                         T.C. Memo. 2001-56



                       UNITED STATES TAX COURT



                 VICTOR M. BELLO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7678-99.                         Filed March 9, 2001.


     Darrell A. Clay, Gary A. Zwick, and Michael J. Jordan, for

 petitioner.

     Carol A. Szczepanik, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     PARR, Judge:    Respondent determined deficiencies and

accuracy-related penalties with respect to petitioner's Federal

income tax as follows:
                                    - 2 -


                                            Accuracy-Related Penalty
          Year         Deficiency               Sec. 6662(a)

          1992           $57,466                  $11,493
          1993            39,669                    7,934
          1994             7,161                    1,432
          1995            36,098                    7,220

     After concessions, the issues for decision are:

     (1) Whether petitioner is entitled to deduct trade or

business expenses under section 162 with respect to his Villa Del

Mar hotel venture for 1992, 1993, 1994, and 1995.           We find he is

entitled to deduct some of the expenses.

     (2) Whether petitioner is entitled to a claimed loss

deduction for 1992 from Amazona Enterprises, Inc. (Amazona), his

wholly owned S corporation.    We find that he is not.

     (3) Whether petitioner is entitled to claimed partnership

loss deductions for 1992 and 1994 from Roadmaster Leasing.          We

find that he is not.

     (4) Whether petitioner is liable for an accuracy-related

penalty under section 6662(a) for substantial understatement of

income tax for 1992, 1993, 1994, and 1995.         We hold that he is

liable for a penalty in 1992 for the understatement attributable

to his disallowed Villa del Mar business expenses and his

disallowed loss deductions from Amazona and Roadmaster Leasing,

in 1993 for the understatement attributable to his disallowed

Villa del Mar business expenses, and in 1995 for his disallowed

Villa del Mar business deductions.
                                - 3 -

     All section references are to the Internal Revenue Code as

amended and in effect during the years in issue, and all Rule

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

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are found

accordingly.   The stipulation of facts and accompanying exhibits

are incorporated by this reference.

     Petitioner resided in Chagrin Falls, Ohio, when he filed his

petition.   Petitioner was born in Nicaragua and left there in

1964 to study medicine in Brazil.   In 1972, petitioner emigrated

to the United States, where he has been a practicing

ophthalmologist.

Villa del Mar Hotel Venture

     During 1984, petitioner returned to Brazil on a trip with a

group of ophthalmologists studying tropical ophthalmology.     While

on that trip, petitioner visited the Flamingo Beaches area of the

City of Salvador in the State of Bahia.     Salvador lies on the

Atlantic Ocean and is located approximately 1,656 kilometers

northeast of Rio de Janeiro.    Salvador was the first city founded

in Brazil and served as Brazil’s first capital.     It contains a

number of cultural and historical sites, including churches,

forts, mansions, and palaces.   In addition, the area enjoys a

mild climate and has many beaches along the Atlantic coastline.

In 1959, a major highway was completed linking the State of Bahia
                                - 4 -

and Rio de Janeiro.   In the mid-1960's, the State of Bahia began

to promote the development of a tourism industry in Salvador.     At

some point, an international airport was constructed in Salvador.

From 1969 through 1986, the number of domestic and international

tourists annually visiting Salvador increased dramatically.     By

1986, an estimated 1.3 million tourists annually visited

Salvador, making it the third most visited city in Brazil after

Rio de Janeiro and Sao Paulo.   Numerous establishments in

Salvador offer hotel and other lodging accommodations to

visitors.   These establishments range from five-star hotels to

pensions and campgrounds.

     During his 1984 visit to the Flamingo Beaches, petitioner

was impressed by the scenic beauty and pristine nature of the

area.   He examined certain undeveloped lots offered for sale in a

recently subdivided large tract of land in the Flamingo Beaches,

and he purchased two of those lots to build a summer home.

However, he later decided to build a small hotel.   From 1984

through 1986, petitioner purchased a total of 17 contiguous lots

in that same tract for the purpose of building his hotel.

     Since petitioner resided and conducted his medical practice

in the United States, he arranged to have another individual in

Brazil supervise the construction of the complex and manage it.

Pursuant to this arrangement, petitioner agreed to finance the

construction and operation of the hotel but promised to give this
                                - 5 -

individual, at some unspecified future date, a 20-percent

interest in Villa del Mar if the hotel operation proved

successful.    Petitioner further issued a power of attorney to

this individual, authorizing him to act on petitioner’s behalf in

connection with the construction and operation of the hotel.

     In 1986, construction of the 12-cabana-style villa complex

called Villa del Mar was completed and opened for business.    The

12 cabanas contain two beds in each and are linked together by a

series of swimming pools.    In addition to the cabanas, the

complex has a reception building.

     Shortly after the 12-cabana complex had opened for business,

petitioner considered the small hotel to be very successful.

However, he was unable to realize a profit from the hotel’s

operation.    As a result, petitioner began to consider the

possibility of building a much larger hotel on the Flamingo

Beaches to accommodate more guests and generate a larger profit.

     In March 1988, petitioner commissioned and obtained a study

concerning the economic feasibility of expanding the 12-cabana

complex into a larger hotel.    The expansion project would include

the construction of two separate three-story buildings or hotel

wings containing a total of 117 additional rooms.    The expanded

hotel would be a four-star hotel.

     Construction of the expansion began later in 1988.

Petitioner personally financed the construction with the
                                - 6 -

expectation that additional future funding would be secured from

the Bank of Development, a Brazilian governmental agency then

helping private investors develop various tourism-industry-

related projects in Salvador.

     In mid-1988, the 12-cabana complex was temporarily closed

for business due to the disruption caused by the expansion

project.   The complex was again reopened for business by 1989.

     Because of a downturn in the Brazilian economy,1 petitioner

never received the Brazilian governmental funding he had expected

for the hotel expansion.   Although he then attempted to obtain

financing from other sources, including certain sources in the

United States, his efforts were unsuccessful.    In 1990,

petitioner was no longer able personally to finance construction

of the hotel expansion or the operation of the 12-cabana complex.

Construction on the hotel expansion ceased sometime in 1990.

When construction was halted, only the skeleton of one of the

planned wings (the concrete and steel "Building A" located east

of the 12-cabana complex) had been erected.    In 1990, the 12-

cabana complex was also closed for business.

     From 1986 through 1990, petitioner reported gross receipts,



     1
      When the March 1988 study on the hotel expansion was
issued, petitioner had hoped to finance approximately 51 percent
of the project’s total cost by obtaining a 6-year loan from the
Bank of Development. He originally had obtained the study, in
part, to help him in procuring such Brazilian governmental
funding.
                                   - 7 -

cost of operations, gross income, expenses, and net loss from

Villa del Mar as follows:

                      1986        1987        1988        1989        1990

Gross receipts        $78,696    $132,635     $61,854     $39,984     $53,282
Cost of operations    (16,337)    (69,957)    (35,934)    (26,006)    (30,489)
Gross income           62,359      62,678      25,920      13,978      22,793
Expenses             (225,977)   (233,294)   (202,143)   (310,661)   (425,892)
Net loss             (163,618)   (170,616)   (176,223)   (296,683)   (403,099)

     In 1991, petitioner discharged the individual who had been

managing Villa del Mar for dissipating and conveying to third

parties certain assets used in the hotel operation.               At this

time, petitioner was also involved in legal disputes with a

number of unpaid former hotel employees and with the construction

company that had worked on the hotel expansion project.                As a

result, petitioner hired a Brazilian real estate consultant, Vera

Lucia Silvana De Oliveira (Ms. Oliveira), to represent him in

resolving his numerous hotel-related problems.

     Until 1993, petitioner continued to seek financing from

other parties to complete the expansion, but he was unsuccessful.

In addition, petitioner expended substantial amounts of money in

connection with resolving various claims that had been made

against him and the hotel property.

     On July 1, 1993, petitioner and the construction company

entered into a settlement regarding their dispute.               Petitioner

would convey ownership of the five lots upon which the unfinished

"Building A" stood to the construction company.             Among other

things, the construction company would then complete "Building
                                - 8 -

A", converting the structure into an apartment/hotel building

containing 56 condominium units.   Petitioner was to receive seven

of those units, and retain ownership of the existing 12-cabana

complex.

     In a later addendum to their 1993 settlement agreement, the

construction company agreed to build a house for petitioner.    The

house would have a value of $100,000 and would be located on one

of petitioner’s other Flamingo Beaches lots.

     On his income tax returns for 1992 through 1995, petitioner

claimed business deductions (some of which are in issue in the

instant case) with respect to his Villa del Mar venture for the

following specified expenses:

                            1992         1993     1994       1995

      Depreciation          $2,353      $2,210   $2,210   $2,039
      Mortgage interest       –-          –-       -–      7,200
      Other interest         8,100      10,800   12,111     --
      Legal, professional   65,750      52,500     –-        560
        services
      Supplies                 154         215     –-        –-
      Taxes                 18,000      18,000    2,000      –-
      Travel                 3,493       4,912     –-        –-
      Wages                 48,880        –-       -–        –-
      Funding fee           25,000        –-       –-        –-
      Legal, professional     –-          -–       –-     100,000
        & mgt. fees
      Security              12,000      12,000   12,000      –-
      Telephone               –-          –-        454      –-


     In 1999, petitioner and Ms. Oliveira reopened the 12-cabana

complex for business as a bed-and-breakfast establishment.
                               - 9 -

Amazona Venture

     In 1991, petitioner was introduced to James Garrett.    Mr.

Garrett proposed that he and petitioner conduct an entertainment

promotion business that would include promoting concerts.    Under

this proposal, petitioner would finance this venture, and Mr.

Garrett would establish and operate the business by arranging to

secure the services of various entertainers for bookings or

concerts.

     On or about May 20, 1991, Amazona, an S corporation, was

incorporated to carry out the above venture.    Petitioner received

and owned 100 percent of Amazona’s outstanding shares of stock.

At some future date after Mr. Garrett had established a

successful entertainment promotion business, petitioner planned

to give Mr. Garrett a stock-ownership interest in Amazona.

     In early July 1991, petitioner opened an account for Amazona

at an Ohio bank.   Mr. Garrett was authorized to withdraw funds

from this account.   Petitioner, on various dates in 1991 and

1992, transferred or deposited funds to this account.

Substantially all of the funds ever credited to the account were

deposited in 1991, and virtually all of the funds had been

withdrawn by Mr. Garrett by the end of 1991.

     On its initial 1992 return, Amazona originally reported

having an ordinary loss of $20,000.    This loss resulted from a

deduction of a $20,000 entertainment fee that had been paid
                               - 10 -

during 1992.    Amazona reported its taxable income on a cash

method of accounting.

       On an amended 1992 return, Amazona reported an ordinary loss

of $48,579.    This loss resulted from payments by Amazona during

1992 for entertainment fees of $47,000, legal fees of $794,

travel expenses of $743, and meals and entertainment expenses of

$42.

       On his 1992 return, petitioner (as 100-percent shareholder

of Amazona) claimed a "nonpassive loss" of $28,589 from Amazona.

His return reflected Amazona to have had an ordinary loss of

$48,579 for 1992, but further stated that only $28,589 of that

loss was allowable to him for 1992 after application of the at

risk provisions of section 465.

Roadmaster Leasing

       In 1992, petitioner met with Lyle Schole, the promoter of a

proposed venture called Roadmaster Leasing.      They discussed

entering into a limited partnership engaged in the business of

buying late-model, used automobiles in the United States to

resell in Latin America.    Petitioner further met and discussed

the proposed venture with Jose Candelario, an accountant Mr.

Schole had retained to perform tax work for Roadmaster Leasing.

       Petitioner agreed to invest and purchase a partnership unit

in Roadmaster Leasing for $25,000.      On September 21, 1992,

petitioner paid $5,000 to Mr. Schole as a downpayment on his
                               - 11 -

partnership unit.   From 1992 through 1994, petitioner was a

partner in Roadmaster Leasing.

     As a result of advice petitioner received from another

accountant (who was hired to help with the financial management

of his medical business and other investments), he made no

further capital contributions to Roadmaster Leasing after 1993.

This accountant had advised him to end his involvement with

Roadmaster Leasing.

     On his 1992 return, petitioner claimed an ordinary

partnership loss of $5,000 from Roadmaster Leasing.    On his 1994

return, he claimed an ordinary partnership loss of $3,558 from

Roadmaster Leasing.    Petitioner attached no information returns

for partners with respect to Roadmaster Leasing to his 1992,

1993, and 1994 returns.

     The Internal Revenue Service has no record of any business

activity, financial operation, or venture that was actually

carried on by Roadmaster Leasing from 1992 through 1994.

Roadmaster Leasing never filed a partnership return for those

years.

Notice of Deficiency

     In the notice of deficiency issued to petitioner for 1992,

1993, 1994, and 1995, respondent disallowed various deductions

petitioner had claimed from Villa del Mar, Amazona, and

Roadmaster Leasing.    The notice of deficiency stated, in
                              - 12 -

pertinent part:

     1.A.1.   It is determined that the deductions shown on
              your schedule C [for Villa Del Mar] for the
              taxable years ending 1992, 1993, 1994 and 1995,
              in the respective amounts of $144,630.00,
              $85,500.00, $14,000.00 and $100,000.00 are
              disallowed, since it has not been established
              that these amounts were ordinary and necessary
              business expenses or were expended for the
              purpose designated. See the figures below.[2]
              Accordingly, your 1992, 1993, 1994 and 1995
              taxable incomes are increased $144,630.00,
              $85,500.00, $14,000.00 and $100,000.00,
              respectively.

 Expenses         12-31-92   12-31-93     12-31-94     12-31-95

  Legal         $65,750      $52,500          --       $100,000
  Taxes          18,000       18,000        2,000          --
  Wages          48,880         --            --           --
  Security       12,000       12,000       12,000          --
  Total        $144,630      $85,500[3]   $14,000      $100,000

     1.A.2. It is determined that the loss shown on your
            1992 return in the amount of $28,589.00 from the
            small business corporation known as Amazona
            Enterprises, is disallowed in full. See Exhibit
            A for details. Accordingly, your 1992 taxable
            income is increased $28,589.00.

     1.A.3. It is determined that the losses shown on your
            1992 and 1994 returns in the respective amounts
            of $5,000.00 and $3,558.00, from the partnership
            known as Roadway [sic] Leasing are disallowed,
            since it has not been established that there
            were any ordinary and necessary business
            expenses paid or incurred or that any
            partnership returns have been filed.


     2
      As indicated previously, respondent did not challenge
certain other Villa del Mar business deductions petitioner had
claimed for the years in issue.
     3
      The notice of deficiency states expenses for the year
ending Dec. 31, 1993, total $85,500. We note that the correct
total is $82,500.
                              - 13 -

           Accordingly, your 1992 and 1994 taxable incomes
           are increased $5,000.00 and $3,558.00,
           respectively.

Specifically, with respect to the disallowed Amazona loss,

respondent determined that it had not been established that the

entertainment fees, legal fees, travel expenses, and meal and

entertainment expenses claimed for the S corporation on

petitioner’s 1992 return were (1) ordinary and necessary business

expenses, or (2) expended for the purposes indicated.    Respondent

further determined that petitioner was liable for a penalty under

section 6662(a) for 1992, 1993, 1994, and 1995 for substantial

understatements of income tax with respect to the entire

underpayment for each year.

                              OPINION

Issue 1.   Villa del Mar Business Deductions

     Section 162(a) allows a taxpayer a deduction for all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a business.    To be deductible under

section 162, an expense must be directly connected with or

proximately result from the taxpayer’s business.    See Kornhauser

v. United States, 276 U.S. 145, 153 (1928).    Capital

expenditures, however, may not be deducted under section 162, but

instead, generally must be added to the basis of the capital

asset for which they are incurred.     See Woodward v. Commissioner,

397 U.S. 572, 574-575 (1970); see also secs. 263, 261, 161.     In
                               - 14 -

particular, whether litigation and other legal costs are

classified as deductible business expenses or nondeductible

capital expenditures incurred in acquiring or disposing of an

asset, depends upon the origin of the claims relating to those

legal costs.    See Woodward v. Commissioner, supra at 577-578;

Dower v. United States, 668 F.2d 264, 266-268 (7th Cir. 1981);

BHA Enters., Inc. v. Commissioner, 74 T.C. 593, 598-601 (1980).

     Petitioner contends that he has largely substantiated his

disputed business expenses.

     Respondent, on the other hand, contends that petitioner has

failed to substantiate the claimed expenses and has failed to

establish that certain of those expenses were not capital

expenditures.    Respondent notes that capital expenditures include

the cost of defending one’s title to property.   See sec.

1.263(a)-2(c), Income Tax Regs.

     With respect to petitioner’s claimed deductions for

security, wages, and taxes, we are satisfied petitioner has

adequately substantiated and established those expenses are not

capital expenditures.   Petitioner testified that from 1992

through 1994 a security service firm was hired to protect the

premises from squatters after the 12-cabana complex was closed

for business.    He said that this firm was paid $1,000 per month

for providing the premises with 24-hour security.   Similarly,

petitioner testified that the taxes claimed for 1992 through 1994
                              - 15 -

were real property taxes imposed on the Flamingo Beaches lots.

In addition, the record includes a number of 1993 real property

tax bills or statements that the Municipality of Salvador had

issued with respect to the Flamingo Beaches lots.   Finally, with

respect to the wages of $48,880 claimed for 1992, petitioner

testified that he paid this amount to satisfy the wage and other

compensation-related claims of his former hotel employees.

Indeed, a report prepared by Ms. Oliveira lists 10 lawsuits that

had been brought by these former employees.

     We are also satisfied that the wage payments were not

capital expenditures.   The wage claims had arisen in connection

with petitioner’s normal operation of his hotel and not in

connection with his acquisition or disposition of a capital

asset.   See BHA Enters., Inc. v. Commissioner, supra at 601.    We

also reject respondent’s suggestion that the settlement payments

constitute capital expenditures because petitioner, in these

disputes, was defending his title to the hotel property.     While

any judgments these former employees obtained might have caused a

lien to attach to the hotel property, these settlement costs need

not be capitalized where the hotel business was the source of the

litigation.   See id. at 600-601.

     Accordingly, we hold that petitioner is entitled to deduct

under section 162:   (1) For 1992, security services of $12,000,

wages of $48,880, and tax expenses of $18,000; (2) for 1993,
                                  - 16 -

security services of $12,000 and tax expenses of $18,000; (3) for

1994, security services of $12,000 and tax expenses of $2,000.4

     With respect to his claimed 1992 and 1993 legal expenses,

petitioner has failed to establish that those expenses were not

capital expenditures.       Virtually no evidence was offered

concerning the nature and origin of the claims involved in these

disputes.5    The record contains no pleadings from these disputes.

We are thus unable to determine the origin and character of the

claim or claims that were litigated in those disputes.       See Dower

v. United States, supra.       Accordingly, we hold that petitioner is

not entitled to deductions under section 162 for his claimed 1992


     4
      We do not consider respondent’s alternative arguments that
petitioner is not entitled to deductions because the Villa del
Mar venture was actually conducted by a separate Brazilian legal
entity, and any deductions petitioner receives are still subject
to a 2-percent floor because, following Villa del Mar’s closing
in 1990, petitioner, at best, only engaged in an investment
activity under sec. 212. This separate legal entity issue is a
new issue which respondent is attempting to raise for the first
time on brief. Similarly, the sec. 212 issue is also a new issue
and was not raised either in the notice of deficiency or in
respondent’s answer.
     5
      In February 1996, Ms. Oliveira issued to petitioner an
itemized statement of 1992 expenses from Villa del Mar. That
statement reflects legal or professional expenses of $65,750 paid
for 1992 as follows:

             Expenses   for lawyers (including
                Court   expenses)--
                  Dr.   Guy Agulha                 $36,000
                  Dr.   Themir Batista               5,750

             Expenses related to architect
                  Orlando Regis                    24,000

No similar statement was provided for 1993.
                                - 17 -

and 1993 legal expenses.6    See Rule 142(a).7

     Similarly, as to the claimed 1995 legal expense of $100,000,

although petitioner testified this was compensation to Ms.

Oliveira, he failed to explain the specific services Ms. Oliveira

had rendered in exchange for this payment.       Ms. Oliveira had been

hired to represent petitioner in resolving his numerous hotel-

related problems, which included a number of legal disputes he

had with third parties.     According to petitioner, he had not been

paying Ms. Oliveira her monthly fee of $5,000.      Instead, he

decided to give her a house valued at $100,000 in payment for her

past and future services.    However, as indicated above, any

compensation for her past services in dealing with petitioner’s

legal disputes might be classified as a capital expenditure,

depending upon the nature and source of the claims in those

disputes.   Moreover, any payment petitioner made for     services in

future years could also be a capital expenditure.      See INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 87 (1992) (noting that,

although capitalization may not be warranted where there is

merely some incidental future benefit, realization of benefits by



     6
      Furthermore, petitioner claimed that the $24,000 paid to
the architect was for new work in revising the hotel expansion to
be undertaken once petitioner and the construction company
resolved their dispute. If so, that payment would be a capital
expenditure.
     7
      The record reflects that respondent’s examination of
petitioner’s 1992 through 1995 returns was begun well before
1998.
                                 - 18 -

a taxpayer beyond the year in which the expenditure is incurred

is still important in determining whether immediate deduction or

capitalization is the appropriate treatment).

     We are also not satisfied that petitioner has substantiated

this alleged $100,000 "expense".     Although the construction

company, in a later amendment, agreed to build a home worth

$100,000 on petitioner's land, the record does not reflect

whether petitioner had actually conveyed this home to Ms.

Oliveira or had merely allowed her to live in it rent-free.       No

deed to her for the home was offered in evidence.

     Accordingly, we hold that petitioner is not entitled to

deduct under section 162 his claimed legal expense of $100,000

for 1995.    See Rule 142(a).

Issue 2.    1992 Amazona Loss8

     Petitioner argues that he is entitled to deduct a loss of

$28,589 claimed from Amazona for 1992.     On brief, petitioner

maintains that the evidence establishes that Mr. Garrett

converted $22,000 which the Ohio Bank had mistakenly credited to

Amazona’s bank account.    Although petitioner essentially

acknowledges that Amazona may not have actually had expenses of

$48,579 as reported on its amended 1992 return, he now argues


     8
      Petitioner was Amazona’s sole shareholder. See supra p. 9.
Petitioner and Amazona thus are not subject to the provisions
found in secs. 6241-6245 concerning certain S corporation
shareholders’ treatment of subchapter S items. See sec.
301.6241-1T(c)(2), Temporary Proced. & Admin. Regs., 52 Fed. Reg.
3002 (Jan. 30, 1987).
                                 - 19 -

that he has substantiated the following payments on the S

corporation’s behalf for the purposes indicated:

     Date              Amount        Payee            Purpose

  January 1992         $794.08   Edward R. Rycheck   Legal Fees
  May 1992            5,000.00   James Garrett       Start-up
  November 1992      22,000.00   Star Bank           Repayment
                                                       James Garrett
                                                       Conversion

     Respondent, on the other hand, contends that none of the

$28,589 loss is allowable to petitioner.     Respondent maintains

that petitioner has not adequately substantiated his basis in

Amazona’s stock,9 and Amazona is not entitled to deduct

unsubstantiated expenses not proven to have been incurred in a

trade or business.    We agree with respondent.

     It appears that much of the claimed expenses that Amazona

reported for 1992 were actually incurred in 1991.     As reflected

by certain bank statements, virtually all the funds deposited to

Amazona’s bank account during 1991 had been withdrawn by Mr.

Garrett before 1992.    The 1991 funds deposited to the account

apparently included $22,000 mistakenly credited by the bank to

the account.   During 1992, only minimal deposits were made to the

account.    Any deductible business expenses Amazona had for 1991



     9
      In this connection, respondent notes that Amazona was
incorporated in May 1991, substantially all its operating funds
were deposited to its bank account during 1991, and Mr. Garrett
had expended almost all the funds in the account by the end of
1991. Respondent maintains that, even if petitioner had made
certain capital contributions to Amazona during 1991, his stock
basis would have to be adjusted by the unknown results of
Amazona’s operations for 1991.
                              - 20 -

should have been reported by Amazona on a return covering 1991,

not on its initial return filed for calendar year 1992.

     There is no evidence in the record to establish that the

funds provided by petitioner were actually expended by Mr.

Garrett for the purposes stated on the amended 1992 return.     That

return reflects that Amazona claimed total expenses of $48,579

for entertainment fees, legal fees, travel, and meals and

entertainment.

     With respect to the claimed legal fees of $794.08,

petitioner testified that the payment was for the attorney’s

services in incorporating Amazona.10   Such an organizational

cost, however, is a capital expenditure not a deductible business

expense under section 162.   Upon an S corporation’s proper

election, such organizational costs may only be amortized and

deducted by that S corporation’s shareholders ratably over a

period of not less than 60 months beginning with the month in

which the corporation starts business.   See sec. 1363(b)(3), 248;

secs. 1.248-1(b)(1) and (2), Income Tax Regs.   In the instant

case, however, no such election was ever made on Amazona’s 1992

return.

     With respect to the $22,000 petitioner asserts he repaid to



     10
      Petitioner originally had expected Mr. Garrett to pay this
legal bill using the $5,000 of start-up money that petitioner had
deposited in Amazona’s bank account in July 1991. Following Mr.
Garrett’s failure to pay the attorney’s bill for the
incorporation work, petitioner paid $794.08 to the attorney in
1992.
                                 - 21 -

Star Bank during 1992 as a result of Mr. Garrett’s "conversion",

the record reflects that the bank had agreed to treat the $22,000

as a loan to petitioner and Mr. Garrett.       The record also

reflects that the bank was still attempting to collect this loan

from Mr. Garrett in late 1992.     In any event, no theft loss under

section 165 was claimed by either Amazona or petitioner for 1992.

We thus do not consider this theft loss issue to be properly

before us.

     Petitioner has failed to establish he is entitled to deduct

a loss of $28,589 he reported from Amazona for 1992.

Accordingly, we hold that petitioner is not entitled to deduct

the loss he claimed from Amazona for 1992.

Issue 3.     1992 and 1994 Roadmaster Leasing Loss Deductions

     Allowability of the Claimed Partnership Losses

     As Roadmaster Leasing conducted no actual business activity,

financial operations, or venture during 1992 and 1994, petitioner

is not entitled to his claimed partnership business losses for

those years.     On brief, petitioner argues he is still entitled to

those losses because he had an actual and honest profit objective

in investing in Roadmaster Leasing.       However, the claimed

partnership business losses are simply not allowable to

petitioner where no business activity was actually carried on by

Roadmaster Leasing.11     Accordingly, we hold that petitioner is

     11
          Petitioner also confuses his own individual intent with
                                                       (continued...)
                                - 22 -

not entitled to his claimed 1992 and 1994 losses from Roadmaster

Leasing.12

Issue 4.     Section 6662 Accuracy-Related Penalties

     Respondent determined that petitioner was liable for an

accuracy-related penalty under section 6662(a) and (b)(2) for

substantial understatement of his income taxes for 1992 through

1995.

     An understatement of income tax is substantial if it exceeds

the greater of (1) 10 percent of the tax required to be shown on

the return, or (2) $5,000.     See sec. 6662(d)(1).    Except in the

case of an item attributable to a "tax shelter", an

understatement is reduced by the portion of the understatement

that is attributable to the tax treatment of an item for which

there is substantial authority, see sec. 6662(d)(2)(B)(i), or

with respect to which there is adequate disclosure, see sec.




     11
      (...continued)
the intent of the partnership. In order for a partnership to be
entitled to a deduction for expenses attributable to a trade or
business in computing its taxable income (or loss) under sec.
703(a), it must be established that the partnership engaged in
the activity in question with a profit motive. That profit
motive analysis is to be made at the partnership level. See
Brannen v. Commissioner, 722 F.2d 695, 702-705 (11th Cir. 1984),
affg. 78 T.C. 471, 499-505 (1982).
     12
      On brief, petitioner contends in the alternative, that he
should be allowed an abandonment loss under sec. 165. We do not
consider this abandonment loss issue to be properly before us, as
petitioner never timely raised this issue and is attempting to do
so for the first time on brief.
                                - 23 -

6662(d)(2)(B)(ii).13    See sec. 6662(d)(2)(B) and (C).

     In addition, section 6664(c)(1) provides that a penalty

under section 6662 shall not be imposed on any portion of an

underpayment if the taxpayer shows reasonable cause for such

portion of the underpayment and that the taxpayer acted in good

faith with respect to such portion.      Reliance on the advice of a

professional, such as an accountant, may constitute a showing of

reasonable cause if, under all the facts and circumstances, such

reliance is reasonable and the taxpayer acted in good faith.     See

sec. 1.6664-4(c), Income Tax Regs.

     Petitioner asserts that no penalties under section 6662(a)

and (b)(2) should be imposed because he qualifies under the

section 6664(c)(1) reasonable cause and good faith exception.

Petitioner maintains that he relied upon the accountants who

prepared his returns.    In connection with his disallowed 1992,

1993, and 1995 Villa del Mar deductions, petitioner further notes

that respondent earlier examined his 1988 return and had fully

allowed him all of his claimed 1988 business deductions from

Villa del Mar.   We disagree.



     13
      The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993),
Pub. L. 103-66, sec. 13251(a), 107 Stat. 531, amended sec.
6662(d)(2)(B)(ii), to also require a reasonable basis for the tax
treatment of the item. This amendment is effective for returns
the due dates for which (determined without regard to extensions)
are after Dec. 31, 1993. See OBRA 1993, sec. 13251(b), 107 Stat.
531.
                              - 24 -



     With respect to petitioner's disallowed Villa del Mar

business deductions for 1992, 1993, and 1995 legal expenses,

petitioner failed to show he supplied his accountants with

complete and accurate information concerning these claimed

deductions.   To demonstrate reasonable cause, a taxpayer must

show that he relied in good faith on a qualified adviser after

full disclosure of all necessary and relevant information.      See

Jackson v. Commissioner, 86 T.C. 492, 539-540 (1986), affd. 864

F.2d 1521 (10th Cir. 1989).   However, in the instant case,

petitioner failed to elaborate as to what exactly he had told or

had not told his accountants concerning the specific purposes of

these legal expenses.   See Stark v. Commissioner, T.C. Memo.

1999-1; cf. Test v. Commissioner, T.C. Memo. 2000-362.

     With respect to the disallowed Amazona loss deduction of

$28,859, we are not satisfied petitioner had disclosed all the

relevant facts to his accountants.     The bank statements on

Amazona’s account reflect that many of the claimed expenses were

likely incurred in 1991, rather than in 1992.     Moreover, many of

the claimed expenses (other than the $794.08 in legal expenses)

were later shown not to have been expended for the purposes

stated on Amazona’s and petitioner’s 1992 returns.

     With respect to the Roadmaster Leasing partnership losses of

$5,000 for 1992 and $3,558 for 1994, petitioner testified that he

had paid Mr. Candelario (an accountant) $1,000 in 1993 to provide
                              - 25 -

him with certain tax papers and information on Roadmaster

Leasing.   However, Mr. Schole (Roadmaster Leasing’s promoter)

previously arranged for Mr. Candelario to perform Roadmaster

Leasing’s tax work.   Indeed, Mr. Candelario had collaborated and

jointly participated with Mr. Schole in his sales effort to have

petitioner invest in Roadmaster Leasing.    Mr. Candelario was thus

hardly a disinterested, objective adviser, and petitioner could

not reasonably rely on Mr. Candelario’s tax advice in claiming

partnership loss deductions from Roadmaster Leasing.   See Rybak

v. Commissioner, 91 T.C. 524, 565 (1988).

     Accordingly, we hold that for 1992 petitioner is liable for

a penalty under section 6662 for substantial understatement of

his income tax with respect to the understatement attributable to

his disallowed Villa del Mar legal expenses and his disallowed

Amazona and Roadmaster Leasing losses.   Similarly, we hold that

for 1993 and 1995 he is liable for a penalty under section 6662
                             - 26 -

for substantial understatement of income tax with respect to the

understatement attributable to his disallowed Villa del Mar legal

expenses for each year.14

                                        Decision will be entered

                                   under Rule 155.




     14
      Although we have also determined that petitioner did not
have reasonable cause with respect to the underpayment
attributable to his disallowed 1994 Roadmaster Leasing
partnership loss, it does not appear (unless the Rule 155
computation shows otherwise) that he meets the sec. 6662(d)(1)
threshold for imposition of a penalty for that year.
