                        T.C. Memo. 2003-93



                      UNITED STATES TAX COURT



           T.P. AND NAJIEH R. CRIGLER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9233-99.              Filed March 28, 2003.



     T.P. Crigler, pro se.

     James R. Rich, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioners’ Federal income tax of $19,675 and an accuracy-

related penalty under section 6662 of $3,935 for 1995.
                                 - 2 -

     The issues for decision are:

     1.   Whether petitioners may deduct an ordinary loss of

$100,000 under section 1244 for loss in value of petitioner’s

FabuGlass stock in 1995.    We hold that they may not.

     2.   Whether petitioners are liable for the accuracy-related

penalty for negligence under section 6662 for 1995.      We hold that

they are.

     Unless otherwise provided, section references are to the

Internal Revenue Code in effect for 1995, and Rule references are

to the Tax Court Rules of Practice and Procedure.    References to

petitioner are to Mr. Crigler.

                           FINDINGS OF FACT

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

Petitioners resided in Chapel Hill, North Carolina, when they

filed their petition.

A.   FabuGlass, Inc.

     1.     B.F. Lists, Inc.

     In 1981, petitioner incorporated B.F. Lists, Inc. (B.F.

Lists), in Arkansas to obtain, rent, and market mailing lists for

the retail sale of professional uniforms and accessories.

Petitioner converted a rodeo arena in Conway, Arkansas, into a

mail order office, warehouse, and shipping facility (the Conway

premises) at a date not specified in the record.
                                - 3 -

     2.   FabuGlass, Inc. and Crigler & Co.

     Petitioner changed the name of B.F. Lists to FabuGlass, Inc.

(FabuGlass), in 1985, and he changed the name of FabuGlass to

Crigler & Co. in 1996.1

     Petitioner owned all of the stock of FabuGlass from 1987-98.

The articles of incorporation adopted in 1985 state that

FabuGlass was formed to manufacture, market, and distribute

fiberglass-reinforced plastic products, accessories, and related

items.

     3.   FabuGlass’ Activities

     FabuGlass manufactured fiberglass Jeep tops and related

parts in 1985 and 1986 at the Conway premises.    FabuGlass had

serious business problems in 1985 and 1986 which petitioner tried

to correct.   In August 1987, FabuGlass agreed to supply Pender

Boat Co. (Pender), a North Carolina company, with fiberglass

molds for Jeep parts, and Pender agreed to furnish Jeep parts to

FabuGlass.    FabuGlass bought sixteen fiberglass Jeep parts from

Pender in October and November 1987.    Petitioner was not

satisfied with the parts that Pender produced.    Drug Enforcement

Administration (DEA) officials in North Carolina apparently

confiscated FabuGlass’ molds from Pender on a date not stated in

the record.



     1
        For purposes of this opinion, we refer to the entity
originally known as B.F. Lists as FabuGlass for all years.
                                 - 4 -

     FabuGlass reported $0 sales or costs of goods sold in 1989.

It rented the Conway premises to an unidentified tenant for

$66,000 in 1989.

     FabuGlass purchased $922,370 of securities for investment in

1989.   In 1989, FabuGlass also had receivables of $1,015, liquid

assets of $899, and owned a building with a book value of

$248,681 less accumulated depreciation of $125,228.

     In 1990-95, FabuGlass derived income from renting real

property and trading stocks and securities.     Petitioner operated

FabuGlass as a business consulting company in 1996 and 1997.

     FabuGlass was an Arkansas corporation that had filed all

required reports and paid all required fees and taxes as of the

date of trial.    It had not liquidated its assets or filed for

bankruptcy protection as of the date of trial.

B.   AmRuss, Ltd.

     In 1992 or 1993, Raymond Sawyer (Sawyer), petitioners’

accountant, and petitioner attempted to do business in Russia

through AmRuss, Ltd. (AmRuss).     FabuGlass was not involved in

petitioner’s efforts to do business in Russia.

     In 1991-94, Charles Layman (Layman) owned a company called

Murphy Body Co.     Murphy Body Co., AmRuss, and a Russian entity

named Association Vnedrenie agreed to do business converting

vehicles into refrigerated or armored trucks, ambulances, and

other specially used vehicles in 1991-94.     The contract between
                                 - 5 -

Murphy Body Co., AmRuss, and Association Vnedrenie is not in

evidence.    An “Addendum to Charter and By-Laws of Vnedrenie-

Murphy” was prepared for petitioner’s signature in his capacity

as chairman of AmRuss.

     On December 22, 1994, AmRuss agreed to sell an armored

vehicle to a Russian entity named Bank Baltisky.       Petitioner

signed the sales contract as president of AmRuss.

C.   Tax Returns for FabuGlass

     Sawyer or his employees prepared the Federal corporate

income tax returns for FabuGlass for 1990-93.       Petitioner gave

Sawyer information relating to income, expenses, and various

stock transactions to use in preparing the returns.       FabuGlass

reported on its returns for 1990-93 that it was an investment

company and that its business activity was investing in financial

securities and real estate.

     Petitioner prepared and signed the original 1994 return for

FabuGlass.    FabuGlass reported on its 1994 return that its

business activity was investments.       Sawyer or his employees

prepared the first amended 1994 return for FabuGlass and added a

net operating loss carryback but did not change other parts of

the return.

     FabuGlass reported that its total liabilities exceeded its

assets for the period 1990-94.    FabuGlass reported the following

amounts of gross income and deductions for 1990-94:
                                     - 6 -

    FabuGlass’ Reported Gross Income and Deductions for 1990-94

            Year                  Gross income                Deductions
            1990                  $(818,321)                     $31,227
            1991                 (1,034,984)                        89,818
            1992                    209,518                           --
            1993                    102,031                           --
            1994                    (13,301)                        16,070
              Total              (1,555,057)                     137,115

      FabuGlass reported $0 gross receipts or sales in 1990, 1991,

and 1992, $25,220 in 1993, and $0 on the original and first

amended 1994 returns.         FabuGlass reported $0 costs of goods sold

on its 1990, 1991, 1992, 1993, and original and first amended

1994 returns.         FabuGlass claimed no deductions for salaries,

wages, rents, and advertising on its 1990-94 returns.

      FabuGlass reported assets on its returns as follows:
                                                                       1
     Item              1990       1991         1992       1993             1994

Cash                 –-            –-           –-             16        –-
Inventories          –-            –-           –-       $166,353     166,353
Investments      $1,068,279     $144,932      $1,794       22,270       3,075
Buildings and
  depreciable
  assets            248,681      248,681     248,681        –-              --
less accumulated
 depreciation      (129,842)    (134,456)    (134,456)      –-           --
  Total assets    1,187,118      259,157      116,019    188,639      169,428
1
  FabuGlass reported these amounts on its original and first amended 1994
returns.

      FabuGlass’ tax returns for 1990-94, a real estate contract,

and a stipulated rental receipt show that less than 50 percent of

FabuGlass’ aggregate gross receipts for 1990-94 were from sources

other than royalties, rents, dividends, interest, annuities, and
                              - 7 -

sales or exchanges of stock or securities (nonoperating sources)

as follows:

                                 Nonoperating        Other
      1990                          sources         sources

    Dividends                         $39,955         --
    Rent receipts                      27,500         --
    Gains from stock transactions      22,117         --
    Commissions                          --         $3,000
      Totals                           89,572        3,000

      1991

    Dividends                         $13,853        --
    Rent receipts                       2,760        --
    Gains from stock transactions     334,916        --
    Real estate sale1                     --        $5,000
      Totals                          351,529       5,000

      1992

    Dividends                         $10,691         --
    Interest                              212         --
    Rent receipts2                     14,779         --
    Gains from stock transactions         611         --
    Real estate sales                    --        $250,000
      Totals                           26,293       250,000

      1993

    Dividends                            $504        --
    Gains from stock transactions      18,939        --
    Sale                                 –-         25,220
    Real estate sales                    --        $102,000
      Totals                           19,443      127,220

      1994

    Dividends                           $304           --
    Boat sales                           --         $22,312
      Totals                             304         22,312
                                      - 8 -

                     Total from                         Total from
                nonoperating sources                   other sources

    1990                  $89,572                         $3,000
    1991                  351,529                          5,000
    1992                   26,293                        250,000
    1993                   19,443                        127,220
    1994                      304                         22,312
      Totals              487,141                        407,532
     1
       FabuGlass did not report this item on its 1991 tax return.
However, the parties stipulated to the contract which shows that
FabuGlass received $5,000 in 1991 from a real estate sale.
     2
       The parties stipulated that FabuGlass received rent
receipts of $14,779 in 1992.

     Sawyer prepared FabuGlass’ tax return for 1995.          Petitioner

gave Sawyer a summary of income, expenses, and various

transactions (e.g., sales of stock and real property) to use in

preparing the 1995 return.          FabuGlass reported that it was an

investment company.       FabuGlass reported the following on its 1995

return:                    Assets and Liabilities

                                        Beginning
                 Item                    of year      End of year
         Cash                                 --            $396
         Inventories                     $166,353        166,353
         Depreciable,                         3,075        3,075
         depletable, and
         intangible assets
           Total assets                   169,428        169,824
         Loans from stockholders        2,026,017      2,431,761
         Capital stock                    430,258         25,000
         Retained earnings             (2,286,847)    (2,286,937)
           Total liabilities and          169,428        169,824
         stockholders’ equity
                               - 9 -

     On their 1995 return, petitioners reported a $405,238 loss

attributable to petitioner’s FabuGlass stock and claimed a

$100,000 deduction2 under section 1244.

     The examination of petitioners’ 1995 income tax return began

in 1997.   Respondent issued a notice of deficiency on February

18, 1999, in which respondent determined that petitioners were

not entitled to a $100,000 deduction under section 1244.

     On November 8, 1999, petitioner prepared and filed a second

amended return for 1994 for FabuGlass.    On it, FabuGlass reported

that its business activity was the manufacture of “Co-Production

Transp. Products” and that its product or service was “vehicle

conversions w/ R.P.”   Also on that return, FabuGlass reported

(for the first time) (1) income of $22,312 from the sale of

boats, costs of goods sold of $31,643, and expenses of $16,070

for travel to Russia, and (2) total assets of $139,325,

consisting of $134,710 of inventories (2 boats), $1,540 of export

items consigned to Russia, and $3,075 of investments.

     Sawyer prepared petitioners’ individual income tax returns

for 1990-96, but not FabuGlass’ return for 1996.

     FabuGlass reported on its 1996 and 1997 returns that its

business activity was consulting.




     2
        The maximum annual amount that may be deducted under sec.
1244 is $100,000 for a husband and wife filing a joint return for
that year. Sec. 1244(b).
                              - 10 -

                              OPINION

A.   Whether Petitioner’s FabuGlass Stock Qualifies as Section
     1244 Stock

     1.   Requirements for Section 1244 Stock

     Generally, when corporate stock becomes worthless, the loss

is a capital loss.   However, an individual who has what would

otherwise be a capital loss on stock that qualifies as section

1244 stock may treat up to $50,000 ($100,000 in the case of a

joint return) of the loss as an ordinary loss.     Sec. 1244(a),

(b), (d)(1)(B).   Section 1244 stock is stock of a domestic

corporation if:   (1) At the time that stock is issued, the

corporation had not received money or other property in excess of

$1 million for its stock as a contribution to capital or as paid-

in surplus; (2) the stock was issued for money or other property

other than stock or securities; and (3) the corporation, during

its 5 most recent taxable years (or, if less, the period during

which the corporation has been in existence) ending before the

date the loss in question was sustained, derived more than 50

percent of its aggregate gross receipts from sources other than

royalties, rents, dividends, interest, annuities, and sales or

exchanges of stocks or securities.     Sec. 1244(c)(1).   The gross

receipts requirement does not apply if, for the 5-year period

described above, the amount of deductions allowed by Chapter 1

(other than by sections 172, 243, 244, and 245) exceeds the

amount of the corporation’s gross income.     Sec. 1244(c)(2)(C).
                                 - 11 -

     Congress intended section 1244 to encourage taxpayers to

invest new funds in small businesses, rather than provide

favorable tax treatment for losses suffered by investment and

holding companies.   H. Rept. 2198, 85th Cong., 1st Sess. (1958),

1959-2 C.B. 709, 711; Bates v. United States, 581 F.2d 575, 580

(6th Cir. 1978); Davenport v. Commissioner, 70 T.C. 922, 926

(1978).

     The Secretary is authorized to prescribe regulations needed

to carry out the purposes of section 1244.        Sec. 1244(e).

Pursuant to that authority, the Secretary issued regulations

which provide that the taxpayer must show that the corporation

was “largely an operating company”3 during the 5-year period

described above even if the gross receipts requirement does not


     3
        Congress intended to limit application of sec. 1244 to
companies which are largely operating companies. The legislative
history states in pertinent part:

                     III. GENERAL EXPLANATION

                     *   *   *     *      *   *   *

     Section 2. Losses on Small-Business Stock

                     *   *   *     *      *   *   *

     Your committee also has imposed a restriction designed
     to limit this tax benefit to companies which are
     largely operating companies. Thus, the corporation, in
     the 5 years before the taxpayer incurs the loss on the
     stock, must have derived more than half of its gross
     receipts from sources other than royalties, rents,
     dividends, interest, annuities, and the sale of stock
     or securities. [H. Rept. 2198, 85th Cong., 1st Sess.
     (1958), 1959-2 C.B. 709, 711; emphasis added.]
                              - 12 -

apply because the corporation’s deductions exceeds its net

income.   Sec. 1.1244(c)-1(e)(2), Income Tax Regs.; Davenport v.

Commissioner, supra at 928-929.     This provision of the

regulations is valid.   Davenport v. Commissioner, supra.

     2.   Contentions of the Parties

     Petitioners contend that petitioner’s FabuGlass stock

qualifies as section 1244 stock and that they may deduct $100,000

as an ordinary loss under section 1244(a) in 1995.    Respondent

contends that petitioner’s FabuGlass stock does not qualify as

section 1244 stock because:   (a) FabuGlass derived less than 50

percent of its aggregate gross receipts from sources other than

nonoperating sources, and FabuGlass’ gross income exceeded its

deductions for 1990-94; and (b) FabuGlass was not largely an

operating company during 1990-94.    Petitioners contend that

FabuGlass’s deductions exceeded its gross income for 1990-94 and

that FabuGlass was largely an operating company during 1990-94.

Petitioners bear the burden of proving that petitioner’s

FabuGlass stock qualifies as section 1244 stock.    Rule

142(a)(1).4




     4
        Sec. 7491 applies to court proceedings arising in
connection with examinations commencing after July 22, 1998.
Sec. 7491(a) does not apply here because the examination of
petitioners’ 1995 return began in 1997.
                              - 13 -

     3.   Whether FabuGlass Was Largely an Operating Company in
          1990-94

          a.   Whether FabuGlass Had Operating Assets, Sales, or
               Paid Salaries in 1990-94

     FabuGlass reported on its returns for 1990-94 that it had no

operating assets and paid no salaries.    This suggests that

FabuGlass was not an operating company.    FabuGlass reported total

sales of $30,312 on its 1990-94 returns.    That amount is

insignificant compared to the $1,555,057 it reported as net

losses from stock transactions for those years.

          b.   Whether FabuGlass’ Tax Returns Establish That It
               Was an Investment Company

     FabuGlass reported on its 1990-95 returns and its first

amended 1994 return that it was an investment company.

Petitioners contend that we should disregard references to

FabuGlass as an investment company on those returns because

FabuGlass was not authorized by its articles of incorporation to

engage in investment activities.

     We disagree.   First, petitioner, as the sole owner of

FabuGlass stock in 1990-95 and preparer of FabuGlass’ original

1994 return, cannot now disavow those returns without cogent

proof that they are incorrect.     Waring v. Commissioner, 412 F.2d

800, 801 (3d Cir. 1969), affg. per curiam T.C. Memo. 1968-126;

Lare v. Commissioner, 62 T.C. 739, 750 (1974), affd. without

published opinion 521 F.2d 1399 (3d Cir. 1975); Kaltreider v.

Commissioner, 28 T.C. 121 (1957), affd. 255 F.2d 833 (3d Cir.
                                - 14 -

1958).    Second, the Instructions to Forms 1120 and 1120-A, U.S.

Corporation Income Tax Return, Codes for Principal Business

Activity, for 1990-95 require a corporation to report on its tax

return its business activity from which it derives its largest

percentage of total receipts, not the business activity

authorized in its articles of incorporation.

     We conclude that FabuGlass correctly reported that it was an

investment company in 1990-95.

            c.   Whether FabuGlass Operated in Russia in 1990-94

     Petitioners contend that FabuGlass was largely an operating

company in 1990-94 because it operated in Russia in those years.

Petitioner testified that FabuGlass tried to sell armored

vehicles and refrigeration trucks to Russian companies.    However,

his testimony on this point was vague.    The record shows that

AmRuss, and not FabuGlass, tried to do business in Russia.

Sawyer, who prepared FabuGlass’ original income tax returns for

1990-95, testified that he did not know that FabuGlass was trying

to do business in Russia, but that AmRuss did try to do business

there.    He testified that he and petitioner considered doing

business in Russia in 1992 or 1993 on behalf of a company called

AmRuss.

     Petitioners contend that Exhibit 39-P, a contract dated

December 22, 1994, shows that FabuGlass was operating in Russia

in 1994.    We disagree.   Exhibit 39-P is a contract in which Bank

Baltisky agreed to buy an armored vehicle from AmRuss.    FabuGlass
                              - 15 -

was not a party to that contract.   Petitioner signed the contract

as president of AmRuss.

     Layman testified that Murphy Body Co. and petitioner, on

behalf of FabuGlass, tried to do business in Russia in 1991-94

with an entity named Association Vnedrenie.   We believe that

Layman’s testimony that FabuGlass was involved in Russia was

mistaken because the documentary evidence refers to AmRuss, not

FabuGlass.   No contract between Murphy Body Co. and Association

Vnedrenie is in evidence.   The record contains an “Addendum to

Charter and By-Laws of Vnedrenie-Murphy” that lists Murphy Body

Co., AmRuss, and Association Vnedrenie as parties to that

addendum and refers to petitioner as chairman of AmRuss.    No

documentary evidence shows that FabuGlass did business in Russia.

     Petitioners point out that FabuGlass claimed deductions for

doing business in Russia on its second amended return for 1994.

Petitioners contend that petitioner was merely correcting errors

on the original and first amended returns for 1994 and that the

second amended return is correct.   We disagree.   Petitioner filed

FabuGlass’ second amended return for 1994 on November 8, 1999,

almost 9 months after respondent issued the notice of deficiency.

This suggests that FabuGlass claimed those deductions simply to

support petitioners’ claim that FabuGlass was an operating

company in 1990-94 because it operated in Russia.

     Respondent contends in the alternative that, if we find that

FabuGlass was active in Russia in 1990-94, then the FabuGlass
                             - 16 -

stock did not become worthless in 1995 because those alleged

activities continued after 1994.   Petitioners argue that

respondent’s contention is a concession that FabuGlass was

largely an operating company in Russia in 1990-94.    We disagree.

Respondent’s contention was contingent on our finding that

FabuGlass operated in Russia in 1990-94.   We have not so found.

          d.   Whether FabuGlass Stopped Doing Fiberglass-Related
               Business in 1995

     Petitioner contends that FabuGlass stopped doing fiberglass-

related business in 1995 when he decided that FabuGlass would no

longer conduct any fiberglass-related business.   We disagree.

There is no evidence that FabuGlass did business related to

fiberglass production or sales after November 1987.

     The record shows no activity by FabuGlass in 1988 except for

petitioner’s letter to the U.S. Attorney to try to retrieve the

FabuGlass molds that the DEA had seized.   FabuGlass reported no

sales or costs of goods sold in 1989.   In 1989, it rented out its

Conway premises for $66,000 and invested $922,370 in securities.

The fact that FabuGlass invested nearly $1 million in 1989

suggests that it did not need those funds to pay operating costs.

The fact that FabuGlass rented out its Conway premises suggests

that FabuGlass was no longer using the Conway premises for

manufacturing or other business activities in 1990-94 because it

was no longer an operating company.
                             - 17 -

     Petitioner testified that FabuGlass correctly reported on

its second amended return for 1994 that its business activity was

the production of reinforced plastic materials.   We are not

convinced by that testimony because, as discussed above, the

weight of the evidence shows that FabuGlass was an investment

company and had stopped doing fiberglass-related business before

1990.

          e.   FabuGlass Was Not Largely an Operating Company in
               1990-94

     We conclude that FabuGlass was not largely an operating

company in 1990-94.

     4.   Conclusion

     We conclude that petitioner’s FabuGlass stock was not

section 1244 stock,5 and thus, petitioners may not deduct an

ordinary stock loss of $100,000 under section 1244 in 1995.6

     5
        In light of our conclusion, we need not decide
respondent’s contentions that petitioners have not established
(1) that the stock was issued for money or other property (other
than stock or securities), (2) that FabuGlass satisfied the 50
percent gross receipts test, and (3) whether FabuGlass stock
became worthless in 1995.
     6
        Petitioners may not deduct any losses under sec. 165(g)
relating to the worthlessness of petitioner’s FabuGlass stock
because the record does not contain sufficient information to
compute petitioner’s basis in that stock in 1995. Petitioner’s
testimony leaves many unanswered questions about his basis. The
only documents in the record to support petitioners’ computation
of basis are the contract showing the 1980 purchase price of real
property ($225,000) that petitioner contributed to FabuGlass in
1985 and bank statements showing transfers from petitioner
totaling $111,000 which petitioners contend were to the First
National Bank of Conway. Petitioners have not shown that the
                                                   (continued...)
                              - 18 -

B.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty for 1995

     Petitioners contend that they are not liable for the

accuracy-related penalty for negligence for 1995 because they

relied on Sawyer’s advice.   We disagree.

     A taxpayer may be relieved of liability for the accuracy-

related penalty if the taxpayer shows that he or she had

reasonable cause for the understatement and acted in good faith.

Reliance on the advice of a qualified tax professional may

constitute reasonable cause if that reliance was reasonable and

the taxpayer acted in good faith.   Sec. 6664(c); sec. 1.6664-

4(a), Income Tax Regs.   To establish good faith reliance on the

advice of a competent adviser, a taxpayer must show that he or

she provided the return preparer with complete and accurate

information and an incorrect return resulted from the preparer’s

mistake.   Sec. 6662; DeCleene v. Commissioner, 115 T.C. 457, 477

(2000); Neonatology Associates, P.A. v. Commissioner, 115 T.C.

43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002); sec. 1.6662-

3(a), Income Tax Regs.

     Petitioners contend that they gave Sawyer complete and

accurate information to prepare their returns properly.    We

     6
      (...continued)
amount of the mortgage and depreciation on the property at the
time of the transfer were less than the $225,000 purchase price.
Petitioners also have not shown why transfers to a bank add to
petitioner’s basis in his FabuGlass stock. We conclude that the
record contains insufficient information from which to compute
petitioner’s basis.
                             - 19 -

believe petitioners have not proved this.    There is no evidence

that petitioners gave Sawyer information showing that

petitioner’s FabuGlass stock qualified under section 1244, i.e.,

information showing that FabuGlass derived more than 50 percent

of its aggregate gross receipts from sources other than

royalties, rents, dividends, interest, annuities, and sales or

exchanges of stocks or securities for 1990-94, that its

deductions exceeded its income for 1990-94, or that it was

largely an operating company in 1990-94.    Thus, we conclude that

petitioners are liable for the accuracy-related penalty for 1995.

     To reflect the foregoing,

                                               Decision will be

                                           entered for respondent.
