                        T.C. Memo. 1999-114



                      UNITED STATES TAX COURT



     FREDERICK BUTCHER AND JUDITH H. BUTCHER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12358-97.                       Filed April 6, 1999.



     Richard L. Friedman, for petitioners.

     Robert W. Mopsick, for respondent.



                        MEMORANDUM OPINION


     FOLEY, Judge:   By notice dated March 12, 1997, respondent

determined a $6,102 deficiency and section 6653(b) additions to

tax relating to petitioners' 1985 Federal income tax.    All

section references are to the Internal Revenue Code in effect for
                                - 2 -


the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     Petitioners agree with respondent's adjustments relating to

petitioners' 1985 income tax return and do not contest the

additions to tax.    The sole issue for decision is whether

petitioners may use income averaging to compute their 1985 tax

liability.

                             Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.    At the time the petition was filed, petitioners

resided in Stillwater, New Jersey.

     During 1985, Mr. Butcher was a self-employed certified

public accountant.    On their 1985 return, petitioners reported a

$68,204 loss relating to JGD Associates, L.P. (JGD Associates).

In 1993, Mr. Butcher pleaded guilty to violating section 7206(1)

(i.e., to willfully subscribing to a 1985 income tax return that

he did not believe to be true and correct as to every material

matter).    In his plea, Mr. Butcher admitted that petitioners were

not entitled to the $68,204 deduction.

     In January 1994, petitioners filed an amended 1985 return,

on which they increased their total taxable income by $68,204

(i.e., the amount of the disallowed deduction).    Petitioners

computed their 1985 tax liability pursuant to the income-

averaging method.    This computation was based on the taxable
                               - 3 -


income amounts petitioners reported for 1982, 1983, and 1984.     On

their 1984 return, petitioners reported, but were not entitled

to, a $30,729 loss relating to JGD Associates.    The period to

assess a deficiency in petitioners' 1984 Federal income tax has

expired.

                            Discussion

     Respondent contends that, for income-averaging purposes,

petitioners are required to use the correct amount of 1984

taxable income, even though the period for assessing a deficiency

relating to that year has expired.     Respondent further contends

that petitioners' 1984 taxable income should be increased by

$30,729 to offset the $30,729 deduction that petitioners were not

entitled to claim.   If respondent is allowed to adjust

petitioners' 1984 taxable income, petitioners will not be

eligible for income averaging (i.e., because their "averagable

income" for 1985 will not exceed $3,000).    See secs. 1301 and

1302.   Petitioners admit they were not entitled to the $30,729

deduction, but they contend that "the Court should apply fairness

and equity" and not permit respondent to adjust their 1984

taxable income.

     Petitioners' contention is meritless.    A taxpayer who seeks

to compute his tax liability under the income-averaging method,

must use the correct, not merely the reported, taxable income of

each of the 3 preceding years, even if the period for assessing a
                                 - 4 -


deficiency has expired.   See Unser v. Commissioner, 59 T.C. 528,

530 (1973).   Thus, for income-averaging purposes, respondent may

increase petitioners' 1984 taxable income by $30,729.       As a

result, petitioners are not eligible for income averaging.

Accordingly, we sustain respondent's determination.

     To reflect the foregoing,



                                            Decision will be entered

                                         for respondent.
