                        T.C. Memo. 2001-79



                      UNITED STATES TAX COURT



                 THOMAS J. ROSSER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1201-98.                     Filed March 30, 2001.



     Carla I. Struble, for petitioner.

     Gary R. Shuler, Jr., for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioner’s income tax of $13,858 for 1993 and $24,697.91 for

1994, additions to tax for failure to timely file under section

6651(a) of $1,386 for 1993 and $6,175 for 1994, and an accuracy-

related penalty of $2,772 for 1993 and $4,939 for 1994 for a

substantial understatement of tax under section 6662(a).
                               - 2 -

      After concessions, the issues for decision are:

     1.   Whether interest that petitioner paid in 1993 and 1994

for loans that he used to acquire, renovate, and operate two

nursing homes and to buy interests in the Sunbury building and

Heritage Inn partnerships is trade or business interest.    We hold

that interest relating to the nursing homes is trade or business

interest, but interest relating to the Sunbury building and

Heritage Inn partnerships is not.

     2.   Whether petitioner may deduct net operating losses in

1994 that were carried forward from 1991 and 1993.   We hold that

he may not.

     3.   Whether petitioner is liable for additions to tax under

section 6651(a) for failure to file timely income tax returns for

1993 and 1994.   We hold that he is.

     4.   Whether petitioner is liable for the penalty under

section 6662(a) for substantial understatement of tax for 1993

and 1994.   We hold that he is to the extent the underpayments in

1993 and 1994 exceed the greater of 10 percent of the tax

required to be shown on the return for each of those years, or

$5,000.   See sec. 6662(d)(1)(A).

     Section references are to the Internal Revenue Code in

effect during the years in issue.   Rule references are to the Tax

Court Rules of Practice and Procedure.
                                 - 3 -

                           FINDINGS OF FACT

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

A.   Petitioner

     Petitioner lived in Westerville, Ohio, when the petition was

filed in this case.     Beginning about 1979, petitioner provided

financial services to individuals through a sole proprietorship

named Financial Perspectives.     Petitioner, his former wife, and

two other couples, formed a general partnership which bought a

building on Sunbury Road in Westerville (Sunbury building) in

1987.     Financial Perspectives’ office was in the Sunbury

building.     Petitioner managed the Sunbury building.

B.   The Nursing Homes

     1.     Acquisition, Incorporation, and Financing

     In December 1985, petitioner and his former wife paid

$650,000 to buy a nursing home in Kirkersville, Ohio

(Kirkersville Nursing Home), from Joseph and Maureen Skidmore

(the Skidmores).     Petitioner and his former wife borrowed money

from State Savings Bank, the Skidmores, and Financial

Perspectives’ clients to buy the Kirkersville Nursing Home.     In

1986, petitioner and his former wife bought a nursing home in

Utica, Ohio (Utica Nursing Home), from Ms. Maybelle William

Braddock (Braddock) for $850,000.     Braddock financed the

purchase.
                                - 4 -

     In 1987, petitioner organized two S corporations:      Living

Care Alternatives of Kirkersville, Inc. (LCAK), and Living Care

Alternatives of Utica, Inc. (LCAU).      Petitioner transferred

ownership of the Kirkersville Nursing Home to LCAK and ownership

of the Utica Nursing Home to LCAU.      After the transfers, he

remained responsible for repaying the funds that he had borrowed

to acquire the nursing homes.    LCAK and LCAU never paid dividends

or made other distributions to petitioner as a shareholder.       LCAK

and LCAU had no accumulated earnings and profits in 1993 and

1994.

     Petitioner, as president of the S corporations, signed

promissory notes in which he agreed to pay himself and his former

wife $576,130.42 on April 1, 1987, and $700,000 on October 8,

1987.

     On October 8, 1987, petitioner and his former wife borrowed

$500,000 from County Savings Bank.      Petitioner paid $450,000 to

Braddock to repay her for financing the Utica Nursing Home

purchase.    He used the rest to renovate the Utica Nursing Home.

     2.     Management

        Petitioner bought the nursing homes so that he could earn

income from operating them and to provide a job for his then-

spouse.    Petitioner planned to earn a fee for managing the

nursing homes and for his wife to earn a salary for serving as

the administrator of the nursing homes.      Petitioner hoped to sell
                                - 5 -

the nursing homes for a profit when he retired, but that was not

a significant consideration for him when he bought them.

     Petitioner was the sole shareholder of LCAK and LCAU in 1993

and 1994.   Petitioner, doing business as Financial Perspectives,

spent an increasing amount of time managing the nursing homes

after 1985, and spent about 97 percent of his time managing them

in 1993 and 1994 and about 3 percent of his time on financial

services.

     Petitioner’s annual income from providing financial services

was $60,000 to $80,000 before he bought the nursing homes.

C.   Other Loans

     Petitioner borrowed money from County Savings Bank,

Braddock, the Skidmores, Dean and Maxine Williams, State Savings

Bank, and 5th Third Bank to acquire operate, improve, and develop

the nursing homes as follows:
                               - 6 -

                  Loan     New Funds or Replacement Note

                                1989
                $10,000   replacement note

                                1990
                 $5,000   replacement note

                                1991
                $20,000   new funds
                 45,000   replacement note
                 10,000   new funds
                  5,000   replacement note
                 10,000   replacement note

                                1992
                $35,000   new funds
                 53,000   replacement   note
                 10,500   replacement   note
                 30,000   replacement   note
                 10,000   new funds
                105,000   replacement   note
                 15,000   replacement   note
                 25,000   replacement   note

                                1993
                 17,939   replacement note
                 21,000   new funds
                 15,000   replacement note
                 20,000   new funds

     Petitioner borrowed $1,500 in 1992 and $20,000 in 1993 that

he used for the Sunbury building in a manner not described in the

record.1   The record does not show how much interest petitioner

paid on these loans in the years in issue.     Petitioner also

borrowed money to invest in a limited partnership that owned a

nursing home called the Heritage Inn.    In 1993, petitioner paid


     1
        The parties stipulated that these are “replacement
notes”. However, the record does not indicate which loans these
notes replaced.
                               - 7 -

interest on $1,000 that he borrowed to pay for another person’s

car lease, $10,000 that he used to retire an obligation of

another person, and $5,000 to establish a trust for another

person.

D.   Petitioner’s Income Tax Returns

     Petitioner reported on Schedules C (Profit or Loss From

Business) attached to his Forms 1040 (U.S. Individual Income Tax

Returns) that, doing business as Financial Perspectives, he had

cash receipts of $155,584 for 1990, $118,745 for 1991, and

$151,152 for 1992, and business expenses (other than interest) of

$44,403 for 1990, $46,790 for 1991, and $52,993 for 1992.

     1.   1990

     For 1990, petitioner reported that he, through Financial

Perspectives, paid mortgage interest of $173,872 and other

interest of $68,209.   He reported that he paid mortgage interest

in 1990 of $34,479 to State Savings Bank, $57,662.23 to County

Savings Bank, $25,005.96 to the Skidmores, $17,224.33 to an

unidentified lender for the second mortgage for the Utica Nursing

Home, and $39,500 to an unidentified lender for the first

mortgage for the Kirkersville Nursing Home.

     2.   1991

     For 1991, petitioner reported gross income of $118,745,

adjusted gross income of $21,316, deductions of $165,841
                                - 8 -

(including $119,051 for interest payments), and a loss of $47,096.

       3.   1992

       For 1992, petitioner reported gross income of $151,152,

adjusted gross income of $28,009, deductions of $239,898

(including $119,079 for mortgage interest payments and $67,826

for other interest), and a $88,746 loss.      He reported paying

mortgage interest for 1992 of $45,878.78 to County Savings Bank,

$16,700.58 to Williams, $24,003.01 to the Skidmores, $29,211.14

to State Savings Bank, and $3,285.55 to 5th Third Bank.

       4.   1993 and 1994

       Petitioner filed his Federal income tax return for 1993 on

November 21, 1994, and for 1994 on October 19, 1995.      On the

Schedules C for Financial Perspectives, petitioner reported the

following:


1993                                     Income      Expenses
       Total cash receipts              $149,213
       Total business expenses
         (other than interest)                         60,159
       Mortgage and other interest1                   180,583

1994
       Total cash receipts               140,302
       Total business expenses
         (other than interest)                         59,093
       Mortgage and other interest2                   180,625
  1
    On his 1993 Schedule C for Financial Perspectives,
petitioner reported paying mortgage interest of $45,190.03 to
County Savings Bank, $23,415.55 to State Savings Bank, $23,140.65
to the Skidmores, $16,328.84 to Williams, and $2,244.48 to Park
National Bank and other interest of $72,508. Petitioner contends
                               - 9 -

that “other interest” includes the interest on the $1,000 car
lease, $10,000 that he used to retire an obligation, and $5,000
to establish a trust, all for what petitioner contends was for
the benefit of an architect who worked on the nursing homes.
2
   On his 1994 Schedule C for Financial Perspectives, petitioner
reported paying mortgage interest of $19,689.65 to State Savings
Bank, $44,695.97 to County Savings, and $2,191.37 to Park
National Bank and other interest of $116,240.


     5.    Election Under Section 172(b)(3)

     Petitioner claimed a $63,482 net operating loss on his 1994

return.   He referred to a “Statement 01" on the return, but he

did not file it with the return.   Petitioner faxed respondent a

“Form 1040 Supporting Statement 01" on January 9, 1996, which

stated that the claimed $63,482 loss was from carryovers of

$30,750 from 1993 and $32,732 from 1991.

     Petitioner did not indicate on his 1991 or 1993 income tax

returns that he intended to forgo the then available 3-year net

operating loss carryback.   See sec. 172(b)(3).

                              OPINION

A.   Petitioner’s Interest Deduction

     1.    Whether Petitioner Had a Substantial Investment Intent
           in Acquiring the Nursing Homes

     Respondent contends that the interest at issue is not trade

or business interest because petitioner used the loans to buy,

renovate, and operate the nursing homes and that petitioner held

them as investments.   We disagree.
                                - 10 -

     A taxpayer holds property for investment if he or she had a

substantial investment intent in acquiring and holding the

property.    See Recklitis v. Commissioner, 91 T.C. 874, 907

(1988); Polakis v. Commissioner, 91 T.C. 660, 668 n.8 (1988);

Miller v. Commissioner, 70 T.C. 448, 455-456 (1978);

W. W. Windle Co. v. Commissioner, 65 T.C. 694, 713 (1976).      A

taxpayer lacks a substantial investment intent if the taxpayer

acquires a business solely to provide employment for himself.

See Boseker v. Commissioner, T.C. Memo. 1986-353; Schanhofer v.

Commissioner, T.C. Memo. 1986-166.

     Petitioner bought the nursing homes to provide self-

employment income for himself and employment for his former

spouse.     About 97 percent of petitioner’s income in 1993 and 1994

was from the nursing homes.    He hoped to sell the nursing homes

for a profit when he retired, but any investment motive was

remote or nonexistent.    Thus, this case is unlike Miller v.

Commissioner, 70 T.C. 448, 453, 457 (1978), and Malone v.

Commissioner, T.C. Memo. 1996-408, in which the taxpayers bought

a controlling interest in the stock of businesses predominantly

as an investment.    We conclude that petitioner did not have a

substantial investment intent when he bought and held the nursing

homes, that he did not hold the nursing homes for investment, and
                              - 11 -

that the interest relating to the nursing homes is trade or

business interest.   See sec. 163(d)(3)(A).2

     Petitioner contends that he may deduct interest on $1,000

that he borrowed to pay for a car lease, $10,000 that he used to

retire an obligation, and $5,000 that he used to establish a

trust, all to pay an architect who worked on the nursing homes.

We disagree.   There is no evidence petitioner borrowed these

amounts for an architect or that these amounts were payment for

work on the nursing homes.   We conclude that interest that

petitioner paid to acquire the car lease, retire the obligation,

and establish a trust was not trade or business interest.

     2.   Whether the Interest Relating to the Nursing Homes Is
          the Expense of the S Corporation and Not of Petitioner

     Respondent contends that petitioner may not deduct the

interest that petitioner paid to buy, renovate, and operate the

nursing homes because it is an expense of the S corporations,

citing Hewett v. Commissioner, 47 T.C. 483, 488 (1967); Hudlow v.

Commissioner, T.C. Memo. 1971-218; and Strasburger v.

Commissioner, T.C. Memo. 1962-255, affd. 327 F.2d 236 (6th Cir.

1964).



     2
        Interest allocable to the trade or business of providing
services as an employee is nondeductible personal interest. See
sec. 163(h)(2)(A). That limitation does not apply here because
petitioner was not an employee; instead, he earned self-
employment income through his Schedule C activity.
                                 - 12 -

     We disagree.    In those cases, the taxpayers’ corporations

incurred expenses related to the corporations and not to the

taxpayers individually.      We held that those taxpayers could not

deduct their corporations’ expenses.       Here, the interest at issue

relates to petitioner individually.       Petitioner bought the

nursing homes primarily to provide employment for himself and his

wife.     He was personally liable to pay the interest.    We conclude

that the interest expense is his and not that of the S

corporations.     See Boseker v. Commissioner, supra; Schanhofer v.

Commissioner, supra.     None of the cases that respondent cites

involves a taxpayer who borrowed money to buy a business to

provide his livelihood.      We hold that petitioner may deduct the

interest that he paid in 1993 and 1994 for loans that he used to

acquire, renovate, and operate the nursing homes.

        3.   Interest Relating to the Sunbury Building and Heritage
             Inn Partnerships

        Petitioner contends that the interest that he paid on loans

used to acquire the Sunbury building and Heritage Inn

partnerships was trade or business interest because he was a

general partner of the partnerships and because Financial

Perspectives and the nursing homes had offices in the Sunbury

building.     We disagree.

        Petitioner did not buy interests in those partnerships to

provide employment for himself.      The record is not clear about

the extent to which he participated in those partnerships.        The
                               - 13 -

Heritage Inn and Sunbury building partnerships only remotely

relate to petitioner’s trade or business.    We conclude that the

interest that petitioner paid in 1993 and 1994 relating to the

Sunbury building general partnership and Heritage Inn limited

partnership is not trade or business interest.

     Petitioner contends that respondent is estopped from

contending that he may not deduct the interest at issue as trade

or business interest because respondent had not disallowed it in

prior audits.   We disagree.   The Commissioner’s failure to raise

an issue in a prior audit does not estop the Commissioner from

raising it in an audit for a later year.    See Knights of Columbus

Council #3660 v. United States, 783 F.2d 69, 72-73 (7th Cir.

1986); Hawkins v. Commissioner, 713 F.2d 347, 351-352 (8th Cir.

1983), affg. T.C. Memo. 1982-451.

     4.   Conclusion

     We conclude that petitioner may deduct the interest that he

paid in 1993 and 1994 relating to loans he used for the nursing

homes under sections 162(a) and 163(a).    We also conclude that

the interest that petitioner paid in 1993 and 1994 relating to

the Sunbury building and Heritage Inn Partnerships is not trade

or business interest because petitioner acquired and held them

for investment.
                                - 14 -

B.   Whether Petitioner May Carry Forward to 1994 Net Operating
     Losses From 1991 and 1993

     Petitioner contends that he may carry forward to 1994 net

operating losses from 1991 and 1993.     We disagree.

     Generally, for the years in issue, a taxpayer must carry a

net operating loss back 3 years and carry it forward 15 years.

See sec. 172(b)(1)(A).3    A taxpayer may elect to forgo the

carryback period.   See sec. 172(b)(3).    Petitioner did not elect

to forgo the carryback period for 1991 or 1993.

     When a taxpayer does not elect to forgo the carryback

period, the taxpayer may carry losses forward only to the extent

they exceed the taxable income for the carryback years even if

the taxpayer did not carry back operating losses for those years.

See sec. 172(b)(2).   To carry forward or carry back net operating

losses, the taxpayer must prove the amount of the net operating

loss carryforward or carryback and that his or her gross income

in other years did not offset that loss.     See sec. 172(c); Jones

v. Commissioner, 25 T.C. 1100, 1104 (1956), revd. and remanded on

other grounds 259 F.2d 300 (5th Cir. 1958); Vaughan v.

Commissioner, 15 B.T.A. 596, 600 (1929).

     Petitioner offered into evidence his tax returns for 1990,

1991, 1992, and 1993.     A tax return does not establish that a

taxpayer had income and losses in the amounts reported on the



     3
        In 1997, sec. 172(b)(1)(A) was amended to generally
require a 2-year carryback and 20-year carryforward.
                              - 15 -

return.   See Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979);

Roberts v. Commissioner, 62 T.C. 834, 837, 839 (1974).

Petitioner did not establish the amount of his 1991 or 1993 net

operating loss, or that his income in the carryback years before

1991 or 1993 did not fully offset any net operating loss.4

     Petitioner has failed to show that he may carry a net

operating loss forward from 1991 or 1993 to 1994.    We conclude

that petitioner may not carry forward any losses to 1994.

C.   Whether Petitioner Is Liable for the Addition to Tax for
     Failure To Timely File

     Respondent determined that petitioner is liable for the

addition to tax for failure to timely file his returns for 1993

and 1994.   Petitioner did not show that he had reasonable cause

for failing to file timely the returns in issue.    Petitioner

offered no evidence and made no argument on this issue.    Thus,

petitioner has conceded this issue.    See, e.g., Bradley v.

Commissioner, 100 T.C. 367, 370 (1993); Sundstrand Corp. v.

Commissioner, 96 T.C. 226, 344 (1991); Rybak v. Commissioner, 91

T.C. 524, 566 n.19 (1988); Money v. Commissioner, 89 T.C. 46, 48

(1987); Leahy v. Commissioner, 87 T.C. 56, 73-74 (1986).




     4
        Thus, we need not decide petitioner’s contentions that he
should not be required to have elected under sec. 172(b)(3) on
his original 1991 and 1993 returns or that respondent has
discretion to allow him to elect now.
                               - 16 -

D.   Whether Petitioner Is Liable for the Accuracy-Related
     Penalty under Section 6662(a)

     Respondent determined and contends that petitioner is liable

for the accuracy-related penalty for substantial understatement

of income tax for 1993 and 1994 under section 6662(a).

     Petitioner contends that respondent is estopped from

asserting the accuracy-related penalty under section 6662(a)

because respondent conceded at trial that negligence is not an

issue in this case.    We disagree.

     Respondent contends that the accuracy-related penalty

applies because there is a substantial understatement of tax, not

because of negligence.    See sec. 6662(b)(2).   Section 6662(b)(2)

imposes a 20-percent penalty on the portion of an underpayment

attributable to a substantial understatement.    A substantial

understatement exists if, for any taxable year, the amount of the

understatement exceeds the greater of 10 percent of the tax

required to be shown on the return for the taxable year, or

$5,000.   See sec. 6662(d)(1)(A).

     If the taxpayer has substantial authority for his or her tax

treatment of any item on the return, the understatement is

reduced accordingly.    See sec. 6662(d)(2)(B)(i).   Petitioner

cited no authority for his position that he may carry forward net

operating losses from 1991 and 1993 to 1994 when he made no

election under section 172(b)(3) and when he did not establish

that he had losses that he could carry forward from 1991 and 1993
                                - 17 -

to 1994.   We conclude that the exception under section

6662(d)(2)(B)(i) does not apply.

     The amount of the understatement is reduced for any item

that is adequately disclosed in the taxpayer’s return, or in a

statement attached to the return, if there is reasonable basis

for the taxpayer’s treatment of the item.    See sec.

6662(d)(2)(B)(ii).   The mere claiming of a deduction is not

disclosure for purposes of section 6662(d)(2)(B)(ii)(I).    See

Accardo v. Commissioner, 942 F.2d 444, 453 (7th Cir. 1991)

(taxpayer's statement that his deduction of $207,000 was for

"Legal fees re conservation of property held for production of

income" is not disclosure for purposes of section

6662(b)(2)(B)(ii)(I)), affg. 94 T.C. 96 (1990); Schirmer v.

Commissioner, 89 T.C. 277, 285-286 (1987) (mere reporting of

income and deductions does not constitute disclosure of relevant

facts).    Here, deducting net operating losses carried forward

from 1991 and 1993 to 1994 is not adequate disclosure under

section 6662(d)(2)(B)(ii)(I).    Thus, petitioner did not

adequately disclose the nature of the net operating loss

carryforward controversy for purposes of section

6662(d)(2)(B)(ii)(I).

     We conclude that petitioner is liable for the accuracy-

related penalty under section 6662(a) for any part of the

underpayment for 1993 and 1994 to the extent the underpayment in
                             - 18 -

those years exceeds the greater of 10 percent of the tax required

to be shown on the return for those years, or $5,000.   See sec.

6662(d)(1)(A).

     To reflect concessions by the parties and the foregoing,

                                             Decision will be

                                   entered under Rule 155.
