Bernard Michael Reed - Page 2

          within the meaning of section 183, and, if so, whether petitioner           
          can substantiate claimed business expenses; and (2) whether                 
          petitioner is liable for an accuracy-related penalty.                       
               Some of the facts have been stipulated and are so found.               
          The stipulation of facts and attached exhibits are incorporated             
          by this reference.  Petitioner resided in Stateline, Nevada, at             
          the time the petition was filed in this case.                               
               During the past 20 years, petitioner purports to have been             
          an accountant, a principal in an architectural firm, a real                 
          estate investor, a taxi driver, a bank auditor, and a salesperson           
          of water purifiers.  During 1991, petitioner drove a taxi for               
          Whittlesea Cabs, ran a water purifier franchise, and operated a             
          real estate investment firm under the name of NSA.  Petitioner              
          conducted both the water purifier business and NSA from his one-            
          bedroom apartment at the Desert Club in Nevada.                             
               Petitioner's water purifier franchise was based on a                   
          "pyramid" incentive system, whereby participants earn income                
          through direct sales and through the recruitment of additional              
          franchisors.  The primary objective is to recruit additional                
          salespersons, with the sale of individual units used as one                 
          method of recruitment.  Petitioner was unable to sell any of the            
          water purifiers and, after giving several away, disposed of                 
          several units at a garage sale held in November 1991.  He did not           
          include the aggregate proceeds from the garage sale ($30-$40) in            
          his gross income for the taxable year at issue.                             

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