                        T.C. Memo. 1995-566



                      UNITED STATES TAX COURT



          WAYNE AND JUNE ELLEN HAIRSTON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 23593-92, 27023-93.    Filed November 28, 1995.



     Wayne Hairston and June Ellen Hairston, pro sese.

     Charles Pillitteri, for respondent.



                        MEMORANDUM OPINION


     ARMEN, Special Trial Judge:   These consolidated cases were

heard pursuant to the provisions of section 7443A(b)(3) and Rules

180, 181, and 182.1

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
     Respondent determined deficiencies in petitioners' Federal

income taxes for the taxable years 1988, 1989, and 1990, as well

as an addition to tax and a penalty for negligence, as follows:


                           Addition to Tax      Penalty
     Year     Deficiency   Sec. 6653(a)(1)    Sec. 6662(a)

     1988     $5,303            $265              ---
     1989      2,788             ---             $558
     1990      2,965             ---              593

     In addition to the foregoing, respondent asserted, in her

answer, an addition to tax for 1990 in the amount of $741 under

section 6651(a)(1) for failure to file a timely Federal income

tax return.

     After concessions by the parties,2 the issues for decision

are as follows:

     (1) Whether petitioners are liable for self-employment tax

for the taxable years 1988, 1989, and 1990;

     (2) whether petitioners are entitled to net operating loss

deductions for the taxable years 1988, 1989, and 1990;




     1
      (...continued)
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.

     2
       Petitioners concede that they are not entitled to deduct
cable and news expenses for the taxable year 1990. For the
taxable years 1988 and 1989, respondent concedes that, if
petitioners do not prove that they are entitled to deduct
mortgage interest on Schedule C, then mortgage interest is
deductible as an itemized deduction on Schedule A.
                               - 3 -

      (3) whether petitioners are entitled to deduct on their

Schedule C for the taxable years 1988, 1989, and 1990, various

expenses in excess of those allowed by respondent;

      (4) whether petitioners are liable for the addition to tax

for negligence under section 6653(a)(1) for 1988;

      (5) whether petitioners are liable for an accuracy-related

penalty for negligence under section 6662(a) for 1989 and 1990;

and

      (6) whether petitioners are liable for an addition to tax

for late filing under section 6651(a)(1) for 1990.

      For simplicity and clarity, we will first set forth the

relevant background facts and general legal principles; we will

then combine additional findings of fact and opinion for each

issue.

Background Facts

      Some of the facts have been stipulated, and they are so

found.   Petitioners resided in Dothan, Alabama, at the time that

their petition was filed with the Court.

      Petitioner Wayne Hairston (petitioner) received both a

bachelor's degree in psychology and a graduate degree in

Christian counseling from Liberty University.   Petitioner has

also completed undergraduate religion courses and graduate

theology courses.   In addition to his formal education,

petitioner is an ordained minister.    Petitioner was ordained by

the Body of Christ Church on May 17, 1987.   The Body of Christ
                                 - 4 -

Church headquarters is located in Nashville, Tennessee.

Subsequently, petitioner was licensed as a minister by the

Alabama District of the Council of the Assemblies of God of

Montgomery, Alabama.     Petitioner is qualified to perform

sacraments, to baptize or christen, and to officiate at marriage

ceremonies and burials.

         Petitioners believe that they were "called" to Dothan,

Alabama, to act in their capacity as Christian or pastoral

counselors.     Accordingly, sometime in 1987, petitioners moved to

Dothan, Alabama, and established the Body of Christ Church of

Dothan, Alabama.3    Petitioners rented residences temporarily

while looking for a permanent residence and an office location.

Petitioners ultimately purchased a permanent residence in the

name of the Body of Christ Church of Dothan, Alabama.

Petitioners actually made the mortgage payments on the residence

and deducted the mortgage interest on Schedule C of their

individual income tax returns for the taxable years in issue.

     Sometime in 1987 petitioners rented an office in downtown

Dothan, Alabama (the "downtown office") for the counseling

business.     The downtown office rented by petitioners consists of

a counseling office, waiting room, reception area, and a bathroom

for the clients.     Petitioners believe that any item that makes a


     3
       At the time of the trial, the Body of Christ Church of
Dothan, Alabama, consisted only of petitioners and was not an
incorporated entity.
                                - 5 -

counseling setting look like a business office is detrimental to

the counseling session.    Accordingly, petitioners use the

downtown office to meet with and counsel clients, but do not

research or attend to office work at the downtown location.

Instead, petitioners use two rooms in their personal residence to

store their books and office equipment and to prepare for

counseling sessions.   Petitioners maintain that approximately 20

percent of their home was used as a home office during the years

in issue.

     Petitioners started operating the Christian counseling

center sometime in 1988.    In addition to counseling, petitioner

occasionally preaches on Sundays, teaches in church settings, and

administers sacraments.    However, the only service for which

petitioner accepts remuneration is counseling.

     Petitioners' Federal and State income tax returns for

taxable years 1988 and 1989 were audited by both the Internal

Revenue Service and the Alabama State Bureau of Revenue.

     Petitioners' 1990 Federal income tax return, which was due

on October 15, 1991, pursuant to extensions of time to file, was

filed on March 3, 1992.

General Legal Principles

     We begin by noting that, as a general rule, the

Commissioner's determinations are presumed correct, and the

taxpayer bears the burden of proving that those determinations

are erroneous.   Rule 142(a); Welch v. Helvering, 290 U.S. 111,
                                 - 6 -

115 (1933).   Moreover, deductions are a matter of legislative

grace, and the taxpayer bears the burden of proving that he or

she is entitled to any deduction claimed.    Rule 142(a); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.

Helvering, supra.    This includes the burden of substantiation.

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976).

     If the record provides sufficient evidence that a taxpayer

has incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the amount of the deduction to which he

or she is otherwise entitled, the Court may, under certain

circumstances, estimate the amount of such expense and allow the

deduction to that extent.    Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930).    However, in order for the Court to

estimate the amount of an expense, we must have some basis upon

which an estimate may be made.     Vanicek v. Commissioner, 85 T.C.

731, 743 (1985).    Without such a basis, any allowance would

amount to unguided largesse.     Williams v. United States, 245 F.2d

559, 560 (5th Cir. 1957).

Issue 1.   Self-Employment Taxes

     Section 1401 imposes a tax on an individual's self-

employment income, which is based on the "net earnings from self-

employment" derived by the individual during the taxable year.

Sec. 1402(b).   Net earnings from self-employment are the gross

income derived by the individual from any trade or business
                                - 7 -

carried on by that individual, less the deductions attributable

to that trade or business.   Sec. 1402(a).   Section 1402(c)(4) and

the final sentence of section 1402(c), however, provide that the

term "trade or business" does not include "the performance of

service by a duly ordained, commissioned, or licensed minister of

a church in the exercise of his ministry" if an exemption under

section 1402(e) is in effect.

     Section 1402(e) provides specific requirements for a

minister to obtain an exemption from self-employment tax.      A

minister seeking the exemption must file an application stating

that he is opposed, because of religious principles or

conscientious beliefs, to the acceptance of certain types of

public insurance, such as that provided by the Social Security

Act, attributable to his or her services as a minister.      Sec.

1402(e)(1).   The application must be filed on or before the due

date of the return for the second taxable year in which the

taxpayer has $400 or more of self-employment income from the

performance of exempted services.   Sec. 1402(e)(3).   The

application deadline is strictly enforced.   See Kelly v.

Commissioner, T.C. Memo. 1980-37; Engstrom v. Commissioner, T.C.

Memo. 1980-41.

     Petitioner filed a Form 4361, Application for Exemption from

Self Employment Tax, which was received by the Internal Revenue

Service on April 17, 1989.   Box 3 and line 4 of the Form 4361

identify petitioner as having been ordained by the Assemblies of
                               - 8 -

God on August 31, 1984.   Further, line 5 states that 1985 and

1986 were the first 2 years in which petitioner had self-

employment earnings of at least $400 from services as a minister.

The application deadline, based on the information provided,

would be April 15, 1987, 2 years prior to the date that

petitioner actually filed the application.   On petitioners' Form

4361, respondent placed a check in the box labeled "Disapproved

for exemption".   The date beside respondent's representative's

signature is May 2, 1989.

     In fact, petitioner was ordained by the Body of Christ

Church of Nashville, Tennessee, on May 17, 1987.   Based upon

petitioners' testimony at trial and on returns filed by

petitioners, it appears that 1988 was the first year in which

petitioner had self-employment income of $400 or more earned from

services as a minister.   Accordingly, the filing deadline for the

exemption application would have been on April 15, 1990, 1 year

after petitioners filed the application.

     For the taxable years 1988, 1989, and 1990, petitioner

reported net earnings from self-employment; however, he did not

report self-employment tax with respect to those earnings.

Instead, for the taxable years 1988 and 1989, petitioner wrote

"Exempt Form 4361" on the line of the return relating to self-

employment tax.   For the taxable year 1990, petitioner did not

enter anything on the line of the return relating to self-

employment tax.
                               - 9 -

      Petitioner testified that all of the income reported on

Schedule C for each taxable year is income from his "counseling

ministry".   Since the exemption applies only with respect to

income attributable to services performed by an individual in the

individual's capacity as a minister, respondent contends that

petitioner does not qualify for the exemption because income

attributable to counseling is not income attributable to the

practice of a religious ministry.

     Although the foregoing matter raises an interesting point of

dispute, we do not have to resolve it in this case.   Even if

petitioner could prove that income derived from his counseling

practice is income derived from a religious ministry, he cannot

prove that he is opposed to public insurance as a conscientious

or religious principle, as is required by section 1402 in order

to qualify for exemption from self-employment tax.

     Petitioner's testimony at trial reveals that he is not

opposed to public insurance as a "religious issue".   The

following exchange illustrates petitioner's beliefs regarding

public insurance:



     The Court:      Okay. And just to go back a couple
                     questions, are you, as an ordained minister,
                     opposed to public insurance?

     Mr. Hairston:   Public -- I am sorry?

     The Court:      Public insurance? Was that the reason that
                     you had filed your application for exemption
                     from the self-employment tax?
                                - 10 -

     Mr. Hairston:     No. I am not opposed to the -- to that, as a
                       religious issue, no.
                            We were advised to -- by our accountant,
                       to file for an exemption with the State,
                       providing the State would allow it. And we
                       asked the State to allow it, which they did.

     Although petitioner signed an exemption application stating

that he is opposed to public insurance because of his religious

principles, the Court finds petitioner's trial testimony to be

more compelling.     The application for exemption contained

numerous significant mistakes, including the date that petitioner

was ordained and the religious body that ordained petitioner.    It

is obvious that petitioner did not carefully review the

application.   In view of the significant mistakes made on the

application, it is possible that petitioner did not even read the

application, including the statement certifying that the

applicant is opposed to public insurance, prior to signing the

Form 4361.

     We hold that petitioner has failed to prove that he is

opposed to public insurance as is required by section 1402(e)(1)

in order to qualify for exemption from the self-employment tax.

Petitioner is therefore liable for self-employment taxes for the

taxable years 1988, 1989, and 1990.4




     4
       We note that for the taxable year 1990, petitioners are
entitled to deduct from gross income one-half of their self-
employment tax liability pursuant to sec. 164(f).
                              - 11 -

Issue 2.   Net Operating Losses

     Petitioners claimed carryforward losses from 1976, 1977,

1980, 1982, 1984, 1985, and 1987 to the taxable years in issue.

More specifically, petitioners claimed a net operating loss

("NOL") carryforward in the amount of $45,207 on page 1 of their

Form 1040 for 1990.   Through amended returns, petitioners claimed

carryforward losses for 1988 and 1989.

     As mentioned above, the Commissioner's determinations are

presumed correct, and the taxpayer bears the burden of proving

that those determinations are erroneous.    Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).    Accordingly, our first

inquiry must be whether petitioners had any net operating losses

in taxable years prior to 1988 that they could carry forward to

the taxable years in issue, 1988, 1989, and 1990.     Myers v.

Commissioner, T.C. Memo. 1995-329.     Regarding this matter, the

record contains joint exhibits consisting of the income tax

returns filed by petitioners for each of the taxable years 1975

through 1990.   The record also contains exhibits from petitioners

showing the NOL schedule compiled by petitioners' tax preparer.

However, no one testified as to the claimed net operating losses

incurred in the years prior to 1988, and the record includes no

proof that such losses were in fact incurred or that carryovers

were available as deductions in any of the years in issue.

     Based on the inadequate record thus presented, we are unable

to find that any net operating losses actually were incurred in
                              - 12 -

the taxable years prior to 1988, quite aside from whether such

losses, if incurred, were allowable to petitioners for tax

purposes and may be carried forward and set off against

petitioners' income for 1988, 1989, or 1990.    Petitioners'

returns, which are in evidence, simply prove that these were the

returns that were filed; they are not self-proving as to the

truth of their contents.   Halle v. Commissioner, 7 T.C. 245

(1946), affd. 175 F.2d 500 (2d Cir. 1949); Caruso v.

Commissioner, T.C. Memo. 1966-190.

     There is nothing else in this record, including testimony

from any witness, as to the amount and allowability as a

deduction of any loss for any taxable year prior to 1988.      We

hold that petitioners have not shown that they incurred a net

operating loss in any taxable year prior to 1988 that could

properly be carried forward to any taxable year in issue.      On

this issue, we must therefore uphold respondent's determination.

Issue 3.   Petitioners' Schedule C Expenses

     Section 162(a) generally allows a deduction for all ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business.    The regulations

promulgated under section 162 clarify that only those ordinary

and necessary business expenses "directly connected with or

pertaining to the taxpayer's trade or business" may be deducted.

Sec. 1.162-1(a), Income Tax Regs.    In addition, under section

262(a) no portion of the expenditures attributable to personal,
                               - 13 -

living, or family expenses may be deducted, except as otherwise

expressly provided in the Code.     Furthermore, section 280A

narrows the general deductibility rule of section 162 when

deductions are claimed for the expenses of an office in the home.

Sec. 280A(a).

     Section 280A(a) denies deductions with respect to the use of

a dwelling unit used by the taxpayer as a residence during the

taxable year.    Section 280A(c), however, permits the deduction of

expenses allocable to a portion of the dwelling unit that is used

exclusively and on a regular basis as "the principal place of

business" for any trade or business of the taxpayer.     Sec.

280A(c)(1)(A).   Additionally, items such as taxes and interest

are allowable as deductions without regard to the business use of

a dwelling.   Sec. 280A(b).

     We now apply these principles to the various expenses

petitioners claimed on Schedule C for the taxable years in issue.

     Mortgage Interest Deductions

     On their Schedule C, petitioners' claimed deductions for

mortgage interest in the amounts of $6,402, $8,442, and $7,939

for 1988, 1989, and 1990, respectively.     Respondent concedes that

petitioners are entitled to deduct mortgage interest for 1988,

1989, and 1990, but contends that such interest is deductible on

Schedule A rather than on Schedule C, as claimed by petitioners.

See supra note 2.
                               - 14 -

     Petitioners contend that their personal residence is a

parsonage and that the parsonage allowance under section 107

allows them to deduct the mortgage interest on their Schedule C

as a business expense.   Petitioners' reliance on section 107 is

misplaced.   On its face, section 107 provides for an exclusion

for the rental value of a parsonage furnished to a minister and

does not address the deductibility of mortgage interest.     It

provides no guidance in determining whether the interest is

deductible on Schedule A or Schedule C.

     As mentioned above, mortgage interest expense is not

disallowed by section 280A and may be deducted as an itemized

deduction under section 163.   See sec. 280A(b).    Further, if any

part of the interest is an ordinary and necessary business

expense within the meaning of section 162, it may be deducted

from gross income.   See sec. 62(a)(1).    Otherwise, at least as

relevant herein, mortgage interest may only be deducted from

adjusted gross income as an itemized deduction on Schedule A.

      Petitioners testified that they used the house both as a

residence and as an office for petitioners' counseling business

for the taxable years 1988 through 1990.     Petitioners also

testified that approximately 20 percent of their home was used as

an office in the home.   We find petitioners' testimony to be

credible and supported by the record.     Thus, we hold that 20

percent of the mortgage interest paid by petitioners was incurred

as an ordinary and necessary expense in carrying on a trade or
                              - 15 -

business.   Accordingly, the portion of the mortgage interest

attributable to petitioners' counseling business is deductible

from petitioner's gross income.   Secs. 62(a)(1); 162; 280A(b).

See Stewart v. Commissioner, T.C. Memo. 1987-436 (where taxpayer

rented out a bedroom in her residence, a deduction from gross

income was allowed for mortgage interest and real estate taxes

attributable to the rented portion of her residence).

     However, petitioners failed to prove that the remaining

portion of the mortgage interest is allocable to a business use

of their residence.   Petitioners admit that they used the

remaining 80 percent of the house as a personal residence.     Thus,

the remaining 80 percent of the mortgage interest is a personal

expense that is deductible under section 163.   Petitioners,

therefore, must deduct 80 percent of the mortgage interest as an

itemized deduction on Schedule A.5

     Accordingly, we sustain respondent's determination only in

part with regard to the mortgage interest issue.

     Rent Expense for 1988

     5
       Petitioners claimed the standard deduction for each of the
taxable years in issue. However, because the Court has only
partially sustained respondent's determination with respect to
the mortgage interest expense, petitioners' itemized deductions
may exceed the standard deduction. In addition, we note that
although petitioners contend, on brief, that they are entitled to
medical expenses in the amount of $3,422, for 1990, they failed
to introduce any persuasive evidence that they are entitled to a
larger deduction than the amount allowed by respondent. It is in
this context that we leave the parties to resolve this matter as
part of their Rule 155 computation.
                               - 16 -

     For the taxable year 1988, petitioners claimed a deduction

on their Schedule C for rent in the amount of $6,500.     Respondent

determined that $1,300 of the rent expense was personal and

nondeductible under section 262 because it represented a rental

payment for petitioners' personal residence.

     Petitioners introduced into evidence a copy of the $1,300

check used to pay the rent in question.    The notation at the

bottom of the check reads "Rent Dec & Jan 103 Salina Ct".

Petitioners lived temporarily at 103 Salina Court while they

looked for a permanent residence.

     Section 262 restricts deductions for personal, family, and

living expenses.   In this case, petitioners have failed to show

the business purpose of the $1,300 rent paid.     Petitioners admit

that the house located at 103 Salina Court was their personal

residence.   The rental payment is, therefore, a nondeductible

personal, living, or family expense under section 262.     See Tyler

v. Commissioner, T.C. Memo. 1991-537 (rental expense deduction

for taxpayer's personal place of residence was a personal expense

disallowed by section 262).

     We take note that petitioners, on brief, contend that they

used part of the temporary residence at 103 Salina Court to

maintain records and do the accounting for the counseling

business.    This does not alter our analysis.   In order for

petitioners to deduct any portion of the rent under this set of

facts, petitioners must prove that the residence at 103 Salina
                               - 17 -

Court constituted their principal place of business for purposes

of section 280A(c).   Petitioners have presented no evidence

regarding this issue.   Accordingly, we sustain respondent's

determination.

     Deductions for Utilities and Depreciation for 1988, 1989,
     and 1990

     For the taxable years 1988, 1989, and 1990 petitioners

claimed deductions for utilities and depreciation for their

downtown office and for the portion of their residence that they

used as an office.    Respondent disallowed the portion of these

deductions attributable to petitioners' home office.

     Petitioners may deduct utilities and depreciation

attributable to their home office only if their home office was

their principal place of business within the meaning of section

280A(c)(1)(A).   This matter depends on the specific facts and

circumstances of each particular case.

     Petitioner used the home office for preparing for counseling

sessions.   Petitioner did not meet with or counsel clients at the

home office and, instead, used the downtown office for that

purpose.    Petitioner testified that he maintained his counseling

books and accounting materials at the home office because the

presence of these items in the downtown office would have

intimidated the clients.

     In deciding whether petitioners are entitled to deductions

for utilities and depreciation in excess of those allowed by
                              - 18 -

respondent, we must apply the definition of "principal place of

business" set forth in Commissioner v. Soliman, 506 U.S. 168,

   , 113 S.Ct. 701, 706 (1993).   In Soliman, the Supreme Court

emphasized two primary considerations in deciding whether a

taxpayer may treat a home office as a principal place of

business:   (1) The amount of time spent at each location, and (2)

the relative importance of the activities performed at each

location.

     In Soliman, the taxpayer, an anesthesiologist, administered

anesthesia and treated patients at hospitals.   However, he

maintained billing records, read medical journals, and prepared

presentations and treatments in his home office.   The Supreme

Court held that the taxpayer was not entitled to a deduction for

home office expenses because the taxpayer's office in his home

was not his "principal place of business".   In so holding, the

Court noted that the activities which the taxpayer performed at

home were less important to the taxpayer's medical practice than

the treatments he provided at the medical facilities.   Id. at

___, 113 S. Ct. at 708.   The Court stated that "The actual

treatment was the essence of the professional service * * *.

* * * [and] the actual treatment was the most significant event

in the professional transaction."   Id.

     In analyzing the first factor set forth in Soliman, the

relative importance of the activities undertaken at each business

location, we should consider whether the functions performed in
                               - 19 -

the home office are necessary to the business.   See Id. at ___,

113 S. Ct. at 707.   Petitioner maintained all of his records and

books in his home office.   Further, petitioner prepared for and

reviewed his counseling sessions in his home office.   Although

petitioner's activities in his home office were important to his

business, petitioner did not introduce any testimony showing that

the functions which he performed at his home office were more

important than the functions which he performed at his downtown

office.   On the contrary, petitioner actually met with and

counseled his clients at the downtown office.    Like the taxpayer

in Soliman, the actual treatment (counseling) was the essence of

petitioner's professional service and was the most significant

event in the professional transaction.   Because we find that the

services performed in the downtown office were more significant

than the activities undertaken in petitioner's home office, this

factor weighs heavily in favor of respondent.

     We now turn to the second factor set forth in Soliman, the

amount of time spent at each location.   Petitioner testified that

he spent almost as much time in the home office as the downtown

office and that sometimes he spent more time in the home office

than in the downtown office.   As approximately equal time was

spent at each location, this factor is not helpful in identifying

petitioner's principal place of business.

     Based upon the evidence presented, we find that petitioner's

home office is not his principal place of business for the
                               - 20 -

counseling ministry.   Accordingly, we sustain respondent's

determination with respect to the deductions for utilities and

depreciation for the taxable years 1988, 1989, and 1990.

     Telephone Expenses for 1988 and 1990

     For the taxable year 1988 petitioners deducted "telephone

and utility" expenses in the amount of $6,117.     Respondent

disallowed $2,141 of the deduction.     For the taxable year 1990

petitioners deducted telephone expenses in the amount of $3,325.

Respondent disallowed $898 of this amount.

     The telephone expenses deducted by petitioner for the

taxable years 1988 and 1990 included expenses for the office

phone in the downtown office, the Yellow Pages advertising, the

charges for call forwarding from the business location to the

personal residence, and business related, long distance calls

made from petitioners' home.   Respondent disallowed the portion

of the telephone expenses attributable to petitioners' home

office.

     Respondent, on brief, contends that petitioners failed to

substantiate the telephone expenses, and further, that even if

they did so, the expenses are not allowable pursuant to section

280A(a) and Commissioner v. Soliman, supra.     We are persuaded

that petitioner incurred some telephone expenses at home in the

course of conducting his trade or business as a counselor.

Additionally, respondent's reliance on section 280A(a) is

misplaced.   The deductibility of telephone expenses is guided by
                              - 21 -

section 162(a), not section 280A.6     See Green v. Commissioner,

T.C. Memo. 1989-599.

     As a general rule, if the record provides sufficient

evidence that the taxpayer has incurred a deductible expense, but

the taxpayer is unable to adequately substantiate the amount of

the deduction to which he or she is otherwise entitled, the Court

may estimate the amount of such expense and allow the deduction

to that extent.   Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930).   Based upon the record, we estimate that of the

$2,141 disallowed by respondent for 1988, $200 consisted of

deductible telephone expenses, and of the $898 disallowed by

respondent for 1990, $75 consisted of deductible telephone

expenses.

     Accordingly, we sustain respondent's determination with

respect to the telephone expenses only in part.

     Insurance Expenses for 1990

     Petitioners claimed a deduction for insurance in the amount

of $5,337 for the taxable year 1990.     Respondent disallowed

$4,355 of the claimed deduction.     At trial, petitioners explained

that the insurance deduction includes expenses for automobile

insurance, personal liability insurance on the downtown office,

     6
       We note that sec. 262(b), effective for 1989 and later
years, disallows a deduction for "basic local telephone service
with respect to the first telephone line" to any residence of the
taxpayer, regardless of any business use of the telephone. This
section, however, does not apply in this case since petitioners
have not claimed local telephone service expenses.
                                  - 22 -

homeowner's insurance attributable to petitioners' home office,

renter's insurance attributable to petitioners' home office, and

hazard insurance on petitioners' residence, and mortgage

insurance.    However, petitioners failed to introduce any evidence

showing that they are entitled to a larger deduction than the

amount allowed by respondent.      Consequently, petitioners have not

met their burden of proof, and we sustain respondent with respect

to this issue.

     Interest Expenses for 1990

     For the taxable year 1990 petitioners deducted "other

interest" in the amount of $1,130.         Of this amount, respondent

disallowed $282.    Although petitioners, on brief, explain that

the interest deducted is attributable to vehicles used in their

business, they failed to introduce any evidence that they are

entitled to a larger deduction than the amount allowed by

respondent.    See Rule 143(b).    Consequently, petitioners have not

met their burden of proof, and we sustain respondent with respect

to this issue.

Issue 4.     Section 6653(a)(1) Addition to Tax for Negligence for
1988

     Respondent determined an addition to tax for negligence

under section 6653(a)(1) against petitioners for their 1988

taxable year.    For that year, section 6653(a)(1) imposes an

addition to tax equal to 5 percent of the underpayment of the tax

required to be shown on a taxpayer's return if any part of that
                              - 23 -

underpayment is due to negligence or disregard of rules or

regulations.   Section 6653(a)(3) defines the term "negligence" to

include any failure to make a reasonable attempt to comply with

the provisions of the Internal Revenue Code.   This section also

defines the term "disregard" to include any careless, reckless,

or intentional disregard.   See Neely v. Commissioner, 85 T.C.

934, 947 (1985) (for purposes of section 6653(a), "negligence" is

the lack of due care or a failure to do what a reasonable and

ordinarily prudent person would do under the circumstances).

Petitioners bear the burden of proof as to the addition to tax

for negligence.   Rule 142(a); Neely v. Commissioner, supra; Bixby

v. Commissioner, 58 T.C. 757, 791 (1972).

     Petitioners did not address the issue of negligence at

trial. Further, the Court is unable to find, independently,

circumstances that would exonerate petitioners from the addition

to tax.   Petitioner received a graduate degree from college.

Further, petitioners submitted Form 4361 without even apparently

reading its contents.   Accordingly, petitioners have failed to

carry their burden of proof, and we therefore sustain

respondent's determination with regard to the addition to tax for

negligence for 1988.

Issue 5. Section 6662(a) Accuracy-related Penalty for Negligence
for 1989 and 1990

     Respondent determined an accuracy-related penalty for

negligence under section 6662(a) against petitioners for their
                               - 24 -

1989 and 1990 taxable years.    The penalty under section 6662(a)

is similar to the addition to tax for negligence under section

6653(a)(1).

     Section 6662(a) and (b)(1) provides that if any portion of

an underpayment of tax is attributable to negligence or disregard

of rules or regulations, then there shall be added to the tax an

amount equal to 20 percent of the amount of the underpayment

which is so attributable.    The term "negligence" includes any

failure to make a reasonable attempt to comply with the statute,

and the term "disregard" includes any careless, reckless, or

intentional disregard.   Sec. 6662(c).   Petitioners have the

burden of proving that respondent's determination of the penalty

is in error.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).

     At trial petitioners did not address the issue of

negligence.    As before, we are unable to find, independently,

circumstances that would exonerate petitioners from the penalty.

Therefore, we conclude that petitioners failed to carry their

burden of proof, and we sustain respondent's determination of the

penalty for negligence for 1989 and 1990.

Issue 6. Section 6651(a) Addition to Tax for Failure to Timely
File for 1990

     For the taxable year 1990, petitioners requested two

extensions of time within which to file their return that

ultimately extended the filing deadline to October 15, 1991.
                               - 25 -

Petitioners' Federal income tax return for 1990 was received on

March 3, 1992.   The date set forth opposite each of petitioners'

signatures on the return was February 27, 1992.

     Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return.    Generally, the Commissioner's

determination is presumed correct, and the taxpayer bears the

burden of proving otherwise.    Rule 142(a); Abramo v.

Commissioner, 78 T.C. 154, 163 (1982).    However, when new matters

are pleaded in the answer, the Commissioner bears the burden of

proof.   Rule 142(a); Ward v. Commissioner, T.C. Memo. 1995-286.

Because respondent asserted the delinquency penalty for the first

time in her answer, respondent bears the burden of proof with

respect to this issue.

     At trial, petitioners admitted that they did not file their

1990 return in a timely fashion.    Petitioners explained that the

reason they did not file timely is that they assumed they were

being granted additional time to file because they were involved

in both State and Federal audits of their income tax returns for

1988 and 1989.

     We have consistently held that a dispute concerning a

taxpayer's liability for a prior taxable year does not constitute

reasonable cause for failing to timely file a return for the

current taxable year.    Glowinski v. Commissioner, 25 T.C. 934

(1956), affd. 243 F.2d 635 (D.C. Cir. 1957); Knollwood Memorial

Gardens v. Commissioner, 46 T.C. 764 (1966); Madden v.
                             - 26 -

Commissioner, T.C. Memo. 1980-350.    Accordingly, petitioners'

dispute with the State and Federal taxing authorities concerning

their tax liability for the taxable years 1988 and 1989 does not

constitute reasonable cause for petitioners' failure to file

their 1990 return in an untimely manner.    We therefore sustain

respondent on this issue.

Conclusion

     To give effect to our resolution of the disputed issues, as

well as the parties' concessions,



                                           Decisions will be entered

                                     under Rule 155.
