                          T.C. Memo. 1996-13



                        UNITED STATES TAX COURT



      SOUTHERN BOILER SALES & SERVICE, INC., Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18272-93.               Filed January 22, 1996.




     Mathew E. Bates, for petitioner.

     Amy Dyar Seals, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     PARKER, Judge:     Respondent determined deficiencies in

petitioner's corporate Federal income tax and an addition to tax

and penalty as follows:

    Taxable Year                    Addition to Tax     Penalty
       Ending          Deficiency     Sec. 6653(a)     Sec. 6662

      7-31-89          $12,363         $618             --
      7-31-90           21,571          --            $4,314
     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years before

the Court, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     The issues for decision are:   (1) The fair market rental

value of the property leased by petitioner from its president and

sole shareholder, (2) whether some further adjustment to

petitioner's gross receipts is required, and (3) whether

petitioner is liable for the addition to tax for negligence under

section 6653(a) for the taxable year 1989 and for the penalty for

negligence under section 6662 for the taxable year 1990.

                          FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

     Petitioner was located in Pleasant Garden, North Carolina,

at the time it filed its petition in this case.    Petitioner is in

the business of selling, installing, and maintaining boilers,

boiler parts, and supplies.   The business began in 1985 and was

incorporated on September 11, 1987.   Luther Ray Berry (Berry) is

petitioner's president and 100-percent shareholder.

     On March 23, 1989, Berry organized a new corporation,

Southern Boiler Sales and Service No. 2, Inc. (No. 2), to expand

into the business of installing and maintaining pipes.    Berry

owned 100 percent of this corporation as well.    However, the

expansion did not materialize, and the business and activity of
                               - 3 -

No. 2 was the same as that of petitioner.   The parties now agree

that petitioner and No. 2 are really one corporation, and the

notice of deficiency generally has combined the gross receipts,

costs of sales, income, and deductions reported on the corporate

tax returns of the two.

     Petitioner had seven employees, five of whom, including

Berry, were technicians.   The technicians worked at the

customers' sites.

     Since its inception, petitioner has leased property owned by

Berry and his wife (the property) for its offices and parts

department.   Prior to petitioner's use of the property, it had

served as the Berrys' personal residence.   The property consists

of a 2,031-square-foot house and two storage sheds (70 and 130

square feet, respectively) on three-quarters of an acre of land.

     Petitioner stored pipefittings and insulation in the two

sheds.   Welding equipment and a pipe rack stood outside.   The

gravel driveway was large enough to park nine vehicles, including

a van and a 1-ton truck.   Generally, four or five vehicles would

be parked there for some period during a normal business day.

Petitioner had no identifying signs on the property other than

those on the truck when it was parked there.   The property had a

well and septic system and was not served by city water or sewer.

     The property is located on Neelley Road in Pleasant Garden,

North Carolina.   During the years at issue, Pleasant Garden was a

rural community that was becoming increasingly suburban, with the
                               - 4 -

nearby city of Greensboro as its focus.    However, the limited

availability of public water and sewer lines and the

unsuitability of the soil for septic tanks in parts of Pleasant

Garden restricted residential development.    The immediate

neighborhood of the property was a well-established residential

area, with some new development within a mile of the property.

Behind the property, but not part of the property, was a pasture

for grazing cows.

     The property is in an area that was, and as of the time of

the trial continued to be, zoned residential-agricultural.    The

zoning designation was RA-40, residential-agricultural.    The

Guilford County Zoning Ordinance described the RA-40 zoning

district as "a district in which the principal use of the land is

for general suburban-residential and agricultural purposes."      One

of the stated intents of this zoning was "to prohibit scattered

commercial and industrial uses of land".

     Regardless of the zoning, one neighborhood resident operated

an accounting business from his home.   Another resident conducted

a construction and repair business, using his home for the office

functions and performing the construction work at the customers'

sites.   A third resident had a commercial dumpster and several

vehicles parked at his home.   One of the houses in the

neighborhood was used exclusively as a dental office.

Petitioner's use of the property as an office violated the local

zoning ordinance.   Despite the zoning violations by petitioner
                                - 5 -

and other residents, the overall appearance of the neighborhood

was that of a residential community.

     The record does not establish how much rent petitioner

(and/or No. 2) actually paid the Berrys for leasing the

property.1

     The firm of A & F Bookkeepers (A & F) prepared the corporate

tax returns of petitioner and No. 2 for the years at issue.

Petitioner provided A & F with check stubs, bank statements, and

other paperwork in order for it to perform these functions.   The

owner of A & F, Bill Anderson, held himself out as a public

accountant.    No representative of A & F appeared or testified at

the trial or provided any other evidence.

     Petitioner filed Federal corporate income tax returns for

its taxable years ending July 31, 1989, and July 31, 1990,

reporting the following:

              Item         FYE 7-31-89      FYE 7-31-90

     Gross Receipts         $614,178         $513,413
     Costs of Sales         (210,441)         (85,457)
     Interest Income           1,335            1,750
     Other Deductions        (67,269)         (80,552)
     Rental Expense          (15,600)         (14,979)
     Depreciation            (16,851)         (18,399)

     1
        As an attachment to respondent's trial memorandum, there
is a "Schedule of Rent Paid to Shareholder". That schedule was
never authenticated or offered into evidence and thus is not part
of the evidentiary record of this case. There is no evidence in
the record to support the ex parte statements contained in that
schedule or in respondent's post-trial brief. However, the Court
deems respondent to have conceded that petitioner and No. 2 paid
the Berrys at least the amounts of rental expense allowed by
respondent in the notice of deficiency, $8,400 and $8,979 for FYE
7-31-89 and FYE 7-31-90, respectively.
                              - 6 -

No. 2 filed corporate tax returns for its taxable years ending

April 30, 1990, and April 30, 1991, reporting the following:

           Item          FYE 4-30-90      FYE 4-30-91

     Gross Receipts       $248,662            -0-
     Costs of Sales        (47,754)           -0-
     Interest Income         3,861            -0-
     Other Deductions      (94,105)        ($29,303)
     Rental Expense        (11,690)           -0-
     Depreciation             -0-             -0-

Berry gave petitioner's returns and No. 2's returns only a

cursory review prior to signing and filing them.

     On audit, respondent determined that petitioner and No. 2

were one business and combined their gross receipts, costs of

sales, income, and expense items.   It is not clear from the

notice of deficiency, the record in this case, or the parties'

arguments as to exactly how or on what basis (accrual, actual

receipt, and/or overlapping of fiscal years) the gross receipts,

costs of sales, income, and expense items were combined.2

Petitioner has agreed that petitioner and No. 2 are one

corporation and has conceded most of the adjustments in the

deficiency notice.




     2
        We note that the first 3 months of No. 2's FYE 4-30-90
overlapped the last 3 months of petitioner's FYE
7-31-89, and the last 9 months of No. 2's FYE 4-30-90 overlapped
the first 9 months of petitioner's FYE 7-31-90. However, No. 2's
gross receipts, costs of sales, income, and deduction items
apparently were not allocated one-fourth to petitioner's FYE
7-31-89 and three-fourths to petitioner's FYE 7-31-90. The
method of allocation used by respondent and accepted by
petitioner is not disclosed by the record. No. 2 filed only two
tax returns during its brief "existence".
                               - 7 -

     Respondent disallowed portions of the rental expenses

claimed for the years at issue.   The notice of deficiency states

that:


          It is determined that your Rents are $8,400
          and $8,979 instead of $15,600 and $14,979 as
          shown on your income tax returns for the tax
          years 7-31-89 and 7-31-90, respectively.
          Therefore your taxable income is increased in
          the amounts of $7,200 and $6,000 for the tax
          years ended July 31, 1989 and July 31, 1990,
          respectively.

The record does not establish how much rent petitioner and No. 2

actually paid to Berry.   See supra note 1.   No. 2 deducted

$11,690 rental expense on its return for its taxable year ended

April 30, 1990, and this amount was not mentioned in the notice

of deficiency.3

     In total, the notice of deficiency adjusted petitioner's

income as follows:

         Item                 FYE 7-31-89         FYE 7-31-90

     Gross Receipts            $135,934            $200,909
     Cost of Sales              (39,581)             (8,173)
     Interest Income              1,336               2,525
     Other Deductions           (57,585)           (126,540)
     Rental Expense               7,200               6,000
     Depreciation                 6,513               6,513

     The notice of deficiency increased petitioner's gross

receipts by $135,934 for its taxable year ended July 31, 1989,


     3
        Respondent's counsel insists that respondent actually
allowed petitioner rental expense deductions of $12,000 each
year, rather than the $8,400 and $8,979. See supra note 1.
Perhaps this matter can be clarified in the parties' Rule 155
computations.
                               - 8 -

and by $200,909 for its taxable year ended July 31, 1990, for

total gross receipts of $750,112 for 1989 and $714,322 for 1990.

Petitioner stipulated to the additional gross receipts for each

year.   The $135,934 plus the $200,909 totals $336,843, which

includes the full $248,662 of No. 2's gross receipts plus

$88,181.   Respondent determined that $88,181 of gross receipts

deposited in petitioner's bank account during August of 1990

should be removed from petitioner's taxable year ended

July 31, 1991, and included in its taxable year ended July 31,

1990.   The deficiency notice shows that the gross receipts for

the taxable year ended July 31, 1991 were reduced by $88,181.

     The deficiency notice allocated the $47,754 of No. 2's costs

of sales to petitioner, $39,581 to its taxable year ended

July 31, 1989, and $8,173 to its taxable year ended July 31,

1990.   The record does not indicate the basis for the allocation.

That adjustment increased petitioner's deductions for costs of

sales from $210,441 to $250,022 and from $85,457 to $93,630 for

those years, respectively.   Petitioner has not challenged that

adjustment.

     Of the $3,861 of interest income No. 2 reported on its

return for taxable year ending April 30, 1990, the deficiency

notice allocated $1,336 to petitioner's income for its taxable

year ended July 31, 1989, and $2,525 to its taxable year ended

July 31, 1990, thus increasing petitioner's total interest income

to $2,671 and $4,275 for those respective years.   The record does
                               - 9 -

not explain the basis of the allocation between the 2 years.

Petitioner stipulated to those additional amounts of interest

income.

     Of the other deductions of $94,105 No. 2 deducted for its

taxable year ended April 30, 1990, and $29,303 for its taxable

year ended April 30, 1991, the deficiency notice increased

petitioner's other deductions by $57,585 for a total of $124,854

for its taxable year ended July 31, 1989, and by $126,540 for a

total of $207,092 for its taxable year ended July 31, 1990.

These total increased other deductions of $184,125 exceed No. 2's

claimed total other deductions by an amount of $60,717.    The

record does not explain the source of these additional

deductions, but neither party has challenged this adjustment.

     Petitioner deducted depreciation of $16,851 for its taxable

year ended July 31, 1989, and $18,399 for its taxable year ended

July 31, 1990.   No. 2 claimed no depreciation deductions.

Respondent disallowed $6,513 of petitioner's claimed depreciation

each year, the portion relating to a Chrysler New Yorker

automobile and a boat.   Petitioner has conceded that adjustment.

     Respondent determined an addition to tax for negligence

under section 6653(a) for the taxable year ended July 31, 1989,

and a penalty for negligence under section 6662(a) for the

taxable year ended July 31, 1990.   Respondent determined the

addition and penalty on the full amounts of the deficiencies,

taking into account the tax shown on the tax returns filed by
                               - 10 -

petitioner for taxable years ending July 31, 1989, and July 31,

1990.    The notice of deficiency apparently did not consider any

part of the $7,165 in tax shown on the return filed by No. 2 for

its taxable year ended April 30, 1990.   Respondent determined

overpayments of tax for petitioner's taxable years 1988 and 1991,

the former due to a loss carryback from 1991 resulting from the

$88,181 reduction in gross receipts for 1991.4




     4
        On October 17, 1994, petitioner filed a motion for leave
to amend petition which the Court denied due to petitioner's
failure to state what issue or issues it wished to raise with
respect to the 1988 and 1991 taxable years. See Rule 34(b)(4)
and (5). Petitioner had proposed to amend its petition to add:

     The Commissioner erred in failing to correctly
     determine the extent to which changes to Petitioner's
     tax liability for its taxable years ended July 31, 1988
     and July 31, 1991 affected Petitioner's tax liability
     for the taxable years ended July 31, 1989 and July 31,
     1990.

Petitioner alleged no specific supporting facts, only that:

     Re-determinations of Petitioner's tax liabilities for
     its taxable years ended July 31, 1988 and July 31,
     1991, or changes which the Commissioner should have
     made but failed to make to said taxable years, will
     affect Petitioner's tax liabilities for the years over
     which the Court has jurisdiction, being the fiscal
     years ending July 31, 1989 and July 31, 1990.

In denying petitioner's motion for leave to amend, the Court's
order of October 19, 1994, stated:

     The Proposed Amendment to Petition is extremely vague
     and fails to state what issue or issues petitioner
     wishes to raise in regard to the 1988 and 1991 taxable
     years.

Petitioner has never clarified any such issues.
                               - 11 -

     In preparation for trial, both parties caused the rental

property to be appraised.    Petitioner's appraiser did not appear

at the trial, and his report was not received into evidence.

Although Berry testified regarding the property's description and

use, petitioner offered no evidence of the property's fair market

rental value.

     Respondent's expert, Daniel G. Barker (Barker), appraised

the fair market rental value of the leased property at $8,300 per

year.   Respondent served a copy of Barker's report on petitioner

on October 26, 1994.    Petitioner did not dispute Barker's

qualifications as an expert witness or his methodology.

Respondent's trial memorandum indicated that she would move to

amend the pleadings to conform to the proof and request an

increased deficiency.

     Barker based his appraisal on the highest and best use of

the property as residential property.    He considered the property

too small to rent for agricultural use, the only other use

permitted by the zoning.    Using the market comparison approach,

Barker considered four residential rental properties, three of

which were located within Greensboro city limits, as comparables.

     According to Barker, the Neelley Road property was in better

condition, slightly larger in size, and in a more attractive

neighborhood that any of the comparable properties.    However,

Barker believed that properties located in or near Greensboro

would be in greater demand because of proximity to employment,
                               - 12 -

shopping, and services, and thus would command higher rents than

those in Pleasant Garden.    Adjusting for location, size, and

condition, Barker calculated the comparables' annual rents to be

$7,521, $7,950, $8,280, and $8,280.

     To corroborate this method, Barker also used the cost

approach of valuation.   Using the mid-range of the sales prices

of four lots facing Neelley Road ($22,500) and valuing the

improvements to the property according to the Marshall & Swift

Residential Cost Handbook ($57,798), Barker determined a total

property value of $80,298.    To this value, Barker applied a

discount rate of 10 percent, which he derived from listings of

lease-to-own residential properties, to reach a rent of $8,030.

This value was within the range of rents calculated under the

market comparison approach.    Using the comparable rents as the

most reliable indicator of fair market rental, Barker appraised

the annual rental value of the property at $8,300.5




     5
        After trial, respondent filed a motion for leave of court
to file amendment, which the Court granted. Respondent's amended
answer to the petition asserted $8,300 as the yearly fair market
rental value of the property and increased petitioner's
deficiencies in income tax to $13,621 and $23,014, for FYE 7-31-
89 and FYE 7-31-90, respectively, the addition for taxable year
1989 to $681, and the penalty for taxable year 1990 to $4,603.
Given that the original notice of deficiency allowed rents of
$8,400 and $8,979 for the taxable years 1989 and 1990,
respectively, the disproportionate increases in the deficiencies
($1,258 and 1,443) indicate that respondent may not have used
$8,300 in recalculating petitioner's taxable income, or may have
relied on her contention that respondent had allowed rents of
$12,000 each year. See supra note 3. The proper deficiency
amounts can be calculated in the Rule 155 proceedings.
                               - 13 -

                              OPINION

Fair Market Rental Value

     Section 162(a)(3) provides that a taxpayer may deduct all

the ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business, including:

     rentals or other payments required to be made as a
     condition to the continued use or possession, for
     purposes of the trade or business, of property to which
     the taxpayer has not taken or is not taking title or in
     which he has no equity.

Section 162(a)(3) by its terms does not limit deductions for

rental payments to a "reasonable" amount, but when the lessor and

lessee have a close relationship and no arm's-length dealing

between them, an inquiry into what constitutes reasonable rental

is necessary to determine whether the sum paid exceeds what the

lessee would have been required to pay had he dealt at arm's

length with a stranger.    Sparks Nugget v. Commissioner, 458 F.2d

631, 635 (9th Cir. 1972), affg. T.C. Memo. 1970-74; Place v.

Commissioner, 17 T.C. 199, 203 (1951), affd. per curiam 199 F.2d

373 (6th Cir. 1952).   The taxpayer must establish that the sums

paid were in fact rentals that he would have been required to pay

in an arm's-length deal; to do so, he must show the amounts paid

were reasonable.   Place v. Commissioner, supra at 204.

     The fair market value of a property must reflect the highest

and best use of the property on the relevant valuation date.

Estate of Juden v. Commissioner, 865 F.2d 960, 963 (8th Cir.

1989), affg. T.C. Memo. 1987-302; Stanley Works & Subsidiaries v.
                              - 14 -

Commissioner, 87 T.C. 389, 400 (1986).    The highest and best use

is the "reasonable and probable use that supports the highest

present value".   Symington v. Commissioner, 87 T.C. 892, 897

(1986).   The fair market value is not affected by whether the

property is put to its highest and best use; the realistic,

objective potential uses control its valuation.     Stanley Works &

Subsidiaries v. Commissioner, supra.     If existing zoning

restrictions preclude a more profitable use, ordinarily such use

should not be considered.   United States v. Meadow Brook Club,

259 F.2d 41, 45 (2d Cir. 1958).   If the possibility of a zoning

reclassification is a reasonable one, however, this is an element

that can be taken into account.   Id.; Frazee v. Commissioner, 98

T.C. 554, 564 (1992).

     Petitioner's position is that the amounts of $15,500 and

$14,979 deducted as rental expenses on its 1989 and 1990 returns,

respectively, were reasonable.6   Respondent asserts through her

amended answer that the fair market rental value of the property

was $8,300 per year, that petitioner's rental deductions should

be limited to this value, and that respondent is entitled to

increased deficiencies and additions (penalties).7

     6
        Presumably petitioner concedes the $11,690 in rent
deducted on the return filed as No. 2. See supra notes 1, 3.
     7
        Petitioner, in its brief, has questioned whether the
Court should have allowed respondent to amend her answer to
conform to the proof after the conclusion of the trial.
Petitioner can claim no surprise or prejudice. The fair market
rental value of the property has always been at issue, respondent
                                                   (continued...)
                               - 15 -

     Generally, the notice of deficiency is presumed to be

correct, and petitioner has the burden of showing otherwise.

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

where respondent has asserted an increased deficiency, she has

the burden of proof on that increase.    Rule 142(a).   The effect

of respondent's amended answer, thus, is that respondent has the

burden of showing that the fair market rental value of the

property was less than that allowed in the notice of deficiency,

while petitioner must show it was greater.    See supra notes 1, 3.

     Petitioner argues that Barker's valuation is so close to the

figures in the notice of deficiency that his expert report should

be excluded from evidence on the basis that it is immaterial.

Petitioner hopes that the Court, after excluding this report,

will accept Berry's testimony as proof that the rents of $15,600

and $14,979 were reasonable.   Berry did not testify about the

rental deductions, and petitioner offered no proof as to the fair

market rental value of its property.

     This Court is "the trier of the facts, the judge of the

credibility of witnesses and of the weight of the evidence, and

the drawer of appropriate inferences."    Hamm v. Commissioner, 325


     7
      (...continued)
served a copy of her expert's report on petitioner well in
advance of the trial, and respondent's trial memorandum made
reference to the possibility of filing just such a motion. Katz
v. Commissioner, T.C. Memo. 1989-191; see Estate of Horvath v.
Commissioner, 59 T.C. 551, 555 (1973). Under these
circumstances, it was appropriate for the Court to grant
respondent leave to amend her answer.
                              - 16 -

F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo. 1961-347.       The

determination of fair market value is a question of fact.

McGuire v. Commissioner, 44 T.C. 801, 812 (1965).     "Such a

[factual] determination is one that is entitled to be made on all

the elements of the particular case."    Silverman v. Commissioner,

538 F.2d 927, 933 (2d Cir. 1976) (quoting Heil Beauty Supplies v.

Commissioner, 199 F.2d 193, 195 (8th Cir. 1952)), affg. T.C.

Memo. 1974-285.   An expert's opinion may be of assistance to the

Court, but the Court may reach a determination of value based

upon its own analysis of all the evidence in the record.

Silverman v. Commissioner, supra at 933.

     Barker's report explains his methodology and the factual

basis for his conclusions in compliance with the requirements of

Rule 143(f) regarding expert witness reports.    We admitted

Barker's report into evidence and do not choose to disregard it,

as petitioner seems to suggest.

     Petitioner has accepted Barker as an expert in real estate

appraisal and has not contested the substance of his testimony.

Berry testified only to a description of the property and that it

served as petitioner's offices and storage space in spite of its

noncompliance with local zoning.   The evidence suggests no

possibility of rezoning during the years at issue or in the

foreseeable future.   Petitioner has offered no evidence of the

property's fair market rental value.    We find the fair market

rental value of the property to be $8,300 per year.
                                  - 17 -

Gross Receipts

     a.     August 1990 Bank Deposits of $88,181

     This issue was not raised in the assignment of errors in the

petition nor in petitioner's trial memorandum or supplemental

trial memorandum, and the issue probably should be treated as

conceded by petitioner.     Rule 34(b)(4).    However, without

objection from respondent, it was raised in petitioner's opening

statement at the beginning of the trial and will be treated as

tried by consent of the parties.      Petitioner requests the Court

to make an ultimate finding of fact that respondent erroneously

increased its income for its taxable year ended July 31, 1990, by

this $88,181 amount.

     The parties agree that $88,181 in checks were deposited in

petitioner's bank account in August of 1990, were reported as

part of gross receipts for its taxable year ended July 31, 1991,

and on audit by respondent were removed from that year and

included as gross receipts for the taxable year ended July 31,

1990.     There agreement ends.

     The parties disagree as to whether petitioner is a cash

basis or an accrual basis taxpayer.        At trial, in response to the

Court's direct question, respondent's counsel advised the Court

that petitioner was a cash basis taxpayer.       The Court was not

advised otherwise thereafter during the trial.       In its post-trial

brief, petitioner argues that as a C corporation it necessarily

had to be on the accrual method of accounting, citing section
                                - 18 -

448(a)(1).     However, section 448(b)(3) provides an exception for

C corporations with gross receipts of less than $5,000,000.

     The record does not establish whether petitioner is a cash

basis or an accrual basis taxpayer.      Berry, petitioner's

president and sole shareholder, was not asked about the matter.

While petitioner characterizes the issue as whether or not

petitioner was an accrual basis taxpayer, it seems to be simply a

matter of constructive receipt of income.      Berry testified that

he deposited the corporation's checks in the bank and that in his

view the funds were not available to his corporation until he

made such deposits.     If, prior to August 1, Berry had in his

possession checks in payment of work performed by the corporation

prior to August 1, the fact that he did not deposit such checks

into the bank account until early August would be irrelevant.

The income would have been constructively received by the

corporation prior to August 1 whether petitioner was a cash basis

or an accrual basis taxpayer.

     We hold that petitioner has not established that respondent

erred in shifting the gross receipts of $88,181 from its taxable

year ended July 31, 1991, to its taxable year ended July 31,

1990.     Indeed, as will be discussed below, petitioner has in

effect stipulated to this adjustment.

     b. Any August 1989 Bank Deposits to be Shifted
        from FYE 7-31-90 to FYE 7-31-89

        While no issue was raised in the petition as to the $88,181

August 1990 bank deposits, petitioner did assign as error
                              - 19 -

respondent's failure to make a similar adjustment for August 1989

bank deposits.

     In paragraph 4.(h) of its petition to the Court, petitioner

assigned as error the following:

          The Commissioner erred in failing to reduce gross
     receipts for Petitioner's taxable year ended July 31,
     1990 [8-01-89 to 7-31-90], by amounts deposited to
     Petitioner's bank account during August of 1989 which
     represent payment of work performed by the Petitioner
     during its fiscal year ended July 31, 1989 [8-01-88 to
     7-31-89]. [Bracketed material added by the Court.]

Respondent denied that allegation in the answer and at trial

asserted that petitioner had never submitted any substantiation

as to any such August 1989 bank deposits that should be shifted.

Petitioner still has not submitted any substantiation.

     At trial petitioner presented Berry's testimony and

proffered No. 2's bank statement for August of 1989.   No. 2's

August 1989 bank statement merely showed that deposits of

$38,906.68 were made that month and that deposits of $17,070.12

were made during the first 3 days of that month, the 3 days about

which petitioner's counsel questioned Berry.   Nothing in that

bank statement served to show the date petitioner received the

checks or when the work was performed.   Petitioner called Berry

as its witness.   As petitioner's president and sole shareholder,

Berry is the individual who should have personal knowledge as to

when work was performed, when payment for such work was received,

and when the payment checks were deposited in the bank.    He was

not asked about these matters in any meaningful way.   Neither
                              - 20 -

Berry's testimony nor the bank statement established that there

was any amount that should be shifted out of the taxable year

ended July 31, 1990, as petitioner asserts.   The Court then

declined to receive No. 2's August 1989 bank statement into

evidence.   The document had no probative value.   Moreover, while

alleging error for its taxable year ended July 31, 1990,

petitioner failed to address the fact that, under its theory, if

gross receipts were taken out of that taxable year, they would

have to be included in the preceding taxable year ended July 31,

1989 (8-01-88 to 7-31-89), when the work was performed.8

     For its taxable year ended July 31, 1989, petitioner

reported on its corporate tax return gross receipts of $614,178

and for its taxable year ended July 31, 1990, reported gross

receipts of $513,413.   Petitioner admitted in paragraph 5.(a) of

its petition that it had those gross receipts for each of those

years.   For its taxable year ended April 30, 1990 (5-01-89 to 4-


     8
        Petitioner's assignment of error (Pet. par. 4.(h)), its
supplemental trial memorandum first identifying the August 1989
bank deposits as a factual dispute for trial, and its post-trial
brief consistently treat this issue as bank deposits made in
August 1989 for work performed during FYE 7-31-89 (8-01-88 to
7-31-89). We note that in par. 5.(h) of the petition where
petitioner alleged facts in support of its assignment of error
(Rule 34(b)(5)), there is some confusion as to the fiscal year or
years from which and to which petitioner seeks to shift gross
receipts. The last sentence of par. 5.(h) seems to suggest that
the August 1989 bank deposits "represent income for the taxable
year ended July 31, 1988." In any event, Berry was not
questioned about any work performed (and/or paid for) during FYE
7-31-89 or during FYE 7-31-88. No. 2 was not organized until
March 23, 1989. Moreover the parties' stipulation of facts
accounts for all gross receipts of both petitioner and No. 2.
                               - 21 -

30-90), No. 2 reported gross receipts of $248,662, and for its

taxable year ended April 30, 1991 (5-01-90 to 4-30-91), reported

zero gross receipts.    In the notice of deficiency respondent

combined the gross receipts of petitioner and No. 2; respondent

increased petitioner's gross receipts for its fiscal year ended

July 31, 1989, from $614,178 to $750,112 for an increase of

$135,934, and for its fiscal year ended July 31, 1990, increased

petitioner's gross receipts from $513,413 to $714,322 for an

increase of $200,909.    Petitioner stipulated to these additional

gross receipts in the amounts of $135,934 and $200,909 for those

respective years.

     The increased gross receipts of $135,934 for the taxable

year ended July 31, 1989, and $200,909 for the taxable year ended

July 31, 1990, to which petitioner stipulated, total $336,843;

that total amount exceeds No. 2's gross receipts of $248,662 by

exactly $88,181.    While the record does not show how or on what

basis No. 2's gross receipts of $248,662 were allocated between

the two taxable years ending July 31, 1989 and 1990, it is clear

that the additional gross receipts to which petitioner stipulated

included all of No. 2's gross receipts plus the $88,181 August

1990 bank deposits that were shifted from petitioner's taxable

year ended July 31, 1991 to its taxable year ended July 31, 1990.

     The parties' stipulation of facts covers all of the gross

receipts of both petitioner and No. 2.    The Court holds

petitioner to the stipulation and is not persuaded that there is
                                - 22 -

any further amount of gross receipts that should be shifted to or

from any of the years.9

Negligence Addition and Penalty

     If any part of any underpayment of tax required to be shown

on a return is due to negligence (or disregard of rules or

regulations), section 6653(a)(1) imposes an addition to tax equal

to 5 percent of the entire underpayment.     Section 6653(c) defined

"underpayment" for this purpose.     For purposes of section

6653(a), the term "negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code.   Sec. 6653(a)(3).    Respondent has determined that

petitioner's deficiency for taxable year ended July 31, 1989, was

due to negligence.

     Section 6662 imposes a penalty on any portion of an

underpayment of tax attributable to negligence or disregard of

rules or regulations.     Sec. 6662(a) and (b)(1).   For purposes of

section 6662, just as for section 6653, negligence includes any

failure to make a reasonable attempt to comply with the internal

revenue laws.   Sec. 6662(c).    Section 6664 defines "underpayment"


     9
        Petitioner has never asked to be relieved of the
stipulation but instead argued that the stipulation merely
combined the gross receipts of petitioner and No. 2. That is not
correct. While petitioner did not cooperate during the pretrial
period and has never submitted any substantiation for any amount
of gross receipts that should be shifted from one year to
another, respondent's counsel offered at trial to consider any
documentation petitioner submitted. Respondent's counsel no
doubt would again extend her gracious offer during the Rule 155
proceedings.
                              - 23 -

for the purpose of this penalty.   However, no penalty will apply

"with respect to any portion of an underpayment if it is shown

that there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion."    Sec.

6664(c).   Respondent has determined the entire amount of

petitioner's deficiency for the taxable year ended July 31, 1990,

was due to negligence.

     Petitioner has provided no evidence of its efforts to comply

with the applicable internal revenue laws other than (1) it used

a bookkeeping service to prepare its Federal income tax returns,

and (2) it made available its check stubs, bank statements, and

other paperwork to that service.   Use of an accountant alone does

not constitute reasonable reliance on that professional's advice.

Ma-Tran Corp. v. Commissioner, 70 T.C. 158 (1978).     The taxpayer

must establish that the correct information was provided to the

accountant and that the items incorrectly claimed or reported in

the return were the result of the accountant's error.     Id. at

173; Enoch v. Commissioner, 57 T.C. 781, 803 (1972).

     Petitioner's deficiencies stemmed from several sources:

filing separate returns for No. 2, inclusion of $88,181 of gross

receipts in an incorrect taxable year, and improper depreciation

and rental expense deductions.   As to the improper depreciation

claimed on the Chrysler New Yorker automobile and the boat each

year, the excessive rental expense deductions each year, and the

$88,181 gross receipts issue for 1990, petitioner has not
                              - 24 -

demonstrated that it supplied adequate information to A & F

regarding any of these items, nor that any portion of those

deficiencies was the result of an error on the part of A & F.

Thus for the taxable year ended July 31, 1989, some part of the

deficiency was attributable to negligence and the negligence

addition applies to the entire underpayment; for the taxable year

ended July 31, 1990, the negligence penalty also applies to the

portions of the underpayment attributable to the depreciation and

rental expense items as well as to the $88,181 gross receipts

item.10

     However, most of the adjustments in the notice of deficiency

flowed from the fact that respondent combined the gross receipts,

costs of sales, interest income, and other deductions of

petitioner and No. 2.   The Court is satisfied that when Berry

organized No. 2 he had to have had legal advice and assistance to

do so, and, with the organization of No. 2, filing separate

corporate returns flowed as a natural consequence.   No. 2 really

only filed one return, the one for its taxable year ended April

30, 1990; the one for its taxable year ended April 30, 1991, just

reported a few deduction items totaling $29,446.   In its petition

to this Court, petitioner acting through its present counsel

asserted that it and No. 2 were separate corporations and that

     10
        In each instance the Court means "underpayment" as
properly defined in sec. 6653(c) and sec. 6664, respectively. We
note that No. 2 reported tax of $7,165 on its return filed for
FYE 4-30-90 that respondent apparently has not taken into
consideration in computing the negligence addition (penalty).
                              - 25 -

each had properly reported the various items separately.     Shortly

before trial petitioner conceded that the two were really a

single corporation and stipulated to (or never challenged) the

adjustments in the notice of deficiency for gross receipts, costs

of sales, interest income, and other deductions.

     Thus, the experiment with No. 2 was brief, and the Court

cannot conclude that it was originally unreasonable or done in

bad faith.   That petitioner's legal position has now been

abandoned and that petitioner has now conceded it and No. 2 were

essentially a single corporation do not automatically mean that

petitioner was negligent or that there was not a reasonable cause

for, and that petitioner did not act in good faith in taking, its

original position.11

     Accordingly, to the extent that any underpayment properly

defined for the taxable year ended July 31, 1990, is attributable

to combining the gross receipts, costs of sales, interest income,

and other deductions of petitioner and No. 2, the Court does not

sustain respondent's determination of a negligence penalty.

     11
        See, however, supra note 8. If petitioner were
contending that some part of the reported gross receipts for the
taxable year ended July 31, 1990, should be reduced by No. 2's
August 1989 bank deposits allegedly representing payment for work
performed during FYE 7-31-88, the Court would conclude otherwise
on the negligence penalty issue. No. 2 was not even organized
until March 23, 1989. The Court does not think that petitioner
could in good faith have thought that income earned by petitioner
during FYE 7-31-88 (8-01-87 to 7-31-88) could be treated as No.
2's gross receipts. However, the Court has not found that any
part of No. 2's August 1989 bank deposits represent gross
receipts to be shifted to another fiscal year, so the Court's
concern becomes moot.
                             - 26 -

However, the Court sustains the negligence penalty for any

underpayment for that year attributable to (1) the $88,181 of

gross receipts that respondent properly shifted from the taxable

year ended July 31, 1991, to taxable year ended July 31, 1990;

(2) depreciation deductions disallowed for the automobile and

boat; and (3) the excessive portion of the rental expense

deduction.

     Based upon the stipulations and the above holdings,


                                   Decision will be entered

                              under Rule 155.
