                          T.C. Memo. 2001-143



                       UNITED STATES TAX COURT



         TOMMY OWENS, JR. AND DAWN R. OWENS, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11069-99.                  Filed June 19, 2001.


     Tommy Owens, Jr., and Dawn R. Owens, pro sese.

     Angela J. Kennedy, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:     Respondent determined deficiencies in,

additions under section 6651(a)(1)1 to, and accuracy-related

penalties under section 6662(a) on petitioners’ Federal income

tax (tax), as follows:


     1
      All section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                  - 2 -

                         Addition to Tax           Accuracy-Related
 Year       Deficiency      Under Sec.            Penalty Under Sec.
                            6651(a)(1)                 6662(a)
 1993         $3,879           $970                      $776
 1994          8,627          2,157                     1,725
 1995          2,276            569                       455

        The issues remaining for decision2 are:

        (1)   Do petitioners have unreported Schedule C gross re-

ceipts for each of the years at issue in the amount determined in

the notice?      We hold that they do.

        (2)   Are petitioners entitled to Schedule C deductions for

each of the years at issue for “Car and truck expenses” (Schedule

C car and truck expenses) in excess of the amount that respondent

allowed in the notice?      We hold that they are not.

        (3)   Are petitioners required to include in income for each

of the years 1994 and 1995 certain insurance proceeds that they

received during each such year?      We hold that they are.

        (4)   Are petitioners entitled for any of the years at issue

to a net operating loss deduction under section 172(a)?         We hold

that they are not.



        2
      At trial, petitioners conceded that if the Court were to
sustain respondent’s determinations with respect to Schedule C,
Profit or Loss From Business (Schedule C), of petitioners’ tax
return (return) for each of the years at issue, they would be
liable for self-employment tax for each of those years, as
determined in the notice of deficiency (notice). In that event,
they would be entitled to a self-employment tax deduction for
each of those years, as determined in the notice.

     At trial, petitioners also conceded that if the Court’s
resolution of the issues remaining for decision were to result in
an underpayment for any of the years at issue, they would be
liable for any such year for the accuracy-related penalty under
sec. 6662(a).
                                - 3 -

     (5)    Are petitioners liable for each of the years at issue

for the addition to tax under section 6651(a)(1)?    We hold that

they are.

                          FINDINGS OF FACT3

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

     At the time the petition was filed, petitioners resided in

Indianapolis, Indiana (Indianapolis).    Petitioner Tommy Owens,

Jr. (Mr. Owens) and petitioner Dawn R. Owens (Ms. Owens) had

moved to Indianapolis from Toledo, Ohio (Toledo), in 1988 and

1990, respectively.

     From January through April 1993, petitioners resided in a

mobile home and paid lot rent to Happy Hollow Trailer Lodge.

During that period, their monthly lot rent was $150.    During

1993, petitioners paid rent and fees in connection with their

mobile home totaling $505 and also paid for their telephone,

cable, and electricity usage at that mobile home.

     Starting in May 1993, petitioners rented a house on Walker

Street in Indianapolis (Walker Street property) in which they

lived until May 1994.    Petitioners made monthly rent payments of

$400 for the Walker Street property to Holly Paul.    During 1993,

petitioners paid at least $2,420 of rent and/or fees to Holly

Paul, and during 1994 they paid at least $1,000 of rent to Holly



     3
      Although not expressly stated, our Findings of Fact and
Opinion pertain to the years at issue unless otherwise indicated
or expressly stated for clarity.
                                - 4 -

Paul.   Throughout the period during which petitioners lived in

the Walker Street property, they also paid for their electricity,

gas, and telephone usage at that property.

     In May 1994, petitioners moved to 1728 East Tabor Street,

Indianapolis (East Tabor Street property).    On August 1, 1994,

Mr. Owens assumed a mortgage on the East Tabor Street property

from Douglas H. Tussey (Mr. Tussey).    On August 3, 1994, Mr.

Tussey executed a warranty deed conveying the East Tabor Street

property to Mr. Owens.    On the same date, petitioners purchased

homeowner’s insurance from State Farm Insurance Company for which

they paid an annual premium of $265.    During 1994, petitioners

paid a total of $10,354.50 to Mr. Tussey and a total of $1,000 to

Re-Max Preferred Realty toward the purchase of the East Tabor

Street property.

     The mortgagee for the East Tabor Street property was Amer-

ica’s Mortgage Servicing, Inc., later known as First Nationwide

Mortgage Corporation.    During 1994, petitioners made mortgage

payments totaling at least $1,050.13 to America’s Mortgage

Servicing, Inc.    During 1995, they made mortgage payments of at

least $3,192.14 to America’s Mortgage Servicing, Inc., later

known as First Nationwide Mortgage Corporation.    Throughout the

period during which petitioners resided at the East Tabor Street

property, they also paid for their gas, telephone, water, and

electricity usage at that property.
                                - 5 -

     Petitioners were the only individuals who lived in the

various residences that they occupied during the years at issue.

During those years, they did most of their grocery shopping at

Sam’s Club.

     During the years at issue, petitioners did not inherit any

money or property, nor did they apply for, or receive, any bank

loans.

     Petitioners maintained a joint bank account, account No.

8011127, at National City Bank (National City joint account)

until May 18, 1993, when they closed that account.    As of Decem-

ber 31, 1992, the balance in petitioners’ National City joint

account was $5.51.    On February 10, 1993, petitioners opened a

joint bank account, account No. 91138256, at Peoples Bank (Peo-

ples joint account) and made an opening deposit into that account

of $2,000.    As of December 31, 1993, the balance in petitioners’

Peoples joint account was $8,873.21.

     In 1988, Mr. Owens started a painting business (painting

business) which he continued to own and operate during the years

at issue and which was petitioners’ primary source of income

during those years.    Ms. Owens assisted Mr. Owens in his painting

business and was paid nonwage compensation of $1,700 during 1993

and $1,900 during 1995.

     Mr. Owens’ painting business undertook primarily industrial

and commercial painting jobs.    In those jobs, Mr. Owens served
                                 - 6 -

primarily as a subcontractor who performed painting work for

various general contractors, although occasionally he performed

work directly for various owners of small businesses.

     Petitioners, who did not maintain a separate bank account

for Mr. Owens’ painting business, generally deposited receipts

from Mr. Owens’ painting business into the National City joint

account that they maintained until May 18, 1993, and thereafter

into the Peoples joint account that they maintained.

     Mr. Owens conducted his painting business both inside and

outside his home State of Indiana.       He conducted that business

outside of Indiana in Ohio, Michigan, Kentucky, and Illinois.

While performing painting jobs outside the State of Indiana, Mr.

Owens received a lot of cash payments for his work.      That was

because it would have been virtually impossible for him to have

cashed any checks received while conducting his painting business

outside the State of Indiana.

     During 1993, 1994, and 1995, petitioners owned an Astro van,

a “box” truck (truck), and a Ford van.      During 1995, petitioners

also purchased a minivan.   Mr. Owens used at least in part one or

more of the vehicles that petitioners owned in conducting his

painting business.   Petitioners did not keep a contemporaneous

log of their business mileage.    Nor did petitioners determine as

of the beginning and the end of each of the years at issue the

odometer readings for any of the vehicles that they owned.
                              - 7 -

     During 1993, 1994, and 1995, petitioners paid cost of goods

sold for Mr. Owens’ painting business totaling $24,121, $64,514,

and $91,607, respectively.

     During 1993, 1994, and 1995, petitioners paid business

expenses for the painting business, excluding amounts paid for

Schedule C car and truck expenses, totaling $29,710, $34,023, and

$71,453, respectively.

     During 1993, 1994, and 1995, petitioners incurred $2,466.62,

$7,355.11, and $9,718.11, respectively, for parts, repairs, and

purchases for their vans and truck.   During each of those years,

petitioners also incurred expenses for gasoline for those vehi-

cles.

     Petitioners received insurance proceeds during 1994 and 1995

in the amounts of $4,300 and $4,700, respectively, as reimburse-

ments for certain of Mr. Owens’ tools that he had used in his

painting business and that had been stolen in prior years.

Petitioners had deducted the cost of those stolen tools on

returns that they had filed prior to 1994 and 1995.

     During the years at issue, petitioners owned rental property

located in Toledo (Toledo rental property), which constituted

another source of income to them during those years.   Petition-

ers’ mortgage with respect to the Toledo rental property was held

by Mid American National Bank, and they also had a second mort-

gage on that property with Northriver Development Corporation.
                               - 8 -

During 1993, 1994, and 1995, petitioners paid rental expenses

with respect to the Toledo rental property totaling $6,668,

$6,330, and $10,239, respectively.

     The only records that petitioners maintained with respect to

Mr. Owens’ painting business and the Toledo rental property were

their bank statements and the checks written on the joint bank

accounts that they maintained (the National City joint account

until May 18, 1993, and thereafter the Peoples joint account).

Petitioners prepared from those bank statements and checks a

monthly listing of the checks (petitioners’ monthly listing) that

they wrote.   Petitioners’ monthly listings, when totaled for the

months during each of the years at issue,4 showed that petition-

ers wrote checks for labor costs on the joint bank accounts that

they maintained (the National City joint account until May 18,

1993, and thereafter the Peoples joint account) that totaled

$18,784.75 for 1993, $43,038.38 for 1994, and $74,545 for 1995.

     During 1995, petitioners purchased property located on

Miller Street in Indianapolis (Miller Street property) for which

they paid at least $1,222.   In addition, during that year,

petitioners made downpayments totaling $10,090 toward the pur-

chase of property located on Massachusetts Street (Massachusetts



     4
      Petitioners’ monthly listings for 1993 that are in the
record do not include petitioners’ monthly listing for May 1993.
Instead, petitioners’ monthly listings for 1993 that are part of
the record include petitioners’ monthly listing for May 1996.
                                - 9 -

Street property).5   With respect to the Massachusetts Street

property, petitioners also made during 1995 at least (1) one

mortgage payment of $1,000, (2) a payment of $292.56 with respect

to telephone service, and (3) payments totaling $220.79 for

materials.

     Ms. Owens visited her mother in Lebanon, Missouri (Lebanon),

at least twice each year.   Ms. Owens’ visits to her mother

usually lasted between one week and one month.    During 1994, Ms.

Owens was snowed in during one of those visits.    As a result, Ms.

Owens stayed in Lebanon for two months.    When Ms. Owens traveled

to visit her mother in Lebanon, she took money with her for her

expenses.    During 1994, when Ms. Owens stayed for two months

because of a snowstorm, Mr. Owens wired her some money.

     Mr. Owens filed Form 1040, U.S. Individual Income Tax

Return, for taxable year 1990, which showed a loss for that year

of $13,779.   Mr. Owens and Ms. Owens jointly filed a return

(joint return) for each of the taxable years 1991 and 1992.

Those joint returns showed losses for 1991 and 1992 of $5,817 and

$31,843, respectively.    The loss that Mr. Owens reported in his

1990 return was equal to the loss that he claimed in Schedule C

of that return, reduced by $121 of taxable interest that he

reported in that return.    The loss that petitioners reported in



     5
      The record does not disclose the location of the Massachu-
setts Street property.
                              - 10 -

their joint return for 1991 was equal to the loss they claimed in

Schedule C of that return, reduced by $39 of taxable interest

that they reported in that return.     The loss that petitioners

reported in their joint return for 1992 was equal to the loss

that they claimed in Schedule C of that return.

     On December 27, 1996, petitioners filed a joint return for

taxable year 1993, which showed a loss of $6,520.     On December

26, 1996, petitioners filed joint returns for taxable years 1994

and 1995, which showed losses of $1,729 and $35,532, respec-

tively.   The loss that petitioners reported in their joint return

for each of the years at issue was equal to the total of the loss

claimed in Schedule C and the loss claimed in Schedule E, Supple-

mental Income and Loss (Schedule E), of each such return.

     In Schedules C of petitioners’ joint returns for 1993, 1994,

and 1995, petitioners reported (1) Schedule C gross receipts of

$66,779, $112,610, and $152,870, respectively; (2) Schedule C

cost of goods sold of $24,121, $64,514, and $91,607, respec-

tively; (3) Schedule C gross income of $42,658, $48,096, and

$61,263, respectively; (4) Schedule C expenses of $46,510,

$48,813, and $93,953, respectively; and (5) Schedule C losses of

$3,852, $717, and $32,690, respectively.     Included within the

claimed Schedule C cost of goods sold for the years 1993, 1994,

and 1995 was claimed cost of labor in the amounts of $20,766,
                             - 11 -

$48,503, and $86,950, respectively.6   Petitioners included the

nonwage compensation of $1,700 and $1,900 that Ms. Owens received

from Mr. Owens’ painting business during 1993 and 1995, respec-

tively, in calculating the cost of labor claimed in Schedules C

of their respective joint returns for those years.    However, Ms.

Owens did not report the respective amounts of such nonwage

compensation in petitioners’ joint returns for 1993 and 1995.

     For each of the years at issue, petitioners computed the

gross receipts from Mr. Owens’ painting business that they

reported in Schedule C for each such year by totaling the bank

deposits that they had made during each such year.   They provided

the resulting total of those deposits for each of the years at

issue to their tax return preparer (return preparer) for report-

ing in Schedule C of their return for each such year.

     For each of the years at issue, petitioners computed the

expenses, with the exception of the Schedule C car and truck

expenses, that they claimed in Schedule C for each such year by

categorizing the checks they had written during each such year

and then totaling each category of expense.   They provided the

resulting total for each such category for each of the years at

issue to their return preparer for reporting in Schedule C of


     6
      The amounts of the cost of labor for 1993, 1994, and 1995
that petitioners claimed as part of the claimed Schedule C cost
of goods sold for those years exceed the respective amounts of
labor costs that are reflected in petitioners’ monthly summaries
for those years.
                              - 12 -

their return for each such year.

     With respect to the Schedule C car and truck expenses, for

each of the years at issue, petitioners provided their return

preparer with the amount of business miles that they claimed they

had driven during each such year, and that return preparer used

the standard mileage rate to determine the amount of the deduc-

tion for such expenses that petitioners claimed in Schedule C of

their return for each such year.

     In Schedule E for 1993, 1994, and 1995, petitioners reported

rental income from the Toledo rental property of $4,000, $5,318,

and $7,397, respectively, and rental expenses from that property

of $6,668, $6,330, and $10,239, respectively.

     In the notice, respondent used an indirect method, the so-

called source and applications of funds method, in order to

determine whether petitioners had unreported Schedule C gross

receipts for any of the years at issue.   That was because peti-

tioners had not maintained adequate records for any of those

years.   Respondent derived all of the amounts that respondent

used in applying the source and application of funds method with

respect to each of the years at issue from one or more of the

following sources:   Petitioners’ joint return for each such year,

petitioners’ bank statements for each such year, petitioners’

monthly listings for each such year, and petitioners’ oral

statements made to respondent’s revenue agent who conducted the
                             - 13 -

examination of each such joint return.    In applying the source

and applications of fund method for each of the years at issue,

respondent prepared a so-called Cash T (Cash T) for each of those

years, which reflected debits and credits for various items that

respondent derived from one or more of the foregoing sources.

Set forth below is the Cash T that respondent prepared for each

of the years at issue:

                              1993

                                      Debits         Credits
     Schedule C gross receipts        $66,779           --
     Cost of goods sold                  --          $24,121
     Schedule C expenses                 --           46,510
     Less standard mileage rate          --          -16,800
     Rental income                      4,000           --
     Rental expenses                     --           6,668
     Bank account balance                   6          8,873
     Personal living expenses            --            8,338
     Checks to Ms. Owens
      deducted as Schedule C
      cost of labor                        --         1,700
     Truck expenses                        –-         4,900
          Totals                         70,785      84,310
           Less total debits                        -70,785
     Understatement                                  13,525
                             - 14 -

                              1994

                                       Debits      Credits
     Schedule C gross receipts        $112,610        --
     Cost of goods sold                   --       $64,514
     Schedule C expenses                  --        48,813
     Less standard mileage rate           --       -14,790
     Rental income                       5,318        --
     Rental expenses                      --         6,330
     Bank account balance                8,873      17,265
     Insurance proceeds                  4,300        --
     Principal payments on
       rental property                   --          2,894
     Personal living expenses            --         22,669
     Truck expenses                      –-          9,788
          Totals                       131,101     157,483
           Less total debits                      -131,101
     Understatement                                 26,382

                              1995

                                       Debits      Credit
     Schedule C gross receipts        $152,870       --
     Cost of goods sold                  --        $91,607
     Schedule C expenses                 --         93,953
     Less standard mileage rate          --        -22,500
     Rental income                      7,397        --
     Rental expenses                     --         10,239
     Bank account balance               17,265           87
     Insurance proceeds                  4,700        --
     Purchase of Massachusetts
       Street property                   --         11,090
     Checks to Ms. Owens
       deducted as Schedule C
       cost of labor                     --          1,900
     Personal living expenses            --         14,047
     Truck expenses                      –-         12,151
          Totals                       182,232     212,574
           Less total debits                      -182,232
     Understatement                      --         30,342


     In the notice, respondent determined to increase petition-

ers’ Schedule C gross receipts for each of the years 1993, 1994,

and 1995 in the amounts of $13,525, $26,382, and $30,342, respec-
                               - 15 -

tively, which were the respective amounts determined for those

years on the basis of respondent’s application of the source and

application of funds method.

     In the notice, respondent also determined to disallow the

claimed Schedule C car and truck expenses for 1993, 1994, and

1995 in the amounts of $11,550, $9,352, and $16,875, respectively

“because it has not been established that more than $5,250.00 for

1993, $5,438.00 for 1994 and $5,625.00 for 1995 was for an

ordinary and necessary business expense, or was expended for

purpose designated.”

     In the notice, respondent also determined that the insurance

reimbursements of $4,300 and $4,700 that petitioners received

during 1994 and 1995, respectively, resulted in taxable gain to

petitioners because they had “deducted the cost of the tools that

were stolen in prior years * * * [and] your basis is zero.”

     In the notice, respondent also determined that petitioners

are liable for each of the years at issue for the addition to tax

under section 6651(a)(1) because they failed to file timely their

return for each of those years.

                               OPINION

     Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.      See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).
                               - 16 -

Schedule C Gross Receipts

     Respondent determined that petitioners did not keep adequate

records from which their taxable income could accurately be

calculated.   The only records of income and expense that peti-

tioners maintained with respect to Mr. Owens’ painting business

and the Toledo rental property were their bank statements, the

checks written on their joint bank accounts (the National City

joint account until May 18, 1993, and thereafter the Peoples

joint account), and petitioners’ monthly summaries that they

prepared from those bank statements and checks.   We agree with

respondent that petitioners did not maintain adequate tax rec-

ords.   See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

     In the absence of adequate records, respondent reconstructed

petitioners’ income on the basis of the source and application of

funds method and determined that petitioners have unreported

Schedule C gross receipts.   The source and application of funds

method of reconstructing income is based on the assumption that,

absent some explanation, the amount by which a taxpayer’s expen-

ditures during a taxable year exceed the taxpayer’s known sources

of income is taxable income.   See Erickson v. Commissioner, 937

F.2d 1548, 1553 (10th Cir. 1991); Petzoldt v. Commissioner, 92

T.C. 661, 694 (1989).

     Petitioners contend that respondent’s indirect method of

income reconstruction was “conducted in a careless, malicious
                             - 17 -

manner” and “is entirely flawed and deceptive”.7    On the instant

record, we reject petitioners’ contentions.   On that record, we

find respondent’s method of reconstructing petitioners’ income

and the results generated by that method to be reasonable.8

     Based on our examination of the entire record before us, we

find that petitioners have failed to establish any error in

respondent’s reconstruction of petitioners’ income on the basis

of the source and application of funds method.     Consequently, we

sustain respondent’s determinations in the notice to increase


     7
      Petitioners also complain that respondent’s revenue agent
who examined the joint returns at issue did not testify at trial.
Instead, another revenue agent of respondent testified with
respect to respondent’s indirect method of income reconstruction
in this case. According to petitioners, they “should have the
opportunity to face” the revenue agent who examined their joint
returns for the years at issue. The individual who testified on
behalf of respondent (respondent’s witness) was a revenue agent
who, as of the time of the trial, had worked for respondent for
13 years, having served as a tax auditor responsible for the
examination of individual tax returns for 9-1/2 years. Respon-
dent’s witness testified because the revenue agent who examined
petitioners’ returns for the years at issue was not available to
testify on the date of the trial in this case. Respondent’s
witness reviewed respondent’s administrative file with respect to
the examination of petitioners’ joint returns for the years at
issue and was thoroughly familiar with the contents of that file,
including all of the work papers therein and petitioners’ joint
returns for the years at issue. Respondent’s witness was also
thoroughly familiar with the source and applications of funds
method that respondent used in reconstructing petitioners’
income. We found respondent’s witness to be credible and her
testimony to be reliable.
     8
      Petitioners make no claims that, prior to 1993, they had
accumulated a large amount of cash or that they received amounts
from nontaxable sources during the years at issue.
                                 - 18 -

petitioners’ Schedule C gross receipts for each of the years at

issue.

Claimed Schedule C Deductions

     Respondent disallowed petitioners’ claimed Schedule C car

and truck expenses for 1993, 1994, and 1995 in the amounts of

$11,550, $9,352, and $16,875, respectively.9

     Deductions are strictly a matter of legislative grace, and

petitioners bear the burden of proving that they are entitled to

any deductions claimed.     See INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).

     Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

any trade or business.     Section 274(d)(4) operates to disallow

any deduction otherwise allowable under, inter alia, section

162(a) with respect to, inter alia, any “listed property”, unless

the taxpayer satisfies the substantiation requirements of that

section.10     “Listed property” is defined in section 280F(d)(4) to


     9
      Respondent did not disallow the remaining claimed Schedule
C car and truck expenses for 1993, 1994, and 1995 in the amounts
of $5,250, $5,438, and $5,625, respectively.
     10
          Sec. 274(d) provides in pertinent part:

     SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC.,
               EXPENSES.

     (d) Substantiation Required.–-No deduction or credit
     shall be allowed--
                                                  (continued...)
                                - 19 -

include passenger automobiles and other property used as a means

of transportation.     See sec. 280F(d)(4)(A)(i) and (ii).

     Petitioners acknowledge that they kept no records of the

type required by section 274(d) and the regulations thereunder.

Consequently, petitioners may establish their entitlement to the

Schedule C car and truck expenses that respondent disallowed for

each of the years at issue only by introducing into the record in

this case their own statements and sufficient evidence corrobo-

rating such statements.     See sec. 274(d)(4); sec. 1.274-5T(c)(1),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

We find that the general, vague, and conclusory testimony of

petitioners regarding the number of miles that one or more of

their vehicles was driven for business purposes during each of

the years at issue does not satisfy those substantiation require-

ments.

     Based upon our examination of the entire record before us,

we find that petitioners have failed to establish that they are


     10
          (...continued)
              *      *     *      *       *      *      *

             (4) with respect to any listed property (as de-
             fined in section. 280F(d)(4)),

     unless the taxpayer substantiates by adequate records
     or by sufficient evidence corroborating the taxpayer’s
     own statement (A) the amount of such expense or other
     item, (B) the time and place of the * * * use of the
     facility or property * * * , (C) the business purpose
     of the expense or other item * * * .
                              - 20 -

entitled to deduct the claimed Schedule C car and truck expenses

at issue.   Consequently, we sustain respondent’s determinations

disallowing those claimed expenses.

Certain Insurance Reimbursements

     Respondent determined that petitioners must include in

income for 1994 and 1995 insurance proceeds in the amounts of

$4,300 and $4,700, respectively, that they received as reimburse-

ments for certain of Mr. Owens’ business tools which had been

stolen in prior years and the cost of which petitioners deducted

in returns that they had filed prior to 1994 and 1995.

     Based on our examination of the entire record before us, we

find that petitioners have failed to prove that the insurance

reimbursements of $4,300 and $4,700 that they received during

1994 and 1995, respectively, do not constitute income.11   See

sec. 1.165-1(d)(2)(iii), Income Tax Regs.   Consequently, we

sustain respondent’s determinations with respect to those insur-

ance reimbursements.

Claimed Net Operating Loss Deductions

     At trial, petitioners took the position that they are

entitled to a net operating loss deduction for each of the years

at issue, which is attributable to net operating loss carryovers


     11
      We are not persuaded by petitioners’ general, vague, and
conclusory testimony regarding their alleged purchase of other
tools during 1994 and 1995 that the insurance reimbursements at
issue do not constitute income.
                              - 21 -

from the years 1990 through 1992.   The only evidence offered by

petitioners in support of that position is their general, vague,

and conclusory testimony, Mr. Owens’ return for 1990, and peti-

tioners’ joint returns for 1991 and 1992.   Although each of the

returns for 1990, 1991, and 1992 shows a loss attributable to

petitioners’ Schedule C business, petitioners failed to introduce

any evidence establishing the loss claimed in each of those

returns.   The returns for 1990 through 1992 constitute nothing

more than the position of petitioners that they had the respec-

tive losses claimed in those returns.

     Based on our examination of the entire record before us, we

find that petitioners have failed to show that they are entitled

for any of the years at issue to a net operating loss deduction.

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

     Respondent determined that petitioners are liable for the

addition to tax under section 6651(a)(1) because they filed their

1993 joint return on December 27, 1996, and their 1994 and 1995

joint returns on December 26, 1996.

     Section 6651(a)(1) imposes an addition to tax for failure to

file timely a tax return.   The addition to tax does not apply if

the failure is due to reasonable cause, and not to willful

neglect.   See sec. 6651(a)(1).

     As we understand petitioners’ position, they contend that

they should not be held liable for the additions to tax under
                                 - 22 -

section 6651(a)(1) because, when the return for each of the years

at issue was due, they were involved in respondent’s examination

of their taxable years 1990 through 1992, and they did not

believe that they owed any tax.     On the record before us, we find

that those reasons do not constitute reasonable cause for pur-

poses of section 6651(a)(1).12

     Based on our examination of the entire record before us, we

find that petitioners have failed to establish that their failure

to file timely the joint returns in question was due to reason-

able cause, and not due to willful neglect.    Consequently, we

sustain respondent’s determinations that petitioners are liable

for each of the years at issue for the addition to tax under

section 6651(a)(1).

     We have considered all of the contentions and arguments of

petitioners that are not discussed herein, and we find them to be

without merit and/or irrelevant.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.




     12
      See Klyce v. Commissioner, T.C. Memo. 1999-198; Likes v.
Commissioner, T.C. Memo. 1991-286; see also Ferguson v. Commis-
sioner, T.C. Memo. 1994-114; Knight v. Commissioner, T.C. Memo.
1984-376.
