Ralph W. Emerson and Suzanne O. Emerson - Page 2

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          tax; and (3) whether petitioners are liable for an accuracy-                
          related penalty under section 6662(a).                                      
               Unless otherwise indicated, all section references are to              
          the Internal Revenue Code in effect for the year in issue.                  
                                  FINDINGS OF FACT                                    
               Some of the facts have been stipulated, and the stipulated             
          facts are incorporated in our findings by this reference.                   
               Petitioners resided in Davis, California, at the time they             
          filed their petition in this case.                                          
               Ralph W. Emerson (petitioner) received an undergraduate                
          degree from the University of California at Los Angeles, studying           
          neurobiology, mathematics, and chemistry.  He then attended                 
          graduate school at Harvard University, studying informational               
          systems and chemistry.  Prior to 1998, petitioner was a research            
          biologist engaged in the business of developing pesticides,                 
          fungicides, and other agricultural products.  Petitioner has                
          attained about 14 patents from the U.S. Patent Office dealing               
          with chemistries and biologies of biochemical pesticides and                
          about twice that amount in international patents.                           
          Petitioner’s Relationship with ProGuard                                     
               On June 26, 1994, petitioner entered into a contract for               
          services (the contract) with ProGuard, Inc. (ProGuard), to                  
          perform scientific research as an independent contractor.                   
          Petitioner and ProGuard shared an interest in developing “safer             

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