                        T.C. Memo. 1997-279



                      UNITED STATES TAX COURT



          DON C. AND JUDY MONTGOMERY, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 20005-93.               Filed June 18, 1997.



       Don C. Montgomery and Judy Montgomery, pro sese.

       Cathleen A. Jones, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION

       WHALEN, Judge:    Respondent determined the following

deficiencies in, additions to, and penalty on, petitioners'

income tax for the years in issue:


                              Additions to Tax          Penalty
Year     Deficiency     Sec. 6653(a)(1)   Sec. 6661    Sec. 6662

1988      $23,921           $1,196            $5,980      --
                             - 2 -


1989     10,097           --              --       $1,761
1990        615           --              --         --
Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect for the years in issue.

       After concessions, the issues remaining for decision

are:    (1) Whether petitioners realized unreported income

from their activities in connection with their son-in-law's

wholly owned corporation; (2) whether petitioners are

liable for the addition to tax for negligence prescribed by

section 6653(a)(1) with respect to their 1988 return; (3)

whether petitioners are liable for the addition to tax for

substantial understatement of liability prescribed by

section 6661 with respect to their 1988 return; and (4)

whether petitioners are liable for the accuracy-related

penalty prescribed by section 6662 with respect to their

1989 return.



                       FINDINGS OF FACT

       Some of the facts have been stipulated and are so

found.    The stipulation of facts, supplemental stipulation

of facts, and exhibits attached to each are incorporated

herein by this reference.    Petitioners are husband and

wife who filed a joint Federal income tax return for each

of the years in issue.    At the time they filed their joint

petition in this case, petitioners resided in Oklahoma
                             - 3 -


City, Oklahoma.   All references to petitioner in this

opinion are to Mr. Don C. Montgomery.



Background

     In 1980, petitioners' son-in-law, Mr. Tom Petty, was

engaged in the fuel transportation business.    Mr. Petty

owned a tractor-trailer suitable for hauling fuel which he

leased to an organization in Houston, Texas, referred to as

Petroleum Wholesale.   In 1982, Mr. Petty and petitioner

decided to enter the fuel transportation business together.

They formed a company called "Pet-Don" to facilitate that

activity.    Pet-Don's original capital consisted of one

tractor-trailer which was contributed by petitioner.

When Mr. Petty terminated his lease agreement with

Petroleum Wholesale, he also contributed his tractor-

trailer to Pet-Don.

     In March 1988, Mr. Petty purchased all of the

outstanding capital stock of a going concern called H&B

Transport, Inc. (H&B).    H&B's primary business activity

consisted of transporting fuel for unrelated parties.

Mr. Petty hired a former employee of H&B to manage the

company's operations in Oklahoma City.    Ill feelings soon

developed between Mr. Petty and H&B's previous owner, who

Mr. Petty felt had failed to honor an agreement to hire H&B
                             - 4 -


to transport freight.    Mr. Petty also grew distrustful of

H&B's manager, who he felt was closely associated with the

previous owner.   Because of this, Mr. Petty asked

petitioner to oversee the disbursement of H&B's funds.

Petitioner agreed, and in April 1988 he began to perform

administrative and supervisory services for H&B, including

writing and signing checks drawn on H&B's bank accounts.

Petitioner never formally received a salary or other

compensation for the services he provided to H&B.

     H&B's primary checking account was with the First

Interstate Bank of Oklahoma (First Interstate).     Both

petitioner and Mr. Petty were authorized to sign checks

drawn on this account.    There was a second checking account

in H&B's name at Community Bank.     Petitioner was the only

person authorized to withdraw funds from this account.

Petitioner Judy Montgomery was an officer of Community Bank

during the years in issue.

     Petitioner's former sister-in-law, Ms. Ann MacKall,

also performed services for H&B during the years in issue.

Ms. MacKall worked in H&B's office performing basic

bookkeeping and administrative functions.     Ms. MacKall

never formally received a salary or other compensation

for her services to H&B.
                            - 5 -


     H&B's bookkeeping system involved the use of a

"pegboard ledger", a sheet of checks held in place over

a permanent ledger by means of pegs along the left side of

a board.   Information written on a check was transferred to

the ledger by means of carbon paper attached to the back of

the check.   The ledger contained a column in which to enter

deposits, a column in which to enter the current balance

in the account, and a column in which Ms. MacKall or

petitioner would sometimes enter comments about the

purposes for which checks were issued.

     During the period in issue, the dollar amounts of

checks drawn on the First Interstate account are often

greater than the current balance shown in the ledger.

In addition, there is no current balance shown for some

periods.   Thus, checks would often be drawn despite an

apparent balance of zero in the account, only to have a

sufficient balance entered later without explanation.

Approximately once every month, Mr. Petty or his mother,

Ms. Melba Petty, would travel to Oklahoma City to collect

the bank statements and canceled checks.

     H&B's drivers sometimes obtained fuel for their

tractors from a tank located on the site where the tractors

were parked.   On other occasions, the drivers would

purchase fuel from unrelated third parties using cash
                             - 6 -


provided by H&B.    H&B's drivers also needed to keep cash on

hand in case a tractor-trailer required repairs while away

from H&B's shop.

     H&B required considerable quantities of cash to pur-

chase fuel on behalf of its customers.    Fuel distributors

generally do not accept checks in payment for fuel unless

the purchaser is well known to the distributor.    Therefore,

H&B was required to pay for the fuel it transported with

cash or cashier's checks.    H&B would often use its own

funds to purchase the fuel it transported on behalf of its

customers.    H&B would then receive reimbursement when it

delivered the fuel to the customer.

     On several occasions during the years in issue, H&B

transported fuel for a company called Trans State Pavers,

Inc. (Trans State).    Trans State was an unrelated corpora-

tion apparently owned by Mr. Bob White.    H&B typically

purchased the fuel that it transported for Trans State from

Jordan Distributors.    H&B generally used cashier's checks

to pay for the fuel it purchased from Jordan Distributors.

Trans State would then pay H&B's driver for the fuel by

giving the driver either cash or a cashier's check at the

time the driver delivered the fuel.    The driver would give

the cash or cashier's check received from Trans State to

petitioner.    In total, the amount of money petitioner
                              - 7 -


received from Trans State was equal to or exceeded the

amount of the cashier's checks he gave to Jordan

Distributors from H&B's funds.    There were no deposits

of cash or cashier's checks from Trans State into H&B's

First Interstate account during the years in issue.

     Sometime during the period in issue, petitioner

learned that the Federal Government was soliciting bids for

a contract to haul fuel for the U.S. Department of Defense.

Petitioner caused H&B to submit a bid for the contract.

H&B was awarded the contract and began hauling fuel for the

Department of Defense.   After H&B completed the contract,

on or about May 1, 1989, the U.S. Government issued a check

payable to H&B in the amount of $19,694.92 for H&B's work

under the contract.

     In June 1989, Mr. Petty moved to Oklahoma City and

assumed control of H&B's operations.    At that time,

petitioner and Ms. MacKall stopped providing services to

the company, and neither of them has had any involvement

with H&B since then.


Lincoln Mark VII Automobile

     From 1988 to the time of trial, petitioner was in

possession of a 1988 Lincoln Mark VII automobile.

Although the title to the automobile lists Pet-Don as

owner, it lists petitioners' residence as the owner's
                                    - 8 -


address.        Both petitioner and Mr. Petty were present at the

time the automobile was purchased.             Mr. Petty made a cash

downpayment, and the remainder of the purchase price was

financed by the proceeds of a loan from Community Bank.

Because Pet-Don did not have sufficient credit to support

the loan, petitioners cosigned the financing agreement in

their individual capacities.          Petitioner used the Lincoln

Mark VII as his personal vehicle at all times between the

date of purchase and the date of trial.

     During 1988, petitioner signed six checks totaling

$4,017.78 that were drawn on H&B's First Interstate account

and made payable to Community Bank.              These checks are as

follows:

         Date           Check No.            Amount        Payee
    11/03/88              1335               $669.76   Community   Bank
      n/a1                1428                669.76   Community   Bank
    04/01/88               n/a                669.50   Community   Bank
    04/28/88              1032                669.50   Community   Bank
    04/31/88              1253                669.50   Community   Bank
    10/04/88              1294                669.76   Community   Bank

     Total                                  4,017.78
     1
      Not available


Each of these checks bears a notation stating that it was

issued as payment for petitioner's "company car".                  A

notation on the pegboard ledger for check No. 1294 also

states "car payment".        These checks represent monthly
                                  - 9 -


payments on the loan used to finance the purchase of the

Lincoln Mark VII.

     Petitioner signed three additional checks during 1988

that were drawn on H&B's First Interstate account in

payment of miscellaneous expenses relating to the Lincoln

Mark VII.      These checks are as follows:


      Date            Check No.           Amount          Payee

    09/01/88            1247              $200       Don Montgomery
    09/27/88            1288               200       Don Montgomery
    10/06/88            1297               200       First Interstate

     Total                                 600

These checks were used to purchase such items as fuel,

tires, maintenance service, and repairs for the Lincoln

Mark VII.

     During 1989, petitioner signed four checks totaling

$2,679.04 that were drawn on H&B's First Interstate account

and made payable to Community Bank.          These checks are as

follows:

      Date            Check No.           Amount           Payee
    01/06/89            1542              $669.76      Community   Bank
    02/03/89             n/a               669.76      Community   Bank
    03/01/89            1694               669.76      Community   Bank
    04/01/89            1794               669.76      Community   Bank

     Total                                2,679.04


Notations on all but one of these checks state that they

were issued as payment for petitioner's "company car".
                           - 10 -


H&B's pegboard ledger also bears a notation for each of

these checks stating "car payment".   These checks also

represent monthly payments on the loan used to finance

the purchase of the Lincoln Mark VII.

     On January 17, 1989, petitioner signed check No. 1570

in the amount of $716.14 that was drawn on H&B's First

Interstate account and made payable to Alexander & Strunk.

This check bears the notation "Insurance - Co. cars".     This

check was used to purchase insurance for petitioner's

Lincoln Mark VII.

     Sometime in March 1989, petitioner signed check No.

1759 in the amount of $850 that was drawn on H&B's First

Interstate account and made payable to First Interstate.

A notation on the front of the check states "Tires/Repairs

Company Vehicle".   This check was also used to pay expenses

relating to the Lincoln Mark VII.

     Sometime after May 1, 1989, petitioner endorsed the

check issued by the U.S. Government to H&B in the amount of

$19,694.92 for the work done by H&B under its contract to

transport fuel for the Department of Defense.   Petitioner

deposited the check into H&B's checking account at

Community Bank.   Petitioner then used the proceeds of the

check to pay the outstanding balance of the loan used to

purchase the Lincoln Mark VII.   Petitioner had no authority
                                - 11 -


to deposit this check into the Community Bank account or to

apply the proceeds to the automobile loan.


Converted Payments From Trans State Pavers

     During 1988, petitioner signed four checks in the

aggregate amount of $18,033.42 that were drawn on H&B's

First Interstate account and made payable to First

Interstate.    Petitioner used the proceeds of each of these

checks to purchase a cashier's check.          These checks and the

cashier's checks that were purchased are as follows:

                                                        Amount Of
      Date          Check No.             Amount     Cashier's Check
    11/03/88          1338               $1,534.63      $1,532.63
    11/07/88           n/a                6,526.39       6,523.39
    11/09/88           n/a                6,500.00       6,500.00
    12/08/88          1440                3,472.40       3,470.40
     Total                               18,033.42      18,026.42




     Each of the cashier's checks was made payable to

Jordan

Distributor and lists Trans State as remitter.

     Petitioner purchased three additional cashier's checks

payable to Jordan Distributors during 1988 with checks

totaling $17,950 that petitioner drew on H&B's First

Interstate account and made payable to cash.          The amount of

these checks and the cashier's checks that were purchased

are as follows:
                              - 12 -


                                                     Amount Of
      Date        Check No.            Amount
                                                  Cashier's Check
       n/a             1358            $9,500         $9,500
    11/02/88           1334             2,150          2,150
    11/21/88            n/a             6,300          6,300

     Total                             17,950         17,950

     None of the cashier's checks purchased in the manner

described above bears any notation indicating the purpose

for which it was issued.      The back of each check bears the

statement "Cashier's Check issued in lieu of the check

Payable to the same payee."      We find that each of these

cashier's checks was used to pay Jordan Distributors for

the cost of fuel that H&B transported for Trans State.

The difference, if any, between the amount of each check

and the amount of the corresponding cashier's check

represents a fee charged by First Interstate for issuing

the cashier's check.

               Each time Trans State received a shipment of

fuel from H&B, its representative would pay H&B's driver

for the fuel with either cash or a cashier's check.        The

H&B driver receiving the cash or cashier's check would then

deliver the funds to petitioner.       In total, the amount of

money petitioner received from Trans State was equal to or

exceeded the amount of money H&B paid to Jordan

Distributors for the fuel, as reflected by the cashier's

checks summarized above.      Petitioner did not deposit any of
                             - 13 -


the money he received from Trans State into H&B's account

at First Interstate.


Wholesale Fuels, Inc.

     In 1988, petitioner and several other individuals

formed a corporation called Wholesale Fuels, Inc.

(Wholesale Fuels).     Petitioner intended Wholesale Fuels

to operate as a "jobber" for Pet-Don.     Mr. Petty and

Mr. James Jordan each contributed $50,000 as capital to the

corporation.   The original shareholders were petitioner,

Mr. Jordan, H.T. Jordan, and Mr. Frank G. McGuire.     There

is no evidence in the record that Mr. Petty held any stock

in Wholesale Fuels at any time during the years in issue.

On May 27, 1988, a bank account was opened in the name of

Wholesale Fuels at Founders Bank in Oklahoma City,

Oklahoma.   Both petitioner and Mr. Petty were authorized

to sign checks drawn on this account.

     On August 4, 1988, petitioner filed with respondent,

on behalf of Wholesale Fuels, Form 637, Registration for

Tax-Free Transactions Under Chapters 31, 32, and 38 of the

Internal Revenue Code.     Petitioner signed the form as

president of Wholesale Fuels, stating that the company was

a wholesale distributor in the business of purchasing and

selling heating oil.    The form bears a handwritten notation

stating that it was revoked on February 12, 1990.
                             - 14 -


     Sometime prior to September 29, 1988, Mr. Jordan, H.T.

Jordan, and Mr. McGuire decided to withdraw from Wholesale

Fuels.   Mr. Petty thereafter repaid Mr. Jordan the $50,000

he had contributed to the corporation.    The record does not

disclose whether Mr. McGuire or H.T. Jordan had contributed

any capital to the corporation, or whether they were repaid

for any such contribution.    On September 29, 1988,

petitioner prepared, but did not send, a letter to the

Internal Revenue Service stating that he was the sole

shareholder of Wholesale Fuels, that Mr. Jordan, H.T.

Jordan, and Mr. McGuire were no longer shareholders, and

that the corporation was electing "small business

corporation" status under subchapter S of the Internal

Revenue Code.

     Wholesale Fuels never conducted any business activity

and never filed a Federal income tax return.    However, the

company did maintain its checking account at Founders Bank.

Mr. Petty periodically used the funds in this account to

pay expenses incurred on behalf of H&B.    On July 21, 1988,

petitioner signed check No. 1196 drawn on H&B's First

Interstate account and made payable to Wholesale Fuels,

Inc., in the amount of $6,000.    Neither the check nor H&B's

pegboard ledger bears any notation of the purpose for this
                             - 15 -


check.   The proceeds of the check were deposited into the

Wholesale Fuels account at Founders Bank.


Deposit Into H&B's Community Bank Account

     On August 25, 1988, petitioner signed check No. 1241

in the amount of $1,500 that was drawn on H&B's First

Interstate account and made payable to Community Bank.

The proceeds of this check were later deposited into H&B's

account at Community Bank.    Although there is no notation

on the check itself, a note attached to the check written

by Ms. Melba Petty states:    "Don says travel expense &

repairs note: Deposited in H&B acct 1st Com Bank #252641".


Miscellaneous Items

     On December 22, 1988, petitioner signed check No. 1477

in the amount of $5,900.40 that was drawn on H&B's First

Interstate account and made payable to First Interstate.

A notation on the back of the check states that a cashier's

check was issued in lieu of the check.    The front of the

check also bears a notation stating "insurance".    A nota-

tion in the space on the pegboard ledger corresponding

to this check states "Rockport Oil Insurance".

     On January 3, 1989, First Interstate issued a

cashier's check payable to the Oklahoma Automobile

Insurance Plan for $5,100.40.    Petitioner purchased this
                            - 16 -


cashier's check with a portion of the proceeds of check No.

1477.    The record does not disclose the reason for the $800

difference between check No. 1477 and the cashier's check.

The record is also silent as to the nature of the insurance

purchased.

     On November 4, 1988, petitioner signed check No. 1346

in the amount of $1,500 that was drawn on H&B's First

Interstate account and made payable to cash.   Petitioner

used the proceeds of this check to purchase a cashier's

check.   The record does not disclose to whom this cashier's

check was payable, to whom it was remitted, or the purpose

for which the proceeds were used.

     Also during 1988, petitioner signed 17 checks in the

aggregate amount of $11,086.84 that were drawn on H&B's

First Interstate account and made payable to cash.   These

checks are as follows:
                              - 17 -


      Date        Check No.              Amount            Payee
       n/a          1214                 $200.00            Cash
    04/05/88         n/a                  500.00            Cash
    07/19/88         n/a                  400.00            Cash
    10/12/88         n/a                  200.00            Cash
    10/18/88         n/a                  150.00            Cash
    10/21/88         n/a                  200.00            Cash
    10/27/88         n/a                  200.00            Cash
    10/24/88        1317                  500.00            Cash
    10/29/88         n/a                  600.00            Cash
       n/a          1373                  300.00            Cash
    11/25/88        1401                  400.00            Cash
    11/28/88        1406                  800.00            Cash
    11/30/88        1409                5,786.84            Cash
    12/02/88         n/a                  300.00            Cash
    12/09/88        1444                  200.00            Cash
    12/12/88        1448                  150.00            Cash
    12/17/88        1463                  200.00            Cash

     Total                             11,086.84

Some of the above checks bear notations stating that they

were used to pay travel or other expenses.         The pegboard

ledger sheet also contains notations for some of these

checks stating that they were used to pay travel and other

expenses incurred on behalf of H&B.

     During 1988, six checks were drawn on H&B's First

Interstate account and made payable to petitioner.            These

checks total $9,577.62, and are as follows:

      Date        Check No.             Amount             Payee
    05/19/88        1113                $240.00      Don   Montgomery
    06/03/88        1271                 137.62      Don   Montgomery
    06/28/88        1171               8,000.00      Don   Montgomery
    07/22/88        1200                 500.00      Don   Montgomery
    08/19/88        1237                 400.00      Don   Montgomery
    08/29/88        1242                 300.00      Don   Montgomery

     Total                             9,577.62


     Check Nos. 1113 and 1271 bear notations stating that
                               - 18 -


they were issued to pay for travel expenses.       Check Nos.

1200 and 1237 bear notations stating that they were issued

to pay for "expenses".       Check No. 1271 was signed by both

petitioner and a "Mr. Moore".       Check No. 1171 was signed by

Mr. Petty.

     During 1989, petitioner signed two additional checks

in the total amount of $5,175 that were drawn on H&B's

First Interstate account and made payable to cash.        These

checks are as follows:

      Date         Check No.            Amount         Payee
    02/13/89          1621                $675          Cash
    02/21/89          1655               4,500          Cash

     Total                               5,175


Check No. 1621 bears a notation stating that it was issued

as repayment to Ms. MacKall for a previous cash deposit.

A notation on the pegboard ledger for this check states

"Repay money dep. 2/10 for SW Comm".        Check No. 1655 bears

a notation stating that it was issued as repayment to

Wholesale Fuels.   There is no entry on the pegboard ledger

for check No. 1655.

     Also during 1989, petitioner signed two checks in the

total amount of $2,097 that were drawn on H&B's First

Interstate account and made payable to First Interstate.

These checks are as follows:
                                - 19 -


        Date        Check No.             Amount       Payee
      04/06/89        1808                  $395   1st Interstate
      04/17/89        1816                 1,702   1st Interstate

       Total                               2,097




       Neither of these checks bears any notation, and the

peg

board ledger sheet on which these checks should appear was

not introduced into evidence.



                                OPINION

       At the outset, we note that respondent concedes part

or all of four of the adjustments determined in the notice

of deficiency.    First, with respect to the adjustment

increasing petitioners' income on the ground that

petitioner realized unreported income from H&B of $81,865

in 1988 and $36,762 in 1989, respondent concedes $5,700 of

the unreported income in 1988 and $5,500 in 1989.        Second,

respondent concedes the full amount of the adjustment

charging petitioner with unreported rental income of $1,853

in 1989, and $979 in 1990.       Third, respondent concedes, as

incorrect, the adjustment disallowing petitioners' capital

loss deductions of $3,000 per year in 1988 and 1989, and

$3,146 in 1990.    Finally, respondent concedes the additions

to tax and penalties attributable to each of these conceded
                           - 20 -


items.   As a result of respondent's concessions, there is

no deficiency for 1990.

     In their post-trial briefs, petitioners argue that

respondent's determination that petitioner received

unreported income from H&B "is inherently arbitrary and

excessive on its face".   Petitioners argue that

respondent's determination is therefore not entitled to the

presumption of correctness, and respondent bears the burden

of proving "that the petitioners had unreported income."

     Generally, a taxpayer bears the burden of proving

that the Commissioner's determination of a deficiency is

erroneous.   See Rule 142(a).   All Rule references are to

the Tax Court Rules of Practice and Procedure.     However,

in a case such as this, in which the Commissioner

determines that a taxpayer realized unreported income,

the Commissioner must provide a minimal evidentiary

foundation for the deficiency determination before the

presumption of correctness attaches to it.    See Erickson

v. Commissioner, 937 F.2d 1548, 1551 (10th Cir. 1991),

affg. T.C. Memo. 1989-552; Weimerskirch v. Commissioner,

596 F.2d 358, 361 (9th Cir. 1979), revg. 67 T.C. 672

(1977); Herbert v. Commissioner, 377 F.2d 65, 71 (9th Cir.

1966), revg. T.C. Memo. 1964-223; Estate of Dickerson v.

Commissioner, T.C. Memo. 1997-165; Siebert v. Commissioner,
                            - 21 -


T.C. Memo. 1997-6; Senter v. Commissioner, T.C. Memo. 1995-

311.    On rare occasions, when such a minimal evidentiary

foundation for the deficiency determination is not present,

this and other courts have not given effect to the

presumption of correctness and have shifted the burden of

going forward with the evidence from the taxpayer to the

Commissioner on the ground that the notice of deficiency is

arbitrary, i.e., without rational foundation in fact, or

excessive.    See Llorente v. Commissioner, 649 F.2d 152 (2d

Cir. 1981), affg. in part, revg. in part, and remanding 74

T.C. 260 (1980); Weimerskirch v. Commissioner, supra;

Dellacroce v. Commissioner, 83 T.C. 269 (1984); Jackson

v. Commissioner, 73 T.C. 394 (1979).

       This is not such a case.   In this case, there is ample

evidence linking petitioner to the funds which form the

basis of the deficiency.    Petitioner controlled and signed

checks drawn on H&B's bank accounts at First Interstate and

Community Bank, and H&B's drivers gave petitioner the cash

and cashier's checks they received from Trans State.     Thus,

we find no basis to conclude that the notice of deficiency

is arbitrary or without foundation.     Accordingly,

petitioners bear the burden of proving that respondent's

determinations are erroneous.     See Rule 142(a).
                           - 22 -


     The principal issue in this case is whether

petitioner realized unreported income from his activities

in connection with H&B.   A taxpayer does not realize income

by acting as a mere conduit for the transfer of funds on

behalf of another.   See Heminway v. Commissioner, 44 T.C.

96 (1965); Teschner v. Commissioner, 38 T.C. 1003, 1007

(1962); Mill v. Commissioner, 5 T.C. 691, 694 (1945); Drew

v. Commissioner, T.C. Memo. 1972-40.   However, "When a tax-

payer acquires earnings, lawfully or unlawfully, without

the consensual recognition, express or implied, of an

obligation to repay and without restriction as to their

disposition," then he has realized income.    James v.

United States, 366 U.S. 213, 219 (1961); see also Meier

v. Commissioner, 91 T.C. 273, 295 (1988).    Thus, we must

determine whether petitioner used the funds he withdrew

from H&B's bank accounts for H&B's benefit, or whether he

converted those funds to his personal use.


Lincoln Mark VII Automobile

     During 1988 and 1989, petitioner signed checks drawn

on H&B's First Interstate account and made payable to

Community Bank totaling $4,017.78 and $2,679.04, respec-

tively.   These checks represent payments on the loan used

to purchase the Lincoln Mark VII.
                             - 23 -


     In 1988, petitioner signed two additional checks

drawn on H&B's First Interstate account and made payable

to himself in the total amount of $400, and one made

payable to First Interstate in the amount of $200.   During

respondent's examination, petitioner told the revenue agent

that the proceeds of these checks were used to pay expenses

relating to the Lincoln Mark VII.

     On January 17, 1989, petitioner signed a check drawn

on H&B's First Interstate account and made payable to

Alexander & Strunk in the amount of $716.14.   The proceeds

of this check were used to purchase insurance for the

Lincoln Mark VII.   Sometime in March 1989, petitioner

signed a check drawn on H&B's First Interstate account and

made payable to First Interstate in the amount of $850.

The proceeds of this check were also used to pay expenses

relating to the Lincoln Mark VII.

     On or about May 1, 1989, the U.S. Government issued

a check payable to H&B in the amount of $19,694.92 as

compensation for work H&B performed under a contract to

haul fuel for the Department of Defense.   Petitioner

endorsed this check and deposited the proceeds into H&B's

account at Community Bank.    The proceeds of this check were

then used to satisfy the outstanding balance of the loan

used to purchase the Lincoln.
                           - 24 -


     In this case, therefore, a total of $4,617.78 in 1988,

and $23,940.10 in 1989, of H&B's funds was used to pay

expenses related to the Lincoln Mark VII.    Respondent

determined that these amounts constitute income to

petitioners because the Lincoln, at all relevant times, was

used by petitioner as his personal vehicle.    Petitioners

bear the burden of proving that respondent's determination

in this regard is erroneous.   See Rule 142(a).    We find

that petitioners have failed to satisfy this burden.

     Petitioners argue that these payments do not con-

stitute income to them because the Lincoln was a "company

car".   Presumably, petitioners argue that the automobile

was used for H&B's business purposes, or that the payments

constitute nontaxable fringe benefits.   We find this

argument unpersuasive.   First, the title to the automobile

lists Pet-Don, not H&B, as owner.   Second, petitioners have

not shown that petitioner used the automobile for any

purpose benefiting the title holder of the car, Pet-Don,

or the payor of the subject payments, H&B.    Petitioner did

not maintain any record of the purposes for which the

automobile was used, nor did he testify that it was used

primarily to further H&B's business purposes.     To the

contrary, petitioner testified that he used a second
                           - 25 -


automobile, a 1981 Buick, to make business trips on

behalf of H&B.

     Petitioners also appear to argue that petitioner

received the Lincoln in a like-kind exchange under section

1031.   We find petitioners' argument without merit.

Petitioner failed to introduce documentary evidence that

he received the Lincoln Mark VII in exchange for a tractor-

trailer, and there is no documentary evidence that

petitioner owned a tractor-trailer other than the one he

testified that he contributed to Pet-Don.   Moreover, Pet-

Don, and not petitioner, was the record owner of the

Lincoln Mark VII at all relevant times.   Essentially,

petitioners argue that they exchanged a tractor-trailer

which they did not own for an automobile which they did

not own.   This is clearly beyond the scope of section 1031.

     Furthermore, section 1031 requires that both the

property transferred and the property received in a like-

kind exchange be held primarily for productive use in a

trade or business, or for investment.   Sec. 1031(a)(1).

Petitioners have not shown that they held the Lincoln

Mark VII for productive use in a trade or business or

for investment.   Thus, even if we accepted petitioner's

characterization of the transaction, section 1031 would not

apply in this case.   Accordingly, we reject petitioners'
                           - 26 -


argument and sustain respondent's determination that all

of H&B's payments toward the purchase of the Lincoln Mark

VII, and its payments for insurance, tires, and other

expenses related to the automobile, constitute income to

petitioners.


Converted Payments From Trans State Pavers

     During 1988, petitioner signed four checks drawn on

H&B's First Interstate account and made payable to First

Interstate in the total amount of $18,033.42.   The proceeds

of these checks were used to purchase cashier's checks

totaling $18,026.42, each of which was payable to Jordan

Distributors.   Also in 1988, petitioner signed three checks

drawn on H&B's First Interstate account and made payable to

cash in the total amount of $17,950.   The proceeds of these

checks were also used to purchase cashier's checks payable

to Jordan Distributors.

     The above cashier's checks were used to purchase fuel

from Jordan Distributors for delivery and sale to Trans

State.   There is no evidence that petitioner ever deposited

the funds he received from Trans State into any of H&B's

bank accounts or otherwise paid the funds to H&B.

Respondent determined that petitioner converted the money

he received from Trans State to his own personal use.

Respondent determined that the amount of money so
                           - 27 -


converted, as measured by the amount of H&B's funds used

to purchase the fuel, constitutes taxable income to

petitioners.

     Petitioners have failed to present any documentary

evidence that petitioner paid the money he received from

Trans State to H&B.   Although there appear to have been

some unexplained deposits into H&B's First Interstate

account during the years at issue, petitioners have failed

to prove that the money petitioner received from Trans

State was deposited into the account.   It is also clear

that the source of funds used to purchase each of the

cashier's checks made payable to Jordan Distributors

consisted of checks drawn on H&B's First Interstate

account.   Thus, we are unable to find that petitioner used

the money he received from Trans State to pay Jordan

Distributors for the fuel H&B transported between the two.

     We note Ms. MacKall's testimony that petitioner either

cashed the checks he received from Trans State and used the

proceeds to purchase cashier's checks, or deposited cash

received from Trans State into H&B's First Interstate

account and then issued separate checks to purchase

cashier's checks.   However, we do not credit Ms. MacKall's

vague testimony on this point.   Moreover, there are no

notations on the pegboard ledger evidencing deposits
                             - 28 -


corresponding to the cashier's checks purchased.   Thus,

there is no basis in the record to reject respondent's

determination that petitioner converted the funds he

received from Trans State to his own personal use.

     Petitioners attached to their reply brief a copy of

an alleged cashier's check payable to H&B for $8,420.       This

check was issued by Community Bank on November 23, 1988,

and names Mr. Bob White, the owner of Trans State, as

remitter.   Petitioners argue that this check proves that

the cashier's checks in question were purchased for

business purposes, and that Trans State had reimbursed H&B

for the fuel transported on its behalf.   However, items

included in briefs are not evidence.   See Rule 143(b);

Evans v. Commissioner, 48 T.C. 704, 709 (1967), affd. 413

F.2d 1047 (9th Cir. 1969).    Further, the cashier's check

was not delivered to respondent prior to trial, and

respondent was not afforded an opportunity to question

petitioners about the check.    Accordingly, we will

disregard this check.

     Considering the facts and circumstances in the record,

we find that petitioners have not met their burden of

proving that petitioner did not convert the money he

received from Trans State to his own personal use.     We

therefore sustain respondent's determination that the
                           - 29 -


amount petitioner received from Trans State, as measured by

the amount of H&B funds used to purchase cashier's checks

payable to Jordan Distributors, constitutes income to

petitioners.

Wholesale Fuels, Inc.

     On July 21, 1988, petitioner signed check No. 1196

drawn on H&B's First Interstate account and made payable

to Wholesale Fuels in the amount of $6,000.   This check

was later deposited into the Wholesale Fuels account at

Founders Bank.   Respondent determined that because

petitioner was the sole shareholder of Wholesale Fuels at

the time the check was deposited into its bank account,

the proceeds of this check constitute income to

petitioners.

     We agree with respondent's premise that a taxpayer

realizes taxable income by diverting the funds of another

to a corporation wholly owned by the taxpayer.    See, e.g.,

Davis v. Commissioner, T.C. Memo. 1991-333.   However,

petitioner did not have sole dominion and control over the

funds in the Wholesale Fuels account at Founders Bank.     As

found above, Mr. Petty periodically used the money in this

account to satisfy expenses incurred on behalf of H&B.

Thus, we find that the money deposited into the Wholesale
                           - 30 -


Fuels account at Founders Bank does not constitute income

to petitioners.


Deposit Into H&B's Community Bank Account

     On August 25, 1988, petitioner signed check No. 1241

drawn on H&B's First Interstate account and made payable to

Community Bank in the amount of $1,500.     A note attached to

the check in Ms. Melba Petty's handwriting states:       "Don

says travel expense & repairs note: Deposited in H&B acct

1st Com Bank #252641".   The proceeds of this check were

deposited into H&B's account at Community Bank.

     Respondent determined that amounts deposited into

H&B's account at Community Bank constitute income to

petitioners because petitioner was the only person

authorized to withdraw funds from the account.     See

generally Bailey v. Commissioner, 52 T.C. 115 (1969), affd.

420 F.2d 777 (5th Cir. 1969).    Petitioners argue that the

money deposited into this account does not constitute

income to them because the account was established and used

for H&B's business purposes.    However, petitioners have not

shown that money in the Community Bank account was ever

used to satisfy expenses incurred on behalf of H&B, or that

the money deposited into the account belonged to H&B.       At

trial, petitioners introduced a document purporting to

authorize Mr. Petty to sign checks drawn on the Community
                             - 31 -


Bank account.    However, this document does not appear to

have been filed with, or in any way accepted by, Community

Bank.    Petitioner himself was unable to recall how he

obtained the document.    Moreover, Mr. Petty testified that

he "never signed anything at Community Bank".     Petitioners

have offered no evidence that Mr. Petty was ever authorized

to withdraw funds from the account.     Accordingly, we find

that petitioner had exclusive dominion and control over

the funds in the Community Bank account, and we sustain

respondent's determination that all H&B funds deposited

into the account constitute income to petitioners.


Miscellaneous Transactions

        On December 22, 1988, petitioner signed check No. 1477

drawn on H&B's First Interstate account and made payable to

First Interstate in the amount of $5,900.40.     In return,

First Interstate issued a cashier's check payable to the

Oklahoma Automobile Insurance Plan in the amount of

$5,100.40.     An entry in the space corresponding to check

No. 1477 on H&B's pegboard ledger states "Rockport Oil

Insurance".     Respondent determined that the entire amount

of the H&B check constitutes income to petitioners.

        We find that $5,100.40 of the amount of check No. 1477

was used to purchase insurance for H&B and, thus, was used

for H&B's benefit.     In this regard, we note that H&B issued
                            - 32 -


a separate check to purchase insurance for the Lincoln Mark

VII on January 17, 1989.    Thus, the entire amount of the

cashier's check is not income to petitioners.    However,

petitioners have offered no explanation of the additional

$800 withdrawn from H&B's account, and there is no basis

in the record on which we can reject respondent's

determination that this additional $800 constitutes income

to petitioners.    Accordingly, we find that $800 of the

proceeds of check No. 1477 constitutes income to

petitioners.

     On November 4, 1988, petitioner signed check No. 1346

drawn on H&B's First Interstate account and made payable to

cash in the amount of $1,500.    Petitioner used the proceeds

of this check to purchase a cashier's check.    However,

petitioners have provided no explanation of how the

proceeds of this cashier's check were used.    Consequently,

petitioners have failed to satisfy their burden of proving

that the proceeds of check No. 1346 do not constitute

income to them, as determined by respondent.

     During 1988, petitioner signed 17 additional checks

drawn on H&B's First Interstate account and made payable to

cash in the aggregate amount of $11,086.84.    Some of these

checks bear notations stating the purposes for which they

were drawn.    H&B's pegboard ledger sheet also contains
                           - 33 -


notations of the purposes for some of these checks.

Respondent argues that petitioners have not met their

burden of proving that these checks do not constitute

income because they did not introduce any receipts or

other evidence to show how the proceeds were spent.    Thus,

respondent maintains that we must sustain her determination

that the proceeds of these checks constitute income to

petitioners.

     Considering all of the facts and circumstances, we

find that these additional checks payable to cash do not

constitute income to petitioners.    Ms. MacKall testified

that petitioner often withdrew cash from H&B's First

Interstate account to obtain funds necessary for H&B's

daily operations.   Although H&B's record keeping was, to

say the least, informal and sloppy, we are nonetheless

convinced that the proceeds of these checks were used to

pay actual expenses incurred on H&B's behalf and were

not converted to petitioner's personal use.    Ms. MacKall

provided summaries of the checks in question and testified

as to how the proceeds were spent.    We find Ms. MacKall's

testimony credible in this regard and find that the

proceeds of these checks do not constitute taxable income

to petitioners.
                             - 34 -


     Also during 1988, six checks were drawn on H&B's First

Interstate account and made payable to petitioner in the

total amount of $9,577.62.    One of these checks was signed

by both petitioner and a "Mr. Moore".    One of the checks

was signed by Mr. Petty.    Some of the checks bear notations

stating that they were issued to pay for travel or other

expenses.    Respondent determined that the entire amount of

these checks constitutes income to petitioners.

     We find that petitioners have not met their burden

of proving that respondent's determination is erroneous

insofar as the six checks payable to petitioner are

concerned.    These checks were issued contemporaneously with

the checks payable to cash.    However, petitioners have

provided no explanation why some of the checks were payable

to cash and others were payable to petitioner if all of the

proceeds were used to pay expenses incurred on H&B's

behalf.   Furthermore, petitioners introduced into evidence

a summary which states that check No. 1171, which was

signed by Mr. Petty, was actually given to Mr. Petty.

Petitioners claim that this check represents part of the

proceeds of another check which was deposited into H&B's

First Interstate account 11 days earlier.    Petitioners'

summary states that this deposit was made from Mr. Petty's

personal funds, and that Mr. Petty used the proceeds of
                            - 35 -


check No. 1171 to pay business expenses.   However,

petitioners do not explain why Mr. Petty, who was away

from Oklahoma City at the time, would write a check payable

to petitioner to withdraw money from H&B's account for his

own business purposes.    We find petitioners' explanation in

this regard both implausible and incredible.

     During 1989, petitioner signed two checks, Nos. 1621

and 1655, drawn on H&B's First Interstate account and made

payable to cash in the aggregate amount of $5,175.     Check

No. 1621 bears a notation stating that it was issued to

repay Ms. MacKall for a previous cash deposit.   The

pegboard ledger entry for this check states "Repay money

dep. 2/10 for SW Comm".   The pegboard ledger entry for

check No. 1655 states that it was issued to repay Wholesale

Fuels for a cash deposit.

     We find that neither of these checks constitutes

income to petitioners.    Ms. MacKall testified that she made

a wire transfer of her own personal funds to Southwest

Commercial Bank on H&B's behalf several days before check

No. 1621 was issued.   Ms. MacKall testified that she made

this transfer to prevent H&B from incurring a fee for late

payment.   We find Ms. MacKall's testimony credible in this

regard and find that check No. 1621 was issued to repay her
                             - 36 -


for this advance.    Accordingly, check No. 1621 does not

constitute income to petitioners.

     Petitioners argue that check No. 1655, dated

February 21, 1989, in the amount of $4,500, was issued to

repay Wholesale Fuels for cash advanced by Wholesale Fuels.

To support this claim, petitioners introduced a check

drawn on the Wholesale Fuels account for $4,500 dated

February 17, 1989.    This check is payable to First

Interstate and was endorsed by H&B.

     We have already found that Mr. Petty periodically used

money in the Wholesale Fuels account to pay expenses

incurred on behalf of H&B.    We therefore find that check

No. 1655 represents a transfer of money between two

accounts used by H&B.    Accordingly, we find that the

proceeds of check No. 1655 do not constitute income to

petitioners.

     Also during 1989, petitioner signed two checks drawn

on H&B's First Interstate account and made payable to First

Interstate in the aggregate amount of $2,097.      Neither

check bears any notation of its purpose, and the pegboard

ledger sheet on which these checks should appear was not

introduced into evidence.    Petitioners have not provided

any explanation of these checks.      There is therefore no

basis in the record on which to reject respondent's
                           - 37 -


determination that this amount constitutes income to

petitioners.


Additions to Tax and Penalty

     Respondent determined that petitioners are liable

for the addition to tax for negligence in 1988 as

prescribed by section 6653(a)(1).    During 1988, section

6653(a)(1) imposed an addition to tax equal to 5 percent

of an underpayment if any part of the underpayment is

attributable to negligence or disregard of rules or

regulations.   Sec. 6653(a)(1).   For this purpose,

negligence is defined as "any failure to make a reasonable

attempt to comply with the provisions [of the Internal

Revenue Code]".   Sec. 6653(a)(3).   Negligence includes

any "lack of due care or failure to do what a reasonable

and ordinarily prudent person would do under the

circumstances."   Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499,

506 (5th Cir. 1967), affg. in part and remanding in part

43 T.C. 168 (1964) and T.C. Memo. 1964-299); see also

Hitchins v. Commissioner, 103 T.C. 711, 719 (1994).     The

term "disregard" includes any careless, reckless, or

intentional disregard.   Sec. 6653(a)(3).   Petitioners bear

the burden of proving that respondent's determination of
                           - 38 -


negligence is erroneous.   See Rule 142(a); Hitchins v.

Commissioner, supra.

     Petitioners have not introduced any evidence or made

any argument that they acted with reasonable care in

reporting their income for 1988.    Consequently, we find

that petitioners have failed to satisfy their burden of

proving that respondent's determination of negligence is

erroneous.

     In addition to negligence, respondent determined that

petitioners are liable for the addition to tax for sub-

stantial understatement of income tax, as prescribed by

section 6661 with respect to their 1988 return.    As in

effect during 1988, section 6661 imposed an addition to

tax equal to 25 percent of any underpayment of income tax

attributable to a substantial understatement of liability.

Sec. 6661(a).   Respondent also determined that petitioners

are liable for the accuracy-related penalty prescribed by

section 6662 with respect to their 1989 return.    Section

6662 imposes a penalty equal to 20 percent of any under-

payment of income tax attributable to a substantial

understatement of liability.   Sec. 6662(a).

     Both sections 6661 and 6662 define a "substantial

understatement" as an understatement of tax liability

equal to the greater of 10 percent of the tax required
                           - 39 -


to be shown for the taxable year or $5,000.   Secs.

6661(b)(1)(A), 6662(d)(1)(A).   In determining whether there

is a substantial understatement of liability, the amount

of an understatement is reduced by any portion attributable

to the tax treatment of an item for which the taxpayer had

substantial authority, and by any item with respect to

which the relevant facts affecting the taxpayer's treat-

ment are adequately disclosed in the return or in a

statement attached to the return.   Secs. 6661(b)(2)(B),

6662(d)(2)(B).

     Petitioners bear the burden of proving that

respondent's imposition of an addition to tax under section

6661 or penalty under section 6662 is erroneous.   See Rule

142(a); Luman v. Commissioner, 79 T.C. 846, 860 (1982).

Petitioners also bear the burden of proving that they had

substantial authority for omitting an item from their

return.   See Tippin v. Commissioner, 104 T.C. 518, 535

(1995).

     We find that petitioners have failed to satisfy their

burden of proving that respondent's imposition of the

addition to tax under section 6661 and penalty under

section 6662 is erroneous in this case.   Petitioners

offered no authority for their position that the items
                           - 40 -


in question did not constitute gross income, and did not

disclose the facts relating to these items in their returns

or statements attached to their returns.    Accordingly, we

sustain respondent's determination that petitioners are

liable for the addition to tax for substantial under-

statement of liability as prescribed by section 6661 with

respect to their 1988 return, and the accuracy-related

penalty as prescribed by section 6662 with respect to their

1989 return, insofar as they have understated their income

tax liability.   However, because respondent has conceded a

portion of the deficiency, and because we have found for

petitioners on others, the amounts of the addition to tax

and penalty shall be determined as part of the Rule 155

computation.

     In light of the foregoing, and reflecting concessions,


                               Decision will be entered

                          under Rule 155.
