                        T.C. Memo. 2001-78



                      UNITED STATES TAX COURT



      RAYMOND F. KLING AND BARBARA K. KLING, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3982-98.                     Filed March 30, 2001.


     James A. Amodio and Stephen L. Kadish, for petitioners.

     Herbert W. Linder, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARR, Judge:   Respondent determined deficiencies in

petitioners' 1991 and 1992 Federal income and self-employment

taxes and accuracy-related penalties as follows:
                                  - 2 -

                                     Accuracy-Related Penalty
      Year         Deficiency               Sec. 6662(a)
                   1
      1991         $30,573.69                 $6,115
                     2
      1992             7,729.42                1,546
     1
       Respondent determined a deficiency     of $21,371.69 in Federal
income tax and $9,202 in self-employment      tax.
     2
       Respondent determined a deficiency     of $2,389 in Federal
income tax, $3,956.42 in self-employment      tax, and an earned
income credit recapture of $1,384.

     The issues for decision are:

     (1) Whether petitioners had unreported net income from a

sports memorabilia activity in the amounts of $96,350 in 1991 and

$28,001 in 1992;

     (2) whether petitioners are liable for self-employment tax

on the net income from the sports memorabilia activity;

     (3) whether petitioners are liable for the accuracy-related

penalties under section 6662(a); and

     (4) whether petitioner Barbara Kling is eligible for relief

under section 6015 with respect to any understatement of tax

attributable to the sports memorabilia activity.

                           FINDINGS OF FACT

A.   Background

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by this

reference.

     Petitioners Raymond F. Kling (Raymond) and Barbara K. Kling

(Barbara) resided in Cleveland, Ohio, when their petition was
                               - 3 -

filed.   Petitioners have been married to each other for more than

31 years and have four adult children.   Although petitioners had

saved some money for their children's education, all the children

have paid for their own undergraduate and postgraduate schooling.

Petitioners purchased their house over 21 years ago for $41,000.

At the time of the trial in this case, the house had a value of

approximately $60,000 and was subject to a $45,000 mortgage.

     For many years, petitioners maintained a joint bank account

in both their names at the National City Bank.   The account had

the same address as their residence, and the monthly bank

statements were sent to that address.    They closed the National

City Bank account in July 1991 and did not maintain a personal

checking account for the remainder of 1991 and all of 1992.

Eventually Barbara opened an account in her own name.

     At the time of the trial in this case, Raymond did not own

any other real property, did not own any stocks or bonds, and did

not have a pension plan or IRA.

     Raymond has collected baseball cards since 1957.   He also

collects stamps, coins, guns, sports memorabilia, typewriters,1

movie posters, autographs, and pictures.   Every year he takes

1,000 to 2,000 photographs of the Cleveland Indians at spring

training.   He has more than a million Cleveland Browns programs,


     1
      Raymond has collected over 600 old typewriters manufactured
from the turn of the century to the 1950's. The average cost of
a typewriter is $3.75. He has given away three typewriters but
has never sold a typewriter.
                                   - 4 -

and 100 Cleveland Indians programs.2

     Raymond goes to flea markets five or six times a week.         He

attends baseball card shows once or twice a month.       Raymond does

not have a booth to sell cards at the shows, but he trades, buys,

and sells cards at the shows.       Over the years, Raymond created a

cash hoard primarily from periodic sales of his memorabilia.

     For about 20 years, Raymond has stored most of the items he

has collected in part of an old building (the warehouse).

Although Raymond displayed some of his sports cards and

collectibles in the front part of the warehouse, most of the

items were in disorganized piles.       The warehouse is known as Ohio

Hobby Dealers Supply.       Raymond pays $500 per month rent for the

warehouse.       In addition to the warehouse, the building also

houses a gym, a travel agency, a mission, and a print shop.

     Raymond also stores some of his memorabilia in an old church

building that he rents from St. Vladimir's.       He began renting

with a 3-year option to purchase from St. Vladimir's in 1991 or

1992.       He paid from $200 to $500 per month for rent and $5,000

for the option to purchase.       At the end of the 3-year option

period, Raymond did not purchase the building and forfeited the

$5,000.

     Raymond did not deduct on his income tax returns the rent

paid for any site where the items he has collected were stored.


        2
      Raymond used to clean out Cleveland Stadium. After every
game he would collect all of the unused scorecards and programs.
                                - 5 -

     From 1979 to 1988, Raymond owned a one-third interest in a

corporation that owned four video stores.    In 1988, the stores

closed because they could not compete with larger video stores

such as Blockbuster.

     Except for his sports memorabilia activity, Raymond was not

otherwise employed from 1988 until 1997.    In 1991, Barbara

attended college full time, paying for her schooling with student

loans.    She began working as a teacher in May 1992.

     In order to supplement their income to cover living expenses

incurred from 1990 through 1992, petitioners refinanced their

house, maximized their credit card balances, and used money they

had saved for their children's educations.    Although some of

petitioners' personal expenses were paid out of the National City

Bank account, Raymond paid most of petitioners' living expenses

with cash.

     In 1990, Raymond made a $10,000 profit from an autograph

session with Jim Brown.

     Raymond bought and sold sports memorabilia, sports

memorabilia supplies, and other collectibles during 1991 and

1992.    Raymond did not maintain any books or records (including

inventory records) regarding the sales and purchases of these

items.

     In 1991, Raymond traded baseball cards for an automobile

worth $2,000.    In 1992, Raymond paid $1,500 for a motor home and
                                - 6 -

then sold the motor home a few months later for the same amount.

B.   David J. Morova

     Raymond and David J. Morova (Morova) are friends who met

through their dealings in sports memorabilia.    Raymond helped

Morova start a small retail business called Davey's Cards,

Comics, and Collectibles (Davey's Cards).    Raymond and Morova

initially intended to operate the store as a partnership.

Raymond helped Morova obtain a vendor's permit and tax ID number,

stocked the store with hobby supplies, and provided the store

with a few video games.    Morova put in his comic book and card

collections.   The store opened in late January 1990.   Sometime

thereafter, Raymond and Morova agreed that the store would be

Morova's alone.

     During the first year of operation, Davey's Cards was the

only store in the area.    Morova was able to pay the bills and

build up his stock.    After the first year, at least four

additional stores opened within 2 miles of Davey's Cards.    About

the same time, card packs became more expensive.    As a result,

the business slowly died.    Raymond and Morova agreed that all

income from the operation of Davey's Cards belonged to Morova,

and Morova reported the income on his Federal income tax returns.
                               - 7 -

C.   Ameritrust Account

     During 1991 and 1992, Raymond and Morova had signature

authority over an Ameritrust checking account titled Davys DBA

Ohio Hobby Dealers Supply (the Ameritrust account).   Bank

statements for the Ameritrust account were mailed to Davey's

Cards.   Morova then delivered the statements to Raymond's

warehouse.

     Raymond was the only person who wrote checks drawn on the

Ameritrust account.   Morova did not sign any checks on the

Ameritrust account.   Morova did use the Ameritrust account to

receive money for credit card sales made by Davey's Cards.

Raymond gave Morova supplies in exchange for the amounts

deposited into the Ameritrust account from credit card sales at

Davey's Cards.   Except for those supplies received from Raymond,

Morova did not use the account to pay any expenses from his

retail store.

D.   Buyers Group

     Raymond and a group of dealers formed a buying group to

purchase supplies and merchandise in bulk (the buyers group).

Raymond would solicit orders from the other members, place the

order with a distributor, and pick up the order.   He usually

collected the money from the members of the group as they picked

up their portion of the supplies.
                                - 8 -

     Raymond rented space in a building in Hartville, Ohio.     Some

members of the buying group would pick up their supplies at the

Hartville site, because it was closer than the warehouse.    One of

Raymond's friends, John Lauderdale, bought and sold cards at the

Hartville site and took care of the pickups at that site.

     Ohio Coin is a wholesale distributor of baseball cards, coin

supplies, and related products in the collectible industry.     Ohio

Coin sells to small distributors, dealers, and to a lesser degree

the public.   Ohio Coin's prices are 30 percent cheaper than other

suppliers in the State.    Customers receive an additional 3-

percent discount if they pick up a skid3 of product.   To get the

3-percent discount, customers of Ohio Coin, such as Raymond's

buyers group, combine orders and then distribute the product

among themselves.

     The round trip from Ohio Coin to Cleveland was approximately

500 miles.    In 1991, instead of spending a whole day to pick up

orders from Ohio Coin, Raymond purchased a van for Lewis Miller,

an employee of Ohio Coin.    The van was titled in Mr. Miller's

name, and Mr. Miller was the owner of the van.    Mr. Miller used

the van to pick up and deliver the items Raymond's group

purchased from Ohio Coin.    Raymond purchased the van from Cumba

Motors for $1,400.   A check in the amount of $1,000 drawn on the

Ameritrust account was made payable to Cumba Motors.    The balance


     3
      A skid is approximately 4 by 4 feet, and two skids will
fill a van.
                                 - 9 -

of the purchase price was made with cash.    The vehicle

experienced a transmission problem and Raymond paid $450 to

Custom Trans, Inc., for the repair.

     In about June or July 1992, Raymond purchased products from

Ohio Coin.   He arranged to pay for the products over time and

gave Ohio Coin a series of 10 to 12 checks for $1,296 each to be

negotiated on a monthly basis.    Beginning in September 1992, the

checks did not clear the bank.    Ohio Coin accepted most of the

products back for about one-half the price.

     Ohio Coin sold approximately $40,000 of "screw-downs" to

Raymond for $.40 each.   The deal for which Raymond bought the

screw-downs fell through, and Ohio Coin bought the product back

for approximately $.19 each.

E.   Carl Dietz and Megacards

     Carl Dietz (Dietz) owns a sports memorabilia shop called

Sports of Sorts.   Raymond lent Dietz money to purchase

photographs.   As of September 22, 1990, Dietz owed Raymond $7,300

for amounts Raymond had lent him.

     During the summer of 1991, Raymond and Dietz attended a

national convention in Anaheim, California.    Raymond helped Dietz

sell a photograph to Megacards for $50,000.    Raymond received

$5,000 from the sale.
                             - 10 -

     Raymond sold certain photographs to Megacards for the

aggregate amount of $77,000 during 1991.   The photographs were

owned by Mr. Dietz and a friend of his, Al Gouley.   Raymond had

lent Mr. Dietz money to purchase the photographs.    When Megacards

purchased the photographs, it paid the purchase price by a

$65,000 wire transfer on December 6, 1991, to the Ameritrust

account and by a $12,000 check made payable to Raymond and

deposited into the Ameritrust account.    Raymond returned $10,000

of the purchase price to either Steve Juskewycz4 or Megacards.

Raymond also paid Mr. Dietz $19,775.   Raymond made a commission

on the sale.

F.   Frank's Wholesale

     In January 1991, Raymond sold memorabilia known as baseball

gross-outs and awesome all-stars for $23,000 to Frank's

Wholesale, owned by Frank Sustar (Sustar).    Sustar gave Raymond

$9,189 in cash, and the cash was put in a paper bag.   On January

14, 1991, Barbara deposited the cash into petitioners' National

City Bank account at Raymond's request.    Raymond also deposited

checks from Frank's Wholesale totaling $15,608.01 into the

Ameritrust and National City Bank accounts.




     4
      Steve Juskewycz was the owner or president of Megacards.
                              - 11 -

G.   Sales From Raymond's Private Collection

1.   James Amodio

      James Amodio purchased sports memorabilia and other

collectibles from Raymond during the years at issue.   Two checks

signed by James Amodio made payable to Raymond in the amounts of

$145 and $152.75 were deposited into the Ameritrust account on

May 20, 1991, and December 6, 1991, respectively.

2.   John Cadier

      In 1991, Raymond sold a baseball card to John Cadier for

$200.   The purchase price was deposited into the Ameritrust

account.

3.   Robert Koehler

      In 1991, Raymond sold baseball photos to Robert Koehler for

$400.   The purchase price was deposited into the Ameritrust

account.

4.   Thomas Jurcak

      In 1991, Raymond sold a baseball to Thomas Jurcak for $48.

The $48 was deposited into the Ameritrust account.

H.   Petitioners' 1991 and 1992 Federal Income Tax Returns

      Petitioners filed their joint Federal income tax returns for

the taxable years 1991 and 1992.   On their 1991 return,

petitioners reported total income of $18,000.   On Schedule D,

Capital Gains and Losses, of the 1991 return, petitioners

reported gain from two sales of photos.   They reported $5,000
                                - 12 -

gain from a July 1, 1991, sale of a photo with zero basis for

$5,000, and a December 4, 1991, sale of photos acquired on

December 1, 1991, with zero basis for $13,000.

     On their 1992 return, petitioners reported total income of

$9,677.75.    They reported $4,624 of Form 1099-MISC income from

Topps Co., $5,032.32 from Barbara's Form W-2 income from

teaching, and $21.43 of interest income.

I.   Reconstruction of Income

      An internal revenue agent of the Internal Revenue Service

audited petitioners' 1991, 1992, and 1993 returns.     The agent

reconstructed petitioners' income using the bank deposits method.

1.   1991 Income

a.   Ameritrust Account

      In 1991, gross deposits of $404,747.80 were deposited into

the Ameritrust account.     Of that amount, $15,295.09 was

attributable to sales paid by credit card at Davey's Cards in

exchange for which Morova received $15,295.09 of supplies from

Raymond.     Additionally, there were $6,058.82 in miscellaneous

bank charges, lease payments on the credit card machine used by

Davey's Card, and charges for deposited items returned for

insufficient funds.

      Checks written and paid on the Ameritrust account for which

respondent allowed a deduction for purchases made during 1991

were as follows:
                              - 13 -

                Payee                  Amount

           Lawrence Machine        $23,156.75
           Midwest Sport Cards       4,937.50
           Sport Design Products    23,269.18
           Tuff Stuff                1,757.05
           Ohio Coin               104,300.37
           Edgewater Book            2,219.01
           Matthew Zechman Co.      15,734.35
           Matthew Zechman           5,067.00
           Good Deal                 1,200.00
           River City Traders          418.00
           CJ's Extra Inning         9,122.50
           Ultra Media Corp.           313.69
           Unique Vinyl              3,156.00
           Extra Base Sports         1,300.00
           B & O Wholesale             610.00
           F.A.F.C.                  2,158.00
           Baseline                    405.00
           B & B Sports Cards          435.00
           Chris' Cards              1,200.00
           John Lauderdale          10,577.00
           Ron Shedlock             30,825.00
           Beckett                   4,166.00
           Myron Swirynsky             540.00
           Ameritrust1              12,000.00
           Don Gries                15,525.00
           Steve Levine                790.00
           David Morova              1,800.00
           Tom Dyschuk               1,080.00
           Eric Lawrence               350.00
           Joey Eacobacci            2,430.00
           Jim Stepanik                460.00
           Stefan Juskewycz Co.     15,662.96
           Cash2                     1,900.00
           Cash3                     2,000.00
           Cash4                       300.00
           Cash5                       200.00
     1
       "Ohio Coin" indicated on memo section of check.
     2
       Two checks payable to cash were negotiated by Franks
Wholesale.
     3
       Check negotiated by Dave Morova.
     4
       Check negotiated by Richard Cook.
     5
       Check negotiated by John Lauderdale.
                                - 14 -

     Respondent allowed deductions as rent expenses paid during

1991 for checks written and paid on the Ameritrust account as

follows:

               Payee           Expense          Amount

           St. Vladimirs          Rent          $5,000
           Edith Rosch            Rent           1,000

     Respondent did not allow any deductions for the following

additional amounts paid from the Ameritrust account in 1991:

                       Payee               Amount

           Debra Bradley                 $27,175.00
           Raymond                        10,013.00
           Bob Kelly                         500.00
           Ray Duffy                         150.00
           Fred Pachasa                      450.00
           O.U.P.A.1                         300.00
           Jim Mitchell                    4,000.00
           Maintenance Engineering, Ltd.     177.93
           Anna Fox                        1,077.00
           Dan Eberhardt                     240.00
           James Brznack                      60.50
           Jennifer Kling                    933.78
           Wade Carsel                       100.00
           Carl Dietz                     19,775.00
           Cash2                           1,200.00
                3
           Cash                            2,500.00
           Cash2                           1,500.00
           John Pepera                       375.00
           Thomas J. Bowers4               1,260.00
           Cash2                             120.00
     1
       Ohio Union of Patrolman's Association.
     2
       "Commons" indicated on memo section of   check.
     3
       "Sam's Club" indicated on memo.
     4
      "Desert Storm" indicated on memo.

b.   National City Bank Account

     From January 1991 until the account was closed in July 1991,

gross deposits of $59,198.55 were deposited into the National
                                - 15 -

City Bank account.     Of that amount, $2,600 was transferred by

check from the Ameritrust account and $18.50 represents amount

received as gifts.

     In 1991, the following amounts were paid from the National

City Bank account for petitioners' personal expenses:

                     Payee                      Amount

             C.P.P.A.1                          $288.00
             Student Travel Service              184.00
             West American Insurance Co.         213.00
             East Ohio Gas                        55.00
             Old Brooklyn Youth League            15.00
             Tom Ballog                          100.00
             Trinity High School                  25.00
             College-level Exam. Program          38.00
             Oriental Trading Co.                 12.60
             Lake Erie Girl Scout Council         24.00
             Internal Revenue Service             92.00
             Treasure of State of Ohio            84.14
             Central Collection Agency           257.96
             College Scholarship Service          26.25
             Our Lady of Good Counsel             50.00
             Cleveland Public Power              116.67
     1
         Cleveland Patrolmen's Association.

     Checks written and paid on the National City Bank account

for which respondent allowed a deduction for purchases made

during 1991 were as follows:

                  Payee                       Amount

             M. Zechman                          690
             Midwest Sports Cards                375
             Jim Beckett                         166
             Lawrence Machine                  3,375
             Ron Shedlock                      8,472
             Ohio Coin                        26,502
             Gateway Cards                       756
             Beckett                           1,419
                              - 16 -

     The following additional amounts were paid from the National

City Bank account in 1991:

                   Payee                     Amount

           Bob Kelly                          $164.00
           Jim Wilson                          200.00
           First Card                          200.00
           Manufacturers Hanover               221.00
           Evelyn Johanson                   1,614.00
           Wholesale Club                    3,000.00
           Sam's Club                        1,874.15
           Cash                             $1,600.00

     During 1991, miscellaneous bank charges and returned check

fees of $269.65 were debited/charged against the National City

Bank account.

c.   IRS Determination for 1991

     The internal revenue agent determined Raymond's gross income

from the sale of sports memorabilia and supplies for 1991 as

follows:

           Ameritrust deposits                  $404,748
           Less misc. expenses                    (5,763)
           National City Bank deposits            59,199
           Less misc. expenses                    (2,600)
             Total                               455,584

     The agent further determined that petitioners' 1991 income

should be increased by $91,749 computed as follows:

           Gross receipts                       $455,584
           Purchases                            (353,234)
           Rent                                   (6,000)
           Self-employment tax adjustment         (4,601)
             Total                                91,749
                                  - 17 -

2.   1992

a.   Ameritrust/Star Bank Account

      During the first 6 months of 1992, gross deposits of $77,482

were deposited into the Ameritrust account.         Miscellaneous bank

charges and deposited items returned for insufficient funds

totaling $2,996.33 were charged to the Ameritrust account in

1992.    During 1992, a total of $1,186.40 attributable to credit

card purchases from Davey's Cards was directly deposited into the

Ameritrust account.      Morova received $1,186.40 of merchandise

from Raymond in exchange for the deposits from the credit card

sales.

      Sometime in June 1992, Ameritrust was acquired by Star Bank,

and the Ameritrust account became the Star Bank account.        In the

latter part of 1992, gross deposits of $17,424 were deposited

into the Star Bank account.

      Respondent allowed a deduction for purchases for checks

written and paid on the Ameritrust/Star Bank account during 1992

as follows:

                 Payee                     Amount

            Ohio Coin1                 $24,251.00
            Ohio Coin                    2,946.00
            Ron Shedlock2                7,340.00
            Megacards                    4,000.00
            Master Printing Co.          3,157.00
            Pro Sport                    2,900.00
            Lawrence Machine             1,700.00
            Unique Vinyl                 1,811.10
            Premier Sportscards            866.48
                                   - 18 -
     1
       Of the amount      paid to Ohio Coin, checks totaling $5,184
were dishonored and       should not be included in purchases paid in
1992.
     2
       Of the amount      paid to Ron Shedlock, checks totaling $10,000
were dishonored and       should not be included in the purchases paid
in 1992.

     Respondent allowed a deduction for rental expenses for

checks written and paid on the Ameritrust/Star Bank account

during 1992 as follows:

                  Payee           Expense          Amount

             St. Vladimirs          Rent           $2,000
             Edith Rosch            Rent            3,000

     The following additional amounts were paid from the

Ameritrust/Star Bank account in 1992:

                   Payee                        Amount

             Barbara Kling                       $750
             CCPL1                                836
             John Banville                        600
             Custom Tran. Inc.2                   450
             Eric Lawrence                      1,035
             Bill Clay                          1,228
             Raymond                            5,000
             Cash                               3,400
             John Houlihan                     26,014
             David Houlihan                     4,000
     1
       Cuyahoga   County Public Library
     2
         Repair of vehicle Raymond purchased from Cumba Motors in
1991.

     Because of insufficient funds, checks written or presented

for payment after August 31, 1992, on the Ameritrust/Star Bank

account were not honored.        Miscellaneous bank charges and

returned check fees of $885.86 were debited/charged against the

Star Bank account during 1992.
                                 - 19 -

b.   IRS Determination for 1992

      The internal revenue agent determined petitioners' gross

income from Raymond's sale of sports memorabilia and supplies for

1992 as follows:

           Ameritrust deposits              $77,482
           Less misc. expenses               (2,934)
           Star Bank deposits                17,424
             Total                           91,972

      The agent did not reduce the gross income to reflect the

$885.86 miscellaneous expenses from the Star Bank account.

      The agent determined that petitioners' 1992 income should be

increased by $26,023 computed as follows:

           Gross receipts                        $91,972
           Purchases                             (58,971)
           Rent                                   (5,000)
           Self-employment tax adjustment         (1,978)
             Total                                26,023

      Of the $58,971 allowed for purchases, checks totaling

$18,130 were dishonored due to insufficient funds.

J.   Barbara Kling

      Barbara knew that Raymond bought and sold sports memorabilia

during the years at issue, that he stored the memorabilia at the

warehouse and at St Vladimir's, and that he maintained the

Ameritrust and Star Bank accounts.
                              - 20 -

                              OPINION

Issue 1. Whether Petitioners Had Unreported Net Income From a
Sports Memorabilia Activity in the Amounts of $96,350 in 1991 and
$28,001 in 1992

     Gross income includes income derived from business.     See

sec. 61(a)(2).   Gross income is construed broadly to include all

"accessions to wealth, clearly realized, and over which the

taxpayers have complete dominion."      Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 431 (1955); Hawkins v. United States, 30

F.3d 1077, 1079 (9th Cir. 1994).   Every person subject to income

tax is required to keep books and records that establish the

amount of gross income and deductions shown by that person on his

or her income tax return.   See sec. 6001;    sec. 1.6001-1(a),

Income Tax Regs.

     When a taxpayer fails to keep adequate records, the

Commissioner is authorized to determine the existence and amount

of the taxpayer's income by any method that clearly reflects

income.   See sec. 446(b); Holland v. United States, 348 U.S. 121

(1954); Mallette Bros. Constr. Co. v. United States, 695 F.2d

145, 148 (5th Cir. 1983); Webb v. Commissioner, 394 F.2d 366,

371-372 (5th Cir. 1968), affg. T.C. Memo. 1966-81.     The

reconstruction of income need only be reasonable in light of all

surrounding facts and circumstances.     See Palmer v. IRS, 116 F.3d

1309, 1312 (9th Cir. 1997); Giddio v. Commissioner, 54 T.C. 1530,

1533-1534 (1970); Schroeder v. Commissioner, 40 T.C. 30, 33
                              - 21 -

(1963).   The Commissioner has latitude in determining which

method of reconstruction to apply when taxpayers fail to maintain

adequate records.   See Petzoldt v. Commissioner, 92 T.C. 661, 693

(1989).   Once the Commissioner has reconstructed a taxpayer's

income, the burden is on the taxpayer to demonstrate that the

Commissioner's determination is excessive.   See Mallette Bros.

Constr. Co. v. United States, supra; Giddio v. Commissioner,

supra at 1534.

     The records maintained by petitioners are insufficient to

permit an accurate computation of their income tax liability for

the years in issue.   Respondent reconstructed petitioners' income

using the bank deposits method.   The bank deposits method is an

accepted method of income reconstruction when a taxpayer has

inadequate books and records and large bank deposits.   See DiLeo

v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d

Cir. 1992); Parks v. Commissioner, 94 T.C. 654, 658 (1990);

Nicholas v. Commissioner, 70 T.C. 1057, 1065 (1978); Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2

(6th Cir. 1977).

     In a bank deposits reconstruction of the taxpayer’s income,

the Commissioner’s agents review and analyze the taxpayer’s bank

records for the years in issue.   Bank deposits are prima facie

evidence of income.   See Clayton v. Commissioner, 102 T.C. 632,

645 (1994).   Absent some explanation, a taxpayer’s bank deposits
                               - 22 -

represent taxable income.   The total of all deposits is

determined by the Commissioner for each year in question to

arrive at the taxpayer’s gross income.    An adjustment is then

made to eliminate deposits that reflect nonincome items such as

gifts, loans, and transfers between the taxpayer’s various bank

accounts.   The Commissioner will also make a further adjustment

for the taxpayer’s ascertainable business expenses, deductions,

and exemptions.    See Percifield v. United States, 241 F.2d 225

(9th Cir. 1957).

     Where respondent has employed the bank deposits method in

his determination of the deficiencies, the burden of proof rests

with petitioners to show that such determination is erroneous.

See Rule 142(a); Estate of Mason v. Commissioner, supra at 657;

Harper v. Commissioner, 54 T.C. 1121, 1129 (1970).    Respondent

need not prove a likely source for the unreported income.    See

Estate of Mason v. Commissioner, supra.    Nor is he required to

prove that all deposits constitute taxable income.    See Gemma v.

Commissioner, 46 T.C. 821, 833 (1966).

     The taxpayer has the burden of proving that the bank

deposits came from a nontaxable source.    See Rule 142(a); Clayton

v. Commissioner, supra; Estate of Mason v. Commissioner, supra;

Sproul v. Commissioner, T.C. Memo. 1995-207.    Additionally, the

taxpayer bears the burden of proof in substantiating claimed

deductions.   See Patton v. Commissioner, 799 F.2d 166, 170 (5th
                               - 23 -

Cir. 1986), affg. T.C. Memo. 1985-148; C.A. White Trucking Co. v.

Commissioner, 601 F.2d 867, 869 (5th Cir. 1979), affg. T.C. Memo.

1977-6.    Therefore, petitioners were required to substantiate

claimed deductions for cost of goods sold in excess of the amount

respondent allowed.    See, e.g., Manning v. Commissioner, T.C.

Memo. 1995-408; Wright v. Commissioner, T.C. Memo. 1993-27;

Danner v. Commissioner, T.C. Memo. 1992-385; Chagra v.

Commissioner, T.C. Memo. 1991-366, affd. without opinion 990 F.2d

1250 (2d Cir. 1993).

A. Petitioners' Initial Arguments

     Petitioners argue that Raymond did not make any profit from

his activity.    They assert that the members of the buyers group

paid the same amount for the supplies that Raymond had paid to

acquire the goods.    Respondent's agent confirmed that Raymond

sold the goods to the buyers group at cost.

     Petitioners argue that since Raymond did not make a profit

from the buyers group activity, there was no income omitted on

their returns.    The flaw with petitioners' argument, however, is

that Raymond used the checking accounts for other transactions

besides the buyers group purchasing activity.    For example,

although the transaction with Dietz and Megacards was unrelated

to the bulk buying for the buyers group, Raymond deposited the

payment from Megacards into and paid Dietz from the Ameritrust

account.    It is also apparent to the Court that Raymond used the
                                - 24 -

accounts for transactions related to his private collection.

     Raymond attended flea markets five or six times a week and

baseball card shows once or twice a month.      He traded, bought,

and sold cards at the shows.    Because he often used the money

from sales to purchase other items, Raymond erroneously believed

that he did not have taxable income from this activity.       Thus,

petitioners did not report any income from sales related to

Raymond's private collection.

     Petitioners next argue that they had no taxable income

because, applying factors set forth under section 183, Raymond

did not engage in the activity for profit.      Petitioners

misinterpret section 183, for although that section limits the

amount a taxpayer may deduct from an activity if that activity is

not engaged in for profit, there is nothing in section 183 that

excludes from income profits earned from such activity.

B.   Reduction of Gross Receipts for Cash Hoard

      Respondent determined that petitioners had gross receipts

from Raymond's sports memorabilia activity, including the bulk

purchasing activity for the buyers group, totaling $455,584 in

1991 and $91,972 in 1992.   Petitioners assert that respondent

should have reduced the amount each year to reflect money from a

cash hoard that Raymond deposited into the Ameritrust account.

      Over the years, Raymond created a cash hoard primarily from

periodic sales of his memorabilia.       He claims the cash hoard was
                                  - 25 -

as follows from 1978 to 1993:

                       Year-end         Net Increase/
             Year       Balance          (Decrease)

             1978       $1,500              $1,500
             1979        2,500               1,000
             19801      41,500              39,000
             1981       44,300               2,800
             1982       50,300               6,000
             1983       53,550               3,250
             1984       62,950               9,350
             1985       70,550               7,600
             1986       83,050              12,400
             1987       75,000              (8,050)
             1988       70,000              (5,000)
             1989       55,000             (15,000)
             1990       40,000             (15,000)
             1991       25,000             (15,000)
             1992       10,000             (15,000)
             1993         -0-              (10,000)
     1
         In 1980, Raymond sold a coin collection.

     Although we have found that Raymond in fact had a cash

hoard, we need not decide for present purposes the amount of the

hoard, because the amount of omitted income should not be reduced

by the amount of the hoard.       In reconstructing petitioners'

income, respondent did not include the amount of cash

expenditures made by petitioners during the years at issue.

Furthermore, except for specific cash deposits that Raymond made

into the Ameritrust account to cover bounced checks, discussed

below, there is no evidence that deposits into the bank accounts

were made from the cash hoard.       Therefore, we find that the

income determined by respondent should not be reduced to reflect

a diminution in any cash hoard that Raymond might have had.
                              - 26 -

C.   Reduction of Gross Receipts for Loans

      On several occasions Raymond deposited his own cash into the

Ameritrust account to cover checks written on the account that

had been dishonored because the account had insufficient funds to

cover the amount of the checks.     He claims that those cash

deposits were in effect loans to the buyers group and that

certain checks payable to cash or to himself from the Ameritrust

account were repayments of those loans.

      Raymond claims that the following cash deposits represent

loans he made to the buyers group and the checks payable to

himself or cash represent the repayment of the loans:

                             Loan
                Date      Cash Deposit       Repayment/Payee

             01/14/1991      $950                    --
             01/14/1991     1,050                    --
             01/29/1991     2,520                    --
             02/04/1991     1,200                    --
             02/08/1991     1,500                    --
             03/25/1991      --            $2,000         Cash
             03/27/1991      --             2,500         Cash
             04/02/1991     1,000                    --
             05/02/1991     1,000                    --
             05/02/1991     2,000                    --
             07/17/1991       --             1,240        Raymond
             07/24/1991       --             1,000        Cash
             08/27/1991       100
             10/03/1991       --            1,500         Cash
             11/04/1991       --              900         Cash
             12/10/1991       --            1,200         Cash
             04/13/1992       --            1,000         Cash
               Total       11,320          11,340

      The bank records show that shortly before each of the above

cash deposits was made, a fee had been charged for one or more
                               - 27 -

checks dishonored because of insufficient funds.    Those records

also show that at the time the checks at issue were written to

cash or Raymond for repayment the account had ample funds.    We

find it is more likely than not that the cash deposits were loans

that Raymond made to the buyers group to cover checks that had

been dishonored for insufficient funds, and the checks payable to

cash and to Raymond represent repayment of those loans.

Therefore, we find that the gross receipts for 1991 should be

reduced by $11,320.

D. Adjustments for Deposits and Checks Related to Houlihan/Roth
Transaction

     Petitioners also claim that in 1991 Raymond was involved in

a transaction between his friend John Houlihan (John), John's

brother Dave Houlihan (Dave), Jeff Roth (Jeff), and Jeff's

girlfriend Debra Bradley (Debra).   Petitioners claim that as a

result of that transaction the gross receipts for 1991 should be

reduced by $27,175 or, in the alternative, the cost of goods sold

should be increased by that amount.     John owns two shops in the

Boston area.

     Petitioners claim that cash deposited into the Ameritrust

account belonged to John (totaling $23,075) and Dave (totaling

$4,000), and the checks written to Debra (totaling $27,175), John

(totaling $26,014), and Dave (totaling $4,000) are part of the

same transaction as follows:
                                  - 28 -

                        Deposits             Withdrawals
        Date        Amount    Source       Amount    Payee

     06/19/1991     $7,000        John              --
     08/08/1991        800        John              --
     08/09/1991              --            $4,000        Debra
     08/11/1991              --             4,000        Debra
     08/16/1991              --             4,000        Debra
     08/20/1991              --             2,075        Debra
     08/20/1991              --             2,600        Debra
     08/22/1991        500        John              --
     08/22/1991      1,500        John              --
     08/23/1991              --             3,500        Debra
     08/26/1991        475        John              --
     08/26/1991      1,300        John              --
     09/10/1991      3,000        John              --
     09/11/1991        900        John              --
     09/13/1991        400        John              --
     09/23/1991        200        John              –
     09/23/1991        400        John              --
     09/23/1991      1,500        John              --
     09/24/1991              --             7,000        Debra
     10/01/1991        500        John              --
     10/15/1991      1,700        John              --
     10/15/1991      2,900        John              --
     10/25/1991      4,000        Dave              --
     02/22/1992              --             5,000        John
     03/13/1992              --             4,200        John
     04/04/1992              --             5,850        John
     04/29/1992              --             3,464        John
     05/03/1992              --             1,000        John
     05/21/1992              --             3,500        John
     06/22/1992              --             1,000        Dave
     07/23/1992              --             1,000        Dave
     07/23/1992              --             1,000        Dave
     08/17/1992              --             1,000        John
     08/17/1992              --             1,000        John
     08/17/1992              --             1,000        John
     09/04/1992              --             1,000        Dave

     Raymond explains the deposits and withdrawals as follows:

John and Dave wanted to purchase a type of card called Uncut

Sheets from Jeff Roth; John and Dave gave Raymond cash, Raymond

deposited the cash into the Ameritrust account, and Raymond sent
                              - 29 -

a series of checks totaling $27,175 to Debra for John and Dave's

orders; Raymond also ordered some of the sheets and paid for the

purchase by wire transfer; Jeff, however, did not send the sheets

that John, Dave, and Raymond had ordered; it took Raymond several

months to get the money back; Raymond received cash and some

merchandise from Jeff; as Raymond received the money from Jeff,

he deposited the cash into his Ameritrust account, and then he

sent the money to John and Dave; Raymond sold some of the

merchandise he received from Roth for $4,200 and sent a check to

John for $4,200.

     Although petitioners' pretrial memorandum indicates that

they would call John to testify as a witness, petitioners failed

to bring a single witness to corroborate Raymond's story.    Thus,

petitioners failed to carry their burden of proving that these

funds represent items that should not be included in their

income.

E.   Adjustments for Purchases/Cost of Goods Sold or Expenses

      Respondent allowed petitioners a deduction of $353,234 in

1991 and $58,971 in 1992 for purchases or cost of goods sold.

Respondent also allowed a deduction for rental expense of $6,000

in 1991 and $5,000 in 1992 Petitioners claim that the deductions

for purchases and expenses should be increased for additional

amounts.
                               - 30 -

     Respondent did not explain the basis or standard used to

determine whether a given item would be included in the purchases

for which a deduction was allowed in 1991 or 1992.    The agent did

not attempt to account for beginning and ending year inventories.

It appears to the Court, however, that the agent, having

confirmed that the goods acquired for the buyers group were

distributed to the members at cost, allowed a deduction for items

identified as purchases made for the buyers group.    Consistent

with that determination, we shall allow a deduction for purchases

made for the buyers group.    Additionally, we shall allow a

deduction for payments unrelated to the buyers group but

attributable to sales or transactions completed during the

taxable year at issue.

1.   Klein News

      Klein News is a distributor of magazines.   In 1990, Raymond

agreed to provide metal racks to hold plastic pages, sleeves, and

hard plastic for sports cards for Klein News.     Klein News agreed

to purchase between $20,000 and $25,000 worth of merchandise per

month.    On December 26, 1990, Raymond wrote a check in the amount

of $24,048.85 made payable to Ohio Coin for payment of

merchandise bought from Ohio Coin related to the deal with Klein

News.    In 1991, Raymond sold merchandise to Klein News for

$23,987.46, the payment for which was deposited into the

Ameritrust account on February 1, 1991.
                                - 31 -

     Respondent did not allow a deduction in 1991 for the cost of

the merchandise purchased from Ohio Coin.      Since the merchandise

was sold in 1991 as part of the Klein News arrangement, the cost

of goods sold for 1991 should be increased by $24,048.85.

2. Additional Checks Written in 1991 on the Ameritrust and
National City Bank Accounts

     Petitioners claim that the deductions for purchases and

expenses should be increased for the following amounts paid from

the Ameritrust and National City Bank accounts in 1991 as

follows:
                          Ameritrust Account

               Payee                         Amount

             Raymond                         $8,773.00
             Bob Kelly                          500.00
             Ray Duffy                          150.00
             Fred Pachasa                       450.00
             O.U.P.A.1                          300.00
             Jim Mitchell                     4,000.00
             Maintenance Engineering, Ltd.      177.93
             Anna Fox                         1,077.00
             Dan Eberhardt                      240.00
             James Brznack                       60.50
             Jennifer Kling                     933.78
             Wade Carsel                        100.00
             Carl Dietz                      19,775.00
             Cash                             1,200.00
             Cash                             2,500.00
             Cash                             1,500.00
             John Pepera                        375.00
             Thomas J. Bowers                 1,260.00
             Cash                               120.00
     1
         Ohio Union of Patrolman's Association.
                                 - 32 -

                       National City Bank Account

               Payee                          Amount

           Bob Kelly                          $164.00
           Jim Wilson                          200.00
           Evelyn Johanson                   1,614.00
           Wholesale Club                    3,000.00
           Sam's Club                        1,874.15
           Cash                              1,600.00

     The following discussion relates to the items listed above

that were withdrawn from the Ameritrust and National City Bank

accounts in 1991.

a.   Raymond

     A check dated May 30, 1991, written on the Ameritrust

account is made payable to Raymond in the amount of $3,173.      "E&J

Sales" is written on the memo section of the check.     The record

also shows that a check from E&J Sales made payable to Raymond

was deposited into the Ameritrust account on May 30, 1991.

Petitioners assert that cost of goods sold in 1991 should be

increased to reflect the purchase of the goods for E&J Sales.

     Raymond explains the check as follows:     E&J Sales is a

company that sells wholesale; E&J Sales asked Raymond to purchase

some merchandise for the company in California and delivered a

check in the amount of $3,173 made payable to Raymond; Raymond

knew the California company would not accept a third party check;

therefore, he deposited the check from E&J Sales into the

Ameritrust account and wrote a check to himself in the same

amount to pay for the merchandise.
                               - 33 -

     Petitioners did not produce a receipt for any goods

purchased for E&J Sales.    Additionally, the check written on the

Ameritrust account made payable to Raymond was endorsed only by

Raymond and not by any other party.     Petitioners failed to bring

a single witness to corroborate Raymond's story.    In failing to

do so, petitioners failed to carry their burden of proving that

these funds represent items that should be included in the cost

of goods sold for 1991.

     Petitioners claim that the remaining three checks written to

Raymond ($2,600 written on January 7, 1991, $2,000 written on

July 3, 1991, and $1,000 written on October 31, 1991) were to

distribute profits from the sale of the pictures the gain from

which Raymond reported on his return.

     On Schedule D of their 1991 return, petitioners reported

gain from two sales of photos.   They reported a $5,000 gain from

a July 1, 1991, sale of a photo with zero basis, and a $13,000

gain from a December 4, 1991, sale of photos acquired on December

1, 1991, with zero basis.   The checks made payable to Raymond do

not coincide with the sales of the photographs reported on the

1991 return.   Furthermore, we have examined the bank records for

the periods around the time of the sales.    There is no evidence

that $5,000 was deposited into the account on or around July 1,

1991, or that $13,000 was deposited into the account around

December 4, 1991.   Petitioners have not established that the
                                - 34 -

income as determined by respondent for 1991 should be reduced by

the amounts of these checks.

b.   Bob Kelly

      Bob Kelly is a small card dealer.   The $500 check paid to

Mr. Kelly was for the purchase of cards.    We find that the

purchase of the $500 of cards was more likely than not a purchase

for Raymond's private collection, rather than a bulk purchase for

the buyers group.   Petitioners have not shown that the cards

purchased were sold during 1991 or 1992.    Therefore, petitioners'

income is not reduced by $500.

c.   Ray Duffy

      Ray Duffy is an autograph promoter.   The $150 check paid to

Mr. Duffy was for the purchase of autographed pictures.    We find

that the purchase of the autographed pictures more likely than

not was a purchase for Raymond's private collection, rather than

a bulk purchase for the buyers group.     Petitioners have not shown

that the autographed pictures purchased from Mr. Duffy were sold,

and that the proceeds from that sale were deposited into their

accounts during 1991 or 1992.    Therefore, petitioners' income for

1991 or 1992 is not reduced by $150.

d.   O.U.P.A.

      Raymond claims that the $300 check written to the Ohio Union

of Patrolman's Association was for an advertisement placed in the

police association's yearly fund raiser book for Davey's Cards.
                                - 35 -

Petitioners did not provide a copy of the ad and did not ask

Morova to substantiate the expense.      Petitioners failed to

provide any evidence to corroborate that the $300 check was for

an advertisement.    Therefore, petitioners' income is not reduced

by $300.

e.   Jim Mitchell

      Jim Mitchell operates Ontario Hobby Dealers Supply.     The

$4,000 check paid to Mr. Mitchell was for the purchase of "close-

outs".     We find that the purchase of $4,000 worth of close-outs

more likely than not was a purchase for the buyers group.

Therefore, the cost of goods sold for 1991 should be increased by

$4,000.

f.   Anna Fox

      Raymond claims that the $1,077 check written to Anna Fox was

for a purchase of a baseball signed by Babe Ruth, Lou Gehrig, Ty

Cobb, and Colonel Jacobs for Davey's Cards.      He further claims

that the ball was stolen, and Morova did not pay Raymond for the

ball.

      Although Morova testified at trial, he was never questioned

about the baseball.    Petitioners have failed to substantiate that

the cost of goods sold should be increased for the $1,077 paid to

Anna Fox.
                               - 36 -

g.   Dan Eberhardt

     Dan Eberhardt is a dealer.   The $240 check paid to Mr.

Eberhardt was for the purchase of a wax case.5    We find that the

$240 purchase of a wax case more likely than not was a purchase

for Raymond's private collection, rather than a bulk purchase for

the buyers group.    Petitioners have not shown that the wax case

purchased was sold during 1991 or 1992.   Therefore, the cost of

goods sold is not increased by the cost of the cards.

h.   Jennifer Kling's Star Wars Collection

     A check in the amount of $933.78 written on the Ameritrust

account was made payable to petitioners' daughter, Jennifer

Kling.

     Raymond claims that Jennifer collected Star Wars cards when

she was in grade school and high school and, in 1991, she sold

the collection to one of Morova's customers.     He further claims

that the purchase price of $933.78 was deposited into the

Ameritrust account.   Raymond then wrote a check dated July 29,

1991, from that account payable to Jennifer in the amount of


     5
      Originally, baseball cards came as a premium with bubble
gum wrapped in a little wax pack (like wax paper around the card)
that were heat sealed. Eventually, the baseball cards became so
popular that the bubble gum wrap became the premium with the
purchase of the baseball cards, and finally the bubble gum was
eliminated. Although the packs are now polypacks, collectors
still refer to them as wax. Today, baseball cards generally are
marketed in one of three ways--wax, cellos, and rack packs. A
wax pack is the smallest, generally containing 1 to 15 cards. A
rack pack generally consists of 3 wax packs and a cello pack
would be a larger pack containing 4 times as many cards and
selling for $3 to $4.
                                - 37 -

$933.78.    Jennifer did not testify at trial in this case.

Although Barbara testified, she did not address the sale of

Jennifer's collection or even confirm that Jennifer ever had such

a collection.     Petitioners did not ask Morova about the sale when

he testified at trial.    Petitioners have not established that the

check to Jennifer was a distribution of proceeds from the sale of

her collection or that the $933.78 payment is otherwise

deductible in 1991.

i.   Wade Carsel

     Wade Carsel is a dealer whose company is named Box Man.

Petitioners have not provided any evidence regarding the $100

check paid to Mr. Carsel.    Therefore, petitioners' income is not

reduced by $100.

j.   Carl Dietz

     The $19,775 check paid to Dietz is the money from the

Megacards deal that Raymond distributed to Dietz.    The sale was

made in 1991, and the proceeds from the sale were deposited into

the Ameritrust account.    Therefore, petitioners' income for 1991

will be reduced by $19,775.

k.   Cash

     Dave Cirino (Cirino) is a dealer who bought large wax boxes,

sorted out the stars, and then sold the commons.6    The checks

payable to cash in the amounts of $1,200 and $120 are for commons


     6
      The term "commons" refers to baseball card that feature a
player who is not considered a star.
                                 - 38 -

purchased from Cirino.     We find that the $1,200 purchase of the

commons more likely than not was a bulk purchase for the buyers

group, rather than for Raymond's private collection.       Therefore,

the purchases for 1991 is increased by $1,200.       We cannot say,

however, that the $120 purchase of the commons was more likely

than not a purchase for the buyers group, rather than for

Raymond's private collection.     Petitioners have not shown that

the commons purchased for $120 from Cirino were sold and the

proceeds from that sale were deposited into their accounts during

1991 or 1992.   Therefore, petitioners have not established that

they are entitled to deduct the $120 in either 1991 or 1992.

l.   John Pepera

      John Pepera (Pepera) is a district manager for a newspaper

called the Cleveland Plain Dealer.        The $375 check paid to Pepera

was for the purchase of a large number of newspapers for a

special event relating to sports.     We find that the purchase of

the newspapers more likely than not was a purchase for Raymond's

private collection, rather than a bulk purchase for the buyers

group.   Petitioners have not shown that the newspapers were sold,

and that the proceeds were deposited into their accounts during

1991 or 1992.      Therefore, the income for neither year is reduced

by the cost of the newspapers.
                                - 39 -

m.   Thomas J. Bowers

      The $1,260 check written to Thomas J. Bowers is for Desert

Storm sets.   We find that the purchase of $1,260 worth of Desert

Storm sets more likely than not was a bulk purchase for the

buyers group, rather than for Raymond's private collection.

Therefore, the deduction for purchases for 1991 is increased by

$1,260.

n.   Bob Kelly

      Bob Kelly was paid $164 for wax.    We find that the $164

purchase of wax more likely than not was a purchase for Raymond's

private collection, rather than a bulk purchase for the buyers

group.    Petitioners have not shown that the wax was sold during

1991 or 1992.     Therefore, the cost of goods sold is not increased

by the cost of the cards.

o.   Jim Wilson

      Jim Wilson owns or works for a vending machine company.

Raymond purchased a $200 used video football game from Mr. Wilson

for Morova's store.     Morova never paid Raymond for the game.

Raymond and Morova initially intended to operate the store as a

partnership to which Raymond agreed to contribute video games.

The purchase of the game was not related to the bulk purchases

for the buyers group.     Petitioners have failed to show that the

cost of the video game is deductible in 1991 or 1992.
                                 - 40 -

p.   Evelyn Johanson

      Evelyn Johanson is the wife of a former security guard who

worked at Cleveland Stadium.     Raymond wrote a check for $1,614 to

Mrs. Johanson for her husband's collection of autographed

baseballs.   Raymond claims that he purchased the baseballs for

Dietz, that the baseballs went to Dietz's store Sports of Sorts,

and that Raymond was repaid the $1,614 when they settled the

Megacards deal.    Raymond did not call Dietz or Mrs. Johanson as a

witness, and there is no other evidence to establish that the

check was for the purchase of baseballs or that the baseballs

went to Dietz.    Therefore, petitioners have failed to establish

that the $1,614 is deductible in 1991 or 1992.

q.   Wholesale Club/Sam's Club

      Wholesale Club (later became Sam's Club) distributed

baseball cards.    Wholesale Club was able to obtain newly issued

baseball cards 2 to 3 weeks before the tobacco and candy

distributors.    Raymond claims that the $3,000 check payable to

Wholesale Club, the $1,874.15 check payable to Sam's Club, and

the $2,500 check payable to cash (with "Sam's Club" written on

the memo portion of the check) were for cases of new baseball

cards. Some of the checks in the record indicate the purpose of

the check, e.g., some checks have "commons" written on the memo

section of the check.    Unlike those checks, there is nothing

noted on the checks written to Wholesale Club or to Sam's Club
                                - 41 -

that indicates that the money was used to purchase baseball

cards.    Petitioners have not established that it is more likely

than not that these checks were used to purchase baseball cards

for the buyers group, rather than for their personal living

expenses.    Therefore, petitioners have failed to establish that

they are entitled to a deduction for the payments.

r.   Cash

      Barbara signed and endorsed a check drawn on the National

City Bank account dated March 18, 1991, payable to cash in the

amount of $1,600.    She then gave the cash to Raymond.    Raymond

claims the $1,600 was used to purchase cards from a company that

would only accept cash, because the buyers group had bounced some

checks.     There is no notation on the check or any other evidence

in the record to indicate its purpose.    Petitioners have not

established that it is more likely than not that cash was used to

purchase supplies for the buyers group, rather than for their

personal living expenses.    Therefore, petitioners have failed to

establish that they are entitled to a deduction for the $1,600.

3.   Unique Vinyl Transaction

      Unique Vinyl makes binders.   On March 13, 1991, Raymond wire

transferred $5,270 from the National City Bank account to Unique

Vinyl's bank account for purchases made during 1991.      The bank

charged a fee of $13.75 for the wire transfer.    Also during 1991,

a $3,156 check made payable to Unique Vinyl was written and paid
                              - 42 -

on the Ameritrust account.   Respondent allowed a deduction for

purchases in 1991 for the $3,156 check and the $5,270 wire

transfer.

     Raymond claims that on February 4, 1991, he transferred by

wire $8,253.96 to Unique Vinyl from the Ameritrust account to pay

for binders for the buyers group.   Although the bank records show

that a check in the amount of $8,253.96 was paid on February 4,

1991, petitioners did not provide any evidence establishing that

Unique Vinyl was the payee of the check or that the payment was a

wire transfer to Unique Vinyl.   Petitioners did not provide a

receipt, invoice, or otherwise establish that the payment

represents a deductible expense.

4.   Charge on Ameritrust Account

      Jim Beckett publishes the Beckett Price Guides for baseball

cards, basketball cards, hockey cards, and nonsport cards.     He

publishes an annual guide that sells for $20 and monthly updates

that sell for $1.   Raymond purchased large quantities of the

price guides.

      Respondent allowed a deduction in 1991 for checks made

payable to Beckett or the buyers group totaling $4,166.   Two of

the checks, one dated April 5, 1991, and the other dated June 7,

1991, were each in the amount of $996.   On February 20, 1991, the

Ameritrust account was charged $996.     Respondent did not allow a

deduction for the $996 charge.   Petitioners claim that the
                               - 43 -

account was charged $996 for another check to Beckett that had

not been honored the first time it was presented to the bank.      We

find it more likely than not that the payment was to Beckett for

the purchase of price guides for the buyers group.    Respondent

allowed petitioners a deduction for similar purchases made later

in the year.    We see no reasonable distinction between the

earlier and later purchases.    Therefore, the deduction for

purchases in 1991 should be increased by $996.

5.   Amounts Paid in 1991 and 1992 for Mr. Miller's Van

      Petitioners also assert that they are entitled to deduct in

1991 the $1,400 purchase price of the van Raymond purchased for

Mr. Miller.    He purchased the van for Mr. Miller so that Mr.

Miller could pick up and deliver the items Raymond's group

purchased from Ohio Coin.    The van was titled in Mr. Miller's

name, and Mr. Miller was the owner of the vehicle.    The vehicle

experienced a transmission problem and Raymond paid $450 to

Custom Trans, Inc., for the repair.     He purchased the van for Mr.

Miller and paid for the repair of the transmission in payment of

Mr. Miller's services.    Those services were related to the buyers

group.   Therefore, petitioners may deduct the $1,400 in 1991 and

$450 in 1992.
                               - 44 -

6. Additional Checks Written in 1992 on the Ameritrust/Star Bank
Account

     Petitioners claim that the deductions for purchases and

expenses should be increased for the following amounts paid from

the Ameritrust/Star Bank account in 1992:

                  Payee                     Amount

            Barbara Kling                    $750
            CCPL1                             836
            John Banville                     600
            Eric Lawrence                   1,035
            Bill Clay                       1,228
            Raymond                         5,000
            Cash                            3,400
     1
       Cuyahoga  County Public Library.
     2
        Repair of vehicle Raymond purchased from Cumba Motors in
1991.

     The following discussion relates to the items listed above

that were withdrawn from the Ameritrust and National City Bank

accounts in 1991

a.   Barbara

     The $750 check written to Barbara was to repay her mother

for a $750 loan that she made to Raymond.    Petitioners argue that

their income should be reduced to reflect the loan.    Petitioners,

however, have failed to show that the $750 Barbara's mother lent

them was deposited into either the Ameritrust or National City

account.    There is no evidence that the $750 was included in

respondent's determination of gross receipts.    Petitioners have

failed to establish that the gross receipts
                              - 45 -

should be reduced by the $750.   Additionally, petitioners are not

entitled to a deduction for repayment of the loan.

b.   C.C.P.L.

      The $836 check to CCPL was for a shelving unit purchased at

an auction by the Cuyahoga County Public Library for Morova's

store.   The purchase was not part of the bulk buying for the

buyers group.   Petitioners have failed to establish that the cost

of the shelving unit is otherwise deductible in 1992.

c.   John Banville

      John Banville works for the National Football League.   The

$600 check payable to John Banville is for the purchase of

footballs and commemorative footballs from the Super Bowl.    We

find that the purchase of the footballs more likely than not was

a purchase for Raymond's private collection, rather than a bulk

purchase for the buyers group.   Petitioners have not shown that

the footballs were sold and that the proceeds were deposited into

their accounts during 1991 or 1992.    Therefore, petitioner's

income for either year is not reduced by the cost of the

footballs.

d.   Eric Lawrence

      Eric Lawrence owns Lawrence Machines, a company that makes

plastic sheets.   Respondent included other payments to Lawrence

Machines in the amount of purchases.     We find that the $1,035

check written to Eric Lawrence more likely than not was a
                                - 46 -

purchase for the buyers group.     Therefore, the cost of goods sold

for 1992 should be increased by $1,035.

e.   Bill Clay

      Bill Clay owned Clay's Collectibles and manufactured

baseball card boxes.     We find that the $1,228 check written to

Bill Clay more likely than not was a purchase for the buyers

group.    Therefore, the cost of goods sold for 1992 should be

increased by $1,228.

f.   Raymond

      The $5,000 check to Raymond was a portion of his $18,000

profit from a picture deal that he reported on petitioner's 1991

return.     Since the $5,000 was reported on the return,

petitioners' omitted income is reduced by $5,000.

g.   Cash

      Three checks totaling $3,400 were made payable to cash.      One

check in the amount of $1,000 indicates that it was for Jim

Mitchell of Ontario Hobby Dealers Supply of Canada.     Another

check in the amount of $1,600 indicates that it was for Ohio

Coin.    Respondent allowed deductions for other checks written to

those payees.     We find that these checks more likely than not

were purchases for the buyers group.     Therefore, the cost of

goods sold for 1992 should be increased by $2,600.

      The third check in the amount of $800 was for the purchase

of pinball machines for Morova's store.     The purchase was not
                               - 47 -

part of the bulk purchasing for the buyers group.      Petitioners

have failed to establish that the cost of the pinball machine is

deductible in 1992.

7.   Dishonored Checks

      Of the $58,971 respondent allowed for purchases in 1992,

checks totaling $18,130 were dishonored due to insufficient

funds.   Petitioners concede that, in computing the amount of

income for 1992, the amount of purchases allowed by respondent

for 1992 should be reduced by $18,130.

8.   Star Account Miscellaneous Expenses

      Respondent reduced gross receipts for 1991 and 1992 for all

miscellaneous charges made against the Ameritrust account.

Respondent did not reduce the gross income to reflect the $885.86

miscellaneous expenses from the Star Bank account.      Star Bank is

the successor to Ameritrust.   The Star Bank account is the same

account as the Ameritrust account.      We see no reason why the

charges should be treated differently.      We find, therefore, the

gross receipts for 1992 should be reduced by $885.86.

F.   Conclusion

      Rounding the amounts above to the nearest dollar, we find

that petitioners are entitled to deduct additional purchases of

$52,680 in 1991 and $10,313 in 1992 computed as follows:
                                - 48 -

     Additional Purchases
               Item                        Amount
          1991
               Klein News                $24,049
               Jim Mitchell                4,000
               Carl Dietz                 19,775
               Cash/Cirino                 1,200
               Bowers                      1,260
               Charge/Beckett                996
               Miller van                  1,400
                 Total                    52,680
          1992
               Miller van                    450
               Lawrence                    1,035
               Clay                        1,228
               Raymond                     5,000
               Cash/Mitchell               1,000
               Cash/Ohio Coin              1,600
                 Total                    10,313

     We find that, without regard to any adjustment for self-

employment tax, petitioners omitted $32,350 from their income in

1991 and $34,932 in 1992 computed as follows:

     1991
            Gross Receipts
                 Notice of Deficiency    $455,584
                 Less loans               (11,320)
                   Total                  444,264
            Purchases
                 Notice of Deficiency    $353,234
                 Additional                52,680
                   Total                  405,914
            Omitted Income
                 Gross receipts          $444,264
                 Purchases               (405,914)
                 Rent                      (6,000)
                   Total                   32,350
                                - 49 -

     1992
             Gross receipts
                  Notice of Deficiency       $91,972
                  Star Bank miscellaneous       (886)
                    Total                     91,086
             Purchases
                  Notice of Deficiency        58,971
                  Additional                  10,313
                  Dishonored checks          (18,130)
                    Total                     51,154
             Omitted Income
                  Gross receipts              91,086
                  Purchases                  (51,154)
                  Rent                        (5,000)
                    Total                     34,932

Issue 2. Whether Petitioners Are Liable for Self-Employment Tax
on the Net Income From the Sports Memorabilia Activity

     Section 1401 imposes a tax on a taxpayer's self-employment

income.     Self-employment income includes the net earnings from

self-employment derived by an individual during the taxable year.

See sec. 1402(b).     Net earnings from self-employment means the

gross income derived by an individual from any trade or business

carried on by the individual, less allowable deductions

attributable to the trade or business, plus certain items not

relevant here.     See sec. 1402(a).   With certain exceptions not

here applicable, the term "trade or business" for purposes of the

self-employment tax generally has the same meaning as used for

purposes of section 162.     Sec. 1402(c).   Thus, to be engaged in a

trade or business within the meaning of section 1402(a), an

individual must be involved in an activity with continuity and

regularity, and the primary purpose for engaging in the activity

must be for income and profit.     See Commissioner v. Groetzinger,
                             - 50 -

480 U.S. 23, 30 (1987).

     Raymond spent most of his time and effort during the years

at issue on the buyers group activity.   He had no intent to

profit from that activity, as indicated by the fact that he

distributed the products to the members of the group at cost.

     Raymond collected sports memorabilia hoping the items would

eventually appreciate in value.   He sold only a few items from

his massive collection and retained much more than he sold.    In

relation to his buying of memorabilia, his selling was sporadic.

He continued to amass items for his collection (including

hundreds of manual typewriters and tens of thousands of Cleveland

Indian programs) without any plan to turn over items at any date

in the foreseeable future and without any consideration of the

cost effectiveness of paying rent to store the items.

     After careful consideration of all the facts and

circumstances, we find that Raymond's memorabilia activity does

not rise to the level of a trade or business.   See Sloan v.

Commissioner, T.C. Memo. 1988-294, affd. without published

opinion 806 F.2d 547 (4th Cir. 1990).    Accordingly, Raymond did

not have net earnings from self-employment during 1991 and 1992,

and he is not liable for self-employment tax for those years.

Issue 3. Whether Petitioners Are Liable for the Accuracy-Related
Penalty Under Section 6662(a)

     Section 6662(a) and (b)(1) impose accuracy-related penalties

equal to 20 percent of the portion of an underpayment that is
                              - 51 -

attributable to negligence or disregard of rules or regulations.

Negligence is a "lack of due care or a failure to do what a

reasonable person would do under the circumstances."    Leuhsler v.

Commissioner, 963 F.2d 907, 910 (6th Cir. 1992), affg. T.C. Memo.

1991-179.   Negligence also includes any failure to make a

reasonable attempt to comply with the provisions of the Code,

exercise reasonable care in return preparation, keep proper books

and records to properly substantiate items, or have a reasonable

basis for a position taken.   See sec. 6662(c);   sec. 1.6662-

3(b)(1), Income Tax Regs.

     In determining whether petitioners were negligent in the

preparation of their returns, we take into account their business

experience.   See Glenn v. Commissioner, T.C. Memo. 1995-399,

affd. 103 F.3d 129 (6th Cir. 1996).

     An exception to imposition of the negligence penalty is

provided if it is shown that there was a reasonable cause for the

understatement and the taxpayer acted in good faith.    Petitioners

bear the burden of proving that they are not liable for the

penalty under section 6662(a).   See Bixby v. Commissioner, 58

T.C. 757, 791 (1972).

     Petitioners' primarily argue that, because Raymond "never

believed he was involved in a trade or business", they are not

liable for the accuracy-related penalty.   To the contrary,

Raymond did know that he bought, sold, and traded sports
                              - 52 -

memorabilia during the years at issue.   He made several sales of

baseball cards during 1991 and 1992 the gains from which were not

reported on petitioners' returns.   The fact that he may have used

the proceeds to purchase other cards or memorabilia, does not

exclude the gain from petitioners' income in the year of the

sale.

     Petitioners have offered no reasonable explanation for their

failure to report all the income from Raymond's sports

memorabilia activity.   Therefore, petitioners are liable for the

accuracy-related penalty under section 6662(a).

Issue 4. Whether Petitioner Barbara Kling Is Eligible for Relief
Under Section 6015 With Respect to Any Understatement of Tax
Attributable to the Sports Memorabilia Activity

     In the petition, Barbara alleged that she was entitled to

relief pursuant to section 6013(e).    Prior to the trial in this

case, Congress enacted section 6015, and simultaneously repealed

section 6013(e).7   Section 6015 provides three avenues of relief

from joint and several liability:   (1) Section 6015(b)(1) (which

is similar to former section 6013(e)) allows a spouse to escape

completely joint and several liability; (2) section 6015(b)(2)

and (c) allow a spouse to elect limited liability through relief

from a portion of the understatement or deficiency; and (3)

section 6015(f) confers upon the Secretary discretion to grant

     7
      Sec. 6015 generally applies to any liability   for tax
arising after July 22, 1998, and any liability for   tax arising on
or before July 22, 1998, that remains unpaid as of   such date. See
H. Conf. Rept. 105-599, at 251 (1998), 1998-3 C.B.   747, 1005.
                              - 53 -

equitable relief in situations where relief is unavailable under

section 6015(b) or (c).   The parties have treated Barbara's claim

pursuant to section 6013(e) as an election pursuant to section

6015(b)(1) and (2) and a request for equitable relief pursuant to

section 6015(f) that respondent denied.   See Corson v.

Commissioner, 114 T.C. 354, 364 (2000); Charlton v. Commissioner,

114 T.C. 333, 338-339 (2000); Butler v. Commissioner, 114 T.C.

276, 282-283 (2000).

     We consider first whether Barbara is entitled to relief

under section 6015(b)(1).

     Section 6015(b)(1) provides:

          (1) In general.--Under procedures prescribed by
     the Secretary, if--

               (A) a joint return has been made for a
          taxable year;

               (B) on such return there is an understatement
          of tax attributable to erroneous items of one
          individual filing the joint return;

               (C) the other individual filing the joint
          return establishes that in signing the return he
          or she did not know, and had no reason to know,
          that there was such understatement;

               (D) taking into account all the facts and
          circumstances, it is inequitable to hold the other
          individual liable for the deficiency in tax for
          such taxable year attributable to such
          understatement; and

               (E) the other individual elects (in such form
          as the Secretary may prescribe) the benefits of
          this subsection not later than the date which is 2
          years after the date the Secretary has begun
          collection activities with respect to the
                             - 54 -

          individual making the election,

     then the other individual shall be relieved of
     liability for tax (including interest, penalties, and
     other amounts) for such taxable year to the extent such
     liability is attributable to such understatement.

     The requirements of section 6015(b)(1) are stated in the

conjunctive; that is, a taxpayer must satisfy all of the

requirements of subparagraphs (A) through (E) to be entitled to

relief under section 6015(b)(1).   There is no dispute in the

instant case that Barbara satisfies the requirements of

subparagraphs (A), (B), and (E).   Respondent, however, contends

that Barbara knew or had reason to know of the understatement

and, therefore, fails to satisfy subparagraph (C).    Respondent

further contends that it would not be inequitable to hold Barbara

liable for the deficiency, and therefore, she fails to satisfy

subparagraph (D).

     When the substantial understatement of tax liability is

attributable to an omission of income from the joint return, the

spouse's knowledge or reason to know of the underlying

transaction which produced the omitted income is sufficient to

preclude relief under section 6015(b)(1).    See Cheshire v.

Commissioner, 115 T.C. 183, 192 (2000).     In the Cheshire case,

the taxpayer knew of the entire amount of retirement

distributions and interest earned, even though she did not know

they were taxable.

     Although Barbara knew that Raymond bought, sold, and traded
                                - 55 -

sports memorabilia, she had no actual knowledge nor reason to

know that the activity produced omitted income.

     In deciding whether a spouse "has reason to know" of an

understatement, we recognize several factors that are relevant to

our analysis, including: (1) The level of education of the spouse

seeking relief; (2) the spouse's involvement in the family's

business and financial affairs; (3) the presence of expenditures

that appear lavish or unusual when compared to the family's past

levels of income, standard of income, and spending patterns; and

(4) the other spouses's evasiveness and deceit concerning the

couple's finances.    See Butler v. Commissioner, supra.

     As to the first factor, level of education, Barbara earned a

college degree in teaching.     Although Barbara knew about

Raymond's sports memorabilia activity, she was a full-time

student and, generally, was not involved in the activity.

     As to the second factor, involvement in the family's

finances, the record does not clearly show who was responsible

for maintaining the family checkbook.     Both Barbara and Raymond

wrote some checks on the National City Bank account to pay the

household bills.     Both had access to the National City bank

statements mailed to petitioners' residence.     Barbara, however,

did not have access to the Ameritrust account statements that

were delivered to Morova'a store and then taken by Morova to the

warehouse.
                              - 56 -

     As to the third factor, unusual or lavish expenditures, the

record demonstrates that the family did not enjoy a high standard

of living during the years at issue.   Indeed, the cash they had

accumulated was consumed.   Barbara paid for her college tuition

with a student loan and maximized her credit card.    She and

Raymond lived in the same house for more than 21 years; they

bought only inexpensive used cars; they refinanced their house,

and their children paid for their own educations.    Most of

Raymond's income was applied toward acquiring collectibles; only

a small portion was spent for the benefit of the family.    There

is no evidence in the record indicating any expenditures out of

the ordinary when compared to petitioners' spending habits in

prior years.

     As to the fourth factor, there is no evidence that Raymond

ever attempted to hide any of his income or assets from Barbara.

     Barbara was aware that Raymond was depositing substantial

amounts of money into their personal checking account, she knew

of her husband's sports memorabilia activities and that he often

dealt in cash during the years in issue.    Barbara, however, had

no knowledge or reason to know that his net income from those

activities during those years exceeded the amounts reported on

the returns.

     We reject the importance that respondent places on Barbara's

access to the National City Bank account.   Checks written on that
                              - 57 -

account and the Ameritrust account were frequently dishonored due

to insufficient funds.   This would have caused a reasonable

person to believe that Raymond's activities were losing money.

It is unlikely that an examination of the statements would have

alerted Barbara that any income was omitted.

     Although we recognize that there may have been a disparity

between the family's total expenditures and their reported income

for the years 1991 and 1992, this does not necessarily indicate

that Barbara should have known of the omitted income.   The record

clearly shows that the omitted funds were used primarily to

purchase Raymond's memorabilia.   The relatively small amount used

to help support the family was spent primarily for groceries,

house payments, bills, and other minor living expenses.

Moreover, petitioners borrowed against their credit cards to pay

the expenses.   These expenditures were in the nature of ordinary

support and would not normally give a spouse reason to know of

omitted income.   See Mysse v. Commissioner, 57 T.C. 680, 698-699

(1972).   There is no evidence of any lavish or extraordinary

expenditures which would have put Barbara on notice of unreported

income.   Cf. Estate of Jackson v. Commissioner, 72 T.C. 356, 361

(1979); Mysse v. Commissioner, supra.

     We conclude, from our examination of the evidence presented,

that there was no reason for Barbara to have known that there was

income from Raymond's sports memorabilia activity that was not
                              - 58 -

reported on petitioners' 1991 and 1992 tax returns.    Therefore,

she satisfies the requirement of section 6015(b)(1)(C).      Cf.,

Cheshire v. Commissioner, 115 T.C. at 192-193; Charlton v.

Commissioner, 114 T.C. at 340.

     We must next decide whether Barbara satisfies section

6015(b)(1)(D).   Section 6015(b)(1)(D) requires a determination of

whether, taking into account all other facts and circumstances,

it is inequitable to hold Barbara liable for the tax.    A

determination under this provision of the statute is essentially

factual.

     The term "inequitable", as defined in section 1.6013-5(b),

Income Tax Regs., is as follows:

     Whether it is inequitable to hold a person liable for
     the deficiency in tax * * * is to be determined on the
     basis of all the facts and circumstances. In making
     such a determination a factor to be considered is
     whether the person seeking relief significantly
     benefited, directly or indirectly, from the items
     omitted from gross income. However, normal support is
     not a significant "benefit" for purposes of this
     determination. * * * Other factors which may also be
     taken into account, if the situation warrants, include
     the fact that the person seeking relief has been
     deserted by his spouse or the fact that he has been
     divorced or separated from such spouse.

     In the instant case, Raymond used the money from his sports

memorabilia activity primarily to purchase more collectibles.       He

did use some of the money for groceries, bills, and other items

of ordinary support for the family.    The use of omitted income

for ordinary support of the family does not constitute a
                                - 59 -

significant benefit for purposes of section 6015(b)(1)(D).     See

Mysse v. Commissioner, supra at 698; see also sec. 1.6013-5(b),

Income Tax Regs.    Additionally, Barbara's joint property right in

the National City account does not constitute a significant

benefit.     See Dakil v. United States, 496 F.2d 431 (10th Cir.

1974).    Barbara actually withdrew only amounts for items

constituting ordinary support.

     Barbara did not significantly benefit from the omitted

income.    See Butler v. Commissioner, 114 T.C. at 291.   Barbara

paid for her college tuition with a student loan and maximized

her credit card.    She and Raymond lived in the same house for

more than 21 years; they bought only inexpensive used cars; they

refinanced their house, and their children paid for their own

educations.    Barbara's lifestyle did not change on account of the

receipt of the omitted income.    There were no unusual transfers

of property to Barbara during either the years at issue.     If

anything, Raymond's activity may have worked to Barbara's

detriment.

     Taking into account all the facts and circumstances, we find

it would be inequitable to hold Barbara liable for the deficiency

in tax.    See Dakil v. United States, supra; Mysse v.

Commissioner, supra.

     Therefore, we find that Barbara qualifies for relief under

section 6015(b)(1) with respect to the understatement of tax
                             - 60 -

(including penalty and interest) attributable to Raymond's sports

memorabilia activity for taxable years 1991 and 1992.

     To reflect the foregoing,

                                        Decision will be entered

                                   under Rule 155.
