                         T.C. Memo. 2010-189



                       UNITED STATES TAX COURT



 CECILIA SHAO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
                           Respondent



     Docket No. 12697-05.                Filed August 26, 2010.



     John B. Kern, for petitioner.

     Daniel J. Parent, for respondent.



                         MEMORANDUM OPINION


     HOLMES, Judge:    Cecilia Shao transferred stock to Derivium

Capital in 2001 and received money in return.    The Commissioner

calls this a sale.    But Shao calls it a nonrecourse loan secured

by her stock, because Derivium promised her that she could get

her stock back if she repaid the loan after three years.

Derivium, however, was not what it appeared.     Instead of hedging
                               - 2 -

the upside risk that it was taking on--which is what Derivium

said it was doing--Derivium simply sold Shao’s stock almost as

soon as it could.   The firm eventually went bankrupt and is

widely reported to have been a Ponzi scheme.   In Calloway v.

Commissioner, 135 T.C. ___ (2010), we held that one of Derivium’s

customers sold his stock when he transferred it to Derivium’s

control.

     In this case, we consider whether Shao, unlike Calloway, can

avoid the penalty that the Commissioner has asserted against her.

                            Background

I. Shao

     The facts in this case are largely uncontested.   Cecilia

Shao moved to California from Taiwan as a child and did well in

school, earning a degree in cultural anthropology from the

University of California, Santa Barbara in 1993.   After college,

she put her degree to work in a museum, but quickly began looking

for better (or at least better paying) jobs–-first at a finance

company, and in 1996 as an administrative assistant for Veritas

Software Corporation.   This was the start of the dot-com boom,

and Veritas offered each new employee an initial stock grant and

then more stock after each merit review.   Shao didn’t have any

experience with stocks, and so she did what was “like a default”

for Veritas employees–-she opened an account with E*trade because

it administered Veritas’s merit grants and employee stock option
                                - 3 -

program.   Now that she was working in the high-tech industry and

had stock options, Shao decided she needed to hire someone to

prepare her tax returns, so she turned to a firm named Wade

Financial.

     Shao rose at Veritas, ultimately becoming a contracts

administrator in the legal department.    Over the next few years,

she accumulated more than 6,000 shares of Veritas stock in her

E*trade account and saw it as a source of income for retirement–-

her nest egg.    But at some point she needed money to buy a car

and began looking for ways to unlock her stock’s value without

selling.   Shao turned to a certified financial planner named

Jovita Honor for advice.    Honor worked at Wade Financial and also

prepared Shao’s taxes.    Honor suggested using a margin loan, so

Shao signed up for one with E*trade.

     Margin-loan brokers offer stockholders a loan worth some of

their stocks’ value, but usually require that the remaining value

not fall below a certain limit, or margin.    If the stock value

falls too low to cover the margin, the stockholder has to deliver

more collateral or pay back part of the loan to keep the broker

secured.   This makes a margin loan risky.

     Shao’s stock increased in value from less than $60,000 to

upwards of $360,000 by July 2001.    But Shao was still riding the

dot-com bubble when it began to leak--Veritas stock began to sink

in early 2001.    Shao, like many who didn’t know the bubble was a
                                 - 4 -

bubble, mistook the decline for a temporary correction, and

didn’t want to sell her nest egg.    But at this point Shao also

wanted to buy a home and needed cash for a downpayment, so she

asked Honor about options with lower risk.

     Honor thought she had found something better for her clients

like Shao--she discovered a South Carolina company called

Derivium Capital, LLC.    Derivium offered what it called loans

worth 90 percent of a stock’s value, with interest usually set at

9.5 or 10.5 percent, and a term of two to five years.    The loans

were nonrecourse, meaning that if a borrower didn’t repay,

Derivium would not have to return the stock or its equivalent to

the borrower, but couldn’t sue for any unpaid balance.    And

unlike E*trade’s loans, the Derivium loans had no margin

requirements.   Derivium boasted to its potential clients that it

could make these loans because it had a sophisticated hedging

strategy.

     Honor recommended a Derivium loan to meet Shao’s objectives,

and Shao agreed.   The loan was for three years at 10.5 percent

interest.   It was nonrecourse, and at the end of the term, left

her with three choices.    She could retrieve her stock by repaying

the loan plus interest, surrender the stock, or put off a final

decision by renewing the loan.    But renewing the loan wasn’t

cheap--she would have to pay a fee of 4.5 percent of the original
                               - 5 -

value of her stock if its price had fallen.1    During the period

covered by the loan, Derivium reserved the right to “assign,

transfer, pledge, repledge, hypothecate, rehypothecate, lend,

encumber, short sell, and/or sell outright some or all of the

securities,” without notice to Shao.     Shao waived her rights to

receive many of the benefits of the stock during the term of the

loan, and she could not prepay.   She did keep the right to

receive any dividends, which Derivium promised to credit against

the interest she owed–-but since her stock didn’t pay dividends,

she never paid interest under this provision.     At the end of the

loan term Shao could repay the loan and get back “the same number

of shares of the same securities received as collateral,” which

would “reflect any and all stock splits, conversions, exchanges,

mergers, or other distributions, except dividends credited toward

interest due.”   Shao believed that the only difference between

Derivium’s deal and her E*trade margin account was that she

wasn’t subject to margin calls with Derivium.

     Shao and Derivium’s president, Charles Cathcart, signed the

Master Agreement on June 27, 2001.     That same day, Shao asked

E*trade to transfer her Veritas shares and the associated margin


     1
       The renewal fee in Calloway v. Commissioner, 135 T.C.
(2010), was a percentage of the balance due at maturity, but
Shao’s documents show that the renewal fee Derivium charged her
was a percentage of the collateral value at the beginning of the
loan term. This appears to be the only difference between the
structure of these two Derivium deals and it doesn’t affect our
analysis.
                                 - 6 -

debt to Derivium’s account at First Union Securities.      On July 5,

Derivium confirmed the amount of the E*trade margin debt it would

accept when the shares were transferred.      Derivium got Shao’s

shares on July 6.    On July 9, Derivium sold the Veritas stock--

without Shao’s knowledge--in several sales ranging between $57.20

and $57.99 a share.   That same day, Derivium sent Shao a

“Valuation Confirmation,” letting her know that the precise

“hedged value” of her stock was $361,980.60, and that after

accounting for the existing debt from her E*trade margin loan,

she would receive $138,081.43 cash via wire transfer.      Shao got

the loan proceeds on July 11.    Derivium got the money from the

Veritas stock sale on July 12.

     Consistent with Shao’s understanding of the transaction,

Honor prepared Shao’s 2001 tax return without reporting a sale of

the Veritas stock.    Shao never received a Form 1099-B, Proceeds

from Broker and Barter Exchange Transactions, for the sale of the

securities, nor a Form 1099-C, Cancellation of Debt, and didn’t

withhold any information from Honor.

     During the loan’s term, Derivium sent Shao quarterly account

statements reflecting the interest accrued, the balance of the

loan, and the value of the shares.       In June 2003, these quarterly

statements began coming from Bancroft Loan Processing, not

Derivium.   The change was apparent only in the very fine print at

the bottom of the statements--Bancroft’s statements otherwise
                                - 7 -

looked identical to Derivium’s.    The 2003 year-end statement and

all Shao’s later statements came from “Bancroft U.S. Processing.”

And when the three-year term was up, it was “Bancroft Ventures

Limited” that wrote Shao to remind her that she could renew the

loan.    None of the statements from the various Bancroft entities

during the term of the first loan showed a business location

other than the United States; they even listed a South Carolina

phone number.

     Despite the halving of her stock’s value over the three-year

term of the loan, Shao nonetheless paid the renewal fee of more

than $16,000 to Bancroft Ventures in July 2004 to keep the loan

alive.    But time and interest made this deal look doubtful to

someone without Shao’s optimism.    If she had repaid the loan

instead of renewing it, she would have needed to send Bancroft

over $400,000 for stock worth only about $165,000.    Shao, though,

still had hope and credibly testified that she renewed the loan

thinking the market would rebound and she could redeem her stock

at the end of a second three-year term.

     The new Master Loan Financing and Security Agreement which

Shao signed came from Bancroft Ventures, Ltd., and prominently

mentioned that BVL was a company based on the Isle of Man.    The

provisions of this agreement were different from those of the

first one.    For instance, Article 12 prohibited Shao from

granting any security interest in the collateral (which,
                               - 8 -

remember, had already been sold) superior to Bancroft’s interest

and required Bancroft to give Shao notice if it did certain

things with her stock.   The Loan Schedule, however, preserved

Derivium’s original rights to “assign, transfer, pledge,

repledge, hypothecate, rehypothecate, lend, encumber, short sell,

sell, sell outright and/or otherwise dispose of some or all of

the Collateral.”   The Loan Agreement Rider made it explicit that

“Borrower is the lawful owner of the Collateral.”   It also

promised Shao that “All Collateral pledged for all Previous Loans

made to Borrower under Derivium Documents has been in the custody

of Derivium, as agent for BVL, or in the custody of BVL, and is

in the custody of BVL as at the date hereof * * * .”

     About a week after renewing her loan, Shao was laid off from

Veritas.   She got a letter from the California Franchise Tax

Board in July 2004 telling her the state was challenging her tax

treatment of the 2001 loan proceeds.2   In early 2005, she learned

of problems other Derivium clients were having, and Bancroft sent

her a letter about some issues it was experiencing.    By this

point, Honor had “dumped” Shao as a client, and Shao turned to a



     2
       The parties did not enter this letter into the record, so
we make no finding of fact regarding its contents beyond Shao’s
admissions at trial. However, we believe her testimony that the
letter was sent July 13, 2004. Shao renewed her loan by writing
a check to Bancroft Ventures dated June 30, 2004, and a 2004
letter from Bancroft dates Shao’s new loan to July 11, 2004. We
therefore find as a matter of fact that Shao received the
Franchise Tax Board letter after she renewed her loan.
                                - 9 -

man named Mr. Nagy for additional tax advice.3    Finally, in April

2005, the Commissioner sent Shao a notice of deficiency,

asserting that she had sold her Veritas stock in 2001.    Shao

contested the notice of deficiency with a timely petition.      She

was a Californian when she filed the petition, and we tried the

case in San Francisco.

II. Derivium

     To understand the Commissioner’s position, however, requires

some understanding of Derivium’s history.4   Charles Cathcart

started Derivium Capital in 1998 under the name “First Security

Capital.”   In re Derivium Capital, LLC, 380 Bankr. 392, 395

(Bankr. D.S.C. 2007).    Cathcart, formerly employed as the chief

economist for the eastern division of Citibank, owned the company

with his son Scott and one Yuri Debevc.    Id.   Together, they

marketed 90-percent loans during the peak of the dot-com bubble,

often targeting individuals with low-basis stock that had



     3
       Although Shao didn’t specify Mr. Nagy’s first name, one
Robert Nagy was a defendant in an action to enjoin the promotion
of tax-fraud schemes allegedly carried out by Derivium and
related entities. United States v. Cathcart, No. C 07-4762 (N.D.
Cal., Sept. 12, 2008) (order denying defendant Nagy’s second
request for a stay, severance, and venue transfer); United States
v. Cathcart, No. C 07-4762 (N.D. Cal., June 27, 2008) (order
denying defendant Nagy’s first motion to sever and transfer
venue).
     4
       This section is provided for background only--we make no
findings of fact as to Derivium’s history outside the (already
presented) facts specific to Shao’s case, although this section
summarizes other published decisions.
                               - 10 -

appreciated significantly, but who didn’t have the means to

engage in more sophisticated financial transactions on their own.

The Derivium founders told borrowers that they used a proprietary

hedging strategy to reduce the risk associated with making the

90-percent loans.5   Cathcart once referred to Derivium’s secret

hedging strategy as “our own Coca-Cola syrup.”    Southall, “Loyal

to the company? Here’s how to hedge,” Investment News, Aug. 6,

2001.    At the time, commentators trumpeted the company as

offering “little guy” investors opportunities that before had

only been used by the ultrarich.    See, e.g., Gross, “How to

Salvage a Portfolio,” N.Y. Times Mag., Apr. 8, 2001, at 75.

     For a while, the system seemed to work.    Derivium made

approximately 1,700 loans totaling about $1 billion with

commissions of $22 million.    Derivium Capital LLC v. United

States Trustee, 97 AFTR 2d 2006-2582 (S.D.N.Y. 2006).    As loan

terms expired, some borrowers even repaid their loans and got

their collateral back.    Although Derivium sold most of the stock

immediately to pay off other investors, it did make some small

real estate investments and even used profits from them to cover

the cost of returning stock to some of the borrowers.    Id.    But


     5
       Derivium’s asserted hedging activity apparently masked the
fact that their long-term strategy, reminiscent of South Park’s
Underpants Gnomes, relied on a business plan of “Step 1: Make 90%
loans. Step 2: ? Step 3: Profit.” See Comaford-Lynch, “Make Your
Financing Pitch Sizzle,” Business Week Online (Feb. 20, 2007),
http://www.businessweek.com/smallbiz/content/feb2007/
sb20070219_940216.htm.
                               - 11 -

as the dot-com bubble burst, there were fewer people holding

appreciated stock, and Derivium ran out of new clients and new

money.

     In 2001, before Derivium ran out of money altogether, the

California Corporations Commissioner sued to enjoin the firm from

marketing the 90-percent loan, alleging that either Derivium was

an unlicensed broker dealing in securities or that Derivium was

an unlicensed lender making consumer or commercial loans.      The

court granted summary judgment partially in Derivium’s favor,

finding that Derivium had engaged in marketing bona fide loans,

not sales of stock.    People v. Derivium Capital, LLC, No.

02AS05849 (Cal. Super. Ct. Nov. 5, 2003); see also Derivium

Capital LLC v. United States Trustee, 97 AFTR 2d 2006-2582 (S.D.

N.Y. 2006).   The California Superior Court in Sacramento County

entered a $750,000 judgment against Derivium after Derivium

agreed that it broke California law requiring lenders and stock

brokers be licensed.    People v. Derivium Capital, LLC, No.

02AS05849 (Cal. Super. Ct. June 13, 2006).   The court also

enjoined Derivium’s owners from “marketing, brokering, or making

of stock loans in the State of California” until they had a

license.   Id. (Oct. 12, 2006).   Bancroft had a harder time; it

did not appear for trial, and the court found that Bancroft had

engaged in both unlicensed lending and unlicensed stock

brokerage.    Id. (Oct. 16, 2006) (“The Court expressly finds that
                               - 12 -

based on the evidence presented at trial, that the stock loans

transactions entered into by Bancroft Ventures Limited amounted

to the constructive purchase and sale of the securities pledged

as collateral * * * for the purpose of California Corporations

Code Section 25210.”).    This litigation forced Derivium to stop

doing business in 2001, but Bancroft agreed to continue running

the business in 2002.    Derivium Capital LLC v. United States

Trustee, 97 AFTR 2d 2006-2582 (S.D. N.Y. 2006).6

     But in 2003 the lawsuits began.    Investors wanting their

stock back found out that Derivium didn’t have it and couldn’t

afford replacement shares.   They filed suits in South Carolina,

California, Wyoming, Connecticut, Delaware, and New York.7

     Not to be outdone, in 2004 the IRS began to investigate

whether Derivium and its related entities had promoted an abusive




     6
       Shao got statements from Derivium until 2003, suggesting
that Derivium did not entirely stop doing business despite
running out of money.
     7
       A few examples of opinions issued in the nearly 70 civil
cases brought as a result of the Derivium scheme–-Sabelhaus v.
Derivium Capital, 150 Fed. Appx. 226 (4th Cir. 2005) (confirming
arbitration award against Derivium); Newton Family, LLC v.
Derivium Capital LLC, No. 2:07-cv-02964 (D.S.C. Feb. 26, 2009)
(jury verdict against Cathcart for $17 million); Schlacte v.
United States, 102 AFTR 2d 2008-5894, 2008-2 USTC par. 50,538
(N.D. Cal. 2008) (tax refund case); WCN/GAN Partners Ltd. v.
Cathcart, No. 2:05-cv-00282-J (D. Wyo., Aug. 3, 2007) (order
granting motion to transfer to South Carolina); McCarty v.
Derivium Capital, LLC, No. 3:03 cv 00651 MRK (D. Conn., Nov. 21,
2005) (order denying claims against American Arbitration
Association).
                               - 13 -

tax shelter in violation of section 6700.8   The theory was that

Derivium “falsely advise[d] customers that they can receive 90%

of the value of their securities without paying income tax on

capital gains.”    The government asserted that Derivium made false

statements about the tax benefits of its product, including

saying that it was marketing loans with potentially indefinite

deferral of tax.   The government quoted Derivium’s marketing

materials as saying:

     You don’t have to sell your shares and trigger a tax
     liability (because loans are not taxable events). In
     fact, depending on your individual tax situation, the
     90% Stock Loan may even enable you to generate more
     cash than selling the position outright, net of capital
     gains tax liabilities.

     The government alleged the total tax loss associated with

Derivium’s scheme to be almost $235 million, Complaint, United

States v. Cathcart, No. C 07-4762 (N.D. Cal. filed Sept. 17,

2007), and won an injunction in late 2007 forbidding Derivium

from continuing to market the scheme, United States v. Cathcart,

No. C 07-4762 (N.D. Cal. Dec. 10, 2007) (order of permanent

injunction).

     Even before this last litigation loss Derivium was beginning

to crater, and it had filed for bankruptcy in September 2005.

Derivium said at the time that it would move under 11 U.S.C.



     8
       Unless otherwise noted, all section references are to the
Internal Revenue Code, and the single Rule reference is to the
Tax Court Rules of Practice and Procedure.
                              - 14 -

section 505 for a mass determination as to whether the stock

loans constituted bona fide loans or sales.    See Derivium Capital

LLC v. United States Trustee, 97 AFTR 2d 2006-2582 (S.D.N.Y.

2006).   It never did, and borrowers were left scrambling to get

their own judgments on a case-by-case basis.   The bankruptcy

court appointed a trustee to oversee the disposition of

Derivium’s assets, and the case was transferred to South

Carolina.   Many of the claims that had been filed against

Derivium and Cathcart in the years before the bankruptcy

eventually ended up before the bankruptcy court.

     As the bankruptcy went forward, the trustee uncovered what

he deemed a “Ponzi scheme.”   Grayson Consulting, Inc. v. Wachovia

Sec., LLC (In re Derivium Capital, LLC), 396 Bankr. 184, 188

(Bankr. D.S.C. 2008).   He also alleged that Cathcart and

Derivium’s other owners had illegally shifted assets out of

Derivium into shell corporations to avoid bankruptcy liquidation.

Campbell v. Cathcart (In re Derivium Capital, LLC), 380 Bankr.

429, 435-36 (Bankr. D.S.C. 2006).

     In an action for a permanent injunction and equitable relief

against the Cathcarts, Debevc, Nagy, and Derivium, the Northern

District of California granted summary judgment for the

government, finding that the loan transactions were “sales of

securities for purposes of tax code treatment, as opposed to bona

fide loans.”   United States v. Cathcart, 104 AFTR 2d 2009-6625,
                               - 15 -

2009-2 USTC par. 50,658 (N.D. Cal. 2009) (order granting summary

judgment and denying summary judgment and miscellaneous rulings).

                             Discussion

       We recently decided in another Derivium case that the

transfer of stock from a customer to Derivium’s control was a

sale under the Code.    See Calloway, 135 T.C. at       (slip op. at

22).    We therefore hold that Shao did sell her Veritas stock in

2001, triggering the capital gain that the Commissioner and Shao

agreed upon in their stipulation.    The only remaining issue is

whether Shao owes the accuracy-related penalty for not reporting

the sale on her 2001 tax return.

       The Commissioner claims that Shao’s understatement was

“substantial”–-i.e., that it was more that $5,000 and ten percent

of the tax required to be shown on her return–-and therefore she

should pay a twenty-percent penalty.      See sec. 6662(a), (b)(2),

(d)(1).    But Shao tells us she shouldn’t have to pay the penalty

because she acted with reasonable cause and in good faith.      See

sec. 6664(c).    This is a determination we must make on a case-by-

case basis, considering all of the facts and circumstances.     Sec.

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

       Among the facts and circumstances that we must consider is

whether there was “an honest misunderstanding of fact or law that

is reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the
                                 - 16 -

taxpayer.”    Id.   Although Shao has a college degree, her focus

was in cultural anthropology and she didn’t have any investing

experience before being hired at Veritas.     When she entered into

both of her stock transactions (the E*trade margin loan and the

Derivium transaction) she did so only after consulting a

certified financial planner.     The Commissioner points out that

Shao worked at a finance company at one point, but we note that

this was around the time she was 24 years old, and between her

jobs as an anthropologist at a museum and as a floating

administrative assistant at Veritas.      We do not, therefore, find

her sophisticated in tax matters because of that one position.

Shao herself began hiring tax professionals to prepare her

returns as soon as she started getting stock options.     When she

entered the Derivium transaction the only stock loan Shao had

ever entered was her E*trade margin loan, which she believed was

similar to this transaction and whose legitimacy had never been

questioned.

     The relevant regulation also tells us that to find good

faith and reasonable cause “the most important factor is the

extent of the taxpayer’s effort to assess the taxpayer’s proper

tax liability.”     Id.   Shao sought financial advice from a trusted

certified financial planner before entering the deal and also

hired her to prepare the related tax returns.     The returns were

consistent with Shao’s understanding of the transaction and
                                - 17 -

consistent with the information returns she received from third

parties because she didn’t get a Form 1099-B or 1099-C showing a

sale of the stock or cancellation of debt.

     We have also found it inappropriate to penalize taxpayers

where a mistake of law was in a complicated subject area without

clear guidance.   Van Wyk v. Commissioner, 113 T.C. 440, 449

(1999).   Calloway was a case of first impression, so there wasn’t

any clear direction on whether a transaction with these

characteristics was a loan or a sale.    While a Derivium loan

might not look particularly complicated to a stock broker or tax

expert, its subtle differences from Shao’s E*trade margin loan

and the corresponding implications for stock ownership are not

(and were not to Shao) readily apparent.    On the basis of her

extremely limited experience, Shao believed the Derivium deal was

like her margin loan.   The only difference in her mind was that

with Derivium she was protected from margin calls.    But that

difference does not create a case where it would “strain

credulity to the breaking point” to say Shao didn’t know

something fishy was going on.    Lynch v. Commissioner, 273 F.2d

867, 872 (2d Cir. 1959) (discrediting taxpayers’ claims they had

no inkling something unusual was happening when each had received

an $80,000 unsecured, undocumented, no-interest loan from a

source they hadn’t met until the transaction and later obtained a

second loan, this one nonrecourse and for significantly more than
                                - 18 -

the market value of the collateral at the time of the loan),

affg. 31 T.C. 990 (1959) and Julian v. Commissioner, 31 T.C. 998

(1959).   At the time of the transaction, Shao reasonably and in

good faith thought she had received an oversecured loan.       She

also believed that Derivium was hedging its position so she had

no reason to think it would ever be under- or unsecured.

     In Calloway, 135 T.C. at       (slip op. at 38), we found that

a taxpayer in a nearly identical transaction failed to prove a

reasonable-cause and good-faith defense based upon his behavior

after the transaction.   Calloway treated the transaction

inconsistently with his own claim that it was a loan by failing

to report dividends as income during the loan term and by failing

to recognize gain or income from the discharge of indebtedness

upon the termination of the so-called loan.      Id. at     (slip op.

at 35).   These actions are inconsistent with good faith.      We also

found that Calloway could not claim reasonable reliance on either

of his professional advisers--Calloway didn’t establish one of

his adviser’s credentials and the other one gave Calloway a

letter from a Derivium promoter which couldn’t be reasonably

relied upon.   Id. at     (slip op. at 36-38).    Calloway’s

advisers, then, didn’t provide him with reasonable cause.       We

also noted that Calloway admitted tax motivation for the

transaction’s form, which indicated that--consistent with his

subsequent actions--he never truly intended it to be a loan.         Id.
                               - 19 -

at     (slip op. at 20-21).    This, of course, also cannot be

considered good faith.

     In Shao’s case we don’t find the circumstances that led the

Court to penalize Calloway--there is no evidence of a

wink-wink-nudge-nudge-say-no-more arrangement with Derivium.     See

Monty Python’s Flying Circus: How To Recognise Different Types of

Trees From Quite a Long Way Away (BBC1 television broadcast Oct.

19, 1969).    Shao had legitimate, nontax motivations for wanting

to structure her deal as a loan instead of a sale--she wanted to

reduce risk and use some of the stocks’ value without selling her

nest egg.    Her naivete, but not (we expressly find) her

negligence, is especially prominent in her renewal of the loan at

a steep price after three years.    Unlike Calloway, Shao treated

her transaction like a loan throughout its existence, proving her

good faith.

     We therefore find that Shao acted in good faith upon an

honest misunderstanding of the law that was reasonable in her

circumstances.    She has proven her defense to the accuracy-

related penalty.


                                          Decision will be entered

                                     under Rule 155.
