T.C. Memo. 1998-164



                      UNITED STATES TAX COURT



              PRINDLE INTERNATIONAL MARKETING, UBO,
               KEYUS GROUP, TRUSTEE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          ROLAND R. AND VIRGINIA A. FOX, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 5907-96, 7178-96.1    Filed May 5, 1998.



     Robert E. Kovacevich, for petitioners.

     Sandra Veliz, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     COLVIN, Judge:   Respondent determined that petitioners were

liable for the following deficiencies in income tax, addition to

tax, and penalty:


     1
       The cases of Prindle International Marketing, UBO, Keyus
Group, Trustee, docket No. 5907-96, and Roland R. and Virginia A.
Fox, docket No. 7178-96, were consolidated for trial, briefing,
and opinion by order of this Court dated May 27, 1997.
                                    -2-

                       Roland and Virginia Fox

                                   Addition
                                    to tax          Penalty
     Year        Deficiency        Sec. 6651      Sec. 6662(a)
     1989          $16,298             --            $3,260
     1992           47,758             --             3,848
     1993           62,892           $15,473         12,578

                Prindle International Marketing, UBO
                        Keyus Group - Trustee

                                               Addition
                                                to tax
     Year             Deficiency               Sec. 6651
     1992               $32,508                  $8,127
     1993                54,068                  13,517

     We must decide the following issues:

     1.     Whether petitioners are entitled to have Roland Fox's

diary admitted into evidence or to use it during his testimony to

refresh his recollection where petitioners had not exchanged it

as required by the Court's standing pretrial order or produced it

in response to a discovery request.       We hold that they are not.

     2.     Whether Prindle International Marketing is a sham.    We

hold that it is, and we do not recognize it for Federal income

tax purposes.

     3.     Whether petitioners Roland and Virginia Fox may deduct

$100,000 as contributions to a welfare benefit plan in 1992.      We

hold that they may not.

     4.     Whether respondent's determination that petitioners

Roland and Virginia Fox received $2,237 in unreported interest

income in 1993 was arbitrary.      We hold that it was.
                                  -3-

     5.      Whether petitioners Roland and Virginia Fox are liable

for self-employment tax of $10,658 for 1992 and $11,057 for 1993.

We hold that they are.

     6.      Whether petitioners Roland and Virginia Fox are liable

for the addition to tax for failure to file under section 6651

for 1993 and the accuracy-related penalty for negligence under

section 6662(a) for 1989, 1992, and 1993.      We hold that they are.

     7.      Whether petitioner Prindle International Marketing is

liable for the addition to tax for failure to file under section

6651 for 1992 and 1993.     We hold that it is not.

     Section references are to the Internal Revenue Code in

effect for the years in issue.     Rule references are to the Tax

Court Rules of Practice and Procedure.

                            FINDINGS OF FACT

A.   Roland and Virginia Fox

     Roland and Virginia Fox (Mr. and Mrs. Fox) were married in

1980 and lived in Spokane, Washington, when they filed their

petition.     They each have three children from prior marriages.

     Mr. Fox joined the U.S. Air Force in 1952.       He retired in

1972.     He received about $22,000 in military retirement pay per

year in 1992 and 1993.     He and his family moved to Spokane,

Washington, in November 1973.     There he earned a bachelor of arts

degree in Russian history.     He also enrolled in a graduate

business administration program at Eastern Washington University,

where he took one tax course.     He attended a school for insurance
                                  -4-

agents in Chicago, Illinois, and took estate planning courses

from the New England Life Insurance Co.     Mrs. Fox had no training

in tax.

     During the years in issue, Mr. and Mrs. Fox owned 15 or 16

rental mobile homes, 2 rental houses, and an apartment building.

Mrs. Fox managed their real estate rental business before and

after they created the trust at issue.

     Mike Dunn (Dunn), a certified public accountant, prepared

Mr. and Mrs. Fox's income tax returns from 1986 to the time of

trial.

B.   Oxyfresh

     Oxyfresh USA, Inc. (Oxyfresh), is a network marketing (also

known as multilevel marketing, described further below) company

which began operating in 1983.     Oxyfresh sold personal care, pet

care, nutrition, dental hygiene and skin care products, a quit-

smoking program, and air purifiers.

     Mr. Fox sold Oxyfresh products and recruited other people to

sell Oxyfresh products.     The distributors Mr. Fox recruited could

also recruit other people to distribute Oxyfresh products.

     Mr. Fox engaged in this activity in 1983 and every year

thereafter.     He received a commission for selling Oxyfresh

products.   He received a smaller commission on sales made by

distributors.     In 1992, Mr. Fox traveled 3 weeks per month in the

United States and Canada conducting Oxyfresh training and

motivational seminars.     Because of his efforts for Oxyfresh, Mr.
                                -5-

Fox earned a percentage of the worldwide sales of Oxyfresh.    In

the years in issue, Mr. Fox owned 250,000 of 53 million shares

that Oxyfresh had issued.

     In the years in issue, Mr. Fox had a contract with Oxyfresh,

a copy of which is not in the record, entitling him or Prindle to

receive payments from Oxyfresh if he performed in accordance with

the contract.   Mr. Fox agreed that he would not sell for Oxyfresh

competitors or falsely advertise Oxyfresh products.

     At a time not stated in the record, Mr. Fox stopped

receiving a percentage of Oxyfresh sales that were made through

the efforts of other Oxyfresh distributors.   However, Oxyfresh

created another position for which Mr. Fox qualified, and Mr. Fox

again received a percentage of the worldwide sales of Oxyfresh.

     From 1983 to 1991, Oxyfresh issued Forms 1099 to Mr. Fox.

Mr. Fox reported his income from Oxyfresh on a Schedule C, Profit

or Loss from Business.   In 1992, Oxyfresh paid between $15,000

and $18,000 per month for Mr. Fox's services.

C.   Prindle International Marketing

     Around 1985, Mr. Fox asked Mrs. Fox's uncle, Dan Giboney

(Giboney), an attorney, about different forms in which to conduct

his Oxyfresh business, including a living trust, C or S

corporation, or partnership.   Mr. Fox also spoke to an attorney

(not named in the record) who specialized in trusts and Mike Dunn

(Dunn), Mr. Fox's accountant, about forms in which to conduct the

Oxyfresh business.   They told him that he could conduct his
                                -6-

Oxyfresh business as a regular corporation, an S corporation, or

a business trust.   In 1989 or 1990, Mr. Fox met Larry Smith

(Smith) who recommended that Mr. Fox not incorporate his Oxyfresh

business.   The record does not describe Smith's professional

qualifications.

     In June 1991, Mr. and Mrs. Fox decided to form a business

trust.2   Smith formed an entity called Prindle International

Marketing (Prindle) for Mr. and Mrs. Fox in California, on June

21, 1991.

     On July 1, 1991, Smith wrote several documents in

Sacramento, California, which purported to make Prindle a

business trust of which Mr. and Mrs. Fox were the beneficiaries.

Smith signed the documents as creator.

     On July 10, 1991, the U.S. Treasury Department issued an

employer identification number to Prindle.

     On January 2, 1992, Mr. and Mrs. Fox opened a checking

account under the name Prindle International Marketing (Prindle

account).   They were the only persons authorized to sign checks

on the Prindle account.




     2
       We use the words "business trust", "trust", "trust
documents", "trustee", "grantor", "transferor", "form",
"establish", and "agent", in our findings of fact for narrative
convenience. We do not intend our use of those terms to indicate
any conclusion about the substance of the transactions at issue.
                                -7-

     Mr. Fox asked Oxyfresh, and Oxyfresh agreed, to make checks

that would have been payable to him after February 1992 payable

to Prindle.

     On September 8, 1993, Mr. Fox applied to the Washington

State Department of Licensing for Business License Services for a

business license.   In the application, Mr. Fox stated that

Prindle is a business which sells health-related products.

     On December 21, 1993, Mr. Fox signed a Washington State

corporate license renewal/annual report for Prindle.    In it, he

stated that Prindle was in the business of wholesale marketing,

and that he was president and trustee and Mrs. Fox was treasurer.

     Mr. Fox did not give Dunn any information about the trust.

Prindle did not file Federal income tax returns for 1992 or 1993.

     Mr. and Mrs. Fox operated their real estate and Oxyfresh

businesses after Prindle was formed just as they had done before

Prindle was formed.   After Prindle was formed, Mr. Fox

purportedly did business as an agent for Prindle.    Mr. and Mrs.

Fox directed income from their real estate and Oxyfresh

businesses to Prindle.

     Prindle had no employees and issued no Forms W-2.

D.   Employers Trust 2000

     On December 30, 1992, Mr. Fox signed a document entitled

"Adoption and Participation Agreement" which stated that he was a

sole proprietor and that he was requesting to participate in a

trust called Employer Trust 2000.     The Adoption and Participation
                                  -8-

Agreement said that it was effective January 1, 1992.      The

Adoption and Participation Agreement provided group term life

insurance coverage for Mr. Fox.    On December 30, 1992, Mr. Fox

signed a document entitled "QNC Contribution Instructions" which

states:   "Contribution amount $100,000".     On that day, Mr. Fox

also signed a document entitled "Collateralized Personal Line of

Credit Instructions" which states:      "Amount to be wired $85,000".

                              OPINION

A.   Exclusion of Mr. Fox's Diary

     Petitioners' counsel wanted Mr. Fox to use his diary to

refresh his recollection at trial about his 1992 expenses.

Respondent objected on the grounds that petitioners had not

exchanged the diary 15 days before the call of the calendar as

required by the Court's standing pretrial order served on

petitioners about 5 months before trial and that petitioners had

not indicated that the diary existed in response to respondent's

discovery request.   Petitioners' counsel said that he had not

known that Mr. Fox kept a diary.    The Court sustained

respondent's objection.

     Petitioners contend that the Court erred in excluding Mr.

Fox's diary from evidence and in not allowing Mr. Fox to use his

diary to refresh his recollection.      We disagree.

     Respondent's counsel said at trial that respondent had asked

petitioners to produce any documents which relate to petitioners'

claims that there should be a decrease in taxable income as
                                 -9-

determined by respondent.   Petitioners' counsel did not dispute

that claim.

     Petitioners contend that the diary is admissible and may be

used to refresh Mr. Fox's memory under rule 612 of the Federal

Rules of Evidence.   We disagree.   The diary fell within the scope

of respondent's discovery requests but was not produced during

discovery or exchanged as required by the Court's pretrial order.

See G.J.B. & Associates, Inc. v. Singleton, 

, 831

(10th Cir. 1990).    In the Singleton case, the plaintiffs had not

exchanged discoverable documents as required by the Court's

pretrial order and sought to use the documents to refresh a

witness' memory.    The U.S. Court of Appeals for the Tenth Circuit

rejected the assertion that, because the notes were being used to

refresh the memory of a witness for the plaintiffs, their counsel

had no duty to reveal the notes.       

that

respondent properly objected to the admission of the diary into

evidence and to Mr. Fox's use of the diary to refresh his

recollection at trial.

B.   Whether To Recognize Prindle as a Trust for Federal Tax
     Purposes

     1.   Mr. and Mrs. Fox Retained Control Over the Purported
          Trust Assets

     Respondent contends that Prindle should not be recognized

for Federal income tax purposes because it is a sham.

Petitioners contend that Prindle is not a sham.
                                -10-

     A trust may be a sham for Federal tax purposes if the

grantor retains control over the property or income placed in the

trust and does not change how the property or income is treated.

United States v. Noske, 

, 1059 (8th Cir. 1997);

Paulson v. Commissioner, 

, 790 (8th Cir. 1993), affg.

per curiam T.C. Memo. 1991-508.   We generally do not recognize a

trust for Federal tax purposes if the grantor keeps substantially

unfettered powers of disposition or beneficial enjoyment of trust

property.   See United States v. Buttorff, 

, 1061

(5th Cir. 1985); Schulz v. Commissioner, 

, 495 (7th

Cir. 1982), affg. T.C. Memo. 1980-568; Vnuk v. Commissioner, 

, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.

     Petitioners dealt with the alleged trust property as if it

were their own.   They did not change how they conducted their

real estate and Oxyfresh businesses.   They opened a checking

account for Prindle.   However, they alone had signature authority

over that account.   There is no evidence that anyone other than

Mr. and Mrs. Fox had any access to any property that Prindle may

have had.

     Petitioners contend that Christopher Bates (Bates) was an

independent trustee and that he controlled all aspects of

Prindle.    Petitioners contend that Mr. and Mrs. Fox did not have

unfettered powers of disposition or beneficial enjoyment because

they needed the concurrence of Bates for the Keyus Group (Keyus)

(formerly known as the Joinder Group) to act with respect to
                                 -11-

Prindle, and that Bates and Keyus participated in telephone

meetings about Prindle, monitored Prindle's expenditures, and

kept Prindle's records.     Mrs. Fox testified that after she wrote

a check on the Prindle account to K-Mart for clothes, Bates

prevented her from using the Prindle account to pay it.      She did

not explain how Bates did that.    She could not recall whether she

repaid Prindle for those clothes.       Mrs. Fox later testified that

Bates allowed her to use the Prindle account to pay for clothes

if they were going to a seminar.    Petitioners offered no other

examples of actions Bates or Keyus took with Prindle's income or

property.    Mr. Fox testified that neither Bates nor Keyus had any

rights to any of Prindle's assets.      We conclude that Bates did

not control Prindle's purported assets.

     2.     Prindle Lacked Economic Substance

     A trust which has no economic substance is not recognized

for Federal tax purposes.     Zmuda v. Commissioner, 

,

1421 (9th Cir. 1984), affg. 

(1982); Markosian v.

Commissioner, 

, 1245 (1980); Furman v. Commissioner,

, 364 (1966), affd. per curiam 

(5th Cir.

1967).    Petitioners presented no credible evidence that they

established Prindle for any reason other than tax avoidance.

     Petitioners contend that Frank Lyon Co. v. United States,

(1978), and Sacks v. Commissioner, 

, 988

(9th Cir. 1995), revg. and remanding T.C. Memo. 1992-596, require

us to recognize Prindle for Federal income tax purposes and
                                  -12-

prevent respondent and the courts from reallocating income from

Prindle to Mr. and Mrs. Fox.     We disagree.   In those cases, the

courts found that a sale and leaseback of a building had economic

substance.    Frank Lyon Co. v. United States, supra at 577; Sacks

v. 

at 988.       In contrast, Prindle had no

economic substance.      Thus, Frank Lyon Co. and Sacks do not

control here.

     Petitioners contend that Prindle had economic substance

because they intended to use it so that income Mr. Fox earned

from Oxyfresh would pass to their children after petitioners

died, citing Brooke v. United States, 

(9th Cir.

1972).    We disagree.    Brooke differs from this case.   In Brooke,

the taxpayer transferred real estate to his children as a gift.

The Montana State Probate Court appointed the taxpayer as their

guardian.    The children rented a pharmacy, apartment, and medical

office to the taxpayer.     The taxpayer used the rents to pay for

the children's insurance, health, and education.      The U.S. Court

of Appeals for the Ninth Circuit found that the transfers to the

children were not shams and that the children had to pay income

tax on the rents.     

     We are not convinced by petitioners' argument because they

have not shown that Oxyfresh would have made payments after Fox

died.    Mr. Fox's testimony on this point was contradictory.      He

said that the income stream would continue after he died.

However, he also agreed with Mrs. Fox's testimony that he needed
                               -13-

to do certain things not stated in the record to receive payments

from Oxyfresh, and he testified that his income from all Oxyfresh

sales had stopped for a while because others performed better

than he did.   This suggests that income from Oxyfresh would not

continue after he died.

     Finally, the fact that petitioners thought they could use

Prindle for estate planning3 does not help them because the

expectancy of such an advantage does not establish entitlement to

an income tax advantage.

     Petitioners contend that Mr. and Mrs. Fox's children are the

beneficiaries of Prindle, but the record is unclear on this

point.   Some trust documents that Smith prepared and Mr. and Mrs.

Fox signed stated that Mr. and Mrs. Fox were Prindle's

beneficiaries, while others indicated that Mr. and Mrs. Fox's

children were beneficiaries.

     Prindle did not file income tax returns to report income

that Mr. and Mrs. Fox deposited in the Prindle account from

Oxyfresh and the real estate business.   Petitioners' position

that Prindle was not a sham is undermined by the fact that Mr.

and Mrs. Fox did not treat Prindle as if it were a taxpayer.

Also, there is no evidence that Mr. and Mrs. Fox filed gift tax

returns reporting the alleged transfer of property to Prindle.

Sec. 2501.


     3
      It is not clear whether they meant to avoid probate, estate
tax, or inheritance tax.
                                   -14-

       3.      Petitioners' Other Contentions

       Petitioners contend that we should recognize Prindle for

Federal tax purposes because the State of Washington and Oxyfresh

recognized it as valid.       We disagree.   We need not recognize an

entity for Federal tax purposes even if it is recognized under

State law.       Neely v. United States, 

(9th Cir.

1985); Zmuda v. Commissioner, 

.

       Petitioners contend that respondent may not rely on the

presumption of correctness because respondent did not call any

witnesses or introduce any evidence.         We disagree.   Respondent's

determination is presumed to be correct unless petitioners show

that it is arbitrary.       Petitioners do not contend that

respondent's determination about Prindle is arbitrary.

       4.      Conclusion

       We conclude that Mr. and Mrs. Fox kept substantially

unfettered powers of disposition and beneficial enjoyment of

trust property, the Prindle arrangement was a sham and had no

economic substance, and Mr. and Mrs. Fox formed Prindle to avoid

tax.       We do not recognize Prindle for Federal tax purposes.

       Thus, the income in question from Mr. and Mrs. Fox's real

estate and Oxyfresh activities is gross income to Mr. and Mrs.

Fox and not to Prindle during the years in issue, and Prindle

need not file Federal income tax returns for 1992 and 1993.4         It


       4
           In light of our decision, we need not decide respondent's
                                                       (continued...)
                                -15-

follows that Prindle is not liable for the addition to tax for

failure to file tax returns under section 6651 for 1992 and 1993.

C.   Welfare Benefit Plan Deduction

     Petitioners contend that they may deduct $100,000 as their

contribution to a qualified welfare benefit fund under section

419(a) and (g)(1) for 1992.   We disagree.

     A welfare benefit fund is any fund which is part of a plan

of an employer through which the employer provides benefits to

employees or their beneficiaries.      Sec. 419(e).   If the

requirements of section 162 or section 212 are otherwise met, a

taxpayer employer may deduct contributions to a welfare benefit

fund in the year in which the taxpayer employer paid the

contributions to the extent of the welfare benefit fund's

qualified cost for that year.   Sec. 419(b).

     Petitioners have not convinced us that they paid $100,000,

or any other amount, to a qualified welfare benefit fund in 1992.

Mr. Fox testified that he sent a certified cashier's check for

$15,000 to Employers Trust 2000.    He testified that he sent




     4
      (...continued)
other contentions that Prindle is not a valid trust under
Washington State law because of insufficient evidence showing
that Mr. and Mrs. Fox actually transferred assets to Prindle or
that Prindle is a grantor trust which should be taxed as a
corporation if it an otherwise valid entity. We also need not
decide petitioners' contention that the Oxyfresh income stream is
assignable, because even if it were, Prindle is not recognized
for Federal tax purposes.
                               -16-

$22,500 in 1992 and $28,200 in 1993.   There is no documentary

evidence to corroborate this testimony.

     Petitioners cite two documents:   "QNC Contribution

Instructions", which Mr. Fox signed on December 30, 1992, states:

"Contribution amount $100,000"; and "Collateralized Personal Line

of Credit Instructions", which Mr. Fox signed on December 30,

1992, states:   "Amount to be wired $85,000".   These documents do

not show that petitioners paid $100,000 in 1992 or at any time.

     We conclude that petitioners may not deduct $100,000 in 1992

under section 419.

D.   Whether Mr. and Mrs. Fox Had $2,237 in Unreported Interest
     Income

     Respondent determined and contends that Mr. and Mrs. Fox had

$2,237 in unreported interest income from Oxyfresh in 1993.

Neither party offered any evidence on this issue.   Petitioners

contend that respondent has the burden of producing evidence

linking them to the unreported income, Weimerskirch v.

Commissioner, 

, 360 (9th Cir. 1979), revg. 

(1977), and that respondent failed to do so.    We agree with

petitioners.

     The U.S. Court of Appeals for the Ninth Circuit, the circuit

in which this case is appealable, requires the Commissioner to

introduce some substantive evidence that shows that the taxpayer

received unreported income.   United States v. Zolla, 

(9th Cir. 1984); Weimerskirch v. 

.      Oxyfresh
                                 -17-

paid compensation to Mr. Fox, but there is no evidence that

Oxyfresh paid any interest to Mr. Fox or to Prindle.     Respondent

has failed to show any link between petitioners and any interest

income.     We do not sustain respondent's determination that Mr.

and Mrs. Fox received $2,237 in unreported interest income from

Oxyfresh in 1993.    See Sanders v. Commissioner, T.C. Memo. 1997-

452.

E.     Self-Employment Tax

       Respondent determined and contends that Mr. and Mrs. Fox are

liable for self-employment tax of $10,658 for 1992 and $11,057

for 1993 for payments from Oxyfresh.    Section 1401(a) imposes a

tax on self-employment income.    Self-employment income is the net

earnings derived by a person from any trade or business carried

on by that person.    Sec. 1402(a) and (b).

       Mr. Fox earned income from Oxyfresh by selling Oxyfresh

products, recruiting distributors, and conducting motivational

workshops 3 weeks per month.    Before the years in issue, Mr. Fox

treated his income from Oxyfresh as self-employment income.      He

did not substantially change the manner in which he conducted his

work for Oxyfresh after Smith formed Prindle.    Thus, those

payments are subject to self-employment tax.    Sec. 1402(a).

       Petitioners contend that Mr. Fox had no self-employment

income if we recognize Prindle as a trust for Federal tax

purposes.    However, we do not recognize Prindle as a trust for

Federal tax purposes for reasons stated in paragraph B, above.
                                    -18-

     Petitioners contend that the Oxyfresh payments to Prindle or

to Mr. Fox are passive income because they were a percentage of

all Oxyfresh company sales, not only sales from distributors that

he recruited.       We disagree.   The payments from Oxyfresh were not

passive income because Mr. Fox's activities to earn them were not

passive.     Mr. Fox had to work for Oxyfresh to receive payments

from Oxyfresh.      Mr. Fox owned Oxyfresh stock, but petitioners do

not contend that the payments from Oxyfresh were dividends.

     Petitioners contend that the Oxyfresh payments are not self-

employment income because they would continue even after Mr. Fox

died.   For reasons stated in paragraph B-2, we are not convinced

that Oxyfresh would continue to make payments after Mr. Fox died.

     Petitioners rely on Gump v. United States, 

,

1128 (Fed. Cir. 1996), in which the U.S. Court of Appeals for the

Federal Circuit held that payments from Nationwide Mutual

Insurance Co.'s Agency Security Compensation Plan to a retired

independent agent who sold Nationwide policies were not subject

to self-employment tax.        In Gump, the Government contended that

the payments were part of the taxpayer's compensation for selling

insurance.    

of Appeals disagreed and held that

payments were made to cancel the payor's business relationship

with the taxpayer.       

of Appeals held that the

payments to cancel the business relationship were not self-

employment income.       

not pay Mr. Fox or Prindle
                                 -19-

to cancel their business relationship.    Thus, Gump differs from

this case.

     We conclude that Mr. and Mrs. Fox are liable for self-

employment tax of $10,658 for 1992 and $11,057 for 1993.

F.   Whether Mr. and Mrs. Fox Are Liable for the Addition to Tax
     for Failure To File for 1993 and the Accuracy-Related
     Penalty for 1989, 1992, and 1993

     Respondent determined and contends that Mr. and Mrs. Fox are

liable for the addition to tax for failure to file an income tax

return for 1993 under section 6651(a) and the accuracy-related

penalty for 1989, 1992, and 1993 under section 6662(a) for

negligence.

     1.   Section 6651(a)(1)

     A taxpayer is liable for an addition to tax of up to 25

percent for failure to file timely Federal income tax returns

unless the taxpayer shows that such failure was due to reasonable

cause and not willful neglect.    Sec. 6651(a)(1); United States v.

Boyle, 

, 245 (1985); Davis v. Commissioner, 

, 820 (1983), affd. without published opinion 

(9th Cir. 1985).

     2.   Section 6662(a)

     Taxpayers are liable for a penalty under section 6662 equal

to 20 percent of the part of the underpayment which is

attributable to negligence.    Sec. 6662(a).   For purposes of

section 6662(a), negligence is a failure to reasonably attempt to

comply with the Internal Revenue Code.    Sec. 6662(c).   The
                               -20-

accuracy-related penalty under section 6662(a) does not apply to

any part of an underpayment if the taxpayer shows that there was

reasonable cause for that part of the underpayment and that the

taxpayer acted in good faith based on the facts and

circumstances.   Sec. 6664(c)(1).

     3.    Reliance on Professional Advice

     A taxpayer may establish that he or she had reasonable cause

for failure to file a timely return, and was not negligent under

section 6662(a), by proving that he or she reasonably relied in

good faith on the advice of a competent, independent expert or

tax professional possessed of all the information.     See United

States v. Boyle, supra at 250; Leonhart v. Commissioner, 

, 750 (4th Cir. 1969), affg. T.C. Memo. 1968-98; Ewing v.

Commissioner, 

, 423 (1988), affd. without published

opinion 

(9th Cir. 1991); Estate of Paxton v.

Commissioner, 

, 820 (1986); Jackson v. Commissioner,

, 538-540 (1986), affd. 

(10th Cir.

1989); Georgia Ketteman Trust v. Commissioner, 

, 108

(1986).    Petitioners contend that they are not liable under

section 6651(a)(1) or section 6662(a) on the grounds that Mr. and

Mrs. Fox relied on competent advice.    We disagree.   Mr. Fox spoke

with Giboney, Mrs. Fox's uncle who is an attorney, about possible

forms for their Oxyfresh business.    Giboney said that a trust

sounded fine to him.   Petitioners did not call Giboney as a

witness.   We do not know his expertise.   Dunn said that Mr. Fox
                                 -21-

could operate his Oxyfresh business as a trust.     However, it is

not clear whether Dunn reviewed the trust documents that Smith

prepared.    Mr. Fox testified that he did not give Dunn any

information regarding the trust.     Mr. Fox did not rely on Dunn in

good faith because he kept information from him.     Dunn attended

the trial but did not testify.     We may draw an unfavorable

inference from his failure to testify for petitioners.     Wichita

Terminal Elevator Co. v. Commissioner, 

, 1165 (1946),

affd. 

(10th Cir. 1947).     Petitioners contend that we

may not draw an adverse inference from Dunn's failure to testify

because the "uncalled witness rule" does not apply in Federal

court.    We disagree.   The U.S. Court of Appeals for the Ninth

Circuit applied the adverse inference rule of Wichita Terminal

Elevator Co. v. 

, in McKay v. Commissioner,

, 1238-1239 (9th Cir. 1989), affg. 

(1987).

       Mr. Fox testified that he asked an unidentified attorney who

specialized in trusts about which form he should use for his

Oxyfresh business.    Mr. Fox testified that the attorney's

conclusion was the same as that of Giboney and Dunn.     We do not

know the expertise of the people on whom petitioners claim to

have relied, and we do not know specifically what their opinion

was.
                                 -22-

     4.   Conclusion

     We conclude that Mr. and Mrs. Fox are liable for the

addition to tax for failure to file a return for 1993 under

section 6651(a) and the accuracy-related penalty for 1989, 1992,

and 1993 under section 6662(a) for negligence.

     To reflect the foregoing,


                                             Decision will be entered

                                        for petitioner in docket No.

                                        5907-96 and under Rule 155 in

                                        docket No. 7178-96.