                   T.C. Summary Opinion 2002-32



                      UNITED STATES TAX COURT



                   JANET L. WIEST, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

                  RAYMOND A. WIEST, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 6294-00S, 6302-00S.     Filed April 2, 2002.


     Robert S. Schriebman and Patrick E. McGinnis, for

petitioners.

     Timothy S. Sinnott, for respondent.


     ARMEN, Special Trial Judge: These consolidated cases were

heard pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time that the petitions were

filed.1   The decisions to be entered are not reviewable by any


     1
       Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1983,
                                                   (continued...)
                                - 2 -

other court, and this opinion should not be cited as authority.

     In so-called affected items notices of deficiency,

respondent determined additions to tax to petitioners’ Federal

income tax for the year and in the amounts as shown below:


                               Additions to Tax
                    Sec.              Sec.          Sec.
                                                    2
     Year         6653(a)(1)      6653(a)(2)        6661
                                  1
     1983          $272             $5,435          $1,359
            1
            The notice of deficiency mistakenly equates the
     amount of the addition to tax with the amount of the
     deficiency in income tax (see infra “J”). Prior to trial,
     respondent filed an answer to claim an increased addition
     to tax pursuant to sec. 6214(a). The increase, in the
     amount of $7,834.69, is purely computational in nature.
            2
            The first page of the notice of deficiency
     mistakenly references sec. 6662(d), which section is the
     successor to sec. 6661 and is applicable for returns the
     due date for which (determined without regard to
     extensions) is after December 31, 1989. See Omnibus
     Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.
     7721(a), (c)(2), (d), 103 Stat. 2395-2400.


     After concessions by the parties,2 the issues for decision

are as follows:

     (1) Whether petitioner Raymond Wiest (petitioner) is liable

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


     1
      (...continued)
the taxable year in issue.
     2
       Petitioners concede that the notice of deficiency is
valid. Cf. Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987),
revg. 81 T.C. 855 (1983).
     Respondent concedes, and petitioner Raymond A. Wiest does
not dispute, that pursuant to sec. 6015, petitioner Janet L.
Wiest is entitled to relief from joint and several liability for
the additions to tax.
                                - 3 -

negligence or intentional disregard of rules or regulations.    We

hold that petitioner is liable for such additions.

     (2) Whether petitioner is liable for the addition to tax

under section 6661 for substantial understatement of tax

liability.   We hold that petitioner is liable for such addition.

     The foregoing two issues relate to the participation of

petitioner as a limited partner in a jojoba partnership known as

San Nicholas Research, Ltd.

                              Background

     Some of the facts have been stipulated, and they are so

found.   The stipulated facts and attached exhibits are

incorporated herein by this reference.

     Petitioner resided in Riverside, California, at the time

that his petition was filed with the Court.

A.   Petitioner’s Background and Experience

     After graduating from high school in 1955, petitioner

attended San Bernardino Valley Junior College for 1 year and

California State University at Long Beach for an additional year.

While in college, petitioner majored in industrial arts.    He did

not take any business or accounting courses, nor did he take any

courses in either Federal or State taxation.

     During 1983, the taxable year in issue, petitioner’s

principal occupation was part owner and operator of a successful

equipment rental company known as Wiest Rentals in Riverside,
                                 - 4 -

California.   The company, which was family owned, rented

construction equipment, such as dump trucks, skip loaders, and

air compressors, and sold building materials, such as rock, sand,

and cement blocks.

     In 1983, petitioner was also a member of the board of

directors of Riverside Thrift & Loan Association, a state-

chartered financial institution in Riverside, California.       As a

board member, petitioner received director’s fees in the amount

of $6,320.

     In 1983, petitioner had fractional interests in commercial

real estate that produced net rental income.     Petitioner also

received fees in the amount of $9,526 for managing one of these

properties.

     In 1983, petitioner also had an interest in some orange

groves in southern California.     The orange groves produced

minimal income.3

     In 1983, petitioner was financially well off and

sophisticated.     Without regard to partnership and farm losses,

petitioner’s reported income exceeded $200,000 for that year,

including (but not limited to):     (1) Compensation from Wiest

Rentals in the amount of $36,500; interest income in the amount

of $52,991; capital gain (net of the 60 percent deduction under


     3
       On his Schedule F, Farm Income and Expenses, petitioner
reported a gross profit of $262 and deducted expenses of $7,181,
for a net loss of $6,919.
                               - 5 -

section 1202) in the amount of $64,694;4 net rental income in the

amount of $33,073; and other income (consisting principally of

rental management fees and director’s fees) in the amount of

$16,006.   In addition, petitioner had equity interests in: (1) A

partnership known as M&W Construction;5 (2) a partnership known

as Canyon Crest Lots; (3) a partnership known as The Attic; (4) a

partnership known as The Thrift Land Company; (5) a partnership

known as Sovereign Land Company; (6) San Nicholas, Ltd. (see

infra “E” through “K”); (7) two parcels of commercial real

estate; and (8) an S corporation.

     Prior to 1983, petitioner had an interest in a family-owned

ranch.   The ranch, which was located in northern California, and

grazed about 250 head of cattle, was operated on a day-to-day

basis by petitioner’s father, who lived in the area.   The ranch

was sold in November 1980.

B.   Petitioner’s Friend and Associate William G. Kellen

     William G. Kellen (Mr. Kellen) was petitioner’s friend and

business associate.   Like petitioner, Mr. Kellen was a member of

the board of directors of Riverside Thrift & Loan Association.



     4
       Petitioner’s capital gain included an installment sale in
March 1983 of 69,971 shares of Riverside Thrift & Loan
Association at a gross profit of $265,844.
     5
        Petitioner’s share of partnership income from M&W
Construction in 1983 was $6,307. This income is apparently the
basis of petitioner’s testimony that his livelihood in 1983 was
based, in part, on “some contracting”.
                               - 6 -

     Mr. Kellen was a general partner and tax matters partner of

four limited jojoba partnerships:    Utah Jojoba Research, Ltd.

(Utah Jojoba); Blythe Jojoba I Research, Ltd. (Blythe Jojoba I);

Blythe Jojoba II Research, Ltd. (Blythe Jojoba II); and Desert

Center Jojoba Research, Ltd. (Desert Center Jojoba).    Each of

these partnerships was similar, if not identical, to San Nicholas

Research, Ltd., described infra in “E” through “H”.

     Prior to 1982, Mr. Kellen did not have any experience in

growing jojoba, nor did he have any experience in either the

research or development of jojoba.     Prior to 1982, Mr. Kellen’s

knowledge concerning jojoba was limited to articles that he had

read in various magazines and a general familiarity with the

existence of an experimental jojoba plantation located at the

University of California at Riverside.    Mr. Kellen did not

consider himself to be an expert in jojoba in 1983.

     In 1983, Mr. Kellen was actively engaged in the practice of

law, specializing in the formation of financial institutions such

as banks, savings and loan associations, and thrift and loan

associations.   Mr. Kellen did not have any expertise in

accounting or tax matters, nor did he ever attempt to render

advice on those subjects.

C.   Petitioner’s Friend and Associate E.T. Jacobs

     E.T. Jacobs (Mr. Jacobs) was petitioner’s friend and

business associate.   Like petitioner, Mr. Jacobs was a member of
                                - 7 -

the board of directors of Riverside Thrift & Loan Association.

     From 1957 to 1973, Mr. Jacobs worked for the Internal

Revenue Service (IRS) as a revenue agent and later as an

examination manager.    As a revenue agent, Mr. Jacobs served as a

dairy specialist and later as a cattle feeding specialist.     As a

manager, Mr. Jacobs supervised the examination of agricultural

businesses in Riverside and Imperial Counties in southern

California.

     After resigning from the IRS, Mr. Jacobs entered private

practice as an accountant.    In 1983, he maintained his own

practice as a certified public accountant.

     In 1982, Mr. Jacobs became interested in the farming of

jojoba in Desert Center, California.    Mr. Jacobs also sold

limited partnership interests in a number of jojoba partnerships.

     At no time relevant to this case did Mr. Jacobs have any

experience or expertise in the research or development of jojoba.

D.   Petitioner’s Friend and Associate Eugene C. Pace

     Eugene C. Pace (Mr. Pace) was petitioner’s friend and

business associate.    Like petitioner, Mr. Pace was a member of

the board of directors of Riverside Thrift & Loan Association.

Like Mr. Kellen, Mr. Pace was an attorney.

     Mr. Pace was president of U.S. Agri, see infra “G”, and a

member of its board of directors.
                               - 8 -

     Prior to 1983, Mr. Pace did not have any experience in

growing jojoba, nor did he have any experience in either the

research or development of jojoba.

E.   Petitioner’s Investment in San Nicholas, Ltd.

      Petitioner was introduced to jojoba by Mr. Pace, who

provided petitioner with a copy of a private placement memorandum

dated October 10, 1983 (see infra “F” and “H”), for San Nicholas

Research, Ltd. (San Nicholas or the partnership).6   Thereafter,

on December 30, 1983, petitioner signed a subscription agreement

and purchased five limited partnership units (a 3.9-percent

interest) in San Nicholas.

      The general partner and tax matters partner of San Nicholas

was Alfred M. Clancy.

      Petitioner purchased the partnership units pursuant to the

aforementioned private placement memorandum.   Petitioner paid

$2,790 per limited partnership unit, or a total of $13,950, for

his five units in San Nicholas.   Of this amount, $1,140 per unit,

or $5,700 for 5 units, was paid in cash.   The balance, $1,650 per

unit or $8,250 for five units, was payable pursuant to a 10-year




      6
       Mr. Pace also provided petitioner with a promotional
videotape, which was produced by U.S. Agri, see infra “G”, and
which featured Mr. Pace, that described jojoba as “liquid gold”
and as “the industrial crop of the future”, which would be
cultivated in “some of the most hostile land anywhere”.
                              - 9 -

promissory note.7

     Prior to investing in San Nicholas, petitioner did not have

any experience or expertise in jojoba, nor did petitioner have

any experience or expertise in the area of research or

development of jojoba.

     Petitioner’s decision to invest in San Nicholas was

influenced by the fact that Mr. Pace, his friend and business

associate, was president of U.S. Agri, see infra “G”, and that

Mr. Kellen, another of petitioner’s friends and business

associates, had also invested in San Nicholas.8

     Petitioner’s decision to invest was also influenced by

petitioner’s belief that an investment in San Nicholas offered

tax benefits.

     Prior to investing in San Nicholas, petitioner did not

consult any attorney.9


     7
       The note, which was recourse in form, contemplated
payments of interest only for the first 5 years. As matters
actually transpired, late in the 1980s, the limited partners were
given the option of paying a steeply discounted percentage of the
principal in cash. The record does not disclose whether
petitioner elected this option.
     8
       Mr. Kellen’s investment in San Nicholas also culminated in
a case in this Court. See Kellen v. Commissioner, T.C. Memo.
2002-19; see also Utah Jojoba I Research v. Commissioner, T.C.
Memo. 1998-6, discussed infra in subdivision “J”, regarding Mr.
Kellen’s involvement in another jojoba partnership.
     9
       Although Mr. Kellen was an attorney, he never rendered any
legal advice to petitioner concerning San Nicholas. Indeed,
petitioner never consulted Mr. Kellen in his capacity as an
                                                   (continued...)
                              - 10 -

F.   Putative Nature of San Nicholas’ Business

     According to the private placement memorandum dated October

10, 1983 (the offering memorandum), San Nicholas was formed in

order “to undertake a comprehensive research and development

program on the plant Simmondsia Chinesis (Jojoba).”   The offering

memorandum described how this program was to be carried out:


     The Partnership will enter into a research and
     development contract * * * with U.S. Agri Research and
     Development Corp. (the “R & D Contractor”), who will
     conduct the experiments in various test sites * * * as
     well as its laboratory or greenhouse facilities that it
     in its sole discretion deems advisable. In addition,
     the R & D Contract sets forth that a site in the
     vicinity of Desert Center and Blythe, California of
     from 30-50 acres will be delineated as the applied
     research site upon which all technology and improved
     cultivars developed on behalf of the Partnership during
     the term of the contract will be placed “in field.”
     The Partnership will also have the right but not be
     obligated to enter into a License Agreement * * * to
     license to U.S. Agri Research and Development Corp. all
     technology developed on behalf of the Partnership for a
     period of forty (40) years and receive therefrom an
     amount equal to 85% of the products produced from the
     developed technology.[10]

     9
      (...continued)
attorney; rather, petitioner merely “chatted” with Mr. Kellen as
a friend and business associate.
     In addition, although Mr. Pace was an attorney, petitioner
never consulted him in that capacity. Indeed, any advice that
Mr. Pace may have rendered was offered in his capacity as an
interested party to the San Nicholas promotion, see infra “G”, a
fact of which petitioner was aware.
     10
        Although San Nicholas may not have been obligated to
enter into a license agreement with U.S. Agri Research and
Development Corp., it was a foregone conclusion that it would do
so. Indeed, the research and development (R&D) contract and the
license agreement were executed concurrently. Notably, execution
                                                   (continued...)
                              - 11 -


     Copies of the research and development (R&D) contract and

the license agreement referred to in the preceding paragraph were

attached as exhibits to the offering memorandum.   The R&D

contract identified U.S. Agri Research and Development Corp.

(U.S. Agri) as a party to the contract and the R&D contractor

thereunder.   The license agreement identified U.S. Agri as a

party to the contract and the licensee thereunder.

G.   U.S. Agri

     As previously indicated, the offering memorandum identified

U.S. Agri as the R&D contractor under the R&D contract and as the

licensee under the license agreement.   U.S. Agri was also the R&D

contractor and the licensee for Utah Jojoba, Blythe Jojoba I,

Blythe Jojoba II, and Desert Center Jojoba.

     As previously indicated, Mr. Pace was the president of U.S.

Agri and a member of its board of directors.   Mr. Kellen also

served as a member of U.S. Agri’s board until he became general

partner of Utah Jojoba, Blythe Jojoba I, Blythe Jojoba II, and

Desert Center Jojoba in late 1982.

     Mr. Pace and Mr. Kellen were close personal friends and

business associates for a number of years before the formation of

San Nicholas in late 1983.


     10
      (...continued)
of the license agreement by San Nicholas served to automatically
terminate the R&D contract pursuant to the terms of the latter
contract. See infra “J”.
                                      - 12 -

H.   Cautionary Language in the San Nicholas Offering Memorandum

      The face of the offering memorandum warned, in block

letters, that “THIS OFFERING INVOLVES A HIGH DEGREE OF RISK”.

The offering memorandum also included the following cautionary

language in block letters:

      PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO CONSTRUE
      THIS MEMORANDUM OR ANY PRIOR OR SUBSEQUENT
      COMMUNICATIONS AS CONSTITUTING LEGAL OR TAX ADVICE.
      * * * INVESTORS ARE URGED TO CONSULT THEIR OWN COUNSEL
      AS TO ALL MATTERS CONCERNING THIS INVESTMENT.

                  *       *       *        *       *       *       *

      THERE IS NO PUBLIC OR OTHER MARKET FOR THE UNITS, NOR
      WILL SUCH MARKET DEVELOP.

                  *       *       *        *       *       *       *

      THE PURCHASE OF SUCH UNITS DESCRIBED IN THIS MEMORANDUM
      INVOLVES A HIGH DEGREE OF RISK (SEE “RISK FACTORS”) AND
      SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE
      TOTAL LOSS OF THEIR INVESTMENT.

              *       *       *        *       *       *       *

      EACH PURCHASER OF THE UNITS HEREIN SHOULD AND IS
      EXPECTED TO CONSULT WITH HIS OWN TAX ADVISOR AS TO THE
      TAX ASPECTS.


      In addition, the offering memorandum limited the sale of

partnership units to investors with a net worth (exclusive of

home, furnishings, and automobiles) of at least $150,000, or

investors whose net worth was at least $50,000 (exclusive of

home, furnishings, and automobiles) and who anticipated that, for

the taxable year of the investment, they would have gross income

of at least $65,000 or taxable income, a portion of which, but
                              - 13 -

for tax-advantaged investments, would be subject to Federal

income tax at a marginal rate of 50 percent.

     The offering memorandum included a section entitled “Risk

Factors”, which was the single longest section.   It began with a

general warning:

          The purchase of the interests offered hereby
     involves various risk factors. Investment in the
     Partnership * * * involves an extremely high degree of
     risk. Investors should consider carefully the various
     risk factors set forth in this and other portions of
     this Memorandum. Investment in the Partnership is
     suitable only for persons of substantial financial
     means who will not require liquidity in the investment.
     Investors must be prepared for the possible loss of
     their entire investment.

     The offering memorandum then proceeded to discuss a number

of specific, and significant, risk factors associated with an

investment in San Nicholas.   Among those risks, the offering

memorandum warned:   (1) Research and development risks were so

great that an investment in San Nicholas should be considered

“highly speculative”; (2) the general partner had no previous

experience in dealing in jojoba; (3) there was no structured

market or distribution system for jojoba; (4) there were no

facilities dedicated to the processing of jojoba; (5) commercial

applications of jojoba are not extensive; (6) the general partner

had not conducted any market analysis or similar studies; (7)

there was no assurance of any increase in marketing or production

facilities or in the demand for jojoba; (8) in the absence of any

such increase, the production of jojoba might be unprofitable,
                               - 14 -

regardless of any technology that might be developed by the R&D

contractor; and (9) there was the likelihood of audit by the IRS.

Indeed, the discussion concerning the tax risks associated with

an investment in San Nicholas constituted half of the section on

“Risk Factors”.

     The offering memorandum also included projections of

revenue, cashflow, and taxable income or loss.     Investors were

warned, however, that those projections, which had been prepared

for the general partner, had not been audited and that they

should not be relied on to indicate the actual results that might

be attained.

I.   Petitioner’s 1983 Schedule K-1 and Income Tax Return

     Petitioner received a Schedule K-1, Partner’s Share of

Income, Credits, Deductions, etc., from San Nicholas for 1983.

The Schedule K-1 reported that petitioner’s distributive share of

partnership loss from San Nicholas was $12,354 for that year.

     Petitioner timely filed a Federal income tax return, Form

1040, for 1983.11   Petitioner attached to his return Schedule E,

Supplemental Income Schedule, and claimed thereon a loss from San

Nicholas in the amount of $12,354.      Petitioner then offset this

loss against his other income.   See supra “A”.



     11
       The return was prepared by Lee R. Jeppson, Jr. (Mr.
Jeppson), a member of an accounting firm in Riverside,
California. In preparing petitioner’s return, Mr. Jeppson relied
on the Schedule K-1 that was provided by petitioner.
                               - 15 -

J.   Jojoba Partnership Litigation

     San Nicholas was examined by the Internal Revenue Service,

and a notice of final partnership administrative adjustment,

FPAA, was ultimately issued to the partnership.   In December

1991, Alfred M. Clancy (Mr. Clancy), the general partner and tax

matters partner of San Nicholas, commenced a TEFRA partnership

proceeding in this Court.12   Subsequently, in November 1993, Mr.

Clancy and the Commissioner agreed to be bound by the decision to

be entered in Utah Jojoba I Research v. Commissioner, docket No.

7619-90, a TEFRA partnership proceeding involving Utah Jojoba

that had previously been commenced by Mr. Kellen in his capacity

as tax matters partner of that partnership.

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

6, the Court made detailed findings of fact related to the jojoba

limited partnerships,13 Mr. Kellen, U.S. Agri, and Mr. Pace.    The

Court described the R&D contract between the partnerships and

U.S. Agri as “mere window dressing” and held that the

partnerships did not, directly or indirectly, engage in research



     12
        The TEFRA partnership proceeding was assigned docket No.
29994-91. TEFRA stands for the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324. See
secs. 6221-6232; N.C.F. Energy Partners v. Commissioner, 89 T.C.
741, 744 (1987); Maxwell v. Commissioner, 87 T.C. 783, 789
(1986).
     13
       At least 18 docketed cases were bound by stipulation to
the outcome of Utah Jojoba I Research v. Commissioner, docket No.
7619-90.
                               - 16 -

or experimentation and that the partnerships lacked a realistic

prospect of entering into a trade or business.   In upholding the

Commissioner’s disallowance of research and experimental

expenditures, the Court concluded that the agreements between the

partnerships and the R&D contractor (U.S. Agri) had been designed

and entered into solely to provide a mechanism to disguise the

capital contributions of limited partners as currently deductible

expenditures.14   The Court stated that the activities of the

partnerships were “another example of efforts by promoters and

investors in the early 1980s to reduce the cost of commencing and

engaging in the farming of jojoba by claiming, inaccurately, that

capital expenditures in jojoba plantations might be treated as

research or experimental expenditures for purposes of claiming

deductions under section 174.”   Id.

     In November 1998, Mr. Clancy, acting in his capacity as tax

matters partner of San Nicholas, consented to entry of decision

against the partnership.   Subsequently, in December 1998, the

Court entered decision against San Nicholas pursuant to the

Commissioner’s Motion for Entry of Decision under Rule 248(a).15

Thereafter, the Commissioner assessed a deficiency in


     14
       In other words, in order to decrease the limited
partners’ cost of investing in the jojoba partnerships, large up-
front deductions were manufactured from expenditures that were
actually capital contributions.
     15
       All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 17 -

petitioner’s income tax for 1983 in the amount of $5,435 and

mailed a so-called affected items notice of deficiency to

petitioner determining additions to tax for negligence and

substantial understatement of tax liability.    See sec. 6230(a);

N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 744 (1987);

Maxwell v. Commissioner, 87 T.C. 783, 792 n.9 (1986).     It is

those additions to tax that are in issue in the present cases.

K.   Epilogue:   Demise of the Jojoba Partnerships

     The jojoba partnerships proved to be financial failures.      In

October 1991, some 30 to 40 jojoba partnerships under contract

with U.S. Agri were consolidated into one large limited

partnership, Jojoba Plantation Ltd.     Sometime thereafter, Jojoba

Plantation Ltd. filed a petition in bankruptcy under chapter 7 of

the Bankruptcy Act.    See Utah Jojoba I Research v. Commissioner,

supra.

     At trial, petitioner’s witness, Mr. Kellen, testified that

the jojoba partnerships failed because of the Internal Revenue

Service.16   At a previous trial, Mr. Kellen testified that “the

collapse, basically, of the tax incentive for doing jojoba”

contributed to the partnerships’ failure.    See id.




     16
       Petitioner’s other witness, Kathleen M. Jacobs, suggested
a different reason: That no commercially viable method of
harvesting jojoba was ever developed, or, as Ms. Jacobs
testified, that “it was impossible to harvest.”
                                - 18 -

                              Discussion

     We have decided many jojoba cases involving additions to tax

for negligence and substantial understatement of tax liability.17

We have found the taxpayers liable for additions to tax for

negligence in all of those cases; likewise, we have found the

taxpayers liable for the addition to tax for substantial

understatement of tax liability in all of those cases that have

presented that issue.

I.   Section 6653(a)(1) and (2) Negligence

     The first issue for decision is whether petitioner is liable

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

respect to the underpayment of tax attributable to petitioner’s

investment in San Nicholas.    Petitioner has the burden of proof

to show that he is not liable for these additions to tax.18   See


     17
       See, e.g., Finazzo v. Commissioner, T.C. Memo. 2002-56;
Welch v. Commissioner, T.C. Memo. 2002-39; Kellen v.
Commissioner, T.C. Memo. 2002-19; Lopez v. Commissioner, T.C.
Memo. 2001-278; Christensen v. Commissioner, T.C. Memo. 2001-185;
Serfustini v. Commissioner, T.C. Memo. 2001-183; Carmena v.
Commissioner, T.C. Memo. 2001-177; Nilsen v. Commissioner, T.C.
Memo. 2001-163; Ruggiero v. Commissioner, T.C. Memo. 2001-162;
Robnett v. Commissioner, T.C. Memo. 2001-17; Harvey v.
Commissioner, T.C. Memo. 2001-16; Hunt v. Commissioner, T.C.
Memo. 2001-15; Fawson v. Commissioner, T.C. Memo. 2000-195; Downs
v. Commissioner, T.C. Memo. 2000-155; Glassley v. Commissioner,
T.C. Memo. 1996-206; Stankevich v. Commissioner, T.C. Memo.
1992-458.
     18
       It must be acknowledged that respondent bears the burden
of proof to show that petitioner is liable for the increase in
the addition to tax under sec. 6653(a)(2). See supra, p. 2,
table, note 1; Rule 142(a). However, in the present case, the
                                                   (continued...)
                              - 19 -

Addington v. Commissioner, 205 F.3d 54, 58 (2d Cir. 2000), affg.

Sann v. Commissioner, T.C. Memo. 1997-259; Bixby v. Commissioner,

58 T.C. 757, 791-792 (1972); Anderson v. Commissioner, T.C. Memo.

1993-607, affd. 62 F.3d 1266 (10th Cir. 1995).    See generally

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).19

     Section 6653(a)(1) imposes an addition to tax in an amount

equal to 5 percent of the underpayment of tax if any part of the

underpayment is due to negligence or intentional disregard of

rules or regulations.   Section 6653(a)(2) imposes another

addition to tax in an amount equal to 50 percent of the interest

due on the portion of the underpayment attributable to negligence

or intentional disregard of rules or regulations.

     Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would

exercise under like circumstances.     See Anderson v. Commissioner,

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



     18
      (...continued)
increase is purely computational in nature, and respondent has
convincingly demonstrated the proper amount of the addition to
tax. Accordingly, our analysis proceeds on the basis that
petitioner bears the burden of proof regarding his liability for
this addition to tax. In any event, we would resolve this issue
for respondent based on a preponderance of the evidence.
     19
        Cf. sec. 7491(c), effective for court proceedings
arising in connection with examinations commencing after July 22,
1998. In the present case, the examination of petitioner’s
income tax return for 1983 commenced well before July 22, 1998.
                               - 20 -

Neely v. Commissioner, 85 T.C. 934, 947 (1985).    The focus of

inquiry is the reasonableness of the taxpayer’s actions in light

of the taxpayer’s experience and the nature of the investment.

See Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740

(1973); see also Sacks v. Commissioner, 82 F.3d 918, 920 (9th

Cir. 1996) (whether a taxpayer is negligent in claiming a tax

deduction “depends upon both the legitimacy of the underlying

investment, and the due care in the claiming of the deduction”),

affg. T.C. Memo. 1994-217; Turner v. Commissioner, T.C. Memo.

1995-363.   In this regard, the determination of negligence is

highly factual.

     Under some circumstances, a taxpayer may avoid liability for

negligence if reasonable reliance on a competent professional

adviser is shown.    See United States v. Boyle, 469 U.S. 241, 250-

251 (1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. on another issue 501

U.S. 868 (1991).    However, reliance on professional advice,

standing alone, is not an absolute defense to negligence, but

rather a factor to be considered.    See Freytag v. Commissioner,

supra.   For reliance on professional advice to excuse a taxpayer

from negligence, the taxpayer must show that the professional had

the requisite expertise, as well as knowledge of the pertinent

facts, to provide informed advice on the subject matter.    See

David v. Commissioner, 43 F.3d 788, 789-790 (2d Cir. 1995), affg.
                              - 21 -

T.C. Memo. 1993-621; Goldman v. Commissioner, 39 F.3d 402, 407

(2d Cir. 1994), affg. T.C. Memo. 1993-480; Freytag v.

Commissioner, supra.

     The facts pertinent to the present case relating to the

structure, formation, and operation of San Nicholas are as found

above and as discussed in Utah Jojoba I Research v. Commissioner,

T.C. Memo. 1998-6.   The offering memorandum identified U.S. Agri

as the contractor under the R&D contract.   In addition, a license

agreement between San Nicholas and U.S. Agri granted U.S. Agri

the exclusive right to use all technology developed for the

partnership for 40 years in exchange for a royalty of 85 percent

of the products produced from such technology.    The R&D contract

and the license agreement were executed concurrently.

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

partnership’s execution of the license agreement.   Because the

two contracts were executed concurrently, amounts paid by the

partnership to U.S. Agri were not paid pursuant to a valid R&D

contract but rather were passive investments in a farming venture

under which the investors’ return, if any, was to be in the form

of royalties pursuant to the license agreement.   Thus, as the

Court held in Utah Jojoba I Research v. Commissioner, supra, the

partnership was never engaged in research or experimentation,

either directly or indirectly.   Moreover, the Court found that

U.S. Agri’s attempt to farm jojoba commercially did not
                                - 22 -

constitute R&D, thereby concluding that the R&D contract was

designed and entered into solely to decrease the limited

partners’ cost of investing in an jojoba partnership through

large, upfront deductions for expenditures that were actually

capital contributions.    The Court further concluded that the

partnership was not involved in a trade or business and had no

realistic prospect of entering into a trade or business with

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

Id.

      Notwithstanding the foregoing, petitioner contends that his

investment in San Nicholas was motivated solely by the potential

to earn a profit.    Petitioner also contends that, taking into

account the nature of his investment and the amount he invested,

he exercised the due care that a reasonable and ordinarily

prudent person would have exercised under like circumstances.

Finally, petitioner contends that reliance on Mr. Kellen, Mr.

Pace, Mr. Jacobs, and a professor at the University of California

should absolve him of liability for negligence in this case.      For

the following reasons, we disagree with petitioner’s contentions.

      First, the principal flaw in the structure of San Nicholas

was evident from an examination of the R&D contract and the

license agreement.    Both of these documents were a part of the

offering memorandum.     A reading of the R&D contract and the

license agreement demonstrates that the license agreement
                                - 23 -

canceled, or rendered ineffective, the R&D contract because of

the concurrent execution of the two documents.    Accordingly, San

Nicholas was never engaged in, either directly or indirectly, any

research or experimentation.    Rather, San Nicholas was merely a

passive investor seeking royalty returns pursuant to the license

agreement.    See Finazzo v. Commissioner T.C. Memo. 2002-56;

Kellen v. Commissioner, T.C. Memo. 2002-19; Lopez v.

Commissioner, T.C. Memo. 2001-278; Christensen v. Commissioner,

T.C. Memo. 2001-185; Serfustini v. Commissioner, T.C. Memo. 2001-

183; Carmena v. Commissioner, T.C. Memo. 2001-177; Nilsen v.

Commissioner, T.C. Memo. 2001-163; Fawson v. Commissioner, T.C.

Memo. 2000-195.    Any experienced attorney capable of reading and

understanding the subject documents should have understood the

legal ramifications of the licensing agreement canceling the R&D

agreement.    Petitioner failed to consult an attorney and,

further, failed to carefully scrutinize the offering himself.

     Second, we are unable to accept uncritically petitioner’s

contention that he invested in San Nicholas solely to earn a

profit.20    Rather, at the time that he signed the subscription


     20
       It is the duty of the Court to listen to testimony,
observe the demeanor of witnesses, weigh the evidence, and
determine what to believe. The Court is not required to accept
testimony at face value, and the Court may discount a party’s
self-interested testimony and place reliance on other evidence
that is believed to be more reliable. See Christensen v.
Commissioner, 786 F.2d 1382, 1383-1384 (9th Cir. 1986), affg. in
part and remanding in part T.C. Memo. 1984-197; Niedringhaus v.
                                                    (continued...)
                               - 24 -

agreement, petitioner believed that his investment in San

Nicholas offered tax benefits, and his decision to invest was

influenced, in part, by that belief.

     Third, we do not think that petitioner, a successful

businessman and, in petitioner’s counsel’s words, “a man who knew

about investments”, exercised due care at the time that he signed

the subscription agreement.    In this regard we are again unable

to accept uncritically petitioner’s contention that he reasonably

relied on the offering memorandum.      The short answer to this

contention is that petitioner either did not read the offering

memorandum in its entirety or chose to ignore portions thereof.

See Goldman v. Commissioner, 39 F.3d 402, 407-408 (2d Cir. 1994),

(holding that the taxpayer’s reliance on offering materials was

not reasonable), affg. T.C. Memo. 1993-480; see also Pasternak v.

Commissioner, 990 F.2d 893, 903 (6th Cir. 1993), affg. Donahue v.

Commissioner, T.C. Memo. 1991-181, holding that claims that are

probably “too good to be true” should be investigated by a

reasonably prudent person.21


     20
      (...continued)
Commissioner, 99 T.C. 202, 212 (1992); Duralia v. Commissioner,
T.C. Memo. 1994-269; see also Tokarski v. Commissioner, 87 T.C.
74, 77 (1986).
     21
       The record includes a promotional videotape, produced by
U.S. Agri and featuring its president Mr. Pace, that described
jojoba as “liquid gold” and as “the industrial crop of the
future”, which would be cultivated in “some of the most hostile
land anywhere”. This videotape was provided to petitioner by Mr.
                                                   (continued...)
                              - 25 -

     The offering memorandum was replete with caveats and

warnings regarding the business and tax risks associated with an

investment in San Nicholas.   The cover page cautioned that “THIS

OFFERING INVOLVES A HIGH DEGREE OF RISK” and warned prospective

investors “NOT TO CONSTRUE THIS MEMORANDUM OR ANY PRIOR OR

SUBSEQUENT COMMUNICATIONS AS CONSTITUTING LEGAL OR TAX ADVICE.”

Potential inventors were urged “TO CONSULT THEIR OWN COUNSEL AS

TO ALL MATTERS CONCERNING THIS INVESTMENT” and were advised “TO

CONSULT WITH [THEIR] OWN TAX ADVISOR AS TO THE TAX ASPECTS.”     The

single longest section of the offering memorandum was devoted to

“risk factors” and warned of numerous risks, specifically

including tax risks, the lack of a structured market and

distribution system for jojoba, and the highly speculative nature

of the investment.   Petitioner ignored these warnings, reasoning

that “I felt that what I had done to investigate the thing * * *

was a reasonable amount of checking for what I invested    * * * ”.

     On brief, petitioner painstakingly dissects portions of the

offering memorandum in an attempt to show that he carefully

perused what he calls a “business plan”.   Petitioner’s piecemeal

approach to the offering memorandum ignores the existence of the

strong cautionary language.   A careful review of the offering

memorandum, especially the portion discussing the tax risks,



     21
      (...continued)
Pace. See supra note 6.
                              - 26 -

would have caused a prudent investor to question the propriety of

the tax benefits.   We would certainly expect no less from an

individual described by his counsel as “an astute businessman”.

     Petitioner contends that his experience with farming and his

reading about jojoba gave him confidence in the viability of his

investment in San Nicholas.   Petitioner essentially compared and

equated the production costs of jojoba found in the articles he

read with his own knowledge of citrus groves, and concluded that

the jojoba industry would be profitable.   Yet, had petitioner

delved deeper into the nature of his investment, he would have

inquired into both the operational aspects of the partnership and

the nature of the research that U.S. Agri was to conduct under

the terms of the R&D contract.22   See Fawson v. Commissioner,

T.C. Memo. 2000-195.

     Petitioner contends that he visited jojoba plantations

before he invested in San Nicholas and that such visits

demonstrate due care in making the investment.   Yet the record

suggests that petitioner’s visits to the plantations were, at

best, incidental to other business that he had in the Desert


     22
        We find it curious that petitioner would choose to
emphasize his experience in farming when the record clearly
demonstrates that he did not have any experience in either the
farming of jojoba or the research or development of jojoba. In
addition, petitioner’s professed experience in farming was
essentially limited to some orange groves, which produced a gross
profit of $262 in 1983, and a family-owned ranch in northern
California that was operated, before it was sold in 1980, by his
father.
                                - 27 -

Center area.23    In any event, petitioner’s principal interest in

the plantations appears to have been to determine how the jojoba

plants were developing.    There is no persuasive evidence in the

record to demonstrate that petitioner visited the plantations in

order to determine whether research or development was being

conducted.    If petitioner had visited the plantations for that

purpose, he would have quickly discovered that U.S. Agri was

engaged in nothing more than a farming activity.    See Kellen v.

Commissioner, T.C. Memo. 2002-19; Fawson v. Commissioner, supra.

Petitioner should have realized that in the absence of any

research and development, there could be no deduction for

research and experimental expenditures under section 174.

     Fourth, petitioner contends that reliance on Mr. Kellen, Mr.

Pace, Mr. Jacobs, and a professor at the University of California

should absolve him of liability for negligence in this case.       We

disagree that any such reliance was reasonable; rather, the

record demonstrates that petitioner failed to obtain competent,

independent, professional advice before investing in San

Nicholas.



     23
          Petitioner testified on direct examination as follows:

     we pulled some gas tanks out of our rental yard, and I
     sold them to [Mr.] Jacobs and took them down to the
     Desert Center because he was going to use them. Well,
     he was going to use one for water and one to store
     diesel in. So, I was down there then and a couple of
     other times.
                               - 28 -

     Petitioner contends that he reasonably relied on advice from

Mr. Kellen.   Yet petitioner never consulted Mr. Kellen as an

attorney but rather as a friend and business associate; moreover,

petitioner characterized his dialogue with Mr. Kellen as

“chat”.24   Regardless, petitioner argues that Mr. Kellen was

qualified as an expert in jojoba.    To the contrary, Mr. Kellen

did not consider himself to be an expert in jojoba in 1983, an

admission borne out by the record.      In this regard, the record

establishes that Mr. Kellen became involved in the farming of

jojoba only in or about 1982, so his experience was limited, and

there is nothing to indicate that he was knowledgeable about

research and development of jojoba.     See Kellen v. Commissioner,

supra; see also Freytag v. Commissioner, 89 T.C. at 888.

     The record also establishes that Mr. Kellen was the general

partner and tax matters partner of four other jojoba

partnerships, including Utah Jojoba.     See supra “B”.   Mr. Kellen

was also the close personal friend and business associate of Mr.

Pace, the president and a director of U.S. Agri, which



     24
       To the extent that the “chat” was focused on any
particular matter, it appears to have focused on the profit
projections in the offering memorandum. However, the offering
memorandum specifically warned that such projections had been
prepared for the general partner, had not been audited, and
should not be relied on. See supra “H”. In addition, we have
previously found that Mr. Kellen’s “analysis” of San Nicholas was
not based on anything other than the projections set forth in the
offering memorandum. Kellen v. Commissioner, T.C. Memo. 2002-19;
see Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
                              - 29 -

corporation was the R&D contractor and licensee of San Nicholas

and other jojoba partnerships.   Indeed, at one time, Mr. Kellen

was also a director of U.S. Agri.   Accordingly, any advice that

Mr. Kellen may have given was essentially that of an insider or

promoter, which advice is inherently suspect.   E.g., Addington v.

Commissioner, 205 F.3d at 59; Pasternak v. Commissioner, 990 F.2d

at 903.

     Petitioner also contends that he reasonably relied on advice

from Mr. Pace, the individual who furnished him with the offering

memorandum and promotional videotape.   At the time of trial, Mr.

Pace was deceased; accordingly, we do not know first hand what

knowledge he may have had or what advice he may have given.25

The record does establish that Mr. Pace was the president of U.S.

Agri and a member of its board of directors.    Petitioner, who was

Mr. Pace’s friend and business associate, was aware that Mr. Pace

was an interested party and that Mr. Pace had a conflict of

interest.

     Reliance on promotional materials furnished by the promoter

of the partnership or by an interested party does not constitute

due care.   See, e.g., Addington v. Commissioner, 205 F.3d at 59

(“It is unreasonable for taxpayers to rely on the advice of

someone who they should know has a conflict of interest.”).


     25
       In Utah Jojoba I Research v. Commissioner, T.C. Memo.
1998-6, the Court found that before 1983, Mr. Pace had only
limited knowledge of, and minimal background in, jojoba.
                              - 30 -

Thus, whatever advice petitioner may have received from Mr. Pace

fails as a defense to negligence because of Mr. Pace’s lack of

competence to give such advice and the clear presence of a

conflict of interest.   See Goldman v. Commissioner, 39 F.3d at

408; LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990), affd.

without published opinion 956 F.2d 274 (9th Cir. 1992); Rybak v.

Commissioner, 91 T.C. 524, 565 (1988); Barlow v. Commissioner,

T.C. Memo. 2000-339; see also Weitzman v. Commissioner, T.C.

Memo. 2001-215, wherein we stated that “The fact that * * * [the

putative adviser] introduced the partnership investment to

petitioner should have put petitioner on guard that * * * [the

putative adviser] was engaged in selling rather than acting as an

independent adviser.”

     Petitioner also contends that he reasonably relied on advice

from Mr. Jacobs.   At the time of trial, Mr. Jacobs was deceased;

accordingly, we do not know first hand what knowledge he may have

had or what advice he may have given.   The record does establish

that Mr. Jacobs only became interested in the farming of jojoba

in 1982, so his experience was limited, and he did not have any

experience or expertise in the research or development of jojoba.

See Freytag v. Commissioner, 89 T.C. at 888.   The record also

establishes that Mr. Jacobs was involved in the sale of limited

partnership interests in a number of jojoba partnerships.

Accordingly, any advice that he may have given can be analogized
                               - 31 -

to that of insider or promoter, which advice is inherently

suspect.   E.g., Addington v. Commissioner, 203 F.3d at 59;

Pasternak v. Commissioner, 99 F.2d at 903.

     In Glassley v. Commissioner, T.C. Memo. 1996-206, we found

that the taxpayers:

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

The record in the present case suggests that whatever advice may

have been given by Mr. Jacobs was nothing more than a generalized

affirmation to invest in jojoba.   Indeed, at trial, petitioner

testified that Mr. Jacobs “thought * * * the investment was very

good”.

     Petitioner also contends that he reasonably relied on advice

from a professor at the University of California at Riverside, a

Dr. Yermanos, an individual whom petitioner regards as an expert

in jojoba.26   Yet petitioner admits that he met this individual

only once and that he showed him no documentation whatsoever.

Indeed, there is nothing in the record to suggest that petitioner

ever discussed the details of San Nicholas with Dr. Yermanos or

that Dr. Yermanos even knew about the existence of the


     26
       We note that this individual did not testify at trial, so
we know essentially nothing about him. We also note that no
mention is made of a “Dr. Yermanos” in Utah Jojoba I Research v.
Commissioner, T.C. Memo. 1998-6.
                               - 32 -

partnership.   Equally significant, the record suggests that

petitioner’s conversation with Dr. Yermanos was, at best,

incidental to other business that petitioner had in the area, as

the following colloquy between petitioner and respondent’s

counsel demonstrates:

          Q: This Dr. Yermanos, where was he-–where was he
     located?

          A: He was with the University of California at
     Riverside in the Ag–-I don’t know how familiar you are
     with Riverside, but they have a complete research–-oh,
     there originally was probably 300 acres in there that
     they–-you know, they–-oh, what do I want to say, they
     experiment. Well, they put like greenhouses over a
     citrus tree and then give it a disease and see what it
     does. So, it’s a research area that the University of
     California uses and it’s an ag research.

          Q:   And you said you spoke with him once?

          A:   That’s correct, yeah.

          Q:   What did you show him, anything?

          A: No. He–-basically, I had a friend of mine who
     did these greenhouses. The Luminex Corporation built
     these greenhouses, and I was out there seeing him, and
     he was out there by where the plants were and stuff,
     and so I talked to him, you know, asked him about–-you
     know, questions about it.

          Q: Okay. And so you didn’t have an appointment
     to meet him or anything.

          A:   No.   No, I did not.

     In short, there is simply nothing in the record to indicate

that this individual at the University of California provided any

advice to petitioner that would absolve him from liability for

the additions to tax for negligence.
                              - 33 -

     Finally, petitioner relies heavily on Krause v.

Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v.

Commissioner, 28 F.3d 1024 (10th Cir. 1994).   That case, however,

is distinguishable on its facts.

     In Krause v. Commissioner, supra, we held for the taxpayers

on the issue of negligence.   We did so in the context of oil

recovery technology based on special or unusual circumstances

related to the energy and oil crisis of the late 1970s and early

1980s:

     In evaluating the imposition of the additions to tax
     in this case, and in light of the above facts
     (encouraging investments in and the development of
     tertiary oil recovery methods such as * * * [enhanced
     oil recovery] technology), we are somewhat
     understanding of the individual investments that were
     made in * * * Partnerships. In the context of the
     hysteria relating to the energy crisis, the oil price
     increases of the late 1970s, the industry and the
     governmental interest in * * * [enhanced oil recovery]
     technology, the heavy and sophisticated promotion of
     these investments * * * we conclude that petitioners
     are not liable for the additions to tax and the
     additional interest element for negligence under
     sections 6653(a), 6653(a)(1) and (2). [Id. at 178.]


     None of the circumstances that were determinative in Krause

v. Commissioner, supra, are present in the case at bar.

Petitioner’s reliance on the cited case is misplaced.

     In view of the foregoing, we hold that petitioner is liable

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

negligence.   Respondent’s determination is sustained.
                                - 34 -

II.   Section 6661(a) Substantial Understatement of Tax Liability

      The second issue for decision is whether petitioner is

liable for an addition to tax under section 6661(a).     That

section, as amended by the Omnibus Budget Reconciliation Act of

1986, Pub. L. 99-509, sec. 8002, 100 Stat. 1951, provides for an

addition to tax of 25 percent of the amount of any underpayment

attributable to a substantial understatement of income tax.

Petitioner bears the burden of proving that he is not liable for

the addition to tax.     Monahan v. Commissioner, 109 T.C. 235, 257

(1997); Mueller v. Commissioner, T.C. Memo. 2001-178.27

      A substantial understatement of income tax exists if the

amount of the understatement exceeds the greater of 10 percent of

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

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

reduced by the portion of the understatement that the taxpayer

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

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

treatment of any item with respect to which the relevant facts

were adequately disclosed on the return.    See sec. 6661(b)(2)(B).

      Substantial authority exists when “the weight of the

authorities supporting the treatment is substantial in relation

to the weight of authorities supporting contrary positions.”

Sec. 1.6661-3(b)(1), Income Tax Regs.     Adequate disclosure of the


      27
           See supra note 19.
                              - 35 -

tax treatment of a particular item may be made either in a

statement attached to the return or on the return itself.    Sec.

1.6661-4(b) and (c), Income Tax Regs.

     If an understatement is attributable to a tax shelter item,

then different standards apply.   First, in addition to showing

the existence of substantial authority, a taxpayer must show that

he or she reasonably believed that the tax treatment claimed was

more likely than not the proper treatment.   Sec.

6661(b)(2)(C)(i)(II).   Second, disclosure, whether or not

adequate, will not reduce the amount of the understatement.   Sec.

6661(b)(2)(C)(i)(I).

     Petitioner appears to concede that there was a substantial

understatement of tax within the meaning of section 6661(a).28

Petitioner does not contend, however, that there was substantial

authority supporting the deduction of the partnership loss that

he claimed on his return, nor does petitioner contend that there

was adequate disclosure of the facts related to that loss.

Rather, petitioner contends that he should be absolved of

liability for the addition to tax by virtue of section 6661(c).




     28
       We note that the understatement of tax on which
respondent determined the addition to tax is $5,435. The amount
required to be shown as tax on petitioner’s return is $51,478.
The understatement is therefore “substantial” because it exceeds
the greater of 10 percent of the amount required to be shown on
the return, or $5,000. Sec. 6661(a).
                              - 36 -

     Section 6661(c) vests the Commissioner with discretion to

waive the addition to tax under section 6661(a) if the taxpayer

shows that he or she acted with reasonable cause and in good

faith.   The Commissioner’s failure to waive the addition to tax

is reviewed by this Court for abuse of discretion.     Martin Ice

Cream Co. v. Commissioner, 110 T.C. 189, 235 (1998).

     There is nothing in the record to suggest that petitioner

ever requested that respondent waive the addition to tax under

section 6661(a).   Indeed, petitioner does not even allege that he

requested such a waiver.   For that reason alone, we cannot find

that respondent abused his discretion in failing to waive the

addition to tax.   See McCoy Enters., Inc. v. Commissioner, 58

F.3d 557, 563-564 (10th Cir. 1995), affg. T.C. Memo. 1992-693;

Finazzo v. Commissioner, T.C. Memo. 2002-56; Klieger v.

Commissioner, T.C. Memo. 1992-734; sec. 1.6661-6, Income Tax

Regs.

     Even if petitioner had requested a waiver under section

6661(c), the record demonstrates that he failed to act reasonably

and in good faith in deducting the claimed loss from San

Nicholas.   Petitioner’s failure to adequately investigate San

Nicholas or to seek independent, competent advice about the

partnership demonstrates a lack of reasonable cause and good

faith.   See Finazzo v. Commissioner, supra; DePlano v.

Commissioner, T.C. Memo. 1998-303.
                               - 37 -

       In view of the foregoing, we hold that petitioner is liable

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

understatement of tax liability.    Respondent’s determination is

sustained.

III.    Conclusion

       Reviewed and adopted as the report of the Small Tax Case

Division.

       To reflect our disposition of the disputed issues, as well

as the parties’ concessions, see supra note 2,




                                Decision will be entered for

                           petitioner in docket No. 6294-00S.

                                Decision will be entered for

                           respondent in docket No. 6302-00S

                           as to the additions to tax under

                           sections 6653(a)(1) and 6661 as

                           determined in the notice of deficiency

                           and as to the addition to tax under

                           section 6653(a)(2) as claimed in

                           respondent's answer.
