                       T.C. Memo. 1999-412



                     UNITED STATES TAX COURT



          WAYNE M. AND JANET L. JOHNSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21955-97.                  Filed December 20, 1999.



     Wayne M. Johnson, pro se.

     Judith Cohen, for respondent.



                       MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:    Respondent determined

a deficiency in petitioners' Federal income tax in the amount of

$1,379 for the taxable year 1994.    Respondent also determined

petitioners were liable for an accuracy-related penalty under

section 6662(a) in the amount of $148 for the taxable year 1994.
                                   - 2 -


Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the year in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

       After concessions by the parties,1 the issues for decision

are:       (1) Whether petitioners are entitled to deduct an aggregate

partnership loss carryover in the amount of $3,313,240 for the

1994 taxable year;2 (2) whether petitioners are entitled to

deduct charitable contributions in the amount of $2,024 for the

1994 taxable year; and (3) whether petitioners are liable for the

accuracy-related penalty pursuant to section 6662(a) for 1994.3

Petitioners filed a timely petition with this Court.      At the time

of filing the petition, petitioners resided in Yarmouth, Maine.




       1
          Petitioner Wayne Johnson concedes he is liable for
self-employment tax, and respondent concedes petitioners are
entitled to a credit for one-half the self-employment tax paid.

       2
          Neither party has questioned the Court’s jurisdiction
to adjudicate the partnership loss in this deficiency proceeding,
and we therefore assume that the partnerships are small
partnerships within the meaning of sec. 6231(a)(1).
       3
          The notice of deficiency contains adjustments to
petitioners' medical expense deduction and earned income credit.
These are computational adjustments which will be affected by the
outcome of the other issues to be decided, and we do not
separately address them.
                                - 3 -


Background

     Petitioner Wayne Johnson (hereinafter petitioner) is an

attorney.    Prior to the year in issue, petitioner was one of

three general partners in several partnerships organized under

the laws of the State of Maine.    Additionally, petitioner was one

of three principal shareholders in two subchapter C corporations

incorporated under the laws of the State of Maine.4   These

entities were established in 1986 and 1987 for the purpose of

purchasing, rehabilitating, and managing inner-city structures in

Portland, Maine.    The entities incurred substantial recourse debt

for the purchase and rehabilitation of the structures, which was

financed through Maine Savings Bank and also through section 312

of the Housing Act of 1964, Pub. L. 88-560, 78 Stat. 769, 790,

codified at 42 U.S.C. sec. 1452(b) (1988) (repealed by Act of

Nov. 28, 1990, Pub. L. 101-625, 104 Stat. 4128).    The general

partners and shareholders, petitioner included, were required to

execute personal guaranties on the debt financed.

     After the entities failed to pay the debt incurred, the

properties which were purchased by the separate entities were

foreclosed upon.    An outstanding debt remained after the

foreclosure, and the entities defaulted on the debt in 1992.      The




     4
          A fourth partner held a 2-percent interest in the
partnerships and corporations.
                                      - 4 -


following table illustrates the amount of the debt outstanding

after foreclosure of the properties:

                                                       Amount       Date of
         Entity                     Type                Owed        Default

D'Ambra Merc. Enterprises      Subchapter C corp.    $399,394.48    7/15/92


D'Ambra Corp.                  Subchapter C corp.     323,845.77    7/15/92

Portland Parris Street         Partnership            200,916.17    8/14/92
Associates

Marshview Point                Partnership            254,868.96    7/18/92
Partnership

Three-Sixty & One              Partnership            760,818.57    6/18/92
One Associates

Fifty-Nine Bramhall St.        Partnership            243,291.23    8/14/92
Associates

Cumberland Hanover             Partnership             56,561.28    8/14/92
Associates

Cumberland Hanover             Partnership            117,832.76    7/31/92
Associates

Park Avenue One                Partnership            974,468.22    6/18/92
Associates

Total debt owed                ----------           $3,331,997.44   --------


Petitioner claimed the following losses on his Federal income tax

returns as his share of the partnership losses incurred:5

                    Tax Year                        Loss Claimed

                    1991                                $72,050
                    1992                              3,376,497
                    1993                              3,331,997
                    1994                              3,313,241




     5
          For convenience, all subsequent amounts are rounded to
the next highest dollar.
                                - 5 -


     Respondent issued petitioners a notice of deficiency for

their 1994 tax year.    In the notice of deficiency, respondent

disallowed petitioners' claimed partnership loss carryover and

their charitable contribution deduction.    Respondent adjusted

petitioners' claimed medical expense deduction and earned income

credit due to the increases in petitioners' adjusted gross

income.   Respondent determined that petitioners were liable for

the self-employment tax and for the accuracy-related penalty.

Respondent also determined that petitioners were entitled to a

self-employment tax credit.

     While no deficiency was determined for 1993, the statement

of adjustments attached to the notice of deficiency included

adjustments to petitioners' 1993 Federal income tax return.    The

adjustments for 1993 consisted of the disallowance of

petitioners' claimed partnership loss carryover from 1992,

charitable contribution deduction, and medical expense deduction.

Respondent also made an adjustment to petitioners' claimed earned

income credit for 1993 as a result of the adjustment to

petitioners' adjusted gross income.

Discussion

     We begin by noting that the Commissioner's determinations

are presumed correct.    See Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).    Deductions are a matter of legislative

grace, and the taxpayers bear the burden of proving that they are
                                - 6 -


entitled to the claimed deduction.      See Rule 142(a); New Colonial

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

     At the outset, we have determined that we do not have

jurisdiction with respect to the adjustments made to petitioners'

1993 Federal income tax return.      Respondent did not determine a

deficiency in tax for petitioners' 1993 tax year and did not

issue a statutory notice of deficiency to petitioners for the

1993 tax year.    See secs. 6212, 6213, 7442; Rules 13, 20; Monge

v. Commissioner, 93 T.C. 22, 27 (1989); Normac, Inc. v.

Commissioner, 90 T.C. 142, 147 (1988).     However, we shall

consider the adjustments to the 1993 tax year to the extent they

affect the deficiency for the 1994 tax year.

     1.   Loss Deduction

     We note that the parties’ arguments as to the deductibility

of the alleged losses are based on the assumption that all the

losses are related to petitioner's partnership interests.      As the

entities involved also include subchapter C corporations, we

shall discuss the applicable law and analysis as applied to these

entities separately.

           A.   Partnership Losses

     Petitioners claimed a partnership loss in the amount of

$3,376,497 for the 1992 taxable year.     Petitioners claimed a

partnership loss carryover in the amount of $3,331,997 for the

1993 taxable year, and a partnership loss carryover in the amount
                                - 7 -


of $3,313,241 for the 1994 taxable year.    Of these amounts,

$723,240 consists of claimed losses related to petitioner's

interests in two subchapter C corporations.    We shall decide

whether petitioners are entitled to a partnership loss carryover

in the amount of $2,590,001 in 1994.

     Section 6001 requires that a taxpayer liable for any tax

shall maintain such records, render such statements, make such

returns, and comply with such regulations as the Secretary may

from time to time prescribe.   To be entitled to a deduction,

therefore, a taxpayer is required to substantiate the deduction

through the maintenance of books and records.

     Petitioner has not established that the entities in question

incurred a loss in 1992, or any other year.    At most, petitioner

has established that the partnership entities defaulted on the

debt in the amount of $2,590,001 in 1992.    Even if petitioner had

established that the partnerships had incurred a loss, petitioner

would not be entitled to a flow-through loss deduction as

petitioner has not established his bases in his partnership

interests.

     The determination of a partner’s basis in his or her

partnership interest must be made before a partner can deduct his

or her share of partnership losses because losses cannot reduce a

partner’s basis below zero.    See sec. 704(d); Sennett v.

Commissioner, 80 T.C. 825, 829 (1983), affd. 752 F.2d 428 (9th
                               - 8 -


Cir. 1985); Wilson v. Commissioner, T.C. Memo. 1999-141; sec.

1.704-1(d)(1), Income Tax. Regs.   Petitioner has failed to

provide any documentation to establish his basis in the

respective partnerships.   Most of the partnership returns (Forms

1065) have not been filed since the partnerships' inception, nor

have the partnerships issued Schedules K-1, Partner's Share of

Income, Credits, Deductions, etc., to the partners.    The returns

that were filed have not been provided to this Court and made

part of this record.

     Petitioner next argues that he is entitled to deduct a loss

based on the worthlessness of his partnership interests.     In

order for petitioner to be entitled to a loss, he needs to

establish the worthlessness of his partnership interest and

further must substantiate the value of his partnership interests.

Even if petitioner’s partnership interests became worthless in

1992, he would not be entitled to a loss deduction because he has

not established the value of his partnership interests.     As we

have previously concluded, petitioner did not present any

evidence to establish the amount of his bases in the

partnerships.   In addition, petitioner did not account for any

income, loss, gain, credits, or deductions that are his

distributive share as a partner in the partnerships.   As

petitioner has not established his basis by accounting for his

initial and any subsequent contributions to the partnerships, his
                                 - 9 -


share of any partnership income, credits, loss, or deductions, he

is not entitled to deduct a loss, as provided by sections 702(a)

and 704(d), nor is he entitled to any loss for the alleged

worthlessness of his partnership interests.     We hold petitioners

are not entitled to a partnership loss carryover in the amount of

$2,590,001 for 1994.

            B.   Subchapter C Corporation Losses

     The remainder of petitioners' claimed loss, $723,240,

originated from petitioner's interests in two subchapter C

corporations.     As stated previously, petitioner has not

established a loss was incurred by the entities in question.

Even if he had, petitioner is not entitled to deduct a loss

sustained by the corporation as a subchapter C corporation is not

a pass-through entity, such as a partnership.

     As to the deductibility of the worthlessness of a taxpayer's

stock in a subchapter C corporation, section 165(g) provides for

a constructive sale or exchange for worthless stock, which

results in the loss’ being treated as a capital loss.     No such

constructive sale or exchange is provided for a partnership

interest.    See La Rue v. Commissioner, 90 T.C. 465, 484 n.22

(1988).   The deductibility of the loss is limited by the

provisions of section 1211(b).     However, petitioner has not

established his basis in the stock.      See sec. 6001; Rule 142(a).

Therefore, respondent is sustained on this issue.
                                - 10 -


     2.   Charitable Contribution Deduction

     Petitioners claimed a charitable contribution deduction in

the amount of $2,024 on their 1994 tax return.      Section 170(a)

allows as a deduction any charitable contribution which is made

within the taxable year.   A charitable contribution is a

contribution or gift to or for the use of an organization

described in section 170(c).    Charitable contributions are

deductible pursuant to section 170 only if verified under

regulations prescribed by the Secretary.      See sec. 170(a)(1).

     If a charitable deduction is made in property other than

money, the amount of the contribution is, generally, the fair

market value of the property at the time of the contribution.

See sec. 1.170A-1(c)(1), Income Tax Regs.      Further, any taxpayer

who makes a charitable contribution of property other than money

shall maintain for each contribution written records from the

donee showing the name and address of the donee, the date and

location of the contribution, and a description of the property

in detail reasonably sufficient under the circumstances.      See

sec. 1.170A-13(b), Income Tax Regs.      The fair market value of the

property is one of the circumstances to be taken into account in

determining the amount of detail to be included on the receipt.

See id.; Thorpe v. Commissioner, T.C. Memo. 1998-123.

     Petitioner testified that petitioners normally make noncash

contributions to Goodwill.     Petitioner provided no specific
                                - 11 -


testimony as to whether the contributions in issue were in fact

made to Goodwill, what the donations specifically consisted of,

and the value thereof.    Although petitioner repeatedly asserted

that respondent's Appeals Officer "did not give [him] a chance to

submit Form 8283", petitioner did not submit Form 8283, or any

other type of documentation, to substantiate the claimed

deduction.

     Petitioner's uncorroborated, vague testimony does not

satisfy the substantiation requirements of section 170(a)(1) and

section 1.170A-13(b)(1), Income Tax Regs.    Accordingly, we

sustain respondent's determination on this issue.

     3.    Accuracy-Related Penalty

     The final issue for decision is whether petitioners are

liable for the accuracy-related penalty pursuant to section

6662(a).     Respondent determined petitioners were liable for the

accuracy-related penalty under section 6662(a) for 1994.     The

accuracy-related penalty is equal to 20 percent of any portion of

an underpayment of tax required to be shown on the return that is

attributable to the taxpayer's negligence or disregard of the

rules or regulations.    See sec. 6662(a) and (b)(1).   "Negligence"

includes of any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue Code.     Sec. 6662(c).

"Disregard" includes any careless, reckless, or intentional

disregard.     Id.
                              - 12 -


     An exception applies to the accuracy-related penalty when

the taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) he acted in good faith with respect to such

underpayment.   See sec. 6664(c).   Whether the taxpayer acted with

reasonable cause and in good faith is determined by the relevant

facts and circumstances.   The most important factor is the extent

of the taxpayer's effort to assess his or her proper tax

liability.   See Stubblefield v. Commissioner, T.C. Memo. 1996-

537; sec. 1.6664-4(b)(1), Income Tax Regs.   Section 1.6664-

4(b)(1), Income Tax Regs., specifically provides: "Circumstances

that may indicate reasonable cause and good faith include an

honest misunderstanding of fact or law that is reasonable in

light of * * * the experience, knowledge and education of the

taxpayer."

     It is the taxpayer's burden to establish he is not liable

for the accuracy-related penalty imposed by section 6662(a).    See

Rule 142(a); Tweeddale v. Commissioner, 92 T.C. 501, 505 (1989).

Petitioner claimed a loss carryover in the amount of $3,313,240

and a charitable contribution deduction in the amount of $2,024

in 1994 and failed to substantiate the claimed deduction under

the requirements of section 6001 and the applicable regulations.

Petitioner is an attorney with knowledge of the law.   On the

basis of the entire record, we conclude that petitioners have not

established the underpayment was due to reasonable cause and that
                              - 13 -


they acted in good faith.   Accordingly, we hold petitioners are

liable for the accuracy-related penalty as determined by

respondent.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
