                    106 T.C. No. 20



                UNITED STATES TAX COURT



           ALFRED E. GALLADE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 791-94, 792-94.        Filed May 28, 1996.



     C, P’s wholly owned corporation, operated a
pension plan in which P participated. Because of C’s
poor financial disposition, P executed a “waiver”, to
assign his fully vested, accrued benefits to C. Due to
the waiver, P did not report any taxable distribution.
R determined that P’s waiver was an impermissible
attempt to assign or alienate his benefits in violation
of sec. 206(d)(1) of ERISA and sec. 401(a)(13), I.R.C.
     1.   Held: P received a taxable distribution.
     2.   Held, further, the distribution was received
by P in 1986.
     3.   Held, further, R abused her discretion by
failing to waive the penalty for substantial
understatement of income tax.
                                - 2 -

     Kenneth M. Barish, James R. McDaniel, and Bruce L. Ashton,

for petitioner.

     Paul B. Burns, for respondent.



     GERBER, Judge:    Respondent alternatively determined a

$540,716 income tax deficiency and a $135,179 addition to tax

under section 66611 for the 1985 tax year, or a $537,808 income

tax deficiency and a $107,562 addition to tax under section 6661

for the 1986 tax year.    The issues remaining for our

consideration are:    (1) Whether petitioner’s waiver of his

pension plan benefits and use of them by his wholly owned

corporation resulted in a taxable distribution to him; (2) if it

is a taxable distribution, whether it is recognizable in 1985 or

1986; and (3) whether petitioner is liable for an addition to tax

under section 6661.

                          FINDINGS OF FACT2

     Petitioner resided in Fontana, California, at the time of

the trial of these consolidated cases.    Petitioner was married to

Adele M. Gallade (ex-wife) during the period under consideration,

except for an interim period when they were divorced (January 20


     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue, and the
Rule references are the Tax Court Rules of Practice and
Procedure.
     2
       The stipulation of facts and exhibits are incorporated
herein by this reference.
                                 - 3 -

through December 29, 1979).   They separated in November 1985, and

they were divorced a second time as of November 30, 1987.

     In 1943, petitioner received a bachelor of science degree in

philosophy.   After graduation, petitioner served in the U.S. Navy

for approximately 5 years, after which he returned to the Los

Angeles area to operate what he refers to as “small businesses”.

In the late 1940s, petitioner began working for Hughes Aircraft

Co. (Hughes) until approximately 1950, when he started a tire

distribution business.   After working in this business,

petitioner returned to Hughes.    Subsequently, petitioner was

hired by a chemical company as a general manager in Inglewood,

California.

     After leaving the Inglewood chemical company, on January 2,

1970, petitioner incorporated his own chemical distribution

business, Gallade Chemical, Inc. (GCI), of which he was the sole

shareholder and officer.   GCI maintained its principal place of

business in Santa Ana, California.       Petitioner was employed by

GCI from its date of incorporation through the years in issue.

     On December 1, 1970, GCI adopted a pension plan known as the

“Defined Benefit Pension Plan of Gallade Chemical, Inc.” (the

Plan), which, at all relevant times, was qualified under section

401(a).   The First American Trust Co. (First American) was the

trustee of the Plan.   Petitioner participated in the Plan from
                              - 4 -

its inception through its termination, at which time his accrued

benefit was fully vested.3

     Section 9.05 of the Plan, captioned “Nonreversion”,

prohibited the Plan funds from being used for any purpose other

than for the exclusive benefit of the participants or their

beneficiaries, except that

     Upon termination of the Plan, any assets remaining in
     the Trust Fund because of an erroneous actuarial
     computation after the satisfaction of all fixed and
     contingent liabilities under the Plan shall revert to
     the Employer.

Under the heading of “Nonassignability”, section 16.03(A) stated:

     None of the benefits, payments, proceeds or claims of
     any Participant shall be subject to any claim of any
     creditor of any Participant and, in particular, the
     same shall not be subject to attachment or garnishment
     or other legal process by any creditor of any
     Participant, nor shall any Participant have any right
     to alienate, anticipate, commute, pledge, encumber or
     assign any of the benefits or payments or proceeds
     which he may expect to receive under this Plan (except
     as provided in this Plan for loans from the Trust).
     [Emphasis added.]

     On May 20, 1985, petitioner, his sons (who were also

employees of GCI), petitioner’s C.P.A. Henry Zdonek (Mr. Zdonek),

and a vice president of Actuarial Consultants, Inc., Scott

Salisbury (Mr. Salisbury), met to review the yearend 1984

     3
       At the Plan’s termination, the present value of
petitioner’s accrued benefit was $1,057,830, and the Plan’s total
available assets at that time were $1,498,682. The present value
of the accrued benefits of all other plan participants was at
that time $312,469.
     The parties agree that, if petitioner failed to report his
distribution from the Plan, the amount should be $1,057,830
rather than $1,082,000, the amount stated in the notices of
deficiency.
                                - 5 -

valuation of the original plan and profit-sharing plan (the

profit-sharing plan) and to discuss the distribution owed to

petitioner, as petitioner was near retirement age.   The options

reviewed by petitioner included his receiving a distribution from

the Plan as taxable income, rolling the benefits over into an

individual retirement account (IRA), or rolling the benefits over

into the profit-sharing plan.   At this meeting, the individuals

present did not discuss the possibility of petitioner’s waiving

his vested plan benefits.

     After the May 20, 1985, meeting, petitioner evaluated the

financial needs of GCI.   Amid GCI’s decreasing customer base and

financial losses, petitioner thought that expansion was

necessary.   Therefore, petitioner decided that it would be best

for GCI if petitioner waived his benefits under the Plan and had

the funds paid to GCI to provide the necessary working capital.

     Between the meeting on May 20, 1985, and July 12, 1985, Mr.

Zdonek called Mr. Salisbury and asked Mr. Salisbury to research

the question of whether petitioner was permitted to waive his

Plan benefits.   On July 12, 1985, Mr. Salisbury prepared a

memorandum to GCI’s pension file which memorialized a telephone

conversation between Mr. Salisbury and Juanita Nappier (Ms.

Nappier), a supervisor with the Pension Benefit Guaranty Corp.

(PBGC).   Mr. Salisbury stated that Ms. Nappier believed that it

would be fine for petitioner to waive his benefits under the Plan

due to GCI’s business conditions, so long as the rank and file
                                 - 6 -

employees received their benefits.       Mr. Salisbury forwarded a

copy of the memorandum to petitioner and Mr. Zdonek.

     On August 5, 1985, Mr. Salisbury sent a letter to Mr.

Zdonek, a copy of which petitioner received.       The letter

confirmed that GCI desired to:    (1) Terminate the Plan; (2) pay

all participants their then-accrued benefits, except for

petitioner whose benefit would “revert” back to GCI; (3) create a

new plan, to which the employees of GCI would transfer their Plan

benefits; and (4) have a waiver of benefits prepared for

petitioner.   Mr. Salisbury commented on the Plan benefits with

respect to Mrs. Gallade, stating that he believed:

     temporary IRS regulations under the Retirement Equity
     Act of 1984, published in the Federal Register on
     July 19, 1985, indicate that, “...any plan that has a
     termination date prior to September 17, 1985 and
     distributes all remaining assets as soon as
     administratively feasible after the termination date,
     is not subject to the new survivor annuity requirements
     [of sections 401(a)(11) and 417]." [See sec. 1.401(a)-
     11T, Q&A-10, Temporary Income Tax Regs., 50 Fed. Reg.
     29373 (July 19, 1985).]

     On September 4, 1985, GCI adopted a resolution terminating

the Plan.   The resolution stated that

     [petitioner] hereby waives all his rights and benefits
     under * * * [the Plan] and that all such rights and
     benefits will revert to the Employer-Corporation upon
     termination of [the] plan.

The termination, which was signed by petitioner, was effective

September 16, 1985.

     In anticipation of the Plan’s termination, on or about

September 6, 1985, GCI filed an Internal Revenue Service Form
                               - 7 -

5310, Application for Determination Upon Termination; Notice of

Merger, Consolidation or Transfer of Plan Assets or Liabilities;

Notice of Intent to Terminate, with the PBGC.   See sec. 2616.3,

PBGC Regs.   With the Form 5310, GCI sought a favorable

determination letter from respondent, and it applied for a Notice

of Sufficiency from the PBGC upon the Plan’s termination.

     On or about December 30, 1985, GCI opened an interest-

bearing account at Republic Bank (the Republic Bank account).

Petitioner and J. Ray Haynes (Mr. Haynes) of First American were

the designated signatories on the Republic Bank account, and all

withdrawals or disbursements required both individuals to sign.

On the same day, First American deposited $771,000 of funds from

the Plan into the Republic Bank account.4

     On January 8, 1986, the PBGC issued a Notice of Sufficiency

to GCI in accordance with GCI’s first application.   On or about

January 15, 1986, the funds were withdrawn, including accrued

interest (total of $772,996.44).   GCI filed a second Form 5310 on

or about March 5, 1986, to notify respondent and the PBGC of

GCI’s plans to transfer the remaining assets from the Plan to the

GCI profit-sharing plan.   On July 17, 1986, First American had

transferred all those assets from the Plan trust, payable to all


     4
       Approximately $400,000 of petitioner’s balance in the Plan
went towards paying suppliers, which we find was distributed to
petitioner in 1986. The remainder, $771,000, was deposited into
the Republic Bank account, which petitioner claims was to be used
at some point for GCI’s expansion into the Inland Empire. The
record is unclear whether such a property was ever purchased.
                                - 8 -

Plan participants except for petitioner, to the profit-sharing

plan trust.    First American then arranged for the remaining

assets, to which petitioner was entitled, to be transferred from

the Plan trust to GCI on August 18 and September 23, 1986.

     During the summer 1986, respondent assigned GCI’s

application for a determination to an employee plans specialist.

During the period July 1986 through January 1987, the specialist

and GCI’s representatives corresponded concerning the

application.    On or about March 31, 1987, the matter was

submitted internally within respondent’s office for technical

advice regarding the Plan’s termination.    On June 9, 1988,

respondent’s national office issued a technical advice

memorandum, stating its position.    On or about July 27, 1988, GCI

withdrew its application for a determination letter.    Thereafter,

this issue was addressed in the examination of petitioner which

led to this controversy.

     A closing conference was held on October 23, 1991, and it

was attended by petitioner, respondent’s agent, the agent’s

supervisor, and Mr. Zdonek.    At this meeting, respondent’s agent

discussed the substantive issues and the reasons he believed that

a section 6661 penalty for substantial understatement should

apply.   Mr. Zdonek told respondent’s agent that he believed this

penalty should not apply.

                               OPINION

Evidentiary Objections
                                 - 9 -

     We first consider the evidentiary objections to certain

stipulated facts.    Respondent objected to the admission of

certain facts concerning a settlement meeting between the parties

at which petitioner’s counsel asked to have the section 6661

penalty waived.   Petitioner seeks to introduce this fact solely

to show that he asked respondent to waive the section 6661

penalty, not to establish liability or validity of the

substantive claim.

     Rule 143(a) provides that trials before this Court are to be

"conducted in accordance with the rules of evidence applicable in

trials without a jury in the United States District Court for the

District of Columbia."    See sec. 7453.

     Rule 408 of the Federal Rules of Evidence provides that

evidence of an offer or promise to compromise or settle is not

admissible to prove liability or validity of a claim or amount.

Settlement agreements, however, are admissible if offered for a

purpose other than to prove liability or a claim's validity.

Wentz v. Commissioner, 105 T.C. 1, 6 (1995); Tijerina v.

Josefiak, 50 Empl. Prac. Dec. (CCH) par. 38,943 (D.D.C. 1988)

(citing County of Hennepin v. AFG Indus., Inc., 726 F.2d 149, 153

(8th Cir. 1984)); see also Sage Realty Corp. v. Insurance Co. of

N. Am., 34 F.3d 124 (2d Cir. 1994); Johnson v. Hugo's Skateway,

974 F.2d 1408 (4th Cir. 1992).    Therefore, the fact that

petitioner and respondent met is admissible for the limited
                                - 10 -

purpose of showing that petitioner asked respondent to waive the

section 6661 penalty.

     Petitioner reserved objections to certain stipulated facts

proposed by respondent.     Petitioner did not address the

objections until his reply brief.     Relying on Midkiff v.

Commissioner, 96 T.C. 724, 734 (1991), affd. sub nom. Noguchi v.

Commissioner, 992 F.2d 226 (9th Cir. 1993), respondent argues

that because of petitioner’s failure to address his evidentiary

objections at trial or on opening brief, petitioner has abandoned

the objections reserved in the parties’ stipulation of facts.

Midkiff held that objections not addressed in briefs are

abandoned.     While that case did not distinguish between opening

and reply briefs, it would be unreasonable to allow a party to

wait until filing a reply brief to address the party's

objections, because it eliminates the opportunity for the adverse

party to respond.    We have found that petitioner in these cases

waited until he filed his reply brief to address his objections;

accordingly, we hold that petitioner did not preserve his

objections.5

The Plan Distribution




     5
       Despite our holding that petitioner’s objections were
abandoned, we note that we did not rely on the statements
contained in the declarations of Bruce A. Hughes, which
petitioner argued are hearsay. Furthermore, the substance of
respondent’s internal request for technical advice was not
relevant to the legal conclusions reached in these cases.
                              - 11 -

     The first substantive issue for decision is whether

petitioner must include in income the value of his fully vested

interest in GCI’s pension plan, which he waived in favor of GCI.

Petitioner asserts that the funds are not includable because of

his permissible “waiver” of benefits in favor of his wholly owned

corporation.

     Respondent argues that petitioner must recognize taxable

income from the Plan’s distribution because petitioner had an

unconditional right to receive the benefits, and any attempted

“waiver” is invalid under the Employee Retirement Income Security

Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, 29 U.S.C. sec.

1001, and the Internal Revenue Code (I.R.C.).

     ERISA was enacted to establish “a comprehensive federal

scheme for the protection of pension plan participants and their

beneficiaries.”   American Tel. & Tel. Co. v. Merry, 592 F.2d 118,

120 (2d Cir. 1979).   ERISA was intended to assure that American

workers “may look forward with anticipation to a retirement with

financial security and dignity, and without fear that this period

of life will be lacking in the necessities to sustain them as

human beings within our society.”   S. Rept. 93-127, at 13 (1974),

1974-3 C.B. (Supp.) 1, 13.   To this end, ERISA requires that

plans provide that benefits may not be assigned or alienated.    H.

Rept. 93-807, at 68 (1974), 1974-3 C.B. (Supp.) 236, 303.    This

provision is included in both the I.R.C. and ERISA section

206(d)(1), which state that a pension plan will not be qualified
                               - 12 -

if its benefits can be assigned or alienated.    Sec. 401(a)(13);

29 U.S.C. sec. 1056(d)(1) (1994).

       Section 1.401(a)-13(c)(1), Income Tax Regs., provides:

            (c) Definition of assignment and alienation--(1)
       In general. For purposes of this section, the terms
       “assignment” and “alienation” include--

                 (i) Any arrangement providing for the
       payment to the employer of plan benefits which
       otherwise would be due the participant under the plan,
       and

                 (ii) Any direct or indirect arrangement
       (whether revocable or irrevocable) whereby a party
       acquires from a participant or beneficiary a right or
       interest enforceable against the plan in, or to, all or
       any part of a plan benefit payment which is, or may
       become, payable to the participant or beneficiary.

       Included in the Plan’s terms is a clause that complies with

the aforementioned antiassignment requirement.    Specifically,

section 16.03 of the Plan contains a nonassignability clause that

includes the statement that a participant shall not “have any

right to alienate * * * the benefits or payments or proceeds

which he may expect to receive under [the] Plan”.

       We must decide whether petitioner’s “waiver” constituted an

assignment or alienation of his benefits under the Plan in

violation of ERISA section 206(d)(1) and I.R.C. section

401(a)(13).

       In light of GCI’s financial difficulties, petitioner decided

that his accrued, fully vested benefit would be put to best use

by GCI.    Therefore, he executed a waiver of benefits in favor of

GCI.    Petitioner contends that ERISA’s antialienation provisions
                                - 13 -

do not apply to a “waiver of a right to payment of benefits made

by a designated beneficiary.”    We disagree.

     “As a general rule, rights under an ERISA plan may not be

waived or assigned”.     Ferris v. Marriott Family Restaurants,

Inc., 878 F. Supp. 273, 277 (D. Mass. 1994) (emphasis added).

The waiver here effectively changed the beneficiary of the Plan.

Such a waiver of benefits is equivalent to an assignment or

alienation, which is statutorily prohibited in the qualified

pension plan at issue.

     Petitioner argues that ERISA section 206(d)(1) and I.R.C.

section 401(a)(13) simply require that plans contain some type of

antialienation provision.    Such provisions, however, must be

given effect.   By violating the statutory provisions, the Plan

ceases to be qualified.    “To be qualified, both a plan’s terms

and operations must meet the statutory requirements.”     Fazi v.

Commissioner, 102 T.C. 695, 702 (1994); see Ludden v.

Commissioner, 620 F.2d 700, 702 (9th Cir. 1980), affg. 68 T.C.

826 (1977); see also Guidry v. Sheet Metal Workers Natl. Pension

Fund, 493 U.S. 365, 371 (1990) (ERISA section 206(d)(1) prohibits

the assignment or alienation of pension plan benefits).    GCI’s

amendment to the Plan providing for the waiver, if given effect,

violates the antialienation requirements of ERISA section

206(d)(1) and I.R.C. section 401(a)(13).

     Petitioner also argues that waivers are permissible if

“knowingly and voluntarily” made; however, petitioner fails to
                                - 14 -

direct us to any authority that supports the argument that his

waiver in the instant cases is valid so long as they were

knowingly and voluntarily made.

     We agree that when the antialienation rule does not apply,

any waiver or alienation must be knowingly and voluntarily made.

Pursuant to ERISA section 201(2), the antialienation rule of

ERISA section 206(d)(1) does not apply to “a plan which is

unfunded and is maintained by an employer primarily for the

purpose of providing deferred compensation for a select group of

management or highly compensated employees”; i.e., a “top hat”

plan.     29 U.S.C. sec. 1051(2) (1994); see also Modzelewski v.

Resolution Trust Corp., 14 F.3d 1374, 1377 n.3 (9th Cir. 1994)

(referring to the characteristics of a “top hat” plan).    However,

the plan under consideration is overfunded and covers both

petitioner and rank and file employees.    Therefore, whether

petitioner’s waiver was knowingly or voluntarily made is of no

consequence because the plan was not a “top hat” plan.     Ferris v.

Marriott Family Restaurants, Inc., supra.

        Petitioner relies heavily on the fact that the PBGC issued a

“Notice of Sufficiency” to GCI which stated that, insofar as it

was concerned, the Plan’s termination was acceptable.

Petitioner’s argument assumes that any Government approval cures

a statutory defect.

        The PBGC was created to ensure that participants in private

pension plans would receive the benefits for which their
                                - 15 -

employers were liable.   ERISA established the PBGC to operate a

mandatory insurance program that provides for benefits if a

pension plan is terminated without adequate funding.     In re

Pension Plan For Employees of Broadway Maintenance, 707 F.2d 647,

648 (2d Cir. 1983).

     Concerning the Plan, GCI filed a Notice of Intent to

Terminate with the PBGC, stating that it planned to effect the

“waiver”.   The PBGC then issued a Notice of Sufficiency after it

determined that the Plan’s assets were sufficient to discharge

all obligations under the Plan.    See sec. 2617.12(c), PBGC Regs.

A Notice of Sufficiency is not a determination of the Federal

income tax consequences of termination; its purpose is to address

plans’ financial sufficiency.    Therefore, petitioner’s reliance

on the Notice of Sufficiency is misplaced.

     Finally, petitioner contends that the Plan’s excess funds

could be waived by petitioner.    Petitioner argues that, pursuant

to section 1.401-2(b)(2), Income Tax Regs., excess plan funds may

revert back to the employer if due to actuarial error.    In this

regard, petitioner argues that there was “actuarial error”

because his waived funds were no longer needed to meet the

obligations to the other Plan participants.

     Section 1.401-2(b)(1), Income Tax Regs., provides, in

relevant part:

     A balance due to an “erroneous actuarial computation”
     is the surplus arising because actual requirements
     differ from the expected requirements even though the
     latter were based upon previous actuarial valuations of
                              - 16 -

     liabilities or determinations of costs of providing
     pension benefits under the plan and were made by a
     person competent to make such determinations in
     accordance with reasonable assumptions as to mortality,
     interest, etc., and correct procedures relating to the
     method of funding. For example, a trust has
     accumulated assets of $1,000,000 at the time of
     liquidation, determined by acceptable actuarial
     procedures using reasonable assumptions as to interest,
     mortality, etc., as being necessary to provide the
     benefits in accordance with the provisions of the plan.
     Upon such liquidation it is found that $950,000 will
     satisfy all of the liabilities under the plan. The
     surplus of $50,000 arises, therefore, because of the
     difference between the amounts actuarially determined
     and the amounts actually required to satisfy the
     liabilities. This $50,000, therefore, is the amount
     which may be returned to the employer as the result of
     an erroneous actuarial computation. If, however, the
     surplus of $50,000 had been accumulated as a result of
     a change in the benefit provisions or in the
     eligibility requirements of the plan, the $50,000 could
     not revert to the employer because such surplus would
     not be the result of an erroneous actuarial
     computation. [Emphasis added.]

     “Actuarial errors” refer to clerical or mathematical

mistakes regarding actuarial assumptions and methods in

determining the future costs and liabilities required to meet a

plan’s funding.   See Holland v. Valhi Inc., 22 F.3d 968, 972

(10th Cir. 1994).   Petitioner argues that his 1984 decision to

assign his benefits to GCI was tantamount to actuarial error.     We

disagree.

     The amount of petitioner’s benefits which he attempted to

assign was part of the benefits which actuarial assumptions

addressed since the Plan’s inception.   In accordance with the

example in section 1.401-2(b)(1), Income Tax Regs., upon

liquidation of the Plan, there were sufficient assets to meet the
                               - 17 -

Plan’s needs, including petitioner’s benefits.    The surplus above

all participants' needs (including petitioner’s) may be excess

due to actuarial error; however, this is not the issue with which

we are faced.    Petitioner attempted to assign only his vested

benefits in the Plan, not the amount by which the Plan may have

been overfunded.    With respect to this amount, the second part of

the example in section 1.401-2(b)(1), Income Tax Regs., is

instructive.    Here, the “excess” benefits that resulted from

petitioner’s attempted waiver exist solely because petitioner

sought to change the benefit provisions of the Plan through the

September 4, 1985, resolution--not because of an erroneous

actuarial computation.

     Petitioner caused the Plan to terminate and distribute his

accrued, fully vested benefit to him individually, while he

contemporaneously decided that the funds would be best utilized

by GCI.   Consequently, petitioner contributed the funds to his

wholly owned corporation.    This investment decision did not

change the substantive result:    the distribution was

petitioner’s--not GCI’s.6   Accordingly, the attempted waiver by

petitioner in favor of GCI constitutes a taxable distribution

from the Plan on its termination.    See sec. 61(a)(11).7

     6
       We also note that petitioner’s attempted assignment would
have violated the express terms of the Plan, sec. 16.03, as well
as both ERISA sec. 206(d)(1) and I.R.C. sec. 401(a)(13).
     7
       In these cases, petitioner was the only party who could
have beneficially received the benefits from the Plan. See Lucas
                                                   (continued...)
                              - 18 -

     Next, we decide in which year petitioner, a cash basis

taxpayer, was required to report the Plan distribution.

Respondent argues that petitioner should recognize the

distribution in 1986; i.e., when it was paid to GCI.    Section

1.451-1(a), Income Tax Regs., provides that “income [is] to be

included in gross income for the taxable year in which [it is]

actually or constructively received by the taxpayer” (emphasis

added).   See also sec. 451(a).   The taxpayer here is petitioner

Mr. Gallade, not GCI.   We must decide whether Mr. Gallade, the

taxpayer, actually or constructively received his distribution in

1986, as respondent contends, or in 1985, as respondent argues in

the alternative.

     Section 1.451-2(a), Income Tax Regs., concerning

constructive receipt as interpreted in Hornung v. Commissioner,

47 T.C. 428, 434 (1967), provides that

     Income although not actually reduced to a taxpayer’s
     possession is constructively received by him in the
     taxable year during which it is credited to his
     account, set apart for him, or otherwise made available
     so that he may draw upon it at any time, or so that he
     could have drawn upon it during the taxable year if
     notice of intention to withdraw had been given.
     However, income is not constructively received if the
     taxpayer’s control of its receipt is subject to
     substantial limitations or restrictions. * * *




     7
      (...continued)
v. Earl, 281 U.S. 111 (1930). In this regard, because we have
held that the total distribution was taxable to petitioner in
1986 under sec. 61(a)(11), it is unnecessary to discuss the
parties’ assignment-of-income argument, which is another theory
under which petitioner’s income could be taxable. Id.
                                  - 19 -

     Petitioner directed GCI to open the Republic Bank account on

December 30, 1985, at which time $771,000 was deposited.8      Both

petitioner and Mr. Haynes of First American were signatories of

the Republic Bank account, and both individuals were required to

sign for a transaction.       Therefore, we must determine whether

this two-signature requirement posed a substantial limitation or

restriction on petitioner’s control of the funds.

     In Estate of Fairbanks v. Commissioner, 3 T.C. 260 (1944),

the decedent was entitled to receive annual delay rentals from

Sun Oil Co., which she specifically devised to her four children

and surviving husband.       Because a dispute arose between

decedent’s husband and her executors, in 1940, the Sun Oil Co.

deposited the rentals in a joint bank account that required the

signatures of decedent’s husband and her executors before any

withdrawals could be made.       The Court held that the estate was

not required to recognize income in 1940, stating that “these

delay rentals were not paid to * * * [the] executors, but, on the

contrary, were paid by the Sun Oil Co. to the * * * [bank], and

were deposited in that bank to a new account” of which decedent’s

husband and her executors were joint signatories.       This Court

stressed that, in order for the executors to make a withdrawal,

they needed the signature of decedent’s husband.       The opinion

concluded that this was enough of a restriction on the account to




     8
         See supra note 4.
                               - 20 -

preclude the estate from recognizing income in 1940; i.e., when

the funds were deposited in the account.      Id. at 266, 267.

     We believe that the same analysis should apply in these

cases.    In Estate of Fairbanks v. Commissioner, supra, the bank

account was established by the payor Sun Oil Co., not by either

of the joint signatories.    However, we believe that the relevant

holding in that case was that the taxpayer estate did not have

the type of unfettered control which would trigger income

recognition.    Petitioner here did not have exclusive control over

the funds until 1986.   In fact, any action required the signature

of a vice president of the Plan’s trustee, First American, who

had a fiduciary duty to act in the Plan’s best interests, which

we believe the Plan’s trustee recognized in his dealings with the

Plan.    See generally Friend v. Sanwa Bank California, 35 F.3d 466

(9th Cir. 1994); see also Winger’s Dept. Store, Inc. v.

Commissioner, 82 T.C. 869, 884 (1984).      Petitioner could not

unilaterally remove the funds in the Republic Bank account.        This

was a substantial restriction on petitioner’s ability to withdraw

funds, and it prevented petitioner from having constructively

received the distribution in 1985.      Instead, petitioner was

taxable on the $771,000 for the 1986 tax year.

Substantial Understatement

     Respondent also determined that petitioner is liable for the

addition to tax for substantial understatement of income tax in

1985 or 1986.   Income tax is substantially understated if, in any
                               - 21 -

year, the amount of the understatement exceeds the greater of 10

percent of the tax required to be shown on the return for the

taxable year or $5,000.   Sec. 6661(b)(1)(A).   Section 6661(a)

provides for an addition to tax equal to 25 percent of the amount

of any underpayment attributable to such understatement.

Pallottini v. Commissioner, 90 T.C. 498 (1988).

     The understatement is reduced by that portion for which

there is "substantial authority" or that has been "adequately

disclosed".    Sec. 6661(b)(2)(B).   Petitioner did not disclose the

transaction at issue on his 1985 or 1986 Federal income tax

returns, so there could not have been adequate disclosure.

Moreover, to show that he had substantial authority, petitioner

must demonstrate that the substantial weight of authority

supports the positions taken on his income tax return.    Sec.

1.6661-3(b)(1), Income Tax Regs.; see also Nestle Holdings, Inc.

v. Commissioner, T.C. Memo. 1995-441.     Petitioner has not shown

this Court any authority for his tax positions.    Furthermore,

opinions of tax professionals may not constitute such authority.

See, e.g., sec. 1.6661-3(b)(2), Income Tax Regs.    In this case,

there was no “substantial authority”.

     Section 6661(c) provides that the Secretary may waive this

penalty “on a showing by the taxpayer that there was reasonable

cause for the understatement * * * and that the taxpayer acted in

good faith.”    The denial of a waiver under section 6661(c) is

reviewable by this Court, and the appropriate standard of review
                               - 22 -

is whether respondent has abused her discretion in not waiving

the addition to tax.    Mailman v. Commissioner, 91 T.C. 1079, 1083

(1988).    If we conclude that respondent's discretion was

exercised arbitrarily, capriciously, or without a sound basis in

fact, we will not sustain the determination.    Karr v.

Commissioner, 924 F.2d 1018, 1026 (11th Cir. 1991), affg. Smith

v. Commissioner, 91 T.C. 733 (1988).

     We have found that petitioner met with his sons (former GCI

employees) to discuss the future of the Plan.    In May 1985, when

petitioner determined that his distribution could benefit GCI’s

operations, he took several steps to assure that the assignment

would comply with the law.    First, petitioner sought the advice

of his C.P.A., Mr. Zdonek, and an actuary, Mr. Salisbury.    Mr.

Salisbury then formally contacted Ms. Nappier of the PBGC, who

stated in writing that she believed petitioner’s “waiver” would

be fine.    To comply with GCI’s filing requirements, petitioner

caused his wholly owned company to file Forms 5310 with

respondent and the PBGC.

     In August 1985, Mr. Salisbury informed petitioner that he

believed that temporary IRS regulations indicated that, with the

Plan’s termination date, the Plan would not be subject to the new

survivor annuity requirements.    Based on the above advice, GCI

adopted the resolution where petitioner agreed to waive his

benefits under the Plan.    Finally, in January 1986, the PBGC
                              - 23 -

issued a Notice of Sufficiency to GCI in accordance with its

first application.

     The most important factor in determining whether petitioner

acted in a reasonable manner and in good faith is the extent to

which he attempted to determine his proper income tax liability.

Mailman v. Commissioner, supra at 1084.    Reliance on the advice

of professionals is tantamount to acting in a reasonable manner

if “under all the circumstances, such reliance [is] reasonable

and the taxpayer acted in good faith.”    Sec. 1.6661-6(b), Income

Tax Regs.; see also Vorsheck v. Commissioner, 933 F.2d 757, 759

(9th Cir. 1991); Shelton v. Commissioner, 105 T.C. 114, 125

(1995); Nestle Holdings, Inc. v. Commissioner, supra.

     On the basis of these facts, we find that petitioner did act

as an ordinarily prudent person in the circumstances.

Accordingly, his reliance on the advice of his hired

professionals was reasonable and in good faith.   Therefore, we

hold that respondent abused her discretion by failing to waive

this penalty.   Accordingly, we hold that petitioner is not liable

for the section 6661 addition to tax.    See, e.g., Nestle

Holdings, Inc. v. Commissioner, supra (holding that it was

unreasonable in that case to penalize a taxpayer for relying on

the advice of a professional or for not prevailing in this

Court).

     Citing Reinke v. Commissioner, 46 F.3d 760, 765 (8th Cir.

1995), affg. T.C. Memo. 1993-197, respondent argues that
                              - 24 -

petitioner was required to request a “waiver” of the addition to

tax, and, because he did not, he is precluded from receiving one.

We disagree.   While the Court of Appeals for the Eighth Circuit

suggests that a taxpayer’s request for a waiver can establish the

Commissioner's degree of fault for failing to waive, it does not

hold that a request is a requirement or prerequisite for a

waiver.

      Petitioner’s C.P.A., Mr. Zdonek, stated that he believed

that the addition to tax did not apply; however, he did not refer

to respondent’s “waiving” the addition to tax.   We hold that Mr.

Zdonek’s statement at the meeting which challenged the addition

to tax had the same effect as a request for a waiver of the

addition to tax, although such a formal request is not required.

Id.   The paramount question is whether petitioner had reasonable

cause and acted in good faith, which he did.


                                         Decisions will be entered

                                    under Rule 155.
