                  T.C. Memo. 1997-93



                UNITED STATES TAX COURT



   THOMAS M. AND CHRISTINE A. FRIES, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 23232-93.                Filed February 24, 1997.



     Corp. was organized in 1987 with $900 in capital
contributions, of which amount H contributed $300.
Shortly thereafter, H advanced an additional $74,700 to
Corp. and received in return a fully enforceable,
unsecured note with a set monthly repayment schedule.
No payment of principal or interest was ever made on
the note by Corp. In 1989, Ps deducted the entire
amount of the advance as a business bad debt under sec.
166, I.R.C. R disallowed the deduction completely,
determining that the advance was a capital contribution
and not a loan. On the facts, Held: The advance H
made to Corp. constituted a contribution to capital
and, therefore, Ps are not entitled to claim a bad debt
deduction under sec. 166, I.R.C. Held, further, R's
determination that Ps are liable for the accuracy-
related penalty under sec. 6662(a), I.R.C., for a
substantial understatement of tax is sustained.
                                 - 2 -

       Thomas M. Fries and Christine A. Fries, pro sese.

       Amy A. Campbell, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

       NIMS, Judge:   Respondent determined a deficiency in

petitioners' Federal income tax for the tax year ended December

31, 1989, in the amount of $19,728.      Respondent also determined

that petitioners are liable for an accuracy-related penalty of

$3,946 pursuant to section 6662(a) for 1989.     (Petitioner

Christine A. Fries is a party to this proceeding solely because

she filed a joint return with her husband, and the term

petitioner will be used henceforth to refer to Thomas M. Fries.)

       All section references are to sections of the Internal

Revenue Code in effect for the year in issue.     All Rule

references are to the Tax Court Rules of Practice and Procedure.

       The issues for decision are as follows:

       (1)   Whether petitioners are entitled to a claimed bad debt

deduction of $75,000 for 1989.     We hold that they are not.

       (2)   Whether petitioners are liable for the accuracy-related

penalty under section 6662(a) for a substantial understatement of

tax.    We hold that they are.

       Some of the facts have been stipulated and are found

accordingly.    The stipulation of facts and attached exhibits are

incorporated herein by this reference.     Petitioners resided in

Dunwoody, Georgia, when they filed their petition.
                                - 3 -

                           FINDINGS OF FACT

     Petitioner, along with his wife and mother, incorporated

National Travel Management, Inc. (National), in December 1986 in

order to start a retail travel business.       They became the

corporation's initial officers and shareholders.       In February

1987, an erstwhile coworker, Fred Burkhalter (Burkhalter),

approached petitioner and indicated his interest in entering the

travel business as well.    Burkhalter informed petitioner that he

knew others who were eager to invest in such a venture.       After

careful consideration, talks commenced between petitioner and

these individuals, and a deal was struck.

     Upon completion of the negotiations, the stock of National

was held as follows:   33 percent by petitioner; 11 percent by Jim

Brands (Brands); 22 percent by Bob Tucker (Tucker) or Tavistock

(a Georgia general partnership of which Tucker was the general

partner); and 33 percent by Burkhalter.       A total of $900 was

contributed for the stock of National, of which amount petitioner

paid $300.   Petitioner was named president of National.

     On May 27, 1987, petitioner, acting as president of

National, executed a note to himself in his individual capacity

(the Fries note) in the amount of $74,700.       The Fries note called

for 120 installments of principal and interest in the amount of

$946.29 each.   The first payment was due on June 28, 1987, with

each subsequent installment due on the 28th day of each month

thereafter, through May 1997.    Petitioner did not insist on
                                 - 4 -

National's establishing a sinking fund or reserve for the payment

of principal and interest on the Fries note, and the note was not

secured.

     Concurrently with the execution of the Fries note, Brands

advanced $24,900 as a "loan" to National and in exchange therefor

received a note on terms similar to the Fries note.    Either

Tucker or Tavistock also advanced funds to National of $49,800 at

this time under similar terms.    Burkhalter did not make such an

advance to National.    Immediately after the advances, National

had a debt to equity ratio of 166 to 1 ($149,400 notes to $900

equity).    From the start, the expectation of the shareholders was

that the operations would generate the cash profits to repay the

advances.

     On the same day that National received the advances,

petitioner conveyed an interest in his house to Tavistock in

exchange for $75,000.    Petitioner understood that, as a condition

of his employment with National, he was required to infuse

capital into the company.    However, he did not have any cash on

hand, nor was he in a position to risk substantial amounts of

money at the time.   Therefore, he mortgaged his residence to

Tavistock and contributed the proceeds to National.    National

issued the Fries note in return for that infusion of cash.

     Shortly after these transactions were completed, National

acquired an operating travel agency from Clark Howard (Howard),

called Action Travel (Action), for roughly $200,000.    National
                               - 5 -

paid approximately $50,000 in cash as a downpayment; the rest of

the purchase price was reflected in a note held by Howard (the

Action note).   Petitioner assumed personal liability as guarantor

for the Action note, which was restructured a short time later to

reduce the amount of the payments National was required to make.

The money used to acquire Action came from the advances made by

petitioner and the others.   The purchase of Action was

contemplated by National's shareholders at the time of their

advances and in part prompted them to make the advances, as did

the need to meet basic operating costs.

     National never made a payment of principal or interest on

the Fries note.   Petitioner never requested repayment or granted

a deferment on the note.   Petitioner could not by his own efforts

repay the obligation of National to himself since all checks

issued by National required two signatures.   However, National

did make periodic payments on the Action note, and petitioner

signed those checks with another officer even after National had

defaulted on his own note.   From 1987 to 1990, National paid

approximately $100,000 on the Action note before defaulting on

that obligation as well.

     National's failure to pay on the Fries note effected a

difficult financial situation for petitioners.   In May 1988, they

were forced to sell their house.   In 1989, in order to make ends

meet, petitioner stepped down as president of National, which by
                                 - 6 -

that point was also having trouble paying salaries to him and

Burkhalter.     He found another job with a competing travel

organization.

     After leaving National's employ, petitioner explored the

possibility of collecting on the Fries note.     He discussed the

matter with his attorney, Edwin W. King (King).     In a letter

dated March 22, 1990, King wrote that, under the circumstances,

he was unwilling to undertake collection proceedings against

National.

     Pursuant to the letter from King, and after petitioner

consulted with his accountants, petitioners claimed a $75,000 bad

debt deduction on their 1989 return.     Petitioners included the

$300 initially paid for the National stock in the deduction.

     On February 5, 1993, petitioners signed a Consent to Extend

the Time to Assess Tax for 1989, extending the period of

limitations until April 15, 1994.    Respondent issued a statutory

notice of deficiency to petitioners for 1989 on August 11, 1993,

completely disallowing petitioners' claimed bad debt deduction.

     After filing a lawsuit against National in 1993, petitioner

was awarded a consent judgment on the Fries note by the State

Court of Dekalb County in the amount of $123,255 ($74,700

principal and $41,085 interest, and attorney's fees) on January

10, 1994.   On February 7, 1994, the shareholders of National

(except petitioner) held a meeting.      At that time, they voted to
                                - 7 -

issue petitioner 4,550 shares of Action and 56 shares of Caldwell

Group, Ltd. (a partially owned subsidiary of National acquired

after petitioner's departure) in a general distribution of

National's assets in partial satisfaction of its creditors.

                               OPINION

     We must adjudge whether petitioners are entitled to a bad

debt deduction under section 166 in 1989 for the $74,700 advance

petitioner made to National in 1987.     (The additional $300

petitioners claimed on their return represents the sum petitioner

paid for his stock in National.    This amount is, therefore,

ineligible for a section 166 deduction.     Sec. 1.166-1(c), Income

Tax Regs.)    We must also decide whether petitioners are liable

for an accuracy-related penalty under section 6662(a) for a

substantial understatement of income tax during 1989.

Issue 1. Whether Petitioners Are Entitled to a Section 166 Bad
Debt Deduction

     Section 166(a)(1) provides that a deduction shall be allowed

for "any debt which becomes worthless within the taxable year."

However, section 166 distinguishes business bad debts from their

nonbusiness counterparts.    Sec. 166(d); sec. 1.166-5(b), Income

Tax Regs.    Business bad debts may be deducted against ordinary

income whether wholly or partially worthless during the year (to

the extent charged off during the tax year as partially worthless

debts).   Sec. 1.166-3, Income Tax Regs.    Nonbusiness bad debts

may be deducted, but only if they are entirely worthless in the
                               - 8 -

year claimed; they are, moreover, subject to the same limitations

that apply to short-term capital losses.   Sec. 166(d).

     A deduction for a bad debt is limited to a bona fide debt.

Sec. 1.166-1(c), Income Tax Regs.   A bona fide debt arises from a

debtor-creditor relationship based upon a valid and enforceable

obligation to pay a fixed or determinable sum of money.    "A * * *

contribution to capital shall not be considered a debt for

purposes of section 166."   Sec. 1.166-1(c), Income Tax Regs; see

In re Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir. 1976); Kean v.

Commissioner, 91 T.C. 575, 594 (1988).

     Petitioners assert that the advance at issue constitutes a

business debt which became entirely worthless during 1989.

Consequently, they posit, they are entitled to fully deduct the

loss against ordinary income during that year.   On the other

hand, respondent makes the following alternative arguments:

First, the advance does not constitute debt, but equity.    Second,

if a valid debtor-creditor relationship did exist between

National and petitioner with respect to the amount in question,

then any loss is not deductible in 1989 because the debt was not

worthless in that year.   Finally, respondent maintains that if

the debt was worthless in 1989, it was a nonbusiness rather than

a business bad debt, deductible only to the extent permitted

under section 166(d).

     Characterization of an advance as either a loan (debt) or

capital contribution (equity) is a question of fact which must be
                               - 9 -

answered by reference to all of the evidence, with the burden on

the taxpayer to establish that the advance was a loan.     Rule

142(a); Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493

(1980); Yale Avenue Corp. v. Commissioner, 58 T.C. 1062, 1073-

1074 (1972).   Advances to a closely held corporation by its

shareholders are subject to particular scrutiny, since "The

absence of arm's-length dealing provides the opportunity to

contrive a fictional debt shielding the real essence of the

transaction and obtaining benefits unintended by the statute."

Gilboy v. Commissioner, T.C. Memo. 1978-114.   Thus, we look

beyond the form of the transaction to determine its true

substance.

     Courts have identified and considered various factors in

deciding questions of debt versus equity.   See, e.g., In re

Uneco, Inc., supra at 1207-1208 (10 factors); Fin Hay Realty Co.

v. United States, 398 F.2d 694, 696 (3d Cir. 1968) (16 factors).

The Court of Appeals for the Eleventh Circuit, to which an appeal

of this case would lie, has adopted the objective factors set

forth in Estate of Mixon v. United States, 464 F.2d 394 (5th Cir.

1972).   See In re Lane, 742 F.2d 1311 (11th Cir. 1984);

Stinnett's Pontiac Serv., Inc. v. Commissioner, 730 F.2d 634

(11th Cir. 1984), affg. T.C. Memo. 1982-314.

     In Estate of Mixon, the Court of Appeals for the Fifth

Circuit delineated the following 13 elements which merit

consideration in determining whether an advance constitutes debt
                               - 10 -

or equity:    (1) The name given to the certificate evidencing the

indebtedness; (2) the presence or absence of a fixed maturity

date; (3) the source of payments; (4) the right to enforce

payment of principal and interest; (5) participation in

management flowing as a result of the advance; (6) the status of

the contribution in relation to regular corporate creditors; (7)

the intent of the parties; (8) "thin" or adequate capitalization;

(9) identity of interest between creditor and stockholder; (10)

source of interest payments; (11) the ability of the corporation

to obtain loans from outside lending institutions; (12) the

extent to which the advance was used to acquire capital assets;

and (13) the failure of the debtor to repay on the due date or to

seek a postponement.    Estate of Mixon v. United States, supra at

402.

       In weighing the evidence favoring characterization of the

advance as debt or equity, we recognize that the various factors

are not of equal significance, and that no one factor is

controlling.    John Kelley Co. v. Commissioner, 326 U.S. 521, 530

(1946); Estate of Mixon v. United States, supra at 402.    This

Court considers the ultimate inquiry to be: "Was there a genuine

intention to create a debt, with a reasonable expectation of

repayment, and did that intention comport with the economic

reality of creating a debtor-creditor relationship?"    Litton Bus.

Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973).    We view the

transaction as of the time the note was issued and not when
                                - 11 -

petitioner's employment relationship or National's future

prospects turned sour.   See Mayhew v. Commissioner, T.C. Memo.

1994-310.

     Due to the myriad factual circumstances under which debt-

equity questions can arise, not all of the factors are

necessarily relevant to each case.       Dixie Dairies Corp. v.

Commissioner, supra at 493-494.     We shall discuss below only

those factors germane to the disposition of the instant matter.

     1.   Name Given to the Certificate
     2.   Presence or Absence of a Fixed Maturity Date

     "[T]he issuance of a bond, debenture, or note is indicative

of a bona fide indebtedness."      Estate of Mixon v. United States,

supra at 403.   Also, the presence of a definite maturity date

indicates a fixed obligation to repay, which is characteristic of

a debt obligation.   Id. at 404.    Here, the note issued to

petitioner had a set monthly repayment schedule, which militates

in favor of debt.

     3.   Source of the Payments

     If repayment is possible only out of corporate earnings, the

transaction resembles a capital contribution; if repayment does

not hinge on earnings, the transaction reflects a loan.        Id. at

405; Leuthold v. Commissioner, T.C. Memo. 1987-610.      In this

case, immediate repayment was not available from National's

existing assets, as National had virtually no resources.       The

amount due each month on the Fries note exceeded National's
                                - 12 -

entire capital base of $900.    No sinking fund or reserve existed

to insure repayment of the advance.      Instead, the shareholder

contributors expected to be repaid out of earnings from

National's operations.

     4.   Right to Enforce Payment

     If a fixed obligation to repay the advance exists, the

transaction is indicative of a loan.      Estate of Mixon v. United

States, supra at 405.     Such an obligation is present in the

instant case.   However, while petitioner's note was fully

enforceable, he took none of the customary steps to assure

repayment in the event the business failed.      No sinking fund was

established, and the note lacked even a modicum of security to

protect petitioner at least against the claims of unsecured

creditors or subsequent lienholders.      Moreover, other than

petitioner's self-serving testimony, no evidence was presented

that he ever demanded repayment of the note.

     This case is distinguishable from Baldwin v. Commissioner,

T.C. Memo. 1993-433, in which a partnership had experienced such

success in its first 9 months of operation that the taxpayer was

understandably not concerned with repayment of the advances he

made in the short term.    Here, there was no early indication of

success on the part of National.     In fact, the evidence all

points to the fact that "from day one, the business went

downhill".   While the Court recognizes that petitioner's concern

for his job might have made him reluctant to badger the other
                                - 13 -

shareholders for repayment of the putative loan when their

relationship began to deteriorate, there was no evidence of any

requests for repayment by petitioner.       See Davies v.

Commissioner, 54 T.C. 170, 176 (1970).       Moreover, nothing

explains petitioner's failure to avoid the problem in the first

place by either securing the note or by setting up a sinking

fund.

     5. Status of the Contribution in Relation to Regular
     Corporate Creditors

     Subordination of a putative loan to that of another creditor

typifies a contribution to capital.       Tomlinson v. 1661 Corp., 377

F.2d 291, 297-298 (5th Cir. 1967).       National repaid about

$100,000 on the Action note, but failed to pay anything at all on

the previously executed Fries note.       While the terms of the Fries

note did not mention subordination, petitioner acquiesced in a de

facto subordination by failing to demand repayment while

continuing to sign checks for the Action note.       See Smithco

Engg., Inc. v. Commissioner, T.C. Memo. 1984-43.

     6.    Intent of the Parties

     The intent of the parties weighs heavily in determining the

debt versus equity question, but subjective intent does not

suffice to alter the relationship or duties created by an

otherwise objectively indicated intent.       In re Lane, 742 F.2d at

1311.     Conclusory and self-serving statements by taxpayers that

they intended to create debts have been accorded little weight by
                              - 14 -

the courts.   The Court of Appeals for the Fifth Circuit has

stated:

     Primary reliance upon subjective indications of intent
     is simply not an effective way of resolving * * * [the
     debt versus equity] problem. In a land of hard
     economic facts, we cannot root important decisions in
     parties' pious declarations of intent. * * * [Texas
     Farm Bureau v. United States, 725 F.2d 307, 314 (5th
     Cir. 1984).]

     Thus, we must look not simply at the pronouncements of the

parties, but also at the circumstances surrounding the

transaction to reveal their intent.    Tyler v. Tomlinson, 414 F.2d

844, 850 (5th Cir. 1969).   If a corporation does not make

required payments or a shareholder does not enforce his right to

receive payments, an advance appears more like equity than debt.

Ambassador Apartments, Inc. v. Commissioner, 50 T.C. 236, 246

(1968), affd. 406 F.2d 288 (2d Cir. 1969).

     In the instant case, petitioner stated in his brief that

"The terms and conditions of the second mortgage and the loan

were identical.   By the nature of this obligation it is clear

that the debt was obviously a loan and not a contribution to any

equity."   However, the underlying note detailing the mortgage's

terms is not part of the record.   (While Brands expressed general

knowledge of a mortgage on petitioner's residence held by

Tavistock, he was not aware of the specifics of that

transaction.)

     Even if petitioner subjectively intended to make a loan, the

circumstances surrounding the advance point to a contribution to
                                - 15 -

capital.     Petitioner never formally demanded repayment.   Despite

engaging in a restructuring of the Action note, he advocated no

similar measure for his note.     National also did not appear to

treat the contribution as a debt inasmuch as no payment of

principal or interest ever occurred, it did not request a

deferment, and it effectively subordinated the note to the Action

note.     Cf. Dallas Rupe & Son v. Commissioner, 20 T.C. 363, 369-

370 (1953) ("here a debt was owed to petitioners by the symphony

and was definitely so recognized by all parties concerned.").       In

any event, National's books or tax returns are not in evidence to

prove it viewed the advance otherwise.

        The only indication that National ever regarded petitioner

as a creditor came at a shareholders' meeting after the consent

judgment had been entered against it in early 1994.     At that

time, the shareholders voted to satisfy petitioner's claim by

awarding him stock in National's subsidiary corporations.

However, this does not necessarily evince National's intent at

the time the advance was made.     Furthermore, the fact that

petitioner won a judgment in State court for the amount of

principal plus interest owing on the note does not dictate that

the advance must be deemed a loan for Federal tax purposes.       See

Road Materials, Inc. v. Commissioner, 407 F.2d 1121, 1124 n.3

(4th Cir. 1969), ("It does not follow * * * that an advancement

qualifying as a debt under state law must be treated as a debt
                               - 16 -

under the Internal Revenue Code."), affg. in part, vacating in

part and remanding T.C. Memo. 1967-187.

     In addition, petitioner could not have realistically

expected repayment at the time he made the advance in light of

National's financial condition.   Petitioner's contribution was

made during the early stages of the corporation's operations.

See Leuthold v. Commissioner, T.C. Memo. 1987-610.     A demand by

petitioner for repayment would have jeopardized the future

success of the corporation on which his continued employment

depended.   See Davis v. Commissioner, 69 T.C. 814, 836 (1978).

     7.   "Thin" or Adequate Capitalization

     An advance to a corporation appears to be equity if the

corporation is thinly capitalized.      American Offshore, Inc. v.

Commissioner, 97 T.C. 579, 604 (1991).     No specific ratio of debt

to equity determines whether a corporation is adequately

capitalized.   2554-58 Creston Corp. v. Commissioner, 40 T.C. 932,

937 n.3 (1963).    However, this Court has held that debt to equity

ratios of 800 to 1, American Offshore, Inc. v. Commissioner,

supra at 604; 205 to 1, 2554-58 Creston Corp. v. Commissioner,

supra at 937; and 123 to 1, Ambassador Apartments, Inc. v.

Commissioner, supra at 245, indicated inadequate capitalization.

     This case closely parallels Thompson v. Commissioner, 73

T.C. 878 (1980).   In Thompson, this Court held that the subject

advances of $20,000 were contributions to capital where a

business had been incorporated with a minimal capital
                               - 17 -

contribution of $500 and the subsequent advances were apparently

its only other source of funds.     Id. at 894-895.   Here, National

had a capital base of $900, with a debt to equity ratio of

roughly 166 to 1.    As in Thompson, insufficient capital existed

to fund National's operations at the time of petitioner's

advance.    See also Tyler v. Tomlinson, supra at 848-849.

     8.    Identity of Interest Between Creditor and Stockholder

     If stockholders make advances in proportion to their

respective stock ownership, a capital contribution is indicated.

Estate of Mixon v. United States, 464 F.2d at 409.     Petitioner

owned 33 percent of National's stock and contributed $74,700 to

the corporation.    Brands, who owned 11 percent of the stock,

contributed precisely one-third of that amount, or $24,900.      A

22-percent shareholder (the record is unclear whether Tucker or

Tavistock) contributed exactly two-thirds of the amount of

petitioner's advance, or $49,800.    Although Burkhalter did not

make an advance, at the time the stock was originally distributed

the parties had apparently agreed to exempt him from making

further monetary contributions.

     9. Ability To Obtain Loans From Outside Lending
     Institutions

     If an ordinary reasonable creditor would not lend funds to a

corporation when funds are advanced by a shareholder, the advance

is more likely to be equity.    Estate of Mixon v. United States,

464 F.2d at 410; American Offshore, Inc. v. Commissioner, supra
                              - 18 -

at 605.   We look to whether the terms of the purported debt were

a "patent distortion of what would normally have been available"

to the debtor in an arm's-length transaction.     Litton Bus. Sys.,

Inc. v. Commissioner, 61 T.C. at 379.

     Petitioner made an advance to National without securing it.

While he alleged that travel agencies were routinely financed in

such a manner by outside lending institutions, we doubt this

occurs without some type of security, especially in light of

National's recent incorporation and financial straits.    See

Thompson v. Commissioner, supra at 895.     Thus, petitioner failed

to act as a reasonable creditor with respect to an

undercapitalized nascent enterprise.    Rather, the advance was

placed at the risk of National's business.

     10. Extent to Which the Advance Was Used To Acquire Capital
     Assets

     Generally, the fact that an advance is used to satisfy the

daily operating needs of a corporation indicates a bona fide

indebtedness, whereas an advance resembles equity if it is used

to acquire capital assets.   Estate of Mixon v. United States, 464

F.2d at 410.   However, advances to new firms that were initially

capitalized inadequately also resemble equity even though the

advances may be used to meet basic operating costs.    See Texas

Farm Bureau v. United States, 725 F.2d at 314; Gilboy v.

Commissioner, T.C. Memo. 1978-114.     In the instant case, newly

incorporated National used a portion of the advance to purchase
                                - 19 -

"necessary first assets".   Texas Farm Bureau v. United States,

725 F.2d at 314.   Moreover, National also used the advance to

acquire Action, a capital asset.

     11. Failure of the Corporation To Repay on the Due Date or
     Seek a Postponement

     The Court of Appeals for the Eleventh Circuit stated in In

re Lane that "This factor and the * * * intent of the parties

factor are, we believe, the most telling of the Mixon factors".

In re Lane, 742 F.2d at 1317.    National made no attempt to repay

its obligation to petitioner, nor did it ever seek to defer

payment or restructure the note as it did with the Action note.

See Tyler v. Tomlinson, 414 F.2d at 849.

     Having applied the foregoing factors to the facts of this

case, and after careful consideration of those factors which

support opposing conclusions, we think it is evident that the

advance was a contribution to capital and not a bona fide debt.

Whatever petitioner's subjective intent regarding the

contribution at issue, the preceding analysis demonstrates that

he could not reasonably have expected repayment on the terms of

the Fries note at the time it was executed.   Moreover, his intent

did not comport with that of National, or with the economic

reality of creating a true debtor-creditor relationship.   We

hold, therefore, that petitioners may not claim a bad debt

deduction under section 166 for the advance petitioner made to
                                   - 20 -

National.    Our conclusion obviates the need to address

respondent's alternative positions regarding this issue.

Issue 2. Whether Petitioners Are Liable for the Section 6662
Accuracy-Related Penalty for a Substantial Understatement of Tax

     Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662(a) for 1989.      Section

6662, which is applicable to returns due after December 31, 1989,

imposes a penalty in an amount equal to 20 percent of the

underpayment of tax resulting from a substantial understatement

of tax.     Sec. 6662(a).   Petitioners bear the burden of proving

that respondent's determination is erroneous.      Rule 142(a); Luman

v. Commissioner, 79 T.C. 846, 860-861 (1982).

     An understatement is equal to the excess of the amount of

tax required to be shown in the return less the amount of tax

shown in the return.     Sec. 6662(d)(2)(A).   An understatement is

substantial in the case of an individual if it exceeds the

greater of 10 percent of the tax required to be shown in the

return or $5,000.     Sec. 6662(d)(1)(A).   An understatement is

reduced to the extent it is based on substantial authority, or

adequately disclosed in the return or in a statement attached

thereto.     Sec. 6662(d)(2)(B).

     The accuracy-related penalty under section 6662 does not

apply with respect to any portion of an underpayment if it is

shown that there was reasonable cause for such portion of the

underpayment and that the taxpayer acted in good faith with
                                - 21 -

respect to such portion.    Sec. 6664(c)(1); Tippin v.

Commissioner, 104 T.C. 518, 533-534 (1995).      In general, the

determination of whether a taxpayer acted with reasonable cause

and in good faith depends upon the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.     The

crucial factor is the extent of the taxpayer's effort to assess

his proper tax liability.    Id.

     Petitioners make no argument that they had substantial

authority, or that they adequately disclosed the relevant facts,

with respect to the deduction on their tax return.      However,

petitioners do summarily opine that they should not be liable for

the section 6662(a) penalty insofar as petitioner "acted under

the advice of Attorneys and Certified Public Accountants".

     Reliance on professional tax advice constitutes reasonable

cause only if the taxpayer acted in good faith and made full

disclosure of all relevant facts to the adviser.      See Paula

Constr. Co. v. Commissioner, 58 T.C. 1055, 1061 (1972), affd.

without published opinion 474 F.2d 1345 (5th Cir. 1973); sec.

1.6664-4(b), Income Tax Regs.      Petitioners did not call any of

petitioner's lawyers or accountants as witnesses.      Thus, no

evidence has been proffered pertaining to the information

petitioner may have provided them in soliciting their advice.

See Droz v. Commissioner, T.C. Memo. 1996-81.      While the record

includes a letter from King in which he concludes that the "debt"
                              - 22 -

is uncollectible, petitioner has not established whether he fully

divulged all relevant facts to King.

     Based on our review of the record, we find that petitioners

have failed to demonstrate that petitioner's reliance on the

advice of his lawyers and accountants was reasonable or that he

acted in good faith.   Accordingly, we sustain respondent's

determination that petitioners are liable for the accuracy-

related penalty with respect to the entire underpayment for 1989.

     To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.
