T.C. Memo. 1997-165



                        UNITED STATES TAX COURT



   ESTATE OF DAVID J. DICKERSON, DECEASED, DOROTHY DICKERSON,
     EXECUTOR AND DOROTHY DICKERSON, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 23458-94, 23459-94,              Filed April 1, 1997.
                 23518-94.



     Audrey J. Orlando, for petitioner.

     Lavonne D. Lawson, for respondent.



                          MEMORANDUM OPINION

     VASQUEZ, Judge:     Respondent determined the following

deficiencies in, additions to, and penalties on petitioners'

Federal income taxes:


     1
        Cases of the following petitioners are consolidated
herewith: Michael and Beverly Michoff, docket No. 23459-94;
Michael Michoff, Jr., and Kimberly L. Michoff, f.k.a. Kimberly
Colombo, docket No. 23518-94.
                                           - 2 -

     Estate of David Dickerson and Dorothy Dickerson (the
Dickersons):

                                                     Penalty
              Year         Deficiency              Sec. 6662(a)

              1989           $21,113                  $4,223
              1990            26,378                   5,276

       Michael Michoff, Sr., and Beverly Michoff (Michoff, Srs.):

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

1986        $29,594               $1,480           $7,399            -0-
1987          8,447                  422            2,112            -0-
1989          4,360                 -0-              -0-            $872
1990          3,647                 -0-              -0-             729

       Michael Michoff, Jr. (Michoff, Jr.):

                                     Additions to Tax                        Penalty
Year   Deficiency     Sec. 6651    Sec. 6653(a) Sec. 6654      Sec. 6661   Sec. 6662(a)
                                    1
1986   $103,152       $25,788        $5,158         $4,991       -0-           -0-
                                     1
1987     30,846         7,712          1,542         1,668       -0-           -0-
1988      8,379          -0-             419          -0-      $2,095          -0-
1989     24,921          -0-            -0-           -0-        -0-         $4,984

     Michael Michoff, Jr., and Kimberly Michoff, f.k.a. Kimberly
Columbo, (together known as Michoff, Jrs.):

                                                     Penalty
              Year         Deficiency              Sec. 6662(a)

              1990              $9,208                $1,842

       Kimberly Colombo:

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

       1986            $16,587                 $829                 $4,147
       1
       If the penalty under sec. 6653(a)(1)(A) applies, the
penalty under sec. 6653(a)(1)(B) will also apply. Sec.
6653(a)(1)(B) includes 50 percent of the interest attributable to
that portion of the underpayment which is due to negligence or
disregard of the rules or regulations.
                               - 3 -

     Pursuant to respondent's motion, these cases have been

consolidated for trial, briefing, and opinion.   All section

references are to the Internal Revenue Code in effect for the

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

of Practice and Procedure.

     After concessions,2 the issues for decision are:

Issues With Respect to the Dickersons

     1.   Whether the Dickersons incurred taxable gain in the

amount of $57,855 in the 1990 tax year from the sale of two lots

of real property;

     2.   whether the Dickersons received rental income in the

amount of $3,550 in the 1990 tax year from the rental of real

property;

     3.   whether the Dickersons received unreported taxable

income in the 1989 and 1990 tax years in the amounts of $55,097

and $2,800, respectively;


     2
        The following issues have been conceded:
     The Michoff, Srs., claimed exemptions to which they were not
entitled for their sons, Michael Michoff, Jr., and Steven
Michoff, in the 1986 tax year.
     The Michoff, Srs., claimed exemptions to which they were not
entitled for Steven Michoff in the 1987 and 1989 tax years.
     The Michoff, Srs., received unreported interest income in
the 1989 and 1990 tax years in the amounts of $54 and $62,
respectively.
     The Michoff, Srs., failed to report taxable State income tax
refunds on their 1989 and 1990 income tax returns in the amounts
of $39 and $159, respectively.
     Michael Michoff, Jr., received unreported interest income in
the 1986 and 1987 tax years in the amounts of $2,089 and $854,
respectively.
     Respondent concedes the deficiency against Kimberly Michoff
for the 1986 tax year.
                                - 4 -

     4.    whether the Dickersons are entitled to any Schedule C

deductions with regard to a Christmas tree farm for the 1989 and

1990 tax years;

     5.    whether the Dickersons are entitled to Schedule A

deductions for loan origination fees and mortgage interest in the

1989 and 1990 tax years; and

     6.    if any underpayments of tax exist, whether such

underpayments by the Dickersons are due to negligence or

disregard of rules or regulations.

Issues With Respect to the Michoff, Srs.

     7.    Whether the Michoff, Srs., failed to report a taxable

withdrawal from their pension fund in the amount of $9,047 for

the 1987 tax year;

     8.    whether the Michoff, Srs., received unreported taxable

income in the 1986, 1987, 1988, and 1989 tax years in the

respective amounts of $75,740, $10,107, $10,673, and $4,600;

     9.    whether the Michoff, Srs., are entitled to itemized

deductions for casualty losses and telephone expenses for their

1989 and 1990 tax years;

     10.    whether the Michoff, Srs., are entitled to any Schedule

C deductions with regard to a Christmas tree farm for their 1990

tax year;

     11.    if any underpayments of tax exist, whether such

underpayments by the Michoff, Srs., are due to negligence or

disregard of rules or regulations; and
                               - 5 -

     12.   whether the Michoff, Srs., substantially understated

their tax in the 1986 and 1987 tax years.

     Issues With Respect to Michoff, Jr., and Kimberly Michoff

     13.   Whether Michoff, Jr., received unreported income in the

1986, 1987, 1988, and 1989 tax years in the amounts of $39,850,

$29,879, $24,422, and $68,798, respectively;

     14.   whether the Michoff, Jrs., had unreported taxable

income in the 1990 tax year in the amount of $22,649;

     15.   whether Michoff, Jr., realized a capital gain from the

sale of a partnership interest in the 1986 tax year in the amount

of $26,058;

     16.   whether Michoff, Jr., is entitled to any Schedule C

deductions with regard to a limousine activity for his 1989 tax

year;

     17.   whether Michoff, Jr., failed to timely file his Federal

income tax returns for the 1986 and 1987 tax years;

     18.   whether Michoff, Jr., failed to pay estimated tax for

the 1986 and 1987 tax years;

     19.   if any underpayments exist, whether the underpayments

of tax for Michoff, Jr., are due to negligence or disregard of

rules or regulations;

     20.   whether Michoff, Jr., substantially understated his tax

for the 1988 tax year; and
                                 - 6 -

     21.    if any underpayment of tax exists, whether such

underpayment by the Michoff, Jrs., for the 1990 tax year is due

to negligence or disregard of rules or regulations.

             Some of the facts have been stipulated and are so

found.     The stipulation of facts and attached exhibits are

incorporated herein by this reference.

     All petitioners in these consolidated cases resided in

California at the time they filed their respective petitions.

These consolidated cases involve three generations of the same

family.     For convenience, we combine our findings of fact with

our opinion under each separate issue heading.

Burden of Production

     Petitioners argue that the notices of deficiency are

arbitrary and excessive on their face, and, therefore, the burden

of production should shift to respondent.     We disagree.

Respondent's determinations are entitled to a presumption of

correctness.     Rule 142(a); Welch v. Helvering, 

(1933).     The burden is upon petitioners to demonstrate in the

first instance that the determination is arbitrary and

unreasonable in order to deprive it of the presumption of

correctness.     Harbin v. Commissioner, 

, 376 (1963).

Petitioners have failed to so demonstrate.     Respondent has

provided sufficient evidence to convince this Court that the

notices of deficiency were neither arbitrary nor unreasonable.

Therefore, unless otherwise indicated, for all of the issues the
                                 - 7 -

burden rests with petitioners to demonstrate that respondent's

determinations are erroneous.    Rule 142(a).

     A rare exception to this rule is where the Commissioner, in

a case involving unreported income, introduces no evidence but

rests on the presumption of correctness and the taxpayer

challenges the deficiency on the grounds that it is arbitrary.

Schad v. Commissioner, 

, 618 (1986), affd. without

published opinion 

(11th Cir. 1987).     The

Commissioner in these circumstances must show some minimal

evidentiary foundation connecting the taxpayer to an income-

producing activity or to the funds.      Edwards v. Commissioner, 

, 1270 (9th Cir. 1982), affg. an Order of this Court;

Weimerskirch v. Commissioner, 

, 361-362 (9th. Cir.

1979), revg. 

(1977).    Whether or not respondent has

substantiated her determination of unreported income with this

evidentiary foundation will be discussed as the issue is

addressed for each petitioner.

     Petitioners in these cases rely heavily on their own

testimony.   We found some of petitioners' testimony to be

general, vague, conclusory, and/or questionable in certain

material respects.   Under the circumstances presented here, we

are not required to, and generally do not, rely on petitioners'

testimony to sustain their burden of establishing error in

respondent's determinations.    See Lerch v. Commissioner, 

, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger
                                   - 8 -

v. Commissioner, 

, 689-690 (9th Cir. 1971), affg. per

curiam T.C. Memo. 1969-159; Tokarski v. Commissioner, 

,

77 (1986).

Gain From the Sale of Real Property

       In May 1990, the Dickersons received $9,748 in proceeds from

the sale of property located at lot 58 of Lake Mont Pines (lot

58).       The Dickersons had a zero basis in lot 58.3   Also in 1990,

the Dickersons sold lot 59 of Lake Mont Pines (lot 59) for

$89,000.       The Dickersons' total basis in lot 59 was $32,061.47.

The parties have stipulated that the Dickersons had taxable gain

from the sale of the two lots in the amount of $57,855.          The

Dickersons now argue that they should be entitled to increased

basis in the property due to litigation costs which were not

reimbursed.       The evidence relating to these costs was solely in

the form of trial testimony.       Petitioners presented no further

evidence of any litigation costs.       Petitioners have failed to

prove that any litigation costs were incurred and, if they had

been incurred, why petitioners are entitled to an increase in

basis as a result.       We sustain respondent on this issue.

Rental Income

       Respondent argues that the Dickersons received unreported

rental income in 1990 in the amount of $3,550.       The Dickersons

leased residential property (the Green Ridge residence) to Roger

and Linda Barrett (the Barretts) in 1990.       The Dickersons


       3
            This was conceded by petitioners on brief.
                               - 9 -

received a $1,000 cleaning deposit from the Barretts in that

year.   The Dickersons received payments from the Barretts with

regard to the lease of the Green Ridge residence in the amount of

$850 each on August 20, 1990, September 20, 1990, and October 30,

1990.   The Dickersons never lived at the Green Ridge residence.

The Dickersons presented no arguments why this amount should not

be included in income.   We therefore consider this issue to be

abandoned and sustain respondent on this issue.   See Lime Cola

Co. v. Commissioner, 

, 606 (1954).

Unreported Income--General

     Respondent, using a bank deposits and expenditures analysis,

determined that each of the petitioners had unreported income for

some of the years in issue.

     The United States Court of Appeals for the Ninth Circuit, to

which an appeal of this case would lie, has held that in order

for the presumption of correctness to attach to the notice of

deficiency in unreported income cases, the Commissioner must come

forward with substantive evidence establishing “some evidentiary

foundation” linking the taxpayer to the income-producing

activity, Weimerskirch v. 

at 361-362, or

“demonstrating that the taxpayer received unreported income”,

Edwards v. 

; see also Rapp v.

Commissioner, 

, 935 (9th Cir. 1985), affg. an Order

of this Court.   We must examine the record to determine whether

there is a minimal evidentiary foundation supporting respondent's
                               - 10 -

determination of unreported income.     The record, however, does

contain substantive evidence supporting respondent's

determination of unreported income.

     Revenue Agent Anita Russell, using a bank deposits analysis,

determined that petitioners had unreported income.     Use of the

bank deposits method for reconstructing income is well

established.    DiLeo v. Commissioner, 

, 867 (1991),

affd. 

(2d Cir. 1992); Estate of Mason v.

Commissioner, 

, 656 (1975), affd. 

(6th Cir.

1977).    Under the bank deposits method, there is a rebuttable

presumption that all funds deposited to a taxpayer's bank account

constitute taxable income.    Price v. United States, 

,

677 (5th Cir. 1964); Hague Estate v. Commissioner, 

,

777-778 (2d Cir. 1943), affg. 

(1941); DiLeo v.

at 868.    Once there is evidence of actual

receipt of funds by the taxpayer, that taxpayer has the burden of

proving that all or a part of those funds are not taxable.

Tokarski v. 

.    The Commissioner must take into

account any nontaxable sources of deposits of which she is aware

in determining the portion of the deposits that represent taxable

income, but she is not required to trace deposits to their

source.    Petzoldt v. Commissioner, 

, 695-696 (1989).

     This case is distinguishable from Weimerskirch v.

at 362, where “the Commissioner did not

attempt to substantiate the charge of unreported income by any
                               - 11 -

other means, such as by showing Weimerskirch's net worth, bank

deposits, cash expenditures, or source and application of funds.”

the taxpayer was not shown by

admissible evidence to have actually possessed any of the funds

that the Commissioner determined to be taxable income.    In the

instant case, the various petitioners were connected to the funds

forming the basis of the deficiency by respondent's analysis of

bank deposits and expenditures.   “[C]onnecting * * * [the

taxpayer] to the funds that form the basis of the deficiency is

sufficient to give him the burden of proving the deficiency

determination erroneous.”   Schad v. Commissioner, 

.

      Respondent has substantiated her determination with

predicate evidence; she used the bank deposits and cash

expenditures method of income reconstruction.   See Blohm v.

Commissioner, 

, 1549 (11th Cir. 1993), affg. T.C.

Memo. 1991-636 (once the Tax Court has found the Commissioner has

made a minimal evidentiary showing, the deficiency determination

is presumed correct); Erickson v. Commissioner, 

,

1551 (10th Cir. 1991), affg. T.C. Memo. 1989-552 (the key is

connecting taxpayers to assets, not to a business).   The burden

of proof therefore lies with petitioners to show error in

respondent's determinations.

Unreported Income--the Dickersons

      Revenue Agent Anita Russell, using a bank deposits analysis,

determined that the Dickersons had unreported income in the
                               - 12 -

amounts of $55,097 and $2,800 for the tax years 1989 and 1990,

respectively.4

     The Dickersons made specific payments on their Primeline

credit account in the total amount of $9,200, which is in issue

in the 1989 tax year.    These were not, however, the total

payments made by the Dickersons on their Primeline credit account

in the 1989 tax year.

     The Dickersons made deposits into their El Dorado savings

account in the amounts of $37,100 and $2,800 in the 1989 and 1990

tax years, respectively.    These were not the total deposits made

into this account in the 1989 and 1990 tax years.

     Respondent also identified a cash expenditure which she

added to the unreported income of the Dickersons for the 1989 tax

year.    This expenditure was the purchase of a cashier's check in

the amount of $8,797 for purposes of purchasing the Green Ridge

Drive residence.

     Petitioners argue that the $8,797 cashier's check was

purchased with loans from Dan Maggard.    However, the check from

Dan Maggard was deposited into the El Dorado account.

Petitioners failed to show a canceled check that was used to



     4
        Petitioners objected to respondent's proposed finding of
fact which reads as follows: "Respondent's revenue agent
conducted a bank deposits analysis of the Dickerson's income for
1989 and 1990." On brief, however, petitioners do not dispute
that respondent's revenue agent conducted a bank deposits
analysis; rather they argue that it was conducted improperly.
This is typical of the argumentative and contradictory statements
that appear throughout petitioners' briefs.
                              - 13 -

purchase the cashier's check, nor did they otherwise prove that

the funds to purchase the check came from the El Dorado account.

Petitioners have failed to establish that the cashier's check was

purchased with funds from nontaxable sources.

     Dorothy Dickerson testified that some of the money that she

deposited into her El Dorado savings account was from checks from

Michoff, Jr., her grandson, and that the rest was from cash that

she had gathered “here and there.”     Petitioners further argue

that the deposits came from gambling winnings that were offset by

losses.   For both the 1989 and 1990 tax years, the Dickersons

reported substantial income from gambling as well as losses to

offset that income.   In performing the bank deposits analysis,

respondent's agent backed out any gambling income that was

reported on the Dickersons' income tax returns.     The Dickersons

have failed to prove any additional gambling losses beyond those

already reported by them and allowed by respondent in the 1989

and 1990 tax years.

     Additionally, petitioners contend that the $9,200 which they

paid toward their Primeline credit account came from their cash

reserves as well as previous withdrawals from that account.

Petitioners, however, offered no persuasive evidence to

substantiate this claim.   Petitioners have failed to meet their

burden of proof regarding this amount.

     A $5,500 deposit made into the El Dorado account on March

20, 1989, came from a cashier's check purchased by Dan Maggard
                                - 14 -

and payable to Michoff, Jr.   Michoff, Jr., then endorsed the

check over to the Dickersons.    This money was given to the

Dickersons by Michoff, Jr., either as a gift or as a loan and is

not therefore taxable to the Dickersons.

     Respondent identified gambling as a source of the

Dickersons' additional income.    Dorothy Dickerson loves to

gamble.   Dorothy Dickerson could not identify what amounts she

won and lost at gambling.

     Respondent further contends that the Dickersons engaged in

transactions with Michoff, Jr., from whom they received moneys

and with whom they freely transferred property.    Respondent

contends that Michoff, Jr., had sources of income which included

a lucrative activity of selling drugs.    Respondent has not made

any preliminary showing of why income from a drug selling

activity of Michoff, Jr., should result in income to the

Dickersons.   However, respondent has shown gambling to be a

possible source of additional income which is sufficient to

satisfy respondent's initial burden of connecting the Dickersons

to an income-producing activity.    Furthermore, even without this

showing, respondent has met her minimal evidentiary burden by

performing a bank deposits analysis.

     With respect to all items except the $5,500 deposit,

petitioners have failed to show that the source of the funds was

nontaxable.   Respondent's determination is sustained as to all

amounts above the $5,500.
                              - 15 -

Loan Origination Fees and Mortgage Interest in 1989 and 1990

     The Dickersons contend that they are entitled to a deduction

of $2,199 for loan origination fees incurred to purchase the

Green Ridge residence in 1989.   Additionally, the Dickersons

argue that they are entitled to deductions for mortgage interest

of $4,012 and $8,779 for the years 1989 and 1990, respectively.

Respondent contends that they are not entitled to these

deductions because they were not made on a qualified residence

within the meaning of section 163(h)(2)(D).   Section 163(h)(2)(D)

allows a deduction for any qualified residence interest.     Section

163(h)(3)(A) provides, inter alia, that qualified residence

interest includes acquisition indebtedness with respect to any

qualified residence of the taxpayer.   A qualified residence

includes the principal residence of the taxpayer as well as one

other residence which is used by the taxpayer as a residence.

Sec. 163(h)(4)(A).   This includes use by a family member,

including a grandson.   Secs. 280A(d)(2)(A), 267(c)(4).   Michoff,

Jr., the Dickerson's grandson, lived in the Green Ridge residence

during 1989 except for the months the residence was rented to the

Barretts.   The Green Ridge residence therefore qualifies as a

qualified residence during 1989.   Because the residence was used

by a family member for the requisite number of days during the

year, the Dickersons have established that they are entitled to
                               - 16 -

deduct the loan origination fees5 as well as the mortgage

interest, subject to substantiation.    Secs. 280A(d)(1) and (2),

267(c)(4).   Respondent further argues that the Dickersons have

not substantiated the claimed deductions and therefore are not

entitled to them.   Petitioners provided a U.S. Department of

Housing and Urban Development Settlement Statement (settlement

statement) which substantiates that petitioners paid $2,199 in

loan origination fees as well as some amount of interest.    If the

record provides sufficient evidence that the Dickersons paid the

mortgage interest, but they are unable to prove the exact amount,

we can estimate the amount of the payments.     Cohan v.

Commissioner, 

, 544 (2d Cir. 1930).    In order for the

Court to make such an estimate, we must have some basis in fact

upon which an estimate may be made.     Vanicek v. Commissioner, 

, 743 (1985).   Without such a basis, any allowance would

amount to unguided largesse.   Williams v. United States, 

, 560 (5th Cir. 1957).   Mrs. Dickerson testified that the

Dickersons paid the mortgage on the Green Ridge residence.

Although we cannot determine the exact amount of interest paid by

the Dickersons, we conclude that, based on Mrs. Dickerson's

testimony and the settlement statement, it was at least as much

as claimed on their Schedule A, and therefore we hold that they



     5
        The loan origination fees are deductible ratably, over
the life of the loan. Sec. 461(g)(1); cf. Huntsman v.
Commissioner, 

, 920 (1988), revd. 

(8th
Cir. 1990).
                              - 17 -

are entitled to the claimed deductions.   Respondent is sustained

to the extent petitioners deducted loan origination fees above

those ratably allocable to the 1989 tax year.

Christmas Tree Farm

     The Dickersons claimed Schedule C expense deductions with

regard to a tree farm business in the amounts of $1,345 and

$1,100 in the 1989 and 1990 tax years, respectively.   The

Dickersons claimed Schedule C losses for the tree farm business

in the tax years 1985, 1986, 1987, 1988, 1989, and 1990.     The

Dickersons reported zero receipts with regard to the tree farm

business in the 1985, 1986, 1987, 1988, and 1989 tax years.     The

Dickersons reported $800 in receipts with regard to the tree farm

business in the 1990 tax year.   Respondent argues that the

Dickersons are not entitled to the claimed deductions because the

tree farm business was not engaged in for profit within the

meaning of section 183.   This is a factual inquiry requiring a

weighing of the evidence in the record.   Petitioners contend that

they entered into and carried on the tree farm activity with the

requisite profit objective and that, as a result, the deductions

are allowed under section 162 or section 212.

     Section 183(a) provides generally that, if an activity is

not engaged in for profit, no deduction attributable to such

activity shall be allowed except as provided in section 183.

     Section 183(c) defines an “activity not engaged in for

profit” as “any activity other than one with respect to which
                                - 18 -

deductions are allowable for the taxable year under section 162

[trade or business] or under paragraph (1) or (2) of section 212

[expenses for the production of income]."     For a deduction to be

allowed under section 162 or section 212(1) or (2), taxpayers

must establish that they engaged in the activity with an actual

and honest objective of making an economic profit independent of

tax savings.   Antonides v. Commissioner, 

, 693-694

(1988), affd. 

(4th Cir. 1990); Dreicer v.

Commissioner, 

, 644-645 (1982), affd. without opinion

(D.C. Cir. 1983).    Their expectation of profit need

not have been reasonable; however, they must have entered into

the activity, or continued it, with the objective of making a

profit.   Hulter v. Commissioner, 

, 393 (1988); sec.

1.183-2(a), Income Tax Regs.

     The burden is on petitioners to show error in respondent's

determination that the Christmas tree farming activity was not

engaged in for profit.    Rule 142(a).   Whether the requisite

profit objective exists is determined by looking to all the

surrounding facts and circumstances.     Keanini v. Commissioner, 

, 46 (1990); sec. 1.183-2(b), Income Tax Regs.     Greater

weight is given to objective facts than to a taxpayer's mere

statement of intent.     Thomas v. Commissioner, 

, 1269

(1985), 

(4th Cir. 1986); sec. 1.183-2(a), Income

Tax Regs.
                                - 19 -

     Section 1.183-2(b), Income Tax Regs., provides a list of

factors to be considered in the evaluation of a taxpayer's profit

objective:    (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended in carrying on the activity; (4) the

expectation that assets used in the activity may appreciate in

value; (5) the success of the taxpayer in carrying on other

similar or dissimilar activities; (6) the taxpayer's history of

income or losses from the activity; (7) the amount of occasional

profits, if any, from the activity; (8) the financial status of

the taxpayer; and (9) elements of personal pleasure or

recreation.   The number of factors for or against the taxpayer is

not necessarily determinative, but rather all facts and

circumstances must be taken into account, and more weight may be

given to some factors than to others.    Cf. Dunn v. Commissioner,

, 720 (1978), affd. 

(2d Cir. 1980).     This

list is nonexclusive, and no single factor or even a majority of

factors necessarily controls.    Abramson v. Commissioner, 

, 371 (1986); sec. 1.183-2(b), Income Tax Regs.

     After weighing all of the objective factors coupled with

petitioner's statements of intent, we conclude that the

Dickersons were not engaged in the tree farming activity for

profit.   There is objective evidence which shows that the

Dickersons did not have a profit objective in carrying on the

tree farming business:    The Dickersons gave away many trees; no
                               - 20 -

business records were kept; there were losses over many years;

the Dickersons only reported receipts in one year of operation;

and the trees provided personal pleasure because they were

located at the Dickerson's residence.    Petitioners offer no legal

argument but to say that they were engaged in the tree farming

activity for profit; they offer no evidence but their own

uncorroborated testimony.    Petitioners have failed to meet their

burden of proof.    Petitioners are, however, entitled to deduct

their expenses to the extent that they received gross income from

the activity.   Sec. 183(b)(2).   To the extent that respondent has

disallowed expenses in excess of gross receipts for the tree

farming activity for the 1989 and 1990 tax years, we sustain

respondent.

Failure To Report Pension Fund Withdrawal in 1987

     The Michoff, Srs., made a taxable withdrawal from their

pension plan in the 1987 tax year in the amount of $9,047.      The

Michoff, Srs., failed to report their pension income.    This

withdrawal was an early distribution from their pension plan.

The parties stipulated to the above facts, and the Michoff, Srs.,

made no argument in their opening brief concerning the issue.      In

their reply brief, the Michoff, Srs., object to the stipulated

facts and contend that this withdrawal was a total distribution

as a result of the disability of Mr. Michoff, Sr., and therefore

the 10-percent penalty should not apply.    See sec.

72(t)(2)(A)(iii).    Gross income includes any amount received from
                                - 21 -

an annuity, including a retirement plan, where an exception does

not apply.    Sec. 72(a).   Additionally, unless an exception

applies, there is a 10-percent additional tax on early

withdrawals from qualified retirement plans.     Sec. 72(t)(1).    The

Michoff, Srs., have offered no testimonial or documentary

evidence to contradict their stipulations or to support an

exclusion.    Respondent's determination is therefore sustained on

this issue.

Unreported Income--Michoff, Srs.

     Revenue Agent Anita Russell, using a bank deposits analysis,

determined that the Michoff, Srs., received unreported taxable

income in the 1986, 1987, 1988, and 1989 tax years.     Based on

this analysis, respondent, after concessions, argues that the

Michoff, Srs., had unreported income for those years in issue in

the amounts of $75,740, $10,107, $10673, and $4,600,

respectively.

     The Michoff, Srs., purchased a cashier's check from El

Dorado Savings and Loan Association for the purpose of purchasing

real property in the amount of $64,500 in the 1986 tax year.

     The Michoff, Srs., made deposits in the amounts of $11,240

and $10,107 which are in issue to their El Dorado Savings and

Loan Association account in the 1986 and 1987 tax years,

respectively.    These deposits do not make up the total amount

deposited into this account in these years.
                               - 22 -

     The Michoff, Srs., made deposits into their Placer savings

account in the amounts of $6,200 and $4,600 which are in issue in

the 1989 and 1990 tax years, respectively.     These deposits do not

make up the total amount of deposits into this account in 1989

and 1990.   Some of these deposits were part of larger deposits.

     The Michoff, Srs., made a payment on their Bank of America

Visa account in the amount of $4,472.64 on August 18, 1989.

     Respondent contends that the above deposits and expenditures

are from unreported income of the Michoff, Srs.     The Michoff,

Srs., contend that the amounts at issue came from the following

sources:    “insurance refund”, “cash reserve”, "gambling winnings

equal losses”, “withdrawn and replaced from accounts”, “cash

withdrawn and replaced”, “refund”, “repayment of loan to Michael

Michoff”, and “transfer from Golden Union #1".     The Michoff,

Srs., argue that Beverly Michoff had saved money over many years

and hid it from her husband because he had a gambling problem.

They contend that many of the deposits in issue came from this

cash reserve.   Beverly Michoff testified that at one time she had

almost $100,000 in cash in a can.    Petitioners argue that some of

the cash reserves came from a personal injury settlement of

Michoff, Sr.    Beverly Michoff testified that around 1971 they

received approximately $60,000 in settlement of the back injuries

of Mr. Michoff, Sr.   No documentary evidence was presented

regarding the personal injury settlement, and Beverly Michoff's

testimony in this regard was vague.     Beverly Michoff testified
                                - 23 -

that she took the settlement money along with money from the

paychecks of Michoff, Sr., and hid them from Michoff, Sr.     The

funds that she used allegedly came from a personal injury

settlement of Michoff, Sr., as well as the paychecks of Michoff,

Sr., which were made out to him and which he picked up at work.

We find it unlikely that Beverly Michoff could have taken these

funds and hid them from Michoff, Sr., for so many years.

Additionally, Beverly Michoff testified that her husband did not

believe in banks.    However, during the years in issue the

Michoff, Srs., actively used savings accounts, credit card

accounts, and a credit union account.     Under all the

circumstances, we are not required to accept the self-serving

testimony of petitioner.     Tokarski v. Commissioner, 

.   Based on our review of the record and the circumstances, we

find Beverly Michoff's explanation of a cash hoard not to be

credible.

      The explanations of the Michoff, Srs., as to their other

deposits and expenditures which are at issue are equally lacking

in credibility.     They seek to rely on uncorroborated testimony

and unsupported argument.     This is not sufficient evidence to

meet their burden of proof.     The Michoff, Srs., have failed to

prove that any of the amounts at issue are from nontaxable

sources.

      As a source of additional income, respondent identified the

transactions of the Michoff, Srs., with their son.     Respondent
                                - 24 -

argues that the evidence shows that the Michoff, Srs., freely

transferred moneys and property between themselves and Michoff,

Jr., and that Michoff, Jr., was involved in the sale of drugs

during this period, which resulted in substantial income to

himself and to his family, including the Michoff, Srs.

Respondent contends that the Michoff, Srs., received money from

Michoff, Jr., from his drug business but offers no explanation of

why this would be taxable to the Michoff, Srs.   We conclude that

this is not a taxable source of income to the Michoff, Srs.

     Respondent did, however, analyze the bank deposits and

expenditures of the Michoff, Srs., to determine the amount of

unreported income.   Petitioners have failed to prove that any of

the disputed amounts are from nontaxable sources.   Respondent is

sustained on this issue.

Casualty Losses and Telephone Expenses

     The Michoff, Srs., claimed miscellaneous itemized deductions

for alleged job required phone usage in the 1989 and 1990 tax

years in the amounts of $264 and $394, respectively.     The

Michoff, Srs., admitted on brief that no evidence was provided to

establish the deductions claimed for the alleged job required

phone usage.   Petitioners failed to meet their burden of proof,

and therefore respondent's determination regarding the deductions

for phone usage is sustained.

     The Michoff, Srs., claimed itemized casualty loss deductions

for the 1989 and 1990 tax years in the amounts of $3,965 and
                                - 25 -

$3,325, respectively.    Michael Michoff, Sr., did not testify on

behalf of the Michoff, Srs.     Beverly Michoff did not know in what

years the alleged casualty losses occurred.       Beverly Michoff was

unsure whether the items for which casualty losses were claimed

were insured.   The Michoff, Srs., did not provide any documentary

evidence to establish the alleged casualty losses claimed on the

1989 and 1990 income tax returns of the Michoff, Srs.       The

Michoff, Srs., have the burden of proving that they are entitled

to the deduction.     Smith v. Commissioner, 

, 463

(1981).   The Michoff, Srs., have failed to meet this burden.

Thus, respondent is sustained on this issue.

Christmas Tree Farm for the 1990 Tax Year

     Respondent determined that the Michoff, Srs., improperly

claimed Schedule C deductions in the amount of $4,300 with regard

to a Christmas tree farm business.       In their answers to

respondent's requests for admissions the Michoff, Srs., admit

that they were not entitled to claim any loss on the Christmas

tree farm during the years in issue.       Additionally, the parties

have stipulated that the Michoff, Srs., claimed Schedule C

deductions, to which they were not entitled, pertaining to a

Christmas tree farm.     The Michoff, Srs., never sold any trees

from the tree farm.     On brief, the Michoff, Srs., contend that

they entered the tree farm business with the intent to make a

profit.   “Petitioner has the burden of proof as to both the

deductibility and substantiation of her claimed business
                               - 26 -

expenses.”    Rule 142(a); Ronnen v. Commissioner, 

, 102

(1988).   Based upon the lack of any evidence provided by

petitioners, and taking into account their stipulations and

admissions, we find that they have failed to carry their burden

of proof with respect to both the deductibility and the amount of

the claimed deductions.    Accordingly, we sustain respondent on

this issue.

Substantial Understatement Penalty--Michoff, Srs.

     Respondent determined additions to tax of $7,339 and $2,112

under section 6661 for the tax years 1986 and 1987, respectively,

for the Michoff, Srs.    Section 6661(a) imposes an addition to tax

of 25 percent of the amount of any underpayment attributable to a

substantial understatement of tax.      An understatement is the

difference between the amount required to be shown on the return

and the amount actually shown on the return and is substantial if

it exceeds the greater of (1) 10 percent of the tax required to

be shown on the return for a taxable year, or (2) $5,000.      Sec.

6661(b)(1) and (2)(A).    The understatement is reduced to the

extent that the taxpayer has (1) adequately disclosed his or her

position or (2) has substantial authority for the tax treatment

of an item.    Sec. 6661; sec. 1.6661-6(a), Income Tax Regs.

Petitioners have the burden of proving they are not liable for

the addition to tax.    Rule 142(a).

     The Michoff, Srs., contend that they should not be liable

for the substantial understatement penalty because their
                                - 27 -

understatement for each of the years 1986 and 1987 was minimal.

Based on our findings, it is clear that the Michoff, Srs., did

substantially understate their Federal income tax.    Respondent is

sustained to the extent, consistent with this opinion, there is

an underpayment attributable to such understatement for each of

the years 1986 and 1987.

Unreported Income--Michoff, Jr.

      Revenue Agent Anita Russell conducted a bank deposits

analysis of the 1986, 1987, 1988, and 1989 tax years of Michoff,

Jr.   Respondent additionally refers to the United States Bureau

of Labor Statistics (BLS) in order to determine petitioner's

unreported income for each of the years in issue.    Based on this

analysis, respondent, after concessions, argues that Michoff,

Jr., had unreported income of $39,850, $29,879, $24,422, and

68,798 in the 1986, 1987, 1988, and 1989 tax years, respectively.

As a potential source for additional income, respondent argues

that Michoff, Jr., had a lucrative business selling drugs.

Michoff, Jr., was convicted of a felony in California for

possession of drugs for sale.

      Deposits were made into the Michaels & Michaels Autobody

Shop's (the autobody shop) CapFed account in the amount of

$71,544 in the 1986 tax year.    Michael Juarez testified that he

did not remember making deposits in this amount into the CapFed

account for the autobody shop in the 1986 tax year.   The autobody

shop's CapFed account remained active through October of 1986,
                               - 28 -

and deposits were made into that account through October of 1986.

No records from the autobody shop were ever provided to

respondent's revenue agent.    Respondent's revenue agent computed

the autobody shop's profit as follows:      Total receipts of $83,544

consist of the deposits into its bank account of $71,544 and cash

expenditure for annual rent which was approximately $12,000.

From this total, Ms. Russell subtracted cost of goods sold of 40

percent.   Ms. Russell computed that the partnership had a net

profit of $35,726.   Michoff, Jr., retained a 25-percent interest

in the autobody shop through 1986.      Ms. Russell therefore

determined that the net profit of Michoff, Jr., was $8,932, which

was 25 percent of the net profit from the partnership.      Neither

Michoff, Jr., nor Michael Juarez filed a partnership return for

the autobody shop for the 1986 tax year.

     Michoff, Jr., made a $10,000 cash down payment on the

purchase of property from Mr. and Mrs. Knight (the Knight

property) in the 1986 tax year.   Michoff, Jr., contends that the

source of this payment was a loan from Dan Maggard.      However,

Michoff, Jr., failed to prove this contention.      Michoff, Jr.,

testified that these funds came from a loan, and he presented a

list of loans which he claims to have received from Dan Maggard.

This list was recently prepared by Michoff, Jr., in preparation

for this litigation.   Additionally, it is only signed by Dan

Maggard and not Michoff, Jr.   Mr. Maggard signed this document at

the request of Michoff, Jr.    At trial, Mr. Maggard testified that
                                - 29 -

he did not remember the terms of these loans.    He further

testified that he and Michoff, Jr., did not document these loans.

Michoff, Jr., later testified that they did document the various

loans.   Furthermore, until 1995, there is no evidence that any of

the amounts were ever repaid.    Michoff, Jr., has failed to prove

that any of the funds came from loans.

     Michoff, Jr., made deposits into his Downey savings account

in the amount of $3,334 which is in issue in the 1986 tax year.

This is not the total amount of deposits in this account in the

1986 tax year.   This amount does not include $1,000 that was

identified as a transfer.

     Michoff, Jr., made a deposit of $3,686 into Kimberly

Michoff's Great Western account in the 1986 tax year.    This

amount is not the total amount deposited into this account in the

1986 tax year by Michoff, Jr.    Michoff, Jr., conceded on brief

that this deposit has not been identified as coming from a

nontaxable source.

     Michoff, Jr., made deposits into his Pacific Valley Bank

account in the amount of $220 in the 1986 tax year.

     In the 1987 tax year, Michoff, Jr., made payments to the

Knights in the amount of $76,195 toward the purchase of the

Knight property.   Of this amount, respondent contends that

$15,682 cannot be traced to previously taxed or nontaxable

sources.   Of the $15,682, Michoff, Jr., admits that $622 is from

unknown sources.
                             - 30 -

     Michoff, Jr., did not file an income tax return for the 1986

or 1987 tax year.

     In the 1988 tax year, Michoff, Jr., made payments of $6,000

toward the purchase of the Knight property.

     Michoff, Jr., made deposits in the amount of $3,500 in his

World Savings Bank account in the 1988 tax year.   These amounts

are not the total amount of deposits to this account in the 1988

tax year.

     Michoff, Jr., reported total income for the 1988 tax year in

the amount of $10,135.

     Michoff, Jr., and Kimberly Michoff expended the following

amounts in the 1989 tax year on the Green Ridge residence:   $900

as a deposit; $29,500; and $8,797.6   The total amount of $39,1977

was spent by Michoff, Jr., and Kimberly Michoff on the Green

Ridge residence in the 1989 tax year.8



     6
        The $8,797 is the same amount that the Dickersons
expended on a cashier's check in the same year to purchase the
Green Ridge residence. Petitioners do not argue that this is a
duplication, and, without evidence to so indicate, we do not
assume that it is.
     7
        On brief, petitioner argues that “There was no proof
offered that Michael Michoff, Jr., had $39,197 in funds for the
Green Ridge property purchase.” We find the parties' stipulation
to this fact to be sufficient proof that this amount was expended
by Michoff, Jr., and Kimberly Michoff.
     8
        The stipulation reached by the parties states that the
funds were expended by Michoff, Jr., and Kimberly Michoff. The
deficiency for the 1989 tax year was asserted only against the
income tax of Michoff, Jr., however, because of the deemed
concession discussed below we do not inquire into what portion of
the funds were expended by Kimberly Michoff.
                              - 31 -

     Michoff, Jr., made deposits to his World Savings Bank

accounts of $5,207 which is in issue in the 1989 tax year.    These

are not the total amount of deposits made into these accounts in

the 1989 tax year.

     Respondent contends that the source of the $39,197 in

payments and the $5,207 in deposits has not been identified by

petitioners.   In response to respondent's proposed findings of

fact on these issues, Michoff, Jr., states:   “Objection.

$5,207.00 receipts from limousine business reported on

Petitioner's Schedule 'C' and included in $6,000 gross receipts.”

Because this is the only objection to respondent's proposed

findings of fact regarding those amounts, we consider the $39,197

expenditure to have been conceded to be unreported income.9

Additionally, Michoff, Jr., provided no evidence that the $5,207

came from previously taxed income.

     Michoff, Jr., made deposits into his Placer savings account

in the amount of $1,528 which is in issue in the 1989 tax year.

This amount is not the total amount deposited into this account

in the 1989 tax year.   Of this amount, Michoff, Jr., contends

that $1,098 came from Kimberly Michoff's salary.   The only proof

of this source is the vague, unsubstantiated testimony of

Michoff, Jr.   Michoff, Jr., contends that most of the remaining


     9
        We rely extensively on petitioners' responses to
respondent's proposed findings of fact. On brief, petitioners
state: “Petitioners have extensively explained their 'unreported
income' in the Objection to Respondent's Requested Findings of
Fact and, therefore, it is unnecessary to repeat them here.”
                                - 32 -

amounts came from a refund, his salary, or a gift.    The only

proof of these amounts is, again, his vague, unsubstantiated

testimony.   Furthermore, for $13 Michoff, Jr., offers no source

but contends that it is not taxable income.

     Michoff, Jr., and Kimberly Michoff lived together during

1986, 1987, 1988, and 1989.   Pursuant to the BLS, the personal

living expenditures, excluding housing, for a couple in 1986,

1987, and 1988 would be $13,678, $14,197, $14,922, respectively.

Pursuant to the BLS, the personal living expenditures for a

couple in 1989 would be $24,549.    In her notice of deficiency,

respondent used the BLS to reconstruct petitioner's income.      This

Court and other courts have approved the use of those statistics

as an acceptable and reasonable method of reconstructing income.

E.g., Pollard v. Commissioner, 

, 1066 (11th Cir.

1986), affg. T.C. Memo. 1984-536; Giddio v. Commissioner, 

, 1532-1533 (1970).

     Michoff, Jr., contends that he should not be charged with

personal living expenses for 1986 because he was residing with

his grandparents and they were providing his room and board.

Additionally, he contends that any incidental expenses he had

were covered by amounts he received from loans, gifts, and

repayments by Michael Juarez.    In her determination, respondent

used BLS statistics that excluded housing for 1986 as well as for

1987 and 1988.   Michoff, Jr., has not established that he did not
                               - 33 -

have personal expenditures or that the amounts paid for personal

expenditures came from nontaxable sources.

     Michoff, Jr., has the burden of proving that respondent's

determinations are in error.   Rule 142(a).   He has failed to meet

this burden with regard to any of the amounts determined to be

unreported income.   Respondent is sustained on this issue.

Unreported Income--Michoff,Jr., and Kimberly Michoff

     Michoff, Jr., and Kimberly Michoff filed a joint Federal

income tax return for the 1990 tax year.

     Respondent's revenue agent conducted a bank deposits

analysis of the 1990 tax year of Michoff, Jr., and Kimberly

Michoff.   Based on this analysis, respondent, after concessions,

argues on brief that Michoff, Jr., and Kimberly Michoff had

unreported income of $22,649 in the 1990 tax year.   Petitioners

concede the deposits in 1990 but claim that they were transfers

from accounts, loans, and gifts and that some of the amounts were

duplicated by the revenue agent and counted more than once.

     The amount that Michoff, Jr., and Kimberly Michoff spent on

personal expenditures by check was subtracted from the bank

deposits total.   Michoff, Jr., and Kimberly Michoff made deposits

into their First Interstate Bank account in the amount of $3,187

which is in issue in the 1990 tax year.    This amount is not the

total amount of deposits into this account in the 1990 tax year.

     The Michoff, Jrs., made deposits into their Placer Savings

Bank accounts in the amount of $18,892 in the 1990 tax year.
                              - 34 -

     Petitioners argue that many of these deposits came from

their wages, which were reported on their individual income tax

return.   However, they have offered no proof of this beyond

vague, unsubstantiated testimony.   Additionally, respondent's

revenue agent backed out net income that was reported on

petitioners' return when she performed her bank deposits

analysis.

     Michoff, Jr., contends that a $3,000 deposit which is in

issue came from the sale of a Porsche to Bill McKay.   Michoff,

Jr., contends that he purchased the Porsche for $2,000 and put

$1,000 worth of repairs into the car.   Other than his own

testimony, which we find lacking in credibility, Michoff, Jr.,

presented three exhibits as proof of his purchase price and cost

of repairs; these exhibits lack any probative value as well as

any indicia of trustworthiness.10


     10
        As proof of his purchase price Michoff, Jr., submitted
two exhibits to the Court. First, Michoff, Jr., submitted a
document from the State Board of Equalization Occasional Sales
Use Tax Unit. This document is a letter which states that
Michoff, Jr.'s, Certificate of Purchase Price, indicating his
purchase price of the car, was selected for routine verification
and that he would need to submit other evidence providing
verification of value. This document proves nothing as it is
merely a request for information. Second, Michoff, Jr.,
submitted a bill of sale purportedly showing that he purchased a
Porsche for $2,000. However, this bill of sale lacks a Vehicle
Identification Number, a transfer date, and the address of the
seller. There is no indication that this is an actual bill of
sale.
     As proof of the cost of repairs, Michoff, Jr., submitted a
pile of receipts. These receipts do not show for what car the
parts were ordered or the work done. Additionally, Michoff, Jr.,
included receipts dated as late as May 28, 1991, for a car which
                                                   (continued...)
                               - 35 -

     We have considered petitioners' arguments regarding all

other deposits that are in dispute and consider them to be

without merit.    Petitioners have failed to carry their burden of

proving a nontaxable source with respect to the disputed deposits

and expenditures.    Therefore we hold that respondent is sustained

on this issue.

Capital Gains from the Sale of a Partnership Interest in 1986

     Prior to the years in issue, Michoff, Jr., had a 50-percent

partnership interest in Michaels & Michaels Autobody Shop (the

autobody shop).    At the beginning of 1986, Michoff, Jr., disposed

of half of his partnership interest in the autobody shop,

retaining a 25-percent interest.   The parties stipulated that the

amount of capital gain from that disposition was $30,644.

Respondent determined that Michoff, Jr., failed to report this

gain.

     Despite these stipulations, Michoff, Jr., argues that he had

no gain from the sale of his partnership interest.    Michoff, Jr.,

offered no documentary evidence to disprove respondent's

determinations and chose instead to rely on unsubstantiated

claims on brief.    Michoff, Jr., has failed to meet his burden of

proof.    We therefore sustain respondent on this issue.

Limousine Activity

    In her notice of deficiency, respondent disallowed Schedule C

deductions claimed by Michoff, Jr., on his 1989 income tax return



     10
      (...continued)
he claims to have sold on or prior to Mar. 26, 1990.
                               - 36 -

with regard to an alleged limousine service.   Respondent's

determinations carry the presumption of correctness.    Michoff,

Jr., must establish that he is entitled to the claimed

deductions.   Rule 142(a).   Deductions are a matter of legislative

grace; petitioner has the burden of showing that he is entitled

to any deduction claimed.    New Colonial Ice Co. v. Helvering, 

, 440 (1934).

     Michoff, Jr., attempts to meet his burden of proof through

his own testimony as well as various receipts.    On brief,

Michoff, Jr., had no objection to the following proposed findings

of fact by respondent relating to the receipts:

          The receipts are deficient as follows:

          a. The copy of the receipt in the amount of
     $405.61 does not indicate what it's for, or who issued
     it, or when it was made.

          b. A receipt in the amount of $18.18 is for the
     1988 tax year.

          c. A receipt in the amount of $49.19 is for the
     1990 tax year.

          d. A receipt in the amount of $4.91 is for the
     1991 tax year.

          e. The All Parts Auto Store receipts, B&M
     Automotive Parts receipts, Carl Chevrolet receipts,
     Kragen Auto receipts, Checker Schuck's Kragen receipt,
     49er Auto Parts invoice, Color-rite Paint Co. invoice,
     C&H Paint & Equipment Supply invoice, and Carl
     Chevrolet invoice do not indicate whether they are for
     a limousine activity or for some other use, such as
     personal use.

          f. Many of these items are invoices and do not
     indicate that payments were made.

          g. The Swift Dodge document statement for $250.00
     is an invoice and not a receipt.
                              - 37 -

          h. The Central Valley Towing document is
     duplicated several times. The insurance application is
     duplicated several times. The check made out to
     Gilbert Insurance is duplicated several times. The
     Swift Dodge document is duplicated several times.

     Michoff, Jr., has offered no evidence that the claimed

deductions were ordinary and necessary to a trade or business.

The receipts offered do not indicate that they were incurred with

regard to the limousine activity of Michoff, Jr., or with regard

to any business activity.   Additionally, many of the receipts

offered to substantiate the claimed deductions were duplicated

and were for tax years not subject to this issue.   Michoff, Jr.,

has failed to substantiate most of his claimed deductions, and he

has failed to establish that any of the claimed deductions were

for expenses ordinary and necessary to a trade or business.

Accordingly, respondent's determination regarding this issue is

sustained.

Failure To Timely File Federal Income Tax Returns

     Respondent contends that Michoff, Jr., is liable for the

addition to tax for failure to timely file for the 1986 and 1987

tax years.   Michoff, Jr., contends that he had less than $3,000

of income for each of those years and thus was not required to

file a return.   It is undisputed that Michoff, Jr., failed to

file an income tax return for the 1986 and 1987 tax years.

     Section 6651(a) provides an addition to tax for failure to

timely file an income tax return by the prescribed due date

unless the taxpayer can establish that such failure was due to

reasonable cause and not willful neglect.   Although reasonable
                                - 38 -

cause is not defined in the Code, the regulations state:         “If the

taxpayer exercised ordinary business care and prudence and was

nevertheless unable to file the return within the prescribed

time, then the delay is due to a reasonable cause.”       Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.      Willful neglect has

been defined as a “conscious, intentional failure or reckless

indifference.”     United States v. Boyle, 

, 245 (1985).

     In the instant case regarding Michoff, Jr., we have found

that he did have income sufficient to require the filing of a

return in both the 1986 and 1987 tax years.       The unverified

belief of Michoff, Jr., that he had no taxes owing does not

constitute reasonable cause of the sort that will allow him to

escape the addition to tax under section 6651(a)(1).       See Olsen

v. Commissioner, T.C. Memo. 1993-432.       We sustain respondent on

this issue.

Failure To Pay Estimated Tax

     Respondent determined an addition to tax for failure to pay

estimated tax for the 1986 and 1987 tax years for Michoff, Jr.

Section 6654 imposes an addition to tax for failure to pay

estimated income tax.    Michoff, Jr., contends that he did not

have sufficient income in 1986 or 1987 to require him to pay

estimated taxes.    Michoff, Jr., bears the burden of proving that

he is not liable for this penalty.       Rule 142(a).   Michoff, Jr.,

contends that he had a loss carryover from his business in 1985

and, thus, did not have sufficient income in 1986 or 1987 to

require him to pay estimated taxes.       Michoff, Jr., offered no
                                - 39 -

proof regarding his entitlement to such a loss carryforward nor

that such a loss would have reduced his income such that he would

not be required to pay estimated taxes.    Once again he makes

conclusory and unsupported arguments that fail to support his

burden of proof.    Respondent is sustained on this issue.

Substantial Understatement Penalty--Michoff, Jr.

       Respondent determined an addition to tax of $2,095 under

section 6661 for the tax year 1988 for Michoff, Jr.    Section

6661(a) imposes an addition to tax of 25 percent of the amount of

any underpayment attributable to a substantial understatement of

tax.    An understatement is the difference between the amount

required to be shown on the return and the amount actually shown

on the return and is substantial if it exceeds the greater of (1)

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

taxable year, or (2) $5,000.    Sec. 6661(b)(1) and (2)(A).   The

understatement is reduced to the extent that the taxpayer has (1)

adequately disclosed his or her position or (2) has substantial

authority for the tax treatment of an item.    Sec. 6661; sec.

1.6661-6(a), Income Tax Regs.    Petitioner has the burden of

proving he is not liable for the addition to tax.    Rule 142(a).

       The only argument of Michoff, Jr., is that he is not liable

for understating his taxes in 1988 and, thus, should not be

charged with the substantial understatement addition to tax.

Based on our findings in this case, there was a substantial

understatement, and, thus, respondent's determination is

sustained.
                               - 40 -

Additions to Tax for Negligence and Accuracy-related Penalty

       Respondent determined that all petitioners in these cases

are liable for additions to tax or accuracy-related penalties for

negligence for the years in which they had underpayments.

Different sections apply to the various years in issue.    Secs.

6653(a)(1)(A) and (B) (for 1986 and 1987), 6653(a)(1) (for 1988),

6662(a) (for 1989 and 1990).    Negligence is defined as a lack of

due care or failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.    Neely v.

Commissioner, 

, 947-948 (1985).    Petitioners bear the

burden of proving that respondent's determinations are erroneous.

Rule 142(a).

       The Dickersons claim that they should not be liable for the

negligence penalty because they are entitled to the deductions

they claimed or because their unreported rental income was offset

by expenses.    This is essentially arguing that they are not

liable for the negligence penalty because they did not underpay

their tax.    We have already found that they did underpay their

tax.    Respondent is sustained with respect to the negligence

penalty resulting from underpayments by the Dickersons.

       The Michoff, Srs., “admit they unintentionally omitted items

from their tax return due to inadvertence and lack of knowledge”

but contend that they should not be burdened with additions to

tax for negligence or the accuracy-related penalty.    The Michoff,

Srs., have failed to offer any proof that they were not negligent

in their underpayment.    Respondent is sustained with respect to
                               - 41 -

the additions to tax and the negligence penalty resulting from

underpayments by the Michoff, Srs.

     For the taxable years 1986, 1987, and 1988, the contention

of Michoff, Jr., that he is not liable for additions to tax for

negligence consists of one sentence:    “Michael Michoff, Jr., is

not liable for the penalties due under IRC [sections]

6653(A)(1)(a) and 6653(A)(1)(b) because he was not guilty of

negligence or disregard of rules or regulations.”    This

contention is not an argument; it is a conclusion.    Respondent is

sustained on this issue.

     Michoff, Jr., presented no argument that he is not liable

for the negligence penalty for the 1989 tax year.    The burden

rests with petitioner to prove that respondent's deteminations

are in error.   Rule 142(a).   We cannot be sure that petitioner

intended to abandon the issue, but in any case respondent's

determination of the applicable penalty resulting from the

underpayment of tax must be sustained with respect to the 1989

tax year of Michoff, Jr.

     For the 1990 tax year Michoff, Jr., and Kimberly Michoff

argue that they are not liable for the accuracy-related penalty

because they have accounted for all of the deposits which were

questioned by the revenue agent.    As we have already found, they

did not.   Respondent is sustained on this issue.
                             - 42 -

     We have considered all arguments by petitioners and, to the

extent not discussed above, find them to be irrelevant or without

merit.

     To reflect the foregoing,

                                             Decisions will be

                                         entered under Rule 155.