                        T.C. Memo. 1997-306



                      UNITED STATES TAX COURT



     JOHN C. VANDERSCHRAAF AND CORNELIA VANDERSCHRAAF, ET AL.,1
    Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 37087-86, 6079-88,       Filed July 2, 1997.
                   8910-88, 21729-88.



      Michael J. Christianson, for petitioners.

      Elizabeth Girafalco Chirich and Susan K. Greene, for

respondent.




1
     Cases of the following petitioners are consolidated
herewith: Estate of Donald R. Lawrenz, Sr., Deceased, Donald R.
Lawrenz, Jr., Executor, and Ella A. Lawrenz, docket No. 6079-88;
John C. Vanderschraaf and Cornelia Vanderschraaf, docket No.
8910-88; and Estate of Donald R. Lawrenz, Sr., Deceased, Donald
R. Lawrenz, Jr., Executor, docket No. 21729-88.

      Petitioner Donald R. Lawrenz, Sr., died on Sept. 7, 1996.
                                        - 2 -

                               MEMORANDUM OPINION


       SWIFT, Judge:        Respondent determined deficiencies in

petitioners’ Federal income taxes, additions to tax, and

increased interest, as follows:


                        Docket Nos. 37087-86 and 8910-88

John C. and Cornelia Vanderschraaf

                            Increased Interest and Additions to Tax
                       Sec.     Sec.      Sec.        Sec.       Sec.        Sec.
Year    Deficiency   6621(c) 6653(a) 6653(a)(1) 6653(a)(2)      6659         6661

1980     $ 23,084       *      $1,154       --            --           --     --
1981       21,939       *         --      $1,097          **        $6,582    --
1982       12,184       *         --         609          **         3,655    ***


                                 Docket No. 6079-88

Estate of Donald R. Lawrenz, Sr., Deceased, and Ella A. Lawrenz

                            Increased Interest and Additions to Tax
                       Sec.      Sec.       Sec.           Sec.              Sec.
Year    Deficiency   6621(c)    6653(a)   6653(a)(1)    6653(a)(2)           6659

1980     $137,835       *        $6,892            --          --            --
1981      200,227       *           --          $10,011        **        $60,068


                                Docket No. 21729-88

Estate of Donald R. Lawrenz, Sr., Deceased

                              Increased Interest and Addition to Tax
                               Sec.                           Sec.
Year   Deficiency             6621(c)                        6653(a)

1979     $212,325                *                             $10,616


         *   120 percent of interest accruing after Dec. 31, 1984,
             on portion of the underpayment attributable to a tax-
             motivated transaction.

       **    50 percent of interest due on portion of underpayment
             attributable to negligence.

       ***   25 percent of underpayment due on portion attributable
             to substantial understatement of tax.
                              - 3 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

     After settlement of some issues, the primary issue for

decision is whether the profit objective of certain partnership

investments should be measured at the partnership level or at the

individual partner level.


Background

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

The entire trial record and the testimony and exhibits admitted

into evidence in our test case opinion in Krause v. Commissioner,

99 T.C. 132, 133-167 (1992), affd. sub nom. Hildebrand v.

Commissioner, 28 F.3d 1024 (10th Cir. 1994), have been stipulated

as part of the trial record herein.   Krause involved limited

partnership investments that are closely related to the limited

partnership investments at issue herein.

     Background and other general facts as they were found in

Krause that relate directly and indirectly to the partnership

investments involved herein we, by this reference, incorporate as

findings of fact in the instant cases.

     Petitioners, John C. and Cornelia Vanderschraaf, resided in

Fountain Valley, California, at the time they filed their

petitions.
                               - 4 -

     Petitioners, Donald R. and Ella A. Lawrenz, resided in

Corona Del Mar, California, at the time they filed their

petitions.

     On their respective Federal income tax returns for the years

in issue, petitioners claimed large losses and interest

deductions relating to investments as limited partners in Boulder

Oil and Gas Associates (Boulder), Technology Oil and Gas

Associates 1979 (Tech-1979), and Winfield Oil and Gas Associates

(Winfield).   Respondent disallowed these claimed losses and

interest deductions, and petitioners filed the instant cases

contesting respondent's adjustments.

      After a lengthy trial in the Krause test cases, we

analyzed, primarily at the partnership level, the objective of

the particular partnerships involved in Krause.   We concluded

that the partnerships did not have the requisite profit objective

to support the losses claimed, and we sustained respondent's

disallowance of the claimed losses relating to the taxpayers’

investments in the partnerships.   Also, on the ground that the

underlying debt obligations did not constitute genuine debt, we

sustained respondent's disallowance of the claimed interest

deductions relating thereto, and we imposed an increased interest

rate under section 6621(c).

     We did not, however, in the Krause test case opinion sustain

respondent's determinations under sections 6653(a)(1) and (2),
                                - 5 -

6659, and 6661 of additions to tax for negligence, for valuation

overstatements, and for substantial understatements of tax.

     As indicated, our findings and holdings in Krause v.

Commissioner, supra, were affirmed by the U.S. Court of Appeals

for the Tenth Circuit.

     The license agreements entered into by Boulder, Tech-1979,

and Winfield with Elektra are not materially different from the

license agreements entered into by the partnerships involved in

the Krause test cases.

     Facts found and conclusions reached in Krause with regard

specifically to lack of profit objective of the partnerships

involved in Krause are incorporated herein by reference and apply

to Boulder, Tech-1979, and Winfield.

     Similar to our findings in Krause v. Commissioner, supra at

169, with regard to the partnerships involved therein, the stated

consideration agreed to by Boulder, Tech-1979, and Winfield for

the license of enhanced oil recovery (EOR) technology and for the

lease of tar sands properties was excessive, bore no relation to

the value of that which was acquired, did not conform to industry

norms, and precluded any realistic opportunity for profit.

     In the oil and gas industry, a portfolio of technology is

not ordinarily licensed when it is not known whether the

technology will even work on the property on which the technology

is to be implemented.    EOR technology is known to be site

specific.   For this reason, the acquisition of a portfolio of EOR
                                - 6 -

technology for use on particular properties typically does not

occur in the oil industry.

     In the late 1970's and early 1980's, when the license

agreements involved in these cases were entered into, the

established license fee in the oil industry for the right to use

EOR technology was a 2-3 percent running royalty based on

incremental increased oil production, or on the income actually

realized therefrom, that was attributable to the particular EOR

technology being licensed.    The fixed fees to be paid by Boulder,

Tech-1979, and Winfield for the EOR technology licenses were not

competitive in the oil industry and were contrary to industry

norms.

     It was not necessary for Boulder, Tech-1979, and Winfield to

license these technologies.   Of the technologies licensed --

Carmel VaporTherm (Carmel), TEC, ElektraFlo, and SME Oil Drive --

only the TEC and Carmel processes were developed to any

significant extent, and the TEC and Carmel processes could have

been licensed by the partnerships directly from the inventors

thereof for running royalties based solely on income realized

therefrom.   Thus, it was not necessary for Boulder, Tech-1979,

and Winfield to license the Carmel and TEC processes from Elektra

and pay up-front fees for them.

     In the oil exploration and production industry, it is

ordinary to lease tar sands properties based on projections of

reserves, not oil in place.
                                - 7 -

     The multimillion dollar license fees and lease royalties

that Boulder, Tech-1979, and Winfield agreed to pay were

excessive, did not reflect arm's-length debt obligations, and are

not to be recognized as legitimate obligations of the

partnerships.   The license fees and lease royalties to which

Boulder, Tech-1979, and Winfield agreed, and the related debt

obligations, do not constitute legitimate, genuine debt

obligations and are to be disregarded.

     On partnership information returns of Boulder, Tech-1979,

and Winfield, petitioners were identified as partners, and on

petitioners' respective individual Federal income tax returns for

the years in issue, they reported their distributive share of the

substantial claimed losses and credits relating to Boulder, Tech-

1979, and Winfield.   By claiming these flowthrough partnership

losses, petitioners repeatedly represented to respondent the

existence of these partnerships and petitioners' status as

partners of the partnerships.

     It was the general partners and the promoters of Boulder,

Tech-1979, and Winfield, not the limited partners, who controlled

the transactions and activities of the partnerships.    Actions and

intent of the general partners with regard to Boulder, Tech-1979,

and Winfield, including the profit objective of the partnerships

or lack thereof, are attributable to petitioners.   See Utah Code

Ann. secs. 48-1-9, -11 to -15, -17, -18; 48-2a-403 (1994).
                               - 8 -

Discussion

     It is well established that the issue under section 183 as

to whether partnerships are engaged in activity with a profit

objective is determined at the partnership level.    Pasternak v.

Commissioner, 990 F.2d 893, 900 (6th Cir. 1993), affg. Donahue v.

Commissioner, T.C. Memo. 1991-181; Simon v. Commissioner, 830

F.2d 499, 507 (3d Cir. 1987), affg. T.C. Memo. 1986-156; Krause

v. Commissioner, 99 T.C. 132 (1992) (and cases cited therein);

Drobny v. Commissioner, 86 T.C. 1326, 1341 (1986) (motion to

vacate denied at T.C. Memo. 1995-209, affd. 113 F.3d 670 (7th

Cir. 1997)); Brannen v. Commissioner, 78 T.C. 471, 505 (1982),

affd. 722 F.2d 695 (llth Cir. 1984); Hager v. Commissioner, 76

T.C. 759, 782 n.11 (1981).

     In resolving this issue, courts focus on actions of the

partners who manage affairs of the partnerships and upon whom

other partners rely to make partnership decisions.   Drobny v.

Commissioner, 86 T.C. at 1341 (citing Brannen v. Commissioner, 78

T.C. at 504-505); Fox v. Commissioner, 80 T.C. 972, 1007-1008

(1983), affd. without published opinion 742 F.2d 1441 (2d Cir.

1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230 (4th

Cir. 1984), affd. without published opinions sub nom. Hook v.

Commissioner, Kratsa v. Commissioner, Leffel v. Commissioner,

Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 5, 6-

7, 9 (3d Cir. 1984).   Under any other approach, different results

would accrue to partners in the same partnerships even though the
                                 - 9 -

partners themselves may have had no control over activity of the

partnerships.   See Independent Elec. Supply, Inc. v.

Commissioner, 781 F.2d 724, 729 (9th Cir. 1986), affg. Lahr v.

Commissioner, T.C. Memo. 1984-472; Resnik v. Commissioner, 66

T.C. 74, 81 (1976), affd. per curiam 555 F.2d 634 (7th Cir.

1977).   For these reasons, in analyzing the profit objective of,

in particular, limited partnerships, individual actions of

limited partners are not the focus of the analysis.

     The U.S. Court of Appeals for the Ninth Circuit has

repeatedly accepted the proposition that a partnership level

determination of profit objective is proper.   See, e.g., Balboa

Energy Fund 1981 v. Commissioner, 85 F.3d 634 (9th Cir. 1996),

affg. in part and revg. in part without published opinion

Osterhout v. Commissioner, T.C. Memo. 1993-251; Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.

1991-212; Vorsheck v. Commissioner, 933 F.2d 757, 758 (9th Cir.

1991); Polakof v. Commissioner, 820 F.2d 321, 323 (9th Cir.

1987), affg. T.C. Memo. 1985-197; Independent Elec. Supply, Inc.

v. Commissioner, supra at 729.

     Analyzing under section 183 the profit objective element at

the partnership level is consistent with and follows the general

rule of Federal partnership taxation that the treatment of

partnership income, loss, deduction, or credit be determined at

the partnership level.   Sec. 702(b); Podell v. Commissioner, 55

T.C. 429, 433 (1970) (citing Estate of Freeland v. Commissioner,
                               - 10 -

393 F.2d 573 (9th Cir. 1968), affg. T.C. Memo. 1966-283); sec.

1.702-1(b), Income Tax Regs.

     Section 761(a) defines a partnership for Federal income tax

purposes essentially as a group, joint venture, or other

unincorporated organization through which any business, financial

operation, or venture is carried on.    See also sec. 7701(a)(2)

and sec. 1.761-1(a), Income Tax Regs., under which the term

"partnership" is defined more broadly than the common law meaning

of partnership.

     Petitioners argue that our holding in Krause v.

Commissioner, supra, disallowing under section 183 claimed

partnership losses for lack of profit objective (and any holding

herein to the same effect with regard to Boulder, Tech-1979, and

Winfield) effectively constitutes a holding that the purported

partnerships did not constitute legal partnerships.    Petitioners

argue therefrom that in the instant cases Boulder, Tech-1979, and

Winfield must be regarded by the Court as something other than

legal partnership entities and that a partnership entity level

analysis of profit objective should not be applied.    Petitioners

argue further that the Court has no option in these cases but to

apply section 183 at the individual partner level with regard to

each and every partner in Boulder, Tech-1979, and Winfield.

     Citing section 761(a) and section 301.7701-3(a), Proced. &

Admin. Regs., petitioners argue further that partnerships lacking

in profit objective are to be regarded as not engaged in any
                               - 11 -

trade or business and that in such situations the partners'

investments should be regarded as the mere coownership of

property.   We disagree.

     Petitioners' specific arguments herein were rejected in

Madison Gas & Elec. Co. v. Commissioner, 72 T.C. 521, 561-563

(1979), affd. 633 F.2d 512 (7th Cir. 1980).   In Madison Gas &

Elec. Co., it was concluded that under section 761(a) a

partnership may exist even without a profit objective.    Section

761(a) merely requires an “unincorporated organization, through

or by means of which any business, financial operation, or

venture is carried on."    Madison Gas & Elec. Co. v. Commissioner,

633 F.2d at 514; see also Pasternak v. Commissioner, 990 F.2d at

900 (tax shelter cotenancies treated as partnerships under

sections 761(a) and 7701(a)(2)); Brannen v. Commissioner, supra

at 512 n.16 (tax shelter partnership not engaged in business for

profit under section 183 treated as partnership under section

761(a)).

     In National Commodity & Barter Association v. United States,

843 F. Supp. 655, 659, 661 (D. Colo. 1993), affd. without

published opinion 42 F.3d 1406 (10th Cir. 1994), an entity that

was organized largely to resist taxes was treated as a

partnership under section 761.

     Petitioners cite certain court opinions out of context.     In

Commissioner v. Culbertson, 337 U.S. 733, 740 (1949), the Supreme

Court stated that a partnership constitutes an organization for
                             - 12 -

production of income to which each partner contributes one or

both of the ingredients of income, which are capital or service.

     References to partnership income in Commissioner v.

Culbertson, supra, as well as in Commissioner v. Tower, 327 U.S.

280 (1946), and Form Builders, Inc. v. Commissioner, T.C. Memo.

1990-75, involve the issue of whether a taxpayer is to be treated

as having invested in a partnership, as distinguished from an

investment in some other type of taxable entity, an issue

different from the issue of whether the underlying activity of

the partnership was entered into for profit.

     In cases such as Krause v. Commissioner, 99 T.C. 132 (1992),

and the instant cases, the focus of the analysis is on whether

the underlying activity entered into by the partnerships was

supported by economic substance and profit objective.   See, e.g.,

Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726

(9th Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472

(citing Hirsch v. Commissioner, 315 F.2d 731, 736 (9th Cir.

1963), affg. T.C. Memo. 1961-256); Krause v. Commissioner, supra

at 168 (citing Nickeson v. Commissioner, 962 F.2d 973 (10th Cir.

1992), affg. Brock v. Commissioner, T.C. Memo. 1989-641).     In

that context and in regard to that particular issue, a court

decision that a partnership activity does not constitute a trade

or business, has no economic substance, or lacks a profit

objective, does not constitute, and is not equivalent to, a
                             - 13 -

holding that the investors intended to create an entity other

than a partnership.

     For example, our focus in Krause was not on whether the

parties intended to form partnerships.   Our focus was on the

underlying activity and transactions entered into by the

partnerships after the investors entered into and invested in the

partnerships.

     As previously noted, finding that the underlying

transactions entered into by the partnerships did not constitute

arm’s-length transactions, that the license fees agreed to were

not negotiated at arm's length and were excessive, and that the

assets acquired were overvalued, we held that the transactions

entered into by the partnerships, upon which the losses in

dispute were based, were not entered into with a profit

objective, that the underlying transactions did not constitute

legitimate for-profit business transactions, and that purported

debt obligations associated therewith did not constitute genuine

debt obligations and were to be disregarded.2   Krause v.

Commissioner, 99 T.C. at 140-141, 145, 171, 175-176.

     The essence and focus of the inquiry as to whether an

arrangement constitutes a partnership is whether the parties

thereto intended to create a partnership.   See, e.g.,

2
     It is noted that the Court made these findings in Krause v.
Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v.
Commissioner, 28 F.3d 1024 (10th Cir. 1994), with respect to a
sister partnership, Technology-1980.
                                - 14 -

Commissioner v. Culbertson, 337 U.S. at 742; S & M Plumbinq Co.

v. Commissioner, 55 T.C. 702, 707 (1971).    Certain factors are

indicative of such an intent.

     In Allison v. Commissioner, T.C. Memo. 1976-248, we noted

four basic attributes of a joint venture or partnership:    (1) A

contract that a joint venture be formed; (2) the contribution of

money, property, and/or services; (3) an agreement for joint

proprietorship and control; and (4) an agreement to share

profits.   Id.; see also S & M Plumbing Co. v. Commissioner, supra

at 707.    Boulder, Tech-1979, and Winfield have all four of these

attributes.

     In Johnson v. United States, 632 F. Supp. 172, 174 (W.D.

N.C. 1986), the following factors were particularly relevant to a

conclusion that a partnership existed:   (1) Whether a partnership

agreement existed; (2) whether the investors represented to

others that they were partners; (3) whether the investors had a

proprietary interest in partnership profits and losses;

(4) whether the investors had a right to control partnership

income and capital; and (5) whether the investors contributed

capital and services.   See also United States v. Levasseur, 45

AFTR 2d 80-1507 at 1511, 80-1 USTC par. 9349 at 83,880 (D. Vt.

1980) (citing Estate of Kahn v. Commissioner, 499 F.2d 1186, 1189

(2d Cir. 1974), affg. Grober v. Commissioner, T.C. Memo. 1972-

240).
                                - 15 -

     Boulder, Tech-1979, and Winfield did not constitute mere

passive coowners of property.   The partnerships entered into

transactions, formed joint ventures, operated gas wells, and

engaged in various other activities.     They carried on a financial

operation or venture.   They are to be treated as partnerships under

section 76l(a) even though underlying activity of the partnerships

lacked a profit objective under section 183.

     Boulder, Tech-1979, and Winfield each had the formal indicia

of partnership status and conducted themselves generally as

partnerships.   They are to be treated as partnerships.   The issue

under section 183 as to the profit objective of the partnership

activity is to be analyzed at the partnership level.    Our

conclusion in Krause v. Commissioner, supra, and herein that

activity and transactions of the partnerships were not entered into

with a profit objective does not affect the status of Boulder,

Tech-1979, and Winfield as partnerships for Federal income tax

purposes.

     Our findings herein as to the lack of profit objective of the

underlying activity of Boulder, Tech-1979, and Winfield are based

in part on petitioners' failure to meet their burden of proof as to

the existence of a profit objective with respect to the underlying

activity of Boulder, Tech-1979, and Winfield, on the fact that the

entire record and evidence of Krause was stipulated to as evidence

in the instant cases, and on the doctrine of stare decisis.

     Stare decisis may apply even though -- because the parties in
                               - 16 -

the present case are not the same parties as were involved in the

prior case -- res judicata would not apply.   Simmons v. Union News

Co., 341 F.2d 531, 533 (6th Cir. 1965); Leishman v. Radio Condenser

Co., 167 F.2d 890 (9th Cir. 1948).

     We have applied stare decisis when faced with repetitive

litigation involving the Federal income tax consequences of

investments in related tax shelter partnerships.   See Pearlman v.

Commissioner, T.C. Memo. 1995-182; Kott v. Commissioner, T.C. Memo.

1995-181; Eisenberg v. Commissioner, T.C. Memo. 1995-180; Decker v.

Commissioner, T.C. Memo. 1995-38; Brown v. Commissioner, T.C. Memo.

1994-43; Kozlowski v. Commissioner, T.C. Memo. 1993-430, affd.

without published opinion 70 F.3d 1279 (9th Cir. 1995); Walsh v.

Commissioner, T.C. Memo. 1993-421, revd. in part on another issue

without published opinion 72 F.3d 136 (9th Cir. 1995).

     With regard to Tech-1979 and Winfield, on the one hand, and

Technology-1980 (one of the partnerships involved in Krause v.

Commissioner, supra), on the other, petitioners allege that a

material difference exists based on a variation between the license

agreements of Tech-1979 and Winfield and the license agreements of

Technology-1980.   Petitioners did not present any credible evidence

to establish how the alleged difference is material.

     Respondent's expert witness testified that although Tech-

1979's and Winfield's license agreements had a somewhat different

structure from Technology-1980's, they were not materially
                               - 17 -

different.   Petitioners have not alleged any differences between

the license agreements of Boulder and Technology-1980.

     We agree with respondent's expert that there were no material

differences between the various license agreements of Boulder,

Tech-1979, and Winfield and the license agreements of Technology-

1980.

     Petitioners have failed to show that the applicable findings

of fact made in Krause with regard to the lack of profit objective,

the license agreements, and the nongenuine nature of the purported

debt obligations should not be applied in these cases.   We conclude

that the activity and transactions of Boulder, Tech-1979, and

Winfield lacked profit objective, as did the transactions of

Technology-1980 and the other partnerships that were involved in

Krause.

     In light of our resolution of the profit objective issue, it

is not necessary to address certain other substantive issues raised

by the parties.


Additions to Tax and Increased Interest

     In our opinion in Krause v. Commissioner, 99 T.C. at 177-180,

we discussed at some length our reasons for not sustaining

respondent's determination of the same additions to tax that

respondent has determined with regard to petitioners herein.    We

believe that that discussion, as set forth in Krause and as
                                 - 18 -

repeated below, is relevant to the additions to tax and increased

interest at issue herein.

     For the years before us, section 6653(a)(1) provides additions

to tax equal to 5 percent of the underpayments if any part of the

underpayments are due to negligence or intentional disregard of

rules or regulations.   Section 6653(a)(2) provides an addition to

tax of 50 percent of the interest on the portion of the

underpayment attributable to negligence.   Negligence under section

6653(a)(1) and (2) constitutes the failure to exercise due care or

the failure to do what a reasonable or ordinarily prudent person

would do under the circumstances.    Zmuda v. Commissioner, 731 F.2d

1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v.

Commissioner, 85 T.C. 934, 947 (1985).

     With regard to our analysis of the additions to tax, it is

important to note that one of respondent's own expert witnesses

acknowledges that investors may have been significantly and

reasonably influenced by the energy price hysteria that existed in

the late 1970's and early 1980's to invest in EOR technology.    A

number of industry and governmental reports and publications

encouraged investors to invest in EOR technology.   Various

governmental incentives, funding, and subsidies were directed at

development of EOR technology.    In the early 1980's, a large amount

of money was spent on the development of technology for the

recovery of oil from shale and synthetic fuels in spite of the fact
                                - 19 -

that such technology was not technically viable at the time and

that minimal oil was produced therefrom.

     In evaluating the imposition of the additions to tax in the

instant cases, and in light of the above facts (encouraging

investments in and the development of tertiary oil recovery methods

such as EOR technology), we are somewhat understanding of the

individual investments that were made in the Boulder, Tech-1979,

and Winfield partnerships.    In the context of the hysteria relating

to the energy crisis, the oil price increases of the late 1970's,

the industry and governmental interest in EOR technology, the heavy

and sophisticated promotion of these investments, and the evidence

in these cases (and in spite of our findings and conclusions

sustaining respondent's substantive tax adjustments), we conclude

that petitioners are not liable for the additions to tax under

section 6653(a)(1) and (2).

     For 1981 and 1982, respondent in these cases, on brief, has

conceded the section 6659 additions to tax.

     For 1982, respondent asserts that petitioners, John and

Cornelia Vanderschraaf, are liable for an addition to tax for

substantial understatement of tax under section 6661, equal to 25

percent of the respective underpayment of tax attributable to such

understatement of tax.   In order for an understatement of tax to be

considered substantial, the amount of the understatement must

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

the Federal income tax return or $5,000.   Sec. 6661(b)(1)(A).
                               - 20 -

Respondent contends that the addition to tax under section 6661

should be imposed because there was no substantial authority

supporting the claimed treatment of the disallowed items.

Petitioners argue that they should be held not liable for the

section 6661 addition to tax and that respondent should have waived

the section 6661 addition to tax.

     Respondent also argues that petitioners never formally

requested respondent to waive the section 6661 addition to tax, and

respondent argues that the Court therefore is without jurisdiction

to review respondent's refusal to waive this addition to tax.

     On the record in these cases, we conclude that the section

6661 addition to tax has always been before the Court and in

dispute between the parties.   Respondent has been aware for years

of petitioners’ request for an abatement thereof.

     In the related test case of Krause v. Commissioner, 99 T.C. at

179 (on general grounds that are also applicable to petitioners

herein), we expressly addressed and rejected respondent's

imposition of the section 6661 addition to tax.   Based on the

record in these cases, we conclude that respondent's refusal to

waive the section 6661 addition to tax constitutes an abuse of

discretion.   Mailman v. Commissioner, 91 T.C. 1079 (1988); see also

Vorsheck v. Commissioner, 933 F.2d 757 (9th Cir. 1991).

     As we explained in Krause v. Commissioner, 99 T.C. at 180,

imposition of increased interest under section 6621(c), and its

predecessor section 6621(d), is more automatic.   Section 6621(c)
                               - 21 -

provided an increased rate of interest for substantial

underpayments attributable to tax-motivated transactions.

Substantial underpayments are defined as underpayments in excess of

$1,000.   By regulation, among the types of transactions that are

considered to be tax-motivated transactions within the meaning of

section 6621(c) are those with respect to which the related tax

deductions are disallowed under section 183 for lack of profit

objective.   Rybak v. Commissioner, 91 T.C. 524, 568 (1988); sec.

301.6621-2T, A-4(1), Temporary Proced. & Admin. Regs., 49 Fed. Reg.

50392 (Dec. 28, 1984).   In light of our findings as to the lack of

profit objective, petitioners are liable for increased interest

under section 6621(c).

     For the reasons stated, respondent's imposition of the

additions to tax is not sustained in these cases, but respondent's

imposition of increased interest under section 6621(c) is

sustained.


                                         Decisions will be entered

                                     under Rule 155.
