                       T.C. Memo. 1999-295



                     UNITED STATES TAX COURT



ESTATE OF WILLIAM T. ROGERS, DECEASED, GAYLE M. ROGERS, PERSONAL
REPRESENTATIVE, AND GAYLE M. ROGERS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23668-95.                Filed September 3, 1999.



     William T. Ramsey, for petitioners.

     Clinton M. Fried, for respondent.
                               - 2 -


                        MEMORANDUM OPINION


     WELLS, Judge:   Respondent determined a deficiency in

petitioners'1 1991 Federal income tax in the amount of $3,506,517

and a section 6662 penalty of $701,303.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.




1
     The notice of deficiency in the instant case was sent to
William T. Rogers and Gayle M. Rogers. William T. Rogers died
during 1998, after the briefs were submitted. Accordingly, the
caption of the instant case was amended to substitute for William
T. Rogers the Estate of William T. Rogers, Gayle M. Rogers,
Personal Representative. For convenience, we hereinafter refer
to petitioner Gayle M. Rogers as petitioner, William T. Rogers as
Mr. Rogers, petitioner and Mr. Rogers as the Rogerses, and
petitioner and the Estate of William T. Rogers, Gayle M. Rogers,
Personal Representative, as petitioners.
                              - 3 -


     The issues we must decide in the instant case are:2   (1)

Whether Mr. Rogers received an interest in certain property

during 1991 as compensation from Alpha Hospital Management, Inc.

(Alpha Hospital), an S corporation in which Mr. Rogers was a

shareholder; (2) the value, if any, of such interest; and (3)

whether petitioners are liable for a penalty pursuant to section

6662(a) for substantial understatement of tax.



2
     Respondent's notice of deficiency determined a deficiency in
the Rogerses' 1991 Federal income tax in the amount of $3,506,517
and a penalty pursuant to sec. 6662 in the amount of $701,303.
In calculating the deficiency, respondent redetermined
petitioner's income with respect to Alpha Medical, Inc. (Alpha
Medical), a subchapter S corporation of which Mr. Rogers was the
sole shareholder. Respondent determined that $8,622,642 reported
by both Alpha Medical and Mr. Rogers as compensation to Mr.
Rogers was excessive. Accordingly, respondent denied Alpha
Medical's deduction for compensation to the extent of $8,122,015
and decreased Mr. Rogers' income from compensation to $500,627.
Respondent further denied Alpha Medical deductions for other
expenses in the amount of $1,507,344. Accordingly, respondent
increased Mr. Rogers' proportionate share of subchapter S income
from Alpha Medical from a loss in the amount of $363,243 to
income in the amount of $9,266,116. Respondent has conceded by
stipulation that Mr. Rogers' distributive share of income from
Alpha Medical is in fact a loss in the amount of $363,243.
     Respondent also determined in the notice of deficiency that
Mr. Rogers was not entitled to report under the installment
method $9,804,000 from the sale of contract rights regarding
certain property. See infra note 5. Subsequently, respondent
amended the answer in the instant case to allege that, during
1991, Mr. Rogers received a compensatory interest in certain
properties as payment for his services in arranging a transaction
between American Medical Holdings, Inc. and Vista Hospital
Systems, Inc. By stipulation, respondent conceded the adjustment
in the notice of deficiency in the amount of $9,804,000 with
respect to the installment sale. Respondent's position is that
the value of the compensatory interest received by Mr. Rogers
during 1991 was $10,320,000.
                                 - 4 -


Background

     The instant case was submitted fully stipulated.    The

parties' stipulations of fact are incorporated into this Opinion

by reference and, accordingly, are found as facts in the instant

case.

     The record in the instant case is voluminous, consisting of

numerous stipulated documents.    The stipulated facts do not

sufficiently explain the documents and the transactions described

in the documents.   Consequently, the record in the instant case

is confusing and incomplete.    Nonetheless, we have done the best

we can to set forth below our findings of the facts of the

instant case.

     At the time they filed the petition in the instant case, the

Rogerses resided in McDonald, Tennessee.    Mr. Rogers was one of

two shareholders of Alpha Hospital, an S corporation.    The other

shareholder was Health Facilities Management Group, a trust

controlled by F. Scott Gross.

     On May 15, 1990, Alpha Hospital entered into two asset

purchase agreements.   One asset purchase agreement was with

American Medical Holdings, Inc. (AMH), a Delaware corporation and

its wholly owned subsidiary New H Circle City, Inc. (Circle

City), a California corporation.    The other asset purchase

agreement was with AMH and its other wholly owned subsidiary, New

H Arroyo Grande, Inc. (Arroyo Grande), a California corporation.
                                - 5 -


Both Circle City and Arroyo Grande owned hospitals and other

assets.   The asset purchase agreements covered both the hospitals

as well as other assets including parcels of raw land that were

adjacent to the hospitals (nonhospital properties).   The

agreements were assignable to "a section 501(c)(3) organization"

and were conditioned upon Alpha Hospital's obtaining financing in

an amount and on terms acceptable to Alpha Hospital in its sole

discretion.

     During the summer and early fall of 1990, Alpha Hospital and

AMH worked with Vista Hospital Systems, Inc., a California non-

profit organization, to complete the acquisition of the

properties by Vista.   As we discuss below, such acquisition was

to be accomplished by the assignment to Vista of Alpha Hospital's

rights under the asset purchase agreements.   First Boston

Corporation, New York, New York (First Boston), agreed to

underwrite the financing of the acquisition, which financing was

to be accomplished by the City of Arroyo Grande's issuing Series

1990 A Certificates of Participation and the City of Corona

issuing Series 1990 B Certificates of Participation (collectively

1990 certificates).    During October 1990, First Boston circulated

a Preliminary Official Statement to potential buyers of the 1990

certificates.   The principal amount sought during the initial

offering was $61.1 million.   First Boston was unable to raise

that amount.
                                - 6 -


     On October 10, 1990, Alpha Hospital and AMH entered into the

First Amendment to the asset purchase agreements.   On that same

day, Alpha Hospital, and Vista entered into an agreement entitled

"Assignment, Assumption and Security Agreement" (assignment

agreement).   In the assignment agreement, Vista was assigned

Alpha Hospital's contract rights to purchase the hospitals that

Alpha Hospital had acquired in the asset purchase agreements.

The assignment agreement also provided that Alpha Hospital would

be retained to manage the day-to-day operation of the hospitals

after the acquisition by Vista.   AMH, Arroyo Grande, and Circle

City consented to the assignment agreement.

     Also, on October 10, 1990, Alpha Hospital and AMH entered

into an agreement with Great Western Inc. (Great Western), a

validly formed, unrelated, corporation that was owned during 1990

by Jill C. Hanna (Ms. Hanna).   Under the terms of the October 10,

1990, agreement, Great Western was assigned the contract rights

of Alpha Hospital to acquire the nonhospital properties.   The

October 10, 1990, assignment agreement covering the nonhospital

properties failed to set forth a sales price or times for making

payments.

     On December 14, 1990, because of the difficulties that First

Boston encountered in raising the necessary financing, AMH and
                               - 7 -


Vista3 entered into the Second Amendment to the asset purchase

agreements that reduced the purchase price of the hospitals.

     On December 15, 1990, Vista and Alpha Hospital entered into

an Amended and Restated Management agreement.   Under the terms of

the December 15, 1990, agreement, Alpha Hospital would receive

$600,000 plus 2 percent of the hospitals' net patient service

revenues annually.   Additionally, Alpha Hospital was to receive

$475,000 for its assignment of its rights under the asset

purchase agreements.   The management agreement was contingent on

the employment of F. Scott Gross at Alpha Hospital.   Neither the

management agreement nor the assignment agreement made any

mention of compensation to be paid to Mr. Rogers.

     On January 10, 1991, AMH and Vista executed the Third

Amendment to the asset purchase agreements in which the overall

size of the tax-exempt financing was lowered from $61.1 million

to $51.4 million, including a reduction in the purchase price by

AMH from $38.3 million to $30.4 million.

     In an agreement dated January 15, 1991, Mr. Rogers assigned

to Great Western all rights that he might have in the agreement

between Alpha Hospital and AMH with respect to the nonhospital




3
     Even though Alpha Hospital was a party to the asset purchase
agreements and first amendment to the asset purchase agreements,
it was not a signatory party to any subsequent amendments to the
asset purchase agreements.
                                - 8 -


properties.4    In return, Great Western agreed to remit to Mr.

Rogers 95 percent of all proceeds it received on the sale of such

properties.    The January 15, 1991, agreement was contingent on

the consummation of the agreements between Vista and AMH and on

Great Western's resale of nonhospital properties.    Also, on

January 15, 1991, Ms. Hanna, on behalf of Great Western, executed

a promissory note requiring Great Western to pay Mr. Rogers 95

percent of the proceeds received on the sale of nonhospital

properties.    On his 1991 Federal income tax return, Mr. Rogers

reported the January 15, 1991, transaction as an installment sale

of contract rights valued at $9,804,000.5

     On January 23, 1991, the sale of the hospitals from AMH to

Vista closed.    On that same day, the nonhospital properties were

transferred by Grant Deeds from Arroyo Grande and Circle City to

Great Western.    Great Western neither paid any remuneration nor

gave anything of value to AMH or its subsidiaries for the

nonhospital properties.

     On February 1, 1991, Great Western leased to Vista a medical

office building located on one of the nonhospital properties for

$143,050 in rent, payable in equal semiannual installments of


4
     The Jan. 15, 1991, agreement refers to properties described
in "Exhibit A", but Exhibit A is not part of the record.
However, it is clear that "Exhibit A" contained a description of
the nonhospital properties.
5
     See supra note 2.
                               - 9 -


$71,525.   For 1991, Great Western reported on its income tax

return the receipt of rent in the amount of $83,446 from the

nonhospital properties.

     Between March and July 1991, Ms. Hanna, on behalf of Great

Western, attempted to sell the nonhospital properties.     During

May 1991, Vista, through Alpha Hospital, offered to purchase the

nonhospital properties.   During 1991, Great Western sold the

nonhospital properties to Vista.   Vista financed the purchase of

the nonhospital properties through tax-exempt Certificates of

Participation issued by the Cities of Arroyo Grande and Corona,

California, (1991 certificates) to Great Western.     The 1991

certificates were nonrecourse obligations secured only by the

property acquired.   The 1991 certificates were zero coupon

obligations and no principal or interest payments were to be made

until specified dates in the future.     On receipt of the 1991

certificates, Great Western agreed that it would not attempt to

transfer or otherwise dispose of the 1991 certificates without

receiving from a rating agency a rating of A or better for the

1991 certificates.

     During November 1991, Ms. Hanna, on behalf of Great Western,

attempted to obtain a rating for the 1991 certificates so that

the certificates could be marketed.     To assist in that effort,

Great Western retained the underwriting firm of Peacock, Hislop,

Staley, and Given, Inc. (Peacock).     The efforts of Peacock
                               - 10 -


ultimately failed.   In a letter dated March 4, 1992, Peacock

ended its representation of Great Western, citing among its

reasons the repeated failure of Great Western to provide it with

adequate information.

     Pursuant to the financing agreement covering its purchase of

the nonhospital properties, Vista was required to make annual

deposits in a sinking fund that would be used to pay principal

and interest on the 1991 certificates when they became due.

Vista defaulted on its obligations in 1993 and tendered to Great

Western a Deed in Lieu of Foreclosure.     At that time, Great

Western discovered that Vista had failed to pay real property

taxes on the nonhospital property in Corona, California, and had

thereby encumbered the property.   Negotiations between Great

Western and Vista were commenced in an attempt to force Vista to

cure its default.    Those negotiations failed and, during October

1995, the trustees of the 1991 certificates foreclosed.

     On March 15, 1996, Great Western executed agreements with

the trustees and the Cities of Arroyo Grande and Corona

terminating the 1991 certificates.      On June 24, 1996, and on July

1, 1996, Great Western received a Trustee's Deed Upon Sale for

each of the nonhospital properties.     During 1997, Great Western

again sold the nonhospital properties.     Most of the purchase

price for the 1997 sale covered back taxes and expenses.     Mr.
                               - 11 -


Rogers, however, received $32,500 from the 1997 sale of the

properties.

Discussion

     We must first decide whether, during 1991, Mr. Rogers

received a compensatory interest in the nonhospital properties as

payment for his services in arranging the transaction between AMH

and Vista.    Because respondent raised this issue for the first

time in the amended answer, respondent bears the burden of proof.

Rule 142.

     Respondent contends that a compensatory interest in the

nonhospital properties was transferred to Mr. Rogers during 1991

as payment for his services in arranging the transfer of the

hospitals from AMH to Vista.    None of the numerous stipulated

documents, however, refer to any such payment.    Rather, the

stipulated documents show that Alpha Hospital received $475,000

for the transfer of its rights to the hospitals and nonhospital

properties from AMH.    Additionally, Alpha Hospital was awarded

lucrative management contracts at both hospitals for which it was

to be paid a combined $600,000, plus 2 percent of the net patient

service revenues annually.    The only documentary evidence of Mr.

Rogers' interest in the nonhospital properties is the agreement

dated January 15, 1991.    In that agreement, Mr. Rogers

transferred his interest in the contract between Vista and AMH,

with respect to the nonhospital properties, to Great Western in
                              - 12 -


return for Great Western's promise to sell those properties and

remit to Mr. Rogers 95 percent of the proceeds.   The character of

Mr. Rogers' interest in the nonhospital properties and the point

at which Mr. Rogers received that interest are not disclosed in

any of the stipulated documents.   Because the instant case was

submitted on the basis of the stipulation of facts without trial,

there is no other evidence concerning Mr. Rogers' interest in the

nonhospital properties.

     Acknowledging that there is no documentary evidence of a

compensation agreement between Mr. Rogers and Alpha Hospital,

respondent argues that there was an oral understanding between

Mr. Rogers and Alpha Hospital that Mr. Rogers would attempt to

sell the hospital properties acquired by Alpha Hospital from AMH

in return for the receipt of the nonhospital properties on

consummation of the sale.   Respondent, however, presented no

witnesses to testify to that understanding and presented no other

evidence in addition to the stipulations.

     As we stated in the introduction to our findings of fact,

the record in the instant case is confusing and incomplete.     The

stipulations of fact fail to explain the significance of the

numerous attached exhibits and the details of the transaction

which the exhibits purport to describe.   The opacity of the

record appears to be due in no small part to respondent's failure

to articulate a coherent theory of the case until long after all
                              - 13 -


the evidence had been submitted.   Moreover, as we stated above,

respondent has the burden of proof in the instant case.   A

decision in favor of respondent, therefore, cannot rest on

assumption or speculation but must rest on fact.   Champayne v.

Commissioner, 26 T.C. 634, 645 (1956); Wood Corp. v.

Commissioner, 22 B.T.A. 1182, 1186 (1931), affd. 63 F.2d 623 (6th

Cir. 1933).   That the instant case was submitted to the Court

fully stipulated does not relieve respondent of that burden.

King's Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511,

517 (1992).

     In sum, respondent has failed to introduce evidence in the

instant case sufficient to show the character of the interest Mr.

Rogers received in the nonhospital properties.   Even if we were

to assume that Mr. Rogers received a valuable6 interest in such

properties, respondent introduced no evidence to show that Mr.

Rogers received that interest during 1991.   Accordingly, based on

the woefully inadequate record before us, we hold that respondent

has failed to carry the burden of proof in the instant case.

     Because we have found that respondent has failed to prove

that Mr. Rogers received a compensatory interest in the

nonhospital properties during 1991, we hold that petitioners are

not liable for the penalty pursuant to section 6662(a) for


6
     Because we hold for petitioner, the issue regarding the
value of Mr. Rogers' interest in the contract rights is moot.
                              - 14 -


substantial understatement.   We have considered respondent's

remaining arguments and find them irrelevant or unnecessary to

reach.7

     To reflect the foregoing,

                                         Decision will be entered

                                    for petitioners.




7
     Respondent has, on brief, advanced the argument that Great
Western is a sham corporation controlled by Mr. Rogers through
his attorney John Konvalinka, who is the brother-in-law of Ms.
Hanna. We note that on the day this case was called for trial,
before the parties agreed to submit the case as fully stipulated,
respondent attempted to assert this theory. Upon petitioner's
objection and the Court's inquiry, respondent specifically
disavowed any such theory regarding the transaction in issue in
the instant case. Respondent has offered no reason why the Court
should consider such an argument.
     Moreover, respondent's protestations of sham are not
supported by the evidence in the record. The parties have
stipulated that Great Western was a validly formed corporation
owned by Ms. Hanna. Additionally, there is extensive
correspondence between Ms. Hanna and various third parties that
evidence Ms. Hanna's active participation in the management and
sale of the nonhospital properties. Accordingly, even if we were
to consider respondent's sham-transaction theory, we would hold
that respondent has failed to carry the burden of proof on that
issue as well.
