                         T.C. Memo. 1996-336



                       UNITED STATES TAX COURT



              HELEN SOPHIE SCHROEDER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3920-95.                         Filed July 24, 1996.



     Helen Sophie Schroeder, pro se.

     Elizabeth Patino and Trevor T. Wetherington, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined the following

deficiencies in and accuracy-related penalties on petitioner's

Federal income tax:
                                  - 2 -

                                          Accuracy-related Penalties
     Year       Deficiency                        Sec. 6662(a)

     1991           $8,997                          $1,799
     1992            4,069                             814
     1993              857                             171

All section references are to the Internal Revenue Code in effect

for the years in issue.      All Rule references are to the Tax Court

Rules of Practice and Procedure.     After concessions,1 the issues

for decision are:

     (1) Whether various costs incurred during 1991 that were

related to buildings used in petitioner's farming and breeding

businesses may be deducted under section 162 as ordinary and

necessary business expenses or must be capitalized under section

263 as expenditures made pursuant to a general plan of capital

improvements;

     (2) whether petitioner is entitled to an interest expense

deduction in the amount of $2,178 for the year 1992;




     1
        Petitioner concedes that she is not entitled to
exemptions in the amounts of $4,300 and $4,600 for the years 1991
and 1992, respectively, for her two minor children, Sara
Elizabeth Obertein and Mary Jo Louise Obertein. Petitioner also
concedes that she is not entitled to an exemption for her
daughter Mary Jo Louise Obertein for 1993. Respondent concedes
that petitioner is entitled to an exemption for her daughter Sara
Elizabeth Obertein for 1993. Respondent also concedes that
petitioner is entitled to exemptions for her brother, George
Heiman David Schroeder for the years 1991, 1992, and 1993.
Respondent further concedes that petitioner is entitled to head
of household filing status for the years 1991, 1992, and 1993.
Respondent further concedes that petitioner is entitled to a
$1,046 interest deduction in 1993.
                                - 3 -

     (3) whether petitioner is entitled to costs of goods sold

in the amounts of $4,890, $16,850, and $1,400 for the years 1991,

1992, and 1993, respectively; and

     (4) whether petitioner is liable for accuracy-related

penalties under section 6662(a) for negligence or disregard of

rules or regulations.

                          FINDINGS OF FACT

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

The stipulation of facts, together with the exhibits attached

thereto, is incorporated herein by this reference.    Petitioner

resided in Rhodes, Michigan, at the time the petition was filed.

     Petitioner owned two improved properties (hereinafter

referred to as the Rhodes property and the Whitefeather property)

that she used in her farming and breeding businesses.      The

properties were located across the street from each other.

Petitioner farmed hay and straw, sold goats and pigs (1991 only),

and raised poodles and quarter horses for sale.

The Rhodes Property

     Petitioner had leased the Rhodes property since 1978 or

1979.   Petitioner purchased the Rhodes property in 1985 from a

longtime family friend whom she had taken care of during the last

years of his life.    She paid $25,000 and other noncash

consideration for the property.    The total purchase price is

unknown.   When purchased, the property consisted of 20 acres, a

house, a granary, a large barn (Rhodes barn), two chicken coops,
                                - 4 -

and a bee cellar (collectively referred to as the Rhodes

buildings). The Rhodes barn is a wooden building built between

1912 and 1915.    Petitioner considered building a new barn on the

Rhodes property but could not get "for any kind of reasonable

money" as much storage capacity as she had with the existing

barn.   The Rhodes barn was in basically good condition, although

it leaked and needed repair.    Its foundation was solid.   The

remainder of the Rhodes property was in deplorable shape; weeds

and brush had grown, and fences were in disrepair.    The chicken

coops, the bee cellar, and the house were in such disrepair that

petitioner had them demolished.    Prior to making the outlays

described below, petitioner used the west end of the barn to

stable horses.    The last time wood sealer had been applied to the

Rhodes barn was in 1976 or 1977.    The barn's tin roof had been

resilvered (painted with a silver-colored coating) also in 1976

or 1977.    The barn doors had been caught several times by the

wind and were damaged.    The back wall of the Rhodes barn had been

bowed out for over 10 years; petitioner admitted that it would

eventually collapse if not repaired.

     In 1991, petitioner resilvered the roof of the Rhodes barn

and replaced four or five of the approximately 126 tin roof

sections.    Petitioner also replaced two structural support rods

(to partially fix the bowing out of the back barn wall),

repounded nails in the wood, renailed the roof, caulked the nail

holes in the roof, applied wood sealer, and prepped and painted
                                - 5 -

the outside of the barn with a red oil-based paint.    The

structure of the barn was not altered.    The work done to the barn

increased its hay storage capacity2 and enhanced the appearance

of the property.    The granary roof also was fixed and the sides

were treated and repainted in the same manner as the Rhodes barn.

Petitioner spent $28,100 in 1991 to make repairs to, make

improvements on, and demolish and remove buildings on the Rhodes

property.    She deducted the following expenses as repairs on her

1991 tax return:

Repair of Rhodes barn roof                              $6,800
Preparation and painting of sides of Rhodes barn         7,200
Repair and removal of debris from interior of
  Rhodes barn                                            1,500
Repair of Rhodes granary roof                            2,700
Preparation and painting of sides of Rhodes
  granary                                                3,600

  Total                                                 21,800

The $6,300 cost of demolishing a house and a storage building and

removing the debris was not deducted by petitioner.    Petitioner

also deducted $250 in 1991 for the replacement of a water heater

in a small house on the Rhodes property.    At trial, petitioner

conceded that the $1,500 cost of replacing two of the three

structural support rods was a capital improvement.

The Whitefeather Property

     Petitioner purchased the Whitefeather property from her

parents in 1993 for $25,000.    The property consists of 40 acres


     2
          Repairing the leaking roof allowed more hay to be stored.
                               - 6 -

and includes a large farmhouse, a small three-room house that

petitioner used as an office, a chicken coop, a garage, a pump

shed, and a barn (Whitefeather barn) to which a sheep shed and a

cow stable were attached (collectively referred to as the

Whitefeather buildings).   The Whitefeather barn was built about

1932 or 1933 and was in usable condition.   Petitioner has used

the barn to store hay and stable horses for the last 15 years.

Petitioner could not remember the last time the Whitefeather barn

had been sealed or painted.

     In 1991, petitioner resealed and painted the wood on the

Whitefeather barn, installed new windows, fixed the doors and

roof, divided a horse stall into two foaling stalls, and

demolished the sheep shed and the cow stable attached to the

barn.   Petitioner also had the chicken coop demolished.    The work

on the roof of the barn included resilvering, caulking, replacing

one or two of the approximately 120 tin sections of the roof, and

reinstalling lightning rods.   Although the work did not increase

the Whitefeather barn's storage capacity, it did enhance its

appearance.

     Petitioner deducted the following expenses as repairs to the

Whitefeather property on her 1991 tax return:

Repair roof of Whitefeather barn                   $2,400
Preparation and painting of Whitefeather barn       2,300
  Total                                             4,700

Petitioner's invoice for the above described work was consistent

with the description on her tax return.   It made no reference to
                               - 7 -

demolition, dividing a stall into two foaling stalls, or door and

window repairs.

Petitioner's Record-Keeping Practices

     Petitioner did not keep a formal set of books.   She would

consolidate her paperwork on summary sheets at the end of the

year or when she prepared her income tax returns.   The summary

sheets were prepared from receipts and entries in petitioner's

pocket calendar.   After they were consolidated, the records used

to prepare the summary sheets "went into the wood stove".   We

found petitioner's testimony to be highly credible.

Petitioner's 1992 Interest Deduction

     Petitioner deducted $2,178 as interest expense on a Schedule

C attached to her 1992 Federal individual income tax return.

Respondent admits that petitioner paid $378 to the State Bank of

Standish in 1992 on an installment loan.   The proceeds of the

installment loan were used to make some of the repairs described

above on the Whitefeather property.    Petitioner paid interest to

the Michigan Federal Credit Union on a loan that was used to

purchase a tractor, a baler, and other farm equipment.   However,

the amount of interest paid to the Michigan Federal Credit Union

is not in the record.   Petitioner borrowed $8,000 from Michael

Tuffnell in the spring of 1992.   No cash payments were made on

the Tuffnell loan in 1992, although petitioner gave Mr. Tuffnell

about $2,500 of hay and straw as payment toward the loan.
                                - 8 -

Petitioner's 1991 Cost of Goods Sold3

     Petitioner reported $4,890 as cost of goods sold on Schedule

F on her 1991 tax return.4    The $4,890 represents the purchase

price of livestock and beef as follows:

     Magic (horse)                       $800
     Pigs (10 at $45 each)                 450
     Pigs (20 at $40 each)                 800
     Beef (6 at $380 each)              2,280
     Goats (20 at $10 each)                200
     Goats (15 at $15 each)              1
                                           360
       Total                            4,890
     1
         Petitioner's math was in error.   The correct total should
         be $225.

Petitioner bought Magic from Standish Livestock Sales in 1991.

Petitioner did not believe that she bought 35 goats, although she

reported both the purchase and sale of 35 goats on her 1991 tax

return.    Petitioner did not report the sale of any pigs on her

1991 tax return.

Petitioner's 1992 Cost of Goods Sold

     Petitioner calculated her cost of goods sold on part III of

Schedule C on her 1992 tax return as follows:

     Inventory at beginning of year                  $5,850
     Purchases                                         -0-
     Cost of labor                                     -0-

     3
        Since respondent does not dispute that the items in
question are allowable as cost of goods sold if properly
substantiated, we will decide only whether adequate
substantiation has been shown.
     4
        Petitioner reported her business activities on Schedule F
in 1991 using the cash method of accounting. Petitioner changed
the nature of her business and reported it on Schedule C in 1992
and 1993 using the accrual method of accounting.
                                - 9 -

     Materials and supplies                               8,300
     Other costs                                          6,900
       Subtotal                                          21,050
     Less inventory at end of year                        4,200
       Total                                             16,850

Petitioner calculated her beginning inventory by taking the

horses and dogs that she started the year with and assigning the

following values to them:

     Crystal (horse)                    $3,500
     Candy (horse)                        1,200
     Sparky (dog)                           150
     Wanda (dog)                            200
     Rascal (dog)                           250
     Buddy (dog)                            220
     Rose (horse)                           350
       Total                             1
                                          5,870
     1
         Petitioner recorded the total as $5,850.

Petitioner assigned an estimated fair market value to Crystal and

Candy based on replacement value.    Crystal was purchased by

petitioner's ex-husband for an unknown amount in 1984.        Candy was

not purchased; she was foaled by Crystal.         Sparky was purchased

by petitioner in 1991 for $150.    Wanda was purchased in 1992 by

petitioner for $200. Rascal was purchased by petitioner in 1991

for $250.    Buddy was purchased by petitioner in 1991 for $220.

Rose was purchased by petitioner in 1991 for $350.

     Petitioner substantiated $7,100 of the $8,300 subtracted for

materials and supplies on her cost of goods sold schedule for

1992 through her testimony and summary sheets.        Petitioner

substantiated all of the $6,900 subtracted for miscellaneous cost

of goods sold through her testimony and summary sheets.
                                - 10 -

     Petitioner calculated her ending inventory by taking the

horses and dogs that she ended the year with and assigning the

following values to them:


     Crystal (horse)                  $3,500
     Sparky (dog)                        150
     Wanda (dog)                         200
     Buddy (dog)                         220
     2 pups                              130
       Total                           4,200

Petitioner's 1993 Cost of Goods Sold

     Petitioner calculated her cost of goods sold on part III of

Schedule C on her 1993 tax return as follows:

     Inventory at beginning of year                  $4,200
     Purchases                                          600
     Cost of labor                                     -0-
     Materials and supplies                           2,100
     Other costs                                       -0-
       Subtotal                                       6,900
     Less inventory at end of year                    5,500
       Total                                          1,400

Petitioner's beginning 1993 inventory is the same as her ending

1992 inventory.   The $600 in purchases consists of the purchase

of the horse Rags.     Petitioner substantiated the $2,100

subtracted for materials and supplies through her testimony and

summary sheets.

     Petitioner calculated her ending inventory by taking the

horses and dogs that she ended the year with and assigning the

following values to them:

     Crystal (horse)                  $3,500
     Midnight (horse)                    550
     Rags (horse)                        600
     Winston (horse)                     550
                               - 11 -

     Sparky (dog)                         150
     Bubbles (dog)                        150
       Total                            5,500

Winston was the offspring of one of petitioner's foals.      There is

no record of how Midnight and Bubbles were acquired.

                               OPINION

Whether Petitioner Must Capitalize Costs Related to Buildings

     It is conceded by respondent that petitioner incurred costs

for the Rhodes and Whitefeather properties in the amounts listed

on her 1991 tax return.    The issue is whether petitioner must

capitalize those costs.    "The line of demarcation between

deductible repairs and additions to capital is, of course,

obscure."    Stoeltzing v. Commissioner, 266 F.2d 374, 376 (3d Cir.

1959), affg. T.C. Memo. 1958-111.

     Amounts expended for ordinary and necessary incidental

repairs and maintenance may be deducted by a cash basis taxpayer

when paid, while amounts incurred to permanently improve property

or increase its value must be capitalized and depreciated over

the useful life of the improvement.      Sec. 162(a); secs. 1.162-4,

1.263(a)-1(b), Income Tax Regs.    The Court of Appeals for the

Ninth Circuit has summarized the difference as:

     The often-litigated distinction between repair expenses
     and capital improvements has been characterized as the
     difference between "keeping" and "putting" a capital
     asset in good condition:

                 The test which normally is to be applied
            is that if the improvements were made to "put"
            the particular capital asset in efficient
            operating condition, then they are capital in
                               - 12 -

          nature. If, however, they were made merely to
          "keep" the asset in efficient operating condition,
          then they are repairs and are deductible.
          [Moss v. Commissioner, 831 F.2d 833, 835 (9th
          Cir. 1987), revg. T.C. Memo. 1986-128 (quoting
          Estate of Walling v. Commissioner, 373 F.2d 190,
          192-193 (3d Cir. 1967)).]

Whether an expense is deductible or must be capitalized is a

question of fact.    See Plainfield-Union Water Co. v.

Commissioner, 39 T.C. 333, 338 (1962) (the test is whether an

expense materially enhances the value of property or appreciably

prolongs the life of the property).

     Most of the expenditures at issue were for maintenance and

repairs; they simply kept the capital asset in efficient

operating condition.   Prepping, treating, and painting wood,

repounding nails, replacing a relatively small number of tin roof

sheets, sealing nail holes, and painting roofs of buildings that

were already in operating condition do not constitute capital

improvements.    These expenditures simply restored the buildings

to their previous condition without adding to the value of the

buildings or prolonging their life in a way that require the

expenditures to be treated as capital.   However, replacing two

support rods on the Rhodes barn, dividing a stall into two

foaling stalls on the Whitefeather barn, and the installation of

a water heater in the Rhodes house are capital improvements.

Also, the costs of demolishing the sheep shed, the cow stable,

and the chicken coop on the Whitefeather property are

nondeductible.   Sec. 280B.   Respondent does not argue that all of
                              - 13 -

the expenditures were capital improvements, but, as part of a

general plan of rehabilitation, she argues that all of the

expenditures nevertheless must be capitalized.

     In United States v. Wehrli, 400 F.2d 686, 689-690 (10th Cir.

1968), the Court of Appeals for the Tenth Circuit stated:

     the courts have superimposed upon the criteria in the
     [Commissioner's] repair regulation an overriding precept
     that an expenditure made for an item which is part of a
     "general plan" of rehabilitation, modernization, and
     improvement of the property, must be capitalized, even
     though, standing alone, the item may appropriately be
     classified as one of repair. * * * Whether the plan
     exists, and whether a particular item is part of it, are
     usually questions of fact to be determined by the fact
     finder based upon a realistic appraisal of all the
     surrounding facts and circumstances, including, but not
     limited to, the purpose, nature, extent, and value of the
     work done, e.g., whether the work was done to suit the needs
     of an incoming tenant, or to adapt the property to a
     different use, or, in any event, whether what was done
     resulted in an appreciable enhancement of the property's
     value. [Fn. ref. omitted.]

Petitioner continued to use the two barns and the granary for the

same business purposes after the repairs as she did before the

repairs.   The capital expenditures to install support rods and a

water heater, to divide a stall into two foaling stalls, and to

demolish a sheep shed and a cow stable were not substantial.    The

only substantial capital expenditures were $6,300 for demolition

of a house and a storage building and removal of debris on the

Rhodes property.   These costs were not deducted by petitioner and

do not relate to any building that was repaired.   "To our

knowledge, every case in which the rehabilitation doctrine has

been applied to date has involved substantial capital
                              - 14 -

improvements and repairs to the same specific asset, usually a

structure in a state of disrepair."    Moss v. Commissioner, supra

at 839 (fn. ref. omitted).

     In Kaonis v. Commissioner, T.C. Memo. 1978-184, affd.

without published opinion 639 F.2d 788 (9th Cir. 1981), we

separated capital expenditures from repairs and allowed the

taxpayer a deduction for the repairs to a rental house.

Specifically, we found that the taxpayer's expenses for painting

and cleaning restored the property to its previous condition and

thus were deductible.   We declined to apply the rehabilitation

doctrine because "the property was tenantable and generally

suitable for its use in the trade or business."    Id.   Here,

likewise, the two barns and the granary were suitable for use in

petitioner's trade or business prior to the repairs; they had

been used by petitioner for over 10 years.

     Respondent points out that the repairs to the Rhodes barn

increased its capacity to store hay.   In Keller Street Dev. Co.

v. Commissioner, 37 T.C. 559 (1961), affd. in part and revd. in

part on other grounds 323 F.2d 166 (9th Cir. 1963), the taxpayer,

a brewery, made some capital improvements to its plant and

equipment.   Most of the improvements were designed to increase

productive capacity so that the brewery could fill increasing

demand.   The Commissioner argued that certain expenses deducted

by the taxpayer should have been capitalized because they were

"part of a general betterment program".    Id. at 567.   However, we
                                - 15 -

declined to apply the rehabilitation doctrine because "the

brewery was in operating condition and use during the taxable

years in question and had been for several years before."      Id. at

568.    In this case, as was true in Kaonis and Keller,

petitioner's property was generally suitable for its intended

use.    Also, the structure of the Rhodes barn was not altered.

However, petitioner must capitalize the $1,500 paid for

installing the two supporting rods in the Rhodes barn.

Petitioner must also capitalize the cost of dividing the stall

into two foaling stalls and demolishing the sheep shed, the cow

stable, and the chicken coop on the Whitefeather property.     The

invoice for this work did not itemize these expenses.     Therefore,

we will make an allocation based on the information available to

us.    We find that of the $4,700 spent by petitioner on the

Whitefeather buildings, $900 must be capitalized and added to

petitioner's basis in the Whitefeather land and $100 must be

capitalized as the cost of creating the two foaling stalls.     Sec.

280B.

Petitioner's 1992 Interest Deduction

       Petitioner's burden of proving that respondent's

determinations in her deficiency notice are erroneous includes

the burden of substantiation.    See Hradesky v. Commissioner, 65

T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976).    Deductions are a matter of legislative grace; petitioner

has the burden of showing that she is entitled to any deduction
                               - 16 -

claimed.    New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).    Section 6001 requires taxpayers to maintain adequate

records from which their tax liability may be determined.

Petzoldt v. Commissioner, 92 T.C. 661, 686 (1989).

     Respondent conceded that petitioner paid $378 to the State

Bank of Standish in 1992 on an installment loan.       Petitioner's

testimony established that the interest was an ordinary and

necessary expense of carrying on her trade or business.

Consequently, the $378 is deductible.      Sec. 162.   Petitioner has

failed to establish that she is entitled to the remaining portion

of the claimed interest deduction.      Although we believe that

petitioner borrowed money from the Michigan Federal Credit Union

for use in her trade or business, she has not proven the amount.

We cannot use the rule of Cohan v. Commissioner, 39 F.2d 540, 544

(2d Cir. 1930), to estimate the interest deduction because we

must have some basis in fact upon which an estimate may be made.

Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).       Without such

basis, any allowance would amount to unguided largesse.5

Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

Petitioner's Costs of Goods Sold

     5
        Respondent argues on brief that petitioner has not
substantiated other deductions on her tax returns for 1992 and
1993. The propriety of these deductions is not at issue as
respondent failed to raise these issues in her notice of
deficiency or in her pleadings. Generally, we will not consider
issues that are raised for the first time at trial or on brief.
Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd. 920 F.2d
1196 (5th Cir. 1990).
                                - 17 -

     Respondent has disallowed petitioner's costs of goods sold

for 1991, 1992, and 1993.    Petitioner bears the burden of proving

that she is entitled to the claimed costs of goods sold.    Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

Rockwell v. Commissioner, 512 F.2d 882, 886 (9th Cir. 1975),

affg. T.C. Memo. 1972-133.

     1.   1991

     Petitioner has met her burden of proof as to the claimed

costs of $800 for the horse Magic and $2,280 for beef.    However,

petitioner has not met her burden with respect to her claimed

costs for goats and pigs.    Although petitioner subtracted $1,250

for pigs on her 1991 cost of goods sold schedule, she reported no

gross receipts from the sale of pigs.    Since there was no sale of

pigs reported on the 1991 tax return, cost of goods sold for pigs

is not allowable for that year.    Petitioner's testimony showed

that she was confused as to whether she had mislabeled the sale

of pigs as the sale of goats.    Petitioner's return showed the

purchase and sale of 35 goats; petitioner testified that she

never owned that many goats.    Since petitioner cannot establish

what was sold, she is not entitled to cost of goods sold for

those items.     Accordingly, petitioner's total cost of goods sold

for 1991 is $3,080.

     2.   1992

     Petitioner assigned values to some animals in her beginning

and ending inventory based on her estimates of their fair market
                                - 18 -

values, which is ordinarily an improper method of valuing

inventory where there is no showing that fair market value was

lower than cost.    Petitioner had checked the box on her Schedule

C to value inventory at cost.    We find petitioner's beginning and

ending inventory for 1992 to be as follows:

                              Beginning       Ending
                              Inventory     Inventory

     Crystal (horse)             -0-           -0-
     Candy (horse)               -0-           -0-
     Sparky (dog)               $150          $150
     Wanda (dog)                 200           200
     Rascal (dog)                250             0
     Buddy (dog)                 220           220
     Rose (horse)                350           -0-
     2 pups                      -0-           -0-
       Total                   1,170           570



Since petitioner substantiated $7,100 of materials and supplies6

and $6,900 of miscellaneous costs, her total allowable costs for

1992 are $14,600 ($7,100 + 6,900 + (1,170 - 570)).

     3.    1993

     Petitioner again assigned values to some animals in her

beginning and ending inventory based on her estimates of their

fair market value, an improper method of valuing inventory in the

circumstances.    Petitioner's method of accounting, as established

in her 1992 tax return, was to value inventory at cost.   We

therefore find petitioner's beginning and ending inventory for

1993 to be as follows:

     6
          See supra note 3.
                               - 19 -

                             Beginning         Ending
                             Inventory       Inventory

     Crystal (horse)            -0-            -0-
     Midnight (horse)           -0-            -0-
     Rags (horse)               -0-           $600
     Winston (horse)            -0-            -0-
     Sparky (dog)              $150            150
     Wanda (dog)                200            200
     Buddy (dog)                220            220
     Bubbles                    -0-            -0-
     2 pups                     -0-            -0-
       Total                    570          1,170

Since petitioner substantiated $2,100 of materials and supplies

and $600 of purchases, her total allowable costs for 1993 are

$2,100 ($2,100 + 600 + (570 - 1,170)).

Section 6662(a) Accuracy-Related Penalty

     Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b), such as

negligence or disregard of rules or regulations.     Respondent

determined that the entire underpayment of petitioner's tax was

due to negligence or intentional disregard of rules or

regulations.    Sec. 6662(b)(1).   As is the case of the predecessor

section covering the addition to tax for negligence, section

6653(a), petitioner bears the burden of proof on the penalties in

issue.    Rule 142(a); Neely v. Commissioner, 85 T.C. 934, 947

(1985).    Negligence includes a failure to make a reasonable

attempt to comply with the provisions of the internal revenue

laws.    Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Negligence is the failure to exercise due care or the failure to
                                - 20 -

do what a reasonable and prudent person would do under the

circumstances.     Neely v. Commissioner, supra.   Disregard includes

any careless, reckless, or intentional disregard of rules or

regulations.     Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

     The accuracy-related penalties of section 6662 do not apply

with respect to any portion of an underpayment if it is shown

that there was reasonable cause for such portion and the taxpayer

acted in good faith with respect to such portion.     Sec.

6664(c)(1).    The determination of whether petitioner acted with

reasonable cause and in good faith depends upon the pertinent

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

     Petitioner has conceded that she failed to keep accurate

books and records, that she incorrectly claimed exemptions for

her children, and that she should not have deducted the cost of

installing the supporting rods.    Petitioner has offered no

evidence that she was not negligent in determining her cost of

goods sold using fair market values rather than cost or in

deducting the costs of demolition on the Whitefeather barn.      To

the extent that respondent has prevailed on the underlying

issues, her corresponding determination of the applicable

penalties is sustained.

     To reflect the foregoing and concessions of the parties,

                                      Decision will be entered

                                 under Rule 155.
