                         T.C. Memo. 2001-116



                       UNITED STATES TAX COURT



          BURIEN NISSAN, INC., ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.    9519-98, 12341-98,           Filed May 14, 2001.
                   11536-99, 16916-99.


     J. Patrick Quinn, for petitioners.

     Roy Wulf, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:    Respondent determined deficiencies and

accuracy-related penalties for Burien Nissan, Inc. (Burien



     1
      Cases of the following petitioners are consolidated
herewith: Burien Nissan, Inc., docket No. 16916-99; and Donald
W. Johnston and Jacque C. Johnston, Deceased, docket Nos. 12341-
98 and 11536-99.
                               - 2 -

Nissan), as follows:

                                        Accuracy-related Penalty
Docket No.     Year      Deficiency          Sec. 6662(a)2
9519-98        1994        $9,842              $1,792.00
16916-99       1995        37,626               7,525.20
16916-99       1996        20,371               4,074.20

     Respondent determined deficiencies and accuracy-related

penalties for Donald W. Johnston and Jacque C. Johnston, Deceased

(the Johnstons), as follows:

                                        Accuracy-related Penalty
Docket No.     Year      Deficiency          Sec. 6662(a)
12341-98       1994       $71,837              $14,367
11536-99       1995       116,984               23,397

     After concessions,3 the issues for decision are:   (1)

Whether Burien Nissan must amortize noncompetition agreement

payments to Mr. Johnston over 15 years pursuant to section 197;

(2) whether Burien Nissan’s operating loss carryforward for 1994


     2
      Unless otherwise indicated, all section 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.
     3
      Burien Nissan deducted $53,500 that it paid to redeem its
own stock on its 1990 and 1991 Federal income tax returns. This
deduction increased the amount of Burien Nissan’s net operating
loss carryforward into 1994. Burien Nissan concedes that it is
not entitled to deduct these payments and that the net operating
loss carryforward has to be reduced accordingly.

     The Johnstons concede that they are not entitled to a
capital loss for their 1994 sale of Burien Nissan stock.

     Respondent concedes that Burien Nissan is entitled to deduct
$23,533 in 1994, $15,000 in 1995, and $11,250 in 1996 in
connection with payments to Gerald Buchner. Respondent also
concedes the $155,842 proposed adjustment in the Johnstons’ 1994
interest income.
                              - 3 -

should be adjusted to account for additional interest deductions

beyond those claimed on its original Federal income tax returns;

(3) whether the Johnstons failed to report a $45,483 lump-sum

payment pursuant to a noncompetition agreement with Burien

Nissan; (4) whether the Johnstons should have reported $290,000

of income in 1995 pursuant to a noncompetition agreement between

Mr. Johnston and Matthew B. West, Inc.; and (5) whether Burien

Nissan and the Johnstons are liable for the accuracy-related

penalties under section 6662(a).

                        FINDINGS OF FACT4

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     Burien Nissan’s mailing address was in Seattle, Washington,


     4
      Burien Nissan and the Johnstons ignored Rule 151(e)(3),
which provides, in part:

     In an answering or reply brief, the party shall set
     forth any objections, together with the reasons
     therefor, to any proposed findings of any other party,
     showing the numbers of the statements to which the
     objections are directed; in addition, the party may set
     forth alternative proposed findings of fact.

     Under the circumstances, we have assumed that Burien Nissan
and the Johnstons do not object to respondent’s proposed findings
of fact except to the extent that their statements on brief are
clearly inconsistent therewith, in which event we have resolved
the inconsistencies based on our understanding of the record as a
whole. See Gleave v. Commissioner, T.C. Memo. 1997-276 n.3; see
also Estate of Jung v. Commissioner, 101 T.C. 412, 413 n.2
(1993).
                                 - 4 -

at the time of the filing of its petitions.    At the time the

Johnstons filed their petitions, their mailing address was in

Tumwater, Washington.

     Mr. Johnston has over 40 years of experience in the

automobile industry, and he has owned interests in six automobile

dealerships.   Mrs. Johnston died in 1995.

The 1990 Sale of Burien Nissan

     As of May 24, 1990, Mr. Johnston and Gary McLaughlin owned

all the issued and outstanding shares of Burien Nissan.    Mr.

Johnston owned 96,000 shares or 80 percent of the issued and

outstanding shares of Burien Nissan.     His basis in those shares

as of May 24, 1990, was $484,080.    Mr. McLaughlin owned 24,000

shares or 20 percent of the issued and outstanding shares of

Burien Nissan.   Mr. McLaughlin is Mr. Johnston’s son-in-law.

     On May 25, 1990, Mr. Johnston and Mr. McLaughlin entered

into a stock purchase agreement (1990 stock purchase agreement)

with Gerald Buchner, Kenneth Stanford, Herbert Whitehead, and

Patrick Watson (purchasers).   The 1990 stock purchase agreement

provided that Mr. Johnston would sell 34,800 shares of Burien

Nissan to the purchasers for $121,3275 and that Mr. McLaughlin

would sell his entire 24,000 shares in Burien Nissan for $83,673.




     5
      All amounts throughout this opinion are rounded to the
nearest dollar.
                               - 5 -

Option Closing

     The 1990 stock purchase agreement provided an option for

Burien Nissan to purchase Mr. Johnston’s remaining 61,200 shares

for $215,000.6   Under the terms of the agreement, Burien Nissan

was required to pay Mr. Johnston the full $215,000 in monthly

installments over a 30-month period beginning in June of 1990.

     The agreement also provided for an option closing.   This was

defined as the moment when Mr. Johnston transferred his remaining

61,200 shares to Burien Nissan.   The option closing date was to

occur within 3 days of Burien Nissan’s full payment for the

purchase of Mr. Johnston’s 61,200 shares.   However, Burien Nissan

breached its obligation to pay for the 61,200 shares, and the

option closing never occurred.7

1990 Noncompetion Agreement

     Pursuant to the terms of the 1990 stock purchase agreement,

Mr. Johnston was required to execute and deliver to Burien Nissan

a noncompetition agreement (1990 noncompetition agreement) at the

option closing.8   The 1990 noncompetition agreement prohibited


     6
      These shares amounted to 51 percent of the outstanding
Burien Nissan shares.
     7
      Mr. Johnston received $53,500 from Burien Nissan in 1990
and 1991. Mr. Johnston never reported receiving the remaining
$161,500 ($161,500 + $53,500 = $215,000) from Burien Nissan
pursuant to the 1990 stock purchase agreement option.
     8
      Exhibit B of the 1990 stock purchase agreement contained
the 1990 noncompetition agreement between Burien Nissan and Mr.
                                                   (continued...)
                                 - 6 -

Mr. Johnston from operating a Nissan dealership within 12 miles

of the Burien Nissan location for 3 years.    Burien Nissan was

required to pay Mr. Johnston $355,000 for signing and abiding by

the agreement.9   The option closing never occurred, the 1990

noncompetition agreement was never signed, and Burien Nissan

never paid Mr. Johnston any amounts due under the noncompetition

agreement.

Breach of the 1990 Stock Purchase Agreement

     Burien Nissan breached its obligation under the 1990 stock

purchase agreement.    In the event of a breach, Mr. Johnston’s

sole remedy under the 1990 stock purchase agreement was to force

a sale of all outstanding Burien Nissan shares to a third party.

Mr. Johnston wrote a letter dated October 14, 1993, putting the

purchasers and Burien Nissan on notice that they had breached the

1990 stock purchase agreement.

Restructured Sale

     On December 13, 1993, Burien Nissan, Mr. Johnston, Mr.

McLaughlin, and the purchasers entered into an addendum to the

1990 stock purchase agreement (1993 addendum) and a contract



     8
      (...continued)
Johnston.
     9
      The 1990 noncompetition agreement provided that in the
event that Burien Nissan was unable to make a single payment of
$355,000 to Mr. Johnston, then consideration shall be paid by
promissory note. The promissory note required monthly payments
of $11,833 until the note was paid in full.
                                 - 7 -

entitled “Supplement to Agreement” (1993 supplement).        Under the

terms of the 1993 addendum, Burien Nissan was to redeem Mr.

Johnston’s capital stock for $434,677 and pay Mr. McLaughlin

$65,323.10     As of December 31, 1993, the books and records of

Burien Nissan reflected an obligation of $434,677 to “Don

Johnston and/or Johnston Family Partnership.”

     Under the terms of paragraph 1.6 in the 1993 supplement, Mr.

Johnston was prohibited from competing with Burien Nissan from

January 15, 1994 through January 15, 1999, in a geographical area

defined as “a line south of Boeing Field running east and west,

west east and south King County lines”.       Burien Nissan was

required to pay Mr. Johnston a fee totaling $352,503 for

complying with the noncompetition agreement.       Payment of the fee

was to be made as follows:

             60 monthly payments of $5,117:       $307,020
             Lump sum payment:                      45,503
               Total payments:                     352,523

     Mr. Whitehead called Mr. Johnston to say that there had been

a $20 error in the computation of amount due under paragraph 1.6

of the 1993 supplement and that Burien Nissan would pay him $20

less in one of the checks.11


     10
      Burien Nissan negotiated a loan for $500,000 from Primus
Financial Services, Inc. (Primus). The purpose of the Primus
loan was to complete the acquisition of Burien Nissan by the
purchasers.
     11
          Par. 1.6 of the 1993 supplement required 60 monthly
                                                       (continued...)
                                 - 8 -

        On December 13, 1993, Burien Nissan gave the Johnston family

partnership a promissory note for $479,949.

        On January 12, 1994, Mr. Johnston and Burien Nissan entered

into a Stock Redemption Agreement (1994 stock redemption

agreement).     Under the terms of the 1994 stock redemption

agreement, Burien Nissan agreed to redeem Mr. Johnston’s 61,200

shares for the sum of $434,677.

        On January 12, 1994, Burien Nissan paid $434,677 to “Don

Johnston Johnston Family Partnership.”     Mr. Johnston surrendered

his remaining 61,200 shares to Burien Nissan on January 12, 1994.

The Johnstons never reported receiving $434,677, as provided in

the 1994 stock redemption agreement.

        The 1994 stock redemption agreement also provided that Mr.

Johnston agreed to:

        sign over and cancel the outstanding promissory note
        payable by Burien Nissan, Inc. in the sum of * * *
        ($479,947) * * *[12]

    The promissory note was marked “cancelled” on January 12,

1994.

    The 1994 stock redemption agreement also provided that the


        11
      (...continued)
payments of $5,117 (60 x $5,117 = $307,020) plus a lump sum
payment of $45,503 ($307,020 + $45,503 = $352,523). However, the
agreement only required a total payment of $352,503.
        12
      We note that par. 2 of the 1994 stock redemption agreement
refers to a promissory note in the amount of $479,947, while the
promissory note is in the stated amount of $479,949, a $2
difference.
                                 - 9 -

parties shall sign an “Agreement Termination Purchase and Sale

Agreement” (termination agreement).13    Mr. Johnston, Mr.

McLaughlin, and the purchasers entered into the termination

agreement on January 12, 1994.    The termination agreement

provided, in part:

     [T]he undersigned parties hereby agree that all further
     rights, liabilities and responsibilities under the May,
     1990 stock [purchase agreement] are terminated,
     including but not limited to the noncompetition
     agreement, the sale and purchase of 61,200 shares of
     Donald Johnston’s remaining stock * * *

     On February 1, 1994, Burien Nissan issued a check for

$45,483 to Mr. Johnston.14   Burien Nissan capitalized the payment

of $45,483 and amortized the cost over 15 years on its original

1994 Federal income tax return.    Mr. Johnston did not report the

$45,483 payment as income.

     Burien Nissan deducted the full amount of 11 monthly

payments of $5,117 on its 1994 Federal income tax return, 12

monthly payments of $5,117 on its 1995 Federal income tax return,



     13
      The 1994 stock redemption agreement also provided that the
parties “shall sign and enter into the Donald Johnston
noncompetition agreement, which document is incorporated herein
by reference.” From this, we conclude that the noncompetition
agreement was not effective until January 1994, when this
agreement was signed and when Mr. Johnston received consideration
for entering into the noncompetition agreement.
     14
      The difference between the $45,483 check paid on Feb. 1,
1994, and the lump-sum payment of $45,503 due Mr. Johnston
pursuant to the 1993 supplement is $20. As stated earlier, the
$20 difference is an adjustment to the payments due Mr. Johnston
due to a computational error.
                                  - 10 -

and 12 monthly payments of $5,117 on its 1996 Federal income tax

return.

Income Tax Reporting of the Burien Nissan Sale

     The Johnstons filed their original 1990 Federal income tax

return on or about April 2, 1991.15        On Schedule D of their

original 1990 income tax return, the Johnstons reported selling

Burien Nissan stock on May 25, 1990, as follows:

             Sales price:                    $121,327
             Cost/basis:                      237,199
             Net long-term capital loss:     (115,872)

     On April 15, 1994, the Johnstons filed a second Form 1040X

(second amended 1990 return) to reflect changes in the treatment

of the Burien Nissan sale.16      On the second amended 1990 return,

the Johnstons reported selling Burien Nissan stock

as follows:
                                            17
             Total sales price:               $319,826


     15
      Norm Smith prepared all income tax returns for Burien
Nissan, the Johnstons, the Johnston Family Partnership, and Don
Johnston, Inc., for all years from 1988 through 1998.
     16
      The Johnstons filed their first Form 1040X amending their
1990 income tax return to reflect changes in the treatment of
interest expense on Apr. 15, 1994.
     17
          The Johnstons computed their sales proceeds as follows:

     Proceeds reported on original return          $121,327
     Amount due the Johnston Family
       Partnership which had been paid to
       Mr. Johnston                                 145,000
     Payments received in 1990 and 1991              53,500
       Total                                        319,827
                                                         (continued...)
                                - 11 -

             Less adjusted basis:           484,080
             Net long-term capital loss:   (164,254)

     The basis amount reported by the Johnstons on their second

amended 1990 return was their basis in all of their Burien Nissan

stock.

     The Johnstons applied a portion of the 1990 long-term

capital loss against 1990 income and carried forward the

remainder, applying it against income earned in 1991, 1992, and

1993.     The Johnstons absorbed the entire remaining capital loss

carryforward on their 1993 income tax return.      They did not have

any capital loss to carry forward to 1994.

     The Johnstons filed their 1994 Federal income tax return on

or about April 15, 1995.     On Schedule D of their 1994 income tax

return, the Johnstons reported selling Burien Nissan stock as

follows:

     Total sales price:               $43,818
                                     18
     Less adjusted basis:             246,881
     Net long-term capital loss:     (203,063)

     The Johnstons had no basis in the shares of Burien Nissan

they sold in 1994.     The Johnstons already had applied their



     17
      (...continued)
     We note that a $1 difference exists between the total
proceeds amount reported here and the amount reported in the
Johnstons’ original 1990 Federal income tax return.
     18
      On their 1994 Federal income tax return, the Johnstons
computed their basis by subtracting the basis reported on their
original 1990 income tax return of $237,199 from their basis in
the 96,000 shares held on May 24, 1990 ($484,080). The Johnstons
disregarded the second amended 1990 return filed on Apr. 15,
1994.
                                      - 12 -

entire $484,080 basis in their Burien Nissan shares against the

proceeds that they reported on their second amended 1990 return.

Burien Nissan Amended Income Tax Returns

      On March 4, 1998, Burien Nissan mailed Amended U.S.

Corporate Income Tax Returns (Forms 1120X) for taxable years

1989, 1990, 1991, 1992, 1993, 1994, 1995, and 1996 to the Ogden

Service Center.      The Form 1120X for 1994 reflected a $74,468

increase in Burien Nissan’s reported loss for the year.                     The

increased loss was due to the following reported adjustments:
                   Johnston                                Reverse        Total
      Accrue       Family                                  Employment     Tax Year
      Additional   Partnership                Employment   Award Prior    Adjustment
      Ransopher    Interest      Sec. 267     Award        Amortization   Expense/
Year  Interest     Adjustment    Adjustment   Adjustment   Expenses       (income)
1989    --         $1,731           --           --           --          $1,731
1990    --            (65)          --           --           --             (65)
1991    --          9,045        $(1,438)        --           --           7,607
1992    --          4,457         (2,497)        --           --           1,960
1993    --          5,917         29,736         --           --          35,653
1994  $10,000         --          11,483       $9,783      $(3,684)       27,582
 Total 10,000      21,085         37,284        9,783       (3,684)       74,468

Sale of Aurora Mitsubishi Assets

      Mr. Johnston owned 75 percent of the outstanding stock of

Don Johnston, Inc.       Mr. McLaughlin and Richard Huntoon owned 5

percent and 20 percent, respectively, of the outstanding stock of

Don Johnston, Inc.       Don Johnston, Inc., owned and operated a car

dealership doing business as “Aurora Mitsubishi” from 1989 until

the sale of the dealership.

      On October 28, 1994, Matthew B. West, Inc., and Don

Johnston, Inc., entered into an agreement entitled “Agreement for

Sale of Assets” (aurora asset sale agreement).                Mr. Johnston

signed the aurora asset sale agreement as president of Don

Johnston, Inc.
                              - 13 -

     The aurora asset sale agreement provided, in part:

     Donald Johnston, agrees to not compete with Purchaser
     in the new car automobile business with regard to
     Mitsubishi Company franchise from a location within
     King County, Washington, for a period of five (5)
     years, * * * As consideration for the noncompetition
     and consulting agreement, Purchaser agrees to pay
     Donald W. Johnston Two Hundred Ninety Thousand Dollars
     ($290,000.00), payable on closing.

     On January 5, 1995, Matthew B. West, Inc., paid Don

Johnston, Inc., $396,181.   This amount included the $290,000

allocated to the noncompetition agreement with Mr. Johnston.     Mr.

Johnston executed a bill of sale in his individual capacity,19

indicating that “in exchange for $290,000.00, Donald Johnston

agrees not to compete with Buyer as specified in the Agreement

for Sale of Assets.”   Mr. Johnston signed a letter dated January

5, 1995, stating that the Buy Sell Agreement had been completed.




     19
      He also signed the bill of sale in his capacity as
president.
                                   - 14 -

      A “Recap of Bill of Sale” (recap) provided the following

allocation to the purchase:

      New vehicle inventory          $(6,183)
      Parts inventory                174,673
      Oil & grease inventory            1,308
      Furniture & fixtures             50,000
      Business taxes                    2,838
      Work-in-process and sublet
        inventories                       754
      Prepaid expenses                  6,250
      Expense of physical inventory       176
      Goodwill                         10,000
      Covenant noncompetition
        agreement                    290,000
      Miscellaneous obligations     (201,349)
                                       68,468
                                     1
                                       396,935
      1
       We note a $754 difference between the $396,935 bill of sale recap and
the $396,181 amount paid by Matthew B. West, Inc., on Jan. 5, 1995.

Mr. Johnston initialed the recap reflecting the allocation of

$290,000 to the “Covenant NonCompetition Agreement.”

      On January 12, 1995, Don Johnston, Inc., paid Mr. Johnston

$200,000 and paid Wilson Ford $250,000.20         Mr. Johnston signed

both Don Johnston, Inc., checks.

      Mr. Johnston did not report any income from the

noncompetition agreement with Matthew B. West, Inc., on his 1994

or 1995 Federal income tax returns.         Don Johnston, Inc., did not

report any income from the noncompetition agreement with Matthew

B. West, Inc., on its Federal income tax returns.

      Don Johnston, Inc., booked the payments for the

noncompetition agreement with Matthew B. West, Inc., as a payable



      20
      In 1990, Wilson Ford was an automobile dealership
controlled by Mr. Johnston.
                                - 15 -

to Mr. Johnston on its corporate books.      On the balance sheets

(Schedule L, with Detail Statement) of its 1994 and 1995 Federal

income tax returns (Forms 1120S), Don Johnston, Inc., reported

that it owed Mr. Johnston $290,000 on December 31, 1994, and

December 31, 1995.

                                OPINION

I.   Section 197

      The first issue is whether Burien Nissan must amortize

noncompetition agreement payments to Mr. Johnston over 15 years

pursuant to section 197.   Burien Nissan argues that the

noncompetition agreement was entered into in 1990; therefore, it

is not a section 197 intangible.    We disagree.

      An “amortizable section 197 intangible” must be amortized

ratably over a 15-year period beginning with the month in which

such intangible was acquired.    Sec. 197(a).    An “amortizable

section 197 intangible” is any section 197 intangible acquired by

a taxpayer after August 10, 1993,21 and held in connection with

the conduct of a trade or business.       Sec. 197(c)(1).   A covenant

not to compete entered into in connection with an acquisition of

an interest in a trade or business is a section 197 intangible.

See sec. 197(d)(1)(E).

      Execution of the 1990 noncompetition agreement was

contingent upon the prior occurrence of particular events.         The

1990 noncompetition agreement would be executed if Burien Nissan


      21
      See Omnibus Budget Reconciliation Act of 1993, Pub. L.
103-66, sec. 13261(g), 107 Stat. 540, for effective date.
                               - 16 -

purchased Mr. Johnston’s remaining 61,200 shares for $215,000 in

monthly installments over a 30-month period beginning in June of

1990, and Mr. Johnston transferred the shares to Burien Nissan at

the option closing.    In this case, the most important event that

fixed the parties’ obligation to enter into the covenant did not

occur.    Burien Nissan breached its obligation to make the

required payments.    Thus, under the terms of the 1990 stock

purchase agreement, Mr. Johnston was not obligated to transfer

his remaining 61,200 shares at an option closing.22

Consequently, Mr. Johnston was under no obligation to execute the

1990 noncompetition agreement.    Indeed, the 1990 stock purchase

agreement was never signed, and Burien Nissan never paid Mr.

Johnston any amounts due pursuant to the 1990 noncompetition

agreement.

     Burien Nissan did not acquire a noncompetition agreement

from Mr. Johnston until after the agreement was signed on

December 13, 1993, which prohibited Mr. Johnston from operating

an automobile dealership in a defined area starting on January

15, 1994.

     Petitioners argue that the agreements executed in December

1993 and January 1994 merely amended and supplemented the 1990

stock purchase agreement.    We disagree.   The termination

agreement executed on January 12, 1994, explicitly stated that

the parties agreed that the 1990 stock purchase agreement was


     22
      The option closing date was to occur within 3 days of
Burien Nissan’s full purchase of Mr. Johnston’s 61,200 shares.
                                - 17 -

terminated, including but not limited to the noncompetition

agreement and the purchase of Mr. Johnston’s remaining 61,200

shares of stock.   Moreover, the terms contained in the

noncompetition agreement ratified on December 13, 1993, were

different from the terms contained in the 1990 covenant.    Each

agreement defined different geographic zones, different time

periods, and different payment amounts over different payment

schedules.   Thus, the later agreement did not add terms that were

lacking in the previous agreement; it was a completely different

agreement.

      We find that the noncompetition agreement was entered into

after August 10, 1993.    Therefore, we hold that Burien Nissan

must amortize the payments made to Mr. Johnston for the

noncompetition agreement over 15 years pursuant to section 197.

II.   Operating Loss Carryforward

      Burien Nissan argues that its operating loss carryforward

for 1994 should be adjusted because it is entitled to additional

interest deductions beyond those claimed on its original Federal

income tax returns.23    Burien Nissan offered Federal income tax


      23
      Burien Nissan also asserted that it was entitled to deduct
$9,783 in connection with a $20,000 cash payment to Mr. Buchner,
as claimed on its 1994 amended Federal income tax return. Burien
Nissan’s original returns for 1994 through 1996 reflected an
amortizable payment of $9,783 in connection with the settlement
of the law suit with Mr. Buchner. Respondent conceded that the
$9,783 payment was deductible in 1994 and that the amortization
payment should be reversed. In connection with the settlement
with Mr. Buchner, Burien Nissan amortized $598 in 1994, $652 in
1995, and $652 in 1996. Burien Nissan incorrectly asserted that
it was entitled to an amortization reversal of $3,684 in 1994.
                                                   (continued...)
                               - 18 -

returns and amended Federal income tax returns as “prima facie

evidence in support [of] its claimed deductions.”

     Deductions are a matter of legislative grace, and the burden

of showing the right to deductions is on the taxpayer.   See Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

The fact that a taxpayer reports a deduction on his income tax

return    is not sufficient to substantiate the deduction claimed

on it.    See Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979);

Roberts v. Commissioner, 62 T.C. 834, 837 (1974).    A tax return

is merely a statement of the taxpayer’s claim; it is not presumed

to be correct.    See id.

     The effect of the proffered income tax returns here is a

conclusion, given without any circumstances to gauge its

accuracy.   No evidence was introduced to substantiate the

accuracy of the deductions taken on the amended returns.     A

taxpayer is required to maintain records to substantiate

deductions claimed on the tax return.   See sec. 6001.   Basically,

Burien Nissan is relying on its own uncorroborated tax returns to

substantiate claimed interest deductions in excess of interest

deductions previously claimed.   Burien Nissan has failed to carry

its burden of proving that it is entitled to the additional

interest deductions claimed in its 1994 Federal amended income

tax return.



     23
      (...continued)
The correct amount of the employment award reversal is $598 in
1994, $652 in 1995, and $652 in 1996.
                               - 19 -

       Burien Nissan also argued that it was entitled to a net loss

carryforward into 1995 based largely on the same reasons asserted

for additional deductions for 1994.     Burien Nissan has failed to

meet its burden for additional deductions in 1995.

III.    Lump-Sum Payment

       The Johnstons argue that Burien Nissan’s $45,483 payment to

Mr. Johnston on February 1, 1994, was made to him in his capacity

as a partner in the Johnston Family Partnership.    According to

the Johnstons, the check was an interest payment on a note due to

the Johnston Family Partnership; not a payment under the 1993

noncompetition agreement.    Therefore, according to the Johnstons,

the payment should not be included in Mr. Johnston’s taxable

income.    We disagree.

       Gross income includes compensation for services.   See sec.

61(a)(1).    We have found that “Amounts paid by a purchaser to a

seller for a covenant not to compete are ordinary income to the

seller since they are tantamount to payments for services.”

Schmitz v. Commissioner, 51 T.C. 306, 313 (1968), affd. sub. nom.

Throndson v. Commissioner, 457 F.2d 1022 (9th Cir. 1972).

       The promissory note from Burien Nissan to the Johnston

Family Partnership was canceled on January 12, 1994, and the

$45,483 check payable to Mr. Johnston was written on February 1,

1994.    Burien Nissan did not deduct the $45,483 payment as

interest on its original 1994 Federal income return; instead, it
                               - 20 -

capitalized the payment and amortized the cost over 15 years.24

       The 1993 agreement, executed on December 13, 1993,

prohibiting Mr. Johnston from competing with Burien Nissan,

required 60 monthly payments of $5,117 and a lump-sum payment of

$45,503.    However, due to a computational error, Mr. Whitehead

told Mr. Johnston that Burien Nissan would reduce one payment by

$20.    Burien Nissan paid the full $5,117 in all of the 60 monthly

payments.    Thus, we conclude that the $45,483 payment to Mr.

Johnston on February 1, 1994, was in satisfaction of the lump-sum

payment due under the 1993 supplement agreement, executed on

December 13, 1993, prohibiting Mr. Johnston from competing with

Burien Nissan.

       We find that the $45,483 lump-sum payment to Mr. Johnston

was paid pursuant to the noncompetition agreement.    We hold that

Mr. Johnston must include the payment in his 1994 taxable income.




       24
      Burien Nissan asserted that it made an error on its 1994
Federal income tax return but that it filed an amended tax return
for additional interest. As discussed supra, pp. 18-19, Burien
Nissan has not established that it was entitled to additional
interest deductions in 1994.
                               - 21 -

IV.   Noncompetition Agreement:   Matthew B. West, Inc.

      Mr. Johnston argues that he should not have to recognize

$290,000 allocated to the covenant not to compete with Matthew B.

West, Inc.   The Johnstons do not dispute that the aurora asset

sale agreement included Mr. Johnston’s covenant not to compete or

that the $396,936 payment from Matthew B. West on January 5,

1995, included the $290,000 allocated to Mr. Johnston’s covenant

not to compete.25   The Johnstons assert, however, that creditors

were paid with the proceeds of the sale and that Mr. Johnston was

a bona fide creditor for the sum of $200,000 that he loaned to

Don Johnston, Inc.26   In short, the Johnstons are attempting to:

(1) Assign $290,000 of the sales proceeds to Don Johnston, Inc.,

and (2) then reallocate or recast the payment to Mr. Johnston

individually as a return of capital rather than compensation.

      25
      Although the Johnstons stipulated that Johnston, Inc.,
received $396,181 on Jan. 5, 1995, from Matthew B. West, Inc.,
they argue on brief that it received $396,936 from the sale. We
cannot account for the $755 difference, which for our purposes,
is irrelevant. We note, however, that the same $755 difference
($754 after accounting for rounding) exists between the bill of
resale recap and the amount paid by Matthew B. West, Inc., on
Jan. 5, 1995. See supra note 20.
      26
      The Johnstons assert that Don Johnston, Inc., borrowed
$250,000 from Wilson Motor Co. on Nov. 9, 1992. Mr. Johnston
testified that he had “funds in at Wilson Ford” and that it was
his personal funds with Wilson Ford that were used to make the
loan from Wilson Ford to Don Johnston, Inc. On brief, the
Johnstons indicate that Wilson Motor Co. was wholly owned by
Donald Johnston. We note, however, that the exhibits referenced
by the Johnstons on brief do not support Mr. Johnston’s assertion
that he had personal money in Wilson Motor Co. and that, in turn,
his personal money was used to lend Don Johnston, Inc., $250,000.
                                - 22 -

     Regardless of who received the income attributable to the

covenant not to compete, the true earner of that income is liable

for the tax on it and cannot escape that tax by assigning the

income to another taxpayer.    See Lucas v. Earl, 281 U.S. 111

(1930).   In the instant case, Mr. Johnston in his individual

capacity, not Don Johnston, Inc., agreed to refrain from

competing in the new car automobile business.    Consequently, Mr.

Johnston in his individual capacity must recognize the income

attributable to that promise.    See Chiappetti v. Commissioner,

T.C. Memo. 1996-183.

     The parties stipulated that the $396,181 payment by Matthew

B. West, Inc., included $290,000 allocated to the noncompetition

agreement with Mr. Johnston.    The presidents of both Don

Johnston, Inc., and Matthew B. West, Inc., signed a letter on the

same day that the payment was made indicating that the purchase

had been completed satisfactorily between both parties.      Mr.

Johnston initialed a “Recap of Bill of Sale” reflecting the

allocation of $290,000 to the “Covenant NonCompetition

Agreement”.   Accordingly, we find that Mr. Johnston may not

challenge the tax consequences of the agreement, which he

voluntarily and knowingly made.    We hold that Mr. Johnston must

include the $290,000 in his 1995 income.
                                - 23 -

V.   Accuracy-Related Penalty

      Respondent determined that both Burien Nissan and the

Johnstons were liable for an accuracy-related penalty under

section 6662(a).   Section 6662(a) imposes a penalty in an amount

equal to 20 percent of the portion of the underpayment of tax

attributable to a taxpayer's negligence or disregard of rules or

regulations, or any substantial underpayment of income tax.     See

sec. 6662(a), (b)(1) and (2).

      Section 6662(c) provides that the term "negligence" includes

any failure to make a reasonable attempt to comply with the

provisions of this title, and the term "disregard" includes any

careless, reckless, or intentional disregard of rules or

regulations.   The Commissioner's determination that a taxpayer

was negligent is presumptively correct, and the burden is on the

taxpayer to show lack of negligence.     See Hall v. Commissioner,

729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo. 1982-337.     We

sustain respondent’s determination of the accuracy-related

penalty under section 6662(a) and (b)(1) for the following

reasons:   Burien Nissan and the Johnstons provided no direct

evidence regarding the negligence penalty to rebut the

presumption of correctness, and the evidence that is in the

record tends to indicate a disregard of the rules and

regulations.   See Rethorst v. Commissioner, T.C. Memo. 1972-222,

affd. 509 F.2d 623 (9th Cir. 1974).
                                - 24 -

     No accuracy-related penalty shall be imposed with respect to

any portion of an underpayment if it is shown that there was

reasonable cause for such portion and that the taxpayer acted in

good faith with respect to such portion.    See sec. 6664(c)(1).

Burien Nissan and the Johnstons claim that a reasonable person

would have taken a similar position in their income tax returns.

We have already rejected Burien Nissan’s explanations for

deducting monthly payments to Mr. Johnston for complying with the

noncompetition agreement, and Burien Nissan has conceded that it

cannot deduct the cost of redeeming stock it purchased from Mr.

Johnston.

     With regard to the Johnstons, no legal authority was

provided to justify the omission of $45,483 in income in 1994 and

$290,000 from income in 1995.    We rejected the Johnstons’

arguments as to why they failed to report these items, and the

Johnstons conceded that they were not entitled to a capital loss

for their 1994 sale of Burien Nissan stock.

     Burien Nissan and the Johnstons also argue that the

accuracy-related penalties should be waived because there was a

reasonable basis for their income tax positions since they relied

on the advice of a tax adviser.    Reliance on professional advice

does not necessarily demonstrate reasonable cause and good faith.

See sec. 1.6664-4(b)(1), Income Tax Regs.    In order for a

taxpayer’s reliance on advice to be reasonable so as to negate a
                              - 25 -

section 6662(a) accuracy-related penalty, this Court requires

that the taxpayer prove by a preponderance of the evidence that

the adviser was a competent professional who had sufficient

expertise to justify reliance; the taxpayer gave the adviser the

necessary and accurate information; and the taxpayer actually

relied in good faith on the adviser’s judgement.   See Neonatology

Associates v. Commissioner, 115 T.C. 43 (2000).

     We are not convinced that petitioners reasonably relied on

their return preparer in reporting the items in issue.   The

record does not contain evidence of what specific information

Burien Nissan and the Johnstons gave their return preparer.

Indeed, we have found that petitioners mischaracterized the key

transactions in this proceeding, and there is every reason to

believe that they made the same representations to their return

preparer.

     Accordingly, we find that petitioners have failed to prove

that any portion of their underpayments was due to reasonable

cause or that substantial authority existed for Burien Nissan’s

and the Johnstons’ various tax positions.   We hold that Burien

Nissan and the Johnstons are liable for the accuracy-related

penalties under section 6662(a) and (b)(1) for the years in

issue.   Respondent also determined that Burien Nissan and the

Johnstons are liable for the accuracy-related penalty for

substantially underpaying their income tax liability for the
                              - 26 -

years in issue under section 6662(a) and (b)(2).   To the extent

that a computation under Rule 155 indicates that a substantial

underpayment of tax within the meaning of section 6662 exists,

then we sustain respondent’s determination.   Of course, the 20-

percent penalty under section 6662 applies only once for each

taxable year.   See sec. 1.6662-2(c), Income Tax Regs.

     To reflect the foregoing and the parties’ concessions,



                                    Decisions will be entered

                               pursuant to Rule 155 in docket Nos.

                               9519-98, 12341-98, and 16916-99.



                                    Decision will be entered for

                               respondent in docket No. 11536-99.
