T.C. Summary Opinion 2001-112



                     UNITED STATES TAX COURT



          JAMES R. AND JANET M. LANDRUM, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 919-00S.               Filed July 26, 2001.



     O. Christopher Meyers, for petitioners.

     Ann L. Darnold, for respondent.



     WOLFE, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the years in issue.
                                - 2 -

     Respondent determined deficiencies in petitioners’ 1996 and

1997 Federal income taxes of $4,805 and $6,720, respectively, and

an accuracy-related penalty under section 6662(a) for 1997 of

$1,344.   The issues for decision are:   (1) Whether petitioners’

Amway distributorship was an activity engaged in for profit

within the meaning of section 183; (2) whether petitioners are

entitled to claimed Schedule C deductions for expenditures

relating to their Amway activity; (3) whether petitioners are

entitled to deduct as charitable contributions amounts in excess

of the amounts allowed by respondent; and (4) whether petitioners

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

for 1997.

Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     When the petition was filed, petitioners resided in Lawton,

Oklahoma.    Petitioner James R. Landrum (Mr. Landrum) worked full-

time for Goodyear Tire and Rubber Co. (Goodyear) as a quality

technician in 1996 and as an alignment specialist in 1997.

Petitioner Janet M. Landrum (Mrs. Landrum) worked full-time as an

x-ray technician for Southwestern Medical Center during both

years in issue.   Petitioners’ four children were, respectively,
                               - 3 -
14, 16, 21, and 24 years of age at the time of trial (January 22,

2001).

     For convenience and clarity, additional findings of fact and

the applicable law are discussed together with respect to each

issue.

Background Concerning Amway

     Prior to the years in issue, petitioners had three separate

experiences with Amway, beginning in 1974.    Mr. Landrum was a

corporal in the Marine Corps and was stationed in Hawaii in 1974.

His Amway activity consisted of purchasing cases of wax from an

Amway distributor at wholesale, selling “a case or two a month to

[his] friends,” and keeping the difference between the wholesale

and retail prices.   He ceased his activities with Amway in 1976

when he was transferred from Hawaii and then released from active

duty with the Marine Corps.   After their marriage in 1977,

petitioners participated in an Amway distributorship.    Their

experience with Amway was unprofitable, and they terminated it

after 2 years.   Petitioners became involved with Amway a third

time in 1985, while Mr. Landrum was employed at Goodyear.

Although petitioners had about 50 persons reporting to them,

directly or indirectly, in the pyramid structure of Amway, there

were insufficient sales for profit.    Petitioners’ third Amway

venture lasted approximately 2 years, and again, petitioners
                               - 4 -
terminated the activity for lack of profit.   In late 1995,

petitioners were introduced to Amway a fourth time by friends of

Mrs. Landrum.   This fourth Amway experience is the subject of the

present controversy.

     Petitioners understood the Amway structure and compensation

technique throughout the years in issue.   Mr. Landrum summarized

it in terms of a 6-4-2 illustration.   He explained that the Amway

participant should purchase his own household products from

Amway.   If he buys $100 of merchandise monthly, he receives a

bonus.   He then recruits six other persons to use $100 of Amway

merchandise monthly, and consequently the initial Amway

participant receives appropriate bonus amounts with respect to

those six persons.   He is “upline” from them, and they are

“downline” from him.   If each of the six downline recruits then

enlists four subrecruits, each of whom uses $100 of products

monthly, the initial Amway participant receives bonus as to usage

from this larger group (1 + 6 + 24 for a total of 31).    Finally,

in this illustration, if each of the 24 subrecruits persuades two

additional people to participate in Amway and purchase $100 of

product monthly, the group relevant to the computation of the

initial Amway participant’s monthly bonus will be expanded to an

even larger number (1 + 6 + 24 + 48 for a total of 79).   In the

6-4-2 illustration, if each participant continues to purchase
                               - 5 -
$100 of merchandise monthly, the initiator of the group will

receive commission based on monthly sales of $7,900, subject to

commission-sharing adjustments.   Mr. Landrum estimated that the

person who established a successful 6-4-2 grouping would receive

$1,800 to $2,200 in monthly commissions and then might proceed to

gain even greater benefits as a “direct distributor” who might

then triple his organization and receive an “Emerald bonus” and

then expand to have six legs and a “Diamond organization”.

According to Mr. Landrum, Amway distributors with an emerald

organization make $75,000 to $100,000 annually, and those with a

diamond organization make $125,000 to $250,000 yearly, “And it

goes up from there” as he put it.1

     Petitioners had no such experience during the years in issue

and all the earlier years of their participation in Amway

distributorships.   There simply is no resemblance between the

wonderfully optimistic projection that Mr. Landrum recited and

the reality of petitioners’ experience during their many years of

association with Amway.




1
     See Nissley v. Commissioner, T.C. Memo. 2000-178, for this
Court’s recent summary of Amway operations with somewhat more
detail and less fantasy, at least as to himself, than Mr. Landrum
provided.
                                 - 6 -



1.   Petitioners’ Amway Distributorship Was Not an Activity
     Engaged in for Profit During 1996 and 1997

      Petitioners filed Schedules C, Profit and Loss From

Business, with their 1996 and 1997 Federal income tax returns and

reported the following:

      Income                                1996            1997

      Gross receipts                        $150           $84.63
      Less: cost of goods sold               -0-           -0-
      Gross income                           150            84.63
      Expenses

      Car and truck                       $8,866       $12,119
      Commission and fees                     28           -0-
      Legal and professional services        300           300
      Travel                                  45           380
      Meals and entertainment                305           437
      Other expenses1                      2,358         2,545.39
        Total expenses                    11,902        15,781.39

          Total net losses               (11,752)      (15,696.76)
      1
       The “Other expenses” claimed for 1996 were:

          Monthly seminars (11 seminars at $28 each)      $308
          Quarterly conferences (3 conferences at
            $130 each, plus food and lodging)             840
          Tapes, catalogs, business support               850
          Cell phone (basic)                              360

      The “Other expenses” claimed for 1997 were:

          Monthly training seminars (tickets)            $308
          Quarterly conferences (3)                       470
          Training tapes and business support           1,767.39

      In the notices of deficiency for 1996 and 1997, respondent

determined that petitioners’ Amway activity did not satisfy

requirements for carrying on a business, and that the expenses
                                 - 7 -
incurred in connection with the Amway activity were therefore

deductible only to the extent of income earned from the activity.

       Section 183(a) provides that if an activity engaged in by an

individual is not engaged in for profit, no deduction

attributable to such activity shall be allowed, except as

provided in section 183(b).2    An “activity not engaged in for

profit” means any activity other than one for which deductions

are allowable under section 162 or under paragraph (1) or (2) of

section 212.    Sec. 183(c).   Section 162 allows a deduction for

all the ordinary and necessary expenses paid or incurred during

the taxable year in carrying on a business.     Section 212 allows a

deduction for all the ordinary and necessary expenses paid or

incurred during the taxable year for the production or collection

of income, or for the management, conservation, or maintenance of

property held for the production of income.     The profit standards

applicable to section 212 are the same as those used in section

162.   Antonides v. Commissioner, 

, 659 (4th Cir.

1990), affg. 

 (1988).




2
     In the case of an activity not engaged in for profit, sec.
183(b)(1) allows a deduction for expenses that are otherwise
deductible without regard to whether the activity is engaged in
for profit. Sec. 183(b)(2) allows a deduction for expenses that
would be deductible only if the activity were engaged in for
profit, but only to the extent that the total gross income
derived from the activity exceeds the deductions allowed by sec.
183(b)(1).
                                 - 8 -
     For a taxpayer to deduct expenses of an activity under

section 162, he must show that he engaged in the activity with an

actual and honest objective of making a profit.     Ronnen v.

Commissioner, 

, 91 (1988); Fuchs v. Commissioner, 

, 98 (1984); Dreicer v. Commissioner, 

, 645

(1982), affd. without opinion 

 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs.    Although a reasonable

expectation of profit is not required, the taxpayer’s profit

objective must be bona fide.     Hulter v. Commissioner, 

, 393 (1988); Beck v. Commissioner, 

, 569 (1985).

“Profit” in this context means economic profit, independent of

tax savings.     Drobny v. Commissioner, 

, 1341 (1986).

Whether a taxpayer has an actual and honest profit objective is a

question of fact to be resolved from all the relevant 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 statement of intent.       Thomas

v. Commissioner, 

, 1269 (1985), affd. 

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

     Section 1.183-2(b), Income Tax Regs., provides the following

nonexclusive list of factors to consider in determining whether

an activity is engaged in for profit:    (1) The manner in which

the taxpayer carried on the activity; (2) the expertise of the
                               - 9 -
taxpayer or his advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that

the 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 with respect to the activity; (7) the amount of occasional

profits, if any, which are earned; (8) the financial status of

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

recreation.

     These factors are not merely a counting device where the

number of factors for or against the taxpayer is determinative.

Instead, all facts and circumstances must be taken into account,

and more weight may be given to some factors than to others.

Dunn v. Commissioner, 

, 720 (1978), affd. 

(2d Cir. 1980).   Some of the factors summarized above are

inapplicable to this situation, and others provide little

guidance to the resolution of the question here.   Therefore, we

focus on the factors that lead to our decision.

     The most significant factors by far in this case are

petitioners’ long history of failure in Amway activities and

their almost total lack of gross revenue from those activities

during the period in issue.   Three times before the years in

issue Mr. Landrum had attempted Amway activity, and Mrs. Landrum
                              - 10 -
had participated in the last two of those efforts.    Each time the

activity was terminated after 2 years.    Mr. Landrum says he

stopped the activity the first time because he was in the

military and left the area of his Amway activity.    He mentions

that the birth of petitioners’ first child had something to do

with terminating Amway the second time.    Nevertheless,

petitioners’ own testimony establishes that they never made any

significant amount from three previous Amway efforts.      They tried

different approaches.   In the first effort, Mr. Landrum sold some

product but did not enlist “downline” distributors.    The second

effort, in 1977-1979 was, according to Mr. Landrum, “just kind of

a break-even deal.”   During the third effort, in 1985-1987,

petitioners built up their downline distributorship to include

more than 50 people, but as Mr. Landrum explained, “they weren’t

doing a lot of product”, and consequently, once again there was

no profit.

     The obvious question is why after three strikes petitioners

did not call themselves out of Amway permanently.    They have

provided no satisfactory answer.   Instead, they explain that in

1995 they were introduced to Amway again.    Mrs. Landrum testified

that they were “personal friends” with people that were doing

Amway successfully, so they thought they also could succeed.

These “personal friends” were upline seven or eight steps from
                              - 11 -
petitioners (at the so-called emerald level) and sometimes would

work with them.   Mr. Landrum explained that his friend and upline

adviser told him he would have to spend $500 per month on

inspirational and instructive tapes and materials, for

approximately 3 months, and then he could expect to gross $500 to

$1,000 or more monthly from Amway.     From this advice, what they

read in Amway literature, and what they heard at Amway seminars,

petitioners say that when they started a fourth time in 1995 they

expected to start making a profit in 90 days.    Despite mounting

losses, petitioners continued their Amway activity for more than

2 years beyond the 90-day trial period, long after it was clear

that the activity was not viable.    The regulations provide that

“where losses continue to be sustained beyond the period which

customarily is necessary to bring the operation to profitable

status such continued losses, if not explainable, as due to

customary business risks or reverses, may be indicative that the

activity is not being engaged in for profit”.    Sec. 1.183-

2(b)(6), Income Tax Regs.

     The exact date when petitioners commenced their fourth

effort at Amway is unclear, but petitioners’ own testimony

establishes that it was in 1995.    Since petitioners might have

explained the starting date and failed to do so, we conclude that

the entire 90-day starting period that petitioners mention took
                              - 12 -
place prior to the years in issue.     By the beginning of 1996,

petitioners had ample experience with Amway and even had tried it

for the appropriate initiating time with their new group and the

aid of their “personal friends”.   Their decision to continue

their Amway activity during 1996 and 1997 after their extensive

and wholly unsuccessful experiences with Amway simply cannot be

accepted as a bona fide business decision.

     Petitioners did not conduct their Amway activity in a

businesslike manner during the years in issue.     They had no

separate bank account for Amway.   They had no records concerning

their meager receipts.   Mr. Landrum suggested that the few

dollars of receipts must have been from the little checks that

Amway occasionally sent, but he had no records about such

matters.   Petitioners kept receipts of expenditures and

calendars, but these materials were not organized or analyzed in

any manner to improve results.   Petitioners did not retain

canceled checks or banking records to prove their expenditures.

Petitioners had no business plan other than the 6-4-2 concept and

a one-page inspirational listing of such items as “Listen to at

least one audiotape promoted by our upline” and “Read 15 minutes

per day from a book promoted by our upline”.     They did not

consult with business experts but relied only on advice from one

of their upline distributors and other interested Amway persons.
                               - 13 -
Under the Amway system, the upline distributor’s income depends

on the downline person’s sales, so the upline person’s interest

is to keep as many people as possible in his organization without

regard to profitability.    Nissley v. Commissioner, T.C. Memo.

2000-178.

     The amount of profits in relation to the amount of losses

incurred, and in relation to the amount of the taxpayer’s

investment and the value of the assets used in the activity, also

are relevant in determining the taxpayer’s intent.    Sec. 1.183-

2(b)(7), Income Tax Regs.   Petitioners’ gross receipts of $150

and $84.63 in 1996 and 1997, respectively, were trivial in

relation to their total claimed expenses of $11,902 and

$15,781.39, respectively.   The magnitude of these discrepancies

is an indication that petitioners did not have the requisite

profit objective.   See, e.g., Burger v. Commissioner, T.C. Memo.

1985-523, affd. 

 (7th Cir. 1987).

     We do not question that petitioners spent some time and

money in their Amway activity.   But petitioners’ evidence as to

the extent of these efforts and expenditures is questionable and

exaggerated.   The claims to mileage exceed the distances to some

of their claimed destinations.   Petitioners presented numerous

receipts for expenditures for Amway tools, but there are no

checks to substantiate the payments.    The upline sponsors,
                               - 14 -
supposedly petitioners’ personal friends, and others in the Amway

chain, did not testify to confirm petitioners’ efforts and

expenditures.

     Substantial income from sources other than the activity may

indicate that the activity is not engaged in for profit,

particularly if the losses from the activity generate substantial

tax benefits.    Sec. 1.183-2(b)(8), Income Tax Regs.   Petitioners

were not wealthy people.    They explain their needs for funds for

retirement and other purposes.    However, in the years in issue,

Mr. and Mrs. Landrum maintained full-time jobs apart from their

Amway activity.    They reported combined wages for 1996 and 1997

of $83,797.08 and $86,401.55, respectively.     This income was more

than sufficient to allow their Amway losses to generate

substantial tax benefits.

     Mr. Landrum said he enjoyed meeting “good people” in his

Amway sales efforts, although he did not enjoy the rejection of

his proposals.    Petitioners qualified to attend Amway promotional

weekend meetings by accumulating the required points within a

limited time.    They qualified by buying a vacuum cleaner and

making other Amway purchases themselves, not by selling to others

or enlisting downline distributors.     Nevertheless, petitioners

attended numerous inspirational weekend programs, both together

and separately.    Mr. Landrum explained the excitement and
                              - 15 -
enthusiasm of these weekends but was not willing explicitly to

classify them as pleasure.   Sometimes petitioners went

separately, partly because of his work schedule and partly

because they were separated during some portion of the years in

issue.   Petitioners’ expenditure of substantial funds and

attendance at numerous Amway conventions and seminars, near and

far, even though their financial return from Amway was nil, and

had been minimal during many years of Amway experience, suggests

an element of pleasure or recreation in the participation.    See

Nissley v. Commissioner, supra, where we commented about this

aspect of the Amway organization as follows: “The record suggests

that petitioners enjoy the same congenial sense of family and the

same gratifying motivational feeling from participating in their

Amway activity as do many other individuals who remain committed

to Amway.”

     Based upon the objective facts and the totality of the

circumstances, petitioners’ contention that their Amway activity

was engaged in for profit is unsupportable.   They had extensive

experience with Amway.   By the years in issue they knew or surely

should have known that they were not going to make money at

Amway.   They benefited to some extent by deducting automobile and

legal and other necessary expenditures that otherwise would be

nondeductible, and they participated in the excitement of the
                              - 16 -
Amway conventions and inspirational weekends.    But certainly on

this record we must conclude that they did not have an actual and

honest profit objective in their Amway activities in 1996 and

1997.   Because we hold that petitioners’ Amway activity was not

an activity engaged in for profit within the meaning of section

183, we do not explicitly address the alternative issue as to

whether petitioners are entitled to claimed Schedule C deductions

for expenditures relating to their Amway activity.    We note,

however, that, as pointed out above, we consider petitioners’

claims to such deductions exaggerated and erroneous, and we

consider their testimony as well as the documents they presented

in substantiation to be inaccurate and distorted in their favor.

     The examination in this case commenced after July 22, 1998.

Accordingly, section 7491(a), a new provision created by Internal

Revenue Service Restructuring and Reform Act of 1998 (RRA 1998),

Pub. L. 105-206, sec. 3001, 112 Stat. 726, concerning the

allocation of the burden of proof, is effective.     Higbee v.

Commissioner, 116 T.C.      (2001).    In the present case, we do

not rest our decision on the burden of proof.    As demonstrated

above, the totality of evidence here, including the stipulation

of facts, petitioners’ own testimony, and petitioners’ own

records, amplified by their explanatory testimony, establish

overwhelmingly that petitioners did not conduct their Amway
                                - 17 -
activity with a bona fide profit objective during 1996 and 1997.

Plainly, if respondent had the burden of proof, he satisfied it;

so section 7491(a) is of no help to petitioners.        Kelly v.

Commissioner, T.C. Memo. 2001-161.       Also, since petitioners

failed to introduce credible evidence of their profit objective

and failed to cooperate with respondent’s reasonable requests for

witnesses, information, documents, meetings, and interviews

through failure of their accountants or otherwise, section

7491(a) would not place the burden of proof as to this issue on

respondent.     Higbee v. Commissioner, supra.

2.   Charitable Contributions

      Petitioners filed Schedules A, Itemized Deductions, with

their joint Federal income tax returns in 1996 and 1997, and

reported the following gifts to charity:

                                              1996          1997

      Gifts by cash or check                $2,200        $2,600
      Gifts other than by cash or check      5,200         6,700

        Total gifts                           7,400         9,300

      Respondent determined that petitioners did not adequately

substantiate the fair market value of the clothing and other

items that they contributed to various nonprofit organizations.

Accordingly, respondent allowed deductions for charitable

contributions for 1996 and 1997 in the amounts of $740 and $930,

respectively.    The amounts allowed represent 10 percent of the
                               - 18 -
amounts claimed as contributions on petitioners’ 1996 and 1997

Federal income tax returns.

     Deductions for charitable contributions are allowable only

if verified under regulations prescribed by the Secretary.        Sec.

170(a).   Section 1.170A-13, Income Tax Regs., in turn, sets forth

the types of substantiation necessary to support deductions for

charitable contributions.

     For charitable contributions of money, taxpayers must

maintain for each contribution one of the following:      (1) A

canceled check; (2) a receipt from the donee organization; or (3)

other reliable written records.   Sec. 1.170A-13(a)(1), Income Tax

Regs.   Petitioners testified that they regularly made cash and

check contributions averaging $50 per week to First Assembly of

God in Lawton, Oklahoma.    Petitioners, however, could produce no

evidence in support of this claim.      Petitioners testified that

they lost the receipts, and that the church did not have any

records dating back to either 1996 or 1997.      Petitioners had no

canceled checks to substantiate any portion of their alleged

contributions.

     We are not required to accept a taxpayer’s uncorroborated

testimony at face value if it is improbable, unreasonable, or

questionable.    Lovell & Hart, Inc. v. Commissioner, 

,

148 (6th Cir. 1972), affg. T.C. Memo. 1970-335; Tokarski v.

Commissioner, 

, 77 (1986).      In view of their testimony
                              - 19 -
concerning their need for funds for retirement savings and other

purposes, and their complete failure of substantiation by check

or receipt or corroborating testimony, we decline to believe

petitioners’ self-serving testimony as to their cash

contributions.   We hold that petitioners are not entitled to

deductions for cash contributions beyond the amounts allowed by

respondent.

     For charitable contributions of property other than money,

taxpayers generally must maintain for each contribution a receipt

from the donee showing the following information:   (1) The name

of the donee; (2) the date and location of the contribution; and

(3) a description of the property in detail reasonably sufficient

under the circumstances.   Sec. 1.170A-13(b)(1), Income Tax Regs.

The amount of the contribution is the fair market value of the

property at the time of the contribution.   Sec. 1.170A-1(c)(1),

Income Tax Regs.

     Petitioners’ contributions of property other than money

consisted of used clothing and household appliances.   To

substantiate their values, petitioners offered documents

consisting of preprinted forms issued by charitable organizations

that petitioners filled in with the type and number of items

allegedly donated and the estimated value of the donation.

Petitioners testified that they determined the values by
                              - 20 -
comparing prices in classified ads, used furniture stores, and

the retail sales outlets of various charitable organizations.

     While the preprinted forms appear authentic, we nevertheless

conclude that petitioners’ self-generated receipts and other

documents do not substantiate the deductions claimed in the

instant case.   See Higbee v. Commissioner, supra.   We do not find

petitioners’ valuations reliable.   The value of an individual’s

used clothing and old furniture and furnishings, in questionable

condition, obviously is not the same as the retail asking price

or list price at a retail store, even a second-hand store.     Once

again we note that petitioners testified about their need for

funds.   Consequently, if they really had items worth many

thousands of dollars, they might be expected to sell these items

and use the proceeds to satisfy their admitted financial needs.

They did not do so, but chose to give away the property in

question without obtaining any sort of appraisal and claim

substantial deductions.   Under these circumstances, we must

conclude that petitioners have exaggerated the value of their

charitable contributions.   We hold that petitioners have failed

to introduce credible evidence to substantiate the actual items

contributed and their fair market values.   Accordingly,

petitioners’ deductions for charitable contributions are limited

to the amounts allowed by respondent.
                                - 21 -
3.   Accuracy-Related Penalty

       Section 6662(a) imposes an accuracy-related penalty of 20

percent of the portion of the underpayment which is attributable

to negligence or disregard of rules or regulations.      Sec.

6662(b)(1).    Negligence is the lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.     Neely v. Commissioner, 

, 947

(1985).    The term “disregard” includes any careless, reckless, or

intentional disregard.    Sec. 6662(c).    No penalty shall be

imposed if it is shown that there was reasonable cause for the

underpayment and the taxpayer acted in good faith with respect to

the underpayment.    Sec. 6664(c).

       As to the penalty under section 6662(a), under RRA 1998,

respondent has the burden of production, sec. 7491(c), but not

the burden of proof.    The requirements of RRA 1998 as to penalty

provisions are discussed in detail in Higbee v. Commissioner, 116

T.C.       (2001), and there is no reason to repeat that discussion

here.

       Respondent has shown that petitioners have failed to keep

adequate books and records and that such records as they have

kept are inaccurate or exaggerated.      Respondent also has

demonstrated that petitioners’ claim that they were engaged in

the Amway activity in 1996-1997 with a bona fide profit objective

is erroneous and inappropriate in view of petitioners’ long and
                              - 22 -
unsuccessful experience with Amway.    Additionally, respondent has

shown that petitioners failed to substantiate their claimed

charitable contribution deductions.    These circumstances show

that respondent has met his burden of production for his

determination of the accuracy-related penalty based on

negligence.   Also, with regard to that determination, petitioners

have failed to meet their burden of proof that they acted with

reasonable cause and in good faith.

     On this record, we find that petitioners have failed to

demonstrate that they were not negligent and also have failed to

show that they did not disregard applicable rules or regulations.

They have not shown that there was reasonable cause for their

underpayment or that they acted in good faith.

     Accordingly, we sustain respondent’s imposition of the

accuracy-related penalty under section 6662(a) for 1997.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                           Decision will be entered

                                      for respondent.