assignment of mortgage was recorded. The Shrank contract was also assigned to the Trust pursuant to an undated instrument executed by petitioners.

On March 15, 1970, petitioners executed a promissory note in the amount of $30,353 with 7 percent interest to the Trust. This note was secured by a second mortgage on the Whitehills lot. The second mortgage was not recorded. The first mortgage on1976 Tax Ct. Memo LEXIS 91">*103 the Whitehills lot was held by First National to secure repayment of $60,000 and was recorded on June 23, 1969. The second mortgage to the Trust which secured cured the $30,353 note was superseded by a second mortgage executed on March 15, 1971, to secure repayment of $43,977.71 at 7 percent interest. This mortgage was also not recorded.

In 1973 petitioners sold the Whitehills property to F. Jerome and Judith A. Corr. A promissory note dated October 24, 1973, was executed by the Corrs to the petitioners in the amount of $76,484.82 at 8 percent interest. This note was secured by a second mortgage.The Corr note and mortgage were assigned to the Trust by petitioners on November 20, 1973. The assignment was recorded on January 2, 1974.

Beagle wrote a series of checks on its corporate account during 1969 and 1970 for goods supplied and services rendered in the construction and furnishing of their residence in the Whitehills Estates. At some point in time notes were executed from petitioners to the Trust reflecting their theory that these involved constructive payments of deductible pension fund contributions by Beagle to the Trust and miscellaneous loans to petitioners.

In March1976 Tax Ct. Memo LEXIS 91">*104 1968 petitioners expended $717.88 on a trip to Florida. Petitioners also made a trip to New York City in September 1968 for which $514.95 was expended. The expenses incurred in connection with the New York City trip included $100 for expenses of petitioners' daughter who was a member of the board of directors of Beagle. No business appointments were scheduled prior to the trips.

Petitioners owned an automobile which was not used for business purposes. Beagle also owned an automobile which was used for various business purposes.In addition, the Beagle car provided transportation for petitioners from their residence to the Campus Music Shop. On occasion, petitioners would use the Beagle car to transport outlines which were produced at their residence to the shop. Although petitioners deducted all expenses related to the Beagle car, respondent allowed only 75 percent of the amount claimed as business related.

OPINION

The primary issue for decision in this case is whether the Trust had sufficient economic reality to be recognized under the tax law. ⁸ The trust was established in conjunction with a pension plan which initially received approval as a qualified plan under section1976 Tax Ct. Memo LEXIS 91">*105 401(a). Respondent contends that the petitioners, who were the sole shareholders and officers of the creator corporation as well as the sole beneficiaries and trustees of the Trust, dealt with the Trust res in a manner which deprived the Trust of any economic reality for Federal tax purposes.Consequently, respondent concludes that since no Trust cognizable under the tax laws was created, Beagle, the creator of the alleged Trust, is not entitled to any deductions for contributions pursuant to the plan. ⁹ We agree with respondent.

1976 Tax Ct. Memo LEXIS 91">*106 The Federal tax consequences we confront do not depend on the paper edifice erected, but on whether that edifice corresponds with economic reality--whether there has been a substantial change in economic ownership. Burde v. Commissioner,352 F.2d 995">352 F. 2d 995 (2nd Cir. 1965), affg. 43 T.C. 252">43 T.C. 252 (1964); Irvine K. Furman,45 T.C. 360">45 T.C. 360 (1966), affd. per curiam 381 F.2d 22">381 F. 2d 22 (5th Cir. 1967). We believe that the petitioners, when all the circumstances of this case are considered in context, should be treated as the owners of the trust property, and that for Federal tax purposes the Trust, having no economic reality, was a nullity. ¹⁰

1976 Tax Ct. Memo LEXIS 91">*107 Where the management, ownership and control of several related entities is in the hands of one person, the Courts carefully scrutinize the relationship of the various entities to ensure that the substance of the transactions--measured by the actual conduct of the parties--accords with the form in which they are cast. We are not here confronted with a case where, although the employees, shareholders, officers, trustees, and beneficiaries are identical, the activities peculiar to each capacity can be isolated and have been conducted in accordance with the duties imposed on the specific role. In the instant case, petitioners' activities could not be segregated as to the various roles. For instance, we cannot discern at which points petitioners acted as trustees, as officers of the creator corporation, as employees, or as beneficiaries of the Trust. Petitioners freely and consistently dealt with the "trust" property as their own and as a matter of economic reality, there was no separation of legal title from beneficial enjoyment.¹¹

1976 Tax Ct. Memo LEXIS 91">*108 Petitioners' enjoyment of the Trust property was not delayed until retirement as contemplated by the pension plan. Instead, the Trust res was used for their immediate personal benefit both as officers of the creator corporation and as individuals. Petitioners drew checks on the Trust checking account to purchase a lot in their individual capacity. Petitioners used Trust funds to pay costs for the construction of a combined personal residence and office. On other occasions petitioners used corporate funds to construct their personal residence, contending that those funds, or at least some portion of them, were contributions to the Trust and loans to the beneficiary. ¹²

1976 Tax Ct. Memo LEXIS 91">*109 If secured, these "loans" were secured by junior unrecorded mortgages. Petitioners did assign one note and a second mortgage securing the note to the Trust and did record the assignment in 1974, 2 years after the qualification of the plan and Trust was revoked.

Petitioners rely on Rev. Rul. 65-178, 2 C.B. 94">1965-2 C.B. 94, 124 as modified by Rev. Rul. 67-288, 2 C.B. 151">1967-2 C.B. 151 as authorizing the alleged loans. Even if the Trust had any economic reality, the loans to petitioners as participants in the plan would not have been within the scope of respondent's rulings. Together those rulings permit loans from a pension trust to participants in excess of their vested interests but only if the loans are adequately secured, bear a reasonable rate of interest, and are repaid within a specified period of time. The loans in this case were evidenced for the most part by unsecured promissory notes executed at some point in time. Additionally, the notes required repayment within specified periods but were not actually repaid in cash when due. Rather, new notes were executed bearing the same interest rate.

In addition, funds of the Trust and the creator corporation were1976 Tax Ct. Memo LEXIS 91">*110 commingled in the Trust savings account. Although petitioners contend that they could identify ownership of the amounts deposited to and withdrawn from the Trust savings account, no books reflecting Trust receipts or expenditures were maintained nor did the corporation keep a record of required contributions. ¹³

1976 Tax Ct. Memo LEXIS 91">*111 At one point petitioners conceded no separate records were kept by Beagle, Inc., and that "the contributions to the auxiliary fund we kept track of by those notes,". At another point petitioners, again conceding lack of contributions records by Beagle, Inc., stated that Beagle's records of contributions were the corporate income tax returns themselves. As concerns the Trust records, petitioners conceded that the Trust "didn't have a journal as such" ¹⁴ and stated that the amounts "to be put in the fund each year can be checked from the 990-P's." These explanations were offered when petitioners' attempts to recall past events from the savings account statements of the Trust proved clearly futile. ¹⁵ Petitioners simply regarded the Trust fund money as their own, stating at one point that "We were the only ones involved at either end * * *". For this reason they dealt with Trust fund money as their own property, and never exercised any fiduciary responsibilities with regard to the trust corpus. Based on the entire record, we hold that the Trust lacked economic reality and was a nullity for tax purposes.

1976 Tax Ct. Memo LEXIS 91">*112 Several secondary issues remain for our consideration. The first is whether petitioners incurred interest expense in the amounts of $2080 and $1000 in 1969 and 1970, respectively. The 1969 interest claim is composed in part of 7 percent interest on a note in the amount of $13,500 executed by petitioners to the Trust in 1968. ¹⁶ The remaining amount for 1969 and the entire amount claimed in 1970 is attributable to payments on a land contract assigned to the Trust in conjunction with a mortgage executed by petitioners.

Since we have determined that the Trust lacked economic reality for Federal income tax purposes, petitioners could not pay any amounts to the Trust. If any interest was paid, it was paid to the corporation. However, petitioners have failed to prove that any interest was paid.

Petitioners rely solely on the records of deposit to the Trust savings account to prove that interest was paid on an existing indebtedness. Although the records clearly indicate that deposits were made1976 Tax Ct. Memo LEXIS 91">*113 to the account, it is impossible for us to determine what amounts, if any, constituted repayments on loans and the amount of interest thereon as contrasted to payments from Beagle. Consequently, petitioners are not entitled to deduct any amounts as interest.

Petitioners also claim a deduction for traveling expenses under section 162. Petitioners contend that the trip to Florida was motivated by a desire to expand the outline publishing business and that the trip to New York was designed to establish buying agreements directly with manufacturers. In addition, petitioners contend that a board of directors meeting was held during the course of their New York trip.

Section 162 provides a deduction for ordinary and necessary business expenses including traveling expenses while away from home on business. The taxpayer must prove that the expenditure was related primarily to business rather than personal reasons. Vaughn v. Chapman,48 T.C. 358">48 T.C. 358 (1967); James Schulz,16 T.C. 401">16 T.C. 401 (1951).

Moreover, to qualify for a deduction for traveling expenses, the taxpayer1976 Tax Ct. Memo LEXIS 91">*114 must also fulfill the stringent substantiation requirements of section 274. Section 274 requires that the amount, time and place, and business purpose of the expenditure be proved by adequate record or by evidence corroborating the taxpayer's own statement.

With respect to travel, the amount to be proven is the amount of each separate expenditure except that the daily costs may be aggregated in reasonable categories. Section 1.274-5(b)(2)(i), Income Tax Regs. The time requirement contemplates evidence of departure and return dates as well as number of days away from home spent on business. Section 1.274-5(b)(2)(ii), Income Tax Regs.

The parties have stipulated that petitioners expended $717.88 and $514.95 on travel to Florida and New York City, respectively. However, no evidence was presented to identify either individual expenditures or aggregate expenditures (such as meals, lodging and transportation) included in those amounts. No evidence regarding specific departure or return dates was presented. Moreover, the only evidence regarding the business nature of the trips was the vague and uncorroborated testimony of petitioner1976 Tax Ct. Memo LEXIS 91">*115 Harry E. Lansing. That testimony consisted of general statements that petitioners met with various manufacturers but Harry Lansing failed to identify any particular persons or business meetings. Additionally, the testimony alluded to a board of directors meeting but neither testimony regarding the substance of the meeting nor any supporting documentary evidence was produced.

Petitioners have thus failed to fulfill any of the substantiation requirements of section 274. Consequently, they are not entitled to a deduction for travel expenses in excess of that allowed by respondent.

The final issue remaining for our decision is whether expenses incurred in connection with a corporate car are fully deductible.

Operating expenses of automobiles used in a business are clearly deductible under section 162. Section 1.162-1(a), Income Tax Regs. However, as with all deductions for business expenses, petitioners must prove that the expenditure was primarily business related. 48 T.C. 358">Vaughn V. Chapman,supra; 16 T.C. 401">James Schulz,supra.

Although the1976 Tax Ct. Memo LEXIS 91">*116 corporately-owned automobile was used primarily in the business, it was not exclusively so used. Petitioners admittedly used the car to commute from their home to the business. Since commuting expenses are not deductible, expenses incurred in connection with the corporate car which were attributable to commuter use are not deductible. Section 1.162-2(e), Income Tax Regs.

Petitioners have failed to produce evidence that commuting and personal use of the car accounted for less than 25 percent of the expenses. Consequently, we sustain respondent's determination that only 75 percent of the operating expenses of the corporate car is deductible.

Decision will be entered under Rule 155.