                       T.C. Memo. 1998-286



                     UNITED STATES TAX COURT



                  TIM H. CUSICK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4186-96.                     Filed August 5, 1998.



     Marc K. Sellers and Paul A. Stamnes, for petitioner.

     Wesley F. McNamara, for respondent.



                       MEMORANDUM OPINION


     PARR, Judge:   Respondent determined a $156,139 deficiency

in petitioner's 1992 Federal income tax and additions to tax
                               - 2 -


under sections 6651(a)1 and 6654(a) in the amounts of $39,035 and

$6,806, respectively.

     After concessions, the issues for decision are:    (1) Whether

for 1992 petitioner is entitled to deduct 50 percent of the

substantiated expenses incurred for certain rental real estate.

This turns on whether petitioner's rental real estate activities

were conducted as a partnership.    We hold that petitioner's

rental real estate activities were conducted as a partnership,

and he is entitled to deduct 50 percent of the expenses incurred.

(2) Whether for 1992 petitioner is liable for an addition to tax

pursuant to section 6651(a).   We hold he is.   (3) Whether for

1992 petitioner is liable for an addition to tax pursuant to

section 6654(a).   We hold he is.

     Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference.    At the time the petition

in this case was filed, petitioner resided in Portland, Oregon.

Background

     In April 1987, petitioner acquired a 50-percent interest in

real property located at 208 Oak Street in Ashland, Oregon (208




     1
          All section references are to the Internal Revenue Code
in effect for the taxable year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
                                - 3 -


Oak Street).    The remaining 50-percent interest in 208 Oak Street

was acquired by Lance K. and Elizabeth A. Pugh (the Pughs).2

     The purchase price for 208 Oak Street was $195,000.

Petitioner and the Pughs were each responsible for half of the

purchase price.    In addition, petitioner and the Pughs agreed to

share profits and losses from 208 Oak Street equally.

     Petitioner and the Pughs acquired 208 Oak Street to provide

a venue for a local theater company.    A plan to transfer 208 Oak

Street to the theater company was abandoned for several reasons,

and petitioner and the Pughs decided to rent office space in the

property to a variety of month-to-month tenants.

     At different times during 1992, petitioner and Pugh each

handled the management of 208 Oak Street.   The management of 208

Oak Street was difficult and required a significant amount of

time.    Petitioner and Pugh not only maintained books and records

and collected rent, but also performed maintenance tasks such as

fixing backed-up toilets and assisting tenants who were locked

out of their offices.

     In 1991, petitioner and the Pughs purchased a second

property located at 310 Oak Street in Ashland, Oregon (310 Oak

Street),3 for $775,000.   The main tenant in 310 Oak Street was a

     2
          References to Pugh are to Lance K. Pugh, and references
to Mrs. Pugh are to Elizabeth A. Pugh.
     3
            The properties located at 208 Oak Street and 310 Oak
                                                     (continued...)
                               - 4 -


supermarket.   Petitioner and Pugh collected rent for 310 Oak

Street, but the supermarket had its own repair people who

provided maintenance for the building.

     Petitioner and the Pughs contributed equally to the purchase

price of 310 Oak Street.   In addition, petitioner and the Pughs

orally agreed to share the profits and losses from 310 Oak Street

equally.

     In November 1992, petitioner and the Pughs sold 310 Oak

Street for $875,000 under an installment contract.   The proceeds

received in 1992 from the sale of 310 Oak Street were split

equally between petitioner and the Pughs.

     In order to keep their ownership interests equal, petitioner

and the Pughs split proceeds from the Oak Street properties

equally and attempted to share expenses as equally as possible.

This was accomplished through an informal system where petitioner

and the Pughs mentally recorded who paid for which expenses.

This system generally kept the shared expenses equal.

     All funds relating to the Oak Street properties were kept in

separate property management bank accounts (the accounts).    All

income from the Oak Street properties was deposited in the

accounts, and all expenses were paid from the accounts.




     3
      (...continued)
Street are referred to jointly as the Oak Street properties.
                               - 5 -


     Petitioner was advised by his accountant that a partnership

return was unnecessary for the Oak Street properties.

Consequently, no partnership return was filed.     Petitioner and

the Pughs reported the profits and losses relating to the Oak

Street properties on their own respective Federal income tax

returns.

Issue 1.   Rental Real Estate Deductions

     Respondent determined that petitioner could not deduct 50

percent of the rental real estate expenses for the Oak Street

properties and that, further, expenses claimed on petitioner's

return had not been substantiated.     Petitioner argues that the

joint ownership and operation of the Oak Street properties

constituted a partnership for Federal income tax purposes, in

which he had a 50-percent interest.     Accordingly, petitioner

claims that he is entitled to deduct 50 percent of the expenses

incurred for the Oak Street properties.

     The principal issue for decision is whether petitioner may

deduct 50 percent of the rental real estate expenses.     Subsumed

in this issue is the question of whether a partnership existed

between petitioner and the Pughs for Federal income tax purposes.

Petitioner bears the burden of proving, first, the existence of a

partnership, and second, his entitlement to the claimed amounts

of the rental real estate deductions.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).
                               - 6 -


     Whether a valid partnership exists for Federal income tax

purposes is governed by Federal law.     See Commissioner v.

Culbertson, 337 U.S. 733 (1949); Lusthaus v. Commissioner, 327

U.S. 293 (1946); Commissioner v. Tower, 327 U.S. 280 (1946);

Bergford v. Commissioner, 12 F.3d 166 (9th Cir. 1993), affg.

Alhouse v. Commissioner, T.C. Memo. 1991-652; Community Bank v.

Commissioner, 819 F.2d 940, 942 (9th Cir. 1987), affg. 79 T.C.

789 (1982); Frazell v. Commissioner, 88 T.C. 1405, 1412 (1987);

Wheeler v. Commissioner, T.C. Memo. 1978-208.

     A partnership, for Federal income tax purposes, is defined

in section 761(a) as "a syndicate, group, pool, joint venture or

other unincorporated organization through or by means of which

any business, financial operation, or venture is carried on, and

which is not, within the meaning of this * * * [subtitle], a

corporation or a trust or estate."     See also sec. 7701(a)(2).

The term "partnership" as defined by the Internal Revenue Code is

broader in scope than the common law meaning of partnership, and

may include groups not traditionally considered partnerships.

Sec. 1.761-1(a), Income Tax Regs.

     A partnership is created "when persons join together their

money, goods, labor, or skill for the purpose of carrying on a

trade, profession, or business and when there is a community of

interest in the profits and losses."     Commissioner v. Tower,

supra at 286.   Generally, "each partner contributes one or both
                               - 7 -


of the ingredients of income--capital or services."     Commissioner

v. Culbertson, supra at 740.

     Whether parties have formed a partnership is a question of

fact, and while all circumstances are to be considered, the

essential question is whether the parties intended to, and did in

fact, join together for the present conduct of an undertaking or

enterprise.   Luna v. Commissioner, 42 T.C. 1067, 1077 (1964);

Gabriel v. Commissioner, T.C. Memo. 1993-524; see also

Commissioner v. Tower, supra at 287.

     In deciding whether two or more persons have formed a

partnership, the Supreme Court has stated:

          The question is not whether the services or
     capital contributed by a partner are of sufficient
     importance to meet some objective standard * * * but
     whether, considering all the facts--the agreement, the
     conduct of the parties in execution of its provisions,
     their statements, the testimony of disinterested
     persons, the relationship of the parties, their
     respective abilities and capital contributions, the
     actual control of income and the purposes for which it
     is used, and any other facts throwing light on their
     true intent--the parties in good faith and acting with
     a business purpose intended to join together in the
     present conduct of the enterprise. * * * [Commissioner
     v. Culbertson, supra at 742.]

See also Luna v. Commissioner, supra at 1077-1078.

     Recognition of a partnership for Federal tax purposes also

requires that the parties conduct some business activity.    See

Madison Gas & Elec. Co. v. Commissioner, 633 F.2d 512, 514-517

(7th Cir. 1980), affg. 72 T.C. 521 (1979); Frazell v.

Commissioner, supra at 1412.   While it is well settled that mere
                               - 8 -


coownership of property does not create a partnership for Federal

income tax purposes, see Estate of Appleby v. Commissioner, 41

B.T.A. 18 (1940), affd. 123 F.2d 700 (2d Cir. 1941), coowners may

also be partners if they or their agents carry on the requisite

degree of business activities, Hahn v. Commissioner, 22 T.C. 212

(1954); Bentex Oil Corp. v. Commissioner, 20 T.C. 565 (1953);

Estate of Winkler v. Commissioner, T.C. Memo. 1997-4; Gabriel v.

Commissioner, supra; Marinos v. Commissioner, T.C. Memo. 1989-

492; Powell v. Commissioner, T.C. Memo. 1967-32.   Section 1.761-

1(a), Income Tax Regs., provides as follows:

     A joint undertaking merely to share expenses is not a
     partnership. For example, if two or more persons
     jointly construct a ditch merely to drain surface water
     from their properties, they are not partners. Mere co-
     ownership of property which is maintained, kept in
     repair, and rented or leased does not constitute a
     partnership. For example, if an individual owner, or
     tenants in common, of farm property lease it to a
     farmer for a cash rental or a share of the crops, they
     do not necessarily create a partnership thereby.
     Tenants in common, however, may be partners if they
     actively carry on a trade, business, financial
     operation, or venture and divide the profits thereof.
     For example, a partnership exists if co-owners of an
     apartment building lease space and in addition provide
     services to the occupants either directly or through an
     agent. * * * [Emphasis added.]

     The arrangement between petitioner and the Pughs is a joint

venture carrying on a "business, financial operation, or venture"

and therefore falls within the literal statutory definition of

partnership.   By the Commissioner's own regulation, the

arrangement is not taken out of this classification simply
                                - 9 -


because petitioner and the Pughs owned the rental real estate as

tenants in common.    See id.

     The regulations and relevant case law indicate that the

distinction between mere coowners and coowners who are engaged in

a partnership lies in the degree of business activity of the

coowners or their agents.    Estate of Winkler v. Commissioner,

supra; Gabriel v. Commissioner, supra; Marinos v. Commissioner,

supra.

     On the basis of the credible testimony of petitioner and

Pugh, we find that petitioner and the Pughs were engaged in a

rental real estate venture involving the Oak Street properties.

Petitioner and Pugh testified, repeatedly, that their intent was

to form a "50-50" partnership and share all profits and losses

equally.   Not only was this their intent, but they did in fact

share all profits and expenses relating to the Oak Street

properties equally.    The degree of business activity exhibited by

petitioner and the Pughs in conducting their rental real estate

activities causes us to characterize the relationship as a

partnership.   Thus, on the basis of all the facts and

circumstances of this case, we find that petitioner in good faith

and acting with a business purpose intended to join together with

the Pughs in the present conduct of an enterprise.   See

Commissioner v. Culbertson, 337 U.S. 733 (1949); Luna v.

Commissioner, supra.
                               - 10 -


     Respondent emphasized the fact that certain partnership

formalities, including a written partnership agreement, were not

present in this case.    We do not find the absence of such

formalities to be fatal to the existence of a partnership.     As

the Supreme Court stated in Commissioner v. Culbertson, supra at

744-745:

     If, upon a consideration of all the facts, it is found
     that the partners joined together in good faith to
     conduct a business, having agreed that the services or
     capital to be contributed presently by each is of such
     value to the partnership that the contributor should
     participate in the distribution of profits, that is
     sufficient. * * *

See also Estate of Winkler v. Commissioner, supra.

     Respondent argues that even if the rental real estate

activities constitute a partnership for Federal income tax

purposes, the record does not contain sufficient evidence to

support a determination of petitioner's basis in his partnership

interest at the end of 1992.    We disagree.   The amount paid for

the Oak Street properties is in the record.    Furthermore, the

Pughs, petitioner's partners, were able to prepare their 1992

Federal income tax return reporting income and expenses from the

Oak Street properties.

     Petitioner asserts that in addition to all stipulated

expenses and adjustments, he is entitled to deduct 50 percent of

the partnership expenses incurred during 1992 in the following

amounts:
                                - 11 -


     208 Oak Street
                          Total Expense          Petitioner's Share
     Interest                $59,242                   $29,621
     Advertising                 934                       467
     Insurance                 2,714                     1,357
     Utilities                 9,728                     4,864
     Meals & ent.                352                       176
     Taxes                     2,604                     1,302
     Cleaning & supplies       2,176                     1,088
     Office & misc.            2,096                     1,048
     Repairs                   4,342                     2,171
           Total expenses     84,188                    42,094

     310 Oak Street
                            Total Expense        Petitioner's Share
     Interest                  $81,914                 $40,957
     Taxes                       3,594                   1,797
           Total expenses       85,508                  42,754

     Deductions are strictly a matter of legislative grace, and

the taxpayer has the burden of establishing entitlement to any

deduction claimed.    Deputy v. du Pont, 308 U.S. 488, 493 (1940);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).        The

taxpayer's burden of establishing his entitlement to a deduction

includes the burden of substantiation.      Hradesky v. Commissioner,

65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976).   The Court is not bound to accept unverified, undocumented

testimony of the taxpayer.    Id.   Accordingly, section 6001 and

the regulations promulgated thereunder require the taxpayer to

maintain records sufficient to enable the Commissioner to

determine the taxpayer's correct tax liability.      Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a),

Income Tax Regs.
                                - 12 -


     To substantiate the above expenses, petitioner introduced a

disorganized collection of checks, receipts, and barely legible

utility bills in addition to his testimony.    Petitioner testified

that it was not until the eve of trial that he was able to obtain

these documents.     Under the circumstances, however, petitioner's

efforts to obtain the documents he needed from Pugh both to

accurately prepare his return and to substantiate his deductions

at trial were minimal.

     In addition, the checks submitted by petitioner did not

equal the amounts of the deductions argued for by petitioner on

brief for certain expenses.4    Therefore, the Court has examined

the documents provided to substantiate petitioner's deductions

and holds that petitioner is entitled to deductions in the

following amounts.

     For 208 Oak Street, petitioner substantiated $838.99 for

advertising expenses, $2,396.52 for insurance, $9,146.98 for

utilities, $394.50 for meals and entertainment, $2,604.97 for

property taxes, $2,176.47 for cleaning and supplies, $2,096.36

for office and miscellaneous, and $4,362.32 for repairs and

maintenance and is entitled to deduct $419.50, $1,198.26,

$4,573.49, $157.80, $1,302.49, $1,088.24, $1,048.18, and


     4
          The amounts also differ from those originally reported
on petitioner's return because, petitioner asserts, "those
figures were based on estimates while the current figures are the
actual amounts."
                              - 13 -


$2,181.16, respectively.   In addition, petitioner substantiated

$59,242.08 of mortgage interest for 208 Oak Street and is

therefore entitled to deduct $29,621.04.

     For 310 Oak Street, petitioner substantiated $81,914.95 of

mortgage interest and $2,057.24 in property taxes and is entitled

to deduct $40,957.48 and $1,028.62, respectively.

Issue 2.   Addition to Tax Under Section 6651(a)

     Respondent determined an addition to tax under section

6651(a) for delinquent filing of a return.

     Section 6651(a) provides that if a taxpayer fails to file a

return by its due date, including extensions of time for filing,

there shall be an addition to tax equal to 5 percent of the tax

required to be shown on the return for each month the failure to

file continues, not to exceed 25 percent.    The addition to tax

under section 6651(a) shall not apply, however, if the taxpayer

can show that the failure to timely file the return was due to

reasonable cause and not willful neglect.    Sec. 6651(a).

     Petitioner did not request an extension of time to file his

1992 Federal income tax return.   Petitioner was required to file

a 1992 Federal income tax return by April 15, 1993.    Secs. 6012,

6072.   Petitioner did not file his 1992 Federal income tax return

until March 28, 1997.

     Petitioner testified that he did not file his return until

that time because he could not get the information he needed to
                              - 14 -


prepare it from Pugh.   Petitioner, however, did not ask Pugh to

provide the information he claimed was necessary to prepare his

return until about a year before trial.

     The Commissioner's determinations are presumed correct, and

the taxpayer bears the burden of proving otherwise.   Rule 142(a);

Welch v. Helvering, 290 U.S. at 115.   Petitioner did not do what

a reasonable and ordinarily prudent person would do under the

circumstances and has failed to meet his burden on this issue.

Accordingly, respondent's determination on this issue is

sustained.

Issue 3.   Addition to Tax Under Section 6654(a)

     Respondent determined an addition to tax under section

6654(a) for underpayment of individual estimated tax.   Petitioner

failed to pay estimated tax during the year in issue, and he has

offered no evidence to show that he qualifies for one of the

exceptions provided in section 6654(e).   Thus, respondent's

determination on this issue is sustained.

     For the foregoing reasons,



                                          Decision will be entered

                                    under Rule 155.
