                        T.C. Memo. 1997-132



                      UNITED STATES TAX COURT



            MARK D. AND SHELDON C. MORGAN, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15590-94.                     Filed March 13, 1997.



     Lewis R. Wiener, for petitioners.

     Daniel J. Parent, for respondent.



                        MEMORANDUM OPINION


     JACOBS, Judge:   By separate notices of deficiency, both dated

May 27, 1994, respondent determined the following deficiencies and

accuracy-related penalties with respect to petitioners' Federal

income taxes:
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                                                Accuracy-Related Penalty
             Year          Deficiency                  Sec. 6662(a)

             1988          $ 1,351                         ---
             1989           19,046                       $3,809
             1990           16,430                        3,286
             1991           16,436                        3,287

Pursuant to an amended answer, filed October 10, 1995, respondent

seeks a $9,864 increase in the deficiency for 1988, so that the

total amended amount of the proposed deficiency for that year is

$11,215.

       Following concessions by petitioners, the issues for decision

are:

       (1)   The    proper   characterization        (loans,     as    contended    by

petitioners, or wages, as contended by respondent) of monthly

payments received by petitioner Mark D. Morgan from Robert Randall

Co.    We    hold   that     such    payments     are    wages,       includable   in

petitioners' income.

       (2)   Whether petitioners are entitled to claimed employee

business     expense    deductions      (for     1989,   1990,    and     1991)    for

automobile expenses.         Because of petitioners' failure to provide

sufficient substantiation, we hold they are not.

       (3)   Whether the increased deficiency asserted by respondent

for 1988 is time-barred.            We hold that it is not.

       (4)   Whether petitioners are liable for the accuracy-related

penalty under section 6662(a) for 1989, 1990, and 1991.                      We hold

they are.
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     All section references are to the Internal Revenue Code for

the years under consideration.                All Rule references are to the Tax

Court Rules of Practice and Procedure.                      All dollar amounts are

rounded.

     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.

                                   General Findings

     Petitioners,           husband     and    wife,    resided       in     Carmichael,

California, at the time they filed their petition challenging

respondent's        determinations.           Petitioners         timely    filed    joint

Federal    income         tax    returns      for    each    of     the    years     under

consideration.           On June 1, 1992, petitioners were issued a refund

of   $1,351    for        tax    year    1988.       The    refund        resulted    from

petitioners' request for a tentative refund based upon a claimed

net operating loss carryback from 1991.

     For convenience and clarity, we have combined additional

findings of fact and opinion with respect to each issue.

Issue 1.   Characterization of Advances From Robert Randall Co.

     Petitioner husband Mark D. Morgan (hereinafter referred to as

petitioner)        has    been   involved      for   many   years     in    real     estate

activities, particularly the construction of real estate.                          In June

1988, he began working for Robert Randall Co. which is in the

business      of     developing         and    managing      apartment        complexes.

Previously, petitioner had been employed by Gibraltar Community
                                   - 4 -

Builders, Inc. (Gibraltar). During 1987, petitioner received wages

from Gibraltar totaling $123,671; for the first 5 months of 1988,

petitioner received wages from Gibraltar totaling $66,382.

      On June 21, 1988, petitioner and Robert Randall, the president

and apparently the sole or at least the majority shareholder1 of

Robert     Randall   Co.,   entered   into    an   agreement      (called   and

hereinafter referred to as the Sunbelt Project Working Agreement),

pursuant to which petitioner agreed to be the regional manager

responsible for locating, acquiring, and developing properties in

the   Sacramento     area   for   multifamily      housing   on    behalf   of

partnerships or other entities to be controlled by Robert Randall

or his affiliate. In accordance with the provisions of the Sunbelt

Project Working Agreement, beginning in June 1988, and throughout

all years under consideration, Robert Randall Co. made monthly

payments,    labeled   "advances",    to     finance   petitioner's     living

expenses.    In addition to these advances2,       Robert Randall Co. paid

wages to petitioner.        FICA (Social Security tax) was withheld on

these wages, but Federal income taxes were not.

      The amount of wages and advances paid to petitioner were as

follows:




      1
          The record is not clear on this point. Robert Randall
testified that he was "the chief executive officer, the
president, the chairman, and the owner" of Robert Randall Co.
      2
          The use of the word "advances" is not meant to give a
legal characterization of the monthly payments.
                                     - 5 -

                               Amount of            Amount of
                  Year           Wages              Advances

                  1988         $11,008              $40,950
                  1989          18,000               75,600
                  1990          18,000               84,600
                  1991          18,000               87,600

       The advances include the following amounts designated as an

automobile allowance:

                  1988         $1,300
                  1989          2,400
                  1990          5,550
                  1991          6,600

       The advances were paid on a monthly basis as follows:
                  June 1988                         $3,150
                  July 1988-Mar. 1990                6,300
                  Apr. 1990-Dec. 1991                7,300

       Robert Randall Co. did not withhold for income tax or FICA tax

on the advances.

       As of the date of trial, petitioner had not repaid any of the

advances.       The advances were not evidenced by notes, nor was

collateral      given.   Nor   did   Robert   Randall    Co.   inquire   into

petitioner's ability to repay the advances. There were no specific

repayment terms or fixed maturity dates. Rather, the advances were

to be charged against petitioner's share of profits of partnerships

to be formed between petitioner and Robert Randall.

       Respondent determined that the advances petitioner received

from   Robert    Randall   Co.   constitute    taxable   compensation    for

services.    Petitioners claim that the advances were nontaxable

loans. Except for 1988, petitioners bear the burden of proving
                                        - 6 -

their characterization of the advances.               Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933).            If petitioners meet their burden

of proof, then the advances are not includable in their income.

See Falkoff v. Commissioner, 62 T.C. 200, 206 (1974); Arlen v.

Commissioner, 48 T.C. 640, 648 (1967).             For 1988 only, respondent

bears the burden of proving the advances constitute taxable income

inasmuch as that is a new matter, first raised in respondent's

amended answer.      Rule 142(a).

       Whether the advances should be characterized as loans or

payments for services is a factual determination.                    Beaver v.

Commissioner, 55 T.C. 85 (1970); Haber v. Commissioner, 52 T.C. 255

(1969), affd. 422 F.2d 198 (5th Cir. 1970).                 For a payment to

constitute a loan, at the time the funds are transferred, the

recipient must intend to repay the advance, and the transferor must

intend to enforce repayment.             Haag v. Commissioner, 88 T.C. 604,

615-616 (1987), affd. without published opinion 855 F.2d 855 (8th

Cir. 1988). Further, the obligation to repay must be unconditional

and    not   contingent     upon   a    future   event.     United   States   v.

Henderson,     375   F.2d   36,    39-40    (5th   Cir.   1967);   Bouchard   v.

Commissioner, 229 F.2d 703 (7th Cir. 1956), affg. T.C. Memo. 1954-

243.    An intent to repay a purported loan by the performance of

services in the future does not result in the exclusion of the

underlying     funds   from       the   recipient's   income.        Beaver   v.

Commissioner, supra at 91.              In such a case, the purported loan

proceeds are nothing more than an advance salary or other payment
                                       - 7 -

for services which are includable in the recipient's income when

received.

     Various objective factors are used in deciding whether an

advance     payment   is   a    loan    or     compensation.      See   Haag   v.

Commissioner, 88 T.C. at 616 n.6., for a listing of some of these

factors.     In the instant case, the following factors lead us to

conclude that the advances petitioner received from Robert Randall

Co. should be characterized as compensation, rather than loans:

     1.     The advances were from an employer to an employee.

     2.     Petitioner's       wage    compensation       from    his   previous

employment with Gibraltar was significantly higher than the Form W-

2 wages petitioner received from Robert Randall Co.

     3.     The monthly advances began as soon as petitioner started

working for Robert Randall Co.

     4.     The amount of the advances was pre-set.

     5.     The advances were paid in regular monthly intervals.

     6.     There were no set repayment terms or fixed maturity date

at the time the advances were made.

     7.     There was no stated interest.

     8.     Petitioner had not repaid any of the advances as of the

date of trial.

     9.     There was no indication that petitioner could repay the

advances from his own resources.

     10.    The   transferor     did     not    inquire    into    petitioner's

financial status before making the advances.
                                      - 8 -

     11.    There was no collateral for the advances.

     12.    Petitioner would not have taken the position with Robert

Randall Co. if the latter had not paid him a substantial amount in

addition to his Form W-2 salary.

     13.    The value of services petitioner rendered was far in

excess of his Form W-2 salary.

     14.    Robert Randall Co. could not have hired someone with

petitioner's qualifications for the amount of Form W-2 salary paid

to petitioner.

     15.    The     transferor    would   have       caused     the   advances   to

petitioner to stop if petitioner had stopped providing services.

     Based on our determination that the advances were not loans,

but rather represent compensation for services, the advances are

includable in petitioner's income in the year paid.

Issue 2.    Automobile Expenses

     On    petitioners'     tax   returns      for     1989,    1990,   and   1991,

petitioners   claimed      employee    business       expense    deductions    with

regard to petitioner's purported business use of an automobile, as

follows:

                    Year                      Amount

                    1989                      $4,375
                    1990                       5,200
                    1991                       4,950

Respondent disallowed these deductions.

     At    trial,    petitioner    failed     to     provide    any   evidence   or

substantiation (such as a log or diary) for the claimed expenses
                                        - 9 -

other    than   his    own    testimony    that    he     "feels"   that       he   drove

approximately 20,000 miles a year for business purposes.

       Section 274(d) provides that no deduction shall be allowed

with    respect   to    any    listed     property       (as   defined    in    section

280F(d)(4)) unless the taxpayer substantiates by adequate records

or sufficient evidence corroborating the taxpayer's own statement

the amount of such expense, the time and place of the expense, the

business purpose of the expense, and the business relationship of

the expense. A passenger automobile is considered listed property.

Sec. 280F(d)(4).

        Because petitioner failed to satisfy the record keeping or

other substantiation requirements of section 274(d), petitioners

are not entitled to the claimed employee business deductions for

automobile expenses for 1989, 1990, and 1991.

Issue 3.     Statute of Limitations Defense

       The next issue for consideration is whether respondent is

time-barred from amending her answer to increase the amount of the

deficiency for 1988 by recharacterizing the advances petitioner

received in 1988 as wages.

       For   1988,    petitioners       reported     a    total   gross    income     of

$82,034, consisting of wages ($77,388), interest ($3,318), and

unemployment compensation ($1,328). In addition, they reported the

sale of their home, but excluded the gain therefrom pursuant to

section 1034. The reported selling price for the home was $180,000;

the excluded gain was $14,050.
                                 - 10 -

     Petitioners did not report in 1988 the $40,950 received in

advances from Robert Randall Co. As previously discussed, the

$40,950     constitutes   compensation,    which       is   includable   in

petitioner's gross income.

     Section 6501(e) provides: "If the taxpayer omits from gross

income an amount properly includable therein which is in excess of

25 percent of the amount of gross income stated in the return, the

tax may be assessed, or a proceeding in court for the collection of

such tax may be begun without assessment, at any time within 6

years after the return was filed."          Further, section 6503(a)

provides for the suspension of the running of the period of

limitations if a proceeding is placed on the docket of this Court,

from the issuance of the deficiency notice until a decision of the

Court becomes final.

     In the instant case, petitioners filed their 1988 return on

April 15, 1989.     The notice of deficiency for 1988 was issued on

May 27,     1994.   The   petition   requesting    a   redetermination   of

respondent's deficiency determination for 1988 was filed on August

30, 1994.    Sec. 6503.

     The $40,950 which petitioners failed to include in their 1988

income is in excess of 25 percent of the amount of gross income

stated on the return.3     Thus, on the date respondent's notice of

     3
          Even if the sale of petitioners' home is taken into
account, for sec. 6501(e) purposes, the $14,050 capital gain on
the sale, not the $180,000 gross sales price, is used in
                                                   (continued...)
                                            - 11 -

deficiency for 1988 was issued, the 6-year period of limitations

had not yet expired, and the omitted $40,950 could have properly

been included in respondent's deficiency notice.                       Accordingly,

respondent         is   not   time-barred        from    asserting   an     increased

deficiency in her amended answer with respect to the omitted

$40,950 of wage income.

Issue 4.       Accuracy-Related Penalty

       Respondent         determined    an     accuracy-related      penalty    under

section 6662(a) for 1989, 1990, and 1991.                  Section 6662 imposes a

penalty equal to 20 percent of the portion of an underpayment that,

among other things, is a substantial understatement of income tax.

       An understatement of income is substantial if it exceeds the

greater of 10 percent of the tax required to be shown on the return

or $5,000.         Sec. 6662(d)(1).         The deficiencies here determined are

substantial understatements.

       The accuracy-related penalty does not apply with respect to

any portion of the 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.   Sec.      6664(c)(1).

Petitioners claim that they relied on their accountant to correctly

prepare their returns.          Reliance by a taxpayer on the advice of a

qualified adviser will constitute reasonable cause and good faith

       3
      (...continued)
computing the gross income reported on the return. See Burbage
v. Commissioner, 82 T.C. 546, 558 (1984), affd. 774 F.2d 644 (4th
Cir. 1985).
                                    - 12 -

if, under all of the facts and circumstances, the reliance was

reasonable and the taxpayer acted in good faith.                   Sec. 1.6664-

4(b)(1),    Income    Tax   Regs.         Considering   all      the    facts   and

circumstances presented, we do not find persuasive petitioner's

defense that he relied on his accountant to correctly prepare his

returns.      The    accountant     did    not   testify.        And    we   found

petitioner's self-serving testimony in this regard to be not

credible.    In conclusion, we hold that petitioners are liable for

the accuracy-related penalty on the entire underpayment for 1989,

1990, and 1991.

     To    reflect   the    foregoing      and   because    of    the   increased

deficiency for 1988,



                                             Decision will be entered

                                    under Rule 155.
