                       T.C. Memo. 1997-31



                     UNITED STATES TAX COURT


               NORWEST CORPORATION AND SUBSIDIARIES,
              SUCCESSOR IN INTEREST TO DAVENPORT BANK
        AND TRUST COMPANY AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 25613-95.                   Filed January 16, 1997.


     Scott G. Husaby, for petitioner.

     Jack Forsberg, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   This case was assigned

pursuant to section 7443A(b)(4)1 and Rules 180, 181, and 183 for

purposes of hearing two motions filed by petitioner:   (1) A

motion to dismiss for lack of jurisdiction with respect to a

1
     Unless otherwise indicated, section references are to the
Internal revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 2 -


portion of an adjustment in the notice of deficiency, and (2) in

the alternative, a motion to shift the burden of proof to

respondent on this adjustment if the Court denies the motion to

dismiss.   Respondent filed a notice of objection to both motions.

Prior to the hearing on these motions, the Court ordered

petitioner to file a supplemental motion to dismiss for lack of

jurisdiction to clarify the factual premise on which the motion

to dismiss for lack of jurisdiction was based.    Petitioner filed

the supplemental motion prior to the hearing.

     In a notice of deficiency, respondent determined a

deficiency of $132,088 in Federal income tax for petitioner's

1991 calendar year.   This deficiency is based upon respondent's

disallowance of $658,000 legal and professional fees that,

according to the deficiency notice, were claimed as ordinary and

necessary business expenses on petitioner's 1991 Federal income

tax return.   The disallowed expenses consisted of the following

expenses listed in the notice of deficiency:


     Legal advice                      $473,453
     Legal advice                           565
     Accounting fees--comfort letter     17,350
     Accounting fees--opinion            15,250      $506,618
     Unidentified costs                               151,382
     Total disallowed expenses2                      $658,000


2
     Respondent also adjusted the environmental tax deduction and
the credit for prior year minimum tax. These adjustments are not
the subject of petitioner's motions and, therefore, are not
before the Court in this proceeding.
                                 - 3 -


     Petitioner is a corporation and is the parent company of a

group of corporations that files consolidated corporate income

tax returns.   At the time the petition was filed, petitioner's

principal place of business was Minneapolis, Minnesota.     The

issue presented by petitioner's motions arises over the legal and

accounting fees described above that were incurred during 1991 in

connection with the acquisition of the Davenport Bank and Trust

Co. and its merger into Bettendorf Bank, the latter of which is a

subsidiary of Norwest Corp.3   The merger of these two banks was

completed on January 19, 1992.

     In petitioner's consolidated income tax return for 1991,

petitioner claimed, as an ordinary and necessary business

deduction, expenses incurred during 1991 regarding the expansion

of its financial services business (banking) within the

geographic area known as the "Quad Cities" of Davenport and

Bettendorf, Iowa, and Moline and Rock Island, Illinois, which

expansion resulted in the acquisition of the Bettendorf Bank and

the merger of that bank into petitioner's consolidated group.

Petitioner included with its Federal income tax return for 1991 a




3
     Hereafter, references to petitioner include Norwest Corp.
and all its subsidiaries that are part of its consolidated group
that includes Davenport Bank and Trust Co. and Bettendorf Bank.
                              - 4 -


statement described as a "protective disclosure statement" to

satisfy section 6662(d)(2)(B),4 which stated:


     The taxpayer has deducted certain legal and professional
     fees as ordinary and necessary business expenses under
     section 162 of the Internal Revenue Code. The amount of the
     expenses deducted was $658,000. In INDOPCO, Inc. v.
     Commissioner, (112 S.Ct. 1039 (1992), aff'g National Starch
     & Chem. Corp. v. Commissioner, 918 F.2d 426 (3d Cir. 1990)),
     the Supreme Court held that a corporation must capitalize
     expenses resulting in future long-term benefits. The
     taxpayer believes that the facts and circumstances with
     respect to the deducted amounts are distinguishable from
     those in INDOPCO.


     In the notice of deficiency, respondent disallowed the

$658,000 on the ground that these expenses should be capitalized.

     The question as to whether the $658,000 should be

capitalized or allowed as an ordinary and necessary expense

deduction is not directly at issue in these motions.   Rather, in

its motions, petitioner contends respondent made no

"determination" of a deficiency with respect to $151,382 of the

$658,000 expenses, and, therefore, this Court has no jurisdiction

with respect to any underpayment attributable to the $151,382.

Alternatively, if the Court has jurisdiction over this portion of

4
     Sec. 6662(a) imposes a penalty for any portion of an
underpayment in tax that is attributable to one or more of five
situations described in sec. 6662(b). Under sec. 6662(d)(2)(B),
any underpayment subject to the penalty shall be reduced if it is
attributable to any item as to which the taxpayer had substantial
authority for the treatment of such item on the return, or as to
which "the relevant facts affecting the item's tax treatment are
adequately disclosed in the return or in a statement attached to
the return."
                               - 5 -


the total adjustment, petitioner contends in its second motion

that the burden of proof with respect to the $151,382 should

shift to respondent.

     A hearing was held on both motions.   At the hearing, neither

party presented any witnesses, and no documentary information was

submitted into evidence.   The hearing consisted solely of the

arguments of counsel.

     It is undisputed that, sometime after petitioner's 1991

return was filed, an engineer agent with the Internal Revenue

Service (IRS) issued to petitioner an information document

request with respect to the $658,000 expenses referred to in the

disclosure statement, requesting an itemization of the expenses

comprising the $658,000 and documentation to support the claimed

expenses.   Petitioner replied with the following itemization:


     Lane & Waterman--legal advice            $473,453
     Lane & Waterman--legal advice                 565
     KPMG--comfort letter                       17,350
     KPMG--tax opinion                          15,250
     Unidentified                              151,382
       Total                                  $658,000


No documentation was provided the IRS agent to support the

$151,382 unidentified costs.

     Petitioner contends that the $151,382, described in the

above itemization as "Unidentified" costs, was included by error

in the $658,000 of expenses referred to on the disclosure

statement and that only $506,618 was incurred and claimed as a
                               - 6 -


deduction on the income tax return.    Since respondent has

disallowed, in the notice of deficiency, expenses of $658,000,

petitioner contends that respondent, in effect, has disallowed

$151,382 of expenses that are not related to petitioner's merger

activity.   Petitioner further argues that, given that petitioner

informed the IRS agent that petitioner did not in fact incur

merger-related expenses of $151,382, and respondent, nonetheless,

disallowed such expenses in the notice of deficiency, respondent

should be required to advise petitioner what items of expenses on

petitioner's tax return comprise the $151,382 disallowed

expenses.   Because respondent, in the audit process, failed to

provide such information, petitioner contends that respondent

failed to make a "determination" of a deficiency attributable to

the $151,382, and, therefore, this Court lacks jurisdiction as to

this $151,382 portion of the $658,000 adjustment.    To quote from

petitioner's memorandum of authorities, "Petitioner repeatedly

requested more specificity as to which expense(s) was being

reviewed to permit identification and retrieval of all source

documentation and other potential support.    Respondent refused to

be more specific as to which expense(s) was being reviewed."

When the examining agent later proposed to disallow the $658,000,

petitioner responded in writing that the $151,382 (of the

$658,000) "was a plug and not identifiable as legal or
                               - 7 -


professional fees related to the merger."5   Since respondent

refuses to identify those expenses claimed on petitioner's return

that comprise $151,382, petitioner contends that respondent has

not "determined" a deficiency attributable to $151,382, citing

Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), revg. 81

T.C. 855 (1983).

     This Court's jurisdiction to redetermine a deficiency is

based upon the issuance of a valid notice of deficiency and a

timely filed petition.   Rule 13(a), (c); see Monge v.

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

Commissioner, 90 T.C. 142, 147 (1988).   At a minimum the notice

of deficiency must identify the taxpayer, indicate that the

Commissioner has made a determination of deficiency, and specify

the taxable year and amount of the deficiency.   See Estate of

Yaeger v. Commissioner, 889 F.2d 29, 35 (2d Cir. 1989), affg. in

part, revg. in part, and remanding T.C. Memo. 1988-264.   The case

of Scar v. Commissioner, supra, cited by petitioner, is

distinguishable from this case.   In the Scar case, the

Commissioner issued a notice of deficiency disallowing deductions

5
     Petitioner has not explained what is meant by its reference
to the $151,382 as a "plug". The Court is unsure whether this
means that $151,382 was added as a "catch-all" of other expenses,
whether supporting documentation was not available for the
$151,382, or whether the $658,000 claimed was intentionally
overstated out of an abundance of caution in attempting to
satisfy the disclosure requirements for purposes of sec. 6662(a).
Respondent's position at the hearing was that the $151,382 was
not an error by petitioner.
                               - 8 -


the taxpayer had never claimed and determined a deficiency at the

highest marginal tax rate.   In the notice of deficiency, it was

stated that the taxpayer's income tax return was not available,

and that the deficiency was determined at the maximum rate of 70

percent to protect the Government's interest but would be

corrected whenever the original return was received or whenever

the taxpayer would send a copy of the return.   Under these facts,

it was held that the Commissioner had not made a determination of

tax because the notice of deficiency, on its face, revealed that

it had been issued without any prior inspection of the taxpayer's

income tax return.   See also Kong v. Commissioner, T.C. Memo.

1990-480.

     In the present case, respondent made an examination of

petitioner's tax return.   Not only did respondent examine the

return, there were communications between respondent's examining

agent and petitioner with respect to the adjustment at issue.

There is no language in the notice of deficiency that indicates

that respondent failed to make a determination or failed to

examine petitioner's return.   Moreover, the fact that the

determination in the notice of deficiency may ultimately be held

to be erroneous does not invalidate the notice of deficiency.

Hannan v. Commissioner, 52 T.C. 787, 791 (1969); Stevens v.

Commissioner, 709 F.2d 12, 13 (5th Cir. 1983), affg. T.C. Memo.

1982-352.   On this record, petitioner has failed to establish
                               - 9 -


that respondent did not make a determination with respect to the

$151,382 portion of the $658,000 adjustment.   The Court,

therefore, has jurisdiction over this issue.   Petitioner's motion

to dismiss for lack of jurisdiction, and its supplemental motion

to dismiss for lack of jurisdiction, therefore, will be denied.

     In the alternative, petitioner contends that, if the Court

has jurisdiction over the $151,382 issue, the burden of proof as

to this issue should shift to respondent.    That is the basis of

petitioner's second motion.   Petitioner relies primarily on

Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), affg. in

part and revg. in part T.C. Memo. 1990-68.   In its memorandum of

authorities in support of this motion, petitioner argues:


     In the income tax return for 1991, Petitioner claimed
     hundreds of thousands of deductions totaling over $141
     million. All deductions claimed in the return are
     identifiable and supportable. Petitioner can prove that all
     expenditures deducted in the return were proper by producing
     invoices and other support for such expenditures. However,
     this process is practically unworkable as it would involve
     the production of hundreds of thousands of documents and
     thousands of hours of court time to review. In the end, the
     Court would find that all expenditures were properly
     deducted in preparing the return, including the $151,382 of
     unidentified costs erroneously characterized as merger-
     related costs in the Disclosure Statement. Respondent must
     provide sufficient specificity in the Notice of Deficiency
     as to which deductions are being disallowed in order for the
     Court, Petitioner, and Respondent to come to some meaningful
     resolution of the issue. A blanket disallowance of
     unidentified costs effectively requires the taxpayer to
     prove up the correctness of the entire return and lends
     itself to a unreasonably burdensome and unworkable process
     for taxpayers, Respondent, and the courts.
                              - 10 -


          Respondent must provide a factual foundation for its
     assessments and has an obligation to substantiate its claim
     that an expenditure has been improperly deducted. Portillo
     v. Commissioner, 91-2 USTC ¶50,304 (5th Cir. 1991),
     indicates that Respondent's failure to properly investigate
     the claimed deduction results in an arbitrary and capricious
     notice of deficiency.


     The facts of this case are distinguishable from the facts of

Portillo v. Commissioner, supra.   In the Portillo case, the IRS,

based upon an information return filed by a payer, determined a

deficiency against the taxpayer for the difference in the amount

reported as income by the taxpayer on his return and the amount

reported by the payer on the information return.   That case,

therefore, dealt with unreported income rather than deductions as

reported and claimed by petitioner in this case.   In the Portillo

case, the taxpayer was unable to present any books and records to

prove a negative (unreported income); consequently, the Court of

Appeals for the Fifth Circuit held that, before the

Commissioner's determination could be accorded the presumption of

correctness, it was necessary, under the facts presented to the

Court, that the Commissioner "must engage in one final foray for

truth in order to provide the Court with some indicia that the

taxpayer received unreported income."   Portillo v. Commissioner,

supra at 1133.6   Under the facts of the Portillo case, the Court

6
     In Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991),
affg. in part and revg. in part T.C. Memo. 1990-68, the taxpayer
reported on his income tax return $10,800 income received from
                                                   (continued...)
                               - 11 -


of Appeals held that, although the Commissioner had made a

"determination", the presumption of correctness could not be

accorded to that determination.

     In this case, there is no third party payer involved as to

the issue before the Court.    Petitioner does not have the burden

of proving a negative.   Moreover, this case does not involve

unreported income but disallowed deductions.    Petitioner has

books and records by which it can, according to its own

assertions, substantiate fully, albeit at some burden, the

expenses reported on its return.    Petitioner alleges that such

proof would show no merger-related expenses in excess of

$506,618.   The Portillo rationale, therefore, is not applicable

to the facts of this case.    Respondent's determination in the

notice of deficiency is entitled to the presumption of

correctness, and the burden to show that this determination is in

error lies with petitioner.    Petitioner's motion to shift the

burden of proof to respondent, therefore, will be denied.



                                          An appropriate order

                                     will be issued.


6
 (...continued)
the payer. At trial, the taxpayer agreed that the correct amount
received was $13,925. Prior to issuance of the notice of
deficiency, the IRS examining agent contacted the payer, and the
payer's records reflected payments to Mr. Portillo of $13,925.
The payer was unable to prove to the examining agent that he had
made payments of $35,305 to Mr. Portillo as reported on the
information return of the payer to the IRS.
