T.C. Memo. 2001-196



                      UNITED STATES TAX COURT



    CHRISTOPHER K. AND BRENDA M. COX, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 9989-99, 9990-99,              Filed July 27, 2001.
                 9991-99.


     Gregory W. Bond, for petitioners.

     Ann L. Darnold, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   In separate notices of deficiency,

respondent determined the following income tax deficiencies,




     1
      Cases of the following petitioners are consolidated
herewith: Gregory A. Cox and Linda M. Cox, docket No. 9990-99;
and Robert A. Burke and Deborah A. Burke, docket No. 9991-99.
                                  - 2 -

penalties, and additions to tax with respect to petitioners’

Federal income taxes:2

Christopher K. Cox (Christopher) & Brenda M. Cox (Brenda),
docket No. 9989-99

                                 Sec. 6662   Sec. 6651(a)(1)
     Year       Deficiency        penalty    addition to tax

     1991         $1,796
     1992         12,291
     1994         10,533            $2,107         $371

Gregory A. Cox (Gregory) & Linda M. Cox (Linda),
docket No. 9990-99

                                             Sec. 6662
             Year            Deficiency       penalty

             1992              $8,205
             1994               1,190          $178

Robert A. Burke (Robert) & Deborah A. Burke (Deborah),
docket No. 9991-99

                                             Sec. 6662
             Year            Deficiency       penalty
            1
             1992            $12,825
             1994              4,706
             1995              5,561          $1,112
     1
      The record also reflects that respondent issued to Deborah
a separate notice of deficiency disallowing a net operating loss
carryback claimed for 1991. Although the parties have treated
1991 as one of the years in dispute, we do not examine
respondent’s determinations made in Deborah’s 1991 notice of
deficiency because Deborah did not file a petition with this
Court regarding that notice. Sec. 6213(a).




     2
      All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. Monetary amounts are
rounded to the nearest dollar.
                                   - 3 -

       Petitioners in each docket filed separate petitions

contesting the proposed deficiencies, penalties, and additions to

tax.       These cases were consolidated for trial, briefing, and

opinion pursuant to Rule 141(a) because they present common

issues of fact and law.

       After the parties’ concessions,3 the only remaining issues

for decision are:4

       (1) Whether Christopher, Gregory, and Deborah, shareholders

in Cox Tomato, Inc. (Cox Tomato), an S corporation, had

sufficient bases in their Cox Tomato stock and in any


       3
      Respondent and Christopher agree that, in 1994, Christopher
had gain of $1,554 from the sale of stock, rather than $11,305 as
was set forth in the notice of deficiency. Christopher also
conceded that he received ordinary dividend income of $391 in
1994.
     Christopher did not present evidence regarding respondent’s
determination that he had unreported capital gain distributions
of $490 from Merrill Lynch in 1994, or that he was liable for the
addition to tax under section 6651(a)(1) for failure to timely
file his 1994 return, and Christopher did not dispute these
adjustments on brief. These adjustments are deemed conceded in
accordance with Rule 149(b).
     Christopher, Gregory, and Deborah did not present evidence
regarding respondent’s determination that they had unreported
distributions from Cox Tomato in 1994 of $9,784, $6,124, and
$4,204, respectively, and they did not dispute these adjustments
on brief. These adjustments are deemed conceded in accordance
with Rule 149(b).
     Deborah conceded that she received from Cox Tomato cash
distributions of $17,440 in 1994 and $18,000 in 1995 and that
those amounts increase her taxable income for the respective
taxable years. Deborah also conceded that her share of Cox
Tomato’s loss for 1994 was $117,881, rather than $139,301 as she
originally reported.
       4
      The only other issues raised in the notices of deficiency
are computational.
                               - 4 -

indebtedness owed by Cox Tomato to them (hereinafter referred to,

in the aggregate, as basis in Cox Tomato) to deduct their

respective shares of the ordinary losses generated by Cox Tomato

during the years at issue;

     (2) whether Deborah may reduce the gross income she derived

from her use of a corporate automobile to reflect that she used

the automobile, in part, for business and that she reimbursed Cox

Tomato for some of her personal use; and

     (3) whether Christopher and Brenda and Gregory and Linda are

liable for the accuracy-related penalty imposed by section

6662(a) for 1994, and whether Robert and Deborah are liable for

the accuracy-related penalty imposed by section 6662(a) for 1995.

                         FINDINGS OF FACT

I.   Background

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

incorporate the stipulation of facts into these findings by this

reference.

     On the date the petitions were filed, Christopher and Brenda

resided in Edmond, Oklahoma; Gregory and Linda resided in

Oklahoma City, Oklahoma; and Robert and Deborah resided in

Ardmore, Oklahoma.   Christopher, Gregory, and Deborah

(collectively referred to as petitioner shareholders) are

siblings.
                                  - 5 -

     For all relevant periods, Cox Tomato was an S corporation

that bought and sold fresh produce primarily from California and

Florida.   In 1987, petitioner shareholders inherited their shares

of stock in Cox Tomato from their father.           For all relevant

periods, petitioner shareholders were the sole shareholders of

Cox Tomato and used the cash method of accounting and the

calendar year for tax reporting.

     During the years at issue, Christopher and Gregory each

owned 34.32 percent and Deborah owned 31.36 percent of Cox

Tomato’s stock.   Without regard to any of the disputed

transactions discussed infra, their bases in their shares of Cox

Tomato stock were:

                     Christopher              Gregory       Deborah
                                          1
     12/31/87          $33,250             $33,250          $28,500
     12/31/88            7,534               7,534            6,460
     12/31/89           34,664              34,664           31,889
     12/31/90           15,465              15,465           15,210
     12/31/91          (26,575)            (26,575)         (21,788)
     12/31/92            9,045               9,045           11,890
     12/31/93             (911)               (911)           2,791
     1
      The parties stipulated each petitioner shareholder’s basis.
The stipulation with respect to Gregory’s basis, however, appears
to contain a typographical error. The corrected calculation
indicates that Gregory actually had a basis on
Dec. 31, 1987, of $33,250 instead of $32,250, the stipulated
number.

     In 1994, Cox Tomato had an operating loss of $375,896.

Petitioner shareholders reported their pro rata shares of Cox

Tomato’s 1994 operating loss on their respective Schedules E,

Supplemental Income and Loss, to their respective Forms 1040,
                                  - 6 -

United States Individual Income Tax Return, for 1994.     Because

each petitioner shareholder was unable to utilize fully his or

her pro rata share of Cox Tomato’s 1994 loss, each petitioner

shareholder filed a Form 1045, Application for Tentative Refund,

which reported a net operating loss (NOL) for 1994 and carried

that NOL back to prior taxable years.     Christopher carried his

NOL back to 1991 and 1992, Gregory carried his NOL back to 1992

only, and Deborah carried her NOL back to 1991, 1992, and 1993.

      In 1995, Cox Tomato had an operating loss of $193,825.

Deborah reported $12,000 of that loss on the Schedule E to her

1995 Form 1040.

II.   Loans

      A.      Loan 91850 for $220,000

      On April 7, 1989, Christopher and Brenda purchased improved

real estate located at 222 East Sheridan in Oklahoma City,

Oklahoma, and gave a mortgage on the property (first mortgage) to

the seller.      Christopher subsequently leased the property to Cox

Tomato for use as a corporate office and warehouse (the

warehouse).

      With respect to the warehouse, Christopher reported rents

received, mortgage and other interest paid, and expenses for

repairs paid, on his Schedules E to his 1991, 1992, and 1994

Forms 1040.      Neither Gregory nor Deborah received any income or
                                 - 7 -

paid any expenses with respect to the warehouse in any of the

years in issue.

     On June 16, 1993,5 Christopher and Brenda borrowed $220,000

from the Oklahoma Bank (loan 91850).     Cox Tomato, acting through

Christopher in his official capacity as president, was a

signatory on the loan.   Christopher, Brenda, and Cox Tomato

executed an installment note for $220,000.    Christopher and

Brenda also executed a mortgage in favor of the Oklahoma Bank

giving the bank a security interest in the warehouse.

Christopher used approximately $70,000 of the loan proceeds to

pay off the first mortgage on the warehouse and gave

approximately $148,000 of the remaining loan proceeds to Cox

Tomato to fund its operations.

     The terms of the installment note required 60 monthly

payments.   Christopher treated loan 91850 as his personal debt

and made at least some payments on it.    Neither Gregory nor

Deborah made any payments on loan 91850 in any of the years in




     5
      Because no deficiency has been asserted for the 1993
taxable year, we may not determine an overpayment or underpayment
of tax for that taxable year. Sec. 6214(b); Alford v.
Commissioner, 

, 988 (10th Cir. 1986), affg. 

 (1985). We may, however, examine the facts and transactions
of the 1993 taxable year to the extent necessary to correctly
determine petitioners’ tax liabilities for the years at issue.
Sec. 6214(b); Lone Manor Farms, Inc. v. Commissioner, 

, 440-441 (1974), affd. without published opinion 

(3d Cir. 1975).
                               - 8 -

issue, either to the Oklahoma Bank or to Christopher in

reimbursement for his payments.

     B.   Loan 92107 for $70,000

     On January 27, 1995, petitioner shareholders and Cox Tomato

as co-makers borrowed $70,000 from the Oklahoma Bank (loan 92107)

for Cox Tomato’s operating capital.    Petitioner shareholders and

Cox Tomato executed an installment note for $70,000 in favor of

the Oklahoma Bank.   Christopher and Brenda also gave the Oklahoma

Bank a mortgage on their personal residence as security for the

loan.

     Christopher treated loan 92107 as his personal obligation

and made at least some payments on it during 1995.    Neither

Gregory nor Deborah made any payments on the loan, either to the

Oklahoma Bank or to Christopher in reimbursement for his

payments, during 1995.

III. Monthly Distributions and Corporate Automobile

     Cox Tomato distributed to Deborah $1,500 each month from

January to May 1994, and from January to December 1995.    In the

intervening months of June 1994 to December 1994, Cox Tomato

distributed to Deborah only $1,420 each month, retaining the $80

difference as Deborah’s payment for her personal use of a 1994

Ford Explorer (automobile) provided to her by Cox Tomato from
                               - 9 -

March 1994 through December 1995.     The automobile’s annual lease

value was $7,750 in 1994 and 1995.6

      Deborah also used the automobile for business purposes such

as collecting receivables, and other employees used the

automobile during working hours to deliver small quantities of

produce.   Neither Cox Tomato nor any petitioner shareholder,

however, kept a mileage log or any other documentation to

substantiate the automobile’s business use during the years at

issue.

IV.   Notices of Deficiency

      In the notices of deficiency, respondent determined that in

1994 petitioner shareholders did not have sufficient bases in

Cox Tomato to claim the losses reported.    Respondent determined

that Christopher and Gregory had no bases in Cox Tomato.

Respondent determined that Deborah had a basis of $2,791 in Cox

Tomato, allowed Deborah to recognize a flowthrough loss in 1994

to the extent of that basis, and disallowed the $12,000 loss she

claimed in 1995 because respondent determined that she had no

remaining basis.   Respondent disallowed each of petitioner

shareholders’ NOL carrybacks for all the years in issue.

Respondent further determined that Deborah must include the




      6
      Deborah has conceded that the distributions received during
1994 and 1995 are includable in her income as determined by
respondent.
                             - 10 -

prorated annual lease value of the corporate automobile she drove

in 1994 and 1995 in her income for those years.

     Lastly, respondent determined that Christopher, Gregory, and

their spouses are each liable for an accuracy-related penalty for

1994 under section 6662(a) and (b)(1) (for negligence or

disregard of rules or regulations) and that Deborah and her

spouse are liable for an accuracy-related penalty for 1995 under

section 6662(a) and (b)(2) (for substantial understatement).

                             OPINION

I.   Petitioners’ Bases in Cox Tomato

     The primary issue for consideration is whether petitioner

shareholders had sufficient bases in their Cox Tomato stock and

in any indebtedness owed by Cox Tomato to them to deduct their

distributive shares of Cox Tomato’s losses for the years at

issue.

     Respondent determined that the amount of Cox Tomato’s losses

petitioner shareholders could deduct was limited by their

adjusted bases in Cox Tomato at the end of 1993.    Petitioner

shareholders contend that certain transactions in which they

participated increased their bases in Cox Tomato under section

1366(d)(1), thereby allowing petitioners to deduct a larger

portion of Cox Tomato’s losses.

     A shareholder of an S corporation may deduct his pro rata

share of any loss sustained by the corporation.    Sec. 1366(a).   A
                              - 11 -

shareholder’s deduction, however, is limited to his basis in the

S corporation’s stock and in any debt the corporation may owe him

(hereinafter referred to, in the aggregate, as basis in an S

corporation).   Sec. 1366(d)(1).7   A taxpayer may increase his

basis in an S corporation only if he makes an additional economic

outlay to or for the benefit of the S corporation.    Goatcher v.

United States, 

, 751 (10th Cir. 1991); Estate of

Leavitt v. Commissioner, 

, 422 (4th Cir. 1989) (“To

increase the basis in the stock of a subchapter S corporation,

there must be an economic outlay on the part of the

shareholder.”), affg. 

 (1988); Guerrero v.

Commissioner, T.C. Memo. 2001-44 (“In order to increase the basis

in the indebtedness of an S corporation, there must be an

economic outlay on the part of the shareholder.”).    An economic

outlay for this purpose is an actual contribution of cash or

property by the shareholder to the S corporation or a transaction

that leaves the S corporation indebted to the shareholder.    Sec.

1366(d)(1); Estate of Leavitt v. Commissioner, supra at 423.      The

economic outlay must leave “‘the taxpayer poorer in a material

sense’” after the transaction than when the transaction began.

Perry v. Commissioner, 

, 1296 (1970) (quoting Horne

v. Commissioner, 

, 254 (1945)).


     7
      Losses in excess of basis may be carried forward to any
subsequent year in which a shareholder has basis in the S
corporation’s stock or debt. Sec. 1366(d)(2).
                                - 12 -

     When an S corporation shareholder is only indirectly liable

for a corporate debt, that shareholder has not transferred any

cash or property to the S corporation or created corporate

indebtedness owed to him until and to the extent the shareholder

actually pays the debt.     Raynor v. Commissioner, 

,

770-771 (1968).    For example, if a shareholder of an S

corporation simply guarantees a corporate debt, that guaranty

does not constitute an economic outlay, and the shareholder is

not entitled to increase his basis in the S corporation as a

result of the guaranty.     Goatcher v. United States, supra; Estate

of Leavitt v. Commissioner, supra.       When, however, a shareholder

obtains a personal loan and transfers some or all of the loan

proceeds to the S corporation, he has made an economic outlay and

is entitled to increase his basis in the S corporation in an

amount equal to the amount transferred to the S corporation.       See

Prashker v. Commissioner, 

, 176 (1972).

     With these principles in mind, we examine the transactions

that petitioner shareholders contend entitle them to an increase

in their S corporation bases.

     A.   91850 Loan for $220,000

          1.      Basis Apportionment Among Petitioner Shareholders

     Petitioner shareholders first contend that loan 91850 should

increase each of their bases because they each made an economic

outlay in that the loan was secured with jointly owned property.
                               - 13 -

Respondent contends that neither Gregory nor Deborah made an

economic outlay with regard to loan 91850.

       Petitioner shareholders’ argument depends upon a faulty

premise.    Petitioner shareholders contend that although

Christopher and Brenda purchased the warehouse and titled it in

their names, Christopher and Brenda actually held the warehouse

as nominees for the three siblings.     Because the warehouse was

used as security for the loan, petitioner shareholders argue

that, as the legal and/or equitable owners of the warehouse, they

are entitled to increase their respective bases in Cox Tomato by

the amount of the loan.

       Whether petitioner shareholders jointly owned the warehouse

is not controlling here.    A shareholder who uses individually

owned property to secure corporate debt has not necessarily made

an economic outlay requiring an increase in his adjusted basis

under section 1366(d)(1).    Perry v. Commissioner, supra at 1296;

Raynor v. Commissioner, supra at 770-771; Guerrero v.

Commissioner, supra.    Economic outlay requires a contribution of

cash or property in exchange for the stock of the corporation or

the creation of an indebtedness owed by the corporation to the

shareholder.    Estate of Leavitt v. Commissioner, supra at 422-

423.    As we stated in Raynor v. Commissioner, supra at 770-771:

       No form of indirect borrowing, be it guaranty, surety,
       accommodation, comaking or otherwise, gives rise to
       indebtedness from the corporation to the shareholders
       until and unless the shareholders pay part or all of
                               - 14 -

     the obligation. Prior to that crucial act, ‘liability’
     may exist, but not debt to the shareholders.

     Neither Gregory nor Deborah made any payments to the

Oklahoma Bank, Christopher, or Cox Tomato regarding loan 91850.8

Consequently, neither Gregory nor Deborah made any economic

outlay with regard to the 91850 loan, and the loan does not

increase their bases in Cox Tomato under section 1366(d)(1).

            2.   Christopher’s Increase in Basis

         Christopher contends, in the alternative, that loan 91850

should increase only his basis in Cox Tomato because only he

owned the warehouse and made payments on the loan.   Apparently

assuming that loan 91850 was really a personal loan to

Christopher and not to Cox Tomato, respondent concedes that

Christopher is entitled to increase his basis in Cox Tomato to

the extent that Christopher proves how much of the loan proceeds

was paid over to Cox Tomato.   Respondent contends, however, that

Christopher failed to introduce “sufficient credible evidence to

establish the amount contributed to Cox Tomato and the amount


     8
      Deborah argued in connection with the 91850 loan that she
contributed or loaned $75,000 to Christopher for improvements to
the warehouse and that her transfer of funds shows she was a co-
owner of the warehouse. As discussed supra, however, ownership
is not controlling here. Moreover, Deborah has not argued or
proven that she is entitled to adjust her basis for this amount
in any event. She offered no documentation of her $75,000
transfer of funds, nor did she prove that the funds went to Cox
Tomato. We are not required to accept a taxpayer’s self-serving
testimony as evidence, particularly in the absence of
corroborating evidence. Tokarski v. Commissioner, 

, 77
(1986).
                              - 15 -

used to pay off * * * [Christopher and Brenda’s] first mortgage

on * * * [the warehouse].”

     Christopher has the burden of proving how much money he

transferred to Cox Tomato out of the proceeds of loan 91850.

Rule 142(a).   Citing a lack of documentation in the record,

respondent asserts that Christopher has not met his burden.

     While it is true that the record in this case is lacking in

documentation that would have made our analysis of this issue

easier and more satisfying, Christopher nevertheless has

convinced us that he transferred approximately $148,000 of the

loan proceeds to Cox Tomato in 1993.   Christopher testified to

that effect and also offered an explanation regarding why

documentation of what transpired in 1993 is not available.9    We

accept Christopher’s testimony on these subjects as credible.

     After evaluating the evidence, we find that Christopher

transferred $148,000 of the $220,000 loan proceeds to Cox Tomato

in 1993, and we hold that Christopher is entitled to increase his

adjusted basis in Cox Tomato by a corresponding amount.

     B.   Loan 92107 for $70,000

     Petitioner shareholders also contend that they were entitled

to increase their bases in Cox Tomato in an aggregate amount of



     9
      Christopher testified that he tried to find his records for
1993 and 1994 but was not able to do so. He also tried to get
records from UMB Bank (formerly the Oklahoma Bank), but the bank
did not retain records for more than 5 years.
                               - 16 -

$70,000 to reflect that they were personally liable on loan

92107.    Petitioner shareholders urge us to conclude that they

made an economic outlay simply by signing the loan documents.

Respondent contends that the loan was not made until 1995;

therefore, the issue of whether the loan requires an adjustment

to the bases of Christopher and Gregory in 1994 is not before us.

Respondent further contends that Deborah did not make an economic

outlay with respect to loan 92107.

     Loan 92107 was not made until 1995.    Since the loan did not

exist in 1994, it cannot have any bearing on the calculation of

Christopher’s or Gregory’s basis in Cox Tomato during 1994.10

     Deborah is also not entitled to any adjustment in her basis

by reason of loan 92107.    Although Deborah signed as a borrower

on the promissory note memorializing the loan, Deborah did not

make any payments to the Oklahoma Bank on loan 92107, nor did she

transfer any cash or property to Cox Tomato in connection with

loan 92107.    We hold, therefore, that Deborah has failed to prove

that she made any economic outlay with respect to loan 92107 and,

absent such proof, she is not entitled to increase her basis in

Cox Tomato by reason of the loan.



     10
      Christopher asserts that he is entitled to increase his
basis in Cox Tomato to reflect the $70,000 loan (the 92107
loan) and an additional $66,000 loan that he obtained in 1995.
We decline to decide whether these loans increase Christopher’s
basis, since Christopher has not filed a petition with respect to
any year after 1994.
                               - 17 -

II.   Corporate Automobile

      Respondent determined that the prorated annual lease value

of the corporate automobile furnished to Deborah during 1994 and

1995 constituted additional gross income to Deborah in each of

those years.    Deborah concedes that the automobile’s prorated

annual lease value constituted income to the extent that she used

the automobile for personal reasons and did not pay for such

personal use.    Deborah contends, however, that the automobile’s

prorated annual lease value did not constitute income to the

extent the automobile was used for business purposes and to the

extent she compensated Cox Tomato for her personal use of the

automobile.    Deborah, however, has cited no provision of the

Internal Revenue Code in support of her argument.

      Section 61(a)(1) provides that gross income includes fringe

benefits such as employer-provided automobiles.    Sec. 1.61-

21(a)(1), Income Tax Regs.    Absent a statutory exclusion, section

61(a)(1) requires that Deborah’s gross income include the full

annual lease value of the automobile, prorated for the portion of

the calendar year in which the automobile was available to

Deborah.   Sec. 1.61-21(d)(1)(i), Income Tax Regs.   The parties

agree that the prorated annual lease value of the automobile is

$6,458 for 1994 and $7,750 for 1995.    Sec. 1.61-21(d)(2),

(4)(i)(A) and (B), and (5)(i), Income Tax Regs.
                               - 18 -

     If Deborah’s argument is that she is entitled to exclude a

portion of the annual lease value of the automobile from her

gross income, as we interpret it to be, her argument would appear

to be grounded in section 132.    Section 132 provides that gross

income does not include any fringe benefit that qualifies as a

working condition fringe.    Sec. 132(a)(3).   A working condition

fringe is defined as “any property * * * provided to an employee

of the employer to the extent that, if the employee paid for such

property * * * such payment would be allowable as a deduction

under section 162 or 167.”    Sec. 132(d).   The value of property

or services furnished to an employee by an employer, however, may

not be excluded from an employee’s gross income as a working

condition fringe pursuant to section 132 unless the

substantiation requirements of either section 274(d) or section

162, whichever is applicable, and related regulations are

satisfied.   Sec. 1.132-5(c)(1), Income Tax Regs.

     Section 274(d) provides that no deduction is allowed with

respect to the use of “listed property”, as defined in section

280F(d)(4), unless certain elements are substantiated.    See sec.

1.274-5T(e)(1)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46026

(Nov. 6, 1985).   A passenger automobile of the type furnished to

Deborah qualifies as listed property under section

280F(d)(4)(A)(i).   Hence, Deborah must satisfy the substantiation

requirements of section 274(d) in order to argue successfully she
                             - 19 -

may exclude all or part of the prorated annual lease value of the

automobile as a working condition fringe under section 132.      Sec.

1.132-5(c)(2), Income Tax Regs.

     Section 274(d)(4) requires a taxpayer to substantiate, by

adequate records or by sufficient evidence corroborating the

taxpayer’s own statement, the following four elements before a

deduction or credit with respect to the alleged business use of

an automobile will be allowed:    (1) The amount of the

expenditure; (2) the mileage for each business use of the

automobile and the total mileage for all use of the automobile

during the taxable period; (3) the date of the business use; and

(4) the business purpose of the use of the automobile.    Sec.

1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).

     Although the applicable regulations provide considerable

guidance to employees who, like Deborah, seek to exclude a

portion of the value of a company-supplied automobile from their

income as a working condition fringe and are required to

substantiate their business use of the automobile, e.g., sec.

1.132-5(c) through (f), Income Tax Regs.; sec. 1.274-5T(b)(6) and

(c), (e), Temporary Income Tax Regs., 50 Fed Reg. 46016 (Nov. 6,

1985); sec. 1.274-6T, Temporary Income Tax Regs., 50 Fed. Reg.

46037 (Nov. 6, 1985), Deborah’s effort to substantiate business

use consisted solely of general testimony that she used the
                              - 20 -

automobile for business approximately 70 percent of the time.

She introduced no testimony, documentation, or corroborative

evidence of any kind sufficient to establish each of the elements

required by section 274(d).   Sec. 1.274-5T(c), Temporary Income

Tax Regs., 50 Fed. Reg. 64016 (Nov. 6, 1985).

     Deborah also argues that the amounts retained by Cox Tomato

from the monthly distributions she received from June through

December 1994 to compensate Cox Tomato for her personal use of

the corporate automobile should be excluded from her gross

income.   We reject this argument because it fails to recognize

that respondent’s adjustment increasing Deborah’s income by the

amount of distributions she received for 1994 includes only the

distributions Deborah actually received; i.e., the distributions

net of the amounts retained by Cox Tomato for Deborah’s personal

use of the automobile.   In effect, Deborah has received the

benefit of an exclusion because the amount Cox Tomato withheld

from her distribution to compensate the company for her personal

use of the automobile was not included in her income.   Deborah is

not entitled to exclude from income money she is not otherwise

required to include in income in the first place.

     On this record, therefore, we hold that Deborah has failed

to substantiate her business use of the corporate automobile she

drove during 1994 and 1995 as required by sections 132 and 274

and that Deborah is not entitled to exclude any part of the
                               - 21 -

automobile’s prorated lease value from her gross income in those

years.

III. Section 6662 Penalty

     A.   Accuracy-Related Penalties for Negligence or Disregard

     Respondent determined that, for 1994, Christopher and Brenda

and Gregory and Linda (petitioners Cox) were liable for an

accuracy-related penalty under section 6662(a) because their

underpayments of tax for 1994 were due to negligence or disregard

of rules or regulations.    Although petitioners Cox contend that

they are not liable for the accuracy-related penalty under

section 6662, the only arguments they made in support of their

position were that respondent erred in making his determination

and that Christopher and Gregory had sufficient bases to allow

them to deduct the NOLs claimed.

     Section 6662(a) and (b)(1) imposes a penalty equal to 20

percent of the portion of an underpayment of income tax

attributable to negligence or disregard of rules or regulations.

Negligence is defined as “any failure to make a reasonable

attempt to comply with the provisions of * * * [the Internal

Revenue Code]”.   Sec. 6662(c); see Neely v. Commissioner, 

, 947 (1985) (negligence is lack of due care or failure to do

what a reasonable and prudent person would do under the

circumstances).   The term “disregard” includes “any careless,

reckless, or intentional disregard.”    Sec. 6662(c).   Disregard of
                               - 22 -

rules or regulations is careless if the taxpayer does not

exercise reasonable diligence to determine the correctness of a

return position that is contrary to the rule or regulation.     Sec.

1.6662-3(b)(2), Income Tax Regs.   Disregard of rules or

regulations is reckless if the taxpayer makes little or no effort

to determine whether a rule or regulation exists.   Id.    Disregard

of rules or regulations is intentional if the taxpayer knows of

the rule or regulation that is disregarded.   Id.

     Section 6664(c)(1) provides, in pertinent part, that the

section 6662(a) penalty shall not be imposed with respect to any

portion of an underpayment if a taxpayer shows that there was a

reasonable cause for such portion and that the taxpayer acted in

good faith with respect to such portion.   Reasonable cause and

good faith may be indicated by an honest misunderstanding of fact

or law that is reasonable in light of the experience, knowledge,

and education of the taxpayer.   Sec. 1.6664-4(b), Income Tax

Regs.

     We have concluded that Christopher may increase his basis in

Cox Tomato by $148,000 to reflect the money he transferred to Cox

Tomato from loan 91850.11   Gregory, however, did not show that he

is entitled to increase his adjusted basis in Cox Tomato.    With

respect to other adjustments proposed in the notices of



     11
      Christopher may still have an underpayment because of his
concessions regarding other adjustments.
                              - 23 -

deficiency, petitioners Cox did not introduce any evidence to

show they made a reasonable effort to comply with the provisions

of the Internal Revenue Code or to determine the correctness of

their reporting positions, or that they had reasonable cause for

their respective underpayments.

     Because petitioners Cox failed to prove that the proposed

deficiencies were not attributable to negligence or disregard of

rules or regulations, and because they did not assert any other

basis for obtaining relief from the section 6662(a) penalty, we

sustain respondent’s determinations that petitioners Cox are

liable for the section 6662(a) penalty to the extent that the

Rule 155 computations show they are liable for underpayments.

     B.   Accuracy-Related Penalty for Substantial Understatement
          of Tax

     Respondent determined that Deborah and her spouse

(petitioners Burke) were liable for an accuracy-related penalty

under section 6662(a) and (b)(2) for 1995 because the

underpayment of tax was due to a substantial understatement of

income tax.   Petitioners Burke contend that they are not liable

for the penalty.

     Section 6662(a) and (b)(2) imposes a penalty equal to 20

percent of the portion of an underpayment attributable to any

substantial understatement of tax.     A substantial understatement

occurs when the amount of the understatement exceeds the greater

of 10 percent of the amount of tax required to be shown on the

return or $5,000 ($10,000 for corporations).    Sec. 6662(d)(1).
                                - 24 -

The amount of an understatement on which the penalty is imposed

will be reduced by the portion of the understatement that is

attributable to (1) the tax treatment of an item that was

supported by substantial authority or (2) any item for which the

relevant facts affecting the item’s tax treatment were

“adequately disclosed in the return or in a statement attached to

the return” and there was a reasonable basis for the tax

treatment by the taxpayer.   Sec. 6662(d)(2)(B)(I).   Additionally,

no penalty will be imposed with respect to any portion of an

underpayment if it is shown that there was reasonable cause for

such portion and the taxpayer acted in good faith with respect to

such portion.   Sec. 6664(c)(1).

     Respondent determined that the understatement to which the

penalty applied was attributable to three items:    (1) Deborah’s

failure to report as income $18,000 of distributions received

from Cox Tomato; (2) Deborah’s failure to report as income the

annual lease value ($7,750) of the corporate automobile; and (3)

Deborah’s reported flowthrough loss from Cox Tomato of $12,000.

     Petitioners Burke do not contend, nor have they proven, that

they had substantial authority for the tax treatment of the items

in question or that they adequately disclosed all relevant facts

as to the tax treatment of those items.    They also do not

contend, nor have they proven, that they had a reasonable basis

for their tax treatment of the items, or that they qualify for

relief under section 6664(c).    Consequently, petitioners Burke

have failed to demonstrate that they are not liable for the
                                 - 25 -

accuracy-related penalty for substantial understatement of income

tax for 1995.      Accordingly, we sustain respondent’s

determination.

IV.   Conclusion

      We hold that Christopher is entitled to increase his

adjusted basis in Cox Tomato by $148,000, the amount he

transferred to Cox Tomato in 1993.        We also hold that, as to all

other adjustments addressed in this opinion, respondent’s

determinations must be sustained.

      We have carefully considered all remaining arguments made by

the parties for contrary holdings and, to the extent not

discussed, find them to be irrelevant or without merit.

      To reflect the foregoing,



                                              Decisions will be entered

                                       under Rule 155.