                            T.C. Memo. 2002-279



                          UNITED STATES TAX COURT



             WILLIAM AND SHIRLEY PRATT, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12271-99.                    Filed November 6, 2002.


     William Pratt, pro se.

     Fred E. Green, Jr., for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:        In a statutory notice of deficiency dated

April 8, 1999, respondent determined deficiencies in petitioners’

Federal   income   tax,     additions   to   tax   pursuant   to   sections

6651(a)(1), and penalties pursuant to 6662(a), as follows:
                              - 2 -

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

     1993     $40,764              $10,191              $8,153
     1994      55,887               13,972              11,177
     1995     288,098               71,855              57,620

     All section references are to the Internal Revenue Code for

the years at issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     The issues for decision are: (1) Whether for 1995 petitioners

are entitled to the amount of cost of goods sold reported on

Schedule C, Profit or Loss From Business; (2) whether for 1993,

1994, and 1995 petitioners are entitled to Schedule C expense

deductions in excess of those amounts allowed by respondent; (3)

whether petitioners are liable for self-employment taxes; (4)

whether petitioners are liable for additions to tax under section

6651(a)(1) for 1993, 1994, and 1995; and (5) whether petitioners

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

substantial understatement of income tax as provided in section

6662(b)(2) for 1993, 1994, and 1995.

     Additional adjustments made by respondent to petitioners’

exemptions, itemized deductions, and self-employment taxes are

computational and will be resolved by our holdings with respect to

the aforementioned issues.
                                - 3 -

                           FINDINGS OF FACT

Background

     Some of the facts have been stipulated and are so found.1   The

stipulation of facts and the exhibits submitted therewith are

incorporated herein by this reference.

         Petitioners William and Shirley Pratt are husband and wife.

At the time the petition was filed, petitioners resided in Desert

Hot Springs, California.

     William Pratt (petitioner) has a tenth-grade education. After

leaving school, petitioner went to Korea for an unspecified period.

Upon his return from Korea, petitioner became involved in sheet

metal work.

     Petitioner owned and operated a sheet metal business under the

name Dormer & Louver of Nevada (Dormer & Louver) in North Las

Vegas, Nevada.    Dormer & Louver manufactured gable vents.   During

the years at issue, petitioner employed three to five employees,

depending upon the amount of business.    Mrs. Pratt   worked in the

office of Dormer & Louver when the business first started; she was

a homemaker during the years at issue.

     Petitioner turned over all of his business records, including

the checkbook, check stubs, and receipts, for Dormer & Louver to


     1
          Shirley Pratt neither signed the stipulation of facts nor
appeared at trial. The case with respect to her will be dismissed
for lack of prosecution, and the decision with respect to her will
be consistent with the decision entered with respect to William
Pratt.
                                       - 4 -

his accountants.        Consequently, petitioner did not know “what the

rent was, how much was paid [for] materials, supplies, and stuff”

with regard to the financial operations of the company.

Federal Income Tax Returns

     Petitioners filed joint Federal income tax returns for 1993,

1994,   and     1995.     Dormer   &    Louver    was    operated    as   a   sole

proprietorship; for Federal income tax purposes, the income and

expenses of the business were reported on Schedule C, Profit or

Loss From Business (Sole Proprietorship).                On the Schedules C,

petitioner described the principal business of Dormer & Louver as

“MANUFACTURING CONSTRUCTION MATERIALS”.

     Petitioners failed to file their 1993-95 tax returns timely.

They did not request extensions of time to file their income tax

returns for any of these years.

     On    an   undisclosed    date     in     1996,   petitioners   filed     for

bankruptcy. Petitioners filed joint income tax returns for 1993-95

after they filed for bankruptcy.

     Petitioners’ joint returns for 1993 and 1994 were prepared by

Accufast      Business    Services,     Inc.     (Accufast),    of    Palmdale,

California.      The 1993 and 1994 returns were signed by Accufast on

April 1, 1994, and April 12, 1995, respectively.                Both of these

returns were signed by petitioners on September 12, 1995.                      The

returns were received by respondent’s Ogden/Las Vegas Service

Center on September 16, 1996.
                                     - 5 -

     The joint return for 1995 was signed by both petitioners and

a representative of J.E. & Associates (J.E. & Assoc.), of Las

Vegas, Nevada, as tax preparer, on November 18, 1996.                  The 1995

return was received by respondent’s Ogden/Las Vegas Service Center

on July 30, 1997.

     On the Schedule C attached to their 1993 Federal income tax

return, petitioners reported Dormer & Louver’s gross receipts to be

$244,710, cost of goods sold to be zero, total business expenses to

be $237,571, and net profit to be $7,139.

     On the Schedule C attached to their 1994 Federal income tax

return, petitioners reported Dormer & Louver’s gross receipts to be

$442,012, cost of goods sold to be zero, total business expenses to

be $435,262, and net profit to be $6,750.

     On   the    Schedule    C   attached    to   their   1995   tax    return,

petitioners     reported    Dormer   &   Louver’s   gross   receipts     to   be

$1,095,339, returns and allowances to be $454,387, cost of goods

sold to be $311,578, total business expenses to be $404,606, and

net loss to be $75,232.

     Dormer & Louver’s gross receipts and business expenses for

1993, 1994, and 1995 were computed using the cash method of

accounting.

     For tax years 1993-95, respondent determined Dormer & Louver’s

cost of goods sold and business expenses to be as follows:
                              - 6 -

    1993

           Item             Amount Claimed    Amount Allowed

   Cost of Goods sold             -0-               -0-
   Advertising                   $106              $106
   Car & truck expenses         8,298             8,298
   Insurance                    2,967             2,967
   Legal & profl. servs.        3,875             3,875
   Office expenses              7,955             7,955
   Rent1                       20,673               163
   Repairs                      3,766             3,766
   Supplies                   112,413               -0-
   Utilities                    3,612             3,612
   Wages                       45,753            45,753
   Other expenses2             28,153            28,153

     1
        On line 20 of the Schedule C, under “Rent or Lease”,
petitioners reported two expenses--$163 for vehicles, machinery &
equipment expenses and $20,510 for other business property
expenses.
     2
         These expenses consisted of $5,055 for payroll taxes,
$1,788 for outside services, $206 for bank charges, $366 for
freight & delivery, $4,819 for insurance, $608 for postage, $8,771
for shipping/shop supply, $3,766 for telephone, and $2,774 for
small tools.
                              - 7 -

    1994

           Item               Amount Claimed     Amount Allowed

    Cost of goods sold             -0-                 -0-
    Advertising                    $42                 $42
    Car & truck expenses         6,618               6,618
    Depreciation                 1,693               1,693
    Insurance                    3,426               3,426
    Legal & profl. servs.        4,452               4,452
    Office expenses              8,531               8,531
    Rent1                       21,106                 596
    Repairs                      2,338               2,338
    Supplies                   131,014                 -0-
    Taxes & licenses            14,207              14,207
    Utilities                    4,116               4,116
    Wages                      199,428             199,428
    Other expenses2             38,291              38,291
     1
         On line 20 of the Schedule C, under “Rent or Lease”,
petitioners reported two expenses--$596 for vehicles, machinery &
equipment expenses and $20,510 for other business property
expenses.
     2
          These expenses consisted of $12,990 for payroll taxes,
$2,980 for outside services, $140 for bank charges, $510 for
freight & delivery, $550 for fuel, $5,610 for insurance, $710 for
postage, $9,680 for shipping/shop supply, $2,080 for telephone, and
$3,000 for small tools. These figures are approximate.
                                    - 8 -

    1995

           Item                   Amount Claimed        Amount Allowed

    Cost of goods sold              $311,578                   -0-
    Returns & Allowances             454,387                   -0-
    Advertising                        3,462                 $3,462
    Insurance                         10,809                 10,809
    Legal & profl. servs.              6,917                  6,917
    Rent1                             43,787                  2,150
    Repairs                            8,574                  8,574
    Supplies                           5,203                  5,203
    Taxes & licenses                  23,995                 23,995
    Meals/Entertainment                2,852                  2,852
    Utilities                          6,442                  6,442
    Wages                            140,376                140,376
    Other expenses2                  152,209                152,209

     1
        On line 20 of the Schedule C, under “Rent or Lease”,
petitioners reported two expenses--$2,150 for vehicles, machinery
& equipment expenses and $41,637 for other business property
expenses.
     2
         These expenses consisted of $14,306 for payroll taxes,
$4,857 for bank charges, $333 for dues & subscriptions, $876 for
postage, $2,198 for communication radios, $4,619 for shipping/shop
supply, $5,020 for subcontractors, $419 for property taxes, $5,503
for telephone, $30,282 for vehicle expense, $15,558 for SIIS,
$61,183 for other taxes, and $7,055 for tool expense.

     At an undisclosed date before July 1998, in conjunction with

preparing a proof of claim in petitioners’ bankruptcy proceeding,

respondent commenced an examination of petitioners’ 1993-95 income

tax returns.      Petitioners were notified in writing of proposed

changes    to   their   1993-95   returns   (the   30-day   letter).2    The

examination of petitioners’ returns culminated in respondent’s


     2
          The 30-day letter was also sent to Thomas E. Crowe, Esq.,
counsel for petitioners.
                                  - 9 -

issuance of a notice of deficiency to petitioners on April 8, 1999.

The adjustments made in this notice are the subject of the present

controversy.

     Petitioners petitioned the Court for a redetermination of

respondent’s    determinations.       The   petition   was   filed   on

petitioners’ behalf by Thomas E. Crowe, Esq. Mr. Crowe withdrew as

petitioners’ counsel on July 10, 2002, 2 months before the trial in

this case was scheduled to begin.

     With respect to the returns for 1993 and 1994, petitioner

contacted Accufast and was informed that the tax returns for those

years were correct. Petitioner requested that Accufast provide him

with all records, receipts, or other documentation which he could

use to substantiate the expenses claimed on the 1993 and 1994

returns.    Accufast, however, could not provide petitioner with the

requested documentation because Accufast did not retain clients’

records after 5 years.     Petitioner believed that the deductions

Accufast claimed as reflected on the 1993 and 1994 tax returns were

accurate.

     In addition, petitioner contacted J.E. & Assoc. for documents

it had used in preparing the 1995 return.        Petitioner testified

that J.E. & Assoc. claimed it had not prepared petitioners’ 1995

return.     Petitioner sent a copy of the return to J.E. & Assoc.

(which showed the return signed by a representative of J.E. &
                                        - 10 -

Assoc.),       but   no   one    from    that     accounting       firm    replied   to

petitioner’s inquiry.

                                        OPINION

       As a general rule, the determinations by the Commissioner in

a notice of deficiency are presumed correct, and the burden is on

the taxpayer to show that the Commissioner’s determinations are

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

(1933).3

       Deductions are a matter of legislative grace; the taxpayer

bears the burden of proving entitlement to all deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

I.   Schedule C--Adjustments

       A business’s income is computed by taking                   into account its

cost of goods sold as well as a variety of expenses.                      Cost of goods

sold       reduces   (i.e.,     is   subtracted        from)   gross      receipts   in

determining the business’s gross income.                  Sec. 1.61-3(a), Income

Tax Regs.       Cost of goods sold is not treated as a deduction from

gross income and is not subject to the limitations on deductions

contained      in    sections    162    and     274.       Metra    Chem     Corp.   v.

Commissioner, 88 T.C. 654, 661 (1987).                    All amounts claimed as


       3
          Pursuant to sec. 7491, the burden of proof or of
production may be placed on the Commissioner in certain
circumstances for audits conducted after July 22, 1998. Sec. 7491
is inapplicable in this case because petitioners’ examination
commenced before July 22, 1998.
                                         - 11 -

costs of goods, however, must be substantiated, and taxpayers are

required to maintain records sufficient for this purpose.                         Sec.

6001; Newman v. Commissioner, T.C. Memo. 2000-345; Wright v.

Commissioner, T.C. Memo. 1993-27; sec. 1.6001-1(a), Income Tax

Regs.

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

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.”                As with cost of goods sold,

amounts deducted pursuant to section 162(a) must be substantiated,

and   records    sufficient         to   establish    such    deductions     must     be

maintained by the taxpayer.              Sec. 6001; Hradesky v. Commissioner,

65 T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th Cir. 1976); see

also sec. 1.6001-1(a), (e), Income Tax Regs.

      When a taxpayer adequately establishes that he or she has paid

or    incurred    a    deductible        expense     but    is     unable   to   fully

substantiate it, the Court is permitted, in some circumstances, to

determine   the       amount   of    the   allowable       deduction   based     on   an

approximation,         bearing      heavily    against       the    taxpayer     whose

inexactitude is of his or her own making.                   Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930).                   There must, however, be

sufficient evidence contained in the record to provide a basis for

the Court to make an estimate and to conclude that a deductible
                                 - 12 -

expense was incurred in at least in the amount to be allowed.4

Norgaard v. Commissioner, 939 F.2d 874, 879 (9th Cir. 1991), affg.

T.C. Memo. 1989-390; Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).

     Petitioner   unsuccessfully       attempted     to    obtain   from   his

accountants the business records of Dormer & Louver, as well as all

documents   the   accountants    had    used    in   the    preparation    of

petitioners’   1993-95   tax    returns.       Petitioner     requested    all

records, receipts, or other documentation which could substantiate

the costs and expenses claimed on the returns.            However, Accufast,

the tax return preparer for 1993 and 1994, did not retain clients’

records after 5 years, and J.E. & Assoc., the other purported tax

return preparer, claimed it had not prepared petitioners’ 1995

return and ignored petitioner’s inquiry.




     4
          Sec. 274 requires a taxpayer to substantiate expenses for
travel, meals and entertainment, and gifts, and with respect to
listed property (as defined in sec. 280F(d)(4) and including
passenger automobiles) by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement establishing
the amount, time, place, and business purpose of the expense. Sec.
274(d); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.
46014 (Nov. 6, 1985).      The sec. 274 rules of substantiation
supersede the doctrine of Cohan v. Commissioner, 39 F.2d 540, 543-
544 (2d Cir. 1930). Sanford v. Commissioner, 50 T.C. 823, 827-828
(1968), affd. 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),
Temporary Income Tax Regs., supra. The expenses and deductions at
issue in this case do not fall within those expenses covered by
sec. 274.
                              - 13 -

     A.   Gross Receipts and Cost of Goods Sold Reported on
          Petitioners’ 1995 Schedule C

     For the tax year 1995, petitioners reported gross receipts

from Dormer & Louver in the amount of $1,095,339 and claimed cost

of goods sold of $311,578. At trial, petitioner testified that the

$1,095,339 reported on petitioners’ 1995 return as gross receipts

and the $311,578 reported as cost of goods sold were each a

“mistake”.   Petitioner further testified “there was no way I could

ever earned a million dollars in sales.”      Petitioner, however,

could not substantiate how the $311,578 claimed as cost of goods

sold was calculated. He testified that he provided the accountants

with the business records, checkbook, stubs, and receipts and that

he relied on his accountants in the preparation of the 1995 tax

return.   Petitioner asserted that he never looked at the 1995

return; rather, he testified that he “signed it and off it went”.

     Statements made on a tax return signed by the taxpayer have

long been considered admissions, and such admissions are binding on

the taxpayer, absent cogent evidence indicating they are wrong.

Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), affg.

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);

Rankin v. Commissioner, T.C. Memo. 1996-350, affd. 138 F.3d 1286

(9th Cir. 1998).

     Other than petitioner’s blanket renunciation of the amount of

gross receipts reported on the return, there is nothing in the
                               - 14 -

record to substantiate petitioner’s claim that Dormer & Louver’s

1995 gross receipts were overstated.    Moreover, petitioner did not

testify or offer any other evidence as to the cost of goods sold.

Thus, we are unable to estimate with a degree of reliability the

amount of Dormer & Louver’s cost of goods sold for 1995.    Because

of petitioner’s inexactitude, we sustain respondent on this issue.

     B. Schedule C Business Expense Deductions for 1993, 1994, and
        1995

          1.   Rent Expenses

     Petitioners claimed rent expenses of $20,510 for 1993, $20,510

for 1994, and $41,637 for 1995.

     With respect to the rent expenses of $20,510 for 1993 and

$20,510 for 1994, petitioner testified that he believed these

figures were accurate.    Petitioner’s testimony was not sufficient

to enable us to estimate the rent expenses. Indeed, petitioner did

not even testify as to whether rent was actually paid, nor did he

identify the lessor, the amount of rent, or the rental period.

Morever, petitioner disputed the claimed $41,637 rent expense for

1995 and in general, testified that the 1995 return was “blown out

of proportion.”   Again, because petitioner presented no evidence,

documentary or otherwise, to substantiate the rent expenses, we

sustain respondent’s determinations on this issue.

          2.   Supplies

     Petitioners claimed Schedule C expenses for supplies in the

amounts of $112,413 for 1993, $131,014 for 1994, and $5,203 for
                                             - 15 -

1995.       Respondent disallowed the $112,413 and $131,014 deductions

for   1993     and       1994,   respectively,        on    account      of    a    lack   of

substantiation as well as petitioners’ failure to establish that

the expenses were ordinary and necessary.

       At     trial,       petitioner        failed   to    present      any       evidence,

documentary         or    otherwise,    to     substantiate       the    claimed      supply

expenses.       Consequently, we sustain respondent’s position on this

issue.

               3.       Returns and Allowances for 1995

        Petitioner claimed Schedule C returns and allowances for the

tax year 1995 in the amount of $454,387. Respondent disallowed the

deduction      and       adjustment     on    account      of   petitioner’s        lack   of

substantiation.

        Again, at trial, when asked if he had anything to substantiate

his returns and allowances for 1995, petitioner stated “I just

don’t    have       a    thing.”      Petitioner        presented       no    evidence     to

substantiate entitlement to the amounts claimed.                         Again, we must

sustain respondent’s determination on this issue.

        4.    Conclusion

        Petitioners failed to substantiate any of the amounts claimed

on    the    Schedules       C   that    were    disallowed       in    the    notice      of

deficiency.         Instead of providing documentary evidence to attempt

to substantiate the amounts claimed, petitioner chose to rely

solely on his testimony.              Petitioner did not call as witnesses the
                                       - 16 -

accountants who prepared the income tax returns or the attorney who

represented petitioners until 2 months before trial.

       In order for the Court to estimate the amount of a deductible

expense, we must have some basis upon which an estimate may be

made.    Vanicek v. Commissioner, 85 T.C. at 743.            Here, there is no

such basis, and were we to nonetheless permit any allowance, such

would amount to unguided largess.             Williams v. United States, 245

F.2d at 560. Although we are sympathetic with petitioner’s plight,

the fact remains that petitioner failed to present even a modicum

of evidence to substantiate the disallowed deductions.

II.    Self-Employment Taxes

       Respondent determined that petitioners are liable for self-

employment tax of $10,893 for 1993, $11,753 for 1994, and $27,203

for 1995.

       Petitioner was self-employed during each of the years at

issue.     He reported the income and expenses of his business on a

Schedule C.       Petitioner presented no evidence on this issue.               We

thus hold petitioner is liable for the self-employment tax under

section 1401 on his Schedule C earnings for 1993, 1994, and 1995,

as     determined     in    the    notice    of   deficiency.         Respondent’s

determination on this issue is sustained.

III.     Section 6651(a)(1) Additions to Tax

       Respondent determined that petitioners are liable for the

addition     to     tax    under   section      6651(a)(1)   as   a    result   of
                                   - 17 -

petitioners’ failure to timely file their Federal income tax

returns for the years at issue.

      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 to file is due to reasonable cause and not to willful

neglect.   Id.    If a taxpayer exercised ordinary business care and

prudence and was nonetheless unable to file the return within the

date prescribed     by   law,    then   reasonable     cause    exists.    Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.          “Willful neglect” means

a   “conscious,   intentional     failure    or   reckless      indifference.”

United States v. Boyle, 469 U.S. 241, 245 (1985).

      The addition to tax is equal to 5 percent of the amount of the

tax required to be shown on the return if the failure to file is

not for more than 1 month.          Sec. 6651(a)(1).           An additional 5

percent is imposed for each month or fraction thereof in which the

failure to file continues, to a maximum of 25 percent of the tax.

Id.   The addition to tax is imposed on the net amount due.                Sec.

6651(b).

      Petitioners’ tax return for 1993 was due April 15, 1994.              The

return   was   prepared,   and    dated   April   1,    1994,    by   Accufast.

However, petitioners did not sign the return until September 12,

1995, more than a year after the return was prepared.                  Further,

they did not file the return until another year later; it was filed

on September 16, 1996.
                                 - 18 -

      Petitioners’ tax return for 1994 was due April 17, 1995.        It

was prepared and dated April 12, 1995, by Accufast.      The return was

signed by petitioners on September 12, 1995, and filed a year later

on September 16, 1996.

      Petitioners’ tax return for 1995 was due April 15, 1996.        It

was prepared and dated November 18, 1996, by a representative of

J.E. & Assoc.     The 1995 return was signed by petitioners on the

same date, but not filed until July 30, 1997.

      At trial, petitioner offered no reasonable explanation for

petitioners’ failure to timely file their 1993 and 1994 Federal

income tax returns.       When asked why his 1995 Federal income tax

return was also filed late, petitioner replied: “Well, I’ve got no

excuse for that.     You know, I’ll be honest with you.”

      Petitioners failed to show that they exercised ordinary care

and prudence in this case. Accordingly, petitioners are liable for

the additions to tax under section 6651(a)(1) for 1993, 1994, and

1995.    Respondent’s determination on this issue is sustained.

IV.   Section 6662(a) Penalty

      Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

attributable    to   a   substantial   understatement   of   tax.   Sec.

6662(b)(1).

        The accuracy-related penalty is not imposed with respect to

any portion of the understatement as to which the taxpayer acted
                                    - 19 -

with reasonable cause and in good faith.            Sec. 6664(c)(1).    The

decision as to whether the taxpayer acted with reasonable cause and

in    good    faith    depends   upon   all   the   pertinent   facts   and

circumstances.        Sec. 1.6664-4(b)(1), Income Tax Regs.       Relevant

factors include the taxpayer’s efforts to assess his proper tax

liability, including the taxpayer’s reasonable and good faith

reliance on the advice of a professional such as an accountant.

Id.     Further, an honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge, and education of

the taxpayer may indicate reasonable cause and good faith.              See

Furnish v. Commissioner, T.C. Memo. 2001-286; Remy v. Commissioner,

T.C. Memo. 1997-72.

      At     trial,    petitioner   testified   that   he   provided    his

accountants (Accufast for 1993 and 1994, and J.E. & Assoc. for

1995) with all of his business records, receipts, and check stubs.

In this regard, petitioner testified:

           I had an accountant that takes care of all this
      stuff, so I really don’t understand it, don’t know what
      it is. You know, he had all the records and took care of
      all that stuff, as far as what the rent was and how much
      was paid, and the materials, supplies and stuff. * * * As
      far as * * * the charges and stuff * * * he had the
      records, the check stubs and all that, and he figured out
      what was there * * *.

      Petitioner further testified that he tried to obtain his

business records and any substantiating documentation from Accufast

for 1993 and 1994 but was told that clients’ records were not

retained after 5 years.          Moreover, petitioner stated that upon
                                           - 20 -

contacting       J.E.   &     Assoc.       to   obtain    his    records   and    any

substantiating documentation for 1995, he was told that J.E. &

Assoc. did not handle petitioner’s account in 1995, although the

signature of the tax preparer for petitioners’ 1995 tax return was

that of a representative of J.E. & Assoc.                       Further attempts by

petitioner       to   reach   J.E.     &    Assoc.    proved    unsuccessful.      In

addition, petitioner testified at trial that his counsel, who

withdrew     2    months      before       trial,    handled     most   matters   for

petitioner.

     Although petitioner failed to present either the accountants

or his former counsel as witnesses to show that his reliance was

reasonable, we found petitioner’s testimony in this regard to be

credible.    Petitioner, through his testimony, demonstrated that he

simply had no available documentation to offer to substantiate the

claimed expenses.

     Petitioner provided all his records to Accufast and believed

that the deductions claimed by Accufast as reflected on the 1993

and 1994 tax returns were accurate.                  It is clear from the record

that petitioner is an unsophisticated taxpayer with a limited

education who relied reasonably and in good faith on Accufast.

     Consequently, we conclude that for 1993 and 1994, petitioner

had reasonable cause and acted in good faith as to any underpayment

resulting from the deductions in issue.                  Accordingly, we hold that
                                    - 21 -

petitioners are not liable for the penalty pursuant to section

6662(a) for the years 1993 and 1994.

     With respect to 1995, petitioner asserts that his reliance on

J.E. & Assoc. was reasonable.          We disagree.   Petitioner asserted

that the figures reflected on petitioners’ 1995 tax return were

“blown out of proportion”.         Petitioner testified that although it

was “possible” to have gross receipts and expenses in amounts as

reflected on petitioners’ 1993 and 1994 returns, with respect to

petitioners’ 1995 return, “jumping up another half a million

dollars   in   one   more   year,   it’s     impossible.”      Additionally,

petitioner testified that he never examined the 1995 tax return

until recently.      The 1995 return was signed by petitioners on

November 18,    1996.       Petitioner   stated   that   his   attorney   was

“handling most of it until him [his attorney] and I parted ways”.

The colloquy set forth below exemplifies petitioner’s testimony on

this matter:

          THE COURT:   * * * When you saw the return-–I know
     that you have an accountant prepare–-

          MR. PRATT:        I never saw this return until just
     recently.

           THE COURT:       Why not?

          MR. PRATT:   My attorney was handling most of it
     until him and I parted ways.

           THE COURT:       Yes, but we’re talking about ‘95.

           MR. PRATT:       Yes.
                                    - 22 -

          THE COURT:   In ‘95, you filed that return sometime
     in, what, in ‘96.

          MR. PRATT:        It says here, in ‘96.

          THE COURT: Right. So, and, normally, you would
     file a return, by the way, in April.

          MR. PRATT:        Oh, I understand that, sir.

          THE COURT: And here, you filed it not in April, but
     you filed it in November.

          MR. PRATT:        November.

          THE COURT: And          then   you   just   accepted   numbers
     without looking?

          MR. PRATT: Well, you know, again, I have to say
     that, you know, all I did was a guy says, “Here, you’ve
     got to get this signed.” Or I think it’s probably my
     attorney, “You’ve got to get this signed and out of
     here.” So I signed it and off it went. I didn’t even
     look at the million dollars until just recently, that Mr.
     Green [respondent’s counsel], here, showed it to me and
     pointed it out.

     Petitioner further testified at trial that with respect to the

1995 return:   “As far as I am concerned, he just wrote some numbers

down and my accountant probably--I mean my attorney at that time

probably said, ‘look, you haven’t filed that thing’; * * * he

probably went back to his office and made one, real quick”.

Petitioner contends that he simply provided the information to his

accountants    and   that   the    accountants    decided   the    amount   of

deductions to which petitioners were entitled.            A cursory look at

the return would have revealed the large increase in gross receipts

reported on the return--gross receipts that petitioner testified
                                  - 23 -

were   not   accurate.   Thus,     we   find   that   petitioner   did   not

reasonably rely on J.E. & Assoc.

       We conclude that for 1995 petitioner did not have reasonable

cause or act in good faith.      Accordingly, we hold that petitioners

are liable for the penalty pursuant to section 6662(a) for 1995.

       We have considered all other arguments made by the parties and

find those arguments not discussed herein to be without merit.

       To reflect the foregoing,



                                                 An appropriate order of

                                         dismissal and decision will be

                                         entered.
