                       T.C. Memo. 2001-163



                     UNITED STATES TAX COURT



         RICHARD E. & ELIZABETH S. NILSEN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 17295-99, 17296-99.           Filed July 3, 2001.


     Jerome L. Blut, for petitioners.

     Timothy S. Sinnott, for respondent.



                        MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   In these consolidated

cases, respondent determined that petitioners were liable for the

following additions to tax for the years 1982 and 1983:1




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


                                Additions to Tax
     Year        Sec. 6653(a)(1)     Sec. 6653(a)(2)        Sec. 6661

     1982             $443                  *                $2,215
     1983               10                  **                 –--

     *      Fifty percent of the interest due on $8,858.
     **     Fifty percent of the interest due on $201.


     The issues for decision are:      (1) Whether, for 1982 and

1983, petitioners are liable for the additions to tax under

section 6653(a)(1) and (2) for negligence, and (2) whether, for

1982, petitioners are liable for the addition to tax under

section 6661 for a substantial understatement of tax.      The issues

in these cases relate to the participation of Richard E. Nilsen

(petitioner) as a limited partner in a partnership known as

Blythe Jojoba II Research, Ltd. (Blythe II or the partnership).

     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 petitions were filed, petitioners'

legal residence was Henderson, Nevada.

     Petitioner is a medical doctor specializing in family

practice medicine.    Petitioner has been practicing family

medicine in Las Vegas, Nevada, since 1964.       During 1963 or 1964,

when petitioner was a medical intern, he became acquainted with a

financial adviser named Gary Sheets (Mr. Sheets).      At that time,

Mr. Sheets began advising petitioner on various financial matters

and introduced petitioner to numerous investment opportunities.
                               - 3 -


Between the years 1964 and 1982, petitioner invested money with

Mr. Sheets approximately two or three times per year.    Petitioner

experienced a favorable rate of financial success with Mr.

Sheets' investment suggestions, which consisted primarily of real

estate investments such as land development.

     During 1982, Mr. Sheets approached petitioner about

investing in Blythe II, which was being promoted as an

agricultural research and development partnership.   Blythe II was

the first agricultural type investment opportunity that had been

proposed by Mr. Sheets for consideration by petitioner.     Mr.

Sheets provided petitioner with a fairly voluminous private

placement memorandum2 (the offering), which described the

proposed investment in, and the activities to be conducted

through, Blythe II.   Petitioner admittedly only scanned the

document and did not carefully read each page.   Instead,

petitioner passed along the offering to his certified public

accountant, Gary Mathis (Mr. Mathis), who routinely reviewed

petitioner's other investment opportunities.    After perusing the

offering, Mr. Mathis advised petitioner that Blythe II appeared

to be a reasonable investment opportunity and that petitioner

should be entitled to deductions for research and development

costs, as well as other partnership expenses.


     2
          The private placement memorandum consisted of some 47
pages, plus 8 exhibits, and a table of contents.
                               - 4 -


     Petitioner also contacted Jack Huntington (Mr. Huntington),

who operated Huntington Jewelers in Las Vegas, to inquire about

the use of jojoba bean oil in the jewelry and watch industry.

According to the offering, one of the potential uses for oil

extracted from jojoba beans was a substitute for sperm whale oil,

which had been banned from importation into the United States in

the early 1970's.   Mr. Huntington advised petitioner that there

was some concern among those in the watch industry about the

availability of sperm whale oil as a lubricant and the prospects

for any viable substitute.   Petitioner did not consult an

attorney or any independent expert in the area of agriculture or

jojoba plants regarding whether jojoba oil could be a viable or

competitive substitute for sperm whale oil.   Petitioners,

nevertheless, invested in Blythe II.

     On their joint 1982 Federal income tax return, petitioners

reported wages of $105,100 from petitioner's medical practice and

a loss of $20,933 from Blythe II.   Including the loss reported

from Blythe II, petitioners reported total net losses from

various partnerships of $54,575 for 1982.   Thus, petitioners

reported an adjusted gross income of $51,576 and a total tax

liability of $3,181.3


     3
          During May 1985, petitioners filed an amended return
for 1982 reporting an increase in adjusted gross income of
$17,265 due to the disallowance of another partnership loss
                                                   (continued...)
                                 - 5 -


     On their joint 1983 Federal income tax return, petitioners

reported wages of $86,000 from petitioner's medical practice and

a loss of $1,006 from Blythe II.    Including the loss reported

from Blythe II, petitioners reported total net losses from

various partnerships of $33,680 for 1983.      Thus, petitioners

reported an adjusted gross income of $71,351 and a total tax

liability of $9,133.4

     Blythe II 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, which involved a

similar jojoba investment program.5      In the decided case, this

Court held that the partnerships6 did not directly or indirectly



     3
      (...continued)
claimed on their original 1982 return. On the amended return,
petitioners reported a total tax liability of $8,617.
     4
          During December 1987, petitioners filed an amended
return for 1983 reporting an increase in adjusted gross income of
$6,132 due to respondent's disqualification of a pension and
profit-sharing plan to which petitioner made contributions during
1983. On the amended return, petitioners reported a total tax
liability of $10,360.
     5
          The tax matters partner of Blythe II signed a
stipulation to be bound by the outcome of Utah Jojoba I Research
v. Commissioner, T.C. Memo. 1998-6.
     6
          Eighteen docketed cases were bound by stipulation by
the outcome of Utah Jojoba I Research v. Commissioner, supra.
                               - 6 -


engage in research or experimentation, and that the partnerships

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 partnerships and the proposed research and

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 partnerships 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 Blythe II's TEFRA proceeding, petitioners

were assessed tax deficiencies of $8,858 for 1982 and $201 for

1983, plus interest.   Subsequently, respondent issued notices of

deficiency to petitioners for 1982 and 1983 for affected items

determining that petitioners are 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 cases.
                                 - 7 -


     The first issue is whether petitioners are liable for the

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

for both years at issue.   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 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 petitioners must establish

otherwise.   See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933); cf. sec. 7491(c).7    Respondent determined that

petitioners’ underpayments were due to negligence.    Petitioners,

therefore, have the burden of proving they were not negligent in

deducting their 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);




     7
          The Internal Revenue Service Restructuring & Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726, added
sec. 7491(c), which shifts the burden of proof to 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. Petitioners do not
contend that their examination commenced after July 22, 1998, or
that sec. 7491 is applicable in these cases.
                                 - 8 -


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;

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
                                 - 9 -


"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.

     The facts pertinent to the instant cases, relating to the

structure, formation, and operation of Blythe II, are as

discussed in Utah Jojoba I Research v. Commissioner, T.C. Memo.

1998-6, with the exception of a few specific dates and dollar

amounts.    Blythe II 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,

dated November 30, 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
                              - 10 -


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

subject to a Federal income tax rate of 50 percent.

     Petitioners' investment was for four limited partnership

units, which required an initial downpayment of $10,000 and

execution of a promissory note for $23,920.   Petitioners paid

$2,600 each year from 1983 through 1985 and $2,100 per year from

1986 through 1991 on the promissory note.   In 1992, petitioners

made a final payment of $3,520.

     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 Blythe II and U.S. Agri granted U.S. Agri the

exclusive right to utilize technology developed for Blythe II 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.8   The R & D agreement was

executed concurrently with the license agreement.


     8
          In the instant cases, the Blythe II offering is
included in evidence as a stipulated exhibit; however, the
stipulated exhibit contains an incomplete copy of the R & D
agreement that was attached to the original offering. To the
extent that relevant facts are omitted due to the incomplete copy
of the R & D agreement (or other incomplete pieces of evidence)
in the instant cases, the Court must rely on findings of fact in
Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6, to
which the partners of Blythe II agreed to be bound. It is
petitioners' burden to establish the context in which their
deductions were taken. See Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115; Bixby v. Commissioner, 58 T.C. 757, 791 (1972).
                              - 11 -


     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

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.

     Petitioners here contend that their investment in Blythe II

was motivated solely by the potential to earn a profit.

Petitioners contend further that their reliance on the advice of
                               - 12 -


their certified public accountant, Mr. Mathis, should absolve

them of liability for the negligence penalty in these cases.

Petitioners also argue that, taking into account their experience

and the nature of the investment in Blythe II, they exercised the

due care that a reasonable and ordinarily prudent person would

have exercised under like circumstances.    For the reasons set

forth below, the Court does not agree with petitioners'

contentions.

     First, the principal flaw in the structure of Blythe II 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, petitioners never consulted an

attorney in connection with this investment, nor did they

thoroughly read the offering themselves.
                               - 13 -


     Secondly, in making their investment in Blythe II,

petitioners relied on the advice of their certified public

accountant, Mr. Mathis, Mr. Sheets, who was a promoter for the

partnership, and petitioner's brief conversation with a local

jeweler about the prospects for the use of jojoba bean oil in the

watch and jewelry industry.    Mr. Mathis, admittedly, made only a

cursory review of the offering and advised petitioners that,

based on what he had read in the offering, there was some basis

for the investment, there would be some tax advantages, and the

investment had, "at least, some potential".   Mr. Mathis testified

that the subject tax deductions appeared reasonable to him

because they were "one for one" deductions rather than the

"multiple write-off kind of investments that were floating around

at that time."   Mr. Mathis did not give petitioners a written

opinion about the investment, nor did he conduct any independent

research or consult any type of agricultural or jojoba plant

expert about the investment.   Instead, he relied solely on the

representations made in the offering.

     Moreover, when questioned by this Court, Mr. Mathis admitted

that, at the time he advised petitioners about Blythe II, he had

rarely been presented with a question concerning research and

development expenses, and he realized that such expenses would

have allowed petitioners certain tax benefits above and beyond

what would have been provided by an ordinary business deduction.
                              - 14 -


Despite his relative inexperience with the deductibility of

research and development expenses, however, Mr. Mathis failed to

conduct 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.   It is also notable that Mr. Mathis had no

educational background or experience in the area of agricultural

pursuits.

     There is no evidence in the record to suggest that

petitioners ever questioned Mr. Mathis about the facts and/or

legal analysis upon which he based his recommendations.    Further,

the record is devoid of any evidence that petitioners asked Mr.

Mathis to explain the Blythe II investment to them, particularly

those portions of the offering that they had opted not to read or

apparently were unable to understand.

     The facts in these cases are similar to those in Glassley v.

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

the taxpayers:


     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" * * *.
                              - 15 -


Similarly, petitioners in these cases acted on their enthusiasm

for the potential uses of jojoba and acted with knowledge of the

tax benefits of making the investment.   The evidence in this

record suggests that the nature of the advice given by Mr. Mathis

was highly generalized and based primarily on a mere cursory

review of the offering rather than on independent knowledge,

research, or analysis.   Petitioners failed to show that Mr.

Mathis had the expertise and knowledge of the pertinent facts to

provide informed advice on the investment in Blythe II.    See

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

petitioners failed to establish that their reliance on the advice

of Mr. Mathis was reasonable or in good faith.   See Glassley v.

Commissioner, supra.

     The Court next examines petitioners' reliance on the advice

of Mr. Sheets.   Mr. Sheets had no background or expertise in the

areas of agriculture or jojoba plants.   In fact, nearly all of

the previous investments recommended to petitioners by Mr. Sheets

had been real estate investments, and Blythe II was the first

investment of an agricultural nature advocated by him.    Also,

because Mr. Sheets was a salesperson for this investment, he had

a personal profit motive, and thus a conflict of interest, in

advising petitioners to purchase the limited partnership

interests.   The advice petitioners allegedly received from Mr.

Sheets fails as a defense to negligence due to his lack of
                               - 16 -

competence to give such advice and the clear presence of a

conflict of interest.   See Rybak v. Commissioner, 91 T.C. 524,

565 (1988).    Petitioners' reliance on the advice of Mr. Sheets

was unreasonable under the circumstances.

     Outside of Mr. Mathis and Mr. Sheets, petitioner's sole

inquiry into the viability of this partnership's operations was

his contact with a jeweler, Mr. Huntington, who advised

petitioner that there were concerns in the watch industry about

the lack of availability of sperm whale oil as a lubricant and

the prospects for any viable substitute for this oil.    The Court

finds it notable that the offering listed at least fifteen

"potential uses of jojoba nuts", only one of which was a

lubricant substitute for sperm whale oil; yet, petitioners chose

to explore only one of those potential uses by contacting a local

jeweler.   Some other potential uses listed in the offering were

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 this

possibility.   Petitioners' failure to investigate any of the

other enumerated potential uses of jojoba plants was unreasonable

under the circumstances.
                             - 17 -

     Petitioners had no legal or agricultural background or

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

to investing more than $30,000 in Blythe II.   Petitioners contend

that, based on the amount of money they were investing in Blythe

II, they couldn't justify spending additional funds to research

the partnership and its proposed activities.   Petitioners argue

further that they didn't know where or how to find an appropriate

expert to examine the investment.   On the contrary, the Court

believes that, at a minimum, petitioners 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.

     Additionally, the Court does not believe that petitioners

would have experienced a great degree of difficulty or incurred a

great deal of expense in 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.9


     9
      In Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-
                                                   (continued...)
                              - 18 -

     Petitioners were not naive investors and should have

recognized the need for independent professional advice.    See

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



     9
      (...continued)
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 Blythe II, Mr.
Kellen, was aware.
                               - 19 -

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

agricultural background.    However, petitioner testified that,

prior to investing some $33,000 in Blythe II, he did not even

bother to read the entire offering, nor did he make an effort to

obtain a reasonable understanding of those portions that he did

read.   Moreover, petitioners failed to monitor the progress of

their investment after purchasing the limited partnership

interests.

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

Circuit (Ninth Circuit), the court to which appeals in these

cases 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
                               - 20 -

business for purposes of qualifying for an immediate deduction

under section 174.   However, in the instant cases, 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 Blythe II, Mr. Kellen, was

questionable, at best, as evidenced by conflicting statements in

the offering.   Also, it is apparent from the evidence presented

in these cases that Mr. Kellen had minimal involvement in the

partnership.    Petitioners are 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 petitioners did not

exercise the due care of reasonable and ordinarily prudent

persons under the circumstances.   Consequently, the Court holds

that petitioners are liable for the negligence additions to tax

under section 6653(a)(1) and (2) for each of the years at issue.

Respondent is sustained on this issue.

     The second issue is whether petitioners are 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,
                                - 21 -

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

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 the

authorities supporting the treatment is substantial in relation

to the weight of authorities supporting contrary positions."

Sec. 1.6661-3(b)(1), Income Tax Regs.      Petitioners appear to

argue that no authority, other than section 174 itself, existed
                                - 22 -

at the time they claimed the relevant loss.    However, their

reliance on section 174, standing alone, does not provide the

substantial authority required under section 6661 and

accompanying regulations.   Petitioners have failed to show that

substantial authority existed for the tax treatment of the Blythe

II loss on their 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

petitioners did not attach a statement to their 1982 return

disclosing the specific facts surrounding their Blythe II loss

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

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 are

relevant to the instant cases.    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).     Petitioners appear to
                              - 23 -

argue that the Blythe II deduction was clearly indicated on their

1982 return.   However, a mere claiming of the loss, without

further explanation, is not sufficient to alert respondent to the

controversial section 174 deduction of which the partnership loss

consisted.   Petitioners have failed to show that the relevant

facts pertaining to their Blythe II loss deduction were

adequately disclosed on their 1982 return.10

     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 for abuse of discretion the Secretary’s

failure to waive the addition to tax.   See Martin Ice Cream Co.

v. Commissioner, 110 T.C. 189, 235 (1998).     Petitioners argue

that they acted in good faith and reasonably relied upon the

advice of Mr. Mathis in claiming the relevant loss.    However,

nothing in the record indicates that petitioners 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, petitioners have not shown that they met the tests

of reasonable cause and good faith.



     10
          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.
                               - 24 -

     Petitioners have failed to prove that they had substantial

authority for their treatment of the partnership loss and that

they adequately disclosed the relevant facts of that treatment.

The understatement upon which the addition to tax was imposed was

$8,858.   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.11   On this record, the Court holds that

petitioners are liable for the addition to tax under section

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

Respondent is sustained on this issue.

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

argument of petitioners herein, the Court concludes such argument

is without merit.



                                         Decisions will be entered

                                    for respondent.




     11
          The amount required to be shown on the return was
$17,475, 10 percent of which equals $1,747.50.
