                        T.C. Memo. 1999-233



                     UNITED STATES TAX COURT



          PAUL TRANS AND THUY BICH DANG, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11873-97.               Filed July 15, 1999.



     Paul Trans and Thuy Bich Dang, pro sese.

     G. Michelle Ferreira, for respondent.



                        MEMORANDUM OPINION


     THORNTON, Judge:   Respondent determined the following

deficiencies, additions to tax, and penalties with respect to

petitioners’ joint Federal income taxes:1


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the years at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                              - 2 -


                              Addition to Tax     Penalties
     Year      Deficiency      Sec. 6651(a)(1)    Sec. 6662(a)

     1992      $7,892                 $463              $1,578
     1993      68,182                 ----              13,636
     1994      70,526                 ----              14,105



     After concessions,2 the issues for decision are:

     (1) Whether petitioners sold their personal residence in

Danville, California (the Danville property) in April 1992,

resulting in capital gain and disallowance of deductions for

mortgage interest accruing after that date;

     (2) whether petitioners are entitled to claim losses for tax

years 1992 and 1993 with respect to certain rental real property

they owned in San Jose, California (the San Jose property);

     (3) whether petitioners had legal or equitable ownership of

certain real property in Milpitas, California (the Milpitas

property) so as to support their claimed deductions for mortgage

interest and property taxes with respect to the property for tax

year 1994;

     2
       Respondent disallowed petitioners’ unreimbursed employee
expense deductions in the amounts of $5,508, $9,119, and $9,158,
for 1992, 1993, and 1994, respectively. Respondent also asserted
a penalty under sec. 6651(a)(1) for petitioners' failure to
timely file their 1992 joint Federal income tax return.
Petitioners failed to address these issues both at trial and on
brief. We treat petitioners’ failure to press these issues as,
in effect, conceding them. See Rule 151(e)(4) and (5);
Sundstrand Corp. & Subs. v. Commissioner, 96 T.C. 226, 344
(1991); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988);
Money v. Commissioner, 89 T.C. 46, 48 (1987). The parties
conceded several other issues in the stipulation of settled
issues.
                               - 3 -


     (4) whether petitioners are entitled to certain Schedule C

deductions for tax year 1994; and

     (5) whether petitioners are liable for accuracy-related

penalties for negligence pursuant to section 6662(a), for all

years at issue.

     Some of the facts have been stipulated and are herein

incorporated by this reference.   When they filed their petition,

petitioners were married and resided in Milpitas, California.

     For purposes of order and clarity, each of the issues

submitted for our consideration is set forth below with separate

background and discussion.

                       The Danville Property

Background

     On September 29, 1989, petitioners purchased their primary

residence on Creekpoint Court in Danville, California.   On April

30, 1992, petitioners executed a grant deed dated April 29, 1992,

conveying the property to Mamoona P. Haq (Haq) for a purchase

price of $400,000.   On June 17, 1992, the grant deed was recorded

in Contra Costa County, California.

     By a document captioned “Deed of Trust with Assignments of

Rents”, dated May 15, 1992, and signed by Haq on May 18, 1992,

Haq assigned to petitioners, for consideration of $24,359.30, all

rents, issues and profits with respect to the Danville property.

A document captioned “Assignment of Deed of Trust and Request for

Special Notice”, also dated May 15, 1992, and bearing

petitioners’ signatures, represents that petitioners were thereby
                                - 4 -


assigning to ERA Golden Hills Brokers, for value received, all

beneficial interest petitioners received from Haq under the deed

of trust dated that same day.   On January 22, 1993, both the deed

of trust and the assignment of the deed of trust were recorded in

Contra Costa County, California, at petitioners’ request.

     Throughout 1992, petitioners made monthly mortgage payments

to Prudential Home Mortgage Co. with respect to the Danville

property, paying a total of $34,035 of mortgage interest for the

year.   On August 5, 1992, petitioners filed a Chapter 7

bankruptcy petition.   Petitioners maintained the mortgage loan on

the Danville property before and after their bankruptcy petition

was filed.

     On their 1992 joint Federal income tax return, petitioners

reported no gain from the sale of the Danville property.     They

claimed $34,035 in mortgage interest deductions with respect to

the property.

     Respondent determined that petitioners sold the Danville

property to Haq in 1992 and realized taxable capital gain on the

sale.   Respondent also disallowed $17,000 of petitioners’

mortgage interest deduction for tax year 1992 attributable to

interest payments made after April 30, 1992.
                                    - 5 -


Discussion

     A.   Capital Gain on Sale of the Danville Property

     Petitioners argue there was no sale of the Danville property

in 1992, and therefore their taxable income for 1992 includes no

capital gain on the property.3       The burden of proof is on

petitioners.     See Rule 142(a).

     For Federal tax purposes, a sale of real property is

generally considered to occur at the earlier of the transfer of

legal title or the practical assumption of the benefits and

burdens of ownership.     See Derr v. Commissioner, 77 T.C. 708, 723

(1981); Baird v. Commissioner, 68 T.C. 115, 124 (1977).

Petitioners conveyed legal title to Haq by grant deed dated April

29, 1992, and executed by petitioners April 30, 1992; the grant

deed was recorded on June 17, 1992.

     Petitioners contend that their signatures on the grant deed,

as well as the assignment of deed of trust, were forged.         The

only evidence offered in support of petitioners’ forgery theory

was petitioner husband’s testimony, which is unsubstantiated and

unconvincing.4    We are not required to accept such testimony, and

we decline to do so.    See Cluck v. Commissioner, 105 T.C. 324,

338 (1995).    Petitioner wife did not testify.     Petitioners failed


     3
       Petitioners do not contend that any sale of the Danville
property would qualify for nonrecognition treatment under sec.
1034.
     4
       While maintaining that he could not recall if he signed
the grant deed, petitioner husband conceded at trial that the
signature on it “looks like my signature”.
                               - 6 -


to call other witnesses, such as Haq or the notary public who

notarized both of the documents in question, or to offer any

other evidence to support their forgery theory.   This failure

gives rise to the inference that the evidence, if produced, would

have been unfavorable to petitioners.   See id.; see also Pollack

v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th

Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947); Stokes v.

Commissioner, T.C. Memo. 1999-204, and cases cited therein.

Accordingly, petitioners have failed to establish that their

signatures on the documents in question were not genuine.

     Petitioners argue that they could not have sold the property

to Haq in April 1992, because they remained liable on the

mortgage until foreclosure in 1994.    The record does not clearly

establish the factual premises of petitioners’ argument.5

Assuming, arguendo, that petitioners’ factual premises are

correct, they do not compel the conclusion that petitioners would

have us draw.   A mortgagor may sell the mortgaged property on

terms whereby the purchaser takes subject to the mortgage debt

but has no personal obligation to pay it.   Osborne, Handbook on

the Law of Mortgages, sec. 248 (2d ed. 1970).   As stated in

Stonecrest Corp. v. Commissioner, 24 T.C. 659, 666 (1955):

     5
        Petitioners introduced into evidence a notice to
foreclose, dated June 24, 1994, and a trustee’s deed of sale
dated Nov. 2, 1994. Neither document, however, specifically
describes the property to which these documents pertain, other
than by reference to Contra Costa County records that are not in
evidence and that are not otherwise explained.
                                 - 7 -


     Taking property subject to a mortgage means that the buyer
     pays the seller for the latter's redemption interest, i.e.,
     the difference between the amount of the mortgage debt and
     the total amount for which the property is being sold, but
     the buyer does not assume a personal obligation to pay the
     mortgage debt. The buyer agrees that as between him and the
     seller, the latter has no obligation to satisfy the mortgage
     debt, and that the debt is to be satisfied out of the
     property. Although he is not obliged to, the buyer will
     ordinarily make the payments on the mortgage debt in order
     to protect his interest in the property.

See also Voight v. Commissioner, 68 T.C. 99 (1977), affd. per

curiam 614 F.2d 94 (5th Cir. 1986); Andrews v. Robertson, 170 P.

1129 (Cal. 1918); Wolfert v. Guadagno, 20 P.2d 360 (Cal. Dist.

Ct. App. 1933); Osborne, Handbook on the Law of Mortgages, sec.

252 (2d ed. 1970).     The facts as established in this record are

consistent with petitioners’ having transferred the Danville

property to Haq subject to petitioners’ mortgage on the

property.6

         Petitioners direct us to other irregularities and

unexplained circumstances regarding the Danville property,

including delays in the recording of the grant deed and of

various other documents, and the declaration of a presumptively

too-small amount of transfer tax on the grant deed conveying the


     6
       For instance, included in the record as petitioners’
exhibit 55 is a memorandum from Prudential Home Mortgage Co. to a
representative of Haq with regard to a mortgage on the Danville
property. The memorandum identifies petitioner husband as the
mortgagor. The memorandum advises Haq’s representative that
Prudential Home Mortgage Co. has paid delinquent taxes on the
Danville property and seeks, inter alia, reimbursement from Haq’s
representative in order to release the property from foreclosure.
Such a communication to Haq’s representative would be consistent
with petitioners’ having transferred the property to Haq subject
to the mortgage.
                                - 8 -


property to Haq.7    Petitioners observe that these irregularities

are not satisfactorily explained by evidence in the record.     Such

irregularities, however, are peculiarly within petitioners’

province to explain, and they have failed to do so.    Accordingly,

we hold that petitioners sold the Danville property to Haq in

1992 and must include in taxable income capital gain realized

with respect to this sale.

     On reply brief, petitioners indicate that, in the event this

Court concludes that they sold the Danville property in 1992,

their only disagreement with respondent’s calculation of the

amount of capital gain is with respect to their basis in the

Danville property.    They argue that the basis as allowed by

respondent should be increased by $641 to reflect amounts

expended for concrete for improvements at the Danville property.

On this point, we agree with petitioners.    We find that

petitioners have adequately substantiated the $641 cost of

concrete, and we hold that this amount is properly includable in

the basis of the Danville property for purposes of calculating




     7
       Petitioners make much of the fact that the grant deed
indicates a documentary transfer tax of only $68.20, which they
contend would reflect value transferred of $62,000. We note,
however, that the grant deed on its face indicates that the
transfer tax was computed on the basis of consideration received
less liens or encumbrances at the time of sale. The evidence
shows that the sales price of the Danville property was $400,000,
and that petitioners’ mortgage on the Danville property, in the
principal amount of $338,000, remained in place after the
transfer to Haq. Accordingly, we find no irregularity with this
particular circumstance; indeed, it tends to bolster respondent’s
position.
                                 - 9 -


the capital gain resulting from the April 1992 sale of this

property.

     B.   Mortgage Interest Deductions

     Section 163 allows a deduction for certain qualified

interest.    No deduction is generally allowed for personal

interest.    See sec. 163(h).   As an exception to this rule, a

deduction is allowable for certain interest paid with respect of

a “qualified residence”.    See sec. 163(h)(3).   For this purpose,

“qualified residence” means generally the taxpayer’s principal

residence and one other dwelling unit that the taxpayer selects

and uses for personal purposes for a specified number of days

during the taxable year.    See secs. 163(h)(4), 280A(d).   The

determination as to whether any property is a qualified residence

is made as of the time the interest is accrued.     See sec.

163(h)(3).

     We have concluded that petitioners sold the Danville

property to Haq in April 1992.     There is no evidence in the

record that petitioners used the Danville property as a residence

after that date.    Accordingly, we sustain respondent’s

disallowance of $17,000 of mortgage interest deductions

attributable to the period after April 1992.8




     8
       While it seems questionable that only about half of the
total interest payments for 1992 would be attributable to
interest payments made during the last two thirds of the year, we
note that any error in this regard appears to be in petitioners’
favor, and we do not undertake to recompute the amount of
respondent’s disallowance.
                                - 10 -


                         The San Jose Property

Background

     On July 17, 1989, petitioners purchased property located at

2976 Glen Crow Court, San Jose, California.      From February to

July 1992, Van Van Nguyen (Nguyen), who was not related to

petitioners, resided at the property, but paid no rent.

Petitioner husband’s brother, Anthony Trans, at times during 1991

and 1992, maintained utility service at the San Jose property.

On December 7, 1992, the World Savings Bank foreclosed on the San

Jose property.

     On Schedule E, Supplemental Income and Loss, of their 1992

joint Federal income tax return, petitioners reported a net loss

from the property totaling $112,283, consisting of a

“carryforward loss” in the amount of $91,941,9 depreciation of

$13,542, repairs of $4,500, auto and travel expenses of $2,100,

and utilities of $200.    Petitioners deducted $16,097 of these

amounts in 1992 and carried forward the $96,186 balance to 1993.

On their 1993 return, petitioners claimed, in addition to the

$96,186 carryforward from 1992, depreciation of $1,693, with




     9
       On their 1989, 1990, and 1991 joint Federal income tax
returns as originally filed, petitioners did not list the San
Jose property as a rental property nor attribute any rental
income to it. In 1992, petitioners amended their 1990 and 1991
joint Federal income tax returns to report $2,400 in gross rental
income and newly claimed deductions that more than offset the
gross income for each year, thereby generating the carryover loss
to 1992.
                               - 11 -


respect to the San Jose property, as well as a $44,872 loss on

the disposition of the property.10

     Respondent disallowed petitioners’ 1992 and 1993 Schedule E

deductions relating to the San Jose property because of lack of

substantiation and on grounds that expenses from the property

were limited to rental income because of excessive personal use

of the property by petitioners or their relatives.    Respondent

recharacterized the San Jose property as a capital asset and

limited petitioners’ allowable loss to $3,000 per year, in

accordance with section 1211(b).


Discussion

     Deductions are strictly a matter of legislative grace, and

taxpayers bear the burden of providing supporting evidence to

substantiate claimed deductions.     See Rule 142(a); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

      The record is devoid of any evidence substantiating the

claimed losses and expenses with respect to the San Jose

property.    In particular, petitioners have failed to substantiate

the existence or amount of any net operating loss in any previous


     10
       Petitioners' Form 4797, Sales of Business Property,
attached to their 1993 joint Federal income tax return, states
that the San Jose property was sold in February 1992. If, as the
parties have stipulated, the bank foreclosed on this property in
December 1992, it would appear that the sales date reported on
the 1993 return was in error. The record does not clarify when
the San Jose property was actually sold.
                              - 12 -


year, or that it was carried forward to 1992 and 1993 in

accordance with the requirements of section 172.11   Accordingly,

petitioners have not established their entitlement to the loss

carryforwards from previous years as reflected on their 1992 and

1993 returns.   See Larabee v. Commissioner, T.C. Memo. 1989-298.

Similarly, petitioners have failed to establish that they

incurred the claimed loss of $44,872 from a sale of the San Jose

property in 1993.   Nor have petitioners presented any evidence

that they paid or incurred any expenses with respect to the San

Jose property in the years at issue.   Accordingly, we sustain

respondent’s disallowance of the losses claimed with respect to

the San Jose property.12


     11
       Under sec. 172, a net operating loss generally may be
carried forward only if it is not absorbed through the operation
of a 3-year carryback, unless an election is made under sec.
172(b)(3) to waive the carryback. See McGuirl v. Commissioner,
T.C. Memo. 1999-21. There is no evidence that petitioners have
followed these procedures.
     12
       In fact, we question whether the San Jose property was
ever rented. There are many irregularities with regard to
petitioners’ purported rental activity at the San Jose property.
For instance, although petitioner husband introduced into
evidence an alleged lease agreement to show that petitioners
leased the San Jose property to petitioner wife’s brother in
1989, petitioner husband conceded at trial that this was not a
real “lease” but a fictitious document created for the purpose of
qualifying for a mortgage. As mentioned above, petitioners
originally omitted any rental activity from the San Jose property
on their 1989, 1990, and 1991 tax returns. When they amended
their 1990 and 1991 tax returns, they reported gross rental
income in the amount of $2,400 for each year. When cross-
examined about the peculiarity of these identical round amounts
of gross rental income for the 2 years, petitioner husband
testified that the amounts reported were probably a "mistake".
In addition, on these amended returns, petitioners claimed
expenses with respect to the San Jose property that duplicated
                                                   (continued...)
                               - 13 -


     In light of this holding, it is unnecessary to consider

respondent’s argument that the San Jose property was used as

petitioners’ personal residence during 1992 and therefore gave

rise only to nondeductible personal expenses.


                        The Milpitas Property

Background

     In January 1994, petitioners were interested in purchasing a

house that was under construction in a development in Milpitas,

California.    They participated in a “camp-out” organized by a

group of prospective buyers to hold their place in line before

the scheduled opening of the builder's sales office on January

29, 1994.    On March 11, 1994, petitioners paid a $350 fee to a

financing company for an appraisal of the Milpitas home and for a

personal credit investigation.

     Petitioners previously had declared bankruptcy and could not

qualify for a loan.    The loan officer suggested petitioners have

another person obtain the loan to purchase the property.


     12
      (...continued)
mortgage interest deductions petitioners had already claimed with
respect to this property. As another example, petitioners listed
the San Jose property on their chapter 7 bankruptcy petition as a
“second home” and listed the nature of the debtor’s interest in
the property as “brother living in house”. The copy of the
bankruptcy petition that respondent received from petitioners in
response to a discovery request had been altered to remove the
words “second home” and “brother living in house”. The
cumulative weight of these irregularities severely strains
petitioners’ credibility. In determining whether a taxpayer has
adequately substantiated deductions, "The credibility of the
taxpayer is a crucial factor." Norgaard v. Commissioner, 939
F.2d 874, 878 (9th Cir. 1991), affg. in part and revg. in part
T.C. Memo. 1989-390.
                                - 14 -


Petitioner wife’s brother, Son Dang, agreed to obtain on behalf

of petitioners a mortgage in the amount of $323,900 on the

Milpitas property.

     On August 3, 1994, petitioners paid out of their own funds

$137,518.62 as a downpayment on the Milpitas property.

Petitioners made the mortgage payments on the Milpitas property.

They also chose, approved, and paid for home improvements, such

as carpeting.   After construction was completed, they lived at

the Milpitas property.

     Son Dang never lived at the Milpitas property.    On December

3, 1994, Son Dang executed a grant deed for the Milpitas property

in favor of petitioner husband.

     On their 1994 joint Federal income tax return, petitioners

deducted $11,738 for mortgage interest and $3,570 for property

taxes paid on the Milpitas property.     In the notice of

deficiency, respondent disallowed the deductions in their

entirety on the ground that petitioners did not own the Milpitas

property.


Discussion

     A. Mortgage Interest Deduction

     In general, section 163 allows a deduction for interest paid

or accrued on certain indebtedness, including acquisition

indebtedness on a qualified residence.     The acquisition

indebtedness generally must be an obligation of the taxpayer and

not an obligation of another.    See Golder v. Commissioner, 604
                              - 15 -


F.2d 34, 35 (9th Cir. 1979), affg. T.C. Memo. 1976-150.   However,

the applicable regulations provide in pertinent part:

          Interest paid by the taxpayer on a mortgage upon
          real estate of which he is the legal or equitable
          owner, even though the taxpayer is not directly
          liable upon the bond or note secured by such
          mortgage, may be deducted as interest on his
          indebtedness. [Sec. 1.163-1(b), Income Tax Regs.]

     In a case with analogous facts, Uslu v. Commissioner, T.C.

Memo. 1997-551, the taxpayers could not qualify for a home

mortgage loan because of a recent bankruptcy.   In Uslu, the

taxpayer-husband and his brother agreed that the brother would

obtain the loan for the property and the taxpayers would pay the

mortgage and all other expenses for maintenance and improvements.

This Court held that although the taxpayers did not hold legal

title to the property, they were the equitable owners and were

entitled to deduct mortgage interest paid by them with respect to

the property.

     Similarly, in the instant case, although petitioners were

not the legal owners of the Milpitas property before December 3,

1994, they consistently treated the Milpitas property as if they

were the owners, paying the downpayment, mortgage payments, and

property taxes with respect to the property, as well as paying

for improvements to the property.   Based on all the evidence, we

infer that those actions were pursuant to an agreement with Son

Dang, who took title to the property and obtained a mortgage only

as an accommodation to petitioners, who could not qualify for a

loan.   A few months later, Son Dang transferred the title to
                               - 16 -


petitioner husband.   We conclude that petitioners held the

benefits and burdens of ownership of the Milpitas property and

have established equitable ownership of it during the period in

question during 1994.    Accordingly, we hold that petitioners are

entitled to deduct the $11,738 home mortgage interest paid by

them with respect to the Milpitas property during 1994.


     B. Property Taxes

     Section 164 allows a deduction for certain taxes, including

State and local real property taxes.    In general, taxes are

deductible only by the person upon whom they are imposed.     See

sec. 1.164-1(a), Income Tax Regs.   However, the person owning the

equitable or beneficial interest in real property and paying the

taxes assessed against the property to protect that interest may

deduct the taxes paid even though legal title is recorded in the

name of another person.    See Estate of Movius v. Commissioner, 22

T.C. 391 (1954); Horsford v. Commissioner, 2 T.C. 826 (1943);

Casey v. Commissioner, T.C. Memo. 1965-282.

     We have concluded that petitioners were equitable owners of

the Milpitas property during 1994; accordingly, we hold that they

are entitled to deduct property taxes they paid on the property

that year.

     For the first time on reply brief, respondent argues that

petitioners have not substantiated that they paid the property

taxes on the Milpitas property.   Respondent has failed to raise

this issue in the notice of deficiency, at trial, or on opening
                              - 17 -


posttrial brief.   In fact, respondent's opening brief expressly

refers to "the property taxes paid by petitioners in 1994, in the

amount of $3,570."   As a general rule, this Court will not

consider issues first asserted on brief.    See Sundstrand Corp. &

Subs. v. Commissioner, 96 T.C. 226, 346-348 (1991).     When issues

are presented in the reply brief only, there is even stronger

reason to disregard them.   See Estate of Snarling v.

Commissioner, 60 T.C. 330, 350 (1973), revd. and remanded on

other grounds 552 F.2d 1340 (9th Cir. 1977).


                     Schedule C Business Loss

Background

     On their 1994 joint Federal income tax return, petitioners

reported Schedule C gross receipts of $15,535, and total Schedule

C expenses of $80,337, resulting in a net loss on Schedule C of

$64,802.   Petitioners contend that this net loss was attributable

to a trade or business that petitioner husband carried on under

the name of Transnet to provide computer consulting services.

     Petitioners also reported on their 1994 joint Federal income

tax return wage income of $180,326.    The substitute Form W-2,

Wage and Tax Statement, attached to the tax return attributes

$167,265 of this amount to petitioner husband's employment with

The Application Group, San Francisco, California.

     In the notice of deficiency, respondent disallowed

petitioners’ claimed Schedule C expenses in the amount of the

reported net loss (i.e., $64,802).     In effect, then, respondent
                                - 18 -


has allowed petitioners' claimed Schedule C deductions to the

extent of their reported gross receipts from this activity (i.e.,

$15,535).


Discussion

     In general, section 162(a) allows a deduction for ordinary

and necessary business expenses paid or incurred during the

taxable year in carrying on a trade or business.     Whether a

taxpayer is carrying on a trade or business requires an

examination of all the relevant facts.     See Commissioner v.

Groetzinger, 480 U.S. 23, 26 (1987).     The burden of proof is on

petitioners.   See Rule 142(a).

     The parties agree that these three factors are relevant in

determining whether a trade or business exists:     (1) whether the

taxpayer undertook the activity intending to make a profit; (2)

whether the taxpayer was regularly and actively involved in the

activity; and (3) whether the taxpayer’s business operations have

actually commenced.    See McManus v. Commissioner, T.C. Memo.

1987-457, affd. per curiam without published opinion 865 F.2d 255

(4th Cir. 1988) and cases cited therein.

     The record does not establish that petitioners satisfy any

of these factors.     First, there is no evidence as to whether

petitioners engaged in this purported activity with “the basic

and dominant intent” of making a profit.     See Hirsch v.

Commissioner, 315 F.2d 731, 736 (9th Cir. 1963), affg. T.C. Memo.

1961-256.    The determination of a profit objective is based on
                               - 19 -


all the facts and circumstances, and “more weight must be given

to the objective facts than to the taxpayer’s mere after-the-fact

statements of intent.”    Drobny v. Commissioner, 86 T.C. 1326,

1341 (1986).    There are virtually no objective facts in the

record to indicate the requisite intent.

       Second, there is no evidence to show that petitioner husband

was regularly and actively involved in this activity.    The fact

that he earned $180,326 in wages in 1994 strongly suggests that

he was regularly and actively involved in his employment for The

Application Group, rather than for Transnet.

       Finally, there is no evidence to support a finding that

Transnet had actually commenced business operations when the

claimed deductions were incurred.    Preopening and startup

expenses are not deductible under either section 162 or section

212.    See Hardy v. Commissioner, 93 T.C. 684, 687 (1989).

       Even if we assume, arguendo, that petitioners were engaged

in a trade or business with respect to Transnet in 1994,

petitioners have failed to establish that they are entitled to

deductions under section 162 in excess of the $15,535 that

respondent has already allowed.

       Petitioners bear the burden of showing their entitlement to

the claimed deductions.    See Norgaard v. Commissioner, 939 F.2d

874, 877 (9th Cir. 1991).    Taxpayers are required to maintain

records sufficient to enable the Commissioner to determine the

taxpayer’s correct tax liability.    See sec. 6001; Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965).     Except in the case of
                                - 20 -


expenses subject to section 274, if a claimed business expense is

deductible, but the taxpayer is unable to substantiate it

adequately, the Court is permitted to make as close an

approximation as possible, bearing heavily on the taxpayer whose

inexactitude is of his own making.       See Cohan v. Commissioner, 39

F.2d 540, 543 (2d Cir. 1930).    The estimate, however, must have a

credible evidentiary basis.   See Norgaard v. Commissioner, supra

at 879; Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

     The record in this case provides no credible evidentiary

basis to support petitioners' claimed deductions in excess of the

$15,535 allowed by respondent.    Although petitioners introduced

into evidence copies of numerous checks and receipts, these

documents cannot be readily correlated to the deductions

petitioners claimed on their Schedule C for tax year 1994.      For

example, the documents purport to establish, among other things,

that during 1994 Transnet paid $18,150 to Richard Hartman and

$3,500 to Son Dang as compensation for computer programming

services.   Petitioners’ Schedule C for tax year 1994, however,

reports no deduction for wages paid, nor did Transnet issue Forms

1099 to Son Dang or Richard Hartman in 1994.13

     13
       The evidence with regard to Richard Hartman is
particularly inscrutable. The documents introduced by
petitioners include invoices issued by Advanced Consulting
Experts to Intel, listing Richard Hartman as contractor, and
bearing notations that expense reimbursements are to be made
directly to Hartman. Nowhere on these invoices is there any
mention of Transnet or petitioners. The copies of the checks to
Hartman that petitioners have introduced into evidence do not
show that they have been canceled by the bank and appear to have
                                                   (continued...)
                               - 21 -


     Moreover, the documents that petitioners have introduced

into evidence do not adequately substantiate the claimed

expenses.    The copies of checks introduced by petitioners

generally do not indicate cancellation by the bank and are

unaccompanied by invoices to substantiate the purpose of the

expenditures.    For instance, one check totaling $15,681.23

purports to be for office furniture, but there is no accompanying

invoice or other evidence showing a purchase of office furniture,

or for that matter, evidence to indicate that Transnet even had

an office.

     In general, section 274(d) disallows any deduction for

certain types of expenses, including travel, entertainment, and

automotive expenses, unless the taxpayer substantiates by

adequate records or sufficient evidence corroborating the

taxpayer's own testimony, the amount, time, place, business

purpose, and business relationship.

     During the year at issue, petitioners deducted $1,929 as

meals and entertainment expenses, and $1,651 for travel expenses.

Petitioners have not substantiated these expenses in accordance

with the requirements of section 274, and accordingly they must

be disallowed.    Cf. Sam Goldberger, Inc. v. Commissioner, 88 T.C.

1532, 1558 (1987); Mohan Roy, M.D., Inc. v. Commissioner, T.C.


     13
      (...continued)
been altered to remove the preprinted legend bearing the account
holder’s name and address. Other portions of the exhibit consist
simply of Hartman’s bank deposit slips and bear no original
reference to petitioners or Transnet.
                                - 22 -


Memo. 1997-562, affd. without published opinion __ F.3d __ (9th

Cir. 1999).14    Respondent's determination on this issue is

sustained.


                       Accuracy-Related Penalty

     Respondent determined that petitioners were liable for

accuracy-related penalties under section 6662(a) for all years in

issue.    Section 6662(a) imposes an accuracy-related penalty equal

to 20 percent of any underpayment that is attributable to

negligence or to a substantial understatement of income tax.

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

reasonable and ordinarily prudent person would do under the

circumstances.    See Neely v. Commissioner, 85 T.C. 934, 947

(1985).   It includes the failure to make a reasonable attempt to

comply with the Internal Revenue Code.    See sec. 6662(c).    No

penalty shall be imposed if it is shown that the taxpayer had

reasonable cause and acted in good faith.    See sec. 6664(c).

     Petitioners exhibited a lack of due care for each of the

years in issue.    With respect to their 1992 tax year, petitioners

failed to report capital gains from the sale of the Danville


     14
       Petitioners introduced into evidence numerous receipts
for various meals and entertainment expenses at issue, including
receipts for a seafood dinner and bakery items. Many of these
receipts bear cryptic handwritten legends of business purpose and
participants that clearly have been added to the copies, in
identical handwriting and pen font, after the fact. Many more
receipts, such as a great many gas station receipts, bear no
indication of business purpose. Petitioners have offered no
particularized corroborating testimony about any of these claimed
expenses.
                                - 23 -


property and deducted mortgage interest attributable to the

period after they sold the property to Haq.    With respect to

their 1992 and 1993 tax years, petitioners claimed substantial

losses with regard to the San Jose property without

substantiation.    With respect to their 1994 tax year, petitioners

claimed substantial Schedule C losses without establishing that

they were engaged in a trade or business, and without adequate

substantiation for the expenses claimed.

     On brief, petitioners argue that they are not liable for the

negligence penalty because they properly relied in good faith on

a paid income tax preparer, providing her with all relevant tax

return information for the tax years in issue.    Reliance on the

advice of a professional tax adviser does not necessarily

demonstrate reasonable cause and good faith.    See sec. 1.6664-

4(b)(1), Income Tax Regs.    All facts and circumstances must be

taken into account.   See sec. 1.6664-4(c)(1), Income Tax Regs.

Reliance may not be reasonable or in good faith if the taxpayer

knew or should have known that the adviser lacked knowledge in

the relevant aspects of Federal tax law.    See id.   The advice

must be based upon all pertinent facts and the applicable law;

these requirements are not met if the taxpayer fails to disclose

facts that the taxpayer knows, or should know, are relevant to

the proper tax treatment of an item.     See sec. 1.6664-4(c)(1)(i),

Income Tax Regs.    The advice must not be based on unreasonable

factual or legal assumptions.    See sec. 1.6664-4(c)(1)(ii),

Income Tax Regs.
                               - 24 -


       Apart from passing references in petitioner husband's

testimony to his tax preparer, the record is devoid of evidence

to support petitioners' contentions.    Petitioners did not call

their tax preparer as a witness.    There is no evidence to support

a determination that petitioners acted reasonably or in good

faith in relying on their tax preparer’s advice, or indeed any

evidence as to what qualifications their tax preparer might have

had.    There is no evidence that petitioners disclosed to their

tax preparer all relevant facts and circumstances, or that the

advice was based on reasonable factual or legal assumptions.

       Accordingly, we sustain the imposition of the accuracy-

related penalty under section 6662(a) for all years in issue.

       To reflect concessions and the foregoing,


                                     Decision will be entered

                                under Rule 155.
