T.C. Memo. 1995-521



                UNITED STATES TAX COURT



     BRUCE SELIG AND ELAINE SELIG, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19151-93.          Filed October 31, 1995.



     P exhibited "exotic automobiles", state-of-the-
art, high technology vehicles with unique design
features or equipment, for a fee. Ps claimed
depreciation deductions for such automobiles. P's
wholly owned S corporation made expenditures related to
P's plans to open an exotic car entertainment complex.
     1. Held: The exotic automobiles were subject to
obsolescence and, thus, were depreciable under secs.
167 and 168, I.R.C.
     2. Held, further, the expenditures made by P's
wholly owned S corporation are nondeductible under sec.
162(a), I.R.C., on account of being preopening expenses
not incurred in a trade or business of the corporation.
     3. Held, further, the sec. 6661, I.R.C.,
additions to tax and sec. 6662, I.R.C., penalties
determined by respondent are, in part, sustained.
                                 - 2 -




     Richard J. Sapinski and Robert J. Alter, for petitioners.

     Robert A. Baxter, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     HALPERN, Judge:     Respondent determined deficiencies in

income tax and additions to tax as follows:

                               Additions to Tax and Penalties
                                 Sec.       Sec.      Sec.
     Year      Deficiency      6651(a)      6661     6662(a)

     1987      $88,837          ---        $39,264     ---
     1988       62,391          ---         13,020     ---
     1989       58,838        $22,260        ---     $11,768
     1990       51,762          ---          ---      10,352

After concessions, the issues remaining for decision are

(1) whether petitioners are allowed depreciation deductions with

regard to certain "exotic automobiles" owned and exhibited by

petitioner husband, (2) whether Exotic Bodies, Inc., an

S corporation within the meaning of section 1361(a)(1), was

engaged in a trade or business such that petitioners may claim

certain losses from that corporation, (3) the basis of certain

shares of stock in BSG Corp., and (4) petitioners' liability for

the additions to tax under section 6661 and penalties under

section 6662(a) set forth above.

     In their opening brief, petitioners proposed no findings of

fact or made any argument with regard to the basis of any shares

in BSG Corp.   In her opening brief, respondent argued that, since
                              - 3 -

petitioners bear the burden of proof, and have failed to

introduce any evidence, the Court should find against petitioners

and hold for respondent on that issue.    In their reply brief,

petitioners state that, subsequent to the trial, petitioners and

respondent "agreed that the adjustment to the capital gain

realized by petitioners in 1989 with respect to Bruce's basis in

BSG Corp. proposed by respondent was correct."    We take that as a

concession by petitioners and, on that basis, sustain so much of

the deficiencies as relate to that issue.    In a footnote,

petitioners added:

          Petitioners contend that the parties' agreement
     with respect to respondent's determination of Bruce's
     basis in BSG Corp. in this case allows them to correct
     their erroneously computed share of BSG Corp.'s
     subchapter S corporation losses in 1985 and 1986 under
     I.R.C. § 1311-1314.

Suffice it to say that neither 1985 nor 1986 is a year before us,

and, therefore, we have no jurisdiction to determine any

overpayment for either of such years.    See sec. 6512(b).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                        FINDINGS OF FACT

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

The stipulations of fact filed by the parties and attached

exhibits are incorporated herein by this reference.
                                - 4 -

     Petitioners resided in Cherry Hill, New Jersey, at the time

the petition was filed.

     Petitioners are husband and wife, who made joint returns of

income for each of the years in question.

     Petitioner husband (petitioner) is a successful businessman.

In 1983, petitioner opened a limousine leasing business under the

name "Scott's Limo & Leasing" (Scott's Limo).       Scott's Limo was

conducted as a sole proprietorship.      Exotic automobiles are

state-of-the-art, high technology vehicles with unique design

features or equipment.    In 1987 and 1988, petitioner purchased

the following exotic automobiles (the exotic automobiles) to be

exhibited at car shows:

  Year of Purchase                  Type                    Cost
        1987             Lotus Pantera                     $63,000
        1987             Lotus Espirit                     $48,000
        1988             Gemballa FerrariTestarossa       $290,453



During the years in issue, Scott's Limo displayed the exotic

automobiles at car shows and earned fees for doing so.       For 1987

through 1990, Scott's Limo received gross income with respect to

the exotic automobiles as follows:

                     Year               Gross Income

                     1987                  $8,555
                     1988                  38,120
                     1989                  24,295
                     1990                  25,760
                                - 5 -

The exotic automobiles did not have license plates and were not

set up to be used on the street.      They were not driven and were

used exclusively for car shows or related promotional

photography.

     Petitioners claimed the following depreciation deductions

with regard to the exotic automobiles:

                                      Depreciation Claimed In:
        Automobile            1987         1988      1989        1990
Lotus Pantera              $12,600       $20,160   $12,096   $7,258
Lotus Espirit                 9,600       15,360     9,216       5,530
Gemballa Ferrari                          58,091    92,945   55,767
Testarossa

     Exotic Bodies, Inc. (the corporation), is a New Jersey

corporation.    At all times here relevant, the corporation was

wholly owned by petitioner.    The corporation was organized in

1987.   For 1988, 1989, and 1990, the corporation was an

S corporation within the meaning of section 1361(a)(1).      For

those years, the corporation made its Federal income tax returns

on the basis of a calendar year.      The corporation was formed for

the purpose of putting together exotic cars for shows as well as

for cross-promoting different products (e.g., automobile-related

paraphernalia, such as T-shirts and frames for license plates).

The corporation was a marketing vehicle for the promotional

aspects of the exotic cars owned by petitioner.
                                - 6 -

       For 1988, the corporation reported gross receipts of $8,369

and an ordinary loss of $31,531 on its Federal income tax return.

Those gross receipts, along with $16,405 of corporate expenses,

which were accepted as verified by respondent, were allocated by

respondent to Scott's Limo.    Petitioners have agreed to that

adjustment.

       For both 1989 and 1990, the corporation reported gross

receipts of zero on its Federal income tax return.    For 1989, it

reported an ordinary loss of $13,218; for 1990, it reported an

ordinary loss of $13,357.    Neither the corporation's 1989 return

nor its 1990 tax return reflects either a cost of goods sold, an

inventory, or any wages paid to employees.    The corporation sold

no merchandise during either 1989 or 1990.

                               OPINION

I.    Introduction

       We must decide (1) whether certain automobiles owned by

petitioner give rise to deductions for depreciation for tax

purposes, (2) whether petitioner's S corporation was in a trade

or business, so that petitioners may claim certain losses

incurred by such corporation, and (3) whether petitioners are

liable for certain additions to tax.     Petitioners bear the burden

of proof.    Rule 142(a).

II.    Depreciation

       Section 167(a) provides that a reasonable allowance for the

exhaustion, wear and tear, and obsolescence of property used in
                               - 7 -

the trade or business or of property held by the taxpayer for the

production of income shall be allowed as a depreciation

deduction.1

     Generally, section 168(a) provides that the depreciation

deduction provided by section 167(a) for any tangible property

shall be determined by using certain applicable methods, periods,

and conventions.2

     Exotic automobiles are state-of-the-art, high technology

vehicles with unique design features or equipment.   Petitioner

owned exotic automobiles that, during 1987 through 1990, he

exhibited for a fee.   The fees earned by petitioner for such




1
     Sec. 167(a) provides as follows:

     General Rule.--There shall be allowed as a depreciation
     deduction a reasonable allowance for the exhaustion,
     wear and tear (including a reasonable allowance for
     obsolescence)--

          (1) of property used in the trade or business, or
          (2) of property held for the production of
          income.
2
     Sec. 168(a) provides as follows:

     Accelerated Cost Recovery System

     General Rule.--Except as otherwise provided in this
     section, the depreciation deduction provided by section
     167(a) for any tangible property shall be determined by
     using--

          (1) the applicable depreciation method,
          (2) the applicable recovery period,
          (3) the applicable convention.
                               - 8 -

exhibitions were substantially less than the depreciation

deductions petitioner claimed with respect to such automobiles.

     The parties do not dispute either that (1) the exotic

automobiles are tangible property or (2) the exotic cars were

used in petitioner's trade or business.    Also, they do not

dispute any aspect of applying section 168 to the exotic

automobiles if we conclude that section 168 is applicable to the

exotic automobiles.   The dispute between the parties is whether a

depreciation deduction is allowable under section 167(a) for

automobiles held in a pristine condition and exhibited for a fee.

     The long and the short of it is yes, providing the

automobiles are subject to obsolescence.    We have found that the

exotic automobiles were state-of-the-art, high technology

vehicles with unique design features or equipment.    We have no

doubt that, over time, the exotic automobiles would, because of

just those factors, become obsolete in petitioner's business.

The fact that petitioners have failed to show the useful lives of

the exotic automobiles is irrelevant.   Cf. Liddle v.

Commissioner, 

, 296-297 (1994), affd. 

(3d Cir. 1995); Simon v. Commissioner, 

 (1994), affd.

__ F.3d __ (2d Cir. 1995)

     In the Liddle and Simon cases, we interpreted section 168,

as added to the Code by section 201(a) of the Economic Recovery

Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172, 204 (sec.

168 (1981)).   The operative term in section 168 (1981) is
                                 - 9 -

"recovery property".    The term "recovery property" is defined in

relevant part to mean "tangible property of a character subject

to the allowance for depreciation * * * used in a trade or

business".    Sec. 168(c)(1) (1981).     In the Simon case, we dealt

with two antique violin bows that the taxpayers, both

professional musicians, used in that trade or business.       In the

Liddle case, we dealt with an antique viol, also used by a

professional musician in his trade or business.      In both cases,

we rejected the Commissioner's argument that, for the instruments

to be property of a character subject to the allowance for

depreciation (i.e., recovery property within the meaning of

section 168(c)(1) (1981)), the taxpayers had to show the useful

life of the property.     Liddle v. Commissioner, supra at 296;

Simon v. Commissioner, supra at 264.       We found it sufficient that

the taxpayers had proven that the instruments were subject to

exhaustion, wear and tear, or obsolescence.       Liddle v.

Commissioner, supra at 296-297; Simon v. Commissioner, supra.

       In 1986, Congress extensively revised and restated section

168.    Tax Reform Act of 1986 (TRA 86), Pub. L. 99-514, sec.

201(a), 100 Stat. 2121.    As restated, section 168 is applicable

to property placed in service after 1986.      TRA 86, Pub. L.

99-514, sec. 203(a)(1), 100 Stat. 2143.      The term "recovery

property" does not appear in section 168, as restated.        There is

no indication, however, that Congress intended to reimpose the

requirement, eliminated by ERTA, that a taxpayer must show the
                              - 10 -

useful life of property if the taxpayer is to determine the

section 167 depreciation deduction under section 168.   Therefore,

we shall follow Liddle v. Commissioner, supra, and Simon v.

Commissioner, supra, in interpreting section 168, as restated.

Accordingly, if petitioners can show that the exotic automobiles

were subject to exhaustion, wear and tear, or obsolescence, they

are entitled to the depreciation deductions that they claimed.

     Petitioners do not seriously attempt to prove that the

exotic automobiles were subject to wear and tear in the sense of

physical deterioration.   Indeed, they state that obsolescence is

the principal basis for their claim of depreciation deductions.

Respondent argues that petitioners have failed to prove that the

exotic automobiles are subject to obsolescence.

     From the beginning, it has been clear that a taxpayer could

recover the cost of business property over a period shorter than

the ordinary useful life of the property if the taxpayer could

show that the assets would become obsolete in the business prior

to the end of such ordinary useful life.   See, e.g., Columbia

Malting Co. v. Commissioner, 

, 1001 (1925).      Section

1.167(a)-9, Income Tax Regs., addresses obsolescence.   In

pertinent part, it states:

     The depreciation allowance includes an allowance for
     normal obsolescence which should be taken into account
     to the extent that the expected useful life of property
     will be shortened by reason thereof. Obsolescence may
     render an asset economically useless to the taxpayer
     regardless of its physical condition. Obsolescence is
     attributable to many causes, including technological
                             - 11 -

     improvements and reasonably foreseeable economic
     changes. Among these causes are normal progress of the
     arts and sciences, supersession or inadequacy brought
     about by developments in the industry, products,
     methods, markets, sources of supply, and other like
     changes, and legislative or regulatory action. * * *

     In Columbia Malting Co. v. Commissioner, supra at 1001, we

said:

           In order that the taxpayer may be entitled to the
     obsolescence deduction in the years involved, there
     must have been substantial reasons for believing that
     the assets would become obsolete prior to the end of
     their ordinary useful life, and second, it must have
     been known, or believed to have been known, to a
     reasonable degree of certainty, under all the facts and
     circumstances, when that event would likely occur.
     * * *

Under section 168(a), we need not concern ourselves with the

second part of that test (when obsolescence would occur), since

we need not determine the actual useful life of the property.     As

to the first part of the test, we assume that the "ordinary"

useful life of the exotic automobiles in petitioner's trade or

business (as show cars) was indeterminable.   Petitioners have

introduced no evidence from which we could find that the exotic

automobiles were subject to wear and tear or exhaustion.

Nevertheless, we are convinced that the exotic automobiles had a

limited useful life as show cars.

     The exotic automobiles are state-of-the-art, high technology

vehicles with unique design features or equipment.   Petitioner

testified that show cars such as the exotic automobiles:

     are state of the art and within three years or four
     years, five years, there could be new cars that are
                                - 12 -

     more state of the art and cars change based on their
     technological opulence * * *

A business associate of petitioner's, Leon Altemose, who had

staged exotic car shows testified:

     These highly customized, modified exotic cars have a
     limited life and I think it's about a year, typically,
     maybe two years and then they start to drop
     significantly in value because they are replaced by
     something better.

We do not need to determine the precise useful life of the exotic

automobiles.    Indeed, petitioner testified that some of the

exotic automobiles might be shown for many years.    Nevertheless,

we are convinced that the exotic automobiles, precisely because

of their nature as state-of-the-art, high technology vehicles,

had a useful life as show cars shorter than their ordinary useful

life and, thus, suffered obsolescence.    We so find.

     Explicit in our finding is a finding that the exotic

automobiles were not museum pieces of indeterminable useful life.

Respondent cites us the U.S. Court of Claims' decision in

Harrah's Club v. United States, 

, 

(1981).   At issue there was the cost of restoring antique

automobiles primarily held for display in connection with the

taxpayer's trade or business.    The taxpayer argued that the

restoration costs were depreciable over the period in which the

restoration could be estimated to be useful in the business of

the taxpayer.    The U.S. Court of Claims disallowed a depreciation

deduction in part on the basis that:     "The evidence establishes
                                - 13 -

that there is no limit on the useful life of a restored car or

other vehicle as a museum object."       Id., 661 F.2d at 207.   In

Simon v. Commissioner, 103 T.C. at 264, we acknowledged that, to

qualify as recovery property, in the case of a passive business

asset that suffered no wear and tear, a taxpayer would have to

prove a determinable useful life.    An example of a passive

business asset that normally would suffer no wear and tear is a

painting displayed for business purposes.      E.g., Clinger v.

Commissioner, T.C. Memo. 1990-459 (painting purchased by a

professional artist and displayed in part for marketing reasons

not recovery property for failure to prove determinable useful

life).   Once a taxpayer establishes that an asset is subject to

exhaustion, wear and tear, or obsolescence, however, we need not

concern ourselves with the particular useful life of the asset.

Liddle v. Commissioner, 103 T.C. at 296-297; Simon v.

Commissioner, supra.     It is of course possible that the exotic

automobiles might some day become museum pieces.      Respondent

suggests that they were museum pieces, but she offers no evidence

to support that claim.    We are satisfied that the exotic

automobiles were show cars, which, because of obsolescence, had a

limited useful life, not museum pieces with an indeterminable

useful life.   The facts of the Harrah's Club case are

distinguishable.

     At the conclusion of the trial in this case, respondent

stated that she no longer would rely on section 183 as a basis
                                - 14 -

for disallowing any deductions in this case.      Accordingly, we

will not inquire whether petitioner's activity of showing the

exotic automobiles was an activity engaged in for profit.

III.   Trade or Business

       For 1989 and 1990, respondent disallowed losses passed

through from the corporation to petitioner.      Respondent

disallowed such losses in their entirety, in the amounts of

$13,218 and $13,357, for 1989 and 1990, respectively.      The

corporation was an S corporation, and petitioner was entitled to

take into account his pro rata share of the corporation's items

of income and loss.    See sec. 1366(a).    One ground on which

respondent disallowed the losses was that, during 1989 and 1990,

the corporation was not carrying on a trade or business as

required by section 162(a).

       Section 162(a) provides in pertinent part:    "There shall be

allowed as a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on any trade

or business".

       The corporation reported neither gross receipts nor gross

income for either 1989 or 1990.       Its ordinary losses reported on

its Federal income tax returns were composed of the following

items:

                               1989                      1990

            Taxes               $38                       $45
            Interest          1,154                       892
            Advertising          38                       100
                               - 15 -

          Amortization       131                     3,057
          Bank charges        50                        20
          Prof. fees         460                      ---
          Travel             895                      ---
          Meals &
           entertainment   1,511                      ---
          Telephone        8,941                     7,276
          Leasing           ---                      1,130
          Office exp.       ---                        219
          Postage           ---                        618
            Total        $13,218                   $13,357

     As to the corporation's activities in 1989 and 1990,

petitioner testified that, for 1989:

          It was active but it was not active in marketing
     of the clothing at that point in time. There was not a
     lot of sales being generated at that point in time. We
     were actively marketing the fundraising at that point
     in time.

and, for 1990:

          We were fulfilling all the obligations for the
     future shareholders as well as the shareholders that
     were putting Exotic Bodies together. All marketing,
     all research, all development.

     Petitioners' argument is that the corporation had entered

into business in 1988 and that its expenditures in 1989 and 1990

"were to extend its existing line of business to the higher end

merchandise market".    Petitioners rely on Briarcliff Candy Corp.

v. Commissioner, 

 (2d Cir. 1973), revg. T.C. Memo.

1972-43, for the proposition that a taxpayer's expenditures in

furtherance of its attempt at expansion are currently deductible

under section 162(a).   Respondent argues that, in 1989 and 1990,

the corporation had not yet entered into a trade or business and

that its expenditures during those years were nondeductible
                              - 16 -

preopening expenses.   Respondent cites Richmond Television Corp.

v. United States, 

, 907 (4th Cir. 1965), vacated and

remanded on other issues 

 (1965), original holding on

this issue reaffd. 

, 411 (4th Cir. 1965), overruled

on other grounds NCNB Corp. v. United States, 

, 289

(4th Cir. 1982), for the proposition that preopening expenses are

nondeductible:

     The uniform teaching of * * * [certain prior] cases is
     that, even though a taxpayer has made a firm decision
     to enter into business and over a considerable period
     of time spent money in preparation for entering that
     business, he still has not "engaged in carrying on any
     trade or business" within the intendment of section
     162(a) until such time as the business has begun to
     function as a going concern and performed those
     activities for which it was organized. [Fn. refs.
     omitted.]

     We agree with respondent that the expenditures made by the

corporation during 1989 and 1990 were nondeductible preopening

expenses.   Petitioners have not carried their burden of proving

that the corporation had engaged in carrying on any trade or

business before or during the years in question.   Although the

corporation may have reported gross receipts from the sale of

what petitioners characterize as "mostly low cost merchandise"

during 1988, such receipts and the corporation's verifiable

expenses for 1988 were allocated by respondent to Scott's Limo.

Petitioners agreed to that adjustment.   From those facts, we

conclude, and find, that the receipts and expenditures were

incurred in the trade or business of Scott's Limo, not in a trade
                                - 17 -

or business of the corporation.    We are convinced, and find, that

the corporation was engaged in no trade or business during 1988.

Likewise, we are convinced, and find, that the corporation was

engaged in no trade or business during either 1989 or 1990.     We

have found that the corporation sold no merchandise in either

1989 or 1990.   Petitioners argue that:

      In 1989 and 1990, * * * [petitioner] refocused Scott's
      Limo's car exhibition activities on becoming a fixed-
      site exhibitor of its exotic cars at his planned exotic
      car entertainment complex. Likewise, * * * [the
      corporation] refocused its activities during these
      years in an effort to continue to compliment [sic]
      Scott's Limo's new-found market as the lead exhibitor
      at the entertainment complex. * * *

The corporation was to play some role with regard to Scott's

Limo's expansion plans.   Whatever that role was, the exotic car

entertainment complex did not open in 1989 or 1990, and the

corporation had not commenced business activities in support

thereof during 1989 and 1990.    The corporation's expenditures

during 1989 and 1990 were nondeductible preopening expenses.

Accordingly, we sustain respondent's disallowance of the losses

passed through from the corporation to petitioner.




IV.   Additions to Tax

      A.   Section 6661
                                - 18 -

     Respondent has determined additions to tax under section

6661 for 1987 and 1988.   Section 6661(a) provides for an addition

to the tax for any year for which there is a substantial

understatement of income tax.    A substantial understatement is

defined as an understatement that exceeds the greater of

10 percent of the tax required to be shown on the return for the

year or $5,000.   Sec. 6661(b)(1)(A).    The amount of the addition

to tax is 25 percent of the underpayment attributable to a

substantial understatement.     Pallottini v. Commissioner, 

 (1988).   The amount of the understatement, however, is

reduced by amounts attributable to items for which (1) there

existed substantial authority for the taxpayer's position, or

(2) where the taxpayer disclosed relevant facts concerning the

items with his tax return.    Sec. 6661(b)(2)(B).   Respondent may

waive all or part of the section 6661 addition to tax on a

showing by the taxpayer that there was reasonable cause for the

understatement (or part thereof) and that the taxpayer acted in

good faith.   Respondent has determined that all of petitioners'

underpayments of income tax liability for 1987 and 1988 are

attributable to substantial understatements of income tax

liability.

     Due to (1) our decision with regard to the depreciation

issue and (2) concessions made by the parties, we are unable to

determine whether there are substantial understatements of income

for 1987 and 1988.   We can, however, address the single remaining
                              - 19 -

issue raised by petitioners with regard to imposition of the

section 6661 additions for both 1987 and 1988.   Any applicable

section 6661 addition to tax can be computed pursuant to

Rule 155.

     Petitioners argue that respondent should have exercised her

authority to waive the section 6661 additions to tax for 1987 and

1988 because "petitioners showed reasonable good-faith reliance

on their tax advisers and the positions at issue were, at the

very least, reasonable interpretations of the then-existing case

law and statutory regulatory authority on these issues."

Apparently, petitioners restrict that argument to the

depreciation deductions, which issue we have resolved favorably

to petitioners, and not to any items that may have been conceded

by petitioners.   In any event, we do not believe that respondent

abused her discretion not to waive the addition to tax.

     While the authority to waive the section 6661 addition to

tax rests with respondent, not with this Court, the denial of a

waiver by respondent is reviewable by the Court under a standard

of abuse of discretion.   Mailman v. Commissioner, 

,

1084 (1988).   Nevertheless, petitioners have not proven that

petitioners sought such a waiver prior to trial or that

petitioners provided to respondent any evidence regarding

reasonable cause or good faith to support a waiver.   Petitioners

have not proven that respondent had any information prior to

trial that would have led her to consider waiving the section
                               - 20 -

6661 additions.    Accordingly, as we noted in Brown v.

Commissioner, T.C. Memo. 1992-15, "we cannot find that respondent

abused * * *[her] discretion when petitioner never requested

respondent to exercise it."    See also McCoy Enterprises, Inc. v.

Commissioner, T.C. Memo. 1992-693 (same), affd. 

 (10th

Cir. 1995) (affg. on precisely that point).

     On the premises stated, the section 6661 additions to tax

determined by respondent are sustained.

     B.   Section 6662

     Respondent has determined accuracy related penalties under

section 6662 for 1989 and 1990.    Section 6662(a) provides for an

accuracy related penalty in the amount of 20 percent of the

portion of any underpayment of tax liability attributable to,

among other things, any substantial understatement of income tax.

Sec. 6662(b)(2).    A substantial understatement is defined as an

understatement which exceeds the greater of 10 percent of the tax

required to be shown on the return for the year or $5,000.     Sec.

6662(d)(1)(A).    The amount of the understatement, however, is

reduced by amounts attributable to items for which (1) there

existed substantial authority for the taxpayer's position, or

(2) where the taxpayer disclosed relevant facts concerning the

items with his tax return.    Sec. 6662(d)(2)(B).   No penalty is

imposed with respect to any portion of an underpayment if the

taxpayer can show that there was a reasonable cause for such

portion and that the taxpayer acted in good faith with respect to
                              - 21 -

such portion.   Sec. 6664(c)(1).   Respondent has determined that

all of petitioners' underpayments of income tax liability for

1989 and 1990 are attributable to substantial understatements of

income tax liability.

     As is true for 1987 and 1988, due to (1) our decision with

regard to the depreciation issue and (2) concessions made by the

parties, we are unable to determine whether there are substantial

understatements of income for 1989 and 1990.   We can, however,

address the two remaining issues raised by petitioners with

regard to imposition of the section 6662 penalties for both 1989

and 1990.   Any applicable section 6662 penalties can be computed

pursuant to Rule 155.

     Petitioners argue that there was substantial authority for

treating the corporation's expenditures in 1989 and 1990 as those

of an established trade or business.   Petitioners rely on the

following proposition:

     The evidence established that * * * [the corporation]
     had, by 1988, gone far beyond any preparatory efforts
     and had, in fact, begun actively selling various exotic
     car-related merchandize [sic] at car shows featuring
     Scot's [sic] Limo's exotic cars."

Petitioners cite Briarcliff Candy Corp. v. Commissioner, 

 (2d Cir. 1973) and NCNB Corp. v. United States, 

(4th Cir. 1982), for the proposition that "expenses incurred

during * * * a business transition or expansion by an existing

business are fully deductible".
                               - 22 -

     Such authorities are not on point.   We have found that the

corporation did not engage in any trade or business in 1988 (or

in 1989 or 1990).   In part, we did so in reliance on petitioners'

agreement that the corporation's receipts and verifiable expenses

for 1988 properly were allocable to the trade or business of

Scott's Limo.   Petitioners have adduced no authority, substantial

or otherwise, to support deductions on the facts as we have found

them and as, apparently, petitioners have agreed to them.

     Finally, in the petition, petitioners aver as a fact, in

support of their assignment that respondent erred in determining

penalties under section 6662, that "petitioners acted in good

faith in reliance on professional advice in filing their returns

as they did and had a reasonable basis for and belief in the

accuracy of said returns."    Respondent denies that averment.    We

assume that petitioners meant to invoke the reasonable cause

exception of section 6664(c)(1).    However, petitioners do not

mention section 6664(c)(1) in their opening brief and, in their

reply brief, state only:    "the facts demonstrate that petitioners

come within the provisions of I.R.C. § 6664 and are entitled to

relief thereunder."   Apparently, the facts that petitioners rely

on are that "petitioners and their accountant clearly made a good

faith effort to determine their true tax liabilities for the

years at issue."    Petitioners have not particularized the

portions of the 1989 and 1990 underpayments with respect to which

they claim to have acted with reasonable cause and in good faith.
                              - 23 -

Except perhaps with respect to the depreciation deductions (an

issue that we have resolved in petitioners' favor), petitioners

have proposed no findings of fact that would allow us to conclude

that petitioners acted with reasonable cause and in good faith.

The closest petitioners come is a proposed finding (which we have

declined to make):   "Bruce has no accounting or tax background

and depended entirely on Giunta [a certified public accountant]

for tax reporting positions taken * * * [on petitioners' 1988 and

1989 returns]".   Petitioners have failed to carry their burden of

showing that they acted with reasonable cause and in good faith

with respect to any portion of the underpayments in tax

determined by respondent for 1989 or 1990 except those portions

of such underpayments attributable to depreciation of the exotic

automobiles.   See sec. 1.6664-4, Income Tax Regs.

     Subject to the Rule 155 computation, section 6662(a) applies

to the whole of the underpayments determined by respondent for

1989 and 1990 except those portions attributable to depreciation

of the exotic automobiles.   To that extent, respondent's

determinations of penalties under section 6662(a) is sustained.


                                         Decision will be entered

                                    under Rule 155.