T.C. Memo. 2002-279

UNITED STATES TAX COURT

WILLIAM AND SHIRLEY PRATT, Petitioners v

. COMMISSIONER OF INTERNAL REVENUE, Respondent

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

William Pratt, pro se.

Fred E. Green, Jr. , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge : In a statutory notice of deficiency dated

April 8, 1999, respondent determined deficiencies in petitioners’

Federal income tax, additions to tax pursuant to sections

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

Additions to Tax Penalty

Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1993 $40,764 $10,191 $8,153

1994 55,887 13,972 11,177

1995 288,098 71,855 57,620

All section references are to the Internal Revenue Code for

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

Rules of Practice and Procedure.

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

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

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

1994, and 1995 petitioners are entitled t o Schedule C expense

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

whether p e titioners are liable for self-employment taxes; (4)

whether petitioners are liable for additions to tax under section

6 651(a)(1) for 1993, 1994, and 1995; and (5) whether petition ers

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

substantial understatement of income tax as provided i n section

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

Additional adjustments made by respondent to petitioners’

exemptions, itemized deductions, and self-employment taxes are

computational and will be resolved by our holdings with respect to

the aforementioned issues.- 3 -

1 Shirley Pratt neither signed the stipulation of facts nor

appeared at trial. The case with respect to her will be dismissed

for lack of prosecution, and the decision with respect to her will

be consistent with t he decision entered with respect to William

Pratt. FINDINGS OF FACT

Background

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

stipulation of facts and the exhibits submitted therewith are

incorporated herein by this reference.

Petitioners William and Shirley Pratt are husband and wife.

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

Hot Springs, California.

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

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

Upon his return from Korea, petitioner became involved in sheet

metal work.

Petitioner owned and operated a sheet metal business under the

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

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

the years at issue, petition er employed three to five employees,

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

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

a homemaker during the years at issue.

Petitioner turned over all of his business records, including

the checkbook, check stubs, and receipts, for Dormer & Louver to- 4 -

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

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

with regard to the financial operations of the company.

Federal Income Tax Returns

Petitioners filed joint Federal income tax returns for 1993,

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

proprietorship; for Federal income tax purposes, the in come and

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

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

petitioner described the principal business of Dormer & Louver as

“MANUFACTURING CONSTRUCTION MATERIALS”.

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

They did not request extension s of time to file their income tax

returns for any of these years.

On an undisclosed date in 1996, petitioners filed for

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

after they filed for bankruptcy.

Petitioners’ joint returns for 1993 and 1994 were prepared by

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

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

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

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

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

Center on September 16, 1996.- 5 -

The joint return for 1995 was signed by both petitioners and

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

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

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

on July 30, 1997.

On the Schedule C attached to their 1993 Federal income tax

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

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

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

On the Schedule C attached to their 1994 Federal income tax

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

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

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

On the Schedule C attached to their 1995 tax return,

petitioners reported Dormer & Louver’s gros s receipts to be

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

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

net loss to be $75,232.

Dormer & Louver’s gross receipts and bus iness expenses for

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

accounting.

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

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

1993

Item Amount Claimed Amount Allowed

Cost of Goods sold -0- -0-

Advertising $106 $106

Car & truck expenses 8,298 8,298

Insurance 2,967 2,967

Legal & profl. servs. 3,875 3,875

Office expenses 7,955 7,955

Rent 1 20,673 163

Repairs 3,766 3,766

Supplies 112,413 -0-

Utilities 3,612 3,612

Wages 45,753 45,753

Other expenses 2 28,153 28,153

1 On line 20 of the Schedule C, under “Rent or Lease”,

petitioners reported two expenses--$163 for vehicles, machinery &

equipment expenses and $20,510 for other business property

expenses.

2 These expenses consisted of $5,055 for payroll taxes,

$1,788 for outside services, $206 for bank charges, $366 for

freight & delivery, $4,819 for insurance, $608 for postage, $8,771

for shipping/shop supply, $3 ,766 for telephone, and $2,774 for

small tools.- 7 -

1994

Item Amount Claimed Amount Allowed

Cost of goods sold -0- -0-

Advertising $42 $42

Car & truck expenses 6,618 6,618

Depreciation 1,693 1,693

Insurance 3,426 3,426

Legal & profl. servs. 4,452 4,452

Office expenses 8,531 8,531

Rent 1 21,106 596

Repairs 2,338 2,338

Supplies 131,014 -0-

Taxes & licenses 14,207 14,207

Utilities 4,116 4,116

Wages 199,428 199,428

Other expenses 2 38,291 38,291

1 On line 20 of the Schedule C, under “Rent or Lease”,

petitioners reported two expenses--$596 for vehicles, machinery &

equipment expenses and $20,510 for other business property

expenses.

2 These expenses consisted of $12,990 for payroll taxes,

$2,980 for outside service s, $140 for bank charges, $510 for

freight & delivery, $550 for fuel, $5,610 for insurance, $710 for

postage, $9,680 for shipping/shop supply, $2,080 for telephone, and

$3,000 for small tools. These figures are approximate.- 8 -

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

counsel for petitioners. 1995

Item Amount Claimed Amount Allowed

Cost of goods sold $311,578 -0-

Returns & Allowances 454,387 -0-

Advertising 3,462 $3,462

Insurance 10,809 10,809

Legal & profl. servs. 6,917 6,917

Rent 1 43,787 2,150

Repairs 8,574 8,574

Supplies 5,203 5,203

Taxes & licenses 23,995 23,995

Meals/Entertainment 2,852 2,852

Utilities 6,442 6,442

Wages 140,376 140,376

Other expenses 2 152,209 152,209

1 On line 20 of the Schedule C, under “Rent or Lease”,

petitioners reported two expenses--$2,150 for vehicles, machinery

& equipment expenses and $41,637 f or other business property

expenses.

2 These expenses consisted of $14,306 for payroll taxes,

$4,857 for bank charges, $333 for dues & subscriptions, $876 for

postage, $2,198 for communication radios, $4,619 for shipping/shop

supply, $5,020 for subcontractors, $419 for property taxes, $5,503

for telephone, $30,282 for vehicle expense, $15,558 for SIIS,

$61,183 for other taxes, and $7,055 for tool expense.

At an undisclosed date before July 1998, in conjunction with

preparing a proof of claim in petitioners’ bankruptcy proceeding,

respondent commenced an examination of petitioners’ 1993-95 income

tax returns. Petitioners were notified in writing of proposed

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

examination of petitioners’ returns culminated in respondent’s- 9 -

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

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

controversy.

Petitioners petitioned the Court f or a redetermination of

respondent’ s determinations. The petition was filed on

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

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

this case was scheduled to begin.

With respect to the returns for 1993 and 1994, petitioner

contacted Accufast and was informed that the tax returns for those

years were correct. Petitioner requested that Accufast provide him

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

use to substantiate the expenses claimed on the 1993 and 1994

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

requested documentation because Accufast did not r etain clients’

r ecords after 5 years. Petitioner believed that the deductions

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

accurate.

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

it had used in preparing the 1995 return. Petitioner testified

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

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

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

3 Pursuant to sec. 7491, the burden of proof or of

productio n may be placed on the Commissioner in certain

circumstances for audits conducted after July 22, 1998. Sec. 7491

is inapplicable in this case because petitioners’ examination

commenced before July 22, 1998. Assoc.), but no one from that accounting firm replied to

petitioner’s inquiry.

OPINION

As a general rule, the determinations by the Commissioner in

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

the taxpayer to show that the Commissioner’s determinations are

incorrect. Rule 142(a); W elch v. Helvering

, 290 U.S. 111, 115

(1933). 3

Deductions are a matter of legislative grace; the taxpayer

bears the burden of proving entitlement to all deductions claimed.

INDOPCO, Inc. v. Commissioner

, 503 U.S. 79, 84 (1992); New Colonial

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

I. Schedule C--Adjustments

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

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

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

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

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

gross income and is not subject to the limitations on deductions

contained in sections 162 and 274. M etra Chem Corp. v.

Commissioner

, 88 T.C. 654, 661 (1987). All amounts claimed as- 11 -

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

required to maintain records sufficient for this purpose. Sec.

6 001; Newman v. Commissioner

, T.C. Memo. 2000-345; Wri ght v.

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

Regs.

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

necessary expenses paid or incurred during the taxable year in

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

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

and records sufficient to establish such ded uctions must be

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

,

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

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

When a taxpayer adequately establishes that he or she has paid

or incurred a deductible e xpense but is unable to fully

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

determine the amount of the allowable deduction based on an

approximation, bearing heavily against the taxpayer whose

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

,

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

sufficient evidence contained in the record to provide a basis for

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

4 Sec. 274 requires a taxpayer to substantiate expenses for

travel, meals and entertainme nt, and gifts, and with respect to

listed property (as defin ed in sec. 280F(d)(4) and including

pass enger automobiles) by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement establishing

the amount, time, place, and business purpose of the expense. Sec.

274(d); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985). The sec. 274 rules of substantiation

supersede the doctrine of Cohan v. Commissioner

, 39 F.2d 540, 543-

544 (2d Cir. 1930). S anford v. Commissioner

, 50 T.C. 823, 827-828

(1968), affd. 412 F.2d 201 (2 d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., supra

. The expenses and deductions at

issue in this case do not fall within those e xpenses covered by

sec. 274. expense was incurred in at least in the amount to be allowed. 4

Norgaard v. Commissioner

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

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

(5th Cir. 1957); Vanicek v. Commissioner

, 85 T.C. 731, 742-743

(1985).

Petitioner unsuccessfully attempted to obtain from his

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

documents the accountants ha d used in the preparation of

petitioners’ 1993-95 tax returns. Petitioner requested all

records, receipts, or other documentation which could substantiate

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

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

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

return prepa rer, claimed it had not prepared petitioners’ 1995

return and ignored petitioner’s inquiry.- 13 -

A. Gross Receipts and Cost of Goods Sold Reported on

Petitioners’ 1995 Schedule C

For the tax year 1995, petition ers reported gross receipts

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

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

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

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

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

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

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

sold was calculated. He testified that he provided the accountants

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

he relie d on his accountants in the preparation of the 1995 tax

return. Petitioner asserted that he never looked at the 1995

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

Statements made on a tax return signed by the taxpayer have

long been considered admissions, and such admissions are binding on

the taxpayer, absent cogent eviden ce indicating they are wrong.

Waring v. Commissioner

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

T.C. Memo. 1968-126; Lare v. Commissioner

, 62 T.C. 739, 750 (1974),

aff d. without published opinion 521 F.2d 1399 (3d Cir. 1975);

Rankin v. Commissioner

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

(9th Cir. 1998).

Other than petitioner’s blanket renunciation of the amount of

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

record to substantiate petitioner’s cl aim that Dormer & Louver’s

1995 gross receipts were overstated. Moreover, petitioner did not

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

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

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

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

B. S chedule C Business Expense Deductions for 1993, 1994, and

1995

1. Rent Expenses

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

for 1994, and $41,637 for 1995.

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

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

figures were accurate. Petitioner’s testimony was not sufficient

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

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

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

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

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

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

documentary or otherwise, to substant iate the rent expenses, we

sustain respondent’s determinations on this issue.

2. Supplies

Petitioners claimed Schedule C expenses for supplies in the

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

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

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

s ubstantiation as well as petitioners’ failure to establis h that

the expenses were ordinary and necessary.

At trial, petitioner f ailed to present any evidence,

documentary or otherwise, to substantiate the claimed supply

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

issue.

3. Returns and Allowances for 1995

Petitioner claimed Schedule C returns and allowances for the

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

deduction and adjust ment on account of petitioner’s lack of

substantiation.

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

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

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

substa ntiate entitlement to the amounts claimed. Again, we must

sustain respondent’s determination on this issue.

4. Conclusion

Petitioners failed to substantiate any of the amounts claimed

on the Schedules C that were disallowed in the notice of

deficiency. Instead of providing documentary evidence to attempt

to substantiate the amounts claimed, petitioner chose to rely

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

accountants who prepared the income tax returns or the attorney who

represented petitioners until 2 months before trial.

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

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

made. V anicek v. Commissioner

, 85 T.C. at 743. Here, there is no

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

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

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

the fact remains that petitioner failed to present even a modicum

of evidence to substantiate the disallowed deductions.

II. Self-Employment Taxes

Respondent determine d that petitioners are liable for selfemployment tax of $10,893 for 1993, $11,753 for 1994, and $27,203

for 1995.

Petitioner was self-employed during each of the years at

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

Schedu le C. Petitioner presented no evidence on this issue. We

thus hold petitioner is liable for the self-empl oyment tax under

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

as determine d in the notice of deficiency. Respondent’s

determination on this issue is sustained.

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

Respondent determined that petitioners are liable for the

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

petitioners’ failure t o timely file their Federal income tax

returns for the years at issue.

Section 6651(a)(1) imposes an addition to tax for failure to

file timely a tax return. The addition to tax does not apply if

the failure to file is due to reasonable cause and not to willful

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

prudence and was nonetheless unable to file the return within the

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

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

a “conscious, intentional failure or reckless indifference.”

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

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

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

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

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

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

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

6651(b).

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

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

However, petitioners did not sign the return u ntil September 12,

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

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

on September 16, 1996.- 18 -

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

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

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

on September 16, 1996.

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

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

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

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

At trial, petitioner off ered no reasonable explanation for

petitioners’ failure to timely file their 1993 and 1994 Federal

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

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

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

Petitioners failed to show that they exercised ordinary care

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

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

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

IV. Section 6662(a) Penalty

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

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

attributable to a su bstantial understatement of tax. Sec.

6662(b)(1).

The ac curacy-related penalty is not imposed with respect to

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

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

decision as to whether the taxpayer acted with reasonable cause and

in good faith depends upon all the p ertinent facts and

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

factors include the taxpayer’s e fforts to assess his proper tax

liability, including the taxpayer’s reasonable and g o od faith

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

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

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

the taxpayer may indicate reasonable cause and good faith. See

Furnish v. Commissioner

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

,

T.C. Memo. 1997-72.

At trial, petitioner test ified that he provided his

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

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

In this regard, petitioner testified:

I had an accountant that takes care of all this

stuff, so I really don’t understand it, don’t know what

it is. You know, he had all the records and took care of

all that stuff, as far as what the rent was and how much

was paid, and the materials, supplies and stuff. * * * As

far as * * * the charges and stuff * * * he had the

records, the check stubs and all that, and he figured out

what was there * * *.

Petitioner further testified that he tried to obtain his

business records and any substantiating documentation from Accufast

for 1993 and 199 4 but was told that clients’ records were not

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

contacting J.E. & Assoc. to obtain his r ecords and any

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

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

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

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

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

addition, petitioner testified at trial that his counsel, who

withdrew 2 months before tri al, handled most matters for

petitioner.

Although petitioner failed to present either the accountants

or his for mer counsel as witnesses to show that his reliance was

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

credible. Petitioner, through his testimony, demonstrated that he

simply had no available documentation to offer to substantiate the

claimed expenses.

Petitioner provided all his records to Accufast and believed

that the deductions claimed by Accufast as reflected on the 1993

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

that petitioner is an unsophisticated taxpayer with a limited

education who relied reasonably and in good faith on Accufast.

Consequently, we conclude that for 1993 and 1994, petitioner

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

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

petitioners are not liable for the penalty pursuant to section

6662(a) for the years 1993 and 1994.

With respect to 1995, petitioner asserts that his reliance on

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

that the figures reflected on pe titioners’ 1995 tax return were

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

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

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

petitioners’ 1995 return, “jum ping up another half a million

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

petitioner testified that he never exa mined the 1995 tax return

until recently. The 1995 return was signed by petitioners on

November 18, 1996. Petitioner stated that his attorney was

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

The colloquy set forth below exemplifies petitioner’s testimony on

this matter:

THE COURT: * * * When you saw the return-–I know

that you have an accountant prepare–-

MR. PRATT: I never saw this return until just

recently.

THE COURT: Why not?

MR. PRATT: My attorney was handling most of it

until him and I parted ways.

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

MR. PRATT: Yes.- 22 -

THE COURT: In ‘95, you filed that return sometime

in, what, in ‘96.

MR. PRATT: It says here, in ‘96.

THE COURT: Right. So, and, normally, you would

file a return, by the way, in April.

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

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

you filed it in November.

MR. PRATT: November.

THE COU RT: And then you just accepted numbers

without looking?

MR. PRATT: Well, you know, again, I have to say

that, you know, all I did was a guy says, “Here, you’ve

got to get this signed.” Or I think it’s probably my

attorney, “You’v e got to get this signed and out of

here.” So I signed it and off it went. I didn’t even

look at the million dollars until just recently, that Mr.

Green [respondent’s counsel], here, showed it to me and

pointed it out.

Petitioner further testified at trial that with respect to the

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

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

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

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

Petitioner contends that he simply provided the information to his

accountants and that the accountants decided the amount of

deductions to which petitioners were entitled. A cursory look at

the return would have revealed the large increase in gross receipts

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

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

reasonably rely on J.E. & Assoc.

We conclude that for 1995 petitioner did not have reasonable

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

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

We have considered all other arguments made by the parties and

find those arguments not discussed herein to be without merit.

To reflect the foregoing,

An appropriate order of

dismissal and decision will be

entered

.