                       T.C. Memo. 1997-101



                     UNITED STATES TAX COURT



           ALLIED MARINE SYSTEMS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                RICHARD M. GIBBONS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 10508-95, 10509-95.    Filed February 27, 1997.



     Mark E. Kellogg and William F. Krebs, for petitioners.

     Susan T. Mosley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Chief Judge:   In these consolidated cases, respondent

determined deficiencies in, additions to, and a penalty on

petitioners' Federal income taxes as follows:
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Docket No. 10508-95

       Year                               Deficiency

       1988                                 $    0
       1989                                  4,796

Docket No. 10509-95

                                Additions to Tax and Penalty
Year          Deficiency   Sec. 6653(a)    Sec. 6661     Sec. 6662

1988           $15,059         $753         $3,560             ---
1989            79,636          ---           ---            $15,927

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

       After concessions by the parties, the issues for decision

are:    (1) Whether petitioner Allied Marine Systems, Inc.

(Allied), is entitled to reductions in gross income and to

additional expenses for 1988 and 1989; (2) whether petitioner

Richard M. Gibbons (petitioner) is entitled to additional

miscellaneous itemized deductions in 1988; (3) whether petitioner

received constructive dividends or wages from Allied's paying his

personal expenses in 1988 and 1989; (4) whether petitioner can

exclude gain under section 121 and defer gain under section 1034

in 1989; and (5) whether petitioner is liable for the additions

to tax and penalty as determined by respondent.
                                - 3 -

                           FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.     At the

time the petitions in these cases were filed, Allied maintained

its principal place of business in Solomons, Maryland, and

petitioner resided in Solomons, Maryland.     Petitioner was born in

1932.

Allied

     In 1973, petitioner retired from the Navy.    While in the

Navy, petitioner's primary duties were underwater construction,

underwater explosives, and deep-sea diving.    Prior to his

retirement, petitioner formed Allied as a partnership.    Allied

was incorporated in 1986.    During the years in issue, Allied was

in the business of general waterfront construction, including

constructing residential bulkheads, piers, and marinas.    Allied

was a cash basis taxpayer during the years in issue.

     In 1988 and 1989, petitioner was president and general

manager of Allied and owned 25 percent of Allied's stock.     His

duties included locating work for Allied, scheduling work

assignments, and obtaining the requisite permits required for

waterfront construction.    Petitioner also used his skills as a

pilot while working for Allied.

     For liability insurance purposes, Allied's accounting system

for receipts was divided into two portions:    "services income"

and "other income".   Services income included moneys derived from
                                 - 4 -

waterfront construction.   The other income account recorded

payments for materials that were sold by Allied, loan repayments,

and payments received in connection with a mortgage.    During

1988, amounts recorded as other income included $7,991 of

payments received in connection with a mortgage held by

petitioner and Joseph Otrompke and a $75,000 loan made by

petitioner to Allied.   The source of the balance of other income

deposited in 1988 is not reflected on Allied's books.

     During 1988, Allied's books reflect that $2,850 of loans

were made to employees of Allied.    During 1989, Allied's books

reflect that $14,175 of loans were made to employees of Allied.

     Although Allied paid its officers $39,790 and $42,725 in

1988 and 1989, respectively, petitioner was not paid any salary

by Allied during 1988 or 1989.    Allied paid petitioner's personal

expenses in the amounts of $44,855 and $35,604 in 1988 and 1989,

respectively.

     Allied's 1988 Schedule L, Balance Sheet, of Form 1120S, U.S.

Income Tax Return for an S Corporation, set forth $75,000 as

outstanding shareholder loans at the end of 1988 and $129,168 as

total liabilities and shareholders' equity.    Allied's 1989

Schedule L does not set forth any specific dollar amount

outstanding as shareholder loans at the beginning or end of 1989.

However, for 1989, beginning total liabilities and shareholders'

equity totaled $129,168, and ending total liabilities and

shareholders' equity for 1989 totaled $112,746.
                                       - 5 -

Airplanes

      Petitioner owned the following four airplanes during 1988

and 1989:
    Airplane           Date Acquired          Date Disposed Of    Purchase Price

1963 Piper PA30          July 1982             July 1989            $ 22,500
1972 Cessna 150          July 1986             July 1989               7,500
1956 Cessna 172          July 1989             Not applicable      Even trade for
                                                                    Piper PA30
1970 Mitsubishi MU2B     July 1989             Not applicable        175,000

Petitioner's airplanes were used by him personally and by Allied

as follows:

                                               1988                      1989

Business usage (hours)                           92                       135
Petitioner's usage (hours)                       81                       179
     Total hours                                173                       314

During 1988, Allied's use of petitioner's airplanes was

53 percent of the total usage.          During 1989, Allied's use of

petitioner's airplanes was 43 percent of the total usage.                    During

1988, Allied paid for all operating expenses of petitioner's

airplanes, including those expenses attributable to personal use.

Petitioner paid at least $40,009 of airplane expenses during

1989.

      Petitioner's airplanes were flown the following number of

hours during the years in issue:

      Airplane                         1988                      1989

      1963 Piper PA30                  150.0                      96.5
      1972 Cessna 150                   22.8                      13.9
      1956 Cessna 172                   ---                        2.2
      Mitsubishi MU2B                   ---                      201.4
      Aztec (rental airplane)           ---                        7.5
                                - 6 -

Solomons Properties Partnership

     On October 24, 1985, petitioner, Richard H. Fischer, Jr.

(Fischer), and Delta Financial Corporation, Inc. (Delta), entered

into a written partnership agreement for the purpose of

acquiring, developing, and reselling real property known as

Oyster Bay, located in Lusby, Maryland.   Petitioner was

responsible for obtaining the necessary permits and overseeing

the construction.   Delta was responsible for securing financing

for the acquisition and cost of developing the property.   Fischer

was responsible for overseeing the acquisition of the land.

     Under the terms of the Solomons Properties (Solomons)

partnership agreement, petitioner, Fischer, and Delta agreed that

the written partnership agreement was intended to set forth all

promises, agreements, conditions, and understandings among them.

Each partner owned a one-third interest in Solomons.

Determinations of each partner's share of income, gain, loss,

credit, or allowance were to be made in accordance with the

agreement.   The partners agreed that legal title to partnership

property would be held in the name of Solomons or in such other

name or manner that would be in the best interest of the

partnership.   The manner of holding title to partnership property

was for the convenience of the partnership, and all such property

would be treated as partnership property.

     In late 1985, Solomons purchased property in Calvert County,

Maryland.    The property included a house (the Solomons house) and
                                - 7 -

improvements.   Petitioner resided in the Solomons house from 1986

until February 1989 and paid no rent.    From time to time,

Solomons business was conducted in the Solomons house.    Solomons

owned the house and pledged it, along with the other partnership

property, as collateral for loans obtained by the partnership.

From 1986 to 1988, Solomons purchased additional adjacent

property.   The total acreage acquired by Solomons was 18.9339

acres.

     In February 1989, Solomons sold the 18.9339 acres of land,

including the house that was occupied by petitioner, for

$5,315,000.    The Solomons house was destroyed by fire in February

1989.

     On February 24, 1989, petitioner and another person

purchased a new home in St. Mary's County, Maryland, for

$158,000.

Other Background

     Petitioner prepared Allied's 1988 and 1989 Federal income

tax returns.    Petitioner prepared his own 1988 Federal income tax

return.   Petitioner's 1989 Federal income tax return was prepared

by Clarkson Richard Sherwood (Sherwood), an accountant.

                               OPINION

Allied's Gross Income and Deductions

     Allied contends that respondent's determination of Allied's

gross income should be reduced by $2,850 and $14,175 in 1988 and

1989, respectively.
                                - 8 -

     Respondent concedes that Allied's income in 1989 should be

reduced by $1,700 to reflect loans to employees that were repaid

during 1989.    Allied's argument is that all of the loans to

employees were repaid in the year that the loans were made and,

thus, that Allied's income should be reduced by the total amount

of the loans to employees in 1988 and 1989.

     Allied's cash receipts and disbursements journals for 1988

and 1989 were introduced as evidence.    None of the deposits were

either identified as loan repayments or traceable to particular

loans.   Except for the $1,700 that was conceded by respondent, no

indication is given in the journals that any other loans to

employees were repaid during 1988 or 1989.    Petitioner's general

and uncorroborated testimony is not sufficient to prove that

Allied's loans to employees were in fact repaid during the same

year that they were made, and the December dates of some loans

suggest otherwise.    Respondent's determination regarding

adjustments to Allied's income, as modified by her concession,

will be sustained.

     Allied also contends that respondent's determination of

Allied's expenses for the operation of petitioner's airplanes

should be increased by $2,000 and $14,675 in 1988 and 1989,

respectively.    Respondent argues that Allied is not entitled to

additional airplane expenses.

     For 1988 and 1989, Allied argues that it is entitled to

additional depreciation deductions related to petitioner's
                                - 9 -

airplanes.   Respondent admits that amounts representing

depreciation for airplanes owned by petitioner were considered in

determining the amount that respondent would accept as a

reasonable estimate of Allied's airplane expenses.   Respondent,

however, argues that Allied is not entitled to depreciate

airplanes for which it did not have the burdens and benefits of

ownership.

     Allied bears the burden of establishing that it is entitled

to additional deductions.   Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Rockwell v. Commissioner,

512 F.2d 882, 886 (9th Cir. 1975), affg. T.C. Memo. 1972-133.

This includes substantiating the amount of the item claimed.

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

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

     Generally, section 167 provides that there shall be allowed

as a deduction for depreciation a reasonable allowance for

exhaustion and wear and tear of property used in the taxpayer's

trade or business or held for the production of income.     Sec.

167(a); sec. 1.167(a)-1(a), Income Tax Regs.   Traditionally, such

allowance is primarily intended to provide a nontaxable fund to

restore property used in producing income at the end of such

property's useful life and is granted to the person who uses

property in his trade or business or for the production of income

and who incurs a loss resulting from the depreciation of capital

that he has invested.   Helvering v. F. & R. Lazarus & Co., 308
                                - 10 -

U.S. 252, 254 (1939); Ryman v. Commissioner, 51 T.C. 799, 802 n.5

(1969).   Depreciation may generally be deducted to the extent

that the taxpayer proves that he or she actually expended capital

in the acquisition or improvement of the property.    Helvering v.

F. & R. Lazarus & Co., supra at 254; Currier v. Commissioner, 51

T.C. 488, 492 (1968).

     Allied does not deny that petitioner, not Allied, owned the

airplanes, and Allied does not contend that it provided funds for

the acquisition of the airplanes.    Although Allied paid some

expenses of the airplanes during the relevant period, Allied has

not provided any proof that it had a capital investment in the

airplanes.   Accordingly, Allied has failed to prove its

entitlement to any additional depreciation deductions with

respect to petitioner's airplanes.

     For 1989, Allied argues that, based on the cost per hour for

each aircraft to which petitioner testified and the stipulated

number of business hours flown, Allied must have incurred

additional expenses.    Allied's position is unsupported by the

record.   Respondent determined that Allied was entitled to

$32,110 of airplane expenses for 1989.    Based on a concession by

respondent, the allowance will be $36,360.    At trial, Allied

introduced various receipts as evidence of airplane expenses.

The receipts totaled less than $16,000, and not all of the

expenses were paid by Allied.    Without supporting independent
                              - 11 -

evidence, Allied's claim is not sufficient to prove its

entitlement to additional airplane expenses.

     Allied raised for the first time on brief its claim that it

is entitled to the deductions as essentially for airplane rental

expenses.   Allied did not give respondent fair warning of this

position; even if we were to consider this position, we would

conclude that it was without merit.    There is not sufficient

evidence before us to establish any rental agreement or any

rental payments during the years in issue.

     We cannot conclude from the evidence that Allied is entitled

to any additional airplane expenses in 1988 or 1989.

Schedule A Deductions

     Petitioner deducted $5,482 as employee business expenses on

his 1988 Form 2106, Employee Business Expenses.    The parties have

stipulated that the amount remaining in dispute is $5,479.    On

brief, petitioner conceded respondent's disallowance of $905

claimed as expenses for travel while away from home.

     Petitioner did not produce any evidence at trial regarding,

and did not dispute on brief, respondent's disallowance of $430

claimed as expenses for meals and entertainment.   Petitioner has

failed to meet his burden of proving that respondent's

determination is incorrect.   Rule 142(a).

     The remaining items in dispute are vehicle expenses of

$3,710 and parking and tolls expenses of $523.
                                - 12 -

     Petitioner testified that he maintained a contemporaneous

automobile log during 1988 but that the log was destroyed when

the Solomons house burned down in early 1989.    In place of the

original log, petitioner introduced a reconstruction of his

claimed business use of the automobile.    Such a reconstruction is

allowed--

     Where the taxpayer establishes that the failure to
     produce adequate records is due to the loss of such
     records through circumstances beyond the taxpayer's
     control, such as destruction by fire, flood,
     earthquake, or other casualty, the taxpayer shall have
     a right to substantiate a deduction by reasonable
     reconstruction of his expenditures or use. [Sec.
     1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed.
     Reg. 46006 (Nov. 6, 1985).]

Respondent argues that petitioner's reconstruction is not

reasonable.

     Petitioner's 1988 Form 2106 indicates that his vehicle was

driven a total of 18,350 miles during 1988.    According to

petitioner's 1988 Form 2106, 16,000 miles was business mileage,

1,500 miles was commuting mileage, and 850 miles was personal

mileage other than commuting.    The reconstruction presented by

petitioner indicates 16,203 miles of purported business travel.

Respondent contends that it is unreasonable to conclude that

petitioner (in addition to the commuting mileage) drove only 850

personal miles during 1988, especially when petitioner has failed

to offer any proof of another vehicle used for personal

transportation.
                              - 13 -

     We agree with respondent.    Petitioner testified that he used

a reconstruction in preparing his 1988 Form 2106.   Petitioner

could not recall, however, whether the reconstruction that was

received into evidence was the same reconstruction that was used

in preparation of his 1988 Form 2106 or when the reconstruction

that was received into evidence was prepared.   If the

reconstruction was not the one used in preparing the return,

there is no explanation for the missing more contemporaneous

record.   In his brief, petitioner acknowledges the difficulty of

recalling details occurring 7 years before the trial, and a

recent reconstruction would inherently be susceptible to error.

We are not persuaded that the reconstruction is reasonable or

reliable.

     Petitioner's testimony regarding the claimed parking fees

and tolls is likewise vague and unconvincing.   Petitioner's

claimed parking fees were based on "an average trip".    Petitioner

did not introduce any evidence or testify as to the specific

number of airport fees (for landing and parking petitioner's

airplanes) or to the number of vehicle parking fees that were

included on his 1988 Form 2106.    Furthermore, petitioner did not

attempt to reconstruct any of the claimed parking fee expenses.

     Respondent's determination that petitioner is not entitled

to employee business expenses will be sustained.
                              - 14 -

Allied's Payment of Petitioner's Personal Expenses

     Respondent determined that Allied's payment of petitioner's

personal expenses in the amounts of $44,855.00 and $35,604 in

1988 and 1989, respectively, was includable in petitioner's gross

income.   After a concession by respondent, the amounts remaining

in dispute are $40,859 and $31,608 for 1988 and 1989,

respectively.   Petitioner contends that Allied's payments of his

personal expenses were nontaxable loan repayments.    Respondent

contends that these payments were dividends or, in the

alternative, wages.

     At trial, the evidence that was introduced by petitioner

consisted mainly of his uncorroborated testimony.    We are not

required to accept testimony that is improbable or vague.     See

Geiger v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971),

affg. T.C. Memo. 1969-159.   Petitioner's testimony is not

supported by the minimal records produced at trial and is not

consistent with the contemporaneous corporate records.    Allied's

1988 Schedule L, Balance Sheet, indicates that at the end of 1988

$75,000 was outstanding as shareholder loans and that liabilities

and shareholders' equity totaled $129,168.    Allied's 1989

Schedule L does not indicate any amount outstanding as

shareholder loans at the beginning of 1989.    However, beginning

liabilities and shareholders' equity totaled $129,168.    Ending

liabilities and shareholders' equity for 1989 totaled $112,746.

We conclude that Allied did not have a contemporaneous intent to
                              - 15 -

treat the payments of petitioner's personal expenses as loan

repayments.

     Petitioner's attempts to characterize retroactively the

payments he received from Allied as loan repayments are not

persuasive.   See Noble v. Commissioner, 368 F.2d 439 (9th Cir.

1966), affg. T.C. Memo. 1965-84.   The pattern of payments from

Allied for petitioner's benefit is more consistent with

constructive dividends.   See Reis v. Commissioner, T.C. Memo.

1995-231; Cordes v. Commissioner, T.C. Memo. 1994-377.

     Petitioner contends that Allied did not have earnings and

profits from which to pay a dividend in 1988 or 1989.    Respondent

concedes that Allied did not make a profit in 1988.   However,

respondent argues that petitioner has failed to show that there

were no historical earnings available in 1988.   Petitioner argues

that Allied was only a corporate shell between its incorporation

in 1986 and 1988 and that no historical earnings could exist.

Petitioner's contention is not supported by any evidence in the

record.   Petitioner has not met his burden of proving that Allied

had insufficient earnings and profits to support the distribution

of dividends, to the extent determined by respondent, during the

years in issue.   Truesdell v. Commissioner, 89 T.C. 1280, 1295

(1987); see Rescigno v. Commissioner, T.C. Memo. 1991-479;

Malicki v. Commissioner, T.C. Memo. 1988-559, affd. sub nom. Gold

Emporium, Inc. v. Commissioner, 910 F.2d 1374 (7th Cir. 1990).
                              - 16 -

     Because petitioner has failed to prove error in respondent's

determination, we need not address respondent's alternative

position that the payments represented wages to petitioner.     We

note, however, petitioner's argument:

     There is no dispute that Gibbon's payments were unique
     among the employees and stockholders of the
     Corporation. The distinction is that unlike the other
     employees and stockholders, Gibbons was the only one to
     loan the Corporation substantial sums of money, to
     advance on behalf of the Corporation funds for its
     business expenses and to provide the Corporation with
     the use of his depreciable equipment for the
     Corporation's business uses. The unique payments were
     in recognition and partial satisfaction of these unique
     activities on its behalf.

Inasmuch as petitioner was not paid any salary during 1988 or

1989, petitioner's argument suggests that he was compensated by

the payments in dispute.   The tax consequences to petitioner

would be the same.   Allied has not timely argued that it would be

entitled to deduct the payments as compensation.   Respondent's

determination that petitioner received constructive dividends in

the amounts of $40,859 and $31,608 for 1988 and 1989,

respectively, will be sustained.

Sections 121 and 1034

     Respondent determined that petitioner is not entitled to

exclude or to defer any gain from the sale of the Solomons house.

Petitioner contends that he is entitled to exclude $125,000 of

gain under section 121 and to rollover $89,667 of gain under

section 1034.
                                - 17 -

     Section 121 provides a one-time exclusion of $125,000 of

gain from the sale of a principal residence for an individual who

has attained age 55, if "during the 5-year period ending on the

date of the sale or exchange, such property has been owned and

used by the taxpayer as his principal residence for periods

aggregating 3 years or more."    Sec. 121(a)(2) (emphasis added),

(b)(1).   The parties are in agreement that petitioner met the age

requirement and used at least a portion of the Solomons house as

his principal residence for the requisite period.   However, the

Solomons house was owned by Solomons, not by petitioner.    Thus,

section 121 is not applicable to petitioner here.

     Section 1034(a) provides for rollover of gain on the sale of

a principal residence:

     If property (in this section called "old residence")
     used by the taxpayer as his principal residence is sold
     by him and, within a period beginning 2 years before
     the date of such sale and ending 2 years after such
     date, property (in this section called "new residence")
     is purchased and used by the taxpayer as his principal
     residence, gain (if any) from such sale shall be
     recognized only to the extent that the taxpayer's
     adjusted sales price (as defined in subsection (b)) of
     the old residence exceeds the taxpayer's cost of
     purchasing the new residence.

Again, the parties are in agreement that petitioner used at least

a portion of the Solomons house as his principal residence and

that petitioner purchased a "new residence" within the requisite

period.   Respondent argues that petitioner has not substantiated

the amount of the gain allocable to the portion used as a

residence and that petitioner did not own the Solomons house and,
                                - 18 -

thus, cannot claim the benefit of section 1034 gain rollover.

Petitioner contends that a "partner in a partnership may claim an

exclusion of the recognition of gain on the sale of property

titled to the partnership and used by a partner as his personal

residence."

     Petitioner points to Lewis Testamentary Trust B v.

Commissioner, 83 T.C. 246 (1984), to support his position.       Lewis

stands for the proposition that an income beneficiary's use of a

house owned by the trust cannot be imputed to the trust in

determining the trust's tax liability under section 57(a),

defining tax preferences for purposes of the minimum tax.     In

that case, the Court therefore concluded that the "principal

residence" exclusion of section 57(a)(9)(D) was unavailable to

the trust.    Lewis does not strengthen petitioner's position.

     Petitioner also relies on Davies v. Commissioner, 54 T.C.

170, 176 (1970), arguing that his failing to pay rents and

Solomons' failing to depreciate the house indicate that the

Solomons house was a residence and not business property.

Petitioner's syllogism fails.    The taxpayer's loss in Davies,

based on a conclusion that the property in question was business

property, does not suggest an opposite result here.   The Solomons

property (whether depreciated or not) was from time to time put

to business uses.   Neither the Court's dictum in Davies v.

Commissioner, supra at 175, nor section 704(c), cited by

petitioner, relating to property contributed to a partnership,
                                - 19 -

applies here.   The Solomons property was purchased by the

partnership, not contributed to it.

     Under section 1034(a), the old residence must be "sold by" a

taxpayer claiming nonrecognition treatment.    The Solomons house

was sold, along with the other partnership property, by Solomons,

not by petitioner.   Maintaining continuity of title is a key to

receiving nonrecognition treatment under section 1034.    See

Starker v. United States, 602 F.2d 1341, 1351 (9th Cir. 1979).

Title to the Solomons house was held in the name of Solomons,

along with the other partnership property.    Petitioner's new

residence was titled in his and another's names.    No continuity

of title exists here.

     Petitioner argues that through an oral agreement with his

partners he gained an interest in the Solomons house.    Neither of

the other Solomons partners corroborated petitioner's testimony.

Petitioner, Fischer, and a Delta representative, Douglass Parran,

Jr. (Parran), testified that each partner had the option to

receive one of the residential units to be built as part of the

development.    Such an agreement would not constitute a transfer

to petitioner of title in the Solomons house.    Fischer testified

that petitioner's use of the Solomons house was important to the

partnership during the construction phase from a security

standpoint and from a convenience standpoint (petitioner was

overseeing the construction).    However, petitioner, Fischer, and

Parran also testified that, from the outset, Solomons intended to
                                  - 20 -

destroy the Solomons house as part of the overall development

plan.

     Solomons treated the Solomons house at all times as

partnership property, pledging it, along with other partnership

property, as collateral for loans.         Petitioner's claim that he

gained title, equitable or otherwise, in the Solomons house is

contrary to the evidence.     Respondent's determination that

petitioner is not entitled to exclude gain under section 121 or

to defer gain under section 1034 in 1989 will be sustained.

Section 6661 Addition to Tax

        Respondent determined that petitioner is liable for the

section 6661 addition to tax for 1988.         Petitioner bears the

burden of proving that respondent’s determination is not correct.

Rule 142(a); Cluck v. Commissioner, 105 T.C. 324, 339 (1995).

Section 6661(a) provides for an addition to tax on underpayments

attributable to a substantial understatement of income tax.

Section 6661(b)(2)(A) defines the term “understatement” as being

the excess of the amount of tax required to be shown on the

return for the taxable year over the amount shown on the return.

An understatement is substantial if it exceeds the greater of

10 percent of the tax required to be shown on the return or

$5,000.     Sec. 6661(b)(1)(A).   The deficiency resulting from our

determinations is a substantial understatement.

        The section 6661 addition to tax is not applicable, however,

if there was substantial authority for the taxpayer's treatment
                              - 21 -

of the items in issue or if the relevant facts relating to the

tax treatment were adequately disclosed on the return.    Sec.

6661(b)(2)(B)(i) and (ii).   Petitioner did not present any

evidence or argument that there was substantial authority for his

treatment of the items in issue or that the treatment was

adequately disclosed on his return.    Accordingly, we conclude

that petitioner is liable for the addition to tax under section

6661 for 1988.

Section 6653(a) Addition to Tax

     Respondent determined that petitioner is liable for the

section 6653(a)(1) addition to tax for 1988.    Section 6653(a)(1)

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

if any part of the underpayment is due to negligence or

intentional disregard of the rules or regulations.    Negligence is

defined as a lack of due care or failure to do what a reasonable

and ordinarily prudent person would do under the circumstances.

Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; Neely v. Commissioner, 85 T.C. 934,

947-948 (1985).   Petitioner bears the burden of proving that

respondent's determination is erroneous.    Rule 142(a); Bixby v.

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

     Petitioner presented neither evidence at trial nor argument

on brief regarding the negligence addition to tax for 1988.

Respondent's determination will be sustained.
                                - 22 -

Section 6662 Penalty

     Respondent determined that petitioner is liable for the

section 6662(a) penalty for 1989.    Section 6662(a) imposes an

accuracy-related penalty in an amount equal to 20 percent of the

underpayment of tax attributable to one or more of the items set

forth in section 6662(b).    On brief, respondent argues that the

determination of the section 6662(a) penalty should be sustained

because petitioner's underpayment was due to negligence or due to

a substantial understatement.    Sec. 6662(b)(1) and (2).    The

deficiency here determined is a substantial understatement.        See

sec. 6662(d)(1).

     The accuracy-related penalty does not apply with respect to

any portion of an underpayment if it is shown that there was

reasonable cause for such portion of an underpayment and that

petitioner acted in good faith with respect to such portion.

Sec. 6664(c)(1).    The determination of whether petitioner acted

with reasonable cause and in good faith depends upon the

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

Tax Regs.   The most important factor is the extent of the

taxpayer's effort to assess his or her proper tax liability for

the year.   Id.    Reliance by the taxpayer on the advice of a

qualified adviser will constitute reasonable cause and good faith

if, under all of the facts and circumstances, the reliance by the
                              - 23 -

taxpayer was reasonable and the taxpayer acted in good faith.

Id.

      Based on the record, we conclude that petitioner is not

liable for the section 6662 accuracy-related penalty on the

portion of the underpayment related to the Solomons house.

Petitioner retained Sherwood to prepare his 1989 return and both

petitioner's and Sherwood's testimony indicated that petitioner

provided Sherwood with all of the information regarding the

Solomons house.   Although petitioner's reliance on Sherwood in

this regard was misplaced, we do not conclude that petitioner's

reliance on Sherwood was unreasonable.

      Petitioner has not shown reasonable cause or good faith for

the remainder of the underpayment.     Neither petitioner nor

Sherwood testified as to what information petitioner provided to

Sherwood regarding Allied's payment of petitioner's personal

expenses.   Thus, the section 6662(a) penalty will be sustained as

to the remaining portion of the underpayment for 1989.

      To reflect the foregoing and concessions of the parties,

                                           Decisions will be entered

                                     under Rule 155.
