                      T.C. Memo. 1998-203



                  UNITED STATES TAX COURT



   RAMON A. GARCIA AND BERTHA E. GARCIA, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21532-95.                   Filed June 3, 1998.



     Richard M. Taylor and James E. McCutcheon III, for

petitioners.

     Elizabeth A. Owen, for respondent.



          MEMORANDUM FINDINGS OF FACT AND OPINION

     WHALEN, Judge:   Respondent determined the following

deficiencies in, and accuracy-related penalties with

respect to, petitioners' Federal income tax:
                            - 2 -


           Year      Deficiency     Sec. 6662 Penalty

          1990       $22,763            $4,553
          1991        25,581             5,116
Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect during the years in

issue.

     The issues remaining for decision are:   (1) Whether

loans that petitioner received from a qualified employer

plan during 1986, together with accrued interest, are

properly treated under section 72(p) as distributions from

the plan in 1991, as respondent contends, or in a prior

year that is not before the Court, as petitioners contend;

(2) in the case of loans from a qualified employer plan

that are treated as distributions under section 72(p),

whether subsequent accruals of interest are properly

treated as additional distributions from the plan; and (3)

whether petitioners are liable for the accuracy-related

penalty for negligence prescribed by section 6662.


                      FINDINGS OF FACT

     Some of the facts have been stipulated and are so

found.   The stipulation of facts, supplemental stipulation

of facts, and exhibits attached to each are incorporated

herein by this reference.   Petitioners are husband and wife
                             - 3 -

who filed joint Federal income tax returns for 1990 and

1991.    At the time they filed their petition in this case

petitioners resided in Del Rio, Texas.     All references to

petitioner are to Mr. Ramon A. Garcia.

     Petitioner is a physician who engages in the practice

of medicine with approximately five employees in Del Rio,

Texas.    In 1976, petitioner established The Ramon A.

Garcia, M.D., P.A., Profit Sharing Plan & Trust Agreement

(the plan) in connection with his medical practice.      The

plan was at all relevant times a qualified employer plan

within the meaning of section 72(p)(4).     Petitioner was a

participant in the plan at all times since its inception.

He also served as plan administrator and as one of three

trustees of the trust that formed part of the plan.

     Petitioner received 13 separate loans from the plan

between February 1986 and June 1992.     The dates and amounts

of these loans are as follows:

                     Date              Amount
                   2/03/86           $15,000.00
                   5/01/86            12,000.00
                   8/15/86            11,760.00
                   1/15/87            10,000.00
                   2/15/87             4,000.00
                   2/15/88            10,000.00
                   8/15/88             5,000.00
                   1/31/90             6,000.00
                   4/16/90            18,000.00
                   1/01/91             1,675.86
                             - 4 -

                   Date              Amount
                 5/22/91             2,151.47
                 3/24/92             2,500.00
                 6/17/92             5,000.00


Each loan is evidenced by a written note, and the terms of

the notes are set forth on substantially identical forms.

Each note requires repayment over a 5-year period "in 20

quarterly installments", together with interest at the rate

of 10 percent per annum.

     Petitioner did not make payments in accordance with

the terms of the notes.    He made only two payments.    On

April 11, 1989, he made a partial payment of $8,545, and

sometime in 1994, he paid the entire outstanding balance

of all of the loans, including all accrued interest.

There is no written agreement or other document evidencing

a renegotiation, extension, renewal, or revision of any

part of the plan or any of the loans.    Petitioners did not

include any of the loans in the gross income reported on

their Federal income tax returns.

     Prior to trial, respondent made concessions which

resulted in reduced deficiencies and penalties.    The

amounts now in dispute are as follows:
                                             - 5 -


                                  Revised
               Year              Deficiency              Sec. 6662 Penalty

               1990                  $9,603                          $1,921
               1991                  22,648                           4,530


         Respondent computed the amount of the revised

deficiency for 1990 by treating the principal amount of

each of the loans that petitioner received in 1990 as a

taxable distribution of plan assets in that year (viz

$24,000, as shown in the following schedule).                                  In addition,

respondent treated the aggregate unpaid interest that

accrued during 1990 on all of the outstanding loans,

except the 1986 loans, as a distribution during 1990 (viz

$5,100.82, as shown in the following schedule).                                       This

amount includes interest that accrued during 1990 on the

loans made in 1987 and 1988 that the parties agree are

deemed distributions prior to 1990.                          Respondent calculated

the aggregate deemed distribution for 1990, $29,100.82, as

follows:


              Loan                   Balance as of   Balance as of     1990 Accrued         Total
  Date     Principal    1990 Loans      12/31/89        12/31/90         Interest       Distribution
 2/03/86   $15,000.00
 5/01/86    12,000.00
 8/15/86    11,760.00
 1/15/87    10,000.00                 $13,120.87      $14,482.98        $1,362.11
 2/15/87     4,000.00                   5,248.35        5,793.19           544.84
 2/15/88    10,000.00                  11,886.86       13,120.87         1,234.01
                                            - 6 -

              Loan                  Balance as of     Balance as of   1990 Accrued       Total
  Date     Principal   1990 Loans      12/31/89          12/31/90       Interest     Distribution
 8/15/88    5,000.00                   5,657.04            244.31         587.27
 1/31/90    6,000.00   $6,000.00                         6,461.34         461.34
 4/16/90   18,000.00   18,000.00                        18,911.25         911.25
 1/01/91    1,675.86
 5/22/91    2,151.47
 3/24/92    2,500.00
 6/17/92    5,000.00   _________                                       _________

                       24,000.00                                        5,100.82      $29,100.82




         Respondent computed the amount of the revised

deficiency for 1991 by treating the principal amount

of each of the loans that petitioner received in 1991

as a distribution of plan assets in 1991 (viz $3,827, as

shown in the following schedule).                         In addition, respondent

treated the aggregate unpaid interest that accrued during

1991 on all of the loans, except the 1986 loans, as a

distribution during 1991 (viz $6,986.75, as shown in the

following schedule).                As with 1990, this amount includes

interest that accrued during 1991 on the loans made in

1987, 1988, and 1990 that the parties agree are deemed

distributions prior to 1991.                        Finally, respondent treated

the principal amounts of the three loans that petitioner

received during 1986, together with accrued interest as of

December 31, 1991, as a distribution in 1991 (viz

$55,941.57, as shown in the following schedule).
                                                - 7 -

Respondent calculated the aggregate deemed distribution

for 1991, $66,755.32, as follows:


              Loan                      Balance as of   Balance as of   1991 Accrued   Balance as of       Total
  Date     Principal    1991 Loans         12/31/90        12/31/91       Interest        12/31/91     Distribution
 2/03/86   $15,000.00                                                                   $26,469.16
 5/01/86    12,000.00                                                                     9,720.53
 8/15/86    11,760.00                                                                    19,751.88
 1/15/87    10,000.00                    $14,482.98      $15,986.50      $1,503.52
 2/15/87     4,000.00                      5,793.19        6,394.60         601.41
 2/15/88    10,000.00                     13,120.87       14,482.98       1,362.11
 8/15/88     5,000.00                      6,244.31        6,892.56         648.25
 1/31/90     6,000.00                      6,461.34        7,132.11         670.77
 4/16/90    18,000.00                     18,911.25       20,874.18       1,962.93
 1/01/91     1,675.86   1   $1,676.00                      1,804.87         128.87
 5/22/91     2,151.47       12,151.00                      2,259.89         108.89
 3/24/92     2,500.00
 6/17/92     5,000.00   __________                                       _________      __________

                             3,827.00                                     6,986.75       55,941.57      $66,755.32


      1
        The difference between the principal amounts of the loans
petitioner received in 1991 and the amounts respondent includes in the
deemed distribution for the year is presumably attributable to
rounding.


         We note that in calculating the unpaid balance of the

1986 loans as of December 31, 1991, respondent applied the

$8,545 payment that petitioner made on April 11, 1989, to

the outstanding balance of the May 1, 1986, loan as of the

date of the payment.                    We also note that, in computing the

revised deficiency, respondent did not treat the principal

amounts of the loans petitioner received in 1987, 1988, or

1992 as taxable distributions in either of the years at

issue.
                           - 8 -

                          OPINION

     Petitioners do not dispute respondent's treatment of

the principal amounts of the 1990 and 1991 loans as deemed

distributions in the respective years of receipt.    However,

petitioners contend that the 1986 loans, together with

accrued interest, should be treated as distributions in

1987 rather than 1991, as determined by respondent.    In

addition, petitioners contend that respondent erred in

treating the unpaid interest that accrued during 1990 and

1991 on all of the outstanding loans, except the 1986

loans, as taxable distributions in those respective years.

Petitioners bear the burden of proving that respondent's

determinations are erroneous.   See Rule 142(a).   All Rule

references are to the Tax Court Rules of Practice and

Procedure.

     Section 402(a) provides that "the amount actually

distributed to any distributee by any employees' trust

described in section 401(a) * * * shall be taxable to [the

distributee], in the year in which so distributed, under

section 72 (relating to annuities)."   Section 72(p)(1)(A)

provides generally that a loan from a qualified employer
                            - 9 -

plan to a plan participant or beneficiary is treated as a

taxable distribution to the participant or beneficiary in

the taxable year in which the loan is received.     See

Patrick v. Commissioner, T.C. Memo. 1998-30; Prince v.

Commissioner, T.C. Memo. 1997-324; Estate of Gray v.

Commissioner, T.C. Memo. 1995-421; cf. Furlong v.

Commissioner, 36 F.3d 25, 26 (7th Cir. 1994), affg. T.C.

Memo. 1993-191.   Section 72(p)(2), however, provides an

exception to this general rule.     Under this exception, a

loan is not treated as a taxable distribution if:     (1) The

principal amount of the loan (when added to the outstanding

balance of all other loans from the same plan) does not

exceed a specified limit; and (2) the terms of the loan

impose certain minimum repayment requirements.     See sec.

72(p)(2).

     Section 72(p) was added to the Code by the Tax Equity

& Fiscal Responsibility Act of 1982 (the 1982 Act), Pub. L.

97-248, sec. 236, 96 Stat. 324, 509.     In its original form,

section 72(p) provided in pertinent part as follows:


          (p) Loans Treated as Distributions.--For
     purposes of this section--
                  - 10 -

(1) Treatment as Distributions.--

     (A) Loans.--If during any taxable year a
participant or beneficiary receives (directly or
indirectly) any amount as a loan from a qualified
employer plan, such amount shall be treated as
having been received by such individual as a
distribution under such plan.

          *   *    *   *    *   *    *

(2) Exception for Certain Loans.--

     (A) General rule.--Paragraph (1) shall
not apply to any loan to the extent that
such loan (when added to the outstanding
balance of all other loans from such plan
whether made on, before, or after August 13,
1982), does not exceed the lesser of—

          (i) $50,000, or

          (ii) ½ of the present value of the
          nonforfeitable accrued benefit of
          the employee under the plan (but
          not less than $10,000).

     (B) Requirement that the loan be
repayable within 5 years.--

          (i) In general.--Subparagraph (A)
     shall not apply to any loan unless such
     loan, by its terms, is required to be
     repaid within 5 years.

          (ii) Exception for home loans.--
     Clause (i) shall not apply to any
     loan used to acquire, construct,
     reconstruct, or substantially
     rehabilitate any dwelling unit which
     within a reasonable time is to be used
     (determined at the time the loan is
                             - 11 -

                 made) as the principal residence of the
                 participant or a member of the family
                 * * *.


This provision applied to all loans made after August 13,

1982.   See 1982 Act, sec. 236(c)(1), 96 Stat. 324, 510.

     As part of the Tax Reform Act of 1986 (the 1986 Act),

Pub. L. 99-514, sec. 1134(b), 100 Stat. 2085, 2484,

Congress amended section 72(p) by, inter alia, adding a

new subparagraph (2)(C), which imposes an additional

requirement for the exception contained in section

72(p)(2).    That provision states as follows:


     (C) Requirement of level amortization.--Except as
     provided in regulations, this paragraph shall not
     apply to any loan unless substantially level
     amortization of such loan (with payments not less
     frequently than quarterly) is required over the
     term of the loan.


Under this level amortization requirement, a loan is not

eligible for the exception contained in section 72(p)(2)

unless it requires substantially level amortization over

the term of the loan, with payments no less frequently than

quarterly.    See id.   This level amortization requirement

applies only to loans that are made, renewed, renegotiated,
                            - 12 -

modified, or extended after December 31, 1986.   See 1986

Act, sec. 1134(e), 100 Stat. 2085, 2484.


Treatment of 1986 Loans

     The principal issue in this case involves the treat-

ment of the 1986 loans.    As discussed more fully below,

this issue turns on whether the 1986 loans were modified

or extended after 1986 such that they are subject to a

proposed regulation interpreting the level amortization

requirement of the 1986 Act.

     The parties agree that at the time the 1986 loans were

made, they were not subject to treatment as distributions

under section 72(p)(1) because they qualified under the

exception set forth in section 72(p)(2).    The 1986 loans

became subject to treatment as distributions later by

reason of petitioner's failure to make the payments

required by the notes.    The parties differ on the time

the 1986 loans should be treated as distributions.

     In formulating the revised deficiency, respondent

treated the 1986 loans as subject to the 1982 Act and

included the outstanding balance of the 1986 loans as of

December 31, 1991, as a taxable distribution of plan assets
                           - 13 -

to petitioners in 1991.   Respondent's position is based on

the conference report accompanying the 1982 Act, which

states in pertinent part as follows:


     if payments under a loan with a repayment period
     of less than 5 years are not in fact made, so
     that an amount remains payable at the end of 5
     years, the amount remaining payable is treated as
     if distributed at the end of the 5-year period.
     * * * [H. Conf. Rept. 97-760, at 619 (1982),
     1982-2 C.B. 600, 672.]


The above-quoted statement from the conference report sets

forth Congressional intent regarding the treatment of loans

that are subject to the 1982 Act, that is, loans made after

August 13, 1982.   See H. Conf. Rept. 97-760, at 620 (1982),

1982-2 C.B. 600, 672.   Based upon the conference report,

respondent treated the unpaid balance of the 1986 loans

as a taxable distribution in 1991, the end of the 5-year

period following the dates of the loans.

     Petitioners concede that the 1986 loans must be

treated as taxable distributions, but argue that "the

entire balance of each loan became taxable to Petitioners

in taxable year 1987, at the latest."   Petitioners reason

that the level amortization requirement contained in
                          - 14 -

section 72(p)(2)(C) that was added to the Code by the 1986

Act applies to the 1986 loans because the loans were

modified after December 31, 1986.   See 1986 Act, sec.

1134(e), 100 Stat. 2085, 2484.   Petitioners further reason

that because the level amortization requirement applies to

the 1986 loans, the interpretation of section 72(p)(2)(C)

contained in a proposed regulation issued under the 1986

Act also applies to the loans.   This proposed regulation

provides as follows:


          Q-10. If a participant fails to make
     installment payments required under the terms
     of a loan that satisfied the requirements of
     [section 72(p)(2)] when made, when does a deemed
     distribution occur and what is the amount of the
     deemed distribution?

          A-10. (a) Timing of deemed distribution.
     Failure to make any installment payment when due
     in accordance with the terms of the loan violates
     [the level amortization requirement of] section
     72(p)(2)(C) and, accordingly, results in a deemed
     distribution at the time of such failure * * * .

          (b) Amount of deemed distribution. If a
     loan satisfied [the requirements of section
     72(p)(2)] when made, but there is a failure to
     pay the installment payments required under the
     terms of the loan * * *, then the amount of the
     deemed distribution equals the entire outstanding
     balance of the loan at the time of such failure.
     [Sec. 1.72(p)-1, Q&A-10, Proposed Income Tax
                            - 15 -

     Regs., 60 Fed. Reg. 66234, 66236 (Dec. 21, 1995)
     (emphasis added).]


     Under this proposed regulation, petitioners contend,

the loans must be treated as distributions at the time

petitioner first failed to make a quarterly installment

payment.   They further contend that such failure occurred

in "1987, at the latest."

     We note at the outset that the above proposed

regulation has not been finalized.    Moreover, even if the

proposed regulation were final, it would not, by its terms,

apply to the 1986 loans.    See sec. 1.72(p)-1, Q&A-19,

Proposed Income Tax Regs. 63 Fed. Reg. 42, 47 (Jan. 2,

1998) (regulation applies to "loans made on or after the

date that is three months after the date of publication of

the final regulations in the Federal Register.")    In any

event, as discussed below, we reject petitioners' threshold

contention that section 72(p)(2)(C) as added to the Code by

the 1986 Act is applicable to the 1986 loans.    Therefore,

we need not address petitioners' contention regarding the

effect of the proposed regulation.
                           - 16 -

     In arguing that the 1986 loans were modified after

December 31, 1986, petitioners stipulate that there is no

written agreement or other document evidencing a renewal,

renegotiation, modification, or extension of the loans.

Petitioners maintain that the loans were modified by the

"regular course of dealing" between petitioner and the

plan.   Specifically, petitioners argue that "Petitioner's

longstanding failure to make required quarterly payments on

the notes (and the plan's failure to enforce such payments)

amounted to a revision or modification of the terms of the

underlying obligations."

     Petitioners cite Tech. Adv. Mem. 93-44-001

(November 5, 1993) (the TAM) to support their position

that the plan's failure to demand payment constituted a

modification of the terms of the notes.   We have previously

noted that a technical advice memorandum is merely a ruling

given to a specific taxpayer based upon the taxpayer's

specific facts and is not a ruling of general application.

See Golden Belt Tel. Association, Inc. v. Commissioner, 108

T.C. 498, 506 (1997).   It does not constitute authority and

should not be cited as precedent.   See sec. 6110(j)(3);
                           - 17 -

Golden Belt Tel. Association, Inc. v. Commissioner, supra;

Transco Exploration Co. v. Commissioner, 95 T.C. 373, 386

(1990), affd. 949 F.2d 837 (5th Cir. 1992); cf. Follender

v. Commissioner, 89 T.C. 943, 958 (1987).

     Moreover, the TAM is clearly distinguishable from the

instant case.   The taxpayer in the TAM was a participant

in a qualified profit-sharing plan who received a loan on

December 18, 1986, from the trust that formed a part of the

plan.   The Commissioner treated the loan as a distribution

under section 72(p)(1) based upon a determination that the

terms of the note violated the level amortization

requirement of section 72(p)(2)(C).    The taxpayer argued

that the loan was not subject to the level amortization

requirement of the 1986 Act because it had been made prior

to December 31, 1986, the effective date of the 1986 Act.

Respondent rejected the taxpayer's argument and determined

that the 1986 Act was applicable because the loan had been

extended after the effective date.    Significantly, the

Commissioner did not rely on the fact that the trustee of

the trust had executed two signed statements after

December 31, 1986, purporting to extend the repayment
                             - 18 -

period under the terms of the note.    Rather, the

Commissioner found that all parties to the loan knew that

the trustee intended to exercise his unilateral authority

to extend it.   In concluding that the loan was modified

after December 31, 1986, the Commissioner stated:


     [The taxpayer] acknowledges that the delay
     in payment was discussed with the [other
     participants in the plan] and the [other
     participants] knew that no attempt would be
     made to demand payment. Therefore, it appears
     that the provision in the original loan giving
     the trustee unilateral authority to extend the
     loan was acted on, and the document [containing
     the written extensions] indicates the trustee did
     extend the loan. Even if the extension agreement
     was prepared after the fact, it appears in this
     closely held company that all parties involved
     knew that the trustee was extending the loan.
     Accordingly, the loan is to be treated as a new
     loan on the date of extension, and is therefore
     subject to the level amortization requirement.
     [Tech. Adv. Mem. 93-44-001 (November 5, 1993).]


     In contrast, there is no evidence in this case that

the parties to the loan transactions intended or agreed to

modify or change the terms of the loans after December 31,

1986, and thus there is no basis to find that the 1986 Act

amendments are applicable.    First, petitioners stipulate

that there is no written document or notation evidencing a
                               - 19 -

renewal, renegotiation, modification, or extension of the

1986 loans.   Second, there is no other evidence that the

parties to the loan intended to modify their contractual

relationship in any manner.      In fact, we are unable to find

from petitioner's vague and evasive testimony that he was

even aware of the quarterly repayment requirements in the

notes.   Petitioner testified on direct examination as

follows:


     Q          Dr. Garcia, the stipulated notes call
           for quarterly repayments. In fact, were
           those quarterly repayments ever made?

     A          No.

     Q          What was your understanding with regard to
           the repayment of the notes?

     A          Well, according to the advice given to
           me by my CPA was that payment would be set
           up and that was the advice that I got. To
           me that plan was never the note.

     Q          Did your CPA, Mr. Glen, ever tell you when
           the notes should be repaid?

     A          No, sir.

                  *   *    *     *      *   *   *

     Q          * * * What was your understanding with
           regard to those quarterly payments?
                            - 20 -

     A           I didn't have any knowledge or
            understanding of that. I was just relying
            on the advice of my CPA.


Petitioner testified on cross-examination as follows:


     Q           Did the notes state that you had to pay
            -- that you had to make payments quarterly?

     A           I don't recollect.


We also note that neither of the other trustees testified

at trial.   Unlike the TAM, in this case we have no basis

to find that the parties to the loans, consisting of

petitioner and the other two trustees, on the one hand,

and petitioner as borrower, on the other hand, intended to

renew, renegotiate, modify, or extend the terms of the

loans after 1986.

     Petitioners also cite three State court cases for the

proposition that the plan's "failure to enforce its rights

over a three or four year period" constituted a "revision

or modification of the [notes]" under State law.   In

effect, petitioners argue that State law controls our

determination of whether the subject loans were renewed,

renegotiated, modified, or extended after the effective
                           - 21 -

date of the 1986 Act.   Petitioners cite no authority for

that proposition.   Nevertheless, we find it unnecessary to

decide whether State law controls under these circumstances

because each of the cases petitioners cite is

distinguishable.

     Each of the State cases involves overt conduct between

two distinct parties to a contract clearly evidencing

mutual intent to change or alter the terms of the contract.

See Goodyear Tire & Rubber Co. v. Portilla, 879 S.W.2d 47

(Tex. 1994) (employer's failure to enforce antinepotism

policy for approximately 17 years); Highpoint of Montgomery

Corp. v. Vail, 638 S.W.2d 624 (Tex. App. 1982) (lender's

regular acceptance of late payments on a note for

approximately 11 years); Wendlandt v. Sommers Drug Stores

Co., 551 S.W.2d 488 (Tex. Civ. App. 1977) (landlord's

failure to object to late payments over a period of 1½ to

2 years).   In contrast, the parties to the notes in this

case did not engage in any conduct evidencing an intent

to renew, renegotiate, modify, or extend the terms of the

notes.   As noted above, we are unable to find that

petitioner was even aware of the provisions in the notes
                            - 22 -

requiring quarterly payments, and neither of the other

trustees testified at trial.

     Moreover, unlike the Texas cases, each of which

involves distinct contractual parties with competing

interests, in this case, petitioner acted as both

administrator of the plan, trustee of the plan trust,

and participant-borrower.   Petitioner's unilateral failure

to demand payment from himself under the circumstances

presented in this case is not sufficient, by itself, to

evidence mutual assent between two parties to modify the

terms of the notes.

     Furthermore, petitioners do not attempt to show at

exactly what point the plan's failure to demand payment

constituted a modification of the loans.   Based on the

cases petitioners cite, any modification that might have

occurred presumably would have taken place after sufficient

time passed to create a "regular course of dealing."    Even

if we accept petitioners' argument that the notes were

modified by a regular course of dealing, petitioners have

not shown any factual basis on which to find that the
                           - 23 -

regular course of dealing was established prior to the

years before the Court.

     Based on the foregoing, we find that petitioners

have failed to prove that the 1986 loans were renewed,

renegotiated, modified, or extended after 1986 within

the meaning of the 1986 Act effective date provisions.

We therefore hold that the level amortization requirement

contained in 1986 Act is not applicable to such loans.    Cf.

Hickman v. Commissioner, T.C. Memo. 1997-545.   Hence, the

interpretation of that provision contained in the proposed

regulation, discussed above, on which petitioners rely, is

not applicable to the 1986 loans.   Accordingly, we sustain

respondent's determination that the outstanding balance of

the 1986 loans as of December 31, 1991, constitutes a

distribution of plan assets to petitioners in 1991.


Unpaid Interest Accrued During 1990 and 1991

     Respondent treats the unpaid interest that accrued

during 1990 and 1991 on all of the loans, other than the

1986 loans, as distributions of plan assets in those

respective years.   These amounts consist, either entirely

or in substantial part, of interest that accrued after the
                             - 24 -

loans were deemed to be distributions for purposes of

section 72(p).    Respondent maintains that such amounts are,

in effect, additional loans from the plan which must be

treated as distributions pursuant to section 72(p)(1)(A).

     We faced a similar question in Chapman v.

Commissioner, T.C. Memo. 1997-147.     The taxpayers in that

case received loans from a qualified employer plan which

respondent treated as deemed distributions pursuant to

section 72(p) under the 1982 Act and the conference report

cited above.     Respondent also treated the interest that

accrued during the 5-year repayment period, as well as

the interest that accrued thereafter, as additional

distributions under section 72(p).

     In holding that none of the interest was properly

treated as a taxable distribution, we stated:


          We are not convinced * * * that Congress
     intended that interest accruing during or after
     the 5-year period be treated as a taxable
     distribution for purposes of section 72(p)(1).
     Respondent's argument relies upon the fiction
     that the accrued interest constitutes an
     additional loan. From the language of section
     72(p)(1), it is apparent that, to be a taxable
     distribution, the loan amount must be received
     either directly or indirectly by the participant
     or beneficiary. The accrued interest does not
                          - 25 -

    satisfy the requirement that the loan must be
    received to be a distribution. Accordingly, we
    find that for the purposes of section 72(p)(1)
    neither * * * [of the taxpayers] received
    distributions in 1988 or 1989 equal to the
    interest * * * which accrued on the plan loans.
    [Chapman v. Commissioner, supra.]


     Furthermore, we note that in proposed regulations

recently issued under section 72(p), the Department of

Treasury takes the position, contrary to respondent's

position in this case, that interest which accrues after

a loan is deemed distributed under section 72(p) is not

treated as an additional deemed distribution.   Section

1.72(p)-1, Q&A-19, Proposed Income Tax Regs., 63 Fed.

Reg. 42, 44 (Jan. 2, 1998), states in part as follows:


     [A-19] deemed distribution of a loan is treated
     as a distribution for purposes of section 72.
     Therefore, a loan that is deemed to be
     distributed under section 72(p) ceases to be
     an outstanding loan for purposes of section
     72, and the interest that accrues thereafter
     under the plan on the amount deemed distributed
     is disregarded in applying section 72 to the
     participant or beneficiary. Even though
     interest continues to accrue on the outstanding
     loan * * *, this additional interest is not
     treated as an additional loan (and, thus, does
     not result in an additional deemed distribution)
     for purposes of section 72(p). * * *
                           - 26 -

The proposed regulation recognizes that a loan may

continue to be an enforceable obligation and continue

to accrue interest after it is treated as a distribution

under section 72(p).   Nevertheless, under the proposed

regulation, once the loan is treated as a distribution,

it ceases to have the characteristics of a loan for

section 72(p) purposes.   Thus, unpaid interest that accrues

after the date the loan is treated as a distribution is not

treated as an additional distribution to the borrower.

     We note that a proposed regulation carries no more

weight than a position advanced by the Commissioner on

brief.   See Hospital Corp. of Am. v. Commissioner, 109 T.C.

21, 53 n.40 (1997); KTA-Tator, Inc. v. Commissioner, 108

T.C. 100, 102-103 (1997); Frazee v. Commissioner, 98 T.C.

554, 582 (1992); Zinniel v. Commissioner, 89 T.C. 357, 369

(1987); F.W. Woolworth Co. v. Commissioner, 54 T.C. 1233,

1265-1266 (1970).   Nonetheless, we find that respondent's

position in the proposed regulation makes more sense than

the respondent's litigating position in this case.

Respondent's litigating position is logically inconsistent

to the extent that it continues to treat the loan as
                            - 27 -

outstanding for purposes of section 72(p) despite the fact

that the principal amount of the loan previously has been

deemed distributed and included in the taxpayer's income

under section 72(p).    Furthermore, respondent cites no

authority in support of the litigating position taken in

this case, other than    a general reference to section

72(p), nor has respondent sought to reconcile the

Commissioner's position in this case with the contrary

position taken in the proposed regulation.    Accordingly, we

hold that respondent erred in treating the unpaid interest

that accrued during 1990 and 1991 on all of the loans,

except for the 1986 loans, as additional distributions.

See Chapman v. Commissioner, supra.

     Petitioners do not challenge respondent's treatment of

the interest that accrued on the 1986 loans prior to the

time the principal amounts were treated as distributions

under section 72(p).    Accordingly, we do not address

whether respondent correctly included such amounts in the

deemed distribution for 1991.
                            - 28 -


Accuracy-Related Penalty

     Respondent determined that petitioners are liable for

the accuracy-related penalty for negligence prescribed by

section 6662.    Petitioners contend that they should not be

liable for the penalty because they acted in reasonable

and good faith reliance on the advice of their accountant,

Mr. Robert Glen, in preparing their 1990 and 1991 tax

returns.   They maintain that Mr. Glen was fully aware

of all of the facts and circumstances relating to the

formation and execution of the plan, as well as

petitioner's loans from the plan, and that Mr. Glen failed

to advise them to report the amounts received as taxable

distributions.   Petitioners also maintain that petitioner

has no training or special knowledge regarding Federal

tax law and qualified plan benefits, and that he did not

understand "the application of federal tax laws to the

loans he received from the qualified plan."
                           - 29 -

     Section 6662 imposes a penalty equal to 20 percent of

any portion of an underpayment of tax that is attributable

to negligence or disregard of rules or regulations.    See

sec. 6662(a) and (b).   The term "negligence" is defined as

"any failure to make a reasonable attempt to comply with

the provisions of [the Internal Revenue Code]".   Sec.

6662(c).   This includes any failure to exercise due care or

to do what a reasonable and ordinarily prudent person would

do under the circumstances.   See Rybak v. Commissioner, 91

T.C. 524, 565 (1988); Neely v. Commissioner, 85 T.C. 934,

947 (1985).   The term "disregard" includes any careless,

reckless, or intentional disregard.   Sec. 6662(c).

Petitioners bear the burden of proving that respondent's

determination of negligence is erroneous.   See Rule 142(a);

Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).

     Under certain circumstances, a taxpayer may avoid the

accuracy-related penalty for negligence by showing that he

or she acted in reasonable and good faith reliance on the

advice of a competent, independent tax professional.     See
                            - 30 -

sec. 6664(c); Freytag v. Commissioner, 89 T.C. 849, 888

(1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501

U.S. 868 (1991); sec. 1.6664-4(b)(1), Income Tax Regs.

Such reliance is not an absolute defense to negligence

but merely a factor to be considered.   See Freytag v.

Commissioner, supra.    When a taxpayer claims reliance on

an accountant, the taxpayer must establish that correct

information was provided to the accountant and that the

item was incorrectly claimed as a result of the

accountant's error.    See id.; Ma-Tran Corp. v. Commis-

sioner, 70 T.C. 158, 173 (1978); Pessin v. Commissioner,

59 T.C. 473, 489 (1972).   Petitioners bear the burden of

proving that their reliance on professional advice was

reasonable.   See Rule 142(a); Freytag v. Commissioner,

supra.

     In this case, the record shows that petitioners'

returns for 1990 and 1991 were prepared by the accounting

firm of Glen & Graf.   However, neither Mr. Glen nor any

member of Glen & Graf testified at trial.   Petitioners
                            - 31 -

could have called Mr. Glen as a witness at trial but

chose not to do so.   This creates a presumption that his

testimony would have been unfavorable to petitioners, or

at least suggests that the testimony would not have

supported their position.   See Wichita Terminal Elevator

Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162

F.2d 513 (10th Cir. 1947); see also Simon v. Commissioner,

830 F.2d 499, 506 (3d Cir. 1987), affg. T.C. Memo. 1986-

156; Schauer v. Commissioner, T.C. Memo. 1987-237; Song

v. Commissioner, T.C. Memo. 1995-446.

     Based upon the record of this case, we do not know

whether Mr. Glen or some other member of his firm prepared

and signed the subject returns.      Petitioner testified that

he did not recollect who signed the returns.      We also do

not know whether Mr. Glen or other members of the firm had

experience or expertise regarding qualified plans, such

that petitioners' alleged reliance on their advice was

reasonable.   Furthermore, there has been no showing of

the specific information that petitioners provided to
                             - 32 -

Glen & Graf or the nature or extent of any advice that

Mr. Glen may have provided to petitioners with respect

to the returns.

     Petitioner testified in general terms that he relied

upon the advice of his accountant to establish and

administer the qualified plan, and that he relied upon

his accountant's advice with respect to his personal

income tax returns for 1990 and 1991, and with respect to

the preparation of annual reports on behalf of the plan.

However, petitioner's testimony regarding the advice he

received from Mr. Glen about the subject loans was vague

and contradictory.   On the one hand, he testified on

direct examination that Mr. Glen advised him not to make

any payments on the loans:


     Q         Now, Dr. Garcia, did you make any
          payments -- your -- did you make any
          payments on the loans which have been
          entered into evidence other than the
          payments -- the partial payment that was
          made in 1988, I believe, and which is shown
          in the stipulation, and then the payment on
                        - 33 -

    April 15, 1994 which again is part of the
    stipulation?

A        No.

Q        An was that all done pursuant to advice
    of this competent CPA?

A        That's correct.

Q        And who was that CPA, Doctor?

A        Robert Glen.

           *   *    *     *      *   *   *

Q        Dr. Garcia, the stipulated notes call
    for quarterly repayments. In fact, were
    those quarterly payments ever made?

A        No.

Q        What was your understanding with regard
    to the repayment of the notes?

A        Well, according to the advice given to
    me by my CPA was that payment would be set
    up and that was the advice that I got. To
    me that plan never was the note.

Q        Did your CPA, Mr. Glen, ever tell you
    when the notes should be repaid?

A        No, sir.
                             - 34 -

     Q            Was it your understanding that he would
             tell you when the notes should be repaid
             under the tax law?

     A            Well, I was counting on his advice.

     Q            * * * What was your understanding with
             regard to those quarterly payments?

     A            I didn't have any knowledge or
             understanding of that. I was just relying
             on the advice of my CPA.

     Q            And, in fact, was that the course of
             action you followed throughout 1987, '87,
             [sic] '88, '89 and until the present?

     A            That's correct.


     On cross-examination, petitioner admits that he never

received any specific advice regarding the taxability of

the loans.    Petitioner testified as follows:


     Q            Mr. Garcia, I -- we would just like to know
             what your position was, whether you felt that you
             were supposed to pay tax on distributions from
             those loans you took in 1986 when you signed your
             return.

     A            I really don't know because, again, I was
             just counting on the advice of my CPA.
                            - 35 -

     Q           And the advice of your CPA was you did not
            have to pay tax?

     A           No.

     Q           No, it was or --

     A           I didn't get any advice in regard to tax,
            paying any tax.

     Q           Your accountant told you, You do not have
            to pay tax on any of these loans that you
            received?

     A           No. He did not say that. The only thing
            that he said was that we need to devise a plan to
            pay off these loans.

     Q           Did he advise you that you didn't have to
            pay off those loans?

     A           No.


     Thus, while the record contains petitioner's self-

serving testimony that he and Mrs. Garcia relied upon the

advice of Mr. Glen, we find petitioner's testimony to be

vague, conclusory, and contradictory.    Indeed, petitioner's

testimony on cross-examination is that he "did not get any

advice [from his accountant] in regard to tax, paying any

tax."    Accordingly, this is not a case in which we are
                          - 36 -

questioning the reasonableness of petitioners' reliance

on the advice of a tax professional.   Cf. Streber v.

Commissioner, 138 F.3d 216 (5th Cir. 1998), revg. T.C.

Memo. 1995-601; Reser v. Commissioner, 112 F.3d 1258 (5th

Cir. 1997), affg. in part and revg. in part and remanding

T.C. Memo. 1995-572; Chamberlain v. Commissioner, 66 F.3d

729 (5th Cir. 1995), affg. in part revg. in part T.C. Memo.

1994-228; Heasley v. Commissioner, 902 F.2d 380 (5th Cir.

1990), revg. T.C. Memo. 1988-408.   Rather, there is no

credible evidence in this case that petitioners' accountant

provided them with any advice regarding the proper tax

treatment of the loans petitioner received from the plan.

Under these circumstances, we are unable to find that

petitioners acted in good faith and reasonable reliance on

the advice of a tax professional such that they should be

relieved of the accuracy-related penalty for negligence.

Cf. Pappas v. Commissioner, 78 T.C. 1078, 1092 (1982);

Sweatman v. Commissioner, T.C. Memo. 1997-468; Drummond

v. Commissioner, T.C. Memo. 1997-71; Balkissoon v.
                           - 37 -

Commissioner, T.C. Memo. 1992-223; Banks v. Commissioner,

T.C. Memo. 1991-641.   Accordingly, we sustain respondent's

imposition of the accuracy-related penalty for negligence.

     In light of the foregoing, and to reflect concessions

and settled issues,

                               Decision will be entered

                          under Rule 155.
