                         T.C. Memo. 2001-177



                       UNITED STATES TAX COURT



                   THOMAS N. CARMENA, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 3412-99.                         Filed July 19, 2001.


     Barbara Sue Geil, for petitioner.

     Timothy S. Sinnott, for respondent.



                          MEMORANDUM OPINION


     COUVILLION, Special Trial Judge: Respondent determined that

petitioner was liable for the following additions to tax for the

year 1982:    $523 under section 6653(a)(1),1 50 percent of the




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


interest due on a deficiency of $10,459 under section 6653(a)(2),

and $2,615 under section 6661.

     The issues for decision are: (1) Whether petitioner is

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

for negligence, and (2) whether petitioner is liable for the

addition to tax under section 6661 for a substantial

understatement of tax.   The issues in this case relate to the

participation of petitioner as a limited partner in a partnership

known as Utah Jojoba I Research (Utah I or the partnership).2

     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioner's

legal residence was Las Vegas, Nevada.

     Petitioner is a medical doctor whose particular area of

specialty is internal medicine.    Petitioner has practiced

internal medicine in the Las Vegas, Nevada, area since 1962.

Petitioner became acquainted with Dr. William K. Stephan (Dr.

Stephan), a retired anesthesiologist who had taken steps to

become a licensed investment adviser.    Dr. Stephan approached

petitioner about investing in Utah I, which was being promoted as


     2
          The stipulation of facts in this case reflects that the
actual participant in Utah I was the Neil Carmena Family Trust, a
grantor trust of which petitioner was the grantor and whose
income and deductions were reported as petitioner's on his
Federal income tax returns. For simplicity, the Court refers to
petitioner as the participant in Utah I.
                               - 3 -


an agricultural research and development partnership.   Dr.

Stephan had learned of the Utah I partnership from one of its

promoters, Gary Sheets (Mr. Sheets), who was affiliated with

Coordinated Financial Services (CFS) in Salt Lake City, Utah.

     Dr. Stephan provided petitioner with a fairly voluminous

private placement memorandum3 (the offering), which described the

proposed investment in and the activities to be conducted through

Utah I.   Petitioner claims that he read the offering; however,

petitioner does not specifically recall reading certain portions

of the offering regarding the risks associated with investment.4

Petitioner alleges that he passed along the offering to his

certified public accountant, Joe Salgo (Mr. Salgo), who routinely

prepared petitioner's Federal income tax returns.   Petitioner

further alleges that Mr. Salgo gave a favorable response to

petitioner's potential investment in Utah I, although petitioner

cannot recall any specific conversation he had with Mr. Salgo

regarding Utah I.




     3
          The private placement memorandum consisted of some 47
pages, plus 8 exhibits, and a table of contents.
     4
          When questioned at trial about reading the offering
petitioner responded, "I'm sure I read it". However, when asked
whether he recalled reading certain portions of the offering
dealing with the risk factors and highly speculative nature of
the investment, petitioner could not recall reading those
portions. The Court surmises from petitioner's testimony that,
if he did read the offering at all, he certainly did not
accomplish a thorough review thereof.
                                - 4 -


     Petitioner did not consult an attorney or any independent

expert in the area of agriculture or jojoba plants regarding

whether jojoba oil or any other jojoba derivative had a

potentially lucrative commercial market.    Petitioner,

nevertheless, invested in Utah I.

     On his 1982 Federal income tax return, petitioner reported

wages of $168,000 from his medical practice, interest income of

$33,124, taxable dividend income of $6,934, and capital gains of

$6,659.    Petitioner reported total net losses of $116,187 from

various partnerships and a parcel of rental real estate, of which

$20,919 represented the loss from Utah I.    Thus, petitioner

reported total income of $103,830 and a total tax liability of

$26,438.

     Utah I was audited by the Internal Revenue Service and a

Notice of Final Partnership Administrative Adjustment was issued

to the partnership.    The partnership initiated a TEFRA proceeding

in this Court and a decision was entered in Utah Jojoba I

Research v. Commissioner, T.C. Memo. 1998-6.    In the decided

case, this Court held that the partnership did not directly or

indirectly engage in research or experimentation and that the

partnership lacked a realistic prospect of entering into a trade

or business.    In upholding respondent's disallowance of research

and experimental expenditures, the Court found that the

agreements between the partnership and the proposed research and
                                 - 5 -


development contractor, U.S. Agri Research & Development Corp.

(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.     The Court stated

that the activities of the partnership were "another example of

efforts by promoters and investors in the early 1980's 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.

     As a result of Utah I's TEFRA proceeding, petitioner was

assessed a tax deficiency of $10,459 for 1982, plus interest.

Subsequently, respondent issued a notice of deficiency to

petitioner for 1982 for affected items, determining that

petitioner was liable for the additions to tax for negligence

under section 6653(a)(1) and (2), and a substantial

understatement of tax under section 6661 for 1982.     These

additions to tax are the subject of the instant case.

     The first issue is whether petitioner is liable for the

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

for 1982.     Section 6653(a)(1) imposes an addition to tax in an

amount equal to 5 percent of an underpayment of tax if any part

of the underpayment is due to negligence or intentional disregard
                               - 6 -


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.    Respondent’s

determinations in a notice of deficiency are presumed correct,

and petitioner must establish otherwise.    See Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933); cf. sec. 7491(c).5

Respondent determined that petitioner's underpayment was due to

negligence.   Petitioner, therefore, has the burden of proving he

was not negligent in deducting his share of the partnership’s

losses.   See Estate of Mason v. Commissioner, 64 T.C. 651, 663

(1975), affd. 566 F.2d 2 (6th Cir. 1977); Bixby v. Commissioner,

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

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

     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;



     5
           The Internal Revenue Service Restructuring & Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added
sec. 7491(c), which places the burden of production on the
Secretary with respect to a taxpayer’s liability for penalties
and additions to tax in court proceedings arising in connection
with examinations commencing after July 22, 1998. Petitioner
does not contend, nor is there evidence, that his examination
commenced after July 22, 1998, or that sec. 7491 is applicable in
this case.
                                 - 7 -


Neely v. Commissioner, 85 T.C. 934, 947 (1985); Glassley v.

Commissioner, T.C. Memo. 1996-206.       The focus of inquiry is

on the reasonableness of the taxpayer’s actions in light of his

experience and the nature of the investment.      See Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973); Greene v.

Commissioner, T.C. Memo. 1998-101, affd. without published

opinion 187 F.3d 629 (4th Cir. 1999); Glassley v. Commissioner,

supra; Turner v. Commissioner, T.C. Memo. 1995-363.       Whether a

taxpayer is negligent in claiming a tax deduction "depends upon

both the legitimacy of the underlying investment, and due care in

the claiming of the deduction."     Sacks v. Commissioner, 82 F.3d.

918, 920 (9th Cir. 1996), affg. T.C. Memo. 1994-217; see Greene

v. Commissioner, supra.

     A taxpayer may avoid liability for negligence penalties

under some circumstances if the taxpayer reasonably relied on

competent professional advice.    See Freytag v. Commissioner, 89

T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd.

on other issue 501 U.S. 868 (1991).      Such reliance, however, is

"not an absolute defense to negligence, but rather a factor to be

considered."   Id.    For reliance on professional advice to relieve

a taxpayer from the negligence addition to tax, the taxpayer

must show that the professional adviser had the expertise and

knowledge of the pertinent facts to provide informed advice on

the subject matter.    See id.
                                 - 8 -


     The facts pertinent to the instant case, relating to the

structure, formation, and operation of Utah I are as discussed in

Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6.       Utah

I was organized in December 1982 as a limited partnership for the

described purpose of conducting research and development (R & D)

involving the jojoba plant.   The offering, prepared by CFS and

dated November 10, 1982, provided for a maximum capitalization of

$2,968,000 consisting of 350 limited partnership units at $8,480

per unit.   Each unit required a cash downpayment of $2,500 and a

noninterest-bearing promissory note in the principal amount of

$5,980 payable in 10 annual installments with an acceleration

provision in the event of default.       The offering was limited to

investors with a net worth (exclusive of home, furnishings, and

automobiles) of $150,000, or investors whose net worth was

$50,000 (exclusive of home, furnishings, and automobiles), and

who anticipated that, for the taxable year of the investment,

they would have gross income equal to $65,000, or taxable income,

a portion of which, but for tax-advantaged investments, would be

subject to a Federal income tax rate of 50 percent.      Each limited

partner also was required to execute a limited guaranty agreement

in which he or she guaranteed a proportionate share of

partnership debt to U.S. Agri.

     Petitioner's investment was for four limited partnership

units, which required an initial down payment of $10,000 and
                               - 9 -


execution of a promissory note for $23,920.   Petitioner was to

make payments of $2,600 each year from 1983 through 1985, $2,100

per year from 1986 through 1991, and a final payment of $3,520 in

1992 on the promissory note.   The record reflects that petitioner

actually paid $10,000 in 1982, $2,600 per year from 1983 through

1985, $2,100 per year from 1986 through 1988, and $8,276 in 1989,

totaling $32,376.6

     The offering identified William Kellen (Mr. Kellen) as the

general partner and U.S. Agri as the contractor for the R & D

program under an R & D agreement.   Additionally, a license

agreement between Utah I and U.S. Agri granted U.S. Agri the

exclusive right to utilize technology developed for Utah I for 40

years in exchange for a royalty of 85 percent of all products

produced.   The offering included copies of both the R & D

agreement and the license agreement.   The R & D agreement was

executed concurrently with the license agreement.

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

partnership's execution of the license agreement.   Since the two

were executed concurrently, amounts paid to U.S. Agri by the

partnership were not paid pursuant to a valid R & D agreement but

were passive investments in a farming venture under which the


     6
          Apparently, in 1989, petitioner executed a ratification
agreement that allowed him to pay off the balance of the
promissory note; i.e., $2,100 per year for 1990 and 1991 and
$3,520 for 1992, at a 20-percent discount.
                              - 10 -


investors' return, if any, was to be in the form of a royalty

pursuant to the licensing agreement.   Thus, as this Court held in

Utah Jojoba I Research v. Commissioner, supra, the partnership

was never engaged in research or experimentation, either directly

or indirectly.   Moreover, this Court found in Utah Jojoba I

Research v. Commissioner, supra, that U.S. Agri's attempts to

farm jojoba commercially did not constitute research and

development, thereby concluding that the R & D agreement was

designed and entered into solely to decrease the cost of

participation in the jojoba farming venture for the limited

partners through large up-front deductions for expenditures that

were actually capital contributions.   The Court concluded further

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.

     Petitioner contends that his investment in Utah I was

motivated solely by the potential to earn a profit.   Petitioner

contends further that his reliance on the advice of his certified

public accountant, Mr. Salgo, and his investment adviser, Dr.

Stephan, should absolve him of liability for the negligence

penalty in this case.   Petitioner also argues that, taking into

account his experience and the nature of the investment in Utah

I, he exercised the due care that a reasonable and ordinarily
                               - 11 -


prudent person would have exercised under like circumstances.

For the reasons set forth below, the Court disagrees with

petitioner's contentions.

     First, the principal flaw in the structure of Utah I was

evident from the face of the very documents included in the

offering.   A reading of the R & D agreement and licensing

agreement, both of which were included as part of the offering,

plainly shows that the licensing agreement canceled or rendered

ineffective the R & D agreement because of the concurrent

execution of the two documents.   Thus, the partnership was never

engaged, either directly or indirectly, in the conduct of any

research or experimentation.   Rather, the partnership was merely

a passive investor seeking royalty returns pursuant to the

licensing agreement.   Any experienced attorney capable of reading

and understanding the subject documents should have understood

the legal ramifications of the licensing agreement canceling out

the R & D agreement.   However, petitioner never consulted an

attorney in connection with this investment, nor did he carefully

read the offering himself.7



     7
          Petitioner testified that he retained the services of
an attorney named Bob Clark (Mr. Clark) to prepare wills and
various contracts, incorporate his medical practice, and form the
Neal Carmena Family Trust. Petitioner, however, failed to seek
Mr. Clark's advice with respect to a potential investment in Utah
I.
                             - 12 -


     Secondly, in making his investment in Utah I, petitioner

purportedly relied on the advice of his certified public

accountant, Mr. Salgo, and Dr. Stephan, who was selling interests

in the partnership and receiving commissions for each sale.      Mr.

Salgo testified that Dr. Stephan was the first person to present

him with a copy of the offering and that was for the purpose of

Mr. Salgo's own potential investment in Utah I.   Mr. Salgo could

not specifically remember whether petitioner actually forwarded a

copy of the offering to him for review, nor could Mr. Salgo

remember actually discussing the partnership with petitioner or

rendering any sort of advice with respect to petitioner's

potential investment therein.8   Mr. Salgo did not provide a

written opinion to petitioner in connection with Utah I, nor did

Mr. Salgo conduct any independent research or consult any type of

agricultural or jojoba plant expert about the investment.      The

record in this case indicates that, if indeed Mr. Salgo rendered

any advice at all to petitioner about Utah I, Mr. Salgo relied

solely on the representations made in the offering in giving such

advice.

     Moreover, the record lacks evidence to show whether Mr.

Salgo had any previous experience with the deductibility of


     8
          Notably, petitioner was also unable to recall whether
he delivered a copy of the offering to Mr. Salgo, or whether Mr.
Salgo specifically rendered any advice to him with respect to his
potential investment in Utah I.
                              - 13 -


research and development expenses at the time he advised

petitioner about Utah I.   These types of expenses would have

allowed petitioner certain tax benefits above and beyond what

would have been provided by an ordinary business deduction.

There is no evidence in the record to suggest that Mr. Salgo

conducted any independent investigation to determine whether the

specific research and development proposed to be conducted by or

on behalf of the partnership would have qualified for deductions

under section 174.   The Court also finds it notable that Mr.

Salgo had no educational background or experience in the area of

agricultural pursuits in general, or jojoba plants in particular.

     There is no evidence in the record to suggest that, even if

Mr. Salgo did advise petitioner to invest in Utah I, petitioner

ever questioned Mr. Salgo about the facts and/or legal analysis

upon which he based his recommendations.    Further, the record is

devoid of any evidence that petitioner asked Mr. Salgo to explain

the Utah I investment to him, which would seem particularly

important given the fact that petitioner obviously did not

exhaustively review the offering himself.

     The facts in this case are similar to those in Glassley v.

Commissioner, T.C. Memo. 1996-206, in which this Court found that

the taxpayers:
                              - 14 -


     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" * * *.


Similarly, petitioner in this case acted on an enthusiasm for the

potential uses of jojoba and acted with knowledge of the tax

benefits of making the investment.     This record fails to reflect

with any certainty that Mr. Salgo actually rendered any advice to

petitioner in connection with Utah I.    However, the record

suggests that what little advice Mr. Salgo may have given to

petitioner was highly generalized and based primarily on a mere

cursory review of the offering rather than on independent

knowledge, research, or analysis.    Petitioner failed to show that

Mr. Salgo had the expertise and knowledge of the pertinent facts

to provide informed advice on the investment in Utah I.    See

Freytag v. Commissioner, 89 T.C. at 888.     Accordingly, petitioner

failed to establish that his reliance on the advice of Mr. Salgo

was reasonable or in good faith.    See Glassley v. Commissioner,

supra.

     The Court next examines petitioner's reliance on the advice

of Dr. Stephan.   Dr. Stephan had no background or expertise in

the areas of agriculture or jojoba plants.    More importantly,

because Dr. Stephan earned a commission on each sale of Utah I

interests, and thus had a personal profit motive in selling this
                              - 15 -


investment to clients, he had a conflict of interest in advising

petitioner to purchase the limited partnership interests.9    The

advice petitioner allegedly received from Dr. Stephan fails as a

defense to negligence due to his lack of competence to give such

advice and the clear presence of a conflict of interest.     See

Rybak v. Commissioner, 91 T.C. 524, 565 (1988).   Petitioner's

reliance on the advice of Dr. Stephan was unreasonable under the

circumstances.

     Outside of Mr. Salgo and Dr. Stephan, petitioner made no

other inquiry into the viability of this partnership's proposed

research and operations.   The Court finds it notable that the

offering listed at least 15 "potential uses of jojoba nuts", yet

petitioner failed to explore the plausibility of any of those

potential uses.   Some of the potential uses listed in the

offering were various lubricants for high-speed or high-

temperature machinery, cosmetics, shampoos and soaps, sunscreens,

pharmaceuticals, cooking oils, disinfectants, polishing waxes,

corrosion inhibitors, candles, animal feed supplements, and

fertilizer.   Being a physician, it seems logical that petitioner

would have had some access to information about the use of jojoba

in the pharmaceutical arena; however, petitioner failed to pursue



     9
          Petitioner acknowledged in his testimony that he
believed Dr. Stephan was receiving commissions for finding
investors to purchase the limited partnership interests.
                              - 16 -

this possibility.   Petitioner's failure to investigate

independently any of the enumerated potential uses of jojoba

plants was unreasonable under the circumstances.

     Petitioner had no legal or agricultural background or

training; yet, he consulted no source of such information prior

to investing more than $30,000 in Utah I.    At a minimum,

petitioner could have contacted an attorney to review the

offering, provide legal advice surrounding the partnership, and

explain the legal ramifications of the licensing agreement

canceling out the R & D agreement.     A reasonable and ordinarily

prudent investor under the circumstances would have consulted an

attorney.   Also, petitioner could have taken the simple step of

contacting the agricultural department of a nearby college or

university or going to another reliable source to inquire about

the research and development of jojoba plants and their potential

commercial usage, if any.   Again, a reasonable and ordinarily

prudent investor would have at least attempted to make this type

of inquiry under the circumstances.10

     Petitioner was not a naive investor and should have

recognized the need for independent professional advice.     See



     10
           In Utah Jojoba I Research v. Commissioner, T.C. Memo.
1998-6, the Court noted that there were experimental jojoba
plantations located at the University of California at Riverside,
California, of which the general partner of Utah I, Mr. Kellen,
was aware.
                              - 17 -

LaVerne v. Commissioner, 94 T.C. 637, 652 (1990), affd. without

published opinion 956 F.2d 274 (9th Cir. 1992), affd. in part

without published opinion sub nom. Cowles v. Commissioner, 949

F.2d 401 (10th Cir. 1991); Glassley v. Commissioner, T.C. Memo.

1996-206.   In fact, the offering cautioned that prospective

investors should not "construe this memorandum or any prior or

subsequent communications as constituting legal or tax advice"

and urged investors to "consult their own counsel as to all

matters concerning this investment."   The offering was replete

with statements, including the cover page statement that "THIS

OFFERING INVOLVES A HIGH DEGREE OF RISK", warning of tax risks

involved with the investment and the highly speculative nature of

the commercial viability of the jojoba plant.   The offering

contained inconsistent information, such as the statement on page

9 that the general partner "has limited experience in dealing in

Jojoba beans and is mainly relying on the R & D Contractor to

develop technology and plant cultivars over the term of the R & D

Agreement", contrasted with the statement on page 34 that the

general partner "pioneered the development of the Blythe Airport

as an alfalfa ranch and jojoba farming in Desert Center" and was

"familiar with the development of jojoba, citrus, vineyards,

alfalfa and asparagus."   Such inconsistencies should have raised

a healthy suspicion in the mind of a reasonable and ordinarily

prudent investor, even one lacking any legal, tax, or
                              - 18 -

agricultural background.   However, petitioner did not diligently

read the offering, nor did he make an effort to have the

investment explained to him prior to committing to invest some

$33,000 in Utah I.

     The Court is mindful that the Court of Appeals for the Ninth

Circuit (Ninth Circuit), the court to which an appeal in this

case would lie, has held that experience and involvement of the

general partner and the lack of warning signs could reasonably

lead investors to believe they were entitled to deductions in

light of the undeveloped state of the law regarding section 174.

See Kantor v. Commissioner, 998 F.2d 1514 (9th Cir. 1993), affg.

in part and revg. in part T.C. Memo. 1990-380.   In its holding,

the Ninth Circuit explained that the Supreme Court's decision in

Snow v. Commissioner, 416 U.S. 500 (1974), left unclear the

extent to which research must be "in connection with" a trade or

business for purposes of qualifying for an immediate deduction

under section 174.   However, in the instant case, the partnership

was neither engaged in a trade or business nor conducting

research and development, either directly or indirectly.

Additionally, the experience in jojoba research and development

of the general partner of Utah I, Mr. Kellen, was questionable,

at best, as evidenced by conflicting statements in the offering.

Also, it is apparent from the evidence presented in this case

that Mr. Kellen had minimal involvement in the partnership.
                              - 19 -

Petitioner is precluded from relying upon a "lack of warning" as

a defense to negligence, when there is no evidence that a

reasonable investigation was ever made, and the offering

materials contained many warnings of the tax risks associated

with the investment.

     On this record, the Court finds that petitioner did not

exercise the due care of a reasonable and ordinarily prudent

person under the circumstances.   Consequently, the Court holds

that petitioner is liable for the negligence additions to tax,

under section 6653(a)(1) and (2) for 1982.   Respondent is

sustained on this issue.

     The second issue is whether petitioner is liable for the

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

understatement of tax for 1982.   Section 6661(a), 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 for the taxable year.     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.   See 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
                                - 20 -

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).

If an understatement is attributable to a tax shelter item,

however, different standards apply.      First, in addition to

showing the existence of substantial authority, a taxpayer must

show that he reasonably believed that the tax treatment claimed

was more likely than not proper.    See sec. 6661(b)(2)(C)(i)(II).

Second, disclosure, whether or not adequate, will not reduce the

amount of the understatement.    See sec. 6661(b)(2)(C)(i)(I).

     Substantial authority exists when "the weight of authorities

supporting the treatment is substantial in relation to the weight

of the authorities supporting contrary positions."      See sec.

1.6661-3(b)(1), Income Tax Regs.    Petitioner has failed to

present evidence to show that substantial authority existed for

the tax treatment of the Utah I loss on his 1982 return.

     Adequate disclosure of the tax treatment of a particular

item may be made either in a statement attached to the return or

on the return itself, if it is in accordance with the

requirements of Rev. Proc. 83-21, 1983-1 C.B. 680.      See sec.

1.6661-4(b) and (c), Income Tax Regs.      The record indicates that

petitioner did not attach a statement to his 1982 return

disclosing the specific facts surrounding his Utah I loss

deduction.   Rev. Proc. 83-21, supra, applicable to tax returns
                             - 21 -

filed in 1983, lists information that would be deemed sufficient

disclosure if listed on the return itself, without the necessity

of attaching an additional statement to the return.    However,

none of the specific tax items referenced in Rev. Proc. 83-21,

supra, are relevant to the instant case.   If disclosure is not

made in compliance with the regulations or the revenue procedure,

adequate disclosure on the return may still be satisfied if

sufficient information is provided to enable respondent to

identify the potential controversy involved.    See Schirmer v.

Commissioner, 89 T.C. 277, 285-286 (1987).     A mere claiming of

the loss, however, without further explanation, is not sufficient

to alert respondent to the controversial section 174 deduction of

which the partnership loss consisted.   Petitioner has failed to

present evidence to show that the relevant facts pertaining to

his Utah I loss deduction were adequately disclosed on his 1982

return.11

     Finally, section 6661(c) provides the Secretary with the

discretion to waive the section 6661(a) addition to tax if the

taxpayer shows he acted with reasonable cause and in good faith.

This Court reviews the Secretary’s failure to waive the addition

to tax for abuse of discretion.   See Martin Ice Cream Co. v.



     11
          As noted earlier, even if an adequate disclosure had
been made on the return, such disclosure would not reduce the
amount of the understatement attributable to a tax shelter item.
                                - 22 -

Commissioner, 110 T.C. 189, 235 (1998).    Petitioner argues that

he acted in good faith and reasonably relied upon the advice of

Mr. Salgo and Dr. Stephan in claiming the relevant loss.

However, nothing in the record indicates that petitioner

requested a waiver for good faith and reasonable cause under

section 6661(c).   In the absence of such a request, this Court

cannot review respondent’s determination for an abuse of

discretion.   See id.    In any event, petitioner has not shown that

he met the tests of reasonable cause and good faith.

     Petitioner has failed to prove that he had substantial

authority for his treatment of the partnership loss and that he

adequately disclosed the relevant facts of that treatment.       The

understatement upon which the addition to tax was imposed was

$10,459.   The understatement is substantial because it exceeds

the greater of $5,000 or 10 percent of the amount required to be

shown on the return.12    On this record, the Court holds that

petitioner is liable for the addition to tax under section

6661(a) for a substantial understatement of tax for 1982.

Respondent is sustained on this issue.




     12
          The amount required to be shown on the return was
$40,915, 10 percent of which equals $4,091.50.
                             - 23 -

     Finally, to the extent the Court has failed to address an

argument of petitioner herein, the Court concludes such argument

is without merit.



                                        Decision will be entered

                                   for respondent.
