                         T.C. Memo. 1997-446




                       UNITED STATES TAX COURT



               JOHN FRANKLIN FOUST, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4162-95.                 Filed September 30, 1997.



     John Franklin Foust, pro se.

     Loren B. Mark, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:    Respondent determined a deficiency in

petitioner’s Federal income tax and an addition to tax and a

penalty as follows:
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                               Addition to tax      Penalty
     Year      Deficiency      Sec. 6651(a)(1)1    Sec. 6662

     1989       $75,389            $3,769.45       $15,077.80

     Following concessions by the parties,2 the issues for

decision are whether:   (1) Petitioner is entitled to a farm loss

deduction of $110,000 for farm rents purportedly paid; (2)

petitioner had unreported income from one of his S corporations,

Cheyenne River Corp., Inc. (Cheyenne), by reason of its

constructive receipt of Federal disaster and crop insurance

payments to its creditors; (3) petitioner is entitled to a

Schedule E loss from Cheyenne that was not reported on Cheyenne’s

Form 1120S; and (4) petitioner is liable for a section 6651(a)(1)

addition to tax for failing to timely file his 1989 Federal




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure. Except for respondent’s determinations
shown above, dollar amounts have been rounded to the nearest
dollar.
     2
       Petitioner conceded the claim asserted in his petition
that a substantial amount of the payment he received in a
contract settlement with his former employer, see infra note 5,
should be excluded from gross income under sec. 104(a)(2).
Respondent conceded that petitioner was entitled to a net
operating loss deduction of $53,979 claimed in his return,
representing a carryover from a prior year, that had been
disallowed by the statutory notice of deficiency. Petitioner
raised at trial and on brief a further claim of entitlement to an
unused investment tax credit carryover from 1987; the Court did
not consider this claim, as not having been properly pleaded, as
having been raised too late, and as lacking foundation in the
record.
                               - 3 -


income tax return and the section 6662 accuracy-related penalty.

We sustain respondent’s determination on each contested issue.

                        FINDINGS OF FACT

Background

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

The stipulation of facts and attached exhibits are incorporated

by this reference.

     At the time of filing the petition in this case, petitioner

was a resident of Lemmon, South Dakota.    Petitioner was married

during the entire year 1989, the year at issue in this case, to

Mary S. Foust (Mrs. Foust).   On October 16, 1990, petitioner

filed a separate individual Federal income tax return for 1989

with the Internal Revenue Service Center at Kansas City,

Missouri, showing zero taxable income and no tax liability.

Pursuant to applications for extension, petitioner had until

October 15, 1990, to file his return.

     Petitioner was a practicing Iowa certified public accountant

from 1971 until 1976 and from 1989 through the time of trial.

Petitioner holds a law degree from Drake University, but has not

been admitted to practice law in any jurisdiction.

Petitioner’s Farming-Related Activities

     On February 22, 1985, petitioner incorporated Cheyenne; he

acquired all its shares and caused it to become an S corporation.

Petitioner organized Cheyenne for the purpose of farming, by
                                - 4 -


crop-share arrangement, 804 acres of farmland owned by Mesa Corp.

(Mesa), an S corporation whose shares were owned by Mrs. Foust.

Mrs. Foust obtained her shares of Mesa from petitioner without

consideration.   Mesa’s Form 1120S for 1989 reported $60,000 of

rental income, expenses of $46,171, consisting primarily of

depreciation and interest, and taxable income of $13,829.

     On March 6, 1986, petitioner purchased a 160-acre farm in

Lucas County, Iowa.   On the same date, petitioner and Mrs. Foust

conveyed this farm to Teton Corp. (Teton), an S corporation

whose shares were beneficially owned by petitioner’s minor

children, Brian John Foust and Michael Franklin Foust.   Cheyenne

began farming Teton’s land in addition to Mesa’s land.   Teton’s

Form 1120S for 1989 reported the receipt of rental income of

$52,200 and taxable income of $31,754.

     Mrs. Foust also owns the shares of Iowa Prairie Corp. (Iowa

Prairie), an S corporation engaged in the manufacture of small

wooden “miniatures” that were sold in craft stores.   During the

year in issue, Iowa Prairie neither conducted any farming

activities nor owned or leased any farm land.   There were no

written rental agreements among or between petitioner, Cheyenne,

Iowa Prairie, Teton, or Mesa.   Petitioner did not engage in any

farming activities in 1989.
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     Petitioner and his brother James D. Foust (James) had

engaged in several joint farming and farm-related ventures,3

including the conduct of farming through Foust Bros. Farms, Inc.

(Foust Bros. Farms).   Foust Bros. Farms applied for and received

disaster loans from the Small Business Administration (SBA) and

the Farmers Home Administration (FMHA) that were personally

guaranteed by petitioner and James.      At the times the FMHA and

the SBA approved the loans to Foust Bros. Farms, petitioner and

James had led the lenders to believe that they were lending to a

separate corporate entity, independently operated and maintained.

However, Petitioner and James did not keep separate books and

records for Foust Bros. Farms.    Petitioner and James so


     3
       The parties have stipulated that, in addition to Foust
Bros. Farms, Teton, Mesa, and Cheyenne River, petitioner filed
articles of incorporation with the Iowa Secretary of State for
the following named corporations, as indicated:

     Foust Brothers Leasing Co.             1977
     Wind River Corp.                       01/04/80
     Ag-Land Investments, Ltd.              01/05/83
     Southern Cross, Inc.                   01/05/83
     Blackhorse Corp.                       01/05/83
     Butte Corp.                            11/02/83
     Bend Corp.                             11/02/83
     Williston Corp.                        11/02/83
     Ranger Corp. of U.S.                   11/02/83
     Savannah Corp.                         11/02/83
     Thunderhawk Ltd.                       11/02/83
     XIT, Inc.                              09/18/84
     Cathedral Corp.                        04/11/86
     Agrivest Corp.                         01/09/87
     Senora Corp.                           01/09/87
     West Texas Corp.                       01/09/87
                                - 6 -


commingled the funds and assets of Foust Bros. Farms with their

personal funds and those of other corporations as to cause the

bankruptcy court to pierce the corporate veil and hold (see

below) Foust Bros. Farms and the other corporations used by

petitioner and James to carry on their farming and farm-related

activities to be their alter egos and ineffective for the purpose

of providing corporate limited liability.

Petitioner’s Bankruptcy Proceedings

     On July 22, 1988, petitioner filed a chapter 12 petition in

bankruptcy with the U.S. Bankruptcy Court for the Southern

District of Iowa.4   On August 10, 1988, petitioner filed a

Statement of Financial Affairs and related bankruptcy schedules

in the bankruptcy proceeding.   On the Statement of Financial

Affairs, a sworn statement, submitted under penalty of perjury,

petitioner purported to list all his assets and liabilities.    The

Statement of Financial Affairs did not contain any reference to

unpaid rent owed by petitioner to Mesa or Teton.

     On December 29, 1988, the chapter 12 bankruptcy proceeding

was converted to a chapter 7 proceeding.    On January 23, 1989,

petitioner filed a new sworn Statement of Financial Affairs,

which made no mention of unpaid rent owed to Mesa and Teton.




     4
       On Apr. 13, 1988, James had filed a personal chapter 7
petition in bankruptcy.
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     On March 28, 1989, a Discharge Order was issued with respect

to petitioner’s chapter 7 bankruptcy proceeding.   Petitioner’s

bankruptcy schedules listed unsecured creditor’s claims totaling

$216,820, more than $100,000 of which were discharged in

bankruptcy.

     The SBA filed with the bankruptcy court a creditor’s claim

against petitioner and James in the amount of $49,646, arising

from its emergency disaster loan to Foust Bros. Farms.   The FMHA

filed creditor’s claims with the bankruptcy court arising from a

disaster loan to Foust Brother’s Farms against petitioner and

James in the amounts of $56,505 and $48,700, respectively.    In

response to a complaint filed on behalf of the SBA and FMHA by

the U.S. Attorney’s Office for the Southern District of Iowa, the

bankruptcy court held, following a trial, that petitioner and

James were personally liable for the debts of Foust Bros. Farms

and that their debts to the SBA and the FMHA were not

dischargeable in bankruptcy.   The bankruptcy court entered

judgments against petitioner, in favor of the SBA in the amount

of $49,646, and in favor of the FMHA in the amount of $56,505.

The findings and order of the bankruptcy court were upheld as to

petitioner by the District Court of the Southern District of Iowa

and the Court of Appeals for the Eighth Circuit.
                               - 8 -


Cheyenne’s Bankruptcy Proceedings

     On February 28, 1989, petitioner filed a voluntary

chapter 12 petition in bankruptcy for Cheyenne.    Cheyenne

failed to fulfill its duties as a debtor-in-possession and to

file complete and adequate schedules with the bankruptcy court.

Cheyenne also failed to cooperate with the trustee in bankruptcy

and to provide the trustee with financial information.    As a

result, Cheyenne’s petition was dismissed on May 15, 1989.

     On June 20, 1989, petitioner filed a second voluntary

chapter 12 petition in bankruptcy for Cheyenne.    This petition

was also filed without the required statements and schedules.      On

July 18, 1989, this petition was dismissed.

     In 1989, the Agricultural Stabilization and Conservation

Service (ASCS) owed a 1988 corn and soybean disaster payment to

Cheyenne in the amount of $37,723.     ASCS distributed the disaster

payment to the Commodity Credit Corporation (CCC) and the SBA,

creditors of Cheyenne, in the amounts of $34,171 and $3,552,

respectively.   Cheyenne did not report the $37,723 disaster

payment on its 1989 Form 1120S.

     In 1989, Cheyenne was also entitled to receive a Federal

Crop Insurance (FCI) payment in the amount of $43,496 from

Thurston Fire & Casualty Insurance Co.    In 1989, the $43,496 FCI

payment was made to AG Services of America, a creditor of

Cheyenne that had financed its farming operations in earlier
                                   - 9 -


years.       Cheyenne did not report the $43,496 FCI payment on its

1989 Form 1120S.

       On July 28, 1989, petitioner purchased 19 cashier’s checks

in the total amount of $183,000 from Valley National Bank, Des

Moines, Iowa.5      Petitioner deposited 11 of these checks, totaling

$110,000, into the bank account of Iowa Prairie.

       Cheyenne’s 1989 Form 1120S reported “no activity” and showed

no income or expenses.       Nonetheless, petitioner claimed a current

net operating loss flowthrough from Cheyenne in the amount of

$11,503.       Petitioner claims to have paid personally $110,000 to

Mesa and Teton for rental expenses that Cheyenne was unable to

pay.       Petitioner claimed a deduction for those alleged payments

on his 1989 Federal income tax return.

       Petitioner was aware that he was required to maintain

records sufficient to support the positions taken on his Federal

income tax returns.       Nonetheless, petitioner did not retain

receipts of transactions, maintain books of account, or prepare

financial statements for himself or any of the corporate entities

in which he had an interest.


       5
       Petitioner received a “contract settlement” in 1989 in the
amount of $183,000, which he reported as income on his 1989
return, in connection with the termination of his employment as
Vice President of Financial Affairs and Chief Financial Officer
of the University of Osteopathic Medicine & Health Sciences of
Des Moines, Iowa. However, the record does not disclose any of
the facts surrounding the contract settlement, nor whether the
$183,000 was used to purchase the cashier’s checks.
                                 - 10 -


                                 OPINION

     Respondent’s determinations are entitled to a presumption of

correctness, and petitioner bears the burden of proof with

respect to all issues in this case.        Rule 142(a).   Petitioner

must substantiate the amounts and payments of claimed expenses

and demonstrate the validity of his claims of deductions

therefor.   Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     Each of respondent’s determinations arose from one aspect or

another of petitioner’s farming operations in prior years.

Because of his failures to maintain and offer in evidence records

and receipts or other required documentation, petitioner has not

carried his burden of proof and persuasion on any of his

substantive claims.      By reason of his failures to provide any

explanation or justification for his errors and omissions in the

preparation and filing of his 1989 return, petitioner has not

carried his burden on the addition and penalty issues.

Issue 1:    Farm Rents

     Petitioner contends that Cheyenne owed Mesa $60,000 and

Teton $50,000 for rental obligations incurred by Cheyenne and

petitioner in years prior to 1989.

     Petitioner did not schedule any such claims against himself

in his bankruptcy proceeding, and the bankruptcy petitions he

filed on behalf of Cheyenne were dismissed for failure to file
                              - 11 -


proper schedules.   We reject the notion that petitioner--or any

bankrupt--can obtain a discharge of debts owed to unrelated

parties and preserve purported other claims for the benefit of

his wife and children by failing to schedule them in the

bankruptcy proceeding.

     Petitioner contends that the $110,000 he deposited into the

bank account of Iowa Prairie was a payment of rents owed by

Cheyenne to Mesa and Teton.   Iowa Prairie did not engage in any

activity related to farming or to Cheyenne, Mesa, or Teton.

Petitioner contends that he deposited money in the account of

Iowa Prairie for payment of rent Cheyenne owed to Mesa because

Mesa did not have its own checking account.   Petitioner provides

no such explanation, nor any other explanation, with respect to

the rent Cheyenne allegedly owed to Teton.    There is no evidence

in the record showing how, if at all, the alleged $110,000 of

payments was ultimately received by Mesa and Teton.

     For 1989, Mesa and Teton reported rental income in the

amounts of $60,000 and $52,200, respectively, and taxable income

of $13,829 and $31,754, respectively.   Mrs. Foust owns the shares

of Mesa and is trustee of the shares of Teton beneficially owned

by petitioner’s and Mrs. Foust’s children.

     Petitioner has presented neither any evidence that he was

personally liable for the debts of Cheyenne nor any evidence of

the terms of any arrangements under which Cheyenne would have
                              - 12 -


owed rent to either Mesa or Teton.     Respondent has drawn our

attention to evidence in the record that tends to suggest that

Cheyenne had a sharecrop arrangement with Mesa under which a cash

payment of rent would not ordinarily be due.     Because we find

that petitioner has failed to substantiate that either he or

Cheyenne was obligated to make the payments,6 or that Mesa or

Teton actually received them, we uphold respondent’s

determination that petitioner is not entitled to a deduction of

$110,000 for payment of rents owed to Mesa and Teton.

Issue 2:   Petitioner’s Unreported Income

     Cheyenne, an S corporation whose shares were owned by

petitioner, conducted farming activities through 1988.     ASCS owed

Cheyenne a disaster payment of $37,723.     In 1989, this amount was

distributed by ASCS to creditors of Cheyenne, CCC and SBA, in the

amounts of $34,171 and $3,552, respectively.     Cheyenne was also

entitled to a Federal crop insurance payment in the amount of

$43,496.   In 1989, this amount was distributed by the payor to AG

Services, a creditor of Cheyenne that had furnished goods and

services to Cheyenne for use in its farming activities.


     6
       In the absence of a personal obligation of petitioner, the
payments by petitioner would be treated as capital contributions
to Cheyenne, and constructive payments by Cheyenne to the payees.
Because Cheyenne was an S corporation whose shares appear to have
been owned by petitioner during 1989, any loss arising from
deductible payments constructively made by Cheyenne would
properly flow through to petitioner for Federal income tax
purposes.
                               - 13 -


     Section 61(a) defines gross income as “all income from

whatever source derived, including * * * Income from discharge of

indebtedness”.    In 1989, the ASCS disaster payment and the

Federal crop insurance payment were applied in their entirety to

discharge Cheyenne’s debts due and owing.    Therefore, Cheyenne

had income in 1989 to the extent of the debts discharged, and

this income flowed through to petitioner by reason of the

operation of subchapter S.

     The debts of Cheyenne were not discharged in bankruptcy.

Regardless of whether petitioner was relieved of any personal

liability for Cheyenne’s debts by the discharge order of the

bankruptcy court, Cheyenne’s petitions in bankruptcy were both

dismissed.    Therefore, as to Cheyenne, these debts were not

discharged in bankruptcy.

     Petitioner has not established that the Federal crop

insurance payments are excludable from the gross income of

Cheyenne.    The insurance coverage applied in the event of

nonproduction rather than destruction.    The crop insurance was

paid because crops could not be produced, not as compensation for

a casualty loss.    “It is well settled that proceeds from a

business interruption policy, which compensates for lost profits

or earnings, are taxable as ordinary income”.    Seidenfeld v.

Commissioner, T.C. Memo. 1995-61; see also Massillon-Cleveland-

Akron Sign Co. v. Commissioner, 15 T.C. 79 (1950).
                                 - 14 -


     Petitioner has not established that the disaster payment is

excludable from Cheyenne’s gross income.7     Petitioner has not

shown that Cheyenne was entitled to receive the disaster payment

by reason of having sustained any casualty loss for which it

would have been entitled to a casualty loss deduction under

section 165.    As a small business corporation engaged in farming,

Cheyenne in all likelihood had used the cash method of

accounting.    Secs. 447 and 448.   As a result, it would have had

no basis in the crops of a prior year in respect of which it was

entitled to a disaster payment.     Lacking any such basis, it would

not have been entitled to a casualty loss for which the disaster

payment would have acted as reimbursement.

Issue 3:   The Schedule E Loss

     On his 1989 personal Federal income tax return, petitioner

claimed a Schedule E loss from Cheyenne in the amount of $11,503.

Cheyenne’s Form 1120S for 1989 did not display any such loss, and

petitioner did not file an amended return for Cheyenne’s 1989

taxable year.

     Petitioner has failed to substantiate the Schedule E loss

claimed on his 1989 personal return.      Cheyenne’s Form 1120S was

marked “no activity”, and the evidence in the record indicates


     7
       Petitioner did not proffer evidence or argument that
disaster payments would be excludable from Cheyenne’s income as
disaster relief, cf. Bannon v. Commissioner, 99 T.C. 59, 62-63
(1992), or as Federal subsidies covered by sec. 126.
                               - 15 -


that Cheyenne did not conduct any farming activities in 1989.

Petitioner has presented no evidence to explain or substantiate

the $11,503 loss.    In the absence of any evidence substantiating

or explaining petitioner’s entitlement to the loss, respondent’s

determination disallowing the loss is upheld.

Issue 4:   The Section 6651(a)(1) Addition to Tax

     Section 6651(a)(1) imposes an addition to tax in the event a

taxpayer fails to timely file his tax return.    The addition to

tax applies unless the taxpayer establishes that his failure to

file was due to reasonable cause and not willful neglect.

     With extensions, petitioner’s 1989 personal Federal income

tax return was due on October 15, 1990.    The parties stipulated

that the return was mailed on October 16, 1990; the return bears

a stamp indicating that the envelope was postmarked on that date.

At the trial, petitioner did not provide any explanation for his

delinquent filing.    Petitioner’s brief included some vague

assertions about why the envelope was erroneously postmarked on

October 16, rather than October 15, but these assertions are not

supported by the record and they directly contradict a stipulated

fact.

     Petitioner has failed to provide any evidence that the late

filing of his 1989 personal Federal income tax return was due to

reasonable cause and not willful neglect.    We uphold respondent’s

determination that petitioner is liable for the section
                               - 16 -


6651(a)(1) addition to tax in an amount equal to 5 percent of the

deficiency.

Issue 5:   The Section 6662(a) Penalty

     Section 6662(a) imposes a 20-percent accuracy-related

penalty for, among other reasons, negligence or disregard of

rules or regulations.    Section 6001 requires taxpayers to

maintain records to support positions taken on their Federal

income tax returns.    In this case, petitioner failed to produce

any documentary evidence to support the positions taken on his

return, with respect to the alleged rental payments, other than

the amounts reported as rental income on the returns of related

taxpayers.    As a practicing certified public accountant with

legal training, petitioner should have known that he was required

to maintain and produce such documentary evidence, and his

failure to do so is clearly negligent.

     An alternative ground for the imposition of the section

6662(a) accuracy-related penalty--set forth in the statutory

notice--is substantial understatement of income.    Sec.

6662(b)(2).    Section 6662(d)(1)(A) defines a substantial

understatement as the greater of “(i) 10 percent of the tax

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

$5,000.”   Petitioner reported no tax liability on his 1989

personal Federal income tax return.     Respondent has determined,
                             - 17 -


and we have upheld, a deficiency that will substantially exceed

$5,000.

     Respondent’s determination that petitioner is liable for the

section 6662(a) penalty is upheld.

     To reflect the foregoing and to give effect to the parties’

concessions,


                                          Decision will be entered

                                      under Rule 155.
