Velinsky v. Commissioner

T.C. Memo. 1996-180

UNITED STATES TAX COURT

KIM L. VELINSKY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5469-94. Filed April 15, 1996.

Bradford E. Henschel, for petitioner.

Mark A. Weiner, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SCOTT, Judge: Respondent determined a deficiency in

petitioner's Federal income taxes for the calendar year 1990 in

the amount of $14,432, and an accuracy-related penalty under

section 66621 in the amount of $2,886.

1
All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
(continued...)
 Some of the issues raised by the pleadings have been

disposed of by agreement of the parties, leaving for decision:

(1) Whether this Court has jurisdiction over this case based on

the notice of deficiency mailed to petitioner with one digit of

the street address missing; (2) whether petitioner is entitled to

relief under section 6013(e) as an innocent spouse and, if so, to

what extent; (3) whether petitioner is entitled to deductions in

excess of the amounts allowed by respondent for expenses incurred

by her late husband in connection with his business; and (4)

whether petitioner is liable for the accuracy-related penalty as

determined by respondent pursuant to section 6662(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are found

accordingly.

Petitioner was a legal resident of Los Angeles, California,

at the time of the filing of the petition in this case.

Petitioner filed a joint Federal income tax return with her late

husband, Mr. Richard Velinsky (Mr. Velinsky), for the taxable

year 1990.

On a Schedule C attached to petitioner's 1990 joint return

are reported income and expenses of Mr. Velinsky's entertainment

and band management business (the Schedule C). Mr. Velinsky

operated this business as the sole proprietor. Mr. Velinsky died

1
(...continued)
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
 -3 -

on October 1, 1993. The Schedule C reported the following:

Gross receipts $71,509
Cost of goods sold 58,430
Gross income 13,079
Total expenses 31,850
Net loss (18,771)

Mr. Stephen Paquette (Mr. Paquette) prepared the Velinsky's

1990 joint Federal income tax return. In preparing this return,

Mr. Paquette relied primarily upon information furnished to him

by Mr. Velinsky. However, Mr. Paquette did examine some of the

supporting receipts for the claimed Schedule C expenses to

satisfy himself that the claimed expenses were not personal but

had a business purpose.

Mr. Velinsky represented to Mr. Paquette that he had an

office in his rental home that was used exclusively for business

purposes (the home office). Mr. Velinsky and petitioner claimed

a $4,800 deduction on the Schedule C for rent and other business

expenses relating to the home office.

Mr. Velinsky and petitioner also claimed a deduction for

$2,471 in utility expenses with respect to the home office and

for specific use of the telephone. The home office was not used

exclusively for business. Petitioner and Mr. Velinsky claimed a

Schedule C deduction for $6,798 for meals and entertainment of

clients during 1990.

Mr. Velinsky told Mr. Paquette that he used his automobile

to travel from his home office to meet with his clients, and that
 -4 -

he drove a total of 38,146 miles for business purposes in 1990.

In 1990, Mr. Velinsky made 3 automobile trips to Phoenix; 2 trips

to San Francisco; 2 trips to Las Vegas; and 1 trip to Denver in

connection with his business. All these trips were from Los

Angeles.

Respondent in her notice of deficiency to petitioner dated

January 7, 1994, disallowed $28,886 of the $31,850 of

petitioner's claimed business expenses. The disallowed items

were the following:

Expense Amount

Car and truck $9,569
Depreciation 1,293
Interest--other 1,333
Legal/professional services 1,200
Rent--other business property 4,800
Travel 2,105
Meals & entertainment 5,426
Utilities 2,471
Admissions 689

The $2,964 in total expenses not disallowed was the

following:

Expense Amount

Meals & entertainment $12
Office expenses 397
Cleaning 151
Dues and publications 680
Parking 212
Postage 545
Printing 642
Seminars 325
 -5 -

Respondent's notice of deficiency disallowed $30,773 of the

$58,430 of claimed cost of goods sold. Most of the $27,657

allowed by respondent as cost of goods sold was amounts Mr.

Velinsky expended in connection with the production of a music

video (the video) made for a band called "The Replacements".

Respondent now concedes that, in addition to the cost of goods

sold items allowed in the notice of deficiency, petitioner is

entitled to an additional $149.45 for photography expenses.

Respondent also concedes that petitioner has satisfied all

elements of section 6013(e), except the provision of section

6013(e)(1)(B) that the understatement of tax is attributable to

grossly erroneous items. Respondent's notice of deficiency to

petitioner was addressed to petitioner at 340 Centinela #A, Los

Angeles, California 90066. Petitioner filed a timely petition on

April 1, 1994, alleging error in respondent's determination as

set forth in this notice of deficiency.

OPINION

Petitioner contends that since the notice of deficiency

dated January 7, 1994, was mailed to 340 Centinela #A, rather

than to 3402 Centinela Avenue, the jurisdictional requirements of

section 6212 have not been met. The address on petitioner's 1990

Federal income tax return is 1385 Vienna Way, Venice, California.

However, based on an exhibit in evidence with respect to the year

1990, petitioner stated that the proper address for the notice of
 -6 -

deficiency was 3402 Centinela Avenue, Los Angeles, California

90066.

Section 6501(a) provides that the amount of any deficiency

in income tax shall be assessed within 3 years after the return

is filed. Section 6503(a) provides, however, that the running of

the 3-year period of limitations is suspended by the mailing of a

notice of deficiency. Section 62122 authorizes the Secretary or

2
SEC. 6212. NOTICE OF DEFICIENCY.

(a) In General.--If the Secretary determines that
there is a deficiency in respect of any tax imposed by
subtitle A or B or chapter 41, 42, 43, or 44, he is
authorized to send notice of such deficiency to the
taxpayer by certified mail or registered mail.

(b) Address for Notice of Deficiency.--

(1) Income and gift taxes and certain excise
taxes.--In the absence of notice to the Secretary
under section 6903 of the existence of a fiduciary
relationship, notice of a deficiency in respect of
a tax imposed by subtitle A, chapter 12, chapter
42, chapter 43, or chapter 44 if mailed to the
taxpayer at his last known address, shall be
sufficient for purposes of subtitle A, chapter 12,
chapter 42, chapter 43, chapter 44, and this
chapter even if such taxpayer is deceased, or is
under a legal disability, or, in the case of a
corporation, has terminated its existence.

(2) Joint income tax return.--In the case of
a joint income tax return filed by husband and
wife, such notice of deficiency may be a single
joint notice, except that if the Secretary has
been notified by either spouse that separate
residences have been established, then, in lieu of
the single joint notice, a duplicate original of
the joint notice shall be sent by certified mail
or registered mail to each spouse at his last
known address.
(continued...)
 -7 -

his delegate, upon determining that there is a deficiency in

income tax, to send a notice of deficiency to the taxpayer by

certified or registered mail. Section 6212(b)(1) provides that a

notice of deficiency in respect to income tax is sufficient if it

is mailed to the taxpayer's last known address. Therefore, the

notice of deficiency is valid whether or not received, if it is

mailed by certified mail to a taxpayer's last known address.

However, if a notice of deficiency is actually received by a

taxpayer in sufficient time to permit the taxpayer, without

prejudice, to file a petition in this Court, it is valid even if

not sent to the taxpayer's last known address. Clodfelter v.

Commissioner, 527 F.2d 754, 757 (9th Cir. 1975), affg. 57 T.C.

102 (1971). Since petitioner filed her petition within 90 days

after the mailing of the notice of deficiency, we have

jurisdiction in this case. Therefore, it is unnecessary to

discuss whether in light of the minor error which petitioner

claims was in the address on the notice of deficiency, it might

under other circumstances have been considered not to have been

mailed to petitioner's last known address.

When a husband and wife file a joint income tax return for a

year, "the tax shall be computed on the aggregate income and the

liability with respect to the tax shall be joint and several."

2
(...continued)
* * * * * * *
 -8 -

Sec. 6013(d)(3). Under section 6013(e),3 if certain requirements

are met for a year, a spouse may be relieved of all or a portion

of the joint liability for that year. The burden is on

petitioner to show that she has satisfied each statutory

prerequisite of section 6013(e)(1).

Respondent has conceded that petitioner meets all of the

criteria required for relief from tax as an innocent spouse,

except that the substantial understatement of tax is attributable

to grossly erroneous items of one spouse. Grossly erroneous

3
Sec. 6013(e) provides, in part:

(1) In General.--Under regulations prescribed by
the Secretary, if--

(A) a joint return has been made under
this section for a taxable year,

(B) on such return there is a
substantial understatement of tax
attributable to grossly erroneous items of
one spouse,

(C) the other spouse establishes that in
signing the return he or she did not know,
and had no reason to know, that there was
such substantial understatement, and

(D) taking into account all the facts
and circumstances, it is inequitable to hold
the other spouse liable for the deficiency in
tax for such taxable year attributable to
such substantial understatement,

then the other spouse shall be relieved of liability
for tax (including interest, penalties, and other
amounts) for such taxable year to the extent such
liability is attributable to such substantial
understatement.
 -9 -

items are defined as "any item of gross income attributable to

such spouse which is omitted from gross income", and "any claim

of a deduction, credit, or basis by such spouse in an amount for

which there is no basis in fact or law." Sec. 6013(e)(2).

Petitioner and respondent disagree as to how the grossly

erroneous items should be characterized. Petitioner contends

that all items should be considered as omissions from gross

income since some of the items disallowed by respondent were

items claimed as cost of goods sold, the disallowance of which

increased the gross income reported on the return. Respondent

argues that all the items disallowed are properly characterized

as deductions.

Petitioner and Mr. Velinsky reported $31,850 as expenses on

the 1990 Schedule C, which included such items as car and truck

expenses, depreciation, and miscellaneous expenses such as

postage, printing, and cleaning expenses. Petitioner and Mr.

Velinsky also reported $58,430 as cost of goods sold on the

Schedule C, and subtracted this amount from gross receipts to

arrive at gross income. Respondent has allowed a "cost of goods

sold deduction" in the amount of $27,657. The amounts that

respondent allowed all related to the production of the video.

These amounts included video production expenses, miscellaneous

supplies for lumber, paint, brushes, and set design, and other

miscellaneous supplies for the music video, including film, film

development, rent, and studio time. Respondent did not allow the
 -10 -

remainder of the claimed cost of goods sold primarily because of

lack of substantiation. The record shows that some items which

were not allowed were amounts expended in 1991 rather than 1990.

There is an indication in the record that most of the other

disallowed items were claimed to be related to production of the

video.

Petitioner contends that the holding of Lawson v.

Commissioner, T.C. Memo. 1994-286, is applicable to this case.

In Lawson v. Commissioner, supra, we held that the overstatement

of cost of goods sold created an omission from gross income.

Similarly, in LaBelle v. Commissioner, T.C. Memo. 1986-602, we

held that there was an omission from gross income where there was

an overstatement of the cost of goods sold.

As we explained in Lawson v. Commissioner, supra, cost of

goods sold is taken into account in computing gross income and is

not an item of deduction. See also Metra Chem. Corp. v.

Commissioner, 88 T.C. 654, 661 (1987).

The basis of our holding that the disallowance of items

claimed as cost of goods sold results in an omission from gross

income is that since the origin of the income tax cost of goods

sold has been taken into account in computing business gross

income and is not an item of deduction. See the discussion in

LaBelle v. Commissioner, supra, in which we pointed out that

section 6013(e), prior to its amendment by the Tax Reform Act of

1984, contained a special definition of gross income that
 -11 -

required that we not treat an overstatement of cost of goods sold

as resulting in an omission from gross income. After the

amendment, the normal definition of gross income applied, and,

therefore, an overstatement of cost of goods sold resulted in an

omission from gross income. In the recent case of Lilly v.

Internal Revenue Service, 76 F.3d 568 (4th Cir. 1996), the Court

of Appeals for the Fourth Circuit adopted the conclusions and

reasoning of our cases in holding that an overstatement of cost

of goods sold results in an omission of gross income.

We conclude that in this case the overstatement of cost of

goods sold results in an omission from gross income. Therefore,

the amount of the understatement of gross income resulting from

the overstatement of cost of goods sold in this case is a grossly

erroneous item, and petitioner is entitled to innocent spouse

relief with respect to the tax resulting from this understatement

of gross income.

Respondent argues that there was a mischaracterization of

items as cost of goods sold on petitioner's return. Respondent

states that the items claimed as cost of goods sold should be

properly classified as deductions and, as such, should be treated

as deductions subject to the requirements of section

6013(e)(2)(B). We find no legal or factual support for

respondent's argument. First, it is unclear from the record to

what extent the items not allowed as cost of goods sold, if they

had been substantiated, should be properly characterized as
 -12 -

deductions. In the notice of deficiency, respondent allowed

$27,657 of claimed cost of goods sold of petitioner's business as

cost of goods sold, which indicates that respondent considered at

least a portion of petitioner's claimed cost of goods sold to be

properly claimed. The indication from the record is that the

disallowed portion of claimed cost of goods sold was either not

properly substantiated or amounts paid in 1991, a year not before

us. Since in the notice of deficiency respondent allowed a

portion of the claimed cost of goods sold, in effect she

determined that the claim was for cost of goods sold to be

subtracted from gross receipts.

Also, our reading of the relevant cases on the issue of

omission from gross income indicates that the determination of

whether to treat an item as a deduction or an omission from

income item is governed by whether the amount is disallowed as

improperly claimed cost of goods sold or an improperly claimed

deduction. In both LaBelle v. Commissioner, supra, and Lawson v.

Commissioner, supra, we determined that items claimed as cost of

goods sold had been disallowed as such thereby causing an

omission from gross income. It was because the disallowance

increased the reported gross income that we held that the

disallowance resulted in an omission from gross income. In Lilly

v. Internal Revenue Service, supra, the Court of Appeals stated:

historically and presently, the * * * [cost of goods
sold] has been taken into account in computing business
gross income. * * * The regulations under * * * the
 -13 -

predecessor of * * * [section 61] provided that: "In
the case of a manufacturing, merchandising, or mining
business, 'gross income' means the total sales, less
cost of goods sold, plus any income from investments
and from incidental income or outside operations."
* * * Currently, I.R.C. section 61(a)(2) includes
gross income from business as part of gross income, and
the regulations thereunder still contain the language
quoted above from the 1939 version of the I.R.C. See
Treas. Reg. sec. 1.61-3 (1994). Because the [cost of
goods sold] is subtracted from total sales in arriving
at gross income, it follows that a taxpayer's
overstatement of the [cost of goods sold] on his
income-tax return is an item omitted from gross income.
[Lilly v. Internal Revenue Service; supra at 572;
emphasis added.]

We regard this statement by the Fourth Circuit as consistent

with our conclusion that if items shown as cost of goods sold on

a taxpayer's return are disallowed, absent an explanation in the

notice of deficiency to the contrary, the disallowance results in

an omission from gross income. We conclude that this case is not

distinguishable from prior cases involving a disallowance of

claimed cost of goods sold subtracted from gross receipts to

arrive at gross income.

Petitioner contends that she is also entitled to relief

under section 6013(e) with respect to the Schedule C deductions

disallowed by respondent. We disagree with petitioner. A

deduction having no basis in fact or in law is a deduction that

is frivolous, fraudulent, or phony. Douglas v. Commissioner, 86

T.C. 758, 763 (1986). It is clear that Mr. Velinsky was in the

business of band management and had business deductions during

the year in issue, but, as in Douglas v. Commissioner, supra, the
 -14 -

amounts disallowed by respondent were disallowed for lack of

substantiation. As we stated in that case, "because petitioner

was unable to substantiate her husband's claimed deductions does

not mean the deductions had no basis in fact or law." Douglas v.

Commissioner, supra at 763. We hold that petitioner is not

entitled to innocent spouse relief with respect to the disallowed

deductions.

Petitioner next contends that some of the deductions for Mr.

Velinsky's band management business are proper and were properly

substantiated. Respondent's position is that petitioner has not

produced sufficient evidence to substantiate the claimed

deductions in amounts in excess of those allowed by respondent or

conceded by respondent at trial.

The parties have stipulated into the record copies of

documents kept by Mr. Velinsky. However, since Mr. Velinsky was

deceased at the time of the trial of this case, we do not have

his testimony as to the validity of the deductions. Petitioner

and Mr. Velinsky's return preparer, Mr. Paquette, testified with

respect to the claimed deductions.

Rev. Proc. 89-66, 1989-2 C.B. 792,4 provides optional

mileage rates for employers and self-employed individuals.

Section 162 allows as a deduction ordinary and necessary expenses

4
Since petitioner is allowed a greater deduction using the
standard mileage rate deduction, petitioner is not allowed a
depreciation deduction. See Rev. Proc. 74-23, 1974-2 C.B. 476.
 -15 -

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

or business. A self-employed individual may deduct the cost of

operating a passenger automobile to the extent that it is used in

a trade or business. Rev. Proc. 89-66, supra, states that

although section 274(d) provides that no deduction shall be

allowed under section 162 with respect to any listed property

(which includes a passenger automobile) unless the taxpayer

complies with the substantiation requirement of that section, the

section also provides that regulations may prescribe that some or

all of the substantiation requirements do not apply to an expense

that does not exceed an amount prescribed by such regulations.

The Revenue Procedure then states that section 1.274-5T(g),

Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46030 (Nov. 6,

1985), in part, grants the Commissioner the authority to

prescribe rules under which such allowances, if in accordance

with reasonable business practices, will be regarded as

substantiation in accordance with section 274(d).

Petitioner offered as evidence numerous repair billings for

the 1984 Ford Thunderbird driven by Mr. Velinsky. Petitioner

deducted $9,569 on Schedule C for car and truck expenses and

$1,293 for depreciation. On the Form 4562 attached to

petitioner's return, petitioner indicated that the automobile was

used 96 percent for business purposes. To substantiate the

gasoline, lube and oil expenses of $1,560, petitioner offered as

evidence copies of her husband's credit card statements for the
 -16 -

year at issue. Amounts charged for gasoline and related items

totaled $835.20, though it is unclear whether these amounts

correspond to Mr. Velinsky's use of the Ford Thunderbird for

business use. To substantiate the repairs expense of $2,100,

petitioner offered into evidence repair bills totaling $87.70,

accompanied by a money order for $876, and canceled checks for

automobile repair services in the amount of $1,559.83. However,

it is unclear from these documents whether the repair expenses

were for the Ford Thunderbird, or which canceled checks

correspond to which repair bills. Petitioner testified that Mr.

Velinsky often used the Ford Thunderbird for travel purposes in

his band management business, particularly for driving his bands

to their performances and for watching other bands perform,

though petitioner was unsure of the actual miles driven by Mr.

Velinsky for business. Mr. Paquette testified that Mr. Velinsky

had informed him that he had taken eight long-distance trips

during 1990 for business purposes. The parties stipulated to a

statement given by Mr. Velinsky to the IRS which confirmed this

fact and from which we made a finding. The miles which Mr.

Velinsky drove on these trips would approximate 7,000. The

record shows that most of Mr. Velinsky's driving was local and

included driving his bands to their performances or to watch

performances of other bands, rather than driving from one city to

another. We are convinced that Mr. Velinsky used the Ford

Thunderbird in his business, although petitioner has not shown
 -17 -

that this automobile was used 96 percent for business. Based on

the limited testimony, and the receipts offered into evidence, we

find that petitioner has substantiated that Mr. Velinsky drove

his automobile at least 23,000 miles for business purposes in

1990. Therefore, based on the 26 cents-a-mile rate allowable in

lieu of actual expenses in 1990, Rev. Proc. 89-66, supra,

petitioner is entitled to deduct $5,980 of the $9,569 of

automobile expenses claimed in 1990.

Petitioner and Mr. Velinsky also deducted $4,800 in rent for

use by Mr. Velinsky of a home office. Section 280A(a) provides

the general rule that no deduction is allowed for the business

use of a dwelling unit which is used by the taxpayer as a

residence. Section 280A(c)(1)(A) provides, however, that the

general rule will not apply as long as a portion of a taxpayer's

residence is exclusively used on a regular basis as the principal

place of business for any trade or business of the taxpayer. See

Commissioner v. Soliman, 506 U.S. 168 (1993).

Under the facts of this case, it is clear that Mr.

Velinsky's home office was not used exclusively for business.

Petitioner testified that the home office was not used

exclusively for Mr. Velinsky's business, and that she and Mr.

Velinsky used the home office for other purposes. She testified

that she used the home office to study and to read. It is well

settled that a home office must be exclusively used for business

in order for the expenses connected with its use to be
 -18 -

deductible. Therefore, we sustain respondent's disallowance of

the claimed deduction for home office expenses.

Petitioner and Mr. Velinsky deducted $2,471 in expenses for

the year at issue which were claimed to be for utilities

applicable to the home office and for business use of the home

telephone. We deny any utility expense deductions relating to

the home office for the reasons mentioned above. Petitioner

offered telephone bills and other substantiating documentation to

show the actual business use of the telephone, primarily long

distance calls. Mr. Paquette explained to the auditor, and

petitioner testified, that Mr. Velinsky used the telephone in his

band management business. Under Cohan v. Commissioner, 39 F.2d

540 (2d Cir. 1930), we allow $30 per month for Mr. Velinsky's

business telephone expenses for long distance calls.

Petitioner and Mr. Velinsky also deducted expenses for

interest, legal and professional services, and admissions.

Petitioner has offered no evidence to substantiate these

deductions, and we hold that petitioner has not met her burden of

proof with regard to these claimed deductions.

Section 274(d) states that a taxpayer is not allowed a

deduction under section 162 for any travel or entertainment

expense, unless the taxpayer has substantiation, in the form of

adequate records or other sufficient corroborating evidence,

showing: (1) The amount of the expense; (2) the time and place

of the travel or entertainment; (3) the business purpose of the
 -19 -

expense; and (4) the business relationship to the taxpayer of

persons entertained. The regulations make it clear that section

274(d) supersedes the doctrine of Cohan v. Commissioner, supra,

and that a deduction for travel and entertainment must be

supported by more than approximations or unsupported testimony of

a taxpayer. Sec. 1.274-5(a), Income Tax Regs. Under section

274(d), every expenditure claimed as a deduction must be

substantiated by the taxpayer by either adequate records or other

sufficient evidence, and his or her failure to do so will cause

such expenditures to be disallowed in full. See Sanford v.

Commissioner, 50 T.C. 823, 828-829 (1968), affd. per curiam 412

F.2d 201 (2d Cir. 1969).

Petitioner offered into evidence copies of several receipts

from various restaurants, as well as tickets to sporting events

and theaters. Petitioner also offered into evidence various

canceled checks to evidence travel expenses. However, these

items were not shown to be related to Mr. Velinsky's business,

except by petitioner's testimony that she never saw her husband

retain receipts for nonbusiness meals and entertainment, and that

her husband often took business trips. There was no record of

the business purpose of the travel or claimed entertainment. The

record does not show the persons present at any meetings, and, in

most cases, the time and place of the meetings or entertainment

are not shown. We, therefore (under section 274(d)) sustain
 -20 -

respondent's disallowance of the claimed deductions for travel

and entertainment expenses.

Also at issue is whether petitioner is liable for the

accuracy-related addition to tax under section 6662(a). Under

section 6662, a 20-percent addition to tax is imposed on the

portion of the underpayment that is attributable to one or more

of the following: (1) Negligence or disregard of the rules or

regulations; (2) substantial understatement of tax; (3) valuation

overstatement; (4) overstatement of pension liabilities; and (5)

estate or gift tax valuation understatements. Respondent

concedes that only negligence and substantial understatement of

tax would have application to the facts in this case.

Negligence includes any careless, reckless, or intentional

disregard of rules or regulations, any failure to make a

reasonable attempt to comply with the provisions of the law, and

any failure to exercise ordinary and reasonable care in the

preparation of a tax return. Neely v. Commissioner, 85 T.C. 934

(1985).

Based on the record, we find that petitioner has not met her

burden of showing that she and Mr. Velinsky were not negligent in

the preparation of their income tax return. It is clear from the

testimony of petitioner's return preparer that Mr. Velinsky's

records were inadequate to determine proper deductions and

expenses for the years at issue, and that he relied on the

information furnished to him by Mr. Velinsky. Petitioner's
 -21 -

return preparer testified that information revealed during the

audit of the tax liability for 1990 would have changed his

calculations as shown on the return. We therefore sustain

respondent's determination of the accuracy-related penalty as to

the entire deficiency for negligence or intentional disregard of

rules and regulations. Therefore, we need not determine whether

there is a substantial understatement of income tax. However,

this fact will be shown when petitioner's tax liability is

recomputed. If there is a substantial understatement of tax,

that fact likewise supports respondent's determination of the

accuracy-related penalty.

Decision will be entered

under Rule 155.