                   T.C. Memo. 1996-1



                UNITED STATES TAX COURT



          WALTON A. SUTHERLAND, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 5780-92, 21777-93,   Filed January 2, 1996.
            592-94.



      R determined deficiencies based on, among other
theories, P’s failure to report as income legal fees
that P, an attorney, earned in 1987.
      1. Held, P’s oral motion to shift the burden of
proof is denied.
      2. Held, further, P’s oral motion to dismiss in
petitioner’s favor the 1987 year because the 3-year
period of limitations on assessment and collection for
that year has expired is denied.
      3. Held, further, P earned the fee in question in
1987.
      4. Held, further, R’s determinations of additions
to tax under sec. 6653(a)(1)(A) and (B), I.R.C., for
1987 are sustained.
      5. Held, further, R’s determination of an
addition to tax under sec. 6661, I.R.C., for 1987 is
sustained.
                                           - 2 -

           Kenneth S. Sussmane, for petitioner.

           Albert G. Kobylarz and Guy G. LaVignera, for respondent.



                     MEMORANDUM FINDINGS OF FACT AND OPINION


           HALPERN, Judge:      These three cases have been consolidated

   for trial, briefing and opinion.             Respondent, by three notices of

   deficiency, determined deficiencies in, and additions to,

   petitioner's Federal income tax, as well as a penalty, as

   follows:

                                             Additions to Tax and Penalties
Docket                          Sec.        Sec.           Sec.         Sec.     Sec.
  No.      Year   Deficiency   6653(a)   6653(a)(1)(A) 6653(a)(1)(B)     6661   6662(a)

 5780-92   1988   $168,900     $8,445        ---           ---        $42,225     ---
21777-93   1987    157,105       ---       $7,855           *          39,276     ---
  592-94   1989     44,728       ---         ---           ---          ---     $8,946

     * 50 percent of the interest due on $157,105.


           Respondent first issued a notice of deficiency for 1988.                In

   that notice of deficiency, respondent explained that the basis

   for the adjustment giving rise to substantially all of the

   deficiency in tax was that petitioner had failed to establish a

   nontaxable source for funds used in his "casino activities".

   Subsequently, respondent issued notices of deficiency for 1987

   and 1989.      The basis for the adjustments made in those notices of

   deficiency is that petitioner, an attorney, failed to report as

   income a certain fee earned by him.              On brief, respondent

   concedes that the three notices of deficiency are to be
                                - 3 -

considered in the alternative, and that she relies primarily on

our finding that petitioner failed to report fee income of

$408,318 in 1987.   Indeed, respondent opens her brief with the

following statement:   "If respondent prevails with respect to the

1987 year, and the legal fee is included therein, there would be

no deficiency for either 1988 nor 1989 as the notices of

deficiency for these years represent alternative theories of

inclusion of the legal fee."1

     In addition to the issue of unreported income, we must

decide:   (1) Whether the statute of limitations bars assessment

of a deficiency for 1987, (2) whether petitioner has been

relieved in part of his burden of proof, and (3) whether

petitioner is liable for certain additions to tax and a penalty.

     Unless otherwise indicated, all section references are to

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

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

Procedure.

                         FINDINGS OF FACT

Introduction

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

The stipulation of facts filed by the parties and accompanying


1
     Respondent's notice of deficiency for 1988 contains an
adjustment increasing income in the amount of $27,258, which is
labeled "Interest Income". The parties have not dealt with that
item on brief. Since respondent has prevailed with respect to
1987, we assume that respondent has conceded that adjustment.
                                - 4 -

exhibits are incorporated herein by this reference.       Some of

respondent's proposed findings of fact have been conceded by

petitioner and, accordingly, are so found.2

     At the time of trial, petitioner was an attorney admitted to

practice law in the State of New York.      From 1974 through the

time of trial, petitioner was employed by the New York State

Department of Law.   In 1980 petitioner resided in New York City

with his sister, Hester Sutherland, and Hester's minor daughter,

Maude.   Sometime in the early 1980's, petitioner moved to 142

Romaine Avenue, Jersey City, New Jersey.        Hester and Maude moved


2
     In part, Rule 151 provides as follows:

                         RULE 151. BRIEFS

                *    *    *     *       *   *      *

     (e) Form and Content:    * * *

                *    *    *     *       *   *      *

     (3) * * * In an answering or reply brief, the party
     shall set forth any objections, together with the
     reasons therefor, to any proposed findings of any other
     party, showing the numbers of the statements to which
     the objections are directed; in addition, the party may
     set forth alternative proposed findings of fact.

     In the instant case, respondent filed an opening brief,
petitioner filed an answering brief, and respondent filed a reply
brief. The answering brief fails to set forth objections to the
proposed findings of fact set forth in the opening brief.
Accordingly, we must conclude that petitioner has conceded
respondent's proposed findings of fact as correct except to the
extent that petitioner's proposed findings are clearly
inconsistent therewith. See Fein v. Commissioner, T.C. Memo.
1994-370 n.1; Estate of Stimson v. Commissioner, T.C. Memo. 1992-
242; Cunningham v. Commissioner, T.C. Memo. 1989-260 n.6.
                               - 5 -

in with petitioner.   Sometime in 1988, Hester purchased, and

moved with Maude into, an apartment in New Jersey.   Petitioner

continued to reside at the Jersey City address during the years

in issue and at the times the petitions herein were filed.

     Maude suffered from sickle cell disease.   On or about

February 27, 1980, Maude became ill.   Hester, accompanied by

petitioner, took Maude to Harlem Hospital in New York City for

treatment.   Subsequently, Maude's condition worsened, and she

suffered permanent injuries.

     The remaining findings of fact relate to the settlement of a

lawsuit claiming medical malpractice (the malpractice action)

brought by Hester in connection with Maude's injuries.

Hester Retains Petitioner

     On or about April 4, 1980, Hester retained petitioner to

prosecute the malpractice action.   Hester agreed that, in

consideration thereof, petitioner was to receive a fee of

33-1/3 percent of the sum recovered (the 33-1/3-percent fee).

The terms of petitioner's engagement are set forth in a document

dated April 4, 1980, headed "Retainer", signed by Hester, and

witnessed by petitioner (the retainer).   At about the same time,

petitioner completed, signed, and filed a retainer statement

(petitioner's retainer statement) with the Judicial Conference of

the State of New York (the Judicial Conference).   Petitioner's

retainer statement reflects the terms of the retainer.
                                 - 6 -

Petitioner Engages Lipsig, Sullivan, Mollen, and Liapakis

     Sometime in April 1980, petitioner engaged the law firm of

Lipsig, Sullivan, Mollen, and Liapakis (the Lipsig firm) to

represent Hester and Maude in the malpractice action.   The Lipsig

firm was to share in the 33-1/3-percent fee.   Initially, the

Lipsig firm was to receive two-thirds of that fee, and petitioner

was to retain one-third.   Later the proportions were changed to

one-half and one-half.

Prosecution of the Malpractice Action

     In October 1980, the Lipsig firm commenced the malpractice

action in the Supreme Court of the State of New York, County of

New York (the New York court).    The Lipsig firm filed a complaint

alleging that the defendants' medical services caused severe,

serious, and permanently disabling injuries to Maude, and caused

the loss to Hester of Maude's services.   Petitioner did not

appear as attorney of record in any of the proceedings relating

to the malpractice action.   Nevertheless, petitioner assisted and

was a tremendous help to the Lipsig firm in the prosecution of

the malpractice action.    For example, he reviewed pleadings, he

assisted in trial preparation, he made specific suggestions on

matters such as reinstating a specific paragraph to the

complaint, he did legal research, e.g., as to the minimum

standards for hospital care in New York, he obtained experts, he

assisted in an interlocutory appeal, and he contributed

meaningfully to settlement of the action.
                               - 7 -

Settlement of the Malpractice Action

     The malpractice action was settled with an entry by the New

York court of an order, the Infants Compromise Order (the order),

on June 2, 1987.   The order is based, in part, on (1) a petition,

the Infant's Compromise Petition (the compromise petition), made

by Hester, (2) an affirmation made by a member of the Lipsig firm

(the Lipsig firm affirmation), and (3) an affirmation made by

petitioner (petitioner's affirmation).   Among other things, the

order authorizes Hester to settle the malpractice action for the

sum of $2,750,000.   From that sum, the order requires that the

Lipsig firm be reimbursed certain disbursements and be paid

$408,318, "as and for their attorneys [sic] fees".   From the

$2,750,000, the order further requires that Hester be paid on her

cause of action for loss of services (1) $250,000 and

(2) $408,318, "one-half of the attorneys [sic] fees in this

action".   The remainder of the sum is ordered to be paid to

Hester on behalf of Maude.   Hester and the Lipsig firm had

previously agreed that the 33-1/3-percent fee would be reduced to

30 percent.

     The sum of $408,318, "one-half of the attorneys [sic] fees

in this action", was ordered paid to Hester because petitioner

had waived his right to that sum.   In the compromise petition,

Hester explains petitioner's waiver as follows:

     My brother, WALTON SUTHERLAND, Esq., who has rendered
     invaluable assistance to me in caring for MAUDE, by
     agreement with * * * [the Lipsig firm] was to receive
                               - 8 -

     fifty (50%) percent of the legal fee. It has been
     agreed by the attorneys for the plaintiffs that fifty
     percent of * * * the legal fee in the amount of
     $408,318.10 be waived to me towards my cause of action
     for loss of services in lieu of [petitioner's]
     receiving his fee.

In the Lipsig firm affirmation, the waiver is explained as

follows:   "Walton Sutherland, Esq., the forwarding attorney in

this matter, has agreed to waive his share of the legal fees in

this case in Hester's behalf so that she may continue to have the

wherewithal to care for her daughter, MAUDE."   Petitioner's

affirmation contains the following explanation:   "Your affirmant

agrees to waive the legal fee in this matter to HESTER

SUTHERLAND, herein, towards her claim for loss of services."

Petitioner's affirmation is dated May 12, 1987.

Deposit of Proceeds Paid to Hester

     Hester received two checks totaling $658,318 in discharge of

the provisions of the order to pay her $250,000 and $408,318 in

settlement of her cause of action for loss of services.    Those

two checks were deposited into account number 08-057596-2 at the

East River Savings Bank, in New York City (the first account).

The first account was titled "WALTON SUTHERLAND JR OR HESTER

SUTHERLAND".   It carried petitioner's Social Security number.

Between August 28, 1987, and February 2, 1988, petitioner

withdrew in excess of $150,000 from the first account.    On

February 3, 1988, the first account was closed and the balance

was transferred to East River Savings Bank account number
                                 - 9 -

08-058077-2 (the second account).     The second account was titled

similarly to the first account, but carried Hester's Social

Security number.    Petitioner was authorized to make withdrawals

from the second account.     Between February 4, 1988, and

November 28, 1990, petitioner withdrew at least $518,000 from the

second account.

Gambling in Atlantic City

     During 1987, 1988, and 1989, petitioner traveled to Atlantic

City, New Jersey, to gamble at at least four casinos:       Caesars

Atlantic City, Tropworld, Ballys Park Place Casino, and Trump

Casino Hotel.    Hester, at times, accompanied petitioner to

Atlantic City.    At each casino, petitioner bought chips, with

which to make bets (known as "buying in").     Additionally, at one

casino, Tropworld, petitioner maintained a front money account

from January 1988 through at least July 1990.       A front money

account allows a patron to put money on deposit with the casino

and draw on the deposit at the gaming tables so the patron does

not have to carry around cash.     The following represents

petitioner's gambling history at the casinos during 1987, 1988,

and 1989:

       1987           Caesars    Tropworld    Trump      Ballys
      Buying
       in               $0        $22,000      $0          $0

     Front money
      deposit          0          0          0         0
           Total      $0       $22,000      $0        $0
     ------------------------------------------------------
      1988          Caesars   Tropworld    Trump     Ballys
                                - 10 -

     Buying
      in              $0         $73,700     $40,300   $56,250

     Front money
      deposit          0       111,200       0         0
           Total      $0      $184,900    $40,300   $56,250
     ------------------------------------------------------
      1989          Caesars   Tropworld    Trump    Ballys
     Buying
      in            $59,900    $48,150    $14,400     $0

     Front money
      deposit          0            0            0        0
          Total     $59,900      $48,150     $14,400     $0

Petitioner's Tax Returns

     Petitioner reported the following items of gross income on

his Federal income tax returns for the years in issue:

                             1987            1988           1989
Wages                      $65,917         $45,379        $48,922
Taxable interest income        105             147            238
State tax refund                  0             16            221
Dividend income                   0               0            33
     Total                 $66,022         $45,542        $49,414

     Petitioner made no disclosures in his 1987 Federal income

tax return or in a statement attached to that return of any

amounts omitted from that return.

Unreported Income

     Petitioner failed to report an item of gross income in the

amount of $408,318 received in 1987.

Negligence

     Petitioner and Hester acted together to structure receipt of

the $408,318 so that petitioner could retain control of it but

claim that he had not received it for tax purposes.
                                  - 11 -

                                  OPINION

I.    Introduction

       A.     Questions for Decision

       The principal question we have been asked to decide is

whether petitioner underreported his income for 1987, 1988, or

1989.       We have found that petitioner failed to report an item of

gross income in the amount of $408,318 received in 1987.         Based

on respondent's concession that the notices of deficiency for

1987, 1988, and 1989 are to be considered in the alternative, and

given that we will sustain respondent's determination of a

deficiency for 1987 in full, we determine that there are no

deficiencies in tax, additions to tax, or penalties for 1988 or

1989.       We shall enter decisions accordingly.   We must still

address two motions made by petitioner and determine whether

petitioner is liable for respondent's addition to tax for 1987.

II.    Motions

       A.     Motion To Dismiss Based on Period of Limitations

       At trial, petitioner orally moved to dismiss in petitioner's

favor with respect to 1987.       We did not then rule on petitioner's

motion.       Petitioner claims that the 3-year period of limitations

on assessment and collection with respect to that year had

expired.       We note that the statute of limitations is an

affirmative defense and does not affect the jurisdiction of this

Court.       Rule 39; Badger Materials, Inc. v. Commissioner, 40 T.C.

1061, 1063 (1963).       Were we to agree with petitioner’s argument,
                                - 12 -

we would recharacterize the motion as one for summary judgment

and enter a decision of no deficiency as to petitioner’s 1987

year.   Sec. 7459(e).

     In general, the assessment of a deficiency in tax must be

made within 3 years of the taxpayer's filing of his return.

Sec. 6501(a).   However, the limitations period is extended to

6 years if the taxpayer omits from gross income an amount

properly includable therein that is in excess of 25 percent of

the amount of gross income stated in the return.

Sec. 6501(e)(1)(A).     In determining the amount omitted there

shall not be taken into account any amount omitted from gross

income if such amount is disclosed in the return or in a

statement attached to the return.     Sec. 6501(e)(1)(A)(ii).

     Petitioner filed his 1987 Federal income tax return on or

about April 15, 1988, reporting gross income in the amount of

$66,022.57.   On July 12, 1993, respondent issued a notice of

deficiency to petitioner for 1987.       Respondent concedes that

assessment of a deficiency in tax for 1987 cannot be made within

the 3-year period provided for in section 6501(a).       Respondent

asserts, however, that the 6-year period of limitations provided

for in section 6501(e)(1)(A) applies.       Respondent must prove that

the requirements of section 6501(e)(1)(A) are satisfied.       See

Bardwell v. Commissioner, 38 T.C. 84, 92 (1962), affd. 318 F.2d

786 (10th Cir. 1963); Seltzer v. Commissioner, 21 T.C. 398, 401-

402 (1953).
                               - 13 -

     In his 1987 Federal income tax return, petitioner reported

gross income of $66,022.    For 1987, petitioner failed to report

an item of gross income in the amount of $408,318.    Petitioner

testified that the copy of his 1987 return in evidence was

complete.    We have examined that copy and find no disclosure of

the omitted item of gross income.    There are no statements

disclosing the omitted item attached to the return.      Petitioner

has omitted from his 1987 Federal income tax return an amount in

excess of 25 percent of the amount of gross income stated in the

return.   He has not disclosed the omitted amount in the return or

in a statement attached to the return.    The copy of petitioner's

1987 return in evidence was received by respondent pursuant to a

subpoena to petitioner requiring him to produce that return.

Petitioner moved for us to quash that subpoena, and we denied

that motion.    On brief, petitioner asks us to reconsider that

denial.   We have done so and again find no grounds for quashing

the subpoena.   The copy of the return in question had been

provided to petitioner by respondent, and the request to provide

it to respondent at trial was not burdensome.

     On the premises stated, petitioner's motion to dismiss will

be denied.

     B.   Motion To Shift Burden of Proof

     At trial, petitioner orally moved to shift the burden of

proof.    We did not then rule on petitioner's motion.   On brief,
                                - 14 -

petitioner concedes that the burden of proof normally rests with

the taxpayer.   See Rule 142(a).   Petitioner argues, however:

     This presumption of correctness does not apply and the
     burden of proof shifts to respondent where there is a
     showing by a petitioner that the determination of the
     deficiency set forth in the notice of deficiency was
     arbitrarily made.

With respect to respondent's notice of deficiency for 1987,

petitioner claims:    "Respondent lost petitioner's 1987 tax return

and calculated the 1987 notice of deficiency arbitrarily without

knowledge of the actual income reported or taxes paid by

petitioner in 1987."

     Petitioner claims that respondent's notice of deficiency is

arbitrary and therefore should not be afforded the usual

presumption of correctness.    In addressing that contention, we

note that the courts generally will not look behind the

Commissioner's determination, even if it is based on hearsay or

other evidence inadmissible at trial.     Anastasato v.

Commissioner, 794 F.2d 884, 886-887 (3d Cir. 1986), vacating T.C.

Memo. 1985-101; Dellacroce v. Commissioner, 83 T.C. 269, 280

(1984); Suarez v. Commissioner, 58 T.C. 792, 813 (1972).

However, where the notice of deficiency is shown to be arbitrary,

that is sufficient to find for the taxpayer unless respondent

adequately cures such arbitrariness.     Helvering v. Taylor, 293

U.S. 507 (1935).     Consequently, under the Rule in Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971), in cases appealable to the Court of Appeals for the Third
                               - 15 -

Circuit, the presumption of correctness will not be given effect

unless the Commissioner produces "evidence linking the taxpayer

to the tax-generating activity in cases involving unreported

income, whether legal or illegal."      Anastasato, supra at 887.   In

these cases, respondent's notice of deficiency for 1987 is based

on petitioner's failure to report an attorney's fee (or

attorney's referral fee) of $408,318.     We conclude there is

sufficient evidence that petitioner was entitled to an attorney's

fee (e.g., the retainer agreement).

     Petitioner claims that respondent lost petitioner's 1987

return.    Petitioner, however, has failed to propose any findings

of fact in support of that claim, and we have made no such

finding.   Petitioner has failed to carry his burden of proof on

that point.    Moreover, even if facts did support that claim,

petitioner has failed to show that respondent's determination was

arbitrary.    Perhaps respondent had abstracted data from

petitioner's return and no longer needed it.     Indeed, it is

difficult to understand just what petitioner's complaint is.

Petitioner is not claiming that he did report the attorney's fee

on his return and that respondent is double charging him.

Whether respondent had petitioner's return or not, respondent

charged petitioner with income respondent had reason to believe

petitioner did not report.    There is nothing arbitrary about

that.
                                - 16 -

       Finally, petitioner argues that respondent raised a new

matter for 1988 (presumably the attorney's fee theory), and ought

to bear the burden of proof on that matter.    See Rule 142(a).

The long and the short of it is that we have sustained

respondent's determination of a deficiency for 1987, not 1988,

and for that year respondent raised no new issue.    Petitioner has

not brought to our attention any authority to the contrary.

       Petitioner's motion to shift the burden of proof will be

denied.    Indeed, even were we to shift the burden of proof to

respondent, that would not help petitioner.    On no issue for

which petitioner bears the burden of proof do we have a situation

in which we must look to who bears the burden of proof to resolve

a balance in the evidence.    In this case, considering the

evidence before us, it is of no consequence who bears the burden

of proof.

III.    Deficiency

       We have found that petitioner failed to report an item of

gross income in the amount of $408,318 received in 1987.      We base

that finding on our conclusion that, at the time the New York

court entered the Infants Compromise Order (the order), on

June 2, 1987, petitioner had the right to a one-half share of the

attorney's fees awarded by the court, which right petitioner

waived in favor of Hester, his sister.    A taxpayer may not avoid

tax by an anticipatory arrangement that assigns income earned by

the taxpayer to another.     Lucas v. Earl, 281 U.S. 111, 112
                              - 17 -

(1930); see United States v. Allen, 551 F.2d 208 (8th Cir. 1977)

(taxpayer, a real estate broker, was taxed on commission earned

on sale of house to his parents; commission turned over to his

parents; taxpayer argued that he had agreed to sell the house to

his parents free of a commission and, therefore, had waived the

commission); Daugherty v. Commissioner, 63 F.2d 77 (9th Cir.

1933), affg. 24 B.T.A. 531 (1931) (attorney who assigned to his

wife one-half of his share of a contingency fee is taxable on the

full share); Kochansky v. Commissioner, T.C. Memo. 1994-160

(attorney who represented client in malpractice suit taxable on

contingent fee assigned to former wife in property settlement

agreement).   When income is assigned to another:   "The choice of

the proper taxpayer revolves around the question of which person

* * * in fact controls the earning of the income rather than the

question of who ultimately receives the income."    Vercio v.

Commissioner, 73 T.C. 1246, 1253 (1980); Vnuk v. Commissioner,

621 F.2d 1318, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164;

Kochansky v. Commissioner, supra.

     Neither party here argues that the $408,318 item here in

question is taxable to the Lipsig firm.   The choice is between

petitioner, for whom, if the item is his, it is a fee includable

in gross income pursuant to section 61(a)(1), and Hester, for

whom, if it is hers, it is an amount excludable from gross income

pursuant to section 104(a)(2) as an amount received on account of

personal injury.   The evidence here strongly supports the
                               - 18 -

conclusion that petitioner controlled the earning of the item in

question, notwithstanding that the New York court ordered that it

be paid to Hester.   In its order (the order), the New York court

called the item an attorney's fee and stated that petitioner had

waived his right to the fee.   If the item were not an attorney's

fee, why would the New York court describe it as such and speak

of a waiver?   Petitioner was not a party to the malpractice

action.   The only possible claim he had to any proceeds was for

services rendered as an attorney.   If he had not rendered those

services, and was not entitled to a fee, then any discussion of a

waiver makes no sense.   Yes, it is possible that petitioner (or

Hester) had negotiated a reduced, one-half, fee arrangement with

the Lipsig firm, and the waiver was simply the way that

arrangement was carried out.   We do not, however, believe that.

Under New York law, attorney's fees in an action involving an

infant are fixed not by the attorney's contract or retainer

agreement but by the court, and any agreement of the guardian is

advisory only.   N.Y. Jud. sec. 474 (McKinney 1983); Werner v.

Levine, 276 N.Y.S.2d 269, 271 (Sup. Ct. 1967).    Under New York

law, in a action involving a minor, a settlement is ineffective

without a court order.   N.Y. Civ. Prac. L. & R. sec. 1207

(McKinney 1976 & Supp. 1995); Valdimer v. Mount Vernon Hebrew

Camps, Inc., 210 N.Y.S.2d 520 (1961).   Affidavits of the infant's

representative and attorney, if any, must accompany the papers

supporting the motion or petition for an order.    N.Y. Civ. Prac.
                               - 19 -

L. & R. sec. 1208 (McKinney 1976 & Supp. 1995).    The order and

the supporting papers we have described--the compromise petition,

the Lipsig firm affirmation, and petitioner's affirmation--all

are consistent in treating petitioner as entitled to a fee, which

he waived.    Both the compromise petition and the Lipsig firm

affirmation describe a contingent fee arrangement of

33-1/3 percent (later reduced to 30 percent).    If the arrangement

were otherwise, i.e., if, from the beginning, petitioner had been

entitled to no portion of that fee and the Lipsig firm was to get

less than 33-1/3 percent (later, 30 percent), then the compromise

petition and the Lipsig firm affirmation were misleading, if not

fraudulent.    We do not believe that to be the case.   Petitioner

assisted and was a tremendous help to the Lipsig firm in the

prosecution of the malpractice action.    The retainer,

petitioner's retainer statement, and his arrangement with the

Lipsig firm all are consistent with the conclusion that

petitioner earned and was entitled to a fee.    The only evidence

to the contrary is the testimony of petitioner and Hester.

Petitioner's testimony was not straightforward; we found him

evasive in many of his answers.    We accord his testimony little

weight.   Hester's testimony agreed with that of her brother.

Because of the close family relationship, and because she exposed

herself to no adverse income tax consequence, we also accord her

testimony little weight.
                                - 20 -

     Finally, petitioner claims that he cannot be taxed on the

item in question because he did not actually receive it, and it

would have been illegal for him to have received it.    See

Commissioner v. First Sec. Bank of Utah, N.A., 405 U.S. 394

(1972).   Petitioner argues that he was prohibited from receiving

the item under (1) New York law and (2) an order issued by his

employer, the New York Attorney General, prohibiting Department

of Law employees from engaging in private practice.    We do not

agree that the New York law or Attorney General rule cited by

petitioner would make it illegal for petitioner to receive the

fee that he waived to Hester.    New York Code of Professional

Responsibility, rule 2-107(A), which covers legal fee splitting,

does not invalidate petitioner's fee-sharing agreements with the

Lipsig firm because (1) we assume Hester consented to the

agreements, as evidenced by the statements made in her affidavit

supporting the petition for a compromise order, and (2)

petitioner contributed to the legal work in an amount sufficient

to satisfy rule 2-107(A).   See Benjamin v. Koeppel, 626 N.Y.S.2d

982, 985-986 (1995) (referring attorney contributed to the legal

work by merely interviewing the client, evaluating the case,

discussing the case with the representing firm, and attending one

meeting between client and firm).    N.Y. Jud. sec. 474 does not

prohibit petitioner from collecting fees; rather it prescribes

the procedural method for obtaining fees, which petitioner failed

to follow as he had assigned his portion of the fee.    Finally,
                                   - 21 -

petitioner has not convinced us that his employment restriction,

while prohibiting him from private practice, makes it illegal for

him to collect the fees received from such practice.

Accordingly, we find that petitioner's ability to receive the fee

was not impeded by law or employment restriction.       The New York

court was apprised of petitioner's agreement with the Lipsig

firm.     We believe that, by ordering that petitioner's waiver be

given effect so that half the attorney's fees be paid to Hester,

the New York court recognized petitioner's right to receive the

fee and, consequently, petitioner's ability to control the fee's

disposition.     Accordingly, $408,318 is taxable to petitioner in

1987.

IV.   Additions to Tax

        A.   Negligence

        We have determined an underpayment in tax for 1987.    Section

6653(a)(1)(A) imposes an addition to tax equal to 5 percent of

the entire underpayment if any portion of such underpayment is

due to negligence.        Section 6653(a)(1)(B) imposes an addition to

tax equal to 50 percent of the interest payable under section

6601 with respect to the portion of the underpayment due to

negligence.      "Negligence is lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances."        Neely v. Commissioner, 85 T.C. 934, 947

(1985)(quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
                               - 22 -

Cir. 1967), affg. in part and remanding in part 43 T.C. 168

(1964)).   Petitioner bears the burden of proof.   Rule 142(a).

     In the petition, petitioner assigns error to respondent's

determination of an addition to tax for negligence on the ground

that there is no deficiency.   Petitioner avers no other facts in

support of his assignment of error.     On brief, petitioner argues

that petitioner reported the transaction consistently with the

actual receipt of the item and that respondent's assignment of

income theory is not contained in the Code or regulations, but is

a "limited doctrine" contained in case law.    Petitioner argues

that petitioner cannot be expected to have intentionally

disregarded that doctrine.   Moreover, petitioner argues that

respondent has introduced absolutely no evidence that petitioner

engaged in any scheme to avoid taxes.    We disagree.   The $408,318

was deposited into a joint account belonging to Hester and

petitioner.   Petitioner withdrew substantial sums from that

account and gambled with them in Atlantic City.    Such use of the

$408,318 is inconsistent with the statement in the Lipsig firm

affirmation, no doubt based on statements by petitioner or

Hester, that petitioner "has agreed to waive his share of the

legal fees in this case in Hester's behalf so that she may

continue to have the wherewithal to care for her daughter MAUDE."

We believe that petitioner and Hester acted together to structure

receipt of the $408,318 so that petitioner could retain control

of it but claim that he had not received it for income tax
                               - 23 -

purposes, and we so find.    We believe that petitioner was

negligent in not reporting the $408,318 on his 1987 return, and

we so find.    We sustain respondent's additions to tax under

section 6653(a)(1)(A) and (B) in their entirety.

     B.   Substantial Understatement of Income Tax Liability

     For returns due before January 1, 1990, section 6661

provides for an addition to tax equal to 25 percent of the amount

of any underpayment attributable to a substantial understatement.

An understatement is "substantial" when the understatement for

the taxable year exceeds the greater of (1) 10 percent of the tax

required to be shown or (2) $5,000.     The understatement is

reduced to the extent that the taxpayer has (1) adequately

disclosed his or her position, or (2) has substantial authority

for the tax treatment of an item.    Sec. 6661; sec. 1.6661-6(a),

Income Tax Regs.    Petitioner bears the burden of proving that he

is not subject to the addition to tax determined by respondent.

Rule 142(a).

     Petitioner’s understatement for the taxable year exceeded

10 percent of the tax required to be shown.     It is therefore

substantial under section 6661.    Petitioner argues, however, that

there was substantial authority for his treatment of the item.

Specifically, petitioner argues that he "reported the transaction

consistently with an award from the New York court and

consistently with the treatment of such item by the Lipsig Firm."

Section 1.6661-3(b)(2), Income Tax Regs., lists the types of
                                - 24 -

authority that will be considered in determining whether

substantial authority exists.    The authority upon which

petitioner relies, i.e., the court award and the Lipsig firm's

treatment, are not among those that will be considered.

Furthermore, there is no evidence that petitioner made any

disclosure of the item on his 1987 tax return.    Petitioner has

thus failed to prove that he is not subject to the section 6661

addition to tax.   Accordingly, we sustain respondent's section

6661 addition to tax.


                                An order denying petitioner’s

                          oral motion to shift the burden of proof

                          will be issued.

                                An order denying petitioner’s

                          oral motion to dismiss for lack of

                          jurisdiction will be issued, and

                          decision will be entered for respondent

                          in docket No. 21777-93.

                                Decisions will be entered for

                          petitioner in docket Nos. 5780-92 and

                          592-94.
