                  T.C. Summary Opinion 2004-149



                     UNITED STATES TAX COURT



    CLIFFORD L. BRODY AND BARBARA J. DECLERK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6525-03S.             Filed November 1, 2004.


     Clifford L. Brody and Barbara J. DeClerk, pro se.

     Avery Cousins III, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.   The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                              - 2 -

     Respondent determined a deficiency of $25,662 in

petitioners’ Federal income tax and an accuracy-related penalty

under section 6662(a) of $5,132.40 for the 1999 taxable year.

After concessions,1 the issues for decision are:   (1) Whether

amounts paid by petitioners on behalf of a corporation are

allowable as an itemized deduction for unreimbursed employee

expenses; (2) whether other amounts paid by petitioners on behalf

of a corporation are allowable as Schedule C deductions; (3)

whether petitioners are entitled to an ordinary loss under

section 1244; and (4) whether petitioners are liable for the

accuracy-related penalty under section 6662(a).




     1
        Petitioners concede that they are not entitled to a
depreciation and sec. 179 expense deduction of $1,150 claimed on
Schedule C, Profit or Loss From Business, for petitioner DeClerk.
Petitioners further concede that they are not entitled to a
deduction for an unreimbursed employee expense of $1,709 claimed
on Schedule A, Itemized Deductions. The depreciation and sec.
179 expense of $1,150 and the unreimbursed employee expense of
$1,709 were incurred as part of petitioner DeClerk’s employment
with IONA Senior Services during the 1999 taxable year. The
unreimbursed expense of $1,709 comprised a vehicle expense of
$559 and vehicle depreciation of $1,150, the latter of which
duplicates the depreciation and sec. 179 expense deduction
claimed on her Schedule C. In the notice of deficiency,
respondent determined that the vehicle expense and depreciation
should be treated as a charitable contribution deduction of $269.
At the time of trial, petitioners conceded this determination.
                                   - 3 -

                                Background

       Some of the facts have been stipulated, and they are so

found.       The stipulation of facts and the attached exhibits are

incorporated herein by this reference.        At the time the petition

was filed, petitioners resided in Washington, D.C.

       During the 1999 taxable year, petitioner Clifford L. Brody

was the chairman of the board, chief executive officer, and

shareholder of Kids Own America, Inc. (KOA).        As of April 1999,

he owned 134,625 shares of common stock, or 53.37 percent, of

KOA.       Petitioner Brody received from KOA for the 1999 taxable

year a Form W-2, Wage and Tax Statement, which reported “Wages,

tips, other compensation” of $266,083.34.

       Also during the 1999 taxable year, petitioner Barbara J.

DeClerk was the treasurer, secretary, and director of KOA.2         In

addition to her positions at KOA, petitioner DeClerk was also a

fundraiser for IONA Senior Services.         As a fundraiser, she

incurred expenses for clients’ lunches, telephone, and automobile

use.       She received a Form W-2 from IONA Senior Services for the

1999 taxable year.




       2
        John Selvaggio, along with petitioners, was a Director of
KOA. We note that a Confidential Private Placement Memorandum
dated Apr. 1999, for KOA did not list petitioner DeClerk as a
director.
                                   - 4 -

       KOA was a “close corporation”3 incorporated in Delaware on

January 16, 1996.       Petitioners started KOA with the concept that

it would become an Internet content provider, which would allow

customers to redeem frequent flier miles or loyalty points for

nontravel products or services, such as financial and educational

products that benefit children.       KOA, primarily through the work

of petitioner Brody, obtained exclusive contracts with several

entities including, but not limited to, Days Inn of America,

Inc., on March 18, 1999, and Netstock Direct Corp. on August 6,

1999.

       On December 15, 1997, petitioners and KOA, as coborrowers,

obtained a $50,000 loan from Franklin National Bank.       This loan

was secured by petitioners’ personal residence.       While KOA was

listed as a “Co-borrower”, petitioners repaid the loan in full on

April 12, 2000.       The record does not contain information as to

the total amount of loan repayments made in 1999.

       During the year in issue, petitioners sought additional

funding for KOA.       A Confidential Private Placement Memorandum

dated April 1999, noted the following:

       Clifford L. Brody, is Chairman and CEO of the Company.
       Prior to founding KidsOA, Mr. Brody established
       Clifford L. Brody Associates, Inc., a consulting firm
       that served major banks and international corporations
       in the development of new products and services. He
       has provided strategic advisory services to introduce


       3
             The term “close corporation” is defined under Delaware
law.       See Del. Code Ann. tit. 8, sec. 342(a) (2001).
                               - 5 -

    new products and services through the use of electronic
    commerce, the Internet, and off-line processing, as
    well as developed marketing strategies, joint ventures,
    and financing programs to expand domestic and foreign
    markets for Citibank, Avon Cosmetics, Hearst
    Publications, Morgan Guaranty, Hewlett-Packard, Potomac
    Mills, US West, and Cabletron. Mr. Brody has advised
    corporate officers, federal regulators, legislators,
    and financial institutions in the United States and
    abroad on government decision-making as it can affect
    existing financial services industry products and
    services. Mr. Brody has also defined strategies for
    securing favorable government decisions to facilitate
    the expansion of business domestically and
    internationally, and negotiated specific agreements on
    behalf of commercial companies and banks.

    Prior to Clifford L. Brody Associates, he served as a
    career Foreign Service Officer. Mr. Brody was posted
    to U.S. Embassies in Paris, France, and Prague,
    Czechoslovakia, to Secretary of State Henry Kissinger’s
    staff, as liaison between the Department of State and
    Congress, as negotiator for economic agreements with
    the former Soviet and Eastern European governments, and
    as Special Advisor for European Affairs to the Joint
    Congressional-Executive Commission on Security and
    Cooperation in Europe (CSCE). Mr. Brody received a
    B.A. degree from Dickinson College.

                 *    *    *    *      *   *   *

    Dependence On Key Personnel. The Company is managed by
    a small number of key executive officers, most notably
    Clifford L. Brody, the Company’s Chairman Chief [sic]
    Executive Officer. The loss of services of one or more
    of these key individuals, particularly Mr. Brody, could
    materially and adversely affect the business of the
    Company and its prospects. The Company believes that
    its success will depend in large part on its ability to
    attract and retain highly skilled and qualified
    personnel. None of the executive officers of the
    Company have [sic] employment agreements and the
    Company does not maintain key person life insurance for
    any of its executive officers.

The Confidential Private Placement Memorandum was supplemented in

October 1999.
                                - 6 -

     Notwithstanding the representations in the Confidential

Private Placement Memorandum, “key man insurance” was obtained at

some point.4   KOA was the beneficiary of the policy, and while

not required by KOA, petitioners paid the insurance premiums on

the key man insurance policy.

     In August 2001, KOA merged with e-Redeem, Inc., a Delaware

corporation in which petitioner Brody served as President.    In

letters to shareholders of KOA dated May 31, 2001, petitioner

Brody proposed that said shareholders would receive an aggregate

of 49.568 percent of the fully diluted capital stock of the

merged entity.

     Petitioner Brody, who has a background in accounting,

prepared KOA’s Form 1120-A, U.S. Corporation Short-Form Income,

for the 1999 taxable year (1999 corporate return).    KOA claimed

deductions for repairs and maintenance of $13,186 and for rents

of $44,762.    KOA did not report any loans from shareholders.

     Petitioner Brody also prepared petitioners’ Form 1040, U.S.

Individual Income Tax Return, for the 1999 taxable year (1999 tax

return).   Petitioners did not file a Form 4797, Sales of Business

Property, with their 1999 tax return.




     4
        The parties did not provide the Court with a copy of the
insurance policy.
                               - 7 -



They did, however, attach a Schedule A, Itemized Deductions, to

report the following unreimbursed employee expenses:

     Professional subscriptions                      $1,098.10
     Key man insurance                                2,335.00
     Personal LC to pay KidsOA bills                 50,000.00
     Brody’s vehicle expense                          5,059.00
     DeClerk’s car depreciation expense               1,150.00
     DeClerk’s car expense for business use             559.00
      Total                                         $60,201.10

Petitioners also attached two Schedules C, Profit or Loss From

Business, to their 1999 tax return.    One Schedule C pertained to

petitioner DeClerk’s “Principal Business or Profession” of “Fund

Raising” and reported a depreciation and section 179 expense

deduction of $1,150.   The other Schedule C reported petitioner

Brody’s “Principal Business or Profession” as a “Service:

Incubator” and claimed the following expenses as deductions:

     Repairs and maintenance                             $4,367
     Office space & expenses paying
          for KOA employees                              33,911
     Interest on funds borrowed to pay KidsOA bills       5,016
      Total expenses                                    $43,294

     In the notice of deficiency, respondent determined that

petitioners were not entitled to itemized deductions for

unreimbursed employee expenses regarding the key man insurance,

loan, and petitioner Brody’s vehicle expense.5   Respondent also


     5
        In the notice of deficiency, respondent determined that
petitioners were entitled to an itemized deduction for the
professional subscriptions. As we indicated earlier, petitioners
concede that they are not entitled to itemized deductions for
                                                   (continued...)
                                - 8 -

determined that petitioners are not entitled to the Schedule C

deductions as a “Service: Incubator”.6    Respondent contends that

these expenses are allowable as deductions to KOA but not to

petitioners individually.    Petitioners contend otherwise and

further contend that they are entitled to an ordinary loss in

1999 under section 1244.

                             Discussion

     Deductions are a matter of legislative grace, and a taxpayer

generally bears the burden of proving that he or she is entitled

to the deductions claimed.    See Rule 142(a); INDOPCO, Inc. v.

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

Helvering, 292 U.S. 435 (1934).    The taxpayer is required to

maintain records that are sufficient to enable the Commissioner

to determine his correct tax liability.    See sec. 6001; sec.

1.6001-1(a), Income Tax Regs.    In addition, the taxpayer bears

the burden of substantiating the amount and purpose of the

claimed deduction.   See Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).




     5
      (...continued)
petitioner DeClerk’s car depreciation expense of $1,150 and her
car expense of $559.
     6
        As indicated earlier, petitioners concede that they are
not entitled to petitioner DeClerk’s Schedule C deduction of
$1,150.
                                 - 9 -

     While examination of petitioners’ 1999 tax return commenced

after July 22, 1998, neither of the parties has addressed the

applicability of section 7491(a) regarding the burden of proof.

Petitioners have not offered any evidence that they satisfied any

of the criteria of section 7491(a)(2)(A) and (B).       Accordingly,

we conclude that the burden of proof remains on petitioners.

Unreimbursed Employee Expenses

     Petitioners deducted the following as unreimbursed employee

expenses on their 1999 tax return:       (1) Key man insurance

premiums of $2,335; (2) petitioner Brody’s vehicle expense of

$5,059; and (3) Personal LC to pay KOA bills of $50,000.00.

     General Principles

     Section 162(a) allows a deduction for all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including a taxpayer’s trade

or business as an employee.   See Primuth v. Commissioner, 54 T.C.

374, 377-378 (1970).   An employee, however, is not entitled to a

deduction for an expense if the employee has a right of

reimbursement from his or her employer, because the employee’s

expenditure is not “necessary”.     Heidt v. Commissioner, 274 F.2d

25, 28 (7th Cir. 1959), affg. T.C. Memo. 1959-31; Lucas v.

Commissioner, 79 T.C. 1, 7 (1982).       As we stated in Stolk v.

Commissioner, 40 T.C. 345, 356 (1963), affd. per curiam 326 F.2d

760 (2d Cir. 1964):    “These charges were business expenses of the
                                - 10 -

* * * [corporations] and [the taxpayer] cannot convert * * * [the

corporate] expenses into his own by failing to claim repayment,

even though paid by him.”   See also Orvis v. Commissioner, 788

F.2d 1406 (9th Cir. 1986), affg. T.C. Memo. 1984-533; Coplon v.

Commissioner, 277 F.2d 534 (6th Cir. 1960), affg. T.C. Memo.

1959-34.

     As a general rule, a taxpayer’s payment of another person’s

obligation is not an ordinary and necessary business expense.

Deputy v. du Pont, 308 U.S. 488 (1940).       Under this rule, a

shareholder, even a majority or sole shareholder, is not entitled

to deduct his or her payments of the corporation’s expenses.

Rink v. Commissioner, 51 T.C. 746, 751 (1969); Willits v.

Commissioner, T.C. Memo. 1999-230.       For Federal income tax

purposes, a corporation is recognized as a separate taxable

entity from its shareholders.    See Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 438-439 (1943).       Because a

corporation’s business is distinct from that of its shareholders,

officers, and employees, such persons may not deduct expenses

which promote the business of the corporation.       Leamy v.

Commissioner, 85 T.C. 798 (1985); Kahn v. Commissioner, 26 T.C.

273 (1956); Das v. Commissioner, T.C. Memo. 1998-353.

     In the present case, the loan from Franklin National Bank

was used not to pay petitioners’ expenses, but to pay those of
                                - 11 -

KOA.    KOA’s expenses included its corporate bills and premiums

for key man insurance.

(1) Key Man Insurance

       While the record does not contain a copy of the key man

insurance policy, such insurance is generally understood to be

life insurance taken out by a company on an essential or valuable

employee, with the company as the beneficiary, as is the case

here.    See Black’s Law Dictionary 945 (8th ed. 2004).

Petitioners are not entitled to deduct the payments representing

insurance premiums.

(2) Vehicle Expense

       We now consider petitioner Brody’s claimed vehicle expense

deduction of $5,059.     Deductions for travel and transportation

expenses otherwise allowable under section 162(a) are subject to

strict substantiation requirements.      See sec. 274(d)(1); sec.

1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).    The record does not contain any evidence indicating

whether KOA had a reimbursement policy for employee travel

expenses or that petitioner Brody complied with the

substantiation requirements.     Respondent’s disallowance of this

deduction is sustained.

(3) Loan/Debt

       In general, there is allowed as a deduction “any debt which

becomes worthless within the taxable year.”      Sec. 166(a)(1).    It
                              - 12 -

is axiomatic that such deductions, if otherwise allowable, are

allowed to the taxpayer to whom the debt is owed.    See Sundby v.

Commissioner, T.C. Memo. 2003-204.     In this case, petitioners

cannot claim their unreimbursed employee deduction of the $50,000

loan as a bad debt deduction under section 166.    The record also

does not contain any evidence indicating a personal loan of

$50,000 from petitioners to KOA.    They are not the taxpayers to

whom the debt is owed.   Indeed, KOA did not report any loans from

shareholders in its 1999 corporate return.

     Petitioners contend, however, that they were entitled to a

deduction for the repayment of the $50,000 loan from Franklin

National Bank because of their role as guarantors in that the

loan repayments were necessary to protect petitioner Brody’s KOA

salary.   As a general rule, a guarantor may be entitled to a bad

debt deduction in two situations.    The first situation arises

when payments giving rise to the debt are not required under a

guaranty but are involuntary in the sense that they were

necessary in the exercise of sound business judgment to protect

existing property rights.   Arrigoni v. Commissioner, 73 T.C. 792,

799 (1980); Martin v. Commissioner, 38 T.C. 188, 191-192 (1962).

The second situation arises when the guarantor is compelled to

pay on the guaranty and the payment gives rise to a claim, which

if worthless, constitutes a bad debt.     Estate of Rapoport v.

Commissioner, T.C. Memo. 1982-584.     In the situation when a
                                - 13 -

payment is compelled, the fact that the guarantor of the

corporate debt is also a shareholder and employee of the

corporation does not preclude the guarantor from a bad debt

deduction so long as the dominant motivation for the guaranty was

to protect his or her salary.    United States v. Generes, 405 U.S.

93 (1972).   The reason for either situation is that, upon payment

by the guarantor, the debtor’s obligation to the creditor becomes

an obligation to the guarantor, not a new debt, and by

subrogation the guarantor steps into the shoes of the creditor.

Putnam v. Commissioner, 352 U.S. 82, 85 (1956).     No deduction is

allowable, however, if at the time the guaranty was made, the

taxpayer had no reasonable expectation of repayment of the sums

advanced.    Hoyt v. Commissioner, 145 F.2d 634 (2d Cir. 1944);

Thompson v. Commissioner, 22 T.C. 507 (1954).

     The record does not support petitioners’ contention that

loan payments in 1999 were necessary to protect petitioner

Brody’s salary of $266,083 from KOA.     Petitioners were compelled

to make their loan repayments to Franklin National Bank not as

guarantors, but as debtors.   Petitioners were listed as “co-

borrowers” and thus were liable in the first instance.    However,

even if we were to assume that loan repayments were made by

petitioners as guarantors, nothing in the record indicates that

petitioners would have had a worthless claim against KOA, since

KOA paid petitioner Brody’s salary in 1999 in the amount of
                              - 14 -

$266,083.   In contrast, his salary was $17,708 in 1997, the year

in which petitioners secured the loan, and his salary was

$132,082 in 1998.   Moreover, petitioner Brody was not required to

provide a guaranty on the loan as a condition of his employment

with KOA.   See Rev. Rul. 71-561, 1971-2 C.B. 128.   Because

petitioners repaid the loan in their role as debtors and not as

guarantors, or because there is no evidence that any claim by

petitioners against KOA would be worthless, United States v.

Generes, supra, is distinguishable, and petitioners’ dominant

motivation is irrelevant.   We sustain respondent’s determination

on this issue.

Schedule C Deductions

     Petitioners claimed the following expenses on petitioner

Brody’s Schedule C:   (1) $4,367 for repairs and maintenance; (2)

$33,911 for “Office Space & Expenses paying for kidsOA [sic]

Employees”; and (3) $5,016 for “Interest on funds borrowed to pay

KidsOA bills”.   All of these expenses relate to KOA.   As

indicated earlier, the only evidence of funds borrowed in the

present case is the loan by Franklin National Bank to petitioners

and KOA.

     A taxpayer who pays expenses of a corporation in which he is

the principal shareholder may deduct such payments if they were

made to protect or promote the taxpayer’s own trade or business.

Lohrke v. Commissioner, 48 T.C. 679, 684-685 (1967); Dietrick v.
                                - 15 -

Commissioner, T.C. Memo. 1988-180.       In the present case, there is

no evidence that petitioner Brody operated a trade or business

during the 1999 taxable year.     He was instead the chairman of the

board, chief executive officer, and shareholder of KOA.      We also

note that, while petitioners claimed Schedule C deductions for

repairs and maintenance and for “Office Space & Expenses paying

for kidsOA [sic] Employees”, KOA also claimed deductions on its

1999 corporate return for repairs and maintenance and for rents.

     As indicated earlier, petitioners claimed a Schedule C

deduction of $5,016 for “Interest on funds borrowed to pay KidsOA

bills”.   In general, a taxpayer is entitled to a deduction on all

interest paid or accrued within the taxable year on indebtedness.

Sec. 163(a).   An exception arises with respect to personal

interest.    Sec. 163(h)(1).   Interest paid or accrued on

indebtedness properly allocable to the trade or business of

performing services as an employee constitutes personal interest

and thus may not be deducted.     See sec. 163(h)(2)(A).   With

certain limitations, an individual taxpayer may deduct investment

interest.7   Sec. 163(d), (h)(2)(B).     To qualify as investment

interest, however, the interest must be paid on indebtedness

allocable to an interest held by the taxpayer in an activity



     7
        Under sec. 163(d)(1), an individual taxpayer can deduct
investment interest only to the extent of net investment income.
Unless petitioners reported investment income, no investment
interest would be deductible in any event.
                              - 16 -

involving the conduct of a trade or business in which the

taxpayer does not materially participate.   Sec.

163(d)(5)(A)(ii)(II).

     In the present case, petitioners are not entitled to deduct

the $5,016 in interest.   Petitioner Brody is in the trade or

business of being an employee of KOA and not of lending money.

Accordingly, the interest paid by petitioners on the loan from

Franklin National Bank constitutes personal interest and,

consonant with section 163(h)(2)(A), may not be deducted by

petitioners.   Nor may petitioners deduct the interest paid as

investment interest under section 163(d), because petitioners

materially participated in KOA.

     We sustain respondent’s determination that petitioners are

not entitled to the claimed deductions on his Schedule C.

Loss Under Section 1244

     An individual taxpayer may claim a limited ordinary loss

deduction for a loss sustained on the sale, exchange, or

worthlessness of section 1244 stock.   Sec. 1244(a).   Respondent

contends that petitioners’ stock in KOA did not constitute

section 1244 stock because, among other things, KOA did not

satisfy the “gross receipts” test under section 1244(c)(1)(C).

We need not address respondent’s contention because the record

does not indicate any loss was sustained in 1999 regarding stock

of KOA.   Petitioners did not file a Form 4797, Sales of Business
                                  - 17 -

Property, to report any loss under section 1244 on their 1999 tax

return.     Nor could they.   During the year in issue, KOA entered

into contracts with Days Inn of America, Inc. and Netstock Direct

Corp.     In August 2001, KOA merged into e-Redeem, Inc., via a

proposal that KOA’s shareholders would receive an aggregate of

49.568 percent of the fully diluted capital stock of the merged

entity.     These factors weigh against a finding of worthlessness

of KOA stock in 1999.      While such facts may not preclude a

finding of worthlessness, they do place upon petitioners the duty

to offer more than their own testimony and the corporate books to

support their view.       See Jacobowitz v. Commissioner, T.C. Memo.

1968-261.     On this issue we hold for respondent.

Accuracy-Related Penalty Under Section 6662(a)

        The final issue is whether petitioners are liable for an

accuracy-related penalty under section 6662(a) for the 1999

taxable year.     An accuracy-related penalty “applies to any

portion of an underpayment of tax required to be shown on a

return” where such portion is attributable to either (1)

negligence of disregard of rules or regulations or (2) a

substantial understatement of tax.         Sec. 6662(a), (b)(1), (2).

The term “negligence” includes any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code.     Sec. 6662(c).    The term “disregard” includes any careless,

reckless, or intentional disregard.         Id.   An understatement of
                               - 18 -

tax is substantial if it exceeds the greater of 10 percent of the

tax required to be shown on the return, or $5,000.    Sec.

6662(d)(1) and (2).   Respondent has the burden of production with

respect to the accuracy-related penalty.   See sec. 7491(c).

     An exception to the section 6662 penalty applies when the

taxpayer demonstrates:   (1) There was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment.   Sec. 6664(c).8   Whether the

taxpayer acted with reasonable cause and in good faith is

determined by the relevant facts and circumstances on a

case-by-case basis.   See Stubblefield v. Commissioner, T.C. Memo.

1996-537; sec. 1.6664-4(b)(1), Income Tax Regs.    “Circumstances

that may indicate reasonable cause and good faith include an

honest misunderstanding of fact or law that is reasonable in

light of all the facts and circumstances, including the

experience, knowledge and education of the taxpayer.”    Sec.

1.6664-4(b)(1), Income Tax Regs.   A taxpayer is not subject to

the addition to tax for negligence where the taxpayer makes

honest mistakes in complex matters, but the taxpayer must take

reasonable steps to determine the law and to comply with it.

Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).       The most

important factor is the extent of the taxpayer’s effort to assess


     8
        This section may provide relief even if a return position
does not satisfy the reasonable basis standard. Sec. 1.6662-
3(b)(3), Income Tax Regs.
                               - 19 -

the proper tax liability.    Stubblefield v. Commissioner, supra;

sec. 1.6664-4(b)(1), Income Tax Regs.

     Respondent has met his burden of production with respect to

the accuracy-related penalty under section 6662(a).   After

sustaining the determinations made by respondent in regard to

petitioners’ 1999 Federal income tax return, petitioner is liable

for a deficiency in excess of $25,000.   As such, petitioner is

liable for an accuracy-related penalty attributable to a

substantial understatement of tax.

     In regard to the section 6664 exception, we find that

petitioners did not act with reasonable cause and in good faith.

Petitioner Brody, who has a background in accounting, prepared

the 1999 corporate return for KOA and the 1999 tax return for

petitioners.   Petitioner DeClerk’s car depreciation expense was

claimed twice on the 1999 tax return, once as part of their

itemized deductions on Schedule A and again as a deduction on her

Schedule C.    Petitioners claimed on their 1999 tax return various

deductions associated with a purported loan between KOA and

petitioners; however, KOA did not report any loans from

shareholders on its 1999 corporate return.   Based upon these

facts and circumstances, and indeed the entire record, we find

that petitioners did not take reasonable steps to comply with

reporting of income and deductions and did not act in good faith.

Accordingly, we sustain respondent’s determination with respect
                             - 20 -

to the accuracy-related penalty under section 6662(a).

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                   for respondent.
