                           T.C. Memo. 1996-51



                        UNITED STATES TAX COURT



            EDDIE M. AND CYNTHIA L. CHANDLER, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 1564-94.              Filed February 13, 1996.



        Samuel Robert McCord, for petitioners.

        Linda J. Wise, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION



        ARMEN, Special Trial Judge:   This case was assigned pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

        1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
     Respondent determined deficiencies in petitioners' Federal

income taxes for the taxable years 1989 and 1990, as well as an

addition to tax and a penalty, as follows:

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

         1989      $3,132           ---            $626
         1990       4,521          $541            $904


     After a concession by petitioners,2 the issues for decision

are as follows:

     (1) Whether petitioners or respondent bears the burden of

proof with respect to respondent's deficiency determinations;

     (2) whether petitioners understated their income on their

1989 and 1990 income tax returns by $11,149 and $15,236,

respectively;

     (3) whether petitioners are liable for an addition to tax

for failure to timely file under section 6651(a)(1) for 1990; and

     (4) whether petitioners are liable for an accuracy-related

penalty for negligence under section 6662(a) for 1989 and 1990.

     Finally, whether petitioners are liable for self-employment

taxes for 1989 and 1990 (and if so, the correlative amount of the


Practice and Procedure.

     2
       Neither at trial nor on brief did petitioners contest
respondent's determination that they received unreported interest
income in the amount of $67 from Family Savings Federal Credit
Union in 1989. Accordingly, petitioners are deemed to have
conceded this adjustment to their income. Murphy v.
Commissioner, 103 T.C. 111, 120 (1994); Smith v. Commissioner,
T.C. Memo. 1994-188, affd. without published opinion 61 F.3d 31
(11th Cir. 1995).
                          - NEXTRECORD   -

deduction under section 164(f) to which they are entitled for

1990) and whether petitioners are entitled to an earned income

credit for 1990 are derivative issues, the resolution of which

depends on our disposition of the second issue enumerated above.

                         FINDINGS OF FACT

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

found.   Petitioners resided in Piedmont, Alabama, at the time

that their petition was filed with the Court.

     For 1989 and 1990, the taxable years in issue, petitioners

were married and filed joint income tax returns.    They have three

children, two sons and a daughter, who were born in 1985, 1986,

and 1987.

     In 1989 and for a short period in 1990, petitioner Eddie M.

Chandler (petitioner) was employed as a rubber worker by Goodyear

Tire and Rubber Company (Goodyear).   Petitioner terminated

employment with Goodyear in 1990.

     Petitioner was also self-employed in 1990.    He reported

income from three separate activities: bulldozer work and

digging; sales of wood products; and sales of melons.

     Petitioner also derived income in 1990 from the sale of

marijuana.   Petitioner had "played" with marijuana for many years

before 1990.   Petitioners did not report any income from the sale

of marijuana on either of their income tax returns for the years

in issue.
                            - NEXTRECORD    -

     Petitioner Cynthia L. Chandler (Mrs. Chandler) is a college

graduate and a registered nurse by profession.         In 1989 and for

part of 1990, she worked part time as a bookkeeper for Mike's

Video in Anniston, Alabama, and received nonemployee compensation

in return for her services.     Mrs. Chandler terminated her

business relationship with Mike's Video in 1990.

     Petitioners reported income on their 1989 and 1990 income

tax returns as follows:

                                                1989          1990

Wages (petitioner)                      $20,907               $245
Interest                                    749                395
Schedule C (petitioner)
   (1) bulldozer work/digging
          net profit                                         6,267
   (2) sale of wood products
          net profit                                         2,910
   (3) sale of melons
          net profit                                         1,500
Unemployment compensation                     145              ---
Bookkeeping income (Mrs. Chandler)          1,800              900
                                           23,601           12,217


     During 1989, petitioners maintained at least three accounts

with Family Savings Federal Credit Union.         During 1990, they

maintained at least four such accounts.         These accounts included

share draft accounts.     Only Mrs. Chandler wrote checks on the

share draft accounts.     Mrs. Chandler did not retain petitioners'

bank statements and the carbon copies of their checks; rather,

she discarded them after the checks had cleared their accounts.
                            - NEXTRECORD    -

     In addition to writing checks, petitioners frequently used

cash in making purchases.    In particular, petitioner conducted

much of his business in cash.

     Expenses paid by petitioners during 1989 by cash and check

did not exceed $37,215.   Expenses paid by petitioners during 1990

by cash and check did not exceed $19,416.

     In December 1990, a grand jury sitting in the United States

District Court for the Northern District of Alabama (the grand

jury) returned a one-count indictment against petitioner,

petitioner's brother Ronnie Chandler, and a number of other

individuals (the other individuals).       The indictment charged

conspiracy to possess with intent to distribute a controlled

substance, namely, marijuana.

     On January 9, 1991, the grand jury returned a 10-count

indictment (the indictment) that superseded the previously

mentioned 1-count indictment.    Petitioner was charged in the

first and tenth counts of the indictment with various narcotics-

related offenses.   Thus, in the first count of the indictment the

grand jury charged petitioner, Ronnie Chandler, and the other

individuals with conspiring to possess marijuana, a controlled

substance, with intent to distribute.       The first paragraph of the

first count of the indictment read as follows:

     The Grand Jury charges:
     1. That from on or about January 1, 1987, to on or about
October 1, 1990, within the Northern District of Alabama, and
elsewhere, the defendants * * * did conspire with each other and
others both known and unknown to the Grand Jury, to unlawfully,
                           - NEXTRECORD   -

knowingly and intentionally possess with intent to distribute and
to distribute 1,000 kilograms or more of a mixture or substance
containing a detectable amount of marijuana and one thousand or
more marijuana plants, a Schedule I controlled substance in
violation of Title 21, United States Code, Section 841(a)(1)(A)
and 846.

     In the tenth count of the indictment the grand jury charged

petitioner with possessing marijuana with intent to distribute.

The tenth count read as follows:


     The Grand Jury charges:
     1. That from in or about June 1990 to in or about September
1990, within the Northern District of Alabama, the defendant,
EDDIE CHANDLER [petitioner], did unlawfully, knowingly and
intentionally possess with the intent to distribute and
distributed marijuana, a Schedule I controlled substance, in
violation of Title 21, United States Code, Section 841(a)(1).

     Initially, petitioner pleaded not guilty to the charges set

forth in the indictment.   However, on February 14, 1991, 2 days

after his jury trial began, petitioner changed his plea and

pleaded guilty to the tenth count of the indictment pursuant to

an agreement reached with the U.S. Attorney.

     On April 25, 1991, the District Court dismissed the first

count of the indictment against petitioner on the oral motion of

the U.S. Attorney and imposed its sentence on petitioner relative

to his guilty plea to the tenth count of the indictment.

Petitioner received 8 months in prison and 5 years of supervised

release subject to the special condition that he participate in a

substance abuse program, including drug testing, as directed by

the U.S. Parole Office.    The Court declined to impose a fine on

petitioner because of his inability to pay.
                           - NEXTRECORD   -

     Petitioners executed their income tax return for 1990 on

June 6, 1991.   The return was received by respondent's Service

Center in Memphis, Tennessee, on June 10, 1991.

     In the notice of deficiency, respondent determined that

petitioners failed to report accurately their income on their

income tax returns for 1989 and 1990.     Accordingly, respondent

used an indirect method in order to reconstruct petitioners'

income for those years.   Specifically, respondent used the source

and application of funds method and determined that petitioners

understated their income (or overstated their expenses) on their

1989 and 1990 income tax returns by $11,149 and $15,236,

respectively.   Respondent determined these amounts as follows:



                          Taxable Year 1989

Funds Available

     Wages - per return                                $20,907
     Interest income - per return                          749
     Unemployment compensation - per return                145
     Miscellaneous income - per return                   1,800
     Interest income - credit union                         67
     Loan                                               15,000
     State tax refund                                       95
     Federal tax refund                                    791
     Credit union acct #11957 (balance on 1/1/89)          194
     Credit union share acct #11246 (balance on 1/1/89) 2,884
     Credit union acct #11246 (balance on 1/1/89)        8,462
     Sale of truck - oral testimony                        250
     Sale of 4-wheeler                                   3,000
     Sale of land to brother                             5,000
     Total funds available                              59,344

Expenditures

     Federal tax - per W-2                                 $1,226
                            - NEXTRECORD   -

     Social security tax - per W-2                       1,561
     State tax - per W-2                                   573
     Local tax - per W-2                                   365
     IRA                                                 2,250
     Payment to GMC - truck purchase                    16,900
     CD purchase                                        10,000
     Credit union acct #11957 (balance on 12/31/89)      4,072
     Credit union share acct #11246 (bal. on 12/31/89)   2,715
     Credit union acct #11246 (balance on 12/31/89)      7,891
     Expenses paid by check                             23,975
     Expenses paid by cash                              19,240
          less: IRA                                     (2,250)
          less: deposits                                (6,125)
          less: truck                                   (1,900)
          less: CD                                     (10,000)
     Total expenditures                                 70,493

Understatement of Income

     Total expenditures                                $70,493
     less: total funds available                       -59,344
     Understatement of income                           11,149



                           Taxable Year 1990
Funds Available

     Wages - per return                                      $245
     Interest income - per return                             395
     Other income - per return                                900
     Federal tax refund                                       298
     Gross receipts per Schedule C's                      12,700
     CD                                                   10,418
     CD                                                   10,804
     Credit union acct #11957 (balance on 1/1/90)           4,072
                                                          1
     Credit union share acct #11957 (bal. on 1/1/90)        1,987
     Credit union share acct #11246 (balance on 1/1/90)     2,715
     Credit union acct #11246 (balance on 1/1/90)           7,891
     Cash from sale of land to brother                      5,000

     Total funds available                                57,425

Expenditures

     IRA                                                  $3,800
     Estimated tax payments - per return                     530
     Schedule C expenses - per return                        600
     Business asset purchased - per return                   450
                               - NEXTRECORD      -

     CD purchased                                                  10,418
     CD purchased                                                  10,804
     Expenses paid by cash                                          3,450
     Credit union acct #11957 (balance on            12/31/90)      6,771
                                                                     1
     Credit union share acct #11957 (bal.            on 12/31/90)      162
     Credit union share acct #11246 (bal.            on 12/31/90)      310
     Credit union acct #11246 (balance on            1/1/90)           668
     Expenses paid by check                                        24,966
          less: Expenses paid by cash                             (10,268)
     Cash on drug busts                                            20,000

     Total expenditures                                                72,661

Understatement of Income

     Total expenditures                                                $72,661
     less: total funds available                                       -57,425
     Understatement of income                                           15,236


     1
      The record does not disclose why this account may have been
      omitted in the reconstruction of petitioners' income for 1989.




                                    OPINION

Matters Related to the Burden of Proof

     Income from an illegal activity

     In general, the Commissioner's determinations are entitled

to a presumption of correctness, and the taxpayer bears the

burden of rebutting such presumption by a preponderance of the

evidence.    Rule 142(a); Welch v. Helvering, 290 U.S 111, 115

(1933).   The presumption of correctness is procedural in that it

transfers to the taxpayer the burden of going forward with the

evidence to establish that the Commissioner's determinations are

incorrect.    Jackson v. Commissioner, 73 T.C. 394, 400 (1979).
                            - NEXTRECORD   -

     Normally, the Court does not look behind a notice of

deficiency to examine the evidence used by the Commissioner in

making the deficiency determinations.      Greenberg's Express, Inc.

v. Commissioner, 62 T.C. 324, 327 (1974).        However, whenever the

notice of deficiency is found to be arbitrary, excessive, or

without rational foundation, the burden of going forward with the

evidence is borne by the Commissioner.         Helvering v. Taylor, 293

U.S. 507 (1935).   This exception to the general rule has been

applied in cases involving unreported income from illegal

activities.   E.g., Dellacroce v. Commissioner, 83 T.C. 269, 287

(1984).

     Petitioners seek to invoke the foregoing exception to the

general rule by arguing that respondent's deficiency

determination for 1990 "is not supported by the proper foundation

of substantive evidence".     Weimerskirch v. Commissioner, 596 F.2d

358, 362 (9th Cir. 1979).    However, for the following reasons, we

do not think that such determination is "a 'naked' assessment

without any foundation." See United States v. Janis, 428 U.S.

433, 441 (1976).

     First, 2 days after his criminal trial began, petitioner

pleaded guilty to the charge that from "in or about June 1990 to

in or about September 1990, within the Northern District of

Alabama, * * * [petitioner] did unlawfully, knowingly and

intentionally possess with the intent to distribute and

distributed marijuana, a Schedule I controlled substance, in
                            - NEXTRECORD   -

violation of Title 21, United States Code, Section 841(a)(1)."

Petitioner's plea constitutes an admission of guilt.

     Second, evidence gathered during the criminal investigation

of Ronnie Chandler, petitioner, and the other individuals, as

well as evidence adduced during the subsequent criminal

prosecution, inculpates petitioner as involved in the drug

business.    Such evidence also undoubtedly influenced his decision

to plead guilty to the tenth count of the indictment 2 days after

the criminal trial began.

     Third, at the trial herein a third party testified that

petitioner had sold her marijuana and had admitted to her that he

had "played" with marijuana for many years before 1990.

     We think that the foregoing matters suffice to establish a

rational basis upon which respondent could determine, as she did,

that petitioner was involved in the drug business during 1990,

and that he derived unreported income from such business during

that year.

     Use of an indirect method to reconstruct income

     Petitioners also argue that respondent's deficiency

determinations for 1989 and 1990 should not enjoy their usual

presumption of correctness because respondent was not justified

in reconstructing petitioners' income for those years using an

indirect method.    Again, we disagree.

     When a taxpayer fails to maintain adequate books and records

as required by section 6001, the Commissioner may reconstruct the
                          - NEXTRECORD    -

taxpayer's income in accordance with a method that clearly

reflects income.   Petzholdt v. Commissioner, 92 T.C. 661, 687

(1989).   This possibility includes the use of indirect methods.

Holland v. United States, 348 U.S. 121 (1954).      Although the

Commissioner's reconstruction need not be exact, it must be

"reasonable in light of all surrounding facts and circumstances."

Schroeder v. Commissioner, 40 T.C. 30, 33 (1963).

     Here it should be recalled that respondent reconstructed

petitioners' income for 1989 and 1990 using an indirect method,

namely, the source and application of funds method.      This method

of reconstructing income has long been accepted by this Court.

E.g., Vassallo v. Commissioner, 23 T.C. 656 (1955).      It is not a

system of accounting; rather, it is a technique that may be used

to determine whether a taxpayer's books and records accurately

reflect the taxpayer's true income.      Id. at 661-662; Estate of

Bartlett v. Commissioner, 22 T.C. 1228, 1230 (1954).

Accordingly, the Commissioner need not prove the inadequacy of a

taxpayer's books and records before using an indirect method of

reconstructing the taxpayer's income.3     Id.   Any other rule would


     3
       We should not be understood to imply that we think that
petitioners' books and records were adequate. Indeed, the
evidence in this case suggests the contrary. For example, Mrs.
Chandler did not retain petitioners' bank statements and the
carbon copies of their checks but rather discarded them after the
checks had cleared their accounts. In addition, petitioner
conducted much of his business in cash. Moreover, it would
appear that no records were maintained regarding sales of
marijuana.
                            - NEXTRECORD   -

unjustly reward the taxpayer who cleverly conceals income in the

guise of a "perfect" set of books and records.

     In view of the foregoing, we hold that petitioners bear the

burden of going forward with the evidence, as well as the

ultimate burden of persuasion, with respect to respondent's

deficiency determinations for the years in issue.

Understatement of Income for 1989 and 1990

     As noted above, respondent reconstructed petitioners' income

for 1989 and 1990 using the source and application of funds

method.   This method of reconstructing income is based on the

assumption that the amount by which a taxpayer's application of

funds during a taxable year exceeds the taxpayer's known sources

of funds for such year represents taxable income.   A taxpayer has

the right, of course, to identify particular areas or specific

instances where the Commissioner's analysis fails to reflect the

taxpayer's actual income.    E.g., Meneguzzo v. Commissioner, 43

T.C. 824 (1965).   Thus, for example, the Commissioner's analysis

should be adjusted whenever the taxpayer demonstrates: (1) The

analysis does not reflect, as a nontaxable source of income,

funds accumulated at the beginning of a year and expended during

the year, or (2) the analysis includes, as an application of

funds, amounts that do not reflect expenditures made by the

taxpayer during the year.

     Petitioners do not dispute the mechanics of respondent's

source and application of funds analysis other than in three
                          - NEXTRECORD   -

respects.   First, they contend that respondent's analysis failed

to credit them with cash on hand at the beginning of 1989.

Second, they contend that respondent's analysis overstated their

expenditures for 1989 and 1990.   Third, they contend that

respondent's analysis erroneously charged them with $20,000

derived from drug trafficking in 1990.   As discussed below, we

reject petitioners' first and third contentions; however, we

agree in part with their second contention.

     Based principally on the testimony of petitioner at trial,

petitioners contend that they had cash on hand at the beginning

of 1989 in the approximate amount of $2,000 to $4,000.    However,

we are unable to accept uncritically petitioner's testimony to

this effect.   See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)

(the Court is not required to accept a taxpayer's self-serving

testimony as gospel).   Apart from our evaluation of the witness,

we note that petitioner's testimony stated no more than that he

maintained cash on hand "on a pretty consistent basis".      Thus,

there was no testimony that cash on hand held at the beginning of

1989 was actually expended during either 1989 or 1990.

     We also reject petitioner's testimony that he was never

involved in either the production, distribution, or sale of

marijuana, and that he never possessed marijuana or even saw a

marijuana plant.   See Tokarski v. Commissioner, supra.    We do not

think that petitioner would have pleaded guilty to a drug-related

felony charge if the foregoing statements were true.     We also
                          - NEXTRECORD   -

reiterate the matters set forth above in our discussion regarding

the burden of proof.

     However, we do partially accept petitioners' contention that

respondent overstated their expenditures for 1989 and 1990.

Based principally on the testimony of Mrs. Chandler, who

impressed us as a credible witness, we have found as a fact that

expenses paid by petitioners by cash and check during 1989 and

1990 did not exceed $37,215 and $19,416, respectively.4    See

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).

Addition to Tax Under Section 6651(a)(1)

     We turn now to the addition to tax for failure to timely

file.

     In the case of a failure to file an income tax return within

the time prescribed by law, section 6651(a)(1) provides for an

addition to tax in the amount of 5 percent of the tax required to

be shown on the return for each month (or part thereof) during

which such failure continues, but not to exceed 25 percent in the

aggregate.   See sec. 301.6651-1(a)(1), Proced & Admin. Regs.    The

taxpayer is not liable for the addition to tax if the failure to

timely file is due to reasonable cause and not due to willful

     4
       Respondent determined that expenses paid by petitioners by
cash and check during 1989 and 1990 amounted to $43,215 and
$28,416, respectively. Consequently, as a result of our finding,
the understatement of petitioners' income for 1989 will be
reduced from $11,149 to $5,149, and the understatement in
petitioners' income for 1990 will be reduced from $15,236 to
$6,236.
                            - NEXTRECORD   -

neglect.    The taxpayer bears the burden of showing that the

Commissioner's determination is erroneous and that the failure to

timely file is due to reasonable cause and not due to willful

neglect.    Rule 142(a); Abramo v. Commissioner, 78 T.C. 154, 163

(1982).

     There is no question that petitioners failed to file their

1990 income tax return within the period prescribed by law.

Their return for that year was due on or before April 15, 1991.5

Sec. 6072(a).    However, they failed to file a return until June

10, 1991.    Accordingly, petitioners are liable for the addition

to tax under section 6651(a)(1) unless they can show that their

failure to timely file was due to reasonable cause and not due to

willful neglect.     Estate of DiRezza v. Commissioner, 78 T.C. 19,

32-33 (1982).

     A failure to file is due to "reasonable cause" if the

taxpayer exercised ordinary business care and prudence but,

nevertheless, failed to file the return within the period

prescribed by law.     Estate of Paxton v. Commissioner, 86 T.C.

785, 819 (1986); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

The term "willful neglect" contemplates a conscious, intentional

failure to file or a reckless indifference to the obligation to

file.    United States v. Boyle, 469 U.S. 241 (1985).   Whether

     5
       Petitioners do not contend that they requested an
extension of time to file their 1990 income tax return, and there
is no evidence in the record suggesting that they did do so. See
sec. 6081(a); sec. 1.6081-1, Income Tax Regs.
                          - NEXTRECORD     -

reasonable cause exists and whether willful neglect is absent are

questions of fact to be decided based on all of the facts and

circumstances in a particular case.      Estate of DiRezza v.

Commissioner, supra at 33.

     Petitioners contend that they are not liable for the

addition to tax because petitioner's attorney in the drug

prosecution advised petitioner not to file his 1990 income tax

return until the criminal case was concluded.     However, apart

from the fact that this contention would not shield Mrs. Chandler

from liability for the addition to tax because she was neither a

defendant nor otherwise implicated in the drug prosecution,6 we

are not persuaded, for the following reasons, that the defense of

reliance on professional advice is available to petitioners under

the particular facts of the present case.      See United States v.

Boyle, supra.

     First, we are again reminded of the familiar principle that

the Court is not required to accept uncritically a taxpayer's

self-serving testimony as gospel.     Tokarski v. Commissioner, 87

T.C. 74, 77 (1986).   The application of this principle in the

present case is especially significant because we cannot imagine

     6
       We note that Mrs. Chandler is a college graduate and a
registered nurse by profession. In 1989 and for part of 1990,
she worked part-time as a bookkeeper. She impressed us as an
intelligent woman. Given her relatively straightforward tax
situation, we can see no compelling reason why she could not have
prepared her own return or at least sought competent assistance
if petitioner had been unwilling to timely file a joint return.
See sec. 6013(b)(1).
                          - NEXTRECORD    -

that an attorney would advise his or her client not to file a

return that is legally required to be filed and not to request an

automatic extension of time to file.     See secs. 6012(a)(1) and

6081(a); sec. 1.6081-1, Income Tax Regs.

     Second, we note that petitioners failed to call as a witness

the attorney who allegedly gave petitioner the advice not to file

his return until the criminal case was concluded.      Thus, we are

reminded of another familiar principle, namely, that a party's

failure to call a critical witness may give rise to a presumption

that, if called, the witness' testimony would not have been

favorable to the party.   Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947).

     Third, petitioner's criminal case was essentially concluded

on February 14, 1991, 2 days after his jury trial began, when

petitioner pleaded guilty to the tenth count of the indictment

pursuant to an agreement reached with the U.S. Attorney.     We fail

to appreciate why the 1990 return could not have been prepared

and filed within the next 2 months.

     Fourth, petitioner failed to prove that the attorney on whom

he allegedly relied was competent to give tax advice and that

petitioner's alleged reliance thereon was therefore reasonable.

In our view, advice not to file a return that is legally required

to be filed and not to request an automatic extension of time to

file is suspect, particularly when, as noted above, petitioner
                          - NEXTRECORD    -

had already plea bargained and was merely awaiting the imposition

of his sentence by the District Court.

     Finally, we note that the return for 1990 filed by

petitioners in June 1991 was in no way incriminatory of

petitioner regarding the sale of marijuana.    Indeed, petitioners

did not report any income from the sale of marijuana on that

return.   We therefore fail to appreciate why there was any need

to delay filing the 1990 return and, a fortiori, why an automatic

extension of time to file could not have been filed.    In our

view, petitioners' return for 1990 makes petitioner's contention

all the more suspect.

     In view of the foregoing, we conclude that petitioners have

failed to carry their burden of proof on this issue.    We hold,

therefore, that they are liable for the addition to tax under

section 6651(a)(1).

Accuracy-related Penalty Under Section 6662(a)

     Finally, we turn now to the accuracy-related penalty for

negligence or intentional disregard of rules or regulations.

     Section 6662(a) imposes a penalty on the underpayment of tax

in an amount equal to 20 percent of the portion of underpayment

due to negligence or intentional disregard of rules or

regulations.   Sec. 6662(b)(1).   "Negligence" includes a failure

to make a reasonable attempt to comply with the provisions of the

internal revenue laws, specifically including the failure to

maintain adequate books and records.     Sec. 6662(c); sec. 1.6662-
                            - NEXTRECORD   -

3(b)(1), Income Tax Regs.    "Disregard" includes any careless,

reckless or intentional disregard of the rules or regulations.

Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

     The accuracy-related penalty does not 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 thereto.    Sec. 6664(c)(1).   The

determination of whether a taxpayer acted with reasonable cause

and in good faith depends upon the pertinent facts and

circumstances of a particular case.    Sec. 1.6664-4(b)(1), Income

Tax Regs.

     The taxpayer bears the burden of showing that the

Commissioner's determination of negligence or disregard of rules

or regulations is erroneous.    Rule 142(a); Bixby v. Commissioner,

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

     Petitioners do not specifically contend that they are not

liable for the accuracy-related penalty apart from their

contention that there is no underpayment of tax for either 1989

or 1990.    However, we have already held to the contrary.

Therefore, they have failed to carry their burden of proof on

this issue.    In addition, we think that petitioners' failure to

maintain adequate books and records reflecting their true income

indicates an intentional disregard for the rules or regulations.

Moreover, the record does not reveal any reasonable cause for

such disregard.
                         - NEXTRECORD     -

     In view of the foregoing, we hold that petitioners are

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

Conclusion

     In order to reflect our disposition of the disputed issues,

as well as petitioners' concession,



                                      Decision will be entered

                              under Rule 155.
