                         T.C. Memo. 1999-267



                      UNITED STATES TAX COURT



            SHANE MICHAEL OPTICAL, CO., A CALIFORNIA
                    CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          ELLIOTT SHANE AND ANN SHANE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket Nos. 4426-98, 4431-98.      Filed August 9, 1999.



     Gino P. Cecchi, for petitioners.

     Wendy Abkin, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   These cases have been consolidated for trial,

briefing, and opinion.   Shane Michael Optical, Co. (Shane

Michael) and Elliott and Ann Shane (collectively the Shanes)
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separately petitioned the Court to redetermine respondent's

determinations as to their 1993, 1994, and 1995 taxable years.

Respondent determined that Shane Michael was liable for accuracy-

related penalties under section 6662(a) of $2,091, $3,379, and

$2,437, respectively, and that it was liable for a $1,704

addition to its 1994 tax under section 6651(a)(1).    Respondent

determined that the Shanes were liable for accuracy-related

penalties under section 6662(a) of $5,653, $6,244, and $8,043,

respectively, and that they were liable for a $1,557 addition to

their 1994 tax under section 6651(a)(1).

     Respondent concedes that none of petitioners are liable for

the additions to tax.   Thus, we are left to decide whether Shane

Michael and the Shanes are liable for the accuracy-related

penalties.   We hold they are not.   Unless otherwise stated,

section references are to the Internal Revenue Code in effect for

the years in issue.   Rule references are to the Tax Court Rules

of Practice and Procedure.

                         FINDINGS OF FACT

     Some of the facts have been stipulated.    The stipulated

facts and the exhibits submitted therewith are incorporated

herein by this reference.    When the Court filed the respective

petitions, Shane Michael's legal address was in San Francisco,

California, and the Shanes resided in San Mateo, California.
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     The Shanes are husband and wife, and they own all the stock

of Shane Michael, a C corporation.      At the time of trial, Mr.

Shane was 81 years old.   Shane Michael retails and wholesales

optical merchandise, and its business requires that its

salespersons travel frequently and worldwide.      Shane Michael

generally requires that its salespersons pay their travel,

entertainment, and other business expenses out of pocket and seek

reimbursement from it for those expenses.

     Shane Michael and the Shanes use the same accounting firm to

perform their accounting and tax work, and they have used this

firm in each of the past 52 years.      As relevant herein, the

accounting firm reviews Shane Michael's records and prepares its

financial statements and income tax returns.      A bank/lender

requires that the firm "review" Shane Michael's records every

year.   The firm also prepares the Shanes' personal income tax

returns.   Each year, Mr. Shane places his tax records in a desk

drawer and, when tax time comes around, gives those documents to

the accounting firm to prepare his personal tax returns.      Mr.

Shane relies on the firm to prepare his personal and corporate

income tax returns correctly.

     Shane Michael's tax returns for the subject years claim

deductions totaling $1,697,206, $1,446,621, and $1,544,323,

respectively.   Of those amounts, respondent determined that Shane

Michael could not deduct the following amounts claimed for

travel, automobile, and insurance expenses because it lacked

substantiation:
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  Year       Travel        Automobile    Insurance     Total

  1993       $27,847       $18,839       $4,803      $51,489
  1994        27,847        22,014        8,031       57,892
  1995        29,023        37,142        7,796       73,961

Shane Michael agrees with this determination.     With the exception

of a $9,374 deduction for taxes claimed in 1995, respondent

disallowed no other amount that Shane Michael reported as a

deduction for the subject years.

     Respondent also determined that the adjustment to Shane

Michael's taxable income meant that the Shanes received

constructive dividends of $51,849 in 1993, $57,892 in 1994, and

$72,785 in 1995.   The Shanes agree with this determination, and

they agree with another determination that, for each year in

issue, they did not include in their gross income $37,500 of

interest income received from Shane Michael.      Mr. Shane had lent

money to Shane Michael before the subject years, and he received

during the subject years interest on those loans.     Mr. Shane did

not receive for the subject years a tax form reporting that he

had received that interest.

     Mr. Shane uses his automobile for business.     He also

traveled on business worldwide and frequently up until the spring

of 1993 when he was diagnosed with cancer and began receiving

medical treatment.     At that time, Mr. Shane also stopped keeping

an expense log which, in previous years, he gave to Shane

Michael's bookkeeper for reimbursement of his business expenses

and to his accountant to prepare the Shanes' personal income tax

returns.   Shane Michael continued to pay Mr. Shane an expense
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allowance after he stopped traveling, including the amount

thereof in the checks that it would give him every month for his

services and for his reimbursed expenses.

     The accounting firm never advised Shane Medical or the

Shanes on the difference or distinction between a personal and a

business expense.

                              OPINION

     Respondent determined that the underpayments stemming from

the income adjustments mentioned above were due to negligence,

and, accordingly, that all of petitioners were liable for

accuracy-related penalties under section 6662(a).   Section

6662(a) imposes an accuracy-related penalty equal to 20 percent

of the portion of an underpayment that is attributable to

negligence.

     Petitioners must prove this determination wrong.    See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); see also

Allen v. Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg.

92 T.C. 1 (1989); Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972).   Petitioners must prove that they made a reasonable

attempt to comply with the provisions of the Internal Revenue

Code, and that they were not careless, reckless, or in

intentional disregard of rules or regulations.   See sec. 6662(c).

     We believe that both Shane Medical and the Shanes have

disproved respondent's determination of negligence.   A taxpayer

is not negligent when the taxpayer relies reasonably on a tax

adviser for tax advice.   Reasonable reliance occurs when:
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(1) The adviser has sufficient expertise to justify reliance,

(2) the taxpayer provides necessary and accurate information to

the adviser, and (3) the taxpayer actually relies in good faith

on the adviser’s judgment.   See, e.g.,    Ellwest Stereo Theatres,

Inc. v. Commissioner, T.C. Memo. 1995-610.    Such is the case

here.   Mr. Shane is an elderly man, and both he and Shane Michael

relied reasonably on their longtime accounting firm to prepare

their tax returns correctly.   Although respondent ultimately

disallowed a small portion of Shane Michael's deductions as

unsubstantiated, we do not believe that Shane Michael was

negligent in claiming those deductions.    Nor do we believe that

the Shanes were negligent when they failed to report the

dividends that resulted from respondent's disallowance of those

deductions, or the interest that Mr. Shane received from Shane

Michael.

     We have considered all arguments by respondent for contrary

conclusions, and, to the extent not discussed above, find them to

be without merit.

                                           Decisions will be entered

                                       for petitioners.
