                        T.C. Memo. 2000-149



                      UNITED STATES TAX COURT



QUANTUM COMPANY TRUST, LONNIE D. CROCKETT, TRUSTEE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

    DAVID C. NORTON AND LOIS K. NORTON, a.k.a. KIM Z. NORTON,
                          Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 185-98, 186-98.        Filed April 25, 2000.



     John Robertson Riley, for petitioners.

     Kay Hill, for respondent.



                        MEMORANDUM OPINION


     JACOBS, Judge:   These cases were consolidated for purposes of

trial, briefing, and opinion.      Pursuant to separate notices of

deficiency, respondent determined the following deficiencies and

accuracy-related penalties:
                                 - 2 -

Quantum Co. Trust, Lonnie D. Crockett, Trustee, docket No. 185-98:

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

     1993            $10,124                     $2,025

David C. and Lois K. Norton, a.k.a. Kim Z. Norton, docket No. 186-
98:
                                         Accuracy-Related Penalty
     Year           Deficiency                 Sec. 6662(a)

     1993            $123,751                   $24,750

     The parties now agree that the income reported by Quantum Co.

Trust for 1993 ($28,000) is properly reportable on the Schedule C,

Profit or Loss From Business, of the 1993 Federal income tax return

of David C. and Lois K. Norton (the Nortons).        Consequently,

respondent concedes that no deficiency or penalty exists with

respect to Quantum Co. Trust for 1993.       Further, the parties

resolved many of their differences giving rise to the deficiency

respondent determined against the Nortons.   After giving effect to

concessions by each of the parties, the issues remaining for

decision are:   (1) With respect to calculating the profit from

David C. Norton’s (Mr. Norton’s) construction activities conducted

through his sole proprietorship known as Northridge Construction

(Northridge) in 1993, (a) whether Northridge’s gross receipts were

underreported by $86,155, (b) whether Northridge’s 1993 cost of

goods sold is greater than the amount stipulated by the parties,

and (c) whether the Nortons are entitled to a deduction for travel

expenses in an amount greater than allowed by respondent; (2)
                                    - 3 -

whether proceeds from the settlement of a lawsuit arising out of

Mr. Norton’s fishing activities are excludable from income pursuant

to section 104(a)(2); (3) whether statutory prejudgment interest

the Nortons received in connection with a personal injury award is

excludable     from income pursuant to section 104(a)(2); (4) whether

the Nortons are entitled to a $15,000 deduction for an ostensible

payment of     environmental cleanup expenses made in connection with

their acquisition of rental property; and (5) whether the Nortons

are liable for the accuracy-related penalty.

         All section references are to the Internal Revenue Code as in

effect for the year under consideration.          All Rule references are

to the Tax Court Rules of Practice and Procedure.

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

Background

         The Nortons, husband and wife, resided in Palmer, Alaska, at

the time they filed their petition.          Quantum Co. Trust’s mailing

address at the time the trustee thereof filed a petition was

Palmer, Alaska.

         During 1993, Mr. Norton was engaged in two unrelated business

activities–-construction of residential and commercial buildings

(through Northridge) and commercial fishing.            Northridge operated

as   a    general   contractor   with   respect   to   the   construction   of
                                   - 4 -

residential and commercial buildings. The income and expenses from

these activities were reported by the Nortons on separate Schedules

C.

      All receipts received from Mr. Norton’s construction and

fishing activities were deposited into a business checking account

maintained at the National Bank of Alaska (NBA). A total of

$2,356,263.15 was deposited into the NBA account during 1993.

      For clarity, we have combined our remaining findings of fact

and opinion for each of the issues to be resolved.

Issue 1.      Amount of Northridge’s Profit for 1993

      Three items remain to be resolved in order to calculate the

profits from Mr. Norton’s construction activities:         (1) The amount

of gross receipts; (2) the amount for cost of goods sold; and (3)

the amount for travel expenses.

      A.   Gross Receipts

      Pamela Ennis Crockett (Mrs. Crockett) prepared the Nortons’

Federal income tax return for 1993.        Utilizing bank deposit slips

and   Forms    1099,   Mrs.   Crockett   determined   Northridge’s   gross

receipts for 1993 to be $1,205,232.57, calculated as follows:
                                 - 5 -

     Total deposits                                    $2,356,263.15

Less:

     Fishing income                      $25,084.19
     Loans from family                    86,155.52
     Nontaxable transfers                144,011.70
     Nontaxable deposits                 867,697.92
     Nontaxable estate                        81.25
     Quantum Trust income                 28,000.00
                                                           1,151,030.58
                                                       1
     Gross receipts                                     1,205,232.57
     1
        The parties stipulated that Northridge’s gross receipts
should be increased by $28,000, representing Quantum Co. Trust’s
income for 1993.

     Respondent maintains that Northridge’s 1993 gross receipts are

$86,155 greater than determined by Mrs. Crockett.       Specifically,

respondent disputes the Nortons’ claim that $86,155 of the NBA

deposits represents nontaxable loans from Mr. Norton’s brother, a

friend, and family members.       We thus must determine the source

(loans vs. gross receipts) of the $86,155 deposit.

        The characterization of the $86,155 depends upon our accepting

the testimony of Mr. Norton as truthful. Mr. Norton testified that

he and his wife emerged from bankruptcy in 1993, and to alleviate

their financial burden, they borrowed moneys from Mr. Norton’s

brother (Steve), a friend (Jim Sullivan), and unnamed family

members.    According to Mr. Norton, he and his wife agreed to repay

the loans with 8 percent interest.        No notes or collateral were

given.
                                      - 6 -

     Once again, we are required to distill truth from falsehood.

See Diaz v. Commissioner, 58 T.C. 560, 564 (1972).            Having observed

Mr. Norton while he was testifying, we find his testimony as to the

source of the $86,155 deposit credible.             We are satisfied that

there    was   a   true   debtor-creditor     relationship    and   that   this

relationship created an unconditional and enforceable obligation to

repay    the   moneys     advanced.     Consequently,    we   conclude     that

Northridge’s gross receipts for 1993 were not underreported as

respondent maintains.

     B.    Cost of Goods Sold

     The parties stipulated that Northridge’s cost of goods sold

for 1993 was $945,143, rather than $945,732, as reported on the

Nortons’ original and amended Schedules C.              In arriving at this

amount, the auditing agent reviewed substantiating documentation.

     At trial, the Nortons sought an additional $4,650 for cost of

goods sold, claiming that this amount was paid to David & Sons for

cabinets and other items.        In support of this claim, the Nortons

introduced an undated invoice, as well as a copy of their check

ledger.     The check ledger for February 12, 1993, indicated that a

check was made payable to “David & Sons” in the amount of $4,450.

No canceled check to show that the $4,650 invoice was paid was

introduced.

        We do not believe that, in general, a party to a stipulation

should be allowed unilaterally to disregard the stipulation.               Even
                                     - 7 -

so, here, the check ledger does not support the Nortons’ claim for

an additional $4,650 for cost of goods sold.            The amount recorded

on the check ledger ($4,450) differs from the invoice amount

($4,650).      We are not convinced that Northridge’s cost of goods

sold for 1993 is greater than the amount stipulated. Consequently,

we conclude that Northridge’s cost of goods sold for 1993 is

$945,143.

        C.   Travel Expenses

     No deduction for travel expenses was claimed on the original

Schedule C for Northridge’s activities.              An amended Schedule C,

however, reflects a deduction in the amount of $5,822 for travel

expenses.      During the audit, the Nortons submitted the following

receipts to substantiate their claimed travel expenses:

             Overnight stay at Merit Inn               $88.00
             Check No. 13616 paid to VISA            1,731.09
             Receipt Fantasia Travel                 3,800.00
             Check No. 13884 paid to VISA              532.00

     Respondent allowed only $88 of the claimed $5,822.                   The

Nortons failed to introduce at trial any evidence to support their

claimed business travel expenses.

     Section     274(d)   requires    strict   substantiation     for   travel

expenses.      Here, the Nortons failed to provide documentation or

other    corroborating    evidence    to   support    their   claimed   travel

expenses.      Consequently, we conclude that the Nortons are not

entitled to a deduction for travel expenses in an amount greater

than allowed by respondent.
                                       - 8 -

Issue 2.     Taxability of Settlement Proceeds From Fishing Lawsuit

     On June 7, 1986, Mr. Norton was fishing for herring on Norton

Sound by means of a beach seine.                 The open period for herring

fishing on that date was 3 hours.               While Mr. Norton and his crew

were hauling in herring, they were informed by State Trooper John

Harman (Officer Harman) that because the lead line was not fully on

the beach as of the end of the 3-hour fishing period, they had to

release their catch. Despite vigorously disputing Officer Harman’s

claim,    Mr.    Norton    complied.       As    a    result,   Mr.     Norton   was

dispossessed of approximately 150 tons of herring valued in excess

of $100,000 and was denied “fish tickets”, which are used for the

subsequent assignment of limited entry fishing permits. (These

permits    are       awarded   by   the   Alaska      Limited   Entry     Fisheries

Commission (the commission) based upon the amount of fish landed

and allow commercial fishermen to maintain and expand their fishing

privileges.)

     On June 2, 1988, Mr. Norton filed a lawsuit against Officer

Harman (both individually and as a trooper of the State of Alaska

Department      of    Public   Safety,    Division      of   Fish   and   Wildlife

Protection) and the State of Alaska (the Harman lawsuit), seeking

monetary   and       declaratory    relief.     The   complaint     contained    six

counts:    (1) Trespass to chattels; (2) conversion; (3) negligence;

(4) punitive damages; (5) deprivation of civil rights; and (6) a
                                    - 9 -

declaratory judgment seeking adjudication of Mr. Norton’s fishing

rights.

     The complaint sought the following monetary relief:

          a.   Compensatory damages for dispossession and/or
     conversion in excess of one hundred one thousand dollars
     ($101,000) to be determined more precisely at trial,
     and/or provision for a like occasion, period and
     opportunity to harvest fish from a herring biomass of
     similar size.

          b.   In the alternative, compensatory damages for
     negligence in excess of one hundred one thousand dollars
     ($101,000) to be determined more precisely at trial.

          c.   Punitive        damages    of   one    thousand   dollars
     ($1,000).

          d.   Compensatory damages for deprivation of civil
     rights in excess of two hundred seventy thousand dollars
     ($270,000) to be determined more precisely at trial.

          *      *         *         *          *          *         *

          f.   Costs,   attorneys’  fees,   prejudgment  and
     postjudgment interest where appropriate, related actual
     expenses and any other relief in law or equity to which
     the plaintiff may be shown to be entitled.

In addition, the complaint sought a judicial determination that Mr.

Norton’s June 7, 1986, catch of herring was a “landed” catch for

purposes of obtaining points awarded by the commission.

     On   December   22,   1992,    the     parties    reached   a   tentative

agreement to resolve the Harman lawsuit.              The release agreement,

dated January 8, 1993, provided in relevant part:

          FOR AND IN CONSIDERATION of the sum of FORTY FIVE
     THOUSAND AND NO/100 DOLLARS ($45,000.00), and other good
     and valuable consideration, the receipt of which is
     hereby acknowledged, the undersigned, DAVID C. NORTON *
     * * does hereby release and forever discharge the STATE
                              - 10 -

     OF ALASKA, DEPARTMENT OF PUBLIC SAFETY, JOHN HARMAN * *
     * of and from all actions, causes of action, suits,
     controversies, claims, and demands of every kind and
     nature, mature or to mature in the future, for and by
     reason of any damages, costs, expenses, and compensation,
     whether for insurance proceeds, personal injury, bodily
     injury, property damage, out-of-pocket expenses, loss of
     earnings, loss of use, loss of consortium, loss of
     services, attorney’s fees, punitive damages, or bad-faith
     handling, or any other thing whatsoever, arising out of
     an incident occurring on or about June 10, 1986, and any
     and all claims embodied in David C. Norton v. John E.
     Harmon [sic], et al. * * *

         *       *       *        *       *       *       *

          This release notwithstanding, nothing in this
     agreement shall restrict the undersigned’s right to apply
     * * * for a limited entry permit for the Norton Sound
     beach seine herring sac roe fishery, nor shall it prevent
     the undersigned from filing an administrative appeal with
     respect to such a permit * * *

The net amount Mr. Norton received in 1993 (after reductions for

attorney’s fees and costs) was $26,280. The Nortons did not report

the settlement proceeds on their 1993 Federal income tax return.

     In the notice of deficiency, respondent determined that the

proceeds received from the settlement of the Harman lawsuit were

taxable to Mr. Norton as compensation for lost fishing income.

     Section 61(a) requires that taxpayers include in their gross

income all income from whatever source derived, absent a contrary

provision in the Internal Revenue Code (Code).   Section 104(a)(2)

is one such provision. Pursuant to section 104(a)(2), gross income

does not include the amount of any damages received (whether by

suit or agreement) on account of personal injuries or sickness.
                                     - 11 -

       The applicable regulations provide that “The term ‘damages

received (whether by suit or agreement)’ means an amount received

* * * through prosecution of a legal suit or action based upon tort

or tort type rights, or through a settlement agreement entered into

in lieu of such prosecution.”          Sec. 1.104-1(c), Income Tax Regs.

Thus, in order to exclude damages from gross income pursuant to

section 104(a)(2), the taxpayer must prove:                (1) The underlying

cause of action is based upon tort or tort type rights, and (2) the

damages were received on account of personal injuries or sickness.

See Commissioner v. Schleier, 515 U.S. 323, 336-337 (1995).

       Where amounts are received pursuant to a settlement agreement,

the nature of the claim that was the actual basis for settlement

controls whether such amounts are excludable from gross income

under section 104(a)(2).       The crucial question is “in lieu of what

was the settlement amount paid”?         Bagley v. Commissioner, 105 T.C.

396,   406   (1995),   affd.   121    F.3d    393   (8th   Cir.   1997).   This

determination is a factual inquiry.           See Robinson v. Commissioner,

102 T.C. 116, 127 (1994), affd. in part, revd. in part on another

ground and remanded 70 F.3d 34 (5th Cir. 1995).

       We now turn our attention to the settlement that Mr. Norton

received by virtue of the release agreement.           Mr. Norton testified

that he believed that the settlement was made on account of

personal injuries.     On the other hand, the attorney for the State
                                - 12 -

of Alaska testified that she viewed the settlement as a compromise

of property-based claims.

       From the face of the release agreement we are unable to

ascertain whether the settlement was made on account of tort type

personal injuries or in claims grounded elsewhere; the release

agreement purports to release defendants from “all actions, causes

of action, suits, controversies, claims, and demands of every kind

and nature”.    Nor are we able to discern from the face of the

release agreement    the   intent   of   the   parties   in   reaching    the

agreement; the release agreement provided “it is the intention of

the parties released * * * and it is the purpose of this agreement,

to discharge absolutely the liability of the parties * * * from any

and all the aforementioned claims”.        Accordingly, we must analyze

the nature of the underlying claims.

       First, we address whether the settlement was made on account

of tort or tort type rights.    This analysis requires us to focus on

the scope of remedies available.         See Cade v. Commissioner, T.C.

Memo. 1999-394.    “A ‘tort’ has been defined broadly as a ‘civil

wrong other than breach of contract, for which the court will

provide a remedy in the form of an action for damages.’”            United

States v. Burke, 504 U.S. 229, 234 (1992) (quoting Keeton et al.,

Prosser & Keeton on the Law of Torts 2 (5th ed. 1984)).                  Such

action for damages is generally compensatory in nature. See id. at

235.
                                         - 13 -

      Of the six counts, five sought damages that directly addressed

Mr. Norton’s losses through tort type claims and remedies.                            These

counts     (i.e.,   trespass        to   chattels,          conversion,       negligence,

punitive damages, and deprivation of civil rights–-due process) are

traditionally recognized as torts under Alaskan law and each

provides remedies       in    the    form   of       an     action    for    compensatory

damages.    The sixth count, however, sought a declaratory judgment

regarding    Mr.    Norton’s    fishing      rights.           Under    Alaska       law,   a

declaratory    judgment       determines         a    party’s        legal   rights     and

relationships and does not provide an independent action for

damages.     See Alaska Airlines, Inc. v. Red Dodge Aviation, Inc.,

475 P.2d 229, 232 (Alaska 1970).            Accordingly, only five counts of

the   complaint       state     claims       having           tort     or     tort     type

characteristics.

      The release agreement provided for $45,000 plus an arrangement

whereby the State of Alaska would address Mr. Norton’s disputed

fishing rights.      The similarity between the nature of the relief

sought in the complaint and the relief afforded in the release

agreement leads us to conclude that the provision in regard to

fishing rights was made in settlement of the claim for declaratory

judgment, and that the $45,000 was allocated to the remaining five

counts.      Consequently,      we       agree       with    the     Nortons    that    the

settlement proceeds arose from tort or tort type claims.
                                     - 14 -

      Although     the   existence    of    tort   or   tort   type   claims   is

necessary, that alone is not sufficient to enable the settlement

proceeds to come within the ambit of section 104(a)(2); a showing

that the $45,000 settlement was “on account of personal injury or

sickness” is also required.          See Commissioner v. Schleier, supra.

Accordingly, we next address whether Mr. Norton recovered damages

on account of traditional personal injury claims such as physical

pain and suffering and/or emotional distress.              See id. at 327.

          In count one of the Harman complaint, Mr. Norton alleged the

following:      “As a result of this dispossession, the plaintiff was

deprived of one hundred fifty (150) tons of herring * * * [in

addition] [he] also suffered additional expenses and inconvenience

for the use of his crew to release the catch.”             Counts two, three,

and four alleged similar damages.             In addition, the only damage

counts five and six alleged related to the loss of valuable fishing

“points”.      Moreover, no physical, mental, or emotional injuries

were pleaded in the complaint.          Accordingly, we conclude that the

injury giving rise to the Harman lawsuit was economic in nature.

The damages Mr. Norton sought were for the loss of anticipated

profits from his fishing activities.               Indeed, Mr. Norton’s own

attorney testified that Mr. Norton’s primary objective in bringing

the lawsuit was to protect his commercial fishing business.                There

is   no    evidence   indicating     that   the    settlement   proceeds   were
                                   - 15 -

intended to remedy physical or emotional injuries arising from

Officer Harman’s actions.

     In sum, we conclude that the settlement proceeds were paid in

lieu of lost fishing income and not on account of personal injury

or sickness.       As a result, we sustain respondent’s determination

that the Harman settlement proceeds are gross income includable on

the Nortons’ Schedule C for 1993.

Issue 3.    Taxability of Prejudgment Interest

     On April 21, 1988, Mr. Norton was injured in an automobile

accident.   The Nortons sued both the driver and the vehicle owners

(the Boehm lawsuit).          On December 28, 1992, an amended final

judgment was entered awarding the Nortons $95,235 in damages

together    with    $45,298   in   prejudgment   interest,   as   well   as

attorney’s fees and costs.         The Nortons received the $95,235 in

1992; they received the $45,298 in 1993.           The Nortons did not

report either the damage award or the prejudgment interest on their

1992 or 1993 Federal income tax returns.

     The parties agree that pursuant to section 104(a)(2), the

$95,235 damage award is excluded from the Nortons’ gross income.

However, in the notice of deficiency respondent determined that the

$45,298 in prejudgment interest is includable in the Nortons’ gross

income.

     The Nortons claim that under Alaska State law, prejudgment

interest is classified as damages and as such is excluded from
                                     - 16 -

gross income pursuant to section 104(a)(2).          See Alaska Stat. sec.

09.30.070    (Michie   1991).   In    contrast,   respondent   argues   that

prejudgment interest does not constitute an award of damages within

the purview of section 104(a)(2).

     We agree with respondent.          Section 104(a)(2) excludes from

gross income     the   amount   of   any   damages   (other   than   punitive

damages) received on account of personal injuries or sickness.

Section 104 is to be narrowly construed; it does not specify that

interest is excluded from gross income.               See Commissioner v.

Schleier, 515 U.S. at 337; Kovacs v. Commissioner, 100 T.C. 124,

128-130 (1993), affd. without published opinion 25 F.3d 1048 (6th

Cir. 1994). Conceptually, an award of damages is different from an

award of interest on damages. See Rozpad v. Commissioner, 154 F.3d

1, 5-6 (1st Cir. 1998), affg. T.C. Memo. 1997-528; Aames v.

Commissioner, 94 T.C. 189, 193 (1990); Greer v. Commissioner, T.C.

Memo. 2000-25.    The term “damages” connotes the “compensation or

satisfaction imposed by law for a wrong or injury” while the term

“interest” means “the price paid for borrowing [or withholding]

money.”     Kovacs v. Commissioner, supra at 128 (quoting Webster’s

Third New International Dictionary (1986)); Smith v. Commissioner,

59 T.C. 107, 111-113 (1972).         In the context of section 104(a)(2),

“damages” do not include interest.

     In sum, we hold that the $45,298 earmarked as “prejudgment

interest” does not constitute damages within the meaning of section
                                  - 17 -

104(a)(2).   See, e.g., Kovacs v. Commissioner, supra; Smith v.

Commissioner, supra.     Consequently, the $45,298 is not excludable

from the Nortons’ gross income.1

Issue 4. Deductibility of Deposit Into Controlled Savings Accounts

     On   September    28,   1993,   the   Nortons   agreed   to   purchase

residential rental property in Big Lake, Alaska (Meadow Creek),

from the Federal Deposit Insurance Corporation (FDIC) for $115,000.

To finance the purchase of Meadow Creek, the Nortons borrowed

$85,000 from NBA.     As a condition for making the loan, NBA required

the Nortons to deposit $15,000 in a controlled savings account

pending   third-party    certification     that   environmental    concerns

regarding contamination by the previous owners of Meadow Creek had

been corrected.     On November 26, 1993, the Nortons caused $15,000

to be deposited into the controlled savings account.          In order to

have the funds released from this account, the Nortons had to

either request reimbursement for cleanup expenses or pay off the

loan in its entirety.

     The Nortons incurred expenses in connection with removing

contaminated soil and replacing concrete floors and drains from the

Meadow Creek property.       None of these expenses were paid in 1993.


     1
          The parties stipulated “that to the extent the Court
finds the prejudgment interest award taxable, the Nortons are
entitled to deduct, as an itemized deduction, the allocable
attorneys fees and court costs which were not paid by the
defendants in the Boehm lawsuit or otherwise reimbursed and which
have not been deducted either elsewhere on their return or in any
other year.”
                                   - 18 -

In a letter dated May 9, 1996, the Nortons requested reimbursement

for the following expenses from the controlled savings account:

     Vendor                  Description                          Amount

GeoCHEM, Inc.                Pit liner                          $1,987.50
Weld-Air                     Angle iron and welding rod            359.00
Brad Zweifel Co.             Soil removal                          414.00
Knapp Enterprises            Soil removal                          414.00

     Total                                                       3,174.50

The requested amount was released to the Nortons.            They paid off

the NBA loan in 1999.        At the time the loan was satisfied, the

controlled savings account had a balance of $6,000 to $8,000; this

amount was released to the Nortons.

     Upon the advice of Mrs. Crockett, the Nortons offset their

1993 Schedule E income with a $15,000 deduction for environmental

cleanup expenses.     Respondent disallowed the claimed deduction.

     Before a taxpayer is allowed a current deduction, a claimed

expense must be paid or incurred.           The Nortons are cash method

taxpayers,    and   under   such   method   expenses   are   deductible   or

capitalized only after such expenses have been actually paid.             See

sec. 1.461-1(a)(1), Income Tax Regs.

     The Nortons did not incur or pay any environmental cleanup

expenses in 1993.2      Rather, they merely made a deposit into a

controlled savings account. (The purpose of the controlled account



     2
          Because the Nortons did not make any expenditures for
environmental cleanup costs in 1993, the question of whether such
costs would be currently deductible is moot.
                                   - 19 -

was to ensure that the Nortons would not strip down the value of

the bank’s lien on the property by failing to remedy environmental

hazards.)    The $15,000 deposit into the controlled savings account

did    not   pay   environmental   cleanup   costs.   Thus,   we   sustain

respondent’s determination on this issue.

Issue 5.     Section 6662(a) Accuracy-Related Penalty

       The final issue is whether the Nortons are liable for the

section 6662(a) accuracy-related penalty.

       Section 6662 imposes a penalty equal to 20 percent of any

portion of an understatement that is attributable to negligence or

disregard of rules or regulations or substantial underpayment of

tax.    See sec. 6662(a) and (b)(1).         “Negligence” includes any

failure of the taxpayer to make a reasonable attempt to comply with

the provisions of the Code, and “disregard” includes any careless,

reckless, or intentional disregard of rules and regulations.          Sec.

6662(c).     The accuracy-related penalty will be imposed unless the

taxpayers can demonstrate that there was reasonable cause and they

acted in good faith with respect to the underpayment. See sec.

6664(c)(1).        In   determining   the    applicability    of   section

6664(c)(1), we weigh the particular facts and circumstances of each

case.    See sec. 1.6664-4(b), Income Tax Regs.         One of the most

important factors that we take into account is the extent of the

taxpayer’s effort to assess the proper tax liability.          See id.
                                   - 20 -

       We believe that the Nortons have sustained their burden of

establishing reasonable cause and good faith.          Numerous deductions

disallowed    by   respondent     in   his   notice   of   deficiency    were

subsequently conceded fully or in large measure by respondent. The

Nortons were not tax sophisticated.           As a result, they actively

sought assistance in determining their tax liability.                Although

some   of   that   advice   was   inaccurate,   we    accept   Mr.   Norton’s

testimony that they reasonably relied upon the advice of two

attorneys as well as their tax preparer in reporting their income

and expenses. Moreover, there is nothing in the record to indicate

that the Nortons’ conduct was negligent or undertaken in reckless

disregard of applicable Code sections.          Accordingly, we hold that

the Nortons are not liable for the accuracy-related penalty.

       In reaching our conclusions herein, we have considered all

arguments presented and, to the extent not discussed above, find

them to be irrelevant or without merit.
                        - 21 -

To reflect the foregoing and the concessions of the parties,



                                   Decision will be entered

                              for petitioner in docket No.

                              185-98.



                                   Decision will be entered

                              under Rule 155 in docket No.

                              186-98.
