                       T.C. Memo. 2001-185



                     UNITED STATES TAX COURT



          DON L. AND LORA CHRISTENSEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 16479-99.                      Filed July 23, 2001.


     Barbara Sue Geil, for petitioners.

     Timothy S. Sinnott, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge: Respondent determined that

petitioners were liable for the following additions to tax for

the years 1982 and 1983:1




     1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                   - 2 -


                                 Additions to Tax
     Year        Sec. 6653(a)(1)      Sec. 6653(a)(2)       Sec. 6661

     1982             $1,047                *               $5,234
     1983                 50                **                –--

     *      Fifty percent of the interest due on $20,933.
     **     Fifty percent of the interest due on $1,006.


     The issues for decision are: (1) Whether, for 1982 and 1983,

petitioners are liable for the additions to tax under section

6653(a)(1) and (2) for negligence, and (2) whether, for 1982,

petitioners are liable for the addition to tax under section 6661

for a substantial understatement of tax.     The issues in this case

relate to the participation of Don L. Christensen (petitioner) as

a limited partner in a partnership known as Blythe Jojoba II

Research, Ltd. (Blythe II or the partnership).

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.    At the time the petition was filed, petitioners'

legal residence was Las Vegas, Nevada.

     Petitioner is a medical doctor specializing in general

surgery.    Petitioner has been practicing general surgery in Las

Vegas, Nevada, since 1965.     When petitioner's investment adviser

retired, he referred petitioner to another financial adviser

named Gary Sheets (Mr. Sheets).      At that time, Mr. Sheets began

advising petitioner on various financial matters and introduced

petitioner to numerous investment opportunities.
                                - 3 -


     During 1982, Mr. Sheets approached petitioner about

investing in Blythe II, which was being promoted as an

agricultural research and development partnership.   Blythe II was

the first agricultural type investment opportunity that had been

proposed by Mr. Sheets for consideration by petitioner.     Mr.

Sheets provided petitioner with a fairly voluminous private

placement memorandum2 (the offering), which described the

proposed investment in and the activities to be conducted through

Blythe II.   Petitioner reviewed the document and then passed

along the offering to his certified public accountant, Clarence

Hulse (Mr. Hulse), who routinely reviewed petitioner's other

investment opportunities.   After perusing the offering, Mr. Hulse

advised petitioner that the "risk reward" appeared to justify an

investment in Blythe II.    Petitioner did not consult an attorney

or any independent expert in the area of agriculture or jojoba

plants regarding whether jojoba oil or any other jojoba

derivative had a potentially lucrative commercial market.

Petitioners, nevertheless, invested in Blythe II.

     On their joint 1982 Federal income tax return, petitioners

reported wages of $506,767.52 from petitioner's medical practice,

interest income of $46,572.78, taxable dividend income of

$712.30, capital gains of $56,589.02, and other income of


     2
          The private placement memorandum consisted of some 47
pages, plus eight exhibits, and a table of contents.
                               - 4 -


$3,638.04.   Petitioners reported total net losses from numerous

partnerships, one rental property, and one small business

corporation of $405,006.93 for 1982, of which $41,866 was the

loss from Blythe II.   Thus, petitioners reported total income of

$209,272.73 and a total tax liability of $39,115.20.3

     On their joint 1983 Federal income tax return, petitioners

reported wages of $611,826.06 from petitioner's medical practice,

interest income of $52,660.89, capital gains of $96,412.52, and

other income of $1,251.16.   Petitioners reported total net losses

from numerous partnerships and two rental properties of

$380,465.98 for 1983, of which $2,012 represented the loss from

Blythe II.   Thus, petitioners reported total income of

$381,684.65 and a total tax liability of $128,567.4


     3
          During April 1986, petitioners filed an amended return
for 1982 reporting a decrease in total income of $5,500 due to an
additional $5,500 loss in connection with Arrowhead Village, a
real estate partnership promoted by Mr. Sheets. On the amended
return, petitioners reported a total tax liability of $36,365.20.
     4
          During March 1985, petitioners filed an amended return
for 1983 reporting a decrease in total income of $15,073 due to
Mr. Hulse's mistaken reporting on their original return of
$15,073 in partnership income that was not attributable to
petitioners. On the amended return, petitioners reported a total
tax liability of $121,212. During July 1985, petitioners filed a
second amended return for 1983, reporting an increase in
deductions of $17,229.34 for various interest paid, charitable
contributions, and business expenses. On the second amended
return, petitioners reported a total tax liability of $112,416.
During April 1997, petitioners filed a third amended return for
1983 reporting a decrease in total income of $4,268.69 due to an
additional $4,268.69 loss in connection with the aforementioned
                                                   (continued...)
                               - 5 -


     Blythe II was audited by the Internal Revenue Service, and a

Notice of Final Partnership Administrative Adjustment was issued

to the partnership.   The partnership initiated a TEFRA proceeding

in this Court, and a decision was entered in Utah Jojoba I

Research v. Commissioner, T.C. Memo. 1998-6, which involved a

similar jojoba investment program.5    In the decided case, this

Court held that the partnerships6 did not directly or indirectly

engage in research or experimentation and that the partnerships

lacked a realistic prospect of entering into a trade or business.

In upholding respondent's disallowance of research and

experimental expenditures, the Court found that the agreements

between the partnerships and the proposed research and

development contractor, U.S. Agri Research & Development Corp.

(U.S. Agri), had been designed and entered into solely to provide

a mechanism to disguise the capital contributions of limited

partners as currently deductible expenditures.    The Court stated

that the activities of the partnerships were "another example of

efforts by promoters and investors in the early 1980's to reduce


     4
      (...continued)
Arrowhead Village partnership. On the third amended return,
petitioners requested an additional refund of $2,134.
     5
          The tax matters partner of Blythe II signed a
stipulation to be bound by the outcome of Utah Jojoba I Research
v. Commissioner, T.C. Memo. 1998-6.
     6
          Eighteen docketed cases were bound by stipulation by
the outcome of Utah Jojoba I Research v. Commissioner, supra.
                               - 6 -


the cost of commencing and engaging in the farming of jojoba by

claiming, inaccurately, that capital expenditures in jojoba

plantations might be treated as research or experimental

expenditures for purposes of claiming deductions under section

174."   Id.

     As a result of Blythe II's TEFRA proceeding, petitioners

were assessed tax deficiencies of $20,933 for 1982 and $1,006 for

1983, plus interest.   Subsequently, respondent issued a notice of

deficiency to petitioners, for 1982 and 1983, for affected items,

determining that petitioners are liable for the additions to tax

for negligence under section 6653(a)(1) and (2) and a substantial

understatement of tax under section 6661 for 1982.   These

additions to tax are the subject of the instant case.

     The first issue is whether petitioners are liable for the

additions to tax for negligence under section 6653(a)(1) and (2)

for both years at issue.   Section 6653(a)(1) imposes an addition

to tax in an amount equal to 5 percent of an underpayment of tax

if any part of the underpayment is due to negligence or

intentional disregard of rules or regulations.   Section

6653(a)(2) imposes another addition to tax in an amount equal to

50 percent of the interest due on the portion of the underpayment

attributable to negligence or intentional disregard of rules or

regulations.   Respondent’s determinations in a notice of

deficiency are presumed correct, and petitioners must establish
                               - 7 -


otherwise.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933); cf. sec. 7491(c).7   Respondent determined that

petitioners’ underpayments were due to negligence.    Petitioners,

therefore, have the burden of proving they were not negligent in

deducting their share of the partnership’s losses.     Estate of

Mason v. Commissioner, 64 T.C. 651, 663 (1975), affd. 566 F.2d 2

(6th Cir. 1977); Bixby v. Commissioner, 58 T.C. 757, 791 (1972);

Anderson v. Commissioner, T.C. Memo. 1993-607, affd. 62 F.3d 1266

(10th Cir. 1995).

     Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would

exercise under like circumstances.     Anderson v. Commissioner,

62 F.3d 1266, 1271 (10th Cir. 1995), affg. T.C. Memo. 1993-607;

Neely v. Commissioner, 85 T.C. 934, 947 (1985); Glassley v.

Commissioner, T.C. Memo. 1996-206.     The focus of inquiry is

on the reasonableness of the taxpayer’s actions in light of his

experience and the nature of the investment.     Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973); Greene v.



     7
           The Internal Revenue Service Restructuring & Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added
sec. 7491(c), which places the burden of production on the
Secretary with respect to a taxpayer’s liability for penalties
and additions to tax in court proceedings arising in connection
with examinations commencing after July 22, 1998. Petitioners do
not contend, nor is there evidence, that their examination
commenced after July 22, 1998, or that sec. 7491 is applicable in
this case.
                                 - 8 -


Commissioner, T.C. Memo. 1998-101, affd. without published

opinion 187 F.3d 629 (4th Cir. 1999); Glassley v. Commissioner,

supra; Turner v. Commissioner, T.C. Memo. 1995-363.      Whether a

taxpayer is negligent in claiming a tax deduction "depends upon

both the legitimacy of the underlying investment, and due care in

the claiming of the deduction."     Sacks v. Commissioner, 82 F.3d.

918, 920 (9th Cir. 1996), affg. T.C. Memo. 1994-217; see Greene

v. Commissioner, supra.

     A taxpayer may avoid liability for negligence penalties

under some circumstances if the taxpayer reasonably relied on

competent professional advice.    See Freytag v. Commissioner, 89

T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd.

on other issue 501 U.S. 868 (1991).      Such reliance, however, is

"not an absolute defense to negligence, but rather a factor to be

considered."   Id.    For reliance on professional advice to relieve

a taxpayer from the negligence addition to tax, the taxpayer

must show that the professional adviser had the expertise and

knowledge of the pertinent facts to provide informed advice on

the subject matter.     Id.

     The facts pertinent to the instant case, relating to the

structure, formation, and operation of Blythe II are as discussed

in Utah Jojoba I Research v. Commissioner, supra, with the

exception of a few specific dates and dollar amounts.     Blythe II

was organized in December 1982 as a limited partnership for the
                                - 9 -


described purpose of conducting research and development (R & D)

involving the jojoba plant.    The offering, dated November 30,

1982, provided for a maximum capitalization of $2,968,000

consisting of 350 limited partnership units at $8,480 per unit.

Each unit required a cash downpayment of $2,500 and a

noninterest-bearing promissory note in the principal amount of

$5,980 payable in 10 annual installments with an acceleration

provision in the event of default.      The offering was limited to

investors with a net worth (exclusive of home, furnishings, and

automobiles) of $150,000, or investors whose net worth was

$50,000 (exclusive of home, furnishings, and automobiles) and who

anticipated that, for the taxable year of the investment, they

would have gross income equal to $65,000, or taxable income, a

portion of which, but for tax-advantaged investments, would be

subject to a Federal income tax rate of 50 percent.

     Petitioners' investment was for eight limited partnership

units, which required an initial downpayment of $20,000 and

execution of a promissory note for $47,840.     Petitioners were to

make payments of $5,200 each year from 1983 through 1985, $4,200

per year from 1986 through 1991, and a final payment of $7,040 in

1992 on the promissory note.    The record reflects that

petitioners actually paid $20,000 in 1982, $5,200 per year from
                              - 10 -


1983 through 1985, $4,200 per year from 1986 through 1988, and

$16,552 in 1989, totaling $64,752.8

     The offering identified William Kellen (Mr. Kellen) as the

general partner and U.S. Agri as the contractor for the R & D

program under an R & D agreement.     Additionally, a license

agreement between Blythe II and U.S. Agri granted U.S. Agri the

exclusive right to utilize technology developed for Blythe II for

40 years in exchange for a royalty of 85 percent of all products

produced.   The offering included copies of both the R & D

agreement and the license agreement.9    The R & D agreement was

executed concurrently with the license agreement.

     According to its terms, the R & D agreement expired upon the

partnership's execution of the license agreement.     Since the two

were executed concurrently, amounts paid to U.S. Agri by the



     8
          In 1989, petitioner executed a ratification agreement
that allowed him to pay off the balance of the promissory note;
i.e., $15,440 ($4,200 per year for 1990 and 1991 and $7,040 for
1992) at a 20-percent discount.
     9
          In the instant case, the Blythe II offering is included
in evidence as a stipulated exhibit; however, the stipulated
exhibit contains an incomplete copy of the R & D agreement that
was attached to the original offering. To the extent that
relevant facts are omitted due to the incomplete copy of the R &
D agreement (or other incomplete pieces of evidence) in the
instant case, the Court must rely on findings of fact in Utah
Jojoba I Research v. Commissioner, supra, to which the partners
of Blythe II agreed to be bound. It is petitioners' burden to
establish the context in which their deductions were taken. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Bixby v.
Commissioner, 58 T.C. 757, 791 (1972).
                             - 11 -


partnership were not paid pursuant to a valid R & D agreement but

were passive investments in a farming venture under which the

investors' return, if any, was to be in the form of a royalty

pursuant to the licensing agreement.   Thus, as this Court held in

Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6, the

partnership was never engaged in research or experimentation,

either directly or indirectly.   Moreover, this Court found in

Utah Jojoba I Research v. Commissioner, supra, that U.S. Agri's

attempts to farm jojoba commercially did not constitute research

and development, thereby concluding that the R & D agreement was

designed and entered into solely to decrease the cost of

participation in the jojoba farming venture for the limited

partners through large up-front deductions for expenditures that

were actually capital contributions.   The Court concluded further

that the partnership was not involved in a trade or business and

had no realistic prospect of entering into a trade or business

with respect to any technology that was to be developed by U.S.

Agri.

     Petitioners here contend that their investment in Blythe II

was motivated solely by the potential to earn a profit.

Petitioners contend further that their reliance on the advice of

their certified public accountant, Mr. Hulse, should absolve them

of liability for the negligence penalty in this case.

Petitioners also argue that, taking into account their experience
                               - 12 -


and the nature of the investment in Blythe II, they exercised the

due care that a reasonable and ordinarily prudent person would

have exercised under like circumstances.   For the reasons set

forth below, the Court does not agree with petitioners'

contentions.

     First, the principal flaw in the structure of Blythe II was

evident from the face of the very documents included in the

offering.   A reading of the R & D agreement and licensing

agreement, both of which were included as part of the offering,

plainly shows that the licensing agreement canceled or rendered

ineffective the R & D agreement because of the concurrent

execution of the two documents.   Thus, the partnership was never

engaged, either directly or indirectly, in the conduct of any

research or experimentation.   Rather, the partnership was merely

a passive investor seeking royalty returns pursuant to the

licensing agreement.   Any experienced attorney capable of reading

and understanding the subject documents should have understood

the legal ramifications of the licensing agreement canceling out

the R & D agreement.   However, petitioners never consulted an

attorney in connection with this investment, nor does it appear

that they carefully scrutinized the offering themselves.

     Secondly, in making their investment in Blythe II,

petitioners relied on the advice of their certified public

accountant, Mr. Hulse, and Mr. Sheets, who was a promoter for the
                               - 13 -


partnership.    At the time of trial, Mr. Hulse was deceased;

therefore, the details in this record surrounding his advice to

petitioners about Blythe II are scant.    Petitioner provided Mr.

Hulse with a copy of the offering and asked Mr. Hulse to review

the same and advise petitioners whether or not to invest in

Blythe II.   Mr. Hulse advised petitioner that, in petitioner's

words, it appeared that "the risk reward justified an investment"

in Blythe II.   Mr. Hulse did not provide petitioners with a

written opinion about the investment.    The record is devoid of

any evidence to show that Mr. Hulse conducted any independent

research or consulted any type of agricultural or jojoba plant

expert about the investment.    The record in this case indicates

that Mr. Hulse relied solely on the representations made in the

offering in rendering his advice to petitioners.

     Moreover, the record lacks evidence to show whether Mr.

Hulse had any previous experience with the deductibility of

research and development expenses at the time he advised

petitioners about Blythe II.    These types of expenses would have

allowed petitioners certain tax benefits above and beyond what

would have been provided by an ordinary business deduction.

There is no evidence in the record to suggest that Mr. Hulse

conducted any independent investigation to determine whether the

specific research and development proposed to be conducted by or

on behalf of the partnership would have qualified for deductions
                              - 14 -


under section 174.   It is also notable that Mr. Hulse had no

educational background or experience in the area of agricultural

pursuits.

     There is no evidence in the record to suggest that

petitioners ever questioned Mr. Hulse about the facts and/or

legal analysis upon which he based his recommendations.    Further,

the record is devoid of any evidence that petitioners asked Mr.

Hulse to explain the Blythe II investment to them, which would

seem particularly important given the fact that petitioners

clearly did not carefully scrutinize the offering themselves.

     The facts in this case are similar to those in Glassley v.

Commissioner, T.C. Memo. 1996-206, in which this Court found that

the taxpayers:


     acted on their fascination with the idea of
     participating in a jojoba farming venture and their
     satisfaction with tax benefits of expensing their
     investments, which were clear to them from the
     promoter’s presentation. They passed the offering
     circular by their accountants for a "glance" * * *.


Similarly, petitioners in this case acted on their enthusiasm for

the potential uses of jojoba and acted with knowledge of the tax

benefits of making the investment.     The evidence in this record

suggests that the nature of the advice given by Mr. Hulse was

highly generalized and based primarily on a mere cursory review

of the offering rather than on independent knowledge, research,
                                - 15 -


or analysis.   Petitioners failed to show that Mr. Hulse had the

expertise and knowledge of the pertinent facts to provide

informed advice on the investment in Blythe II.   See Freytag v.

Commissioner, 89 T.C. at 888.    Accordingly, petitioners failed to

establish that their reliance on the advice of Mr. Hulse was

reasonable or in good faith.    See Glassley v. Commissioner,

supra.

     The Court next examines petitioners' reliance on the advice

of Mr. Sheets.   Mr. Sheets had no background or expertise in the

areas of agriculture or jojoba plants.   In fact, it appears that

nearly all of the previous investments recommended to petitioners

by Mr. Sheets had been real estate investments, and Blythe II was

the first investment of an agricultural nature advocated by him.

More importantly, because Mr. Sheets had a personal profit motive

in selling this investment to clients, he had a conflict of

interest in advising petitioners to purchase the limited

partnership interests.10   The advice petitioners allegedly

received from Mr. Sheets fails as a defense to negligence due to

his lack of competence to give such advice and the clear presence

of a conflict of interest.   See Rybak v. Commissioner, 91 T.C.




     10
          Petitioner acknowledged in his testimony that he knew
Mr. Sheets was receiving commissions for finding investors to
purchase the limited partnership interests.
                               - 16 -

524, 565 (1988).    Petitioners' reliance on the advice of Mr.

Sheets was unreasonable under the circumstances.

     Outside of Mr. Hulse and Mr. Sheets, petitioners made no

other inquiry into the viability of this partnership's proposed

research and operations.    The Court finds it notable that the

offering listed at least 15 "potential uses of jojoba nuts"; yet,

petitioners failed to explore the plausibility of any of those

potential uses.    Some of the potential uses listed in the

offering were various lubricants for high-speed or high-

temperature machinery, cosmetics, shampoos and soaps, sunscreens,

pharmaceuticals, cooking oils, disinfectants, polishing waxes,

corrosion inhibitors, candles, animal feed supplements, and

fertilizer.   Being a physician, it seems logical that petitioner

would have had some access to information about the use of jojoba

in the pharmaceutical arena; however, petitioner failed to pursue

this possibility.    Petitioners' failure to investigate

independently any of the enumerated potential uses of jojoba

plants was unreasonable under the circumstances.

     Petitioners had no legal or agricultural background or

training; yet, they consulted no source of such information prior

to investing more than $60,000 in Blythe II.    Petitioners argue

that they didn't know where or how to find an appropriate expert

to examine the investment.    On the contrary, the Court believes

that, at a minimum, petitioners could have contacted an attorney
                              - 17 -

to review the offering, provide legal advice surrounding the

partnership, and explain the legal ramifications of the licensing

agreement canceling out the R & D agreement.   A reasonable and

ordinarily prudent investor under the circumstances would have

consulted an attorney.   Additionally, the Court does not believe

that petitioners would have experienced a great degree of

difficulty in contacting the agricultural department of a nearby

college or university or going to another reliable source to

inquire about the research and development of jojoba plants and

their potential commercial usage, if any.   Again, a reasonable

and ordinarily prudent investor would have at least attempted to

make this type of inquiry under the circumstances.11

     Petitioners were not naive investors and should have

recognized the need for independent professional advice.    See

LaVerne v. Commissioner, 94 T.C. 637, 652 (1990), affd. without

published opinion 956 F.2d 274 (9th Cir. 1992), affd. in part

without published opinion sub nom. Cowles v. Commissioner, 949

F.2d 401 (10th Cir. 1991); Glassley v. Commissioner, supra.       In

fact, the offering cautioned that prospective investors should

not "construe this memorandum or any prior or subsequent

communications as constituting legal or tax advice" and urged


     11
          In Utah Jojoba I Research v. Commissioner, supra, the
Court noted that there were experimental jojoba plantations
located at the University of California at Riverside, California,
of which the general partner of Blythe II, Mr. Kellen, was aware.
                               - 18 -

investors to "consult their own counsel as to all matters

concerning this investment."    The offering was replete with

statements, including the cover page statement that "THIS

OFFERING INVOLVES A HIGH DEGREE OF RISK", warning of tax risks

involved with the investment and the highly speculative nature of

the commercial viability of the jojoba plant.    The offering

contained inconsistent information, such as the statement on page

9 that the general partner "has limited experience in dealing in

Jojoba beans and is mainly relying on the R & D Contractor to

develop technology and plant cultivars over the term of the R & D

Agreement", contrasted with the statement on page 34 that the

general partner "pioneered the development of the Blythe Airport

as an alfalfa ranch and jojoba farming in Desert Center" and was

"familiar with the development of jojoba, citrus, vineyards,

alfalfa and asparagus."    Such inconsistencies should have raised

a healthy suspicion in the mind of a reasonable and ordinarily

prudent investor, even one lacking any legal, tax, or

agricultural background.    However, petitioners did not carefully

read the offering, nor did they make any effort to have the

investment explained to them prior to committing to invest some

$65,000 in Blythe II.

     The Court is mindful that the Court of Appeals for the Ninth

Circuit (Ninth Circuit), the court to which an appeal in this

case would lie, has held that experience and involvement of the
                               - 19 -

general partner and the lack of warning signs could reasonably

lead investors to believe they were entitled to deductions in

light of the undeveloped state of the law regarding section 174.

See Kantor v. Commissioner, 998 F.2d 1514 (9th Cir. 1993), affg.

in part and revg. in part T.C. Memo. 1990-380.   In its holding,

the Ninth Circuit explained that the Supreme Court's decision in

Snow v. Commissioner, 416 U.S. 500 (1974), left unclear the

extent to which research must be "in connection with" a trade or

business for purposes of qualifying for an immediate deduction

under section 174.   However, in the instant case, the partnership

was neither engaged in a trade or business nor conducting

research and development, either directly or indirectly.

Additionally, the experience in jojoba research and development

of the general partner of Blythe II, Mr. Kellen, was

questionable, at best, as evidenced by conflicting statements in

the offering.   Also, it is apparent from the evidence presented

in this case that Mr. Kellen had minimal involvement in the

partnership.    Petitioners are precluded from relying upon a "lack

of warning" as a defense to negligence, when there is no evidence

that a reasonable investigation was ever made, and the offering

materials contained many warnings of the tax risks associated

with the investment.

     On this record, the Court finds that petitioners did not

exercise the due care of reasonable and ordinarily prudent
                              - 20 -

persons under the circumstances.   Consequently, the Court holds

that petitioners are liable for the negligence additions to tax

under section 6653(a)(1) and (2) for each of the years at issue.

Respondent is sustained on this issue.

     The second issue is whether petitioners are liable for the

addition to tax under section 6661(a) for a substantial

understatement of tax for 1982.    Section 6661(a), as amended by

the Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509,

sec. 8002, 100 Stat. 1951, provides for an addition to tax of 25

percent of the amount of any underpayment attributable to a

substantial understatement of income tax for the taxable year.      A

substantial understatement of income tax exists if the amount of

the understatement exceeds the greater of 10 percent of the tax

required to be shown on the return, or $5,000.   Sec.

6661(b)(1)(A).   Generally, the amount of an understatement is

reduced by the portion of the understatement which the taxpayer

shows is attributable to either (1) the tax treatment of any item

for which there was substantial authority, or (2) the tax

treatment of any item with respect to which the relevant facts

were adequately disclosed on the return.   Sec. 6661(b)(2)(B).   If

an understatement is attributable to a tax shelter item, however,

different standards apply.   First, in addition to showing the

existence of substantial authority, a taxpayer must show that he

reasonably believed that the tax treatment claimed was more
                               - 21 -

likely than not proper.   Sec. 6661(b)(2)(C)(i)(II).   Second,

disclosure, whether or not adequate, will not reduce the amount

of the understatement.    Sec. 6661(b)(2)(C)(i)(I).

     Substantial authority exists when "the weight of the

authorities supporting the treatment is substantial in relation

to the weight of authorities supporting contrary positions."      See

sec. 1.6661-3(b)(1), Income Tax Regs.    Petitioners have failed to

show that substantial authority existed for the tax treatment of

the Blythe II loss on their 1982 return.

     Adequate disclosure of the tax treatment of a particular

item may be made either in a statement attached to the return, or

on the return itself, if it is in accordance with the

requirements of Rev. Proc. 83-21, 1983-1 C.B. 680.     Sec. 1.6661-

4(b) and (c), Income Tax Regs.    The record indicates that

petitioners did not attach a statement to their 1982 return

disclosing the specific facts surrounding their Blythe II loss

deduction.   Rev. Proc. 83-21, supra, applicable to tax returns

filed in 1983, lists information that would be deemed sufficient

disclosure if listed on the return itself, without the necessity

of attaching an additional statement to the return.    However,

none of the specific tax items referenced in Rev. Proc. 83-21,

supra, are relevant to the instant case.    If disclosure is not

made in compliance with the regulations or the revenue procedure,

adequate disclosure on the return may still be satisfied if
                             - 22 -

sufficient information is provided to enable respondent to

identify the potential controversy involved.     Schirmer v.

Commissioner, 89 T.C. 277, 285-286 (1987).     However, a mere

claiming of the loss, without further explanation, is not

sufficient to alert respondent to the controversial section 174

deduction of which the partnership loss consisted.     Petitioners

have failed to show that the relevant facts pertaining to their

Blythe II loss deduction were adequately disclosed on their 1982

return.12

     Finally, section 6661(c) provides the Secretary with the

discretion to waive the section 6661(a) addition to tax if the

taxpayer shows he acted with reasonable cause and in good faith.

This Court reviews the Secretary’s failure to waive the addition

to tax for abuse of discretion.   See Martin Ice Cream Co. v.

Commissioner, 110 T.C. 189, 235 (1998).     Petitioners argue that

they acted in good faith and reasonably relied upon the advice of

Mr. Hulse in claiming the relevant loss.    However, nothing in the

record indicates that petitioners requested a waiver for good

faith and reasonable cause under section 6661(c).      In the absence

of such a request, this Court cannot review respondent’s

determination for an abuse of discretion.    See id.    In any event,



     12
          As noted earlier, even if an adequate disclosure had
been made on the return, such disclosure would not reduce the
amount of the understatement attributable to a tax shelter item.
                               - 23 -

petitioners have not shown that they met the tests of reasonable

cause and good faith.

     Petitioners have failed to prove that they had substantial

authority for their treatment of the partnership loss and that

they adequately disclosed the relevant facts of that treatment.

The understatement upon which the addition to tax was imposed was

$20,933.   The understatement is substantial because it exceeds

the greater of $5,000 or 10 percent of the amount required to be

shown on the return.13   On this record, the Court holds that

petitioners are liable for the addition to tax under section

6661(a) for a substantial understatement of tax for 1982.

Respondent is sustained on this issue.

     Finally, to the extent the Court has failed to address an

argument of petitioners herein, the Court concludes such argument

is without merit.



                                         Decision will be entered

                                    for respondent.




     13
          The amount required to be shown on the return was
$69,852, 10 percent of which equals $6,985.20.
