Joseph B. Leonard and Dorothy A. Cole Leonard - Page 14

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          their 1988 return, petitioners claimed a net operating loss                 
          carryover from 1987 of $640,600, almost as much as was originally           
          claimed on the amended 1985 return.  The claimed carryover was              
          overstated by about $316,400.                                               
               We hold that petitioners were negligent and intentionally              
          disregarded rules or regulations in claiming the "embezzlement              
          loss", and that they are liable for the addition to tax under               
          section 6653(a)(1) for 1988.                                                
          Issue 3.   Substantial Understatement                                       
               Section 6661, applicable to 1988, imposes an addition to tax           
          of 25 percent of the amount of any underpayment that results from           
          a substantial understatement of tax.  An understatement is                  
          substantial if it exceeds the greater of 10 percent of the tax              
          required to be shown or $5,000.   Sec.  6661(b)(1)(A).                      
               Petitioners reported a tax liability of $5,859 for 1988.  They         
          had about $240,000 in income that year, and their correct tax               
          liability would have been much larger than reported.  We hold that          
          petitioners have failed to carry their burden of showing that they          
          are not liable for the addition to tax under section 6661 for 1988.         
          Issue 4.   Accuracy-Related Penalty                                         
               Section 6662(a), applicable to 1989, imposes a penalty of 20           
          percent  of  the  underpayment  attributable  to  negligence  or            
          substantial understatement of tax.  Sec.  6662(a), (b)(1) and (2).          
          As previously found, petitioners were negligent and substantially           
          understated their tax for 1988 by claiming a carryover with respect         
          to the alleged theft loss in 1985.  They also were negligent and            

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