                        T.C. Memo. 1997-554



                      UNITED STATES TAX COURT



       ALEXANDER M. MOYE AND JUDY H. MOYE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3525-95.                 Filed December 18, 1997.



     Stephen R. Klorfein, for petitioners.

     Larry D. Anderson and Beverly Bann, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   For 1990, respondent determined that

petitioners have a deficiency in income tax of $42,911 and are

liable for a penalty under section 6662(a) of $8,582.
                                - 2 -


     The issues for decision are:

     1.   Whether petitioners' police dog training business was a

sole proprietorship or a C corporation in 1990.    If it was a sole

proprietorship, petitioners may deduct its net loss of $159,426

on their individual income tax return.    We hold that petitioners'

police dog training business was incorporated on February 28,

1990, and that petitioners may not deduct the loss on their

personal income tax return for 1990.

     2.   Whether petitioners are liable for the substantial

understatement penalty under section 6662(a) for 1990.    We hold

that they are.

     Unless otherwise indicated, section references are to the

Internal Revenue Code as in effect for 1990.    Rule references are

to the Tax Court Rules of Practice and Procedure.    References to

petitioner are to Judy H. Moye.    References to Mr. Moye are to

Alexander M. Moye.

                      I.     FINDINGS OF FACT

A.   Petitioners

     Petitioners lived in Fayetteville, Georgia, when they filed

the petition in this case.    Mr. Moye is a retired airline pilot.

Petitioner served as a member of the Georgia State Senate around

the year in issue.
                                - 3 -


B.   JAM Bonding Co., Inc.

     Around 1982, petitioners began to operate a bonding business

called JAM Bonding Co. (JAM Bonding).   Several months after they

began to operate JAM Bonding, petitioners discussed their

business with Paul C. Oddo, Jr. (Oddo), a certified public

accountant.   Oddo told petitioners the benefits of incorporating.

Petitioners decided to incorporate JAM Bonding.   However, they

deferred incorporating it so they could deduct the losses on

their personal tax returns.   James A. Bischoff (Bischoff), an

attorney, incorporated JAM Bonding.

     Petitioners owned and operated JAM Bonding in 1990.    JAM

Bonding's 1988 gross receipts were $502,900.   Petitioners' income

from JAM Bonding was $94,000 in 1990.

C.   Police Dog Training Business

     1.   Inception

     Around 1989, petitioners decided to start a police dog

training business.    Petitioner applied to the Bureau of Alcohol,

Tobacco and Firearms (BATF) and to the Drug Enforcement

Administration (DEA) for licenses to handle narcotics and

explosives needed to train police dogs.
                                - 4 -


     2.     Insurance for the Police Dog Training Business

     Petitioners' police dog training business obtained insurance

from the Snellings Walters Insurance Agency of Atlanta, Georgia.

On October 24, 1989, Mr. Moye applied for a general liability

insurance policy for "Rosewood Kennels and Southern Police Dog

Academy".    Snellings Walters Insurance Agency typed an "X" in a

box on the application indicating that the insured was a

corporation.    The policy period was from September 1, 1989, to

September 1, 1990.    Mr. Moye deleted "President" (which had been

added to the insurance application by Snellings Walters Insurance

Agency) and inserted "Sec/Treas" next to his name.

     On October 24, 1989, Mr. Moye applied for Georgia workers'

compensation insurance for "Rosewood Kennels and Southern Police

Dog Academy, Inc.", effective October 20, 1989.    Mr. Moye deleted

"President" (which had been added by Snellings Walters Insurance

Agency) and inserted "Sec/Treas" in the section entitled

"Corporations, Officers, Sole Proprietors or Partners"; he also

wrote "Sec/Treas." under his signature on the application.

     On November 27, 1989, the Snellings Walters Insurance Agency

addressed a letter to Mr. Moye at "Rosewood Kennels & Southern

Police Dog Academy, Inc."    The Agency asked him to sign a Georgia

Form WC 8.    Form WC 8 states that its use is required if a

corporate officer desires to decline workers' compensation

coverage from the State Board of Workers' Compensation.      It

provided in part:
                                - 5 -


                         NOTICE TO REJECT

     I Alexander Moye, Jr., certify that I am an officer of
     Rosewood Kennels and Southern Police Dog Academy, Inc.
     and hereby elect to reject the provisions of the
     Georgia Workers' Compensation Law.

Mr. Moye signed the form on November 28, 1989.

     On November 27, 1989, Commercial Union Insurance Co.

prepared and issued a workers' compensation and employers'

liability policy to "Rosewood Kennels and Southern Police Dog

Academy Inc." for October 31, 1989, to October 31, 1990.    The

policy included JAM Bonding's Federal identification number as

though it belonged to Rosewood Kennels.

     3.   Buying Land for the Business

     In November 1989, petitioners told Oddo that they were in

the process of establishing their police dog training business.

     On December 7, 1989, petitioners bought 140.9 acres in Pike

County, Georgia.   The land was titled in their individual names.

Petitioners used 26 of the 140 acres for their police dog

training business.

D.   SBA Loan

     1.   Initial SBA Loan Application

     On December 8, 1989, petitioners applied to the U.S. Small

Business Administration (SBA) for a $550,000 loan guaranty.

Thomas L. Redding, the controller of the United Bank Corp. of

Barnesville, Georgia (United Bank), prepared the application.

Part of the application said:   "If Applicant is a proprietor or
                                 - 6 -


general partner, sign below:".    Petitioners left that section

blank.    Below that section the application said:   "If Applicant

is a Corporation, sign below:".    "Southern Police Dog Academy (A

division of Rosewood Kennels)" was typed on the line in that

section called "Corporate Name and Seal".    There was no seal

affixed to the document.    Petitioner signed in the corporate

section above the word "president", and Mr. Moye signed above the

words "corporate secretary".

     On December 8, 1989, petitioner signed, next to the word

"President", a document entitled "Estimated Projection and

Forecast of Two Year's Earnings" in which the applicant's name

was listed as "Southern Police Dog Academy, Inc."

     On December 8, 1989, Mr. Moye signed, under the words

"Southern Police Dog Academy", a document entitled "Compensation

Agreement for Services in Connection with Application and Loan

from [Or in Participation With] Small Business Administration".

He was required to submit that document with the application for

the SBA loan guaranty.

     2.     SBA Review of the Loan Application

     On January 18, 1990, an SBA loan specialist reviewed

petitioners' December 8, 1989, loan application and suggested

that the loan be reduced from $550,000 to $500,000.    Douglas J.

Tuttle (Tuttle), a senior vice president of United Bank in 1989,

concurred with that action.    Tuttle had first done business with
                                 - 7 -


petitioners late in 1989 when they borrowed money from United

Bank to finance their police dog business.

     On January 24, 1990, the SBA mailed a loan agreement to

United Bank.   It stated that the SBA had approved a loan guaranty

for the $500,000 loan made to "Rosewood Kennels, Inc., d/b/a/

Southern Police Dog Academy".    The loan agreement included forms

for petitioners to sign.   The signature line was as follows:

                                 Rosewood Kennels, Inc.,
                                 d/b/a Southern Police Dog Academy
                                 Williamson, Georgia

                           By:
                                 Judy H. Moye                  Date
                                 President

Petitioner signed and Mr. Moye attested the document.

E.   Incorporation of Rosewood Kennels, Inc.

     Near the end of 1989, petitioners met with Oddo at the

future construction site of the police dog training business.

They generally discussed incorporating the business.    Oddo

believed that petitioners would delay incorporating for several

months because of the construction.

     Petitioners wanted to operate the police dog training

business as the Southern Police Dog Academy, a division of

Rosewood Kennels, Inc.   Petitioners asked Bischoff to organize a

corporation for them in 1989 named "Rosewood Kennels, Inc."

Petitioners told him that they wanted to preserve the name and

that the corporation would begin to do business later.    Bischoff

applied for and on December 21, 1989, the secretary of state of
                                - 8 -


Georgia issued, a name reservation certificate for "Rosewood

Kennels, Inc."   It was valid for 2 months.

     On February 28, 1990, Bischoff filed articles of

incorporation for Rosewood Kennels, Inc., with the secretary of

state of Georgia.   In April 1990, Bischoff billed petitioners

$100 for filing the articles of incorporation.   Petitioners paid

that bill with a check drawn on their personal checking account.

F.   Events After Petitioners Filed the SBA Loan Application

     1.   Interim Construction Loan

     United Bank provided interim construction financing for the

police dog training business.   Petitioners each signed a

promissory note on March 2, 1990, for an interim loan to build

buildings and roads for the police dog training business.    That

loan provided financing until the loan guaranteed by the SBA

closed.   Petitioners used that construction loan and a loan from

Home South Mortgage to buy assets for the business.

     2.   Premium Finance Agreement

     On May 1, 1990, Mr. Moye signed a "Premium Finance

Agreement", which is a Federal truth-in-lending agreement.

Snellings Walters Insurance Agency prepared the document.    The

document states the total amount of premiums and payments, the

downpayment, the amount financed, the finance charge, the annual

percentage rate, and the payment schedule.    The document listed
                                 - 9 -


"Alex Moye, Jr., Judy Moye & Rosewood Kennels, Inc. T/A Southern

Police Dog Academy" under "Insured and Address".

     3.   Invoices

     In April and May 1990, Pete W. Onni (Onni), an employee of

petitioners' police dog training school, sent invoices totaling

$16,300 to police departments for equipment and 520 hours of dog

handler training.    The invoices were on letterhead for "Southern

Police Dog Academy, a division of Rosewood Kennels, Inc."     The

letterhead stated that petitioner was president, Mr. Moye was

secretary/treasurer, and Onni was director.

     4.   Petitioners' Conveyance of Land to Rosewood Kennels,
          Inc.

     On June 2, 1990, petitioners conveyed 26 acres of land by

deed to Rosewood Kennels, Inc.

G.   The SBA Loan Closing on June 2, 1990

     The SBA loan closed on June 2, 1990.   At the closing,

petitioner signed a document entitled "Compensation Agreement for

Services in Connection with Application and Loan from [Or in

Participation With] Small Business Administration" beneath

"Rosewood Kennels, Inc. (Applicant)" and above "Judy H. Moye,

President".   Petitioner also signed an SBA settlement statement

for Rosewood Kennels, Inc.

     At the loan closing, petitioners each signed personal

guaranties for the $500,000 loan.    The guaranties stated that the
                                - 10 -


loan was being made to "Rosewood Kennels, Inc."             Mr. Moye signed

a guaranty for JAM Bonding for the $500,000 loan to "Rosewood

Kennels, Inc."   Petitioners also signed an SBA compliance

agreement in which they agreed not to discriminate on the basis

of race, color, religion, sex, or national origin.               It stated

that the SBA had approved a loan to Rosewood Kennels, Inc.                  The

following appeared at the bottom of the form:

                                Rosewood Kennels, Inc.
                                Woodcreek Road
                                Williamson, Georgia 30292               227-4083

                                By Judy H. Moye, President

                                Typed Name & Title of Authorized Official


Petitioner signed below her name and title.           Mr. Moye signed

above "Signature of Authorized Official".          The form called for a

corporate seal, but no seal was affixed to the document.

     On June 2, 1990, Mr. Moye signed a $500,000 note from

Rosewood Kennels, Inc., to United Bank.         Petitioner signed above

her name and "President", and Mr. Moye signed above

"secretary/treasurer".   The Rosewood Kennels, Inc., corporate

seal was affixed to the note.    They also signed an agreement for

Rosewood Kennels, Inc., which granted to United Bank for the

$500,000 note a security interest in all equipment, machinery,

furniture, fixtures, inventory, raw materials, work in process,
                               - 11 -


supplies, and accounts receivable owned by Rosewood Kennels, Inc.

It provided in part:

          In Witness Whereof, the Undersigned, Rosewood
     Kennels, Inc. for and in consideration of the sum of
     Five hundred thousand dollars ($500,000.00) has this
     day executed and delivered the within Security
     Agreement.

                                     Rosewood Kennels, Inc.
                                     By:
                                         Judy H. Moye, President

Petitioner signed the security agreement beneath "Rosewood

Kennels, Inc." and above "Judy H. Moye, President".    Mr. Moye

signed above "Alexander M. Moye, Jr., Secretary/treasurer".

     Petitioners never met anyone from the SBA while they were

applying for the loan.

     Some SBA loan documents said that the loan was being made to

Southern Police Dog Academy without referring to it as

incorporated.

H.   Documents That Petitioners Signed in 1990 After the SBA
     Closing

     1.   Environmental Disclosure Statement

     In June 1990, petitioner certified to United Bank that

Rosewood Kennels, Inc., was complying with environmental laws and

regulations.    The environmental disclosure statement stated in

part:

          If a corporate entity, affix the corporate seal
     and execute in the corporate name by a duly authorized
     officer; if a partnership, execute Environmental
                                - 12 -


     Disclosure Statement in firm name together with
     signature of General Partners; if an individual, have
     signature notarized.

The corporate seal of Rosewood Kennels, Inc., was affixed to the

form.     Petitioner signed above her name and "President", and Mr.

Moye signed above his name and "Secretary/Treasurer".     Their

signatures were not notarized.

     2.      August 9, 1990, Note

        Petitioners signed a personal note for a construction loan

for the police dog training business on August 9, 1990.     They

used the proceeds of the August 9, 1990, loan to build buildings

and roads for the business.

        3.   Insurance Endorsements

        On October 2, 1990, Mr. Moye signed three endorsements

(smoke heat detection, exclusions for actions based on sexual

harassment claims, and lead paint poisoning) effective September

26, 1990, for an insurance policy issued to "Rosewood Kennels and

Southern Police Dog Academy, Inc." by Western World Insurance Co.

        4.   Workers' Compensation Election

        On December 8, 1990, petitioner signed Georgia Form WC 8

(Corporate Officer Rejection, State Board of Workers'

Compensation).     In that form, she certified that she was "an

officer of Southern Police Dog Academy" and elected to be

excluded from certain workers' compensation insurance coverage.
                             - 13 -


I.   Oddo's Discovery That Bischoff Had Filed the Articles of
     Incorporation

     On October 11, 1990, Oddo called Mr. Moye and suggested that

it was time to incorporate the police dog training business

because it was the end of its first quarter of operations.    Mr.

Moye told Oddo to call Bischoff.   Oddo called Bischoff's office.

Bischoff's secretary told Oddo that Bischoff had already

incorporated petitioners' police dog training business.    Oddo

decided to keep the books as if the police dog training business

were a sole proprietorship until the end of the year.   The record

does not indicate whether Oddo discussed this with petitioners.

J.   Bank Account, Business Records, and Tax Returns

     1.   Business Bank Account and Records

     In 1990, petitioners conducted all of the banking for their

police dog training business through a bank account which was in

their individual names.

     Oddo prepared a general ledger and general journal for

Southern Police Dog Academy for January 1 to December 31, 1990.

Under "Loans - officers & shareholders", the ledger and journal

lists several loans from petitioners.

     On June 26, 1991, Oddo sent to petitioner at "Rosewood

Kennels d/b/a Southern Police Dog Academy" a balance sheet and

income statement for Southern Police Dog Academy as of December
                               - 14 -


31, 1990.   Total liabilities included loans of $45,969.82 from

officers and shareholders.

     Business cards for the police dog training business and

correspondence such as vendor and utility bills and marketing

brochures did not state that the business was incorporated.    Some

of those documents were prepared in the name of Southern Police

Dog Academy.

     Petitioners applied for a Federal identification number for

Rosewood Kennels, Inc., on March 12, 1991.

     2.     S Corporation Election

     On April 22, 1991, Rosewood Kennels, Inc., received a notice

from respondent accepting its S corporation election.

     3.     Petitioners' Income Tax Returns

     On June 25, 1991, petitioners and Oddo signed petitioners'

income tax return for 1990.    Petitioners reported the income and

expenses from the police dog training business on a Schedule C.

Petitioners reported that the business lost $159,426 in 1990.

Petitioners deducted the mortgage interest they paid on the

United Bank loan on that Schedule C.    They said the business was

"Rosewood Kennels, Inc. d/b/a Southern Police Dog Academy".

Petitioners filed their 1990 return on June 28, 1991.

     Oddo prepared an undated corporate return with zeros

throughout for Rosewood Kennels, Inc., Southern Police Dog

Academy, for 1990.
                                 - 15 -


                           II.    OPINION

A.   Parties' Contentions and Background

     Respondent determined and contends that petitioners' police

dog training business was incorporated on February 28, 1990, and

that petitioners may not deduct its loss on a Schedule C for that

year.   The Commissioner's determination is presumed to be

correct, and the taxpayer has the burden of proving otherwise.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114 (1933).

     Petitioners contend that they may deduct the $159,426 loss

from the police dog training business on their individual tax

return because they intended it to be a sole proprietorship in

1990.   Petitioners contend that we should disregard the

incorporation of Rosewood Kennels, Inc., because they did not

intend to incorporate it or operate it as a corporation in 1990

and did not know until October 1990 that Bischoff had

incorporated it.

     State law governs whether a corporation is formed and

governs the legal relationships that are established when an

entity is formed.   Stoody v. Commissioner, 66 T.C. 710, 716

(1976); Skarda v. Commissioner, 27 T.C. 137, 144 (1956), affd.

250 F.2d 429 (10th Cir. 1957); sec. 301.7701-1(c), Proced. &

Admin. Regs.   Federal law governs whether an entity is taxed, or

disregarded, as a corporation.     Burk-Waggoner Oil Association v.

Hopkins, 269 U.S. 110 (1925); Carver v. United States; 188 Ct.
                              - 16 -


Cl. 202, 412 F.2d 233 (1969); Stoody v. Commissioner, supra at

716-717; sec. 301.7701-1(c), Proced. & Admin. Regs.

     We will first decide whether Rosewood Kennels, Inc., was

incorporated in 1990 under Georgia law.    We will then decide

whether its incorporation should be disregarded for Federal tax

purposes.

B.   Whether Rosewood Kennels, Inc., Was Incorporated in 1990

     Petitioners contend that stock must be issued and

organizational minutes must be filed before a corporation exists

under Georgia law.   We disagree.

     Under Georgia law, a corporation exists as soon as the

articles of incorporation are filed with the secretary of state.

Ga. Code Ann. sec. 14-2-203 (Supp. 1988).    The secretary of state

of Georgia filed the articles of incorporation for Rosewood

Kennels, Inc., on February 28, 1990.   Thus, petitioners'

corporation began to exist on that date.    Id.

     Bischoff testified that he did not tell petitioners that he

filed the articles of incorporation for Rosewood Kennels, Inc.

Whether or not he did, petitioners knew by April 1990 that

Bischoff had filed the articles of incorporation because that is

when they received and paid Bischoff's bill.      Bischoff had been

petitioners' attorney for about 8 years and had incorporated JAM

Bonding for petitioners 8 years earlier.    He was petitioners'

agent when he reserved the name "Rosewood Kennels, Inc." in
                               - 17 -


December 1989.   Petitioners asked him to incorporate their police

dog training business.    Petitioners took no action to disavow or

void the filing after April 1990, when they paid the bill for the

incorporation, or even after October 1990, when they contend they

first learned about it.

     Petitioners contend that they did not know Bischoff had

billed them for incorporating their business and that their

employees must have paid the bill.      We disagree.   Petitioners

used their personal checking account for Rosewood Kennels.        We

believe it is unlikely that petitioners let employees use their

personal checking account.    The check used to pay the bill is not

in evidence.   However, the three checks on that account that are

in evidence as examples of expenses paid for petitioners' police

dog training business were signed by Mr. Moye.

     Section 14-2-205 of the Official Code of Georgia Annotated

(Supp. 1988) provides that an entity must complete its

organization before it may engage in business.      Petitioners

contend that, because of that section, Rosewood Kennels, Inc.,

must complete its organization before it is formed or recognized

for tax purposes.   Petitioners also cite Saxton v. Luke, 296

S.E.2d 751 (Ga. Ct. App. 1982), for the proposition that a

corporation may not begin to operate in Georgia until stock is

issued and organizational minutes are filed.      We disagree.    The

fact that petitioners did business through the corporation in
                               - 18 -


1990 before it issued stock or held an organizational meeting

does not mean it was not incorporated under section 14-2-203 of

the Official Code of Georgia Annotated.

     In Saxton v. Luke, supra, Forrester and Saxton incorporated

Forrester & Saxton, Inc., on October 22, 1979.   The business did

not issue stock or file corporate minutes.   On October 24, 1979,

Luke contracted with Forrester & Saxton, Inc., for a paving

project.    Saxton and Forrester stopped operating their business

early in 1980 before they completed Luke's paving project.    Luke

sued Saxton and Forrester for breach of contract.    The court held

that Saxton and Forrester were personally liable for the debts of

the corporation in part because the corporate form could be

disregarded to avoid fraud or evasion of contractual or tort

responsibility.   The Saxton case does not hold that the owners of

a corporation may disavow it when it would be advantageous for

them to do so, as petitioners seek to do here.

     We conclude that Rosewood Kennels, Inc., was incorporated on

February 28, 1990.

C.   Whether Petitioners' Corporation Should Be Disregarded for
     Federal Tax Purposes

     We will not disregard a corporation for Federal tax purposes

if it (1) served an intended business function or (2) engaged in

business.   Moline Properties, Inc. v. Commissioner, 319 U.S. 436

(1943).    The corporation's tax existence is established if either
                               - 19 -


test applies.    Carver v. United States, supra.   A corporation's

tax identity is rarely ignored unless it is a sham.     Bennett

Paper Corp. v. Commissioner, 699 F.2d 450, 452 (8th Cir. 1983),

affg. 78 T.C. 458 (1982); Crouch v. United States, 692 F.2d 97,

99-100 (10th Cir. 1982); Strong v. Commissioner, 66 T.C. 12, 22

(1976), affd. without published opinion 553 F.2d 94 (2d Cir.

1977).    The lack of compliance with formalities of State laws

does not affect whether the corporation is disregarded under

Moline Properties.    United States v. Creel, 711 F.2d 575, 579-580

(5th Cir. 1983); Evans v. Commissioner, 557 F.2d 1095 (5th Cir.

1977), affg. in part and revg. in part T.C. Memo. 1974-267.

     1.     Whether Rosewood Kennels, Inc., Engaged in Business

     Petitioners contend that we should disregard the

incorporation of Rosewood Kennels, Inc.    We disagree because,

under the second part of the Moline Properties test, we do not

disregard the incorporation of an entity if it actually engaged

in business.    Moline Properties, Inc. v. Commissioner, supra;

Carver v. United States, 188 Ct. Cl. 202, 412 F.2d 233 (1969).

     Only a minimal amount of business activity is required to

meet the second part of the Moline Properties test.     Britt v.

United States, 431 F.2d 227, 235 (5th Cir. 1970); Paymer v.

Commissioner, 150 F.2d 334, 336-337 (2d Cir. 1945) (corporation

recognized because it borrowed $50,000); Hospital Corp. of Am. v.

Commissioner, 81 T.C. 520, 579-580 (1983); Strong v.
                               - 20 -


Commissioner, 66 T.C. at 24-25 (corporation recognized because it

owned insurance, borrowed money, and had a checking account).

     Rosewood Kennels, Inc., did considerably more than the

corporations in Paymer and Strong.       Rosewood Kennels, Inc., owned

26 acres of land which it used as collateral.      It borrowed

$500,000.   It applied for and obtained insurance policies.       It

sent its customers invoices which showed that it sold equipment

and provided services to them in 1990.

     Petitioners contend that Rosewood Kennels, Inc., did not

engage in business in 1990.    We disagree.    A significant amount

of documentary evidence contradicts their testimony.

     2.     Cases Cited by Petitioners

     Petitioners contend that we should disregard their

corporation just as we did the corporations in Blue Flame Gas Co.

v. Commissioner, 54 T.C. 584 (1970); Barker v. Commissioner, T.C.

Memo. 1993-280; and Bystry v. United States, 596 F. Supp. 574

(W.D. Wis. 1984).   We disagree.

      The taxpayers in Blue Flame Gas Co. v. Commissioner, supra,

had a partnership when they filed articles of incorporation.

They contributed no property to the corporation.      The corporation

did no business and was abandoned.      We held that the losses at

issue were attributable to the partnership.      Id. at 599.     In

Barker v. Commissioner, supra, we held that the business should

not be taxed as a corporation because it lacked assets and had no
                                  - 21 -


business activities.   In Bystry v. United States, supra at 576,

579, the taxpayers transferred no land or other assets to their

business and never did business as a corporation.

     Petitioners point out that the taxpayers in Barker and

Bystry had no corporate bank accounts and contend that this fact

is dispositive.    We disagree.    In contrast to the facts in those

cases, Rosewood Kennels, Inc., owned property, borrowed money,

obtained insurance, and did business.

     3.   The Invoices

     Petitioners contend that their employee, Onni, had the

Rosewood Kennels, Inc., letterhead printed and used it without

their knowledge.    Petitioners both testified that Onni concluded,

without petitioner's telling him, that Rosewood Kennels was

incorporated, and that petitioner was president and Mr. Moye was

secretary/treasurer.    We do not find petitioners' testimony in

this regard to be credible.    We decide whether a witness is

credible on the basis of objective facts, the reasonableness of

the testimony, the consistency of statements made by the witness,

and the demeanor of the witness.      Quock Ting v. United States,

140 U.S. 417, 420-421 (1891); Wood v. Commissioner, 338 F.2d 602,

605 (9th Cir. 1964), affg. 41 T.C. 593 (1964); Pinder v. United

States, 330 F.2d 119, 124-125 (5th Cir. 1964); Concord Consumers

Hous. Coop. v. Commissioner, 89 T.C. 105, 124 n.21 (1987).

Petitioners' testimony about the letterhead was implausible.     We
                               - 22 -


do not believe that Onni decided the contents of and printed and

used petitioners' business letterhead without their knowledge.

     4.    Some Documents Were Silent About Rosewood Kennels'
           Corporate Status

     Petitioners point out that some of the documents in the

record did not state that Rosewood Kennels was incorporated in

1990, and some documents refer only to the Southern Police Dog

Academy.   Petitioners also point out that not all of the

documents that called for a corporate seal had one.    Petitioners

contend that these facts show that it did not do business as a

corporation.   We disagree.   Rosewood Kennels, Inc., clearly owned

property, borrowed money, had insurance, and did business.

     5.    Whether Petitioners Knew That Their Police Dog Training
           Business Represented Itself as a Corporation

     Petitioners deny that they were responsible for or knew

about the many legal and financial documents that they signed

that referred to Rosewood Kennels as a corporation.    They contend

that they did not know that they transferred property to Rosewood

Kennels, Inc., or that it had applied for and received an SBA

loan and various insurance policies because they did not prepare

the documents for those transactions.   We disagree.

     Petitioners are reasonably sophisticated about business.

They founded JAM Bonding, which had gross receipts of more than

$500,000 in 1988.   They delayed incorporating JAM Bonding so they

could deduct its losses on their personal returns.
                              - 23 -


     They signed many documents that clearly stated that Rosewood

Kennels was incorporated and that petitioners were its officers.

Some of the documents included the corporate seal.   We believe

that petitioners knew what they were signing.   For example,

petitioners knew that they conveyed 26 acres of land to Rosewood

Kennels, Inc., on June 2, 1990.   Rosewood Kennels, Inc., used the

26 acres of land as collateral when it borrowed $500,000.

Petitioners' claim of ignorance is unconvincing.

     Petitioners contend that it is insignificant that petitioner

signed her name as "president".   Petitioner testified that she

did not think that a "president" was a corporate officer.

Petitioners' denial is not credible.

     Petitioners contend that the fact that they used JAM

Bonding's Federal identification number on documents for Rosewood

Kennels, Inc., shows that Rosewood Kennels, Inc., was not

incorporated and that it did not do business as a corporation.

We disagree.   Petitioners offer no authority for their position.

     Petitioners point out that Rosewood Kennels, Inc., filed a

Federal tax return with all zeros for 1990.   That fact does not

necessarily lead us to disregard it as a corporate entity.     See

Strong v. Commissioner, supra at 24.
                                - 24 -


     6.      Conclusion

     We conclude that the second part of the Moline Properties

test is met because Rosewood Kennels, Inc., actually engaged in

business.1    Thus, we recognize Rosewood Kennels, Inc., as a

corporation in 1990 for Federal tax purposes.     Petitioners have

not shown that any of the losses were their personal losses.      We

sustain respondent's determination that the losses at issue were

those of Rosewood Kennels, Inc., in 1990.

D.   Substantial Understatement of Tax

     Respondent determined that petitioners are liable for the

accuracy-related penalty because they substantially understated

their tax under section 6662(a).

     The penalty under section 6662 does not apply to any part of

an underpayment for which there was reasonable cause and the

taxpayer acted in good faith.     Sec. 6664(c)(1).   Whether a

taxpayer acted with reasonable cause and in good faith depends on

all pertinent facts and circumstances.     Sec. 1.6664-4(b)(1),

Income Tax Regs.     Circumstances that may indicate reasonable

cause and good faith include an honest misunderstanding of fact

or law that is reasonable in light of the experience, knowledge,

and education of the taxpayer.     Id.



     1
       In light of our conclusion, we need not decide whether the
first part of the Moline Properties, Inc. v. Commissioner, 319
U.S. 436 (1943), test is met.
                                - 25 -


     Petitioners contend that they had reasonable cause to take

the position on their return that their police dog training

business was not incorporated in 1990.    They contend that they

acted in good faith and relied on Oddo.    We disagree.   To show

good faith reliance on the advice of a competent adviser, the

taxpayer must show:    (1) That he or she gave the return preparer

complete and accurate information, (2) that an incorrect return

was a result of the preparer's mistakes, and (3) that the

taxpayer believed in good faith that he or she was relying on the

advice of a competent return preparer.     Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 662 (1987); Pessin v. Commissioner, 59

T.C. 473, 489 (1972).

     Petitioners did not give Oddo full details or complete and

accurate information about those transactions.    They did not tell

him that they transferred land to Rosewood Kennels, Inc., that it

borrowed $500,000, and that it did business as a corporation in

1990.    Thus, they are not entitled to rely on his advice.      Metra

Chem Corp. v. Commissioner, supra.

        Petitioners rely on Larotonda v. Commissioner, 89 T.C. 287

(1987).    The taxpayer in Larotonda reasonably, but erroneously,

assumed that an involuntary assignment of the taxpayer's Keogh

account was not income.    That case involved essentially a

technical or legal question.    In contrast, the issue here is

essentially factual; i.e., whether petitioners knew that Rosewood
                             - 26 -


Kennels, Inc., was incorporated, owned land, borrowed money, and

did business.

     We sustain respondent's determination and conclude that

petitioners are liable for the penalty for substantial

understatement of tax under section 6662(a) for 1990.

     To reflect the foregoing,


                                             Decision will be

                                   entered for respondent.
