                          T.C. Memo. 2001-190



                        UNITED STATES TAX COURT



                 EDWARD C. TIETIG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5884-98.                          Filed July 25, 2001.


     Edward C. Tietig, pro se.

     Michael D. Zima, for respondent.



                          MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes, accuracy-related penalties,

and additions to tax as follows:

                                 Penalty          Addition to Tax
   Year      Deficiency        Sec. 6662(c)       Sec. 6651(a)(1)

   1990       $45,519             $9,104              $11,380
   1991        42,441              8,488                 -0-
   1992        15,111              3,022                 -0-
   1993         6,848              1,370                1,027
                                   - 2 -


        After concessions,1 the issues for decision are:   (1)

Whether petitioner is entitled to a $32,241 deduction for amounts

purportedly paid to Mark Tietig for use of his securities as loan

collateral in 1993; (2) whether Farm & Grove Realty, Co. (Farm &

Grove) earned income of $215,922 on the sale of 53 lots in 1990;

(3) whether petitioner had unreported capital gains of $57,531.25

in 1991; (4) whether petitioner is allowed a $179,937 net

operating loss carryforward deduction in 1993; (5) whether

petitioner is entitled to deduct $19,995 as a casualty loss in

1993; (6) whether petitioner is liable for the self-employment

tax under section 14012 for 1990, 1991, and 1993; (7) whether

petitioner is entitled to correcting entries relating to flow-

through income reported from a partnership in 1990 and a flow-

through loss reported from the same partnership in 1991; and

(8) whether petitioner is liable for the accuracy-related penalty

pursuant to section 6662(a) for the years 1990, 1991, 1992, and

1993.

     For purposes of order and clarity, after a brief general

background, each of the issues submitted for our consideration is

set forth below with separate background and discussion.



        1
         See appendixes A and B.
        2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -

                          General Background

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

The stipulations of fact, the supplemental stipulations of fact,

and the stipulation of settled issues are incorporated by this

reference.     Petitioner resided in Florida at the time he filed

his petition.

     Petitioner earned a bachelor’s degree in marketing from the

University of Cincinnati in 1951 and a juris doctor degree from

the University of Michigan in 1956.

     Petitioner was the sole stockholder and director of Eureka

Field Nursery, Inc. (Eureka Field Nursery), Tropstock, Inc.

(Tropstock), and Kiddies 50 Corp.     Each corporation was involved

in the sale and care of plants.

         Petitioner was also the sole shareholder of Farm & Grove,

holding 100 percent of its stock, and was entitled to 100 percent

of the profits or losses of Farm & Grove during the years 1989

through 1993.     Farm & Grove, an S corporation, was organized in

1978 to sell real estate.

     In March of 1985, petitioner formed a partnership referred

to as the Kiddies-CKE 38 Joint Venture.3       Petitioner and his

three minor children (Brian, Erik, and Kris Tietig) were all




     3
      The association was labeled a joint venture on its Form
1065, U.S. Partnership Return of Income. For Federal income tax
purposes, joint ventures are partnerships. Sec. 7701(a)(2).
Thus, throughout this opinion we refer to it as a partnership.
                                 - 4 -

partners in the partnership.     The partnership was formed to

acquire 38 lots for immediate sale.

     On December 30, 1990, the Kiddies-CKE 38 Joint Venture

acquired equitable title to 53 additional lots and changed its

name to the Kiddies 91 Joint Venture4 (Kiddies 38/91

partnership).5

      In February of 1989, petitioner formed the Edward Tietig/

Mark Tietig 100 Lot Joint Venture (100-lot partnership).6     The

partnership’s principal business activity was land resales.

I.   Issue 1.    Payments for Use of Collateral

     A.   Background

      In 1982, petitioner had a series of loans that were coming

due that were cross-collateralized by various properties.

Petitioner needed to either pay off or refinance the loans but

found that he could do neither.     Petitioner did not have

sufficient liquid funds to pay off the loans, and no institution

would lend him the money.     As a result, petitioner sought the



      4
      The name changed because of the increased number of lots
held by the joint venture (38 + 53 = 91).
      5
      The association was labeled a joint venture on its Form
1065. For Federal income tax purposes, joint ventures are
partnerships. Sec. 7701(a)(2). Thus, throughout this opinion we
refer to it as a partnership.
      6
      The association was labeled a joint venture on its Form
1065. For Federal income tax purposes, joint ventures are
partnerships. Sec. 7701(a)(2). Thus, throughout this opinion we
refer to it as a partnership.
                                - 5 -

help of his son Mark Tietig.    At the time, Mark Tietig had cash

reserves stemming from a settlement he had received from the

Chris Craft Corp. on account of a boating accident.

     Petitioner secured a loan from Westfield Financial Corp.

(Westfield Financial) in July 1983.     Westfield Financial agreed

to modify an existing $550,000 loan to City National Bank of

Miami as trustee (trust loan) and to lend petitioner $2 million

(Tietig loan).   The trust loan was guaranteed by petitioner, Mark

Tietig, Emerald Lake of Delray, Inc., Emerald Lake Development &

Construction Co., Farm & Grove, TropStock,    Kiddies 50 Corp., and

Eureka Field Nursery.   The loans were both secured, in part, by

real property owned by petitioner in Kissimmee, Florida

(Kissimmee property), and by land in Lakeland, Florida.    Both

loans were also secured, in part, by securities worth

approximately $800,000 pledged by Mark Tietig in 1983.7

     Petitioner signed a promissory note agreeing to pay his son

$800,000, plus interest at “the highest legal rate under the laws

of Florida.”   The unpaid principal balance and the interest were

due and payable on the earlier of July 20, 1985, or the date that

Westfield Financial exercised its rights to realize upon the

bonds pledged by Mark Tietig.




     7
      The securities consisted of 600 units in E.F. Hutton and
Co., Inc., Tax-Exempt Trust National Series #76 and 245 units in
E.F. Hutton and Co., Inc., Tax-Exempt Trust National Series #77.
                                 - 6 -

     The promissory note would be deemed null and void if the

bonds were released to Mark Tietig, and he was released from all

liability without incurring any loss.    Pledging the bonds as

collateral for the loan to petitioner was consideration for

executing the promissory note.    Petitioner gave Mark Tietig a

“surety loan or a surety note and mortgage” secured by real

property owned by petitioner in five Florida counties.    All

dividends and interest paid on account of the pledged securities

were to be paid to Mark Tietig.

     On September 19, 1983, Mark Tietig paid $200,000 to Eureka

Field Nursery for an interest in 8,000 trees ($25 per tree).

Additionally, Mark Tietig was required to pay $56,000 per year

($7 per tree) for maintenance of the trees, pursuant to a joint

venture agreement between Mark Tietig and Eureka Field Nursery.

Out of the sales of any trees, Mark Tietig was to receive his

cost8 plus 6 percent, plus 50 percent of any profit after a $10

commission was paid to the nursery.

     In August 1985, petitioner secured a loan from Caribank of

$3,430,000.   From the Caribank loan proceeds, $1,900,000 was

given to Westfield Financial, reducing the amount of that loan

balance to approximately $500,000 and removing the Kissimmee and

Lakeland properties from the Westfield Financial mortgage.      The



     8
      The initial fee plus a prorated amount to reimburse him for
maintenance of the trees.
                                  - 7 -

remainder of the loan from Caribank was to fund the construction

of 27 condominium units on the Kissimmee property.

     As security for the Caribank loan, a portion of the

securities previously pledged by Mark Tietig for the Westfield

Financial loan was allocated to part of the collateral for the

Caribank loan.

     In March 1988,9 petitioner, Eureka Field Nursery, Farm &

Grove, and Mark Tietig entered into a “First Amendment and

Supplement to Joint Venture Agreement” (amended joint venture

agreement).     The agreement amended the terms of the joint venture

created in the September 19, 1983, agreement between Mark Tietig

and Eureka Field Nursery, and stated that Eureka Field Nursery

owed Mark Tietig $68,786.41 ($56,000 plus $12,786.41 interest),

which represented his original investment in the joint venture.

The agreement also provided that petitioner owed Mark Tietig

$230,000 for the “past and future use” of his securities.         In

total, Mark Tietig was owed $298,786.41 under the agreement.10

Mark Tietig, however, was not limited to this amount in the event

that the remaining pledged securities were taken by Westfield

Financial.     Paragraph 3 of the amended agreement stated that the



     9
      The agreement states that it was made on Sept. 30, 1987;
however, in the upper left-hand corner of the agreement the date
Mar. 14, 1988, appears. Whether the agreement was in effect in
1987 or 1988 is irrelevant for the purpose of our analysis.
     10
          Consisting of:   $230,000 + $68,786.41 = $298,786.41.
                               - 8 -

$298,786.41 due to Mark Tietig was not to draw interest and was

to be Mark Tietig’s contribution to the joint venture.

     Mark Tietig’s investment return was to come from joint

venture sales (various lots and trees) and from any proceeds

received from the State of Florida on account of the canker

settlement.11

     Caribank eventually released to Mark Tietig its portion of

the securities pledged by him, the value being approximately

$500,000.   The remainder of the collateral was taken by Westfield

Financial in 1989, with Mark Tietig losing $300,000 worth of

securities.

     As of June 6, 1991, the balance owed Mark Tietig by

petitioner and the entities that he controlled was listed as

$445,000.   Petitioner, Mark Tietig, and various other entities in

which petitioner owned an interest entered into an agreement

called the “Settlement Agreement and Amendment to Blanket Surety

Mortgage” (settlement agreement) for the stated purpose of

restating the parties’ “mutual obligations”.   The agreement was

dated August 5, 1992.

     Under the terms of the settlement agreement, petitioner and

the various entities that he controlled owed Mark Tietig


     11
      According to the amended joint venture agreement, a
portion of the trees which were subject to the original joint
venture agreement was destroyed, with little or no compensation,
by the State of Florida pursuant to the citrus canker eradication
program.
                                 - 9 -

$371,600.     Interest was provided for at 10 percent.

Additionally, petitioner agreed to make principal only payments

of $5,000 to Mark Tietig each month beginning November 1, 1992.

     There was a dispute between Mark Tietig and a law firm over

fees incurred in petitioner’s bankruptcy case.12     The settlement

agreement provided that if it was determined that Mark Tietig

owed any additional attorney’s fees, then petitioner would pay

them to Mark Tietig, and this amount would be added to the amount

petitioner owed Mark Tietig under the original 1983 promissory

note and agreement and secured by the same collateral.

     B.     Discussion

     Deductions are a matter of legislative grace, and the burden

of showing the right to deductions is on the taxpayer.     Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Petitioner argues that he is entitled to a $32,241 deduction in

1993 for payments that he allegedly made to his son Mark Tietig.

The deduction was not claimed on petitioner’s Federal income tax

return for that year or disallowed by respondent in his notice of

deficiency; rather, the issue was raised for the first time by

petitioner in his petition to the Tax Court.     Petitioner did not

explain in his petition or on brief how he arrived at $32,241 as

a deduction or why it is deductible.




     12
          Petitioner filed for bankruptcy on Sept. 22, 1988.
                                - 10 -

     Petitioner does indicate that his claim is somehow based

upon transactions in which Mark Tietig pledged certain securities

as collateral in order to help petitioner secure loans from

banks.     In support of petitioner’s argument, he submitted a

handwritten accounting sheet entitled “Mark E. Tietig

Accounting”.13    On the accounting sheet, the “beginning balance”

before June 6, 1991, is listed as $445,000.     Petitioner did not

explain how this figure was derived.

     A check number appears next to most, but not all, of the

reported payments.    There is nothing on the accounting sheet to

indicate what entity made the payments, and petitioner did not

provide copies of the checks or bank statements.

     If the payments were, in fact, made, then some or all of the

payments could have been made by corporations controlled by

petitioner, rather than petitioner himself.     For instance, the

very first payment reflected on the accounting sheet is a $54,230

payment made by Eureka Field Nursery on June 6, 1991.     That check

was written on and drawn from Eureka Field Nursery’s bank

account.    Mark Tietig testified that Eureka Field Nursery owed

him approximately $256,000 and that he had fully collected that

debt.     Thus, additional payments reflected on the accounting

sheet, if made, may have come from and on behalf of a debt owed



     13
      See appendix C. The author of the accounting sheet and
the date of its creation are unknown.
                                 - 11 -

by Eureka Field Nursery.     If so, these payments may already have

been deducted as expenses on Eureka Field Nursery’s corporate

income tax returns.

     Indeed, petitioner could not recall whether the 1993

payments reflected on the accounting sheet were made from a

personal bank account or an account from a corporation controlled

by petitioner.     When petitioner was pressed on this point, he

indicated that Judy Fox could provide additional details

regarding the payments.     Ms. Fox testified that she has been the

office manager for Farm & Grove, the Tietig 4 Land Trust, Kiddies

38 partnership, Edward C. Tietig, PA, Villasol Realty, and

Emerald Lake Utilities since 1990 and that she is the primary

custodian of the canceled checks and bank statements.

Nevertheless, petitioner did not ask Ms. Fox during her testimony

to establish the source of the checks.     The inference we draw is

that the testimony would have been unfavorable to petitioner.

See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,

1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

     Moreover, petitioner testified that he had bank statements

and checks reflecting the payments in his business office at the

time of the trial.14     A party’s failure to introduce evidence

within his possession and which, if true, would be favorable to

him gives rise to the presumption that if produced it would be


     14
          Petitioner testified that all payments were made by check.
                                - 12 -

unfavorable.     Recklitis v. Commissioner, 91 T.C. 874, 890 (1988);

Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d

409 (5th Cir. 1968); Wichita Terminal Elevator Co. v.

Commissioner, supra at 1165.

      Assuming arguendo that the payments were made, and from

petitioner’s personal account, it is not clear that the payments

were not moneys paid to Mark Tietig’s attorneys by petitioner as

the result of the settlement agreement executed in 1992.

Payments made for this purpose have not been shown to be

deductible.    We hold that petitioner is not entitled to the

$32,241 deduction.

II.   Issue 2.   Farm & Grove’s Sale of 53 Lots in 1990

      A.   Background

      Farm & Grove reported $249,723 in gross income on its 1990

Form 1120S, U.S. Income Tax Return for an S Corporation.

      In a series of transactions between 1981 and the end of

1990, Farm & Grove acquired a large inventory of unimproved land

lots in Brevard County, Florida.    Included in the series was Farm

& Grove’s 1987 acquisition of a fee simple interest in 539 lots

in the Cape Kennedy Estates real estate development from the

Atlantic Ridge Corp. for a purchase price of $317,272.

      On December 30, 1990, Farm & Grove transferred equitable

title of 53 of the Brevard County lots to the Kiddies 38
                                - 13 -

partnership.15    The transfer was accomplished with the execution

of the First Amendment to Kiddies 38 Agreement (sales agreement).

Petitioner, Farm & Grove, and petitioner as guardian of his minor

children (Brian, Erik, and Kris Tietig) were parties to the sales

agreement.16   Petitioner and his minor children were all partners

in the Kiddies 38 partnership, which was now called the Kiddies

91 partnership.

     The sales agreement provided, in part, as follows:

     3. The consideration to be paid by the Joint Venture
     to * * * [Edward C.] Tietig and Farm & Grove is as
     follows:

               a. The payment by the Joint Venture of the
          note and mortgage attached hereto * * * in the
          total amount of $174,900 which represents
          $3,300.00 per lot release price of these lots from
          the lien of the County Bank mortgage.

               b. A further sum of $72,822.00 cash
          representing additional consideration of $1,374.00
          per lot. Said cash shall be paid by the sale
          and/or hypothecation of existing mortgages
          receivable * * *. When each of these notes and
          mortgages shall be hypothecated and upon what
          terms shall be at the discretion of Tietig; but,
          provided however, that a net cash flow of no less
          than $1,250.00 per month shall remain * * *



     15
      Before this transaction, the partnership was referred to
as the Kiddies-CKE 38 Joint Venture. Afterwards, its new name
was Kiddies 91 Joint Venture. The name changed because of the
increased number of lots held by the joint venture (38 + 53 =
91).
     16
      Petitioner signed the agreement individually, as president
of Farm & Grove, and as natural father and duly appointed
guardian of his three minor children (Brian, Erik, and Kris
Tietig).
                              - 14 -

     The attached unexecuted Mortgage Deed listed Farm & Grove as

the mortgagor (debtor) and petitioner as mortgagee (lender).     The

Mortgage Deed, which was not executed, also provided as follows:

     Random releases for each parcel encumbered herein shall
     be given at any time upon payment of $3,300.00
     principal [p]lus accrued interest upon such amount.
     All regular paymenbts [sic] and prepayments of
     principal shall be credited towards such releases.

The note provided the following terms:

     FOR VALUE RECEIVED the undersigned promises to pay to
     the order of Edward C. Tietig the principal sum of One
     hundred seventy-four thousand nine hundred Dollars
     ($174,900) together with interest thereon from March 1,
     1991 at the rate of 8.9% per cent, per ANNUM until
     maturity, said interest being payable monthly on the
     1st day of March, 1991 and payment both principal and
     interest being payable in lawful money of the United
     States or its equivalent to Farm & Grove Realty. * * *

     Payments of principal and interest of $1,393.95 on the
     first (1st) day of April, 1991, and on the first (1st)
     day of each month thereafter until the first (1st) day
     of March 2021, when the entire remaining balance will
     become due and payable.

     This Note may be prepaid in whole or in part, at any
     time, without penalty.

     As a result of the transaction, Farm & Grove held only the

legal title to the lots, as trustee for the Kiddies 38/91

partnership.   Farm & Grove did not report any gain from the sale

of the equitable interest in the 53 lots to the partnership on

its 1990 Form 1120S.

     The Kiddies 38/91 partnership appears to have been solvent

in 1990 and 1991.   On Schedule L, Balance Sheets, of its 1991

Form 1065, U.S. Partnership Return of Income, the partnership
                               - 15 -

reported assets in excess of liabilities of $442,480.    The

partnership also reported ordinary income of $48,072.84 and

$91,092 on its 1990 and 1991 Forms 1065, respectively.

     B.   Discussion

     Respondent asserts that petitioner realized $216,524.6117 of

gain on the transfer of 53 lots from Farm & Grove to the Kiddies

38/91 partnership in 1990.18   Petitioner argues that either gain

from the transfer should be recognized in a year subsequent to

1990 or, in the alternative, no gain at all should be recognized.

We address petitioner’s arguments in turn.




     17
      Gain on the transfer was calculated by subtracting Farm &
Grove’s basis in the 53 lots from the purchase price. Farm &
Grove paid $317,272 to acquire the 539-lot parcel which included
the 53 lots whose equitable interest was transferred to the
Kiddies-CKE 38 partnership. Respondent assumed that the lots
were equal in value, and petitioner has not asserted otherwise.
Thus, Farm & Grove’s basis in the 53 lots whose equitable
interest was transferred was $31,197.39 or $588.63 per lot.

     Respondent calculated the purchase price by adding the
amount Farm & Grove was to eventually receive upon the sale of
each lot to third parties ($1,374 x 53 lots = $72,822) to the
amount required for the release of the County Bank mortgage lien
($174,900). According to respondent, the total amount received
by Farm & Grove was $247,722 ($72,822 + $174,900 = $247,722).
Therefore, respondent calculated petitioner’s gain on the
transfer to be $216,524.61 ($247,722 - $31,197.39 = $216,524.61)
     18
      The notice of deficiency determined gain of $215,922.
According to respondent, the difference between the $216,524.61
gain asserted on brief and the $215,922 used in the notice of
deficiency is attributable to rounding. Originally, respondent
rounded the price per lot paid by Farm & Grove for the
acquisition of the lots up from $588.63 to $600 (53 x $600 =
$31,800) and ($247,722 - $31,800 = $215,922).
                              - 16 -

          1.   Timing

     Petitioner offers two arguments why gain from the sale

should not be recognized in 1990.   First, petitioner asserts that

the Kiddies 38/91 partnership’s $174,900 payment to Farm & Grove

for the 53 lots was contingent upon County Bank’s reducing

petitioner’s debt to the bank by $174,900 or $3,300 per lot.

According to petitioner, when County Bank refused to transfer the

debt obligation to the partnership, payment was treated as a

contingent sale from resales starting in 1991.    We find no such

language in the sales agreement.

     Consideration for the transfer consisted of $174,900 ($3,300

per lot) through the assumption of debt,19 plus $1,374 per lot to

be paid upon the sale and/or hypothecation of the existing

mortgage on those lots.   Nothing in the agreement indicates that

the transfer was contingent upon County Bank’s reducing

petitioner’s debt by $174,900.   Rather, the agreement explicitly

provides that consideration for the transaction was to be paid by

the partnership to petitioner and Farm & Grove.   The attached

Mortgage Deed and note, while not executed, provides further

evidence that the agreement was not contingent upon County Bank’s

reducing petitioner’s debt by $174,900.   Farm & Grove and

petitioner were named as parties on the Mortgage Deed and on the



     19
      This amount is the same amount that was required to
release a lot from the County Bank mortgage lien.
                                  - 17 -

note.       The Mortgage Deed provided for random releases upon the

payment of $3,300 principal plus accrued interest.         Absent from

the Mortgage Deed and the note is any mention of County Bank.

Thus, we conclude that when the transaction was structured and

executed, it was not contingent upon County Bank’s reducing

petitioner’s debt by $174,900.

       The agreement was dated December 31, 1990.       Therefore, the

sale was made in 1990, and Farm & Grove must recognize income

from the sale in 1990.20

       Petitioner’s second timing argument is that the sale should

be recognized under the installment method provided under section

453.    For Federal income tax purposes, gain from qualifying

installment sales of property can be reported under the

installment method subject to certain exceptions.         Sec.

453(a)(1).       Dealer dispositions are excepted from the definition

of “installment sale” by section 453(b)(2)(A).         A dealer

disposition includes any disposition of real property which is

held by the taxpayer for sale to customers in the ordinary course

of the taxpayer’s business.       Sec. 453(l)(1)(B).

       Petitioner does not dispute that Farm & Grove was engaged in

the trade or business of selling real estate.       However,




       20
      Farm & Grove did not report any gain from the sale of the
equitable interest in the 53 lots to the partnership on its 1990
Form 1120S, U.S. Income Tax Return for an S Corporation.
                              - 18 -

petitioner argues that Farm & Grove satisfies the exception for

sales of residential lots to individuals.

     The sale of a residential lot to an individual in the

ordinary course of a taxpayer’s business is not considered a

dealer disposition if neither the seller nor any person related

to the seller can make any improvements on the lot.    Sec.

453(l)(2)(B)(ii)(II).   In the instant case, the transfer of lots

was not made to an individual.   The property transfer was to a

partnership, the Kiddies 38/91 partnership.     The common,

ordinary, and plain meaning of section 453(l)(2)(B)(ii)(II)

requires that the transfer be made to an individual.    The

language seems to be so unambiguous as to give no alternative but

to apply it precisely as written.    We find nothing that would

support an interpretation of section 453(l)(2)(B)(ii)(II) that

differs from the words of the statute, and petitioner has not

provided us with any reasoning to support his argument.

     Petitioner also has not provided sufficient evidence that

the 53 lots transferred were residential lots.    For purposes of

section 453(l)(2)(B)(ii)(II), a residential lot is a parcel of

unimproved land upon which the purchaser intends to construct (or

intends to contract to have another person construct) a dwelling

unit for use as a residence by the purchaser.     Wang v.

Commissioner, T.C. Memo. 1998-127.
                                - 19 -

     In petitioner’s proposed findings of fact relating to this

issue, he did not assert any facts or point to any exhibits or

testimony that would indicate that the lots in question were

zoned so that a buyer would be permitted to construct a house on

the property if the buyer desired or that the lots were marketed

to potential purchasers as residential lots suitable for building

dwelling units on the land as opposed to a speculative

investment.    Id.   Petitioner has not met his burden of showing

that he satisfied the residential real estate exception for

dealer dispositions.

     Since section 453 is substantively unavailable to Farm &

Grove, the established realization and recognition principles

under section 1001 are controlling.      Under section 1001(b), the

amount realized from the sale or other disposition of property

shall be the sum of any money received plus the fair market value

of the property (other than money) received.

          2.     Fair Market Value of Cash Equivalent

     Petitioner argues, in the alternative, that the gain to Farm

& Grove is not the face value of the note but its market value.

Petitioner asserts that the note had no value, and therefore, no

gain accrued to Farm & Grove.

     To establish that the note had a fair market value of zero,

petitioner testified that the note had no value because County

Bank would not accept it.    Petitioner further testified that
                                  - 20 -

finance companies would not take the note and that the lots were

unmarketable because $3,300 had to be put up in order to obtain

good title to a lot.

       By contending that the note had no fair market value upon

receipt, petitioner assumes the burden of establishing that

contention.    See Rule 142(a).    We do not consider the fact that

petitioner failed to convince County Bank to accept the note as

having any weight.    There may have been other reasons aside from

the marketability of the note which prevented County Bank from

accepting it.    Petitioner did not offer into evidence anything

from County Bank indicating its refusal to accept the note and

why.    No expert witnesses testified that there was no market for

the note.

       Petitioner does assert on brief that he “testified as to his

past experience in selling or hypothecating notes of this type”.

When we review the testimony cited by petitioner, we note that he

testified only with regard to his experience with this note, not

any past experiences with other similar notes.     With regard to

his experience with the note in question, he did not provide any

corroborating evidence to support his testimony (e.g., testimony

from a representative of County Bank indicating that County Bank

refused to accept the note because it had no value).

       In our opinion, the evidence does not sustain petitioner’s

contention.    Petitioner has not established any lesser value or
                               - 21 -

shown by a preponderance of the evidence that the note had no

fair market value; therefore, we must affirm respondent’s

determination.

     Moreover, the solvency of the maker of a note is of prime

importance in determining whether it is worth its face value.21

Pack v. Commissioner, T.C. Memo. 1980-65.   In the instant case,

the partnership was solvent.   On Schedule L of its 1991 Form

1065, the partnership reported “partnership equity accounts” in

excess of $400,000 for 1990 and 1991.   Additionally, petitioner

testified that his three minor children, who were partners in the

partnership, had “considerable funds of their own.”   Petitioner

was a partner in the partnership.   He signed the First Amendment

to Kiddies 38 Agreement individually, as president of Farm &

Grove, and as guardian of his three minor children, stating that

the consideration for the lots would be paid by the partnership

to petitioner personally and to Farm & Grove.   Thus, we have no

reason to believe that the partnership or its partners would not

make good on the payments contemplated by the sales agreement and

the promissory note.




     21
      Respondent argues on brief that he determined that the
fair market value of the contractual promise and the note was the
face amount.
                               - 22 -

III.   Issue 3.   1991 Capital Gains

       A.   Background

       A two-story structure was constructed in Miami, Florida

(Miami property), during 1984.      Eureka Field Nursery, Tropstock,

and Kiddies 50 Corp. (corporations) were to share the

construction costs of the Miami property, which combined office

and residential space.

       The corporations resolved that the expenses of building the

structure would be allocated as follows:

             Corporation               Percentage of Expenses

       Eureka Field Nursery, Inc.                47.5
       Tropstock, Inc.                           47.5
       Kiddies 50 Corp.                           5.0

Additionally, the corporations resolved that the three

corporations could demand contributions from Farm & Grove or any

other entity which used the facilities.

       In order to facilitate the construction of the structure,

petitioner obligated himself as mortgagor to AmeriFirst Mortgage

Co. as mortgagee, in the amount of $214,000.

       On Eureka Field Nursery’s 1985 Form 1120S, it claimed a

depreciation allowance of $16,555.04 on the property.     The

accompanying depreciation schedule reports a cost basis in the

structure of $446,985.19 and an 18-year recovery period.        Eureka

Field Nursery used the straight-line method of depreciation in

1985 in calculating its allowable depreciation deduction.
                                 - 23 -

     On Schedule L of Eureka Field Nursery’s 1985 Form 1120S, the

company reported “Buildings and other depreciable assets” of

$508,207.32 at the end of the tax year.      On Schedule L of Eureka

Field Nursery’s 1986 Form 1120S, the company reported “Buildings

and other depreciable assets” of $61,597.13 before depreciation

of $42,592.07 at the end of the tax year.

     A judgment of foreclosure was ordered on December 2, 1991,

with respect to the Miami property.       Resolution Trust Corporation

(RTC) was the plaintiff.     The Circuit Court for Dade County,

Florida, determined that RTC was due $206,044.77 in principal

under the note and mortgage sued upon, interest on the date of

judgment of $47,944.02, and unpaid real estate taxes from the

years 1989, 1990, and 1991 of $14,386.85, plus other costs of the

suit.

     B.     Discussion

        Petitioner did not report any capital gains or losses on his

1991 Federal income tax return.     Respondent argues that

petitioner had unreported capital gains of $57,531.25 in 1991.

This figure results from respondent’s netting long-term capital

gains of $90,534.25 with short-term capital losses of $33,003.

We address the long-term gains and short-term losses in turn.

             1.   Long-Term Capital Gains

        Respondent computed long-term capital gains of $90,534.25 by

netting a long-term capital gain of $90,720.25 with a long-term
                                - 24 -

capital loss of $186.     The parties dispute the amount of gain

that petitioner should have recognized when the Miami property

was foreclosed and the amount of loss that petitioner should have

recognized when Eureka Field Nursery ceased doing business.      We

address the gain on the Miami property first.

                a.   Miami Property

     Respondent argues that petitioner realized a $90,720.25

long-term capital gain when the Miami property was foreclosed in

1991.

     Petitioner does not dispute that relinquishment of the Miami

property by means of a foreclosure sale is treated as a sale or

exchange.   Chilingirian v. Commissioner, 918 F.2d 1251 (6th Cir.

1990), affg. T.C. Memo. 1986-463.     Petitioner does dispute:   (1)

The percentage of gain or loss attributed to business versus

personal use; (2) petitioner’s basis in the structure; and (3)

whether real estate taxes and mortgage interest forgiven should

be part of the amount realized.     We turn to petitioner’s

arguments in turn.

                     i.     Business v. Personal Use

     In the notice of deficiency, respondent determined that the

structure on the Miami property was used 59 percent in a trade or

business.   Petitioner argues that the entire structure was used

in a trade or business despite the fact that he lived there.
                                - 25 -

     In determining whether there is gain or loss on the

foreclosure of petitioner’s property in 1991, an allocation must

be made for tax purposes between the portion of the structure’s

use devoted to personal use and the portion devoted to

petitioner’s business.    See Snyder v. Commissioner, T.C. Memo.

1975-221.

     According to petitioner, the entire structure should be

treated as property used in a trade or business despite the fact

that he lived there.     In support of his argument, petitioner

cites four Tax Court cases.22    In each cited case, the taxpayer

was seeking an exclusion from gross income under section 61 for

either lodging or meals provided by his employer pursuant to

section 119.

     Under section 119(a)(2), the value of lodging furnished to

an employee is excluded from the employee’s gross income if “the

employee is required to accept such lodging on the business

premises of his employer as a condition of his employment.”

Here, however, the fair rental value of the lodging provided to

petitioner has not been included in his income by respondent.

Rather, respondent determined that petitioner realized a capital

gain when the Miami property was foreclosed.     Thus, section 119

as an exception to section 61 does not apply in the instant case.


     22
      Giesinger v. Commissioner, 66 T.C. 6 (1976); Lindeman v.
Commissioner, 60 T.C. 609 (1973); Olkjer v. Commissioner, 32 T.C.
464 (1959); and Stone v. Commissioner, 32 T.C. 1021 (1959).
                               - 26 -

     Petitioner has not met his burden of showing that

respondent’s business use determination was incorrect.

                     ii.   Basis

     Petitioner asserts that his basis in the Miami property

(excluding land and fill costs) was $491,182, of which $446,000

was depreciable.23   In the notice of deficiency, respondent

determined that petitioner’s cost basis in the structure was

$214,000, which represented the amount of the mortgage and note

executed by petitioner in favor of Amerifirst Mortgage Co.24


     23
      We note that a depreciation schedule for Eureka Field
Nursery for the end of the fiscal year Dec. 31, 1985, reports a
cost basis of $446,985.19 in the structure, not $446,000 as
asserted on page 10 of his brief and not $445,182 as asserted on
page 13 of his brief.
     24
      The notice of deficiency also adjusted petitioner’s cost
basis in the Miami property for allowed or allowable depreciation
on the basis of the business portion of the structure and using
the straight-line method with a recovery period of 18 years. In
his petition, petitioner calculates depreciation deductions on
the Miami property for the years 1988 through 1991 under the
straight-line method with a recovery period of 18 years.
Petitioner makes no reference in his trial memorandum to how
allowable depreciation deductions for the Miami property are to
be treated.

     In petitioner’s posttrial briefs, he calculates allowable
depreciation for the period 1986 through 1991 for the first time
using a 31.5-year recovery period but makes no argument as to why
31.5 years is the correct recovery period.

     The petition filed in this case, as it relates to this
issue, does not satisfy the requirements of Rule 34. The
petition did not provide any indication that petitioner intended
to make the recovery period an issue, nor did it contain a clear
and concise assignment of error on the part of the Commissioner.
See Rule 34(a) and (b)(4). Any issue not raised in the
                                                   (continued...)
                                - 27 -

     A taxpayer is required to maintain records sufficient to

show whether he or she is liable for Federal income taxes.    Sec.

6001.     Petitioner has not provided any invoices from contractors

or canceled checks showing the billing or payment of any cost.

No documentation other than the foreclosure has been presented

with respect to petitioner’s cost basis in the structure.

     Petitioner testified that he lacked adequate records to

substantiate his costs because his records were stolen in 1991.

Petitioner did not try to reconstruct his records from other

sources.25    Instead, petitioner offered his own testimony, the

testimony of his son, Mark Tietig, and a letter from an architect

to substantiate his claimed cost basis in the Miami property.

     Petitioner’s testimony included his personal estimates of

the actual cost to build the structure based on a price per

square foot.    Petitioner’s estimates were derived by taking the

basis figure reported on a depreciation schedule prepared for

Eureka Field Nursery’s 1985 Form 1120S and then backing into this

figure by estimating the square footage cost of the structure.



     24
      (...continued)
assignment of error shall be deemed to be conceded. Rule
34(b)(4). Therefore, no adjustment to the recovery period
applied in the notice of deficiency is required.
     25
      Petitioner testified that he could not locate the general
contractor. However, he did not attempt to contact any of the
subcontractors even though he knew them by name and, in some
instances, had written checks payable to both the general
contractor and the subcontractor.
                              - 28 -

Petitioner’s testimony was not based on his actual recollection

of the costs incurred; rather, it was calculated to corroborate

the figure listed on the tax return.

     Mark Tietig’s testimony, like petitioner’s, included

personal estimates of the actual cost to build the structure

based on a price per square foot.   His testimony was not based on

his actual recollection of the costs incurred, nor did he specify

the cost of individual items26 that were computed as part of the

total cost of construction.

     We find that the personal estimates provided by petitioner

and Mark Tietig are neither persuasive nor conclusive evidence of

petitioner’s actual cost to build the structure.27




     26
      He testified regarding the different prices per square
foot for different sections of the structure (e.g., garage, first
floor, second floor) but not for individual components such as
concrete, framing, etc.
     27
      Even if the estimated cost per square foot were close to
what a person would pay to build this particular structure, it
does not follow in this case that petitioner actually incurred
those costs. Petitioner took great pride in his ability to build
the structure at the “lowest price”. Petitioner acknowledged
that as a contractor, he saved money by doing some aspects of the
construction, and much of the procurement of materials, himself.
                               - 29 -

     Petitioner also provided a letter dated October 10, 1996,

written by Architect Alan Lerner.28     According to the letter, the

cost of the structure was $400,000.29

     Mr. Lerner’s letter was not written near the time the Miami

property was built; it was written approximately 12 years after

the structure was completed.   Furthermore, according to

petitioner’s own testimony, Mr. Lerner did not bill for the cost

of construction materials or services, nor did he pay them.

Moreover, Mr. Lerner’s letter does not indicate that he consulted

any of the contractors who did the work or that he referenced a

written record or source documents to determine the structure’s

actual cost.

     Petitioner has not established that respondent’s

determination that petitioner’s cost basis in the structure was

greater than $214,000 was in error.30


     28
      The parties included this letter as an exhibit in their
stipulation of facts. The stipulation stated that respondent did
not stipulate the truth of the letter’s content.
     29
      We note that the estimated cost provided by Mr. Lerner
($400,000) cannot be reconciled with petitioner’s estimated cost
of $446,000 as asserted on page 10 of his brief, or $445,182 as
asserted on page 13 of his brief, or $446,985.19 as reported on a
depreciation schedule attached to Eureka Field Nursery’s 1985
income tax return.
     30
      Consistent with respondent’s determination, 59 percent or
$126,260 of petitioner’s $214,000 cost basis in the structure is
allocated to business use, while the remaining 41 percent or
$87,740 is allocated to personal use.

                                                      (continued...)
                                - 30 -

                      iii.   Past Due Taxes and Interest

     In determining the amount realized by petitioner upon

foreclosure of the Miami property, the notice of deficiency did

not include past due taxes of $14,386.85 and interest of

$47,944.02.   This is a new matter upon which respondent has the

burden of proof.   Rule 142(a).

     Petitioner asserts in his petition that the principal

balance of $206,044.77 at the time of foreclosure represents the

total consideration for purposes of determining gain or loss.

However, petitioner appears to have abandoned this argument on

brief.    Indeed, petitioner in an exhibit contained in his reply

brief under the heading “Calculation of Foreclosure Loss” treats

the $47,944.02 of past due interest and the $14,386.85 in past

due taxes as amounts realized.    Petitioner does not argue, in

either his opening or rely brief, that these items should not be

included in the amount realized.     We find that the amount


     30
      (...continued)
     Respondent then adjusted petitioner’s cost basis of $126,260
as follows:

     Cost basis                         $126,260.00
     Depreciation already claimed
       (1985 Form 1120S)                 (16,555.04)
     Allowable depreciation not claimed
       between 1986 and 1991             (42,084.00)
     Petitioner’ adjusted basis           67,620.96

     We note that respondent, in adjusting petitioner’s basis by
$16,555 for depreciation already claimed, rounded to the nearest
dollar. We have added 4 cents to respondent’s figure for
consistency.
                                - 31 -

petitioner realized upon the disposition of the Miami property in

foreclosure includes the accrued interest of $47,944.02 and real

estate taxes of $14,386.85.31

     We hold that petitioner realized $268,375.6432 upon

foreclosure of the Miami property, and as stated above, the

amount realized is to be apportioned 59 percent business and 41

percent personal.   Thus, petitioner’s capital gain on the

foreclosure of the Miami property in 1991 is $90,720.66.33

               b.    Long-Term Capital Loss

     Respondent determined that petitioner incurred a long-term

capital loss of $186 on his Eureka Field Nursery stock when the



     31
      The notice of deficiency stated that if these costs were
claimed as a deduction, then the amount realized would be
increased by the same amount. Petitioner argues that he is
entitled to an itemized deduction for the past due real estate
taxes and mortgage interest. Respondent concedes petitioner’s
entitlement to these deductions but apportions the expenses as 59
percent business and 41 percent personal. Consistent with our
earlier finding regarding apportioning business versus personal
use of the structure, we find that petitioner is entitled to the
deductions but on a prorated basis as determined by respondent.
     32
      The $206,044.77 of principal, $47,944.02 of accrued
interest to the date of judgment, and $14,386.85 of real estate
taxes for a total of $268,375.64 ($206,044.77 + $47,944.02 +
$14,386.85 = $268,375.64).
     33
      Amount realized (see supra note 32)       $268,375.64
      Business use of property                  x       .59%
                                                 158,341.62
      Less adjusted basis (see supra note 30)     67,620.96
      Net gain                                    90,720.66

     We note that a 41-cent difference exists between our
calculation and respondent’s ($90,720.66 - $90,720.25 = $0.41).
                             - 32 -

company ceased business in 1991.   Petitioner argues that the

amount of the capital loss is $140,800.

     The principal dispute between the parties turns on whether

petitioner’s basis34 in Eureka Field Nursery stock was reduced by

a reported $155,440.09 reduction in Eureka Field Nursery’s

accumulated adjustment account (the undistributed earnings on

which tax has been paid by Eureka Field Nursery’s shareholders)

in 1986.35

     Petitioner asserts that the 1986 reduction in the

accumulated adjustment account was not a distribution; rather, it

was an accounting entry to correct a prior error.   According to



     34
      Respondent determined petitioner’s adjusted stock basis in
Eureka Field Nursery by using the figures reported on the
company’s Forms 1120S for the years 1983 through 1990, inclusive.
Respondent made two variations from strict adherence to the
income tax returns. The first variation involves the treatment
of the reported $155,440.09 reduction in Eureka Field Nursery’s
accumulated adjustment account in 1986 (discussed above). The
second variation involves a $43 adjustment to petitioner’s stock
basis in 1990, which petitioner has not disputed. Thus, we
consider the $43 adjustment conceded by petitioner.
     35
      Respondent determined that petitioner’s adjusted basis of
$145,151 in his Eureka Field Nursery stock was reduced to zero as
a result of the $155,440.09 distribution. See sec.
1367(a)(2)(A). As a result, petitioner realized no gross income
from the distribution to the extent of $145,151, his basis in the
Eureka Field Nursery stock. See sec. 1368(b)(1). Accordingly,
respondent asserts that petitioner should realize the amount in
excess of his adjusted basis in his Eureka Field Nursery stock,
$10,289, as gain ($155,440.09 - $145,151 = $10,289.09). See sec.
1368(b)(2). Respondent concedes that his examiner erred by
applying this excess against petitioner’s shareholder loans with
Eureka Field Nursery. Instead, this figure constituted gain to
petitioner. See id.
                                - 33 -

petitioner, his outside accountant incorrectly assumed that

Eureka Field Nursery owned the Miami property since it claimed

depreciation on the structure in 1985.   This assumption led the

outside accountant to increase Eureka Field Nursery’s assets by

$491,182.26 on Schedule M of its 1985 Form 1120S.   Petitioner

states that he discovered this mistake in 1986 and then ordered

the outside accountant to remove the item from the Schedule L

balance sheet.   This led, according to petitioner, to reductions

in the accumulated adjustment account of $155,440.09 in 1986 and

$31,543 in 1987 and an increase of $698 in 1988.

     We have already found that petitioner has not established

that his cost basis in the Miami property was $446,985.19.

However, even if we were to accept petitioner’s assertion that

his cost basis in the structure was $446,985.19, it does not

necessarily follow that the subsequent reductions in the

accumulated adjustment account related to the Miami property.    If

the “other reductions” entry on Eureka Field Nursery’s 1986 Form

1120S was an entry to remove the structure from the Schedule L

balance sheet, then the entry would have been approximately

$491,182.26, not $155,440.09.

     Petitioner did not offer any evidence to substantiate his

claim.   Petitioner did not call the outside accountant as a

witness.   We can only presume that any testimony supplied by that
                               - 34 -

individual would not have been favorable.   See Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. at 1165.

     We sustain respondent’s determination that petitioner’s

long-term capital loss on the Eureka Field Nursery Stock is $186

in 1991.

           2.   Short-Term Capital Loss

     Respondent determined that petitioner incurred a bad debt

loss in 1991 of $22,714 due to unpaid shareholder loans by Eureka

Field Nursery when it ceased operations in 1991.   On brief,

respondent argues that petitioner’s loss is $33,003.36

     In his petition, petitioner asserted that respondent erred

in determining the amount of nonbusiness bad debt in 1991, but he

makes no arguments in his brief regarding this issue.    Petitioner

asserts in his reply brief that respondent concedes the amount

stated, $22,714, but that the true amount in dispute is $60,36837

as set forth in “Petitioner’s Recap, Exhibit 1 hereto.”   However,



     36
      The amount of the loss is based on a $55,567 outstanding
shareholder loan reported on Schedule L of Eureka’s 1990 income
tax return with two modifications: An increase of $4,800 in 1990
and a decrease of $27,365 in 1991.

     Petitioner does not dispute the $4,800 increase in
shareholder loans to $60,367 in 1990, and the $27,365 decrease in
shareholder loans in 1991 was stipulated by the parties. Thus,
the total loss is $33,003 ($55,567 + $4,800 = $60,367 - $27,365 =
$33,002. We note a $1 difference.).
     37
      Apparently, petitioner neglected to reduce the total loan
amount due of $60,367 by the stipulated loan repayments totaling
$27,365. See supra note 36.
                                - 35 -

petitioner’s recap states as follows:       “Short Term Capital Loss -

Worthlessness of Shareholders Loans - EFN ($33,003.00)”.

Petitioner makes no arguments in his reply brief regarding this

issue.     We conclude that petitioner’s bad debt loss in 1991 is

$33,003.     See Money v. Commissioner, 89 T.C. 46, 48 (1987).

IV.   Issue 4.    1993 Net Operating Loss

      A.    Background

      On Schedule E, Supplemental Income and Loss, of petitioner’s

original 1990 Federal income tax return, he reported nonpassive

losses from Schedule K-1, Partner’s Share of Income, Credits,

Deductions, Etc., of $130,722 and passive and nonpassive income

from Schedule K-1 of $52,633.     This resulted in a loss on

Schedule E of $78,089.     On Schedule 1, petitioner reported that

$78,386 of the $130,722 nonpassive losses was from Farm & Grove.

On page 1 of petitioner’s 1990 Federal income tax return, he

reported a negative adjusted gross income of $77,183, which

consisted of the $78,089 loss from Schedule E, taxable interest

income of $844.05, and dividend income of $61.08.

      On petitioner’s amended 1990 return, he increased the

reported loss from Farm & Grove by $4,506 to $82,892 and reported

additional income of $32,172 from the 100-lot partnership.

      On Schedule E of petitioner’s 1992 Federal income tax

return, he reported nonpassive losses from Schedule K-1 of

$122,867 and passive and nonpassive income from Schedule K-1 of
                                 - 36 -

$8,939.     This resulted in a loss on Schedule E of $113,928.    On

Schedule 2, petitioner reported that $104,675 of the $122,867

nonpassive losses was from Farm & Grove.     After adjusting for

$24,600 in income reported on Form 1099-MISC, Miscellaneous

Income, and $597 in interest income, petitioner reported a

negative adjusted gross income of $89,26938 on page 1 of his 1992

Federal income tax return.

     On his 1993 income tax return, petitioner claimed a net

operating loss carryover deduction of $179,937.     On a supporting

schedule for line 22, other income, petitioner included a

statement showing that the $179,937 claimed deduction was the sum

of an alleged $90,07139 loss in 1990 and an alleged     $89,866 loss

in 1992.40

     Petitioner’s amended income tax return for 1991 removed the

net operating loss carryforward deduction he had claimed on his

original 1991 Federal income tax return.     The amended 1991 tax

return bore the notation that the 1990 net operating loss had

been carried back in full to 1988 and 1989.

     B.      Discussion

     Respondent increased petitioner’s 1993 gross income by

disallowing a $179,937 net operating loss carryforward


     38
          We note that $597 + $24,600 + ($113,928) = ($88,731).
     39
          It is unclear how petitioner arrived at this amount.
     40
          It is unclear how petitioner arrived at this amount.
                                 - 37 -

deduction.41     Petitioner’s deduction was based on alleged losses

in 1990 and 1992.

     According to respondent, the adjustments reflected in the

notice of deficiency, many of which have been conceded by

petitioner, disclose that petitioner’s income in 1990 and 1992

was in amounts sufficient to absorb the claimed net operating

loss carryforward.     Thus, petitioner would not be entitled to a

net operating loss deduction in 1993.

     The loss reported by petitioner for 1990 principally

involved a flow-through loss from Farm & Grove.     Petitioner

reported an $82,892 loss from Farm & Grove in 1990.     After

accounting for issues conceded by the parties, issues considered

conceded under Rule 34(b)(4), and the fact that we sustained one

of respondent’s determinations regarding the sale of lots to

Kiddies-CKE 38 partnership, petitioner’s distributive share of

income from Farm & Grove in 1990 is $104,636, not an $82,892 loss

as reported.42

     The loss reported by petitioner for 1992 also principally

involved a flow-through loss from Farm & Grove.     Petitioner

reported a $104,675 loss from Farm & Grove in 1992 but concedes



     41
      A net operating loss deduction is the excess of allowable
deductions over gross income, computed under the law in effect
for the loss year, with the required adjustments. Sec. 172(c)
and (d).
     42
          See appendix D.
                                 - 38 -

that his loss from this entity in 1992 was only $7,083, which is

the same amount of loss that respondent determined in the notice

of deficiency.

     We agree with respondent that all these adjustments and

concessions should be taken into account.        When that is done, it

is clear that there are no losses in 1990 and 1992 that are

available to be carried forward to 1993 pursuant to section 172.

V.   Issue 5.    Casualty Loss

     A.   Background

     On October 2, 1991, petitioner’s son Brian Tietig, who was

17 years old at the time, discovered that a theft and extensive

vandalism had occurred at the Miami property.        Brian Tietig

called the Metro-Dade Police Department and reported the crime on

that date.   Petitioner completed a property loss report for the

Metro-Dade Police Department on January 20, 1992.        Petitioner

gave what he considered the “replacement costs” of the property

stolen from his house in the property loss report he signed on

January 20, 1992.

     Petitioner brought a lawsuit against TransAmerica Premier

Insurance Co. (TransAmerica) in 1992 in the Circuit Court for

Brevard County, Florida.    Petitioner recovered $1,500 from

TransAmerica.    Petitioner and TransAmerica executed a Property

Damage Release on October 4, 1993.        After October 4, 1993,
                                - 39 -

petitioner no longer had any reasonable prospect of recovering

the remainder of the theft loss.

     Petitioner reported the loss on his 1993 Federal income tax

return.     Petitioner claimed on Form 4684, Casualties and Thefts,

that the cost or basis of the property stolen was $38,822.

     B.     Discussion

     Section 165(a) allows as a deduction “any loss sustained

during the taxable year and not compensated for by insurance or

otherwise”.43     In general, the amount of the deduction equals

the adjusted basis of the property involved.    Sec. 165(b).

Petitioner has the burden of proving the adjusted basis of the

property.    See Rule 142(a).

     Petitioner asserts the proper loss amount is $19,995, while

respondent asserts the proper amount of the loss is $20,149

before the limitation imposed by section 165(h)(2).44

     In determining the amount of petitioner’s deduction,

respondent accepted petitioner’s representations as to the cost

or fair market value of all artwork reported stolen and adjusted

the business property reported stolen for depreciation.


     43
      The parties agree that the theft loss was deductible in
1993, not 1991 as originally determined by respondent.
     44
      Sec. 165(h)(2) provides that losses from property used for
personal purposes are allowed for a taxable year only to the
extent that they exceed 10 percent of the adjusted gross income
of the individual. In the present case, petitioner’s 1993
adjusted gross income will be determined in a Rule 155
computation.
                                - 40 -

Respondent then reduced this amount by the $1,500 insurance

reimbursement and by $100 in accordance with section 165(h)(1).45

This brings the allowable loss to $20,149 before application of

section 165(h)(2).

      Petitioner presented no arguments on brief as to why

respondent’s computation was incorrect.     Petitioner’s sole

argument regarding the proper amount of the deduction is

contained in his reply to respondent’s proposed findings of fact,

in which he states:     “Parties have agreed that the proper loss

figure is $19,995.”     Therefore, respondent’s determination is

sustained.

VI.   Issue 6.   1990 Self-Employment Tax

      A.   Background

      Petitioner did not report any self-employment tax due on his

1990 through 1993 Federal individual income tax returns

(including the amended returns for 1990 and 1991).

      On the Schedule K-1 attached to the 1990 Form 1065 for the

100-lot partnership and the Kiddies 38/91 partnership, petitioner

was listed as a general partner.     Also on the 1990 and 1991

Schedules K-1 for the same partnerships, petitioner reported that

he was entitled to 100 percent of the 100-lot partnership’s gains

or losses and 75 percent of the Kiddies 38/91 partnership’s gains



      45
      Sec. 165(h)(1) provides that theft losses with respect to
personal property must be further reduced by $100.
                                  - 41 -

or losses.   Both partnerships were engaged in the business of

selling real estate.

     On their 1990 and 1991 Forms 1065, the partnerships reported

the following:

                         1990                          1991
                 100-Lot    Kiddies 38/91      100-Lot   Kiddies 38/91
Interest
  income         $15,717        $21,582.58    $13,191     $23,195

Ordinary
  income          11,372         48,071.84    (17,339)     91,092

Guaranteed
  payments to
  petitioner
  as partner      20,800         15,000.00     19,200      15,100

     Petitioner provided management services to Eureka Field

Nursery during 1991.       Petitioner was paid $6,421 in management

fees for the services that he provided Eureka Field Nursery

during 1991.

     Petitioner managed and acted as a consultant for a number of

his S corporations and partnerships, negotiating most, if not

all, of their land sales.

     On the Kiddies 38/91 Form 1065 for 1993, the partnership

reported $52,748 of ordinary income and that it made $8,900 of

guaranteed payments to partners.

     B.    Discussion

     Petitioner argues that he is not subject to the self-

employment tax on moneys that he received from the 100-lot and

Kiddies 38/91 partnerships in 1990, 1991, and 1993.
                               - 42 -

     Section 1401 provides that a tax shall be imposed, in

addition to other taxes, on the self-employment income of every

individual.    Self-employment income generally includes an

individual’s net earnings from self-employment in any trade or

business, a partner’s distributive share of income or loss from

any trade or business carried on by a partnership of which he is

a member, and guaranteed payments from such a partnership.     Sec.

1402; sec. 1.1402(a)-1, Income Tax Regs.    Section 1402(a)(2)

specifically excludes interest from the term “net earnings from

self-employment.”    Petitioner bears the burden of proving that he

is not liable for the self-employment tax.    See Rule 142(a).

     Petitioner argues that he acted as a mere conduit in

collecting funds distributed by the partnerships and that in his

role as guardian, he simply transferred the funds to his minor

children.   Petitioner asserts that he did not have property

rights in the funds distributed by the partnerships.

     The Federal income tax returns filed on behalf of both

partnerships report petitioner’s entitlement to a percentage of

the profits and losses and guaranteed payments from each

partnership.    Petitioner has not demonstrated that by virtue of

his guardianship role, his rights in the funds distributed by

these partnerships were restricted, and he has submitted no

evidence that he distributed the money to his minor children.
                              - 43 -

     Petitioner also argues that the only services that he

provided were for Farm & Grove.   This argument ignores the fact

that during the years in issue, petitioner was a general partner

at both the 100-lot and the Kiddies 38/91 partnerships.    During

the years in issue, the partnerships conducted businesses and

reported distributing profits and losses as well as guaranteed

payments to petitioner.   Thus, petitioner is liable for the self-

employment tax.

     We hold that petitioner is liable for the self-employment

tax based on moneys that he received from the 100-lot and Kiddies

38/91 partnerships in 1990, 1991, and 1993.46

VII. Issue 7.   Flow-Through Adjustment

     A.   Background

     On Schedule K-1 of its 1990 and 1991 Form 1065, the 100-lot

partnership reported petitioner’s share of income as $11,372 in

1990 and a loss of $17,339 in 1991.    Petitioner reported the

$11,372 in income from the 100-lot partnership on his amended

1990 Federal income tax return, and he reported the $17,339 loss

on his 1991 Federal income tax return.

     B.   Discussion

     Petitioner argues that the reported income and loss from the

100-lot partnership should be stricken from his 1990 and 1991



     46
      Petitioner is entitled to a deduction in 1990, 1991, and
1993 for paying the self-employment tax. See sec. 164(f).
                                - 44 -

Federal income tax returns.47   Petitioner did not provide any

documentation or testimony indicating why his 1990 and 1991

Federal income tax returns should be treated other than as he

originally reported them.   Petitioner has not met his burden and

established that correcting entries should be made as he asserts.

VIII. Issue 8.   Accuracy-Related Penalty

     A.   Background

     Petitioner did not prepare his personal income tax returns

or those of the corporations and partnerships in which he held an

interest with respect to the years in issue.   Petitioner’s

employee, Ms. Fox, prepared his tax returns for the years 1990

through 1993.    In preparing the returns, Ms. Fox had assistance

from an outside accountant in each year.

     In preparing the returns, Ms. Fox had access to petitioner’s

business files in the Brevard County office.   Petitioner was not

customarily in the Brevard County office when Ms. Fox was

preparing the returns.

     Ms. Fox collected the information to be placed on the

return, and petitioner was available to speak to her and the

assisting accountant in the event they had questions concerning

an item of income or a transaction.




     47
      This issue does not relate to an adjustment made in the
notice of deficiency. Instead, it relates to a claim that
petitioner initially made in his petition.
                              - 45 -

     No preparer is listed in the signature block on any of the

initial Federal income tax returns or the amended income tax

returns for the years in issue.

     B.   Discussion

     Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a) for the years

1990, 1991, 1992, and 1993.   Section 6662(a) imposes a penalty in

an amount equal to 20 percent of the portion of the underpayment

of tax attributable to a taxpayer’s negligence or disregard of

rules or regulations.   Sec. 6662(a) and (b)(1).

     Section 6662(c) provides that the term “negligence” includes

any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, and the term “disregard”

includes any careless, reckless, or intentional disregard of

rules or regulations.   The Commissioner’s determination that a

taxpayer was negligent is presumptively correct, and the burden

is on the taxpayer to show lack of negligence.     Hall v.

Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C. Memo.

1982-337.

     Petitioner asserts that he relied upon Ms. Fox to prepare

his Federal income tax returns.   A taxpayer cannot avoid its duty

to file accurate returns by shifting responsibility to its

bookkeeper or its employee when the taxpayer makes an inadequate

effort to see that the books and records are being kept
                                    - 46 -

correctly.     Leroy Jewelry Co., Inc. v. Commissioner, 36 T.C. 443,

445 (1961).     In the instant case, petitioner did not present

sufficient evidence to justify a finding that the accuracy-

related penalty for negligence is not applicable.       In addition to

the several holdings in this opinion in favor of respondent,

petitioner conceded48 that several income items representing

substantial amounts were omitted from his Federal income tax

returns.     Such omissions included the failure to report

substantial amounts of interest income, a guaranteed payment from

a partnership, taxable Social Security benefits, and distributive

shares of income from S corporations.        These omissions were due

to errors petitioner did not attempt to check.

     No accuracy-related penalty shall be imposed with respect to

any portion of an 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).

Petitioner argues that he also relied upon outside accountants

and, thus, he should not be liable for the accuracy-related

penalty.     In order for a taxpayer’s reliance on advice to be

reasonable so as to negate a section 6662(a) accuracy-related

penalty, this Court requires that the taxpayer prove by a

preponderance of the evidence that the adviser was a competent

professional who had sufficient expertise to justify reliance;


     48
          See appendixes A and B.
                              - 47 -

the taxpayer gave to the adviser the necessary and accurate

information; and the taxpayer actually relied in good faith on

the adviser’s judgment.   Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 99 (2000).

     We are not convinced that petitioner reasonably relied on

his outside accountant in reporting the items in issue.     The

record does not contain evidence of what specific information

petitioner provided the outside accountant.   Indeed, it was Ms.

Fox who provided the information to the outside accountant.

Petitioner has not established that the incorrect returns were

the result of advice provided by the outside accountant.

Accordingly, we find that petitioner has failed to prove that any

portion of his underpayments was due to reasonable cause or that

substantial authority existed for his various tax positions.

     Petitioner also argues that he is protected by the automatic

stay provision of 11 U.S.C. sec. 362 (1994) from the accuracy-

related penalty for negligence.   As a general rule, the filing of

a petition in bankruptcy operates to stay the commencement or

continuation of any action or proceeding against the debtor.      11

U.S.C. sec. 362(a) (1994).   However, 11 U.S.C. sec. 362(b)(9)

(1994) provides an exception to the automatic stay for audits

conducted by the Government to determine tax liability.      We find

that petitioner’s involvement in a bankruptcy proceeding did not

prevent respondent from determining that petitioner was liable
                             - 48 -

for the accuracy-related penalty pursuant to section 6662(a) and

(b)(1).

     To reflect the foregoing,

                                        Decision will be entered

                                   under Rule 155.
                              - 49 -

                            APPENDIX A

     All the following issues were conceded by the parties in the

stipulation of settled issues.

     Petitioner concedes that he had unreported interest income

of $42,175 in 1990, $41,734 in 1991, $21,251 in 1992, and $40,724

in 1993.   Petitioner concedes that he received taxable management

fee income of $6,420.70 from Eureka Field Nursery during 1991.

Petitioner concedes that his flow-through loss from the S

corporation Villa Sol during 1990 was $750.   Additionally,

petitioner concedes that his distributive share from the S

corporation Brevard Specialities was $2,531 in 1990, $800 in

1991, and $535 in 1992.

     Petitioner concedes that he did not report a $19,200

guaranteed payment from a partnership in 1991.   Petitioner

concedes that he received taxable Social Security benefits

(subject to Code limitations) of $3,371.50 in 1991 and $3,816 in

1992.

     Petitioner concedes that he realized a capital gain of

$23,865.68 as a result of the condemnation by the Florida

Department of Transportation of .46 acres petitioner owned in

1992.   Petitioner concedes that he received a short-term capital

gain of $225 from the closing out of the bank account of Eureka

Field Nursery in 1992.
                             - 50 -

     Petitioner concedes that he is liable for the addition to

tax pursuant to section 6651(a)(1) relating to 1990 and 1993, if

there is any tax due for those years before the application of

any net operating losses from other years.

     Respondent concedes that petitioner is entitled to an

itemized deduction for investment interest of $26,750 in 1991,

$20,309 in 1992, and $10,022 in 1993.   Respondent also concedes

that a $54,229.76 payment by Eureka Field Nursery to Mark Tietig

in 1991 was not a distribution to petitioner, that it does not

reduce petitioner’s basis in Eureka Field Nursery stock, and that

it does not reduce the loans owed petitioner by Eureka Field

Nursery.
                                - 51 -

                            APPENDIX B

     All the following issues were either conceded on brief or

deemed conceded.

     Respondent concedes that Eureka Field Nursery’s $54,229.76

payment to Mark E. Tietig was a return of capital to Mark Tietig

and therefore should be excluded from the computation of

petitioner’s gain from Eureka Field Nursery.    Respondent also

concedes that the $54,229.76 did not actually belong to Eureka

Field Nursery but instead to the joint venture entered into by

Eureka Field Nursery and Mark Tietig.    Respondent concedes that

the $54,229.76 was not income to Eureka Field Nursery.

Respondent concedes that the subsequent transfer of this amount

to Mark Tietig was not really a payment to Mark Tietig by Eureka

Field Nursery of money it had earned but a distribution from the

joint venture to Mark Tietig.    Respondent concedes that the

$54,229.76 payment should not be included in the calculation of

petitioner’s distributive share from Eureka Field Nursery in

1991.

     Respondent determined that petitioner’s distributive share

of income from Farm & Grove should be increased by $1,755 in 1990

because of realized gains on foreclosed properties.    Petitioner

did not specifically allege an error by respondent regarding this

issue in his petition.   Thus, we consider the issue conceded.

See Rule 34(b)(4).
                               - 52 -

     We note that in petitioner’s reply brief, he considers

several issues conceded.    We list below all the issues that

petitioner considered conceded in his reply brief.

     The $1,755 gain in 1990 due to realized gains on foreclosed

properties was not listed as one of the issues not in

controversy.   Another issue, gain on the sale of 53 lots, was

conceded by petitioner in his reply brief because it was not

petitioned.    However, in his petition, petitioner alleged error

by respondent on the sale of the 53 lots and argued the issue in

his brief and reply brief.    In light of the inconsistency, we

shall view the matter in the light most favorable to petitioner,

and we consider his arguments in the opinion.

     With respect to the other issues considered not in

controversy by petitioner in his reply brief, we consider the

following issues conceded.

     Petitioner concedes that in 1990, Farm & Grove earned income

of $168,567 on account of installment sales made during 1989.

Petitioner concedes that in 1990, Farm & Grove earned income of

$50,987 on account of installment sales made during 1990.

     Petitioner concedes that his distributive share of income

from Farm & Grove in 1991 is a loss of $97,501, in 1992 is a loss

of $7,083, and in 1993 is a loss of $75,072.

     Petitioner concedes that he is liable for an $8,259 self-

employment tax in 1991 and a $6,848 self-employment tax in 1993.
                                - 53 -

     Petitioner concedes that he is not entitled to a net

operating loss deduction in 1991 stemming from his 1990 tax year.

     In his petition, petitioner asserted that he filed a Form

1040, U.S. Individual Income Tax Return, for the year 1994, which

resulted in a net operating loss eligible for carryback to 1991

of $253,889.   The notice of deficiency did not cover 1994, and

petitioner on brief has abandoned this assertion.   Indeed,

petitioner listed this issue as one of the issues he considered

“not in controversy” in his reply brief.   Therefore, we consider

the issue conceded.

     Respondent concedes that petitioner is entitled to self-

employment tax deductions for the years 1990, 1991, and 1993.

     Petitioner concedes that he had interest income from Eureka

Field Nursery of $33,043 in 1991.

     Petitioner concedes that the correct amount of flow-through

income from the Kiddies 38/91 partnership during 1991 is $83,419.

     Petitioner concedes that his distributive share from Eureka

Field Nursery in 1990 is $43.

     The parties agree on the formula to be used for calculating

interest due under section 453(l)(3) for the years 1990, 1991,

and 1992.   The parties also agree that deductions allowed

petitioner for interest paid pursuant to section 453(l)(3) for

the years 1990, 1991, and 1992 will be determined under a Rule

155 computation.
                              - 54 -

     Finally, petitioner asserted in his petition that a

deduction is allowable for 1990 for an unprocessed claim for

refund filed with the Internal Revenue Service.   Petitioner

introduced no evidence at trial regarding this issue, and

petitioner’s opening and reply briefs make no reference to this

issue.   Since this possible issue was not argued on brief, it is

deemed conceded.   See Money v. Commissioner, 89 T.C. 46 (1987).
                                  - 55 -

                                APPENDIX C

                              Mark E. Tietig
                                Accounting

   Beginning Balance                                       $445,000
                                           1
       Payment        EFN 104 6/6/91         54,230         390,770
       Payment        MET 195 9/19/91         5,000         385,770
       Payment        MET 206 2/6/92          5,000         380,770
       Cadallac                               2,400         378,370
       Kluger                                 7,000         371,370
_____________________________________________________________________
_____________________________________________________________
           Per Agreement        Balance as of 8/5/92 $371,600

Installment        Check        Monthly
Due Date            No.         Amount     Owed       Paid   Balance
_________________________________________________________________

92 November                        5,000        5,000     5,000    366,600
   December                        5,000       10,000     5,000    361,600

93 January                         5,000       15,000     5,000    356,600
   February                        5,000       20,000     5,000    351,600
   March Partial                   5,000                    820    350,780
9-21-92 P-7105
  Osceola County                                          20,820
3-8-93
  Bal. March          1005         5,000        4,180     4,180    346,600
4-5-93 April          1007         5,000        5,000     5,000    341,600
5-6-93 May                         5,000        5,000     5,000    336,600
6-8 June              1012         5,000        5,000
6-8 July              1012         5,000       10,000
6-8 Payment           Find                                10,000 326,600
8-5 August            1013         5,000       5,000       5,000 321,600
9-5 September         1014         5,000       5,000       5,000 316,600
10-5 October          1015         5,000       5,000       5,000 311,600
11-5 November         1016         5,000       5,000       5,000 306,600
12-5 December         1017         5,000       5,000       5,000 301,600

1-5-94 Jan.           1018         5,000       5,000      5,000    296,600
2-5 Feb.              1019         5,000       5,000      5,000    291,600
3-5 March                          5,000       5,000      5,000    286,600
4-5 April                          5,000       5,000      5,000    281,600
5-5 May                            5,000       5,000      5,000    276,600
6-5 June                           5,000       5,000      5,000    271,600
6-27 Payment                                            271,500        100

                                   Paid in Full
     1
         All figures are rounded to the nearest dollar.
                                - 56 -

                              APPENDIX D

     Below we compare the notice of deficiency adjustments to

Farm & Grove’s 1990 income with the final treatment per the

concessions and our findings.

                                              TYE         Final
                                           12/31/90     Treatment

Ordinary income per return as filed        ($82,892)

Increases (Decreases) to income:
                                                        1
a.   1989 installment sales                 168,587      168,587
                                                            2
b.   Current years installment sales         50,987          50,987
                                                                3
c.   Gain on foreclosures                       1,755            1,755
                                                        4
d.   K-38 lot sales                         215,922         215,922

e.   Less amounts reported                 (249,723)    (249,723)


Ordinary income as corrected                104,636         104,636

Your distributive share of
  ordinary income                           104,636         104,636

Less:     Ordinary income reported on
         your return                        (82,892)         (82,892)

Increase (Decrease) in taxable income       187,528             187,528

     1
        Conceded.
     2
        Conceded.
     3
        Considered conceded per Rule 34(b)(4).
     4
        Respondent’s determination sustained.
