                           T.C. Memo. 1995-515



                         UNITED STATES TAX COURT



    LEONARD L. LEIGHTON AND JOYCE S. LEIGHTON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 21169-93.                  Filed October 30, 1995.



       Leonard L. Leighton, for petitioners.

       Stephen C. Coen, for respondent.



                           MEMORANDUM OPINION

       KÖRNER, Judge:    Respondent determined deficiencies in and

additions to petitioners' Federal income taxes for the years and

in the amounts as follows:

                           Additions to Tax Under Section
Year    Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6653(a)(1)    6661

1987    $463,497        $23,175         *           --      $115,874
1988       6,530           --           --         $327        1,633

*50 percent of the interest due on the deficiency.

         All statutory references are to the Internal Revenue Code

in effect for the years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure, except as

otherwise noted.
                                 2

     Petitioners Leonard L. and Joyce S. Leighton were residents

of San Antonio, Texas, in the years 1987 and 1988, and at the

time the petition was filed in this case.   For those years, they

filed joint income tax returns on the cash basis.    Hereinafter,

references to petitioner are to Leonard L. Leighton.

     The issues we must decide in this case are:    (1) Whether

respondent erred in determining that petitioners had unreported

ordinary income in 1987 of $762,685; (2) whether respondent erred

for 1987 in determining that petitioners had unreported net

capital gains of $653,787; and (3) whether petitioners had net

capital losses in excess of any reportable capital gains for

1987.   Minor additional adjustments to income, as well as

additions to tax for each year for negligence and for substantial

understatement of tax under sections 6653 and 6661, were raised

as issues in the petition herein, but were never mentioned by

petitioners thereafter, either at trial or on brief, and are

deemed to be conceded.   See Rule 151.

     Petitioner is a practicing attorney at law in San Antonio,

Texas, having received his license to practice in 1961, and he

also holds a masters in taxation degree from New York University.

He has taught law at the law school at St. Mary's University.     At

least since 1981, petitioner has been a partner in a law firm in

San Antonio, Texas, and Mrs. Leighton has worked for such firm as

a secretary.   Petitioner was principal partner of and held a

controlling interest in said law firm from 1981 through 1988, and
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was also engaged in law practice and other activities prior to

that time.   Petitioner was on the board of directors of a bank

known as Schertz Bank & Trust Co. from 1975 through 1987, and at

one time owned a controlling interest and was a director in said

bank.   Petitioner maintained a number of bank accounts at the

Schertz Bank in the names of himself, his law partners, his wife,

or in similar names showing involvement in professional activity.

Petitioner also maintained bank accounts in at least seven other

banks, which were likewise titled either in the name of himself,

his wife, his partners, or associated interests, and over which

he had control.   The principal account which petitioner

maintained at the Schertz Bank, however, known as the "Leonard

Leighton, Attorney at Law", account, had checks drawn by both

petitioner or his wife, and was the depositary of many funds.

     Using friends, and sometimes clients, as sources, from 1972

through 1988, petitioner promoted and managed more than forty

real estate ventures, sometimes called "joint ventures",

involving raw land, apartment complexes, and motels.   His friends

and clients were the principal sources of investment in these

ventures, which were composed of different individuals who

invested varying amounts of money in the various joint ventures.

Petitioner drew all necessary joint venture agreements and

conducted all necessary negotiations regarding purchases and

sales in these ventures.   No two joint ventures had identical
                                  4

investors, except that petitioner himself was a member of every

venture; he was the only common member.

     Petitioner kept no journals, ledgers, or other formal books

of account for the joint ventures.    To the extent there was any

contemporaneous accounting for investors' funds collected by

petitioner, it consisted merely of notes on check stubs.

Although no member of any of the joint ventures authorized

petitioner to transfer funds from one joint venture to another

joint venture, petitioner consistently did so, as the need for

funds to meet the obligations of one joint venture would arise,

and funds available to petitioner would be in another joint

venture.    Petitioner accordingly did extensive commingling of

funds between the various joint ventures, of which he was the

only common member.    He did such commingling on his own

authority.    Some funds were also abstracted from joint venture

moneys received by petitioner and were used for his personal

purposes.    This commingling of funds, and their application to

other accounts and in some cases to petitioner's personal

purposes, was done without any knowledge or authorization by the

other investors in the various joint accounts, either orally or

in writing.    All such transfers were done by petitioner on his

own authority.

     As a result of commingling and appropriations in the many

joint ventures in which petitioner was engaged, together with

certain sales, failures, and foreclosures that occurred, lengthy
                                 5

litigation regarding certain of the ventures was brought by

certain investors in the Texas courts against petitioner, and

substantial judgments have resulted against him, which as yet

remain unpaid.   The Texas Bar Association also proceeded in the

courts against petitioner for his unethical conduct in

mishandling and misapplying clients' funds that were intrusted to

his care.   Petitioner agreed to substantial restitution to

various investors for their funds which had been misapplied, but

it is not shown that such restitution has occurred.   Petitioner

was found guilty of improper conduct in the handling of his

clients' funds; in lieu of outright disbarment, he was placed on

probation for a period of 10 years.

     Upon examination of petitioners' returns for the years in

issue here, respondent determined that petitioner had

misappropriated $762,685 in 1987, which had been spent either for

his own personal purposes or to relieve the financial necessities

of other joint ventures in which he was the only common

principal, and respondent added such amount to petitioner's

income.   Petitioners challenge this determination.

     The statutory notice of deficiency in issue herein also

determined that petitioner, as principal of the various ventures,

had unreported capital gains in 1987 of $653,787, as the result

of certain of the joint ventures that were sold, went to closing

and were paid off.
                                  6

     Petitioner denies all this, and petitioner further claims

unspecified capital loss deductions for 1987 based on judgments

entered against him by holders of notes and members of the

various joint ventures, as well as on account of an alleged

$100,000 loss on a loan made by petitioner to a particular joint

venture.    Petitioner claims that his loss in various of the joint

ventures was established when he abandoned his interests in said

ventures, or when said judgments were rendered against him.

     As to the three issues remaining to be decided in this case,

as we have detailed above, the burden of proof--that is to say,

the burden of ultimate persuasion--was upon petitioners.       Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).       It was the task

of petitioners to convince the Court by adequate proof that

respondent was in error, and to what extent, in determining that

petitioners had the additional income for 1987, which respondent

determined came about as a result of petitioner's illegal

abstraction of funds to commingle with other joint accounts over

which he had control, as well as abstraction of funds to use for

petitioner's personal purposes.       Likewise, it was petitioners'

burden to show that respondent's determination of additional

unreported capital gains income in 1987 was erroneous, and to

what extent.    Finally, it was petitioner's burden to demonstrate

that he had additional losses that were deductible for the year

1987, in excess of any capital gains which he otherwise had

realized.
                                  7

     Petitioners totally failed to carry their burden of proof on

all points.    Despite a great deal of generality, petitioner (who

was the only witness for petitioners) stayed well away from

mentioning any amounts of the unreported income for 1987 that had

been determined by respondent, as being erroneous, let alone

proving any such amounts.   Likewise, petitioner testified to no

amounts, and offered documentary evidence as to no amounts, by

which respondent had determined excessive capital gains realized

by petitioner in 1987.   Finally, petitioners totally failed to

establish that they had incurred any long-term capital losses in

excess of any realized gains, based upon the argument that the

judgments rendered against petitioner created losses that he

could deduct, and that he incurred deductible losses when his

joint venture projects were abandoned.

     This failure of essential proof runs throughout each issue

in the case:

     (1) As to the additional unreported income resulting from

petitioner's misapplication of trust funds and his taking of

joint venture funds for his personal uses, it is well established

that gross income for income tax purposes includes income that a

person takes or receives and that is subject to his control and

disposition, even if the income be illegally obtained.   Sec.

61(a); James v. United States, 366 U.S. 213 (1961); see Rutkin v.

United States, 343 U.S. 130 (1952).    Petitioner admitted that he

misappropriated joint venture funds from the trust accounts that
                                  8

he maintained for his coventurers, and he also admitted that he

took some of such funds for his personal uses.    He totally failed

to show the extent, if any, where respondent was in error as to

her determination of additional unreported income.

     (2) As to the additional unreported capital gains for 1987,

respondent admitted that some cost basis had been allocated to

petitioner in her computation of the capital gains.    There is no

evidence in this record, and petitioner has produced none, that

petitioners had any cost basis in excess of that allowed by

respondent which would reduce the net capital gains in any of the

recomputations that respondent made.    Sec. 1012.   In fact, to the

extent that any of the testimony at trial herein or any of the

exhibits admitted into evidence touched upon it at all, it was

strongly suggested that petitioner had no cost basis in the

various ventures in any amount.

     (3) As to the additional capital losses claimed by

petitioners as an offset, and more, to the capital gains

determined by respondent, petitioner has produced no evidence of

any amounts of loss, but instead has relied on a general argument

that the judgments rendered against him, as well as the

abandonment of various projects by the joint ventures, produced

capital losses which he could deduct.    Quite aside from

petitioner's failure to prove any cost basis in any of these

ventures, as we have mentioned above, it does not appear that any

of the judgments which petitioner admits were rendered against
                                  9

him (in some amount) have yet been paid, and petitioner admitted

as much on the witness stand.    Likewise, there is no proof that

any of the alleged joint ventures formally abandoned their

interests in the properties concerned in 1987, nor what

petitioner's interest in any such joint venture was.1

     Although section 165(a) provides that there shall be allowed

as a deduction any loss sustained during the taxable year (and

not compensated by insurance or otherwise), the basis for

determining such loss must be the adjusted basis under section

1011.    The amount of loss allowable shall not exceed the

taxpayer's adjusted basis in the asset, sec. 1.165-1(c), Income

Tax Regs.    Petitioners have the burden of proving the amount of

their basis, Millsap v. Commissioner, 46 T.C. 751, 760 (1966),

affd. 387 F.2d 420 (8th Cir. 1968), and the loss cannot be

computed where the taxpayer (petitioners here) failed to prove

their basis in the property in question.    Both petitioner's

arguments suffer from the same defect:    there is no admissible

evidence showing that petitioner had any cost basis in any joint

venture which allegedly was abandoned in 1987, and there is no



     1
        The record herein contains a mass of petitioner's
exhibits, some of which purport to show losses and recorded
judgments with respect to some of petitioner's joint ventures.
These exhibits were admitted into evidence solely for showing the
mass of documents that petitioner had furnished to respondent in
the preparation of this case; they were not stipulated as true or
admissible as to their contents by respondent. This limitation
on admissibility was clearly stated in the trial stipulation
executed by the parties. See Rules 91, 143.
                               10

evidence that he paid any of the judgments that have been

rendered against him, which would add to his cost basis in such

ventures.

     All other adjustments in the statutory notice of deficiency

having been conceded by petitioner,

                                      Decision will be entered

                              for respondent.
