                        T.C. Memo. 1999-346




                       UNITED STATES TAX COURT



           FLORIDA INDUSTRIES INVESTMENT CORPORATION
                AND SUBSIDIARIES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18310-96.              Filed October 19, 1999.



     Kenton V. Sands, for petitioners.

     Charles Baer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined deficiencies in,

additions under section 6651(a)(1)1 to, and accuracy-related




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

penalties under section 6662(a) on petitioners' Federal income

tax (tax), as follows:

        Taxable                                           Accuracy-
       Year Ended       Deficiency   Addition to Tax   Related Penalty
  February 28, 1991      $133,316        $50,286          $40,228
  February 29, 1992        59,808          5,981           11,962
  February 28, 1994       158,230         39,558           31,646


       The issues remaining for decision are:

       (1)   Are petitioners entitled to nonrecognition treatment

under section 1031 with respect to certain gains realized by

petitioner Orlando Industrial Properties, Inc. (OIP) during the

taxable year ended February 28, 1991, as a result of the disposi-

tion of certain real estate interests?     We hold that they are

not.

       (2)   Are petitioners entitled to nonrecognition treatment

under section 1033 with respect to certain gain realized by OIP

during the taxable year ended February 28, 1991, as a result of

the condemnation of certain real property?      We hold that they are

not.

       (3)   Are petitioners liable for the addition to tax under

section 6651(a)(1) for each of the taxable years at issue except
                                 - 3 -

the taxable year ended February 28, 1993?2      We hold that they

are.

       (4)   Are petitioners liable for the accuracy-related penalty

under section 6662(a) for each of the taxable years at issue

except the taxable year ended February 28, 1993?      We hold that

they are.

                           FINDINGS OF FACT

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

       Petitioner Florida Industries Investment Corporation (FIIC)

had its principal place of business in Orlando, Florida, at the

time the petition was filed.

       At all relevant times, FIIC was the common parent of an

affiliated group within the meaning of section 1504(a).      That

group included, inter alia, OIP, Indian River Farms, Inc. (IRF),

and Canti Carriage Company (CCC).    Throughout the taxable years

at issue, William Canty (Mr. Canty) was the sole stockholder of

FIIC, which owned 100 percent of the outstanding stock of OIP,

IRF, and CCC, and he also was the president of, inter alia, FIIC

and each of those subsidiaries of FIIC.       At all relevant times,

the principal business activity of both OIP and IRF was real

estate investment and development, and the principal business

activity of CCC was auto sales.

       2
      Although respondent made determinations with respect to
petitioners’ taxable year ended Feb. 28, 1993, those determina-
tions did not result in a deficiency, and respondent made no
determinations under secs. 6651(a)(1) and 6662(a), for that year.
                                - 4 -

     Mr. Canty negotiated all real estate transactions on behalf

of FIIC, OIP, and other petitioners involved in real estate

investment.    As far as Mr. Canty was concerned, such negotiations

were not final until a real estate deal was actually closed.

When one of the petitioners was interested in buying certain real

property, as a negotiating tactic Mr. Canty sometimes intention-

ally stalled the closing even after a real estate contract had

been signed.   That was because Mr. Canty believed that such a

stalling tactic tended to lower the purchase price.

     Petitioners filed consolidated U.S. Corporation income tax

returns (consolidated returns) for the taxable years ended

February 28, 1991, February 29, 1992, February 28, 1993, and

February 28, 1994, on August 24, 1992, December 28, 1992, Novem-

ber 29, 1994, and April 27, 1995, respectively.      Each of those

consolidated returns was signed by C. Riggs (Mr. Riggs) as return

preparer.

Claimed Section 1031 Real Estate Transactions

     On September 28, 1982, pursuant to a joint venture agree-

ment, OIP, Xway, Inc. (Xway), a Florida corporation, and Alpha

Trust (Alpha), a Florida trust, formed a joint venture under the

name Interstate Park (Interstate).      The joint venturers formed

Interstate in order to, inter alia, acquire and develop certain

commercial real property located in Orlando, Florida (commercial

real property), that OIP was in the process of purchasing from

the School Board of Orange County, Florida (School Board).      In
                                - 5 -

connection with that purchase, OIP was required to give the

School Board a purchase money mortgage in the amount of $588,300

(OIP's purchase money mortgage).

     OIP and Alpha each acquired a 25-percent interest in Inter-

state, and Xway acquired the remaining 50-percent interest in

that joint venture.    OIP acquired its 25-percent interest in

Interstate by contributing to it the commercial real property.

In return, Interstate agreed to assume and pay OIP's purchase

money mortgage.    Alpha and Xway acquired their respective 25-

percent and 50-percent interests in Interstate by agreeing to

guarantee the indebtedness assumed by Interstate.

     Interstate undertook to develop and improve the commercial

real property.    It subdivided that property into several commer-

cial lots (commercial lots) and installed streets and utilities

on those lots.    Thereafter, on June 25, 1990, OIP and Alpha

agreed to redeem and surrender their respective interests in

Interstate.   In order to effect those agreements, (1) Interstate

deeded to OIP commercial lots 11 and 12 (lots 11 and 12), and OIP

assumed its share of Interstate's liabilities by executing a note

in the amount of $146,374 (OIP's $146,374 note); and (2) Inter-

state deeded to Alpha certain other commercial lots, and Alpha

agreed to assume its share of Interstate's liabilities.

     At the time of the redemptions of the respective interests

of OIP and Alpha in Interstate and the dissolution of Interstate

as a joint venture, a contract of sale between Interstate and
                                - 6 -

Orange County Mental Health Services (Health Services) was in

effect, under which Interstate agreed to sell commercial lots 14

and 15 (lots 14 and 15) to Health Services.     In order to preserve

the rights of Interstate's joint venturers in that pending sale,

on June 25, 1990, those joint venturers established a trust

(Interstate trust) to which Interstate quitclaimed lots 14 and 15

and in which OIP and Alpha each held a 25-percent, and Xway held

a 50-percent, beneficial interest.      On the same date, OIP, Alpha,

and Xway entered into an addendum to the trust agreement which

created the Interstate trust.   That addendum provided that if the

sale of lots 14 and 15 to Health Services were not completed by

September 10, 1990, the contract of sale between Interstate and

Health Services with respect to those lots would be terminated,

the Interstate trust would be dissolved, and specified portions

of lots 14 and 15 would be deeded to OIP, Alpha, and Xway as

beneficiaries of that trust.

     On July 26, 1990, (1) Interstate3 purchased from OIP lots 11

and 12 for $470,000 ($470,000 purchase price) and (2) Xway

purchased from OIP OIP's 25-percent interests in lots 14 and 15

for $700,000 ($700,000 purchase price).     Mr. Canty and OIP wanted

to structure the foregoing sales so as to qualify under section


     3
      Although Interstate, the joint venture, was dissolved after
two of the three joint venturers redeemed their interests therein
on June 25, 1990, Xway, the remaining joint venturer and sole
owner of Interstate after those redemptions, decided to use the
name Interstate when it purchased lots 11 and 12 from OIP.
                              - 7 -

1031, but they did not so advise Mr. Riggs, petitioners' return

preparer, until he was asked to prepare petitioners' consolidated

return for the taxable year ended February 28, 1991.

     Interstate paid the $470,000 purchase price for OIP's lots

11 and 12 by accepting OIP's assignment to it of OIP's $146,374

note and delivering funds equal to the balance of the $470,000

purchase price, i.e., $323,626, to The Bank of Winter Park (Bank)

in its capacity as the escrow agent under an agreement entitled

"EXCHANGE ESCROW SECURITY AGREEMENT" (escrow agreement).   Xway

paid the $700,000 purchase price for OIP's 25-percent interests

in lots 14 and 15 by delivering funds in that amount to the Bank

in its capacity as the escrow agent under the escrow agreement.

     The escrow agreement was entered into on July 26, 1990,

among Interstate as the buyer of OIP's lots 11 and 12 and OIP's

25-percent interests in lots 14 and 15,4 OIP as the seller there-

of, and the Bank as the escrow agent.   The escrow agreement

provided in pertinent part:

          WHEREAS, pursuant to that certain Contract for
     Sale and Purchase by and between Exchangor [OIP], as
     Seller, and Buyer [Interstate], dated the 26 day of
     July, 1990 (the "Contract"), Exchangor agreed to ex-
     change or sell certain real property [OIP's lots 11 and
     12 and OIP's 25-percent interests in lots 14 and 15]
     * * * (hereinafter referred to as the "Property"); and

          WHEREAS, pursuant to the terms of the Contract,
     Buyer has agreed to cooperate with Exchangor in effect-
     ing a "like kind exchange" pursuant to the provisions

     4
      Xway decided to use the name Interstate when it entered
into the escrow agreement. See supra note 2.
                         - 8 -

of Section 1031 of the Internal Revenue Code of 1986
with respect to the Property; and

     WHEREAS, Exchangor is in the process of identify-
ing a parcel or parcels of real property to be acquired
by Buyer (hereinafter referred to as the "Like Kind
Property"), which Like Kind Property, if acquired, will
be exchanged by Buyer with Exchangor for the Property;
and

     WHEREAS, pursuant to the Contract, Buyer has, of
even date herewith, acquired the Property from Exchang-
or; and

     WHEREAS, pursuant to the Contract the total pur-
chase price for the Property, after non cash adjust-
ments, prorations and allocation of expenses (but
without regard to Buyer's costs and expenses), would be
$1,023,626.00 [consisting of $323,626 due from Inter-
state with respect to its purchase of OIP's lots 11 and
12 and $700,000 due from Interstate with respect to its
purchase of OIP's 25-percent interests in lots 14 and
15] which sum shall hereinafter be referred to as the
"Escrow Deposit"; and

     WHEREAS, Buyer, Exchangor and Escrow Agent have
agreed that Buyer shall deliver, or cause to be deliv-
ered, the Escrow Fund to Escrow Agent and Escrow Agent
shall hold and disburse the Escrow Fund, as agent for
Buyer, pursuant to the terms and conditions hereinafter
set forth.

     NOW, THEREFORE, * * * the parties hereto agree as
follows:

     1. Recitals. The recitations of fact and all
other matters set forth in the "Whereas clauses" above
are true and correct and are incorporated herein.

     2. Escrow Deposit. Simultaneously with the
execution of this Agreement, as security for Buyer's
obligations under this Escrow Agreement and under the
Contract regarding cooperating in effecting like kind
exchanges by executing assignable contracts for acquir-
ing exchange property or properties from the owner(s)
thereof (hereinafter referred to as the "Owner"), Buyer
has delivered or caused to be delivered the Escrow
Deposit to Escrow Agent, * * * which Escrow Deposit
shall be deposited by Escrow Agent, within two
                         - 9 -

(2) business days from the date of this Agreement, in
an interest bearing account at * * * The Bank of Winter
Park. * * * all interest or other returns earned there-
on shall belong to Buyer and shall be held in such
account by the Escrow Agent as further security for
Buyer's obligations under this Escrow Agreement and
under the Contract regarding cooperating and effecting
like kind exchanges. The Escrow Deposit together with
any additional amounts hereafter contributed by Buyer
to the Escrow Agent hereunder and all interest or other
return earned thereon are hereinafter collectively
referred to as the "Escrow Fund." The Escrow Fund
shall be paid and disbursed in accordance with the
provisions of paragraph 5 below; provided, however, the
Escrow Agent shall have no duty to investigate or
otherwise determine whether any of the provisions,
stipulations or conditions contained in said paragraph
5 have been met or complied with, and the only duties
of the Escrow Agent with respect to disbursement of the
Escrow Fund shall be to disburse the same upon three
(3) days prior written notice from Buyer and Exchangor
to the Escrow Agent, which disbursement by the Escrow
Agent shall be in accordance with such written notice
* * *.

     3. Authenticity of Notice. For all purposes of
this Agreement, John Hefferan is hereby authorized to
act as agent for Buyer and W.A. Canty is hereby autho-
rized to act as agent for Exchangor. Any notice given
to or made by said persons shall be deemed given to or
made by the respective parties. Escrow Agent shall
have no duty of independent investigation or duty to
verify the authority of either John Hefferan or W.A.
Canty to provide such written notice as aforesaid
* * *.

   *       *       *       *       *       *       *

     5. Like Kind Exchange. Buyer and Exchangor agree
to the following provisions and further agree that the
Escrow Fund shall be disbursed to meet Buyer's obliga-
tions to Exchangor in accordance with the following
provisions of this paragraph 5.

     (a) Identification of Like Kind Property By
Exchangor. Exchangor may, at any time within forty-
five (45) days after the date hereof (hereinafter
referred to as the "Closing Date"), identify (as con-
templated by Section 1031(a)(3) of the Code and the
                        - 10 -

Treasury Regulations promulgated thereunder) the Like
Kind Property by notifying Buyer in writing of the
identity of the Like Kind Property.

      (b) Buyer to Enter into Assignable Contract to
Acquire Identified Like Kind Property. Upon identifi-
cation of such Like Kind Property as provided in
(a) above, Buyer agrees to execute a Contract with the
Owner thereof providing for the acquisition by Buyer or
his assigns of the Like Kind Property upon terms and
conditions acceptable to, and approved in writing by
Exchangor, which contract shall be executed by Buyer
within three (3) days following the receipt by Buyer of
written direction from Exchangor to execute said Con-
tract. It is agreed that Buyer shall not be required
to execute a contract for the acquisition of the Like
Kind Property unless Buyer's total potential liability
upon default under said contract does not exceed an
amount equal to the "Agreed Amount" (as hereinafter
defined) payable with respect to such Like Kind Prop-
erty. Buyer will simultaneously assign any such con-
tract to Exchangor which will close in its own name.
Buyer will expend the escrow funds to complete the
purchase of the exchange properties in Exchangor's
name.

     (d) Disposition of Funds If Some or All Like Kind
Properties Are Not Acquired. In the event that the non
simultaneous like kind exchange of the Exchange Prop-
erty contemplated hereunder is not consummated in whole
or in part in accordance with the provisions of this
paragraph 5, Buyer and Exchangor agree that the Escrow
Agent shall distribute the Escrow Fund as follows:

     (1) In the event Exchangor does not identify all
or any of the Like Kind Property within the forty-five
(45) day period referred to in (a) above, then Exchang-
or shall notify Buyer in writing at any time after the
expiration of such forty-five (45) day period and
Buyer, within three (3) business days of receipt of
said written notice, shall cause Escrow Agent to pay to
Exchangor an amount equal to the Agreed Amount.

     (2) If any portion of the Agreed Amount has not
been expended by Buyer at the expiration of the one
hundred eighty (180) day period [after July 26, 1990]
* * * and has not previously been paid by Escrow Agent
or Buyer to Exchangor under (1) above, such unpaid
portion shall be paid by Escrow Agent to Exchangor no
                            - 11 -

later than five (5) business days after the expiration
of such period.

     (3) Any funds held by the Escrow Agent hereunder
after making the distributions provided for in subpara-
graphs 5(d)(1) and (2) above shall be paid to Buyer
within five (5) days after expiration of the one hun-
dred eighty (180) day period referred to above.

     (e)   Defined Terms.    For purposes of this para-
graph 5:

     (1) As used in subparagraphs 5(b) * * * and
(d)(1), the term "Agreed Amount" shall mean an amount
equal to the sum of the Net Cash, decreased by any
portion thereof previously expended, or required under
this paragraph 5 to be expended, by the Buyer for other
Like Kind Property (together with the "growth factor"
attributable thereto), or otherwise paid from the
Escrow Fund at the direction of Buyer to Exchangor
(together with the "growth factor" attributable there-
to), pursuant to this Paragraph 5 (the "Modified Net
Cash"), plus a "growth factor" equal to an amount
determined by multiplying the Modified Net Cash by the
product which results from multiplying *% by the actual
number of days from the date of the closing provided
for in Paragraph 5 hereof to the date of the acquisi-
tion by Buyer of the Like Kind Property from the Owner
as contemplated hereunder.

* to be determined

     (2) As used in subparagraph 5(d)(2), the term
"Agreed Amount" shall mean an amount equal to the sum
of the Net Cash decreased by any portion thereof previ-
ously expended from the Escrow Fund at the direction of
Buyer for other Like Kind Property (together with the
"growth factor" attributable thereto), or otherwise
paid from the Escrow Fund to Exchangor pursuant to this
Paragraph 5 (the "Modified Net Cash"), plus a "growth
factor" equal to an amount determined by multiplying
the Modified Net Cash by the product which results from
multiplying *% by the actual number of days from the
Closing Date to the date the amounts due Exchangor as
provided for in subparagraph 5(d)(2) are paid to
Exchangor.

* to be determined
                             - 12 -

          (3) "Net Cash" shall mean the portion of the
     total purchase price that would have been payable under
     the Contract by Buyer to Seller for the Exchange Prop-
     erty (if Buyer had acquired such Exchange Property for
     cash rather than pursuant to a nonsimultaneous ex-
     change) adjusted for all applicable credits, adjust-
     ments and prorations but excluding Buyer's closing
     costs and expenses.

        *       *       *       *       *        *       *

          7. Miscellaneous Provisions. The following
     miscellaneous provisions all apply to this Agreement:

        *       *       *       *       *        *       *

          (e) Amendment and Modification. The parties may
     amend, modify or supplement this Agreement only in the
     form of a written agreement signed by all the parties.

After the escrow agreement was entered into on July 26, 1990, the

parties to that agreement never amended, modified, or supple-

mented it by signing a written agreement to that effect, as

required by paragraph 7(e) of the escrow agreement.

     The escrow agreement was signed on behalf of OIP by Mr.

Canty as its president, on behalf of Interstate by the secretary

and treasurer of Xway which was the sole owner of Interstate, and

on behalf of the Bank by the Bank's president.   John Hefferan

(Mr. Hefferan) also signed the escrow agreement as "TRUSTEE FOR

INTERSTATE PARK JOINT VENTURE" (Interstate's trustee).   It was

Mr. Canty who asked Mr. Hefferan to sign the escrow agreement as

Interstate's trustee, and Mr. Hefferan agreed to do so, even

though Mr. Hefferan was not familiar with either Interstate or

Xway and did not know Bernard Kaplan (Mr. Kaplan), the president

of Xway who controlled Interstate after OIP and Alpha redeemed
                              - 13 -

their respective interests in that joint venture and who was the

person with whom Mr. Canty, acting on behalf of OIP, dealt.

     Mr. Hefferan, who is an attorney, has known Mr. Canty for

approximately 40 years and has had numerous contacts with him

during that time, including doing legal work for various compa-

nies or partnerships in which Mr. Canty had some direct or

indirect interests and, to a lesser extent, for Mr. Canty person-

ally.   Since 1982, Mr. Hefferan has represented Mr. Canty and

certain entities in which he had interests, including certain of

the petitioners herein, with respect to at least 19 separate

matters.   On August 23, 1990, while the escrow agreement was in

effect, OIP made a contribution to Mr. Hefferan's election

campaign account.

     In signing the escrow agreement as Interstate's trustee, Mr.

Hefferan understood that he was acting as the trustee for Inter-

state of funds that it was depositing into the Bank under the

escrow agreement and that were to be used to pay for the purchase

of property designated by OIP.   Mr. Hefferan further understood

that his primary duty to Interstate under the escrow agreement

was to sign contracts to buy property which were brought to him

by either Interstate or OIP, but which in fact were usually

presented to him by Mr. Canty as OIP's agent.   The escrow agree-

ment was silent as to the standard to be used by Mr. Hefferan in

approving contracts to buy property that were presented to him.

However, Mr. Hefferan understood from reading that agreement that
                              - 14 -

Mr. Kaplan who was acting on behalf of Interstate acquired

certain properties from Mr. Canty acting on behalf of OIP, that

Mr. Kaplan acting on behalf of Interstate agreed to place the

cash to fund those purchases in escrow, and that any reasonable

request by Mr. Canty on behalf of OIP to buy property with that

escrowed cash would be granted, but only up to the amount of such

cash.

     Pursuant to the escrow agreement, Interstate deposited into

a money market trust account at the Bank (escrow account) the

aggregate amount (i.e., $1,023,626) owed OIP with respect to the

purchases from OIP of lots 11 and 12 and OIP's 25-percent inter-

ests in lots 14 and 15 (escrowed sales proceeds).   (We shall

refer to the escrowed sales proceeds and any interest earned

thereon and belonging to Interstate pursuant to paragraph 2 of

the escrow agreement as the escrow fund.)

     On July 27, 1990, OIP purchased for $750,000 an apartment

complex (Brentwood property) in Irving, Texas.   Of the total

purchase price that OIP paid for the Brentwood property, $637,500

was financed through a loan from the Resolution Trust Corpora-

tion.   After debits and credits reflected in the closing state-

ment, the balance due with respect to the purchase of that

property was $170,688.17.   That balance was paid by a wire

transfer on July 27, 1990, in the amount of $200,000 that Mr.

Hefferan authorized be made with a portion of the escrow fund.

The portion of that $200,000 wire transfer which was not used to
                                - 15 -

pay the balance due on the purchase of the Brentwood property,

i.e., $29,311.83, was not redeposited into the escrow account.

     On November 20, 1990, OIP purchased from Mr. Canty his

residence in Orlando, Florida.    Thereafter, Mr. Canty continued

to live rent free in that residence.      Of the total purchase price

that OIP paid Mr. Canty for his residence, $125,000 was paid with

a portion of the escrow fund.    OIP acquired no other residential

properties during the early 1990's.

     On December 11, 1990, OIP purchased for $490,000 approxi-

mately 174.5 acres of land in Vero Beach, Florida (Vero Beach

property), from the General Development Corporation (General),

which was the debtor in possession of that property.      General

provided financing to OIP for that purchase in the amount of

$367,500 and retained a purchase money mortgage on the Vero Beach

property with respect to that loan.      After debits and credits

reflected in the closing statement with respect to the purchase

of the Vero Beach property, the balance due from OIP to General

was $66,000.   That amount was paid by a $66,000 check drawn on

the escrow account, signed by Mr. Hefferan, and dated December

11, 1990.

     On December 20, 1990, OIP purchased for $3 million an

apartment complex in Fort Worth, Texas (Quail Ridge property),

from American National Insurance Company (American National).

American National provided financing to OIP for that purchase in

the amount of $2,888,000 and retained a mortgage on the Quail
                              - 16 -

Ridge property with respect to that loan.     After debits and

credits reflected in the closing statement with respect to the

purchase of the Quail Ridge property, the balance due from OIP to

American National was $482,521.48.     The check signed by Mr.

Hefferan and dated December 20, 1990, which was drawn on the

escrow account in order to pay that amount due, was for $490,000.

The portion of that $490,000 check that was not used to pay the

balance due on the purchase of the Quail Ridge property, i.e.,

$7,478.52, was not redeposited into the escrow account.

     Mr. Kaplan, the president of Xway, was aware that Mr. Canty

contemplated structuring the sales by OIP of lots 11 and 12 and

OIP's 25-percent interests in lots 14 and 15 so as to qualify for

like-kind exchange treatment under section 1031.     Mr. Kaplan

believes that at approximately the time of those sales, and

probably within 45 days after those sales, Mr. Canty made him

generally aware of properties that Mr. Canty was interested in

purchasing, including the properties in Vero Beach, Florida, and

in Texas that were ultimately purchased with a portion of the

escrow fund.   However, the escrow agreement did not identify any

particular property to be purchased thereunder and did not

identify what portion of the escrowed sales proceeds was to be

used to purchase such property and what portion was to remain as

boot under section 1031.   Moreover, although the escrow agreement

required OIP to identify within 45 days after July 26, 1990, any

property that it wanted Interstate to acquire pursuant to the
                                - 17 -

escrow agreement (replacement property) by notifying Interstate

in writing of the identity of any such property, OIP did not

comply with that requirement.

     Although the escrow agreement required Interstate, upon

identification by OIP of a replacement property, to execute with

the owner of such property an assignable contract to purchase it

(provided that Interstate's total potential liability on default

under such a contract did not exceed an amount payable with

respect to such property that was equal to the "Agreed Amount" as

defined in paragraph 5(e) of the escrow agreement), Interstate

did not comply with that requirement with respect to at least

three of the four replacement properties that were ultimately

purchased by OIP with a portion of the escrow fund.   Instead, OIP

acquired at least those three properties through preexisting

contracts in its own name or without any contract at all.

     The escrow agreement did not permit any withdrawals to be

made from the escrow fund except (1) to pay for any replacement

property acquired by OIP; (2) to pay OIP the "Agreed Amount" as

defined in paragraph 5(e)(1) of the escrow agreement within three

business days after Interstate received written notice from OIP

that OIP did not identify all or any of the replacement property

within 45 days after July 26, 1990;5 (3) to pay OIP no later than


     5
      The escrow agreement required such written notice by OIP to
Interstate to be made at any time after the expiration of that
45-day period.
                              - 18 -

five business days after the expiration of the 180-day period

after July 26, 1990, any portion of the "Agreed Amount" as

defined in paragraph 5(e)(2) of the escrow agreement that had not

been expended by Interstate within that 180-day period for the

purchase of replacement property or that had not previously been

paid to OIP pursuant to paragraph 5(d)(1) of the escrow agreement

relating to OIP's failure to identify all or any of the replace-

ment property within 45 days after July 26, 1990; and (4) to pay

any remaining portion of the escrow fund to Interstate within

five days after the expiration of the 180-day period after July

26, 1990.   Nonetheless, after the expiration of the 45-day period

after July 26, 1990, and before the expiration of the 180-day

period after that date, a check in the amount of $50,000, which

was signed by John Hefferan, payable to OIP, and dated November

26, 1990, was drawn on the escrow fund.   The purpose for that

withdrawal as stated on that check was "Draw Re:   Canty".   In

addition, a check in the amount of $50,000, which was signed by

John Hefferan, payable to Canti Carriage Company, and dated

December 11, 1990, was drawn on the escrow fund.   The purpose for

that withdrawal as stated on that check was "Draw".   Although the

$50,000 check payable to Canti Carriage Company was signed by

John Hefferan, Mr. Canty wrote both the name of the payee and the

amount on that check.   Furthermore, on January 8, 1991, OIP

received a distribution of $12,740.10 from the escrow fund, which

comprised all the moneys remaining in that fund as of that date.
                              - 19 -

     In addition to writing the name Canti Carriage Company and

the amount on the check in the amount of $50,000 dated December

11, 1990, which was drawn on the escrow fund, Mr. Canty wrote in

the name of the payee on at least several other checks drawn on

the escrow account and presented those checks to Mr. Hefferan for

his signature.   Mr. Canty also reviewed and balanced the bank

statements issued by the Bank with respect to the escrow account.

     The general ledger of OIP contained entries relating to the

escrow fund, including entries relating to the interest credited

monthly to that fund and belonging to Interstate pursuant to

paragraph 2 of the escrow agreement.   The following entries were

made in OIP's general ledger with respect to the escrow fund:
                              - 20 -

0001106     Escrow Funds Rec.-I Park Sale Asset
07/26/90 GL00043 Record Starker Sale of I     GL 1,023,626.00
                  Park Land
07/27/90 GL00043 Purchase of BAD from Esc.    GL   200,000.00CR
                  Funds
07/31/90 GL00044 Interest Income I-4 Escrow   GL       902.60
08/31/90 GL00044 Interest Income I-4 Escrow   GL     5,602.27
09/28/90 GL00044 Interest Income I-4 Escrow   GL     5,458.39
10/05/90 GL00044 Interest Income I-4 Escrow   GL       915.71
10/23/90 GL00043 Deposit for purchase of QFW GL     50,000.00CR
                  from Escrow
10/23/90 GL00045 Am. Natnl-Consid. for        GL        50.00CR
                  Contract fr Escrow
11/05/90 GL00044 Interest Income I-4 Escrow   GL     5,530.07
11/20/90 GL00045 Purchase 3822 Bainbridge-    GL   125,000.00CR
                  From Escrow
11/26/90 GL00045 Dist of Excess funds from    GL    50,000.00CR
                  I-4 Escrow
12/05/90 GL00044 Interest Income I-4 Escrow   GL     4,670.58
12/11/90 GL00045 Dist of Excess I Park Esc    GL    50,000.00CR
                  Funds to OIP
12/11/90 GL00045 Record Purchase of Vero      GL    70,640.50CR
                  from Esc Funds
12/20/90 GL00043 Purchase of QFW from Esc.    GL   490,000.00CR
                  Funds
01/04/91 GL00044 Interest Income I-4 Escrow   GL     1,724.98
01/08/91 GL00046 Final Dist I-4 Escrow-Dist   GL    12,740.10CR
                  Excess Funds
Totals for Account Number 0001106
           .00    1,048,430.60   1,048,430.60 .00          .00

     In Schedule D of petitioners' consolidated return for the

taxable year ended February 28, 1991, petitioners reported and

recognized aggregate gains in the amount of $234,360 from the

sales by OIP of lots 11 and 12 and OIP's 25-percent interests in

lots 14 and 15.   Those reported gains were considered by peti-

tioners to be boot under section 1031.

Claimed Section 1033 Real Estate Transaction

     During petitioners' taxable year ended February 28, 1991,

OIP owned a 50-percent interest in a partnership known as
                              - 21 -

Sandlake Executive Center (Sandlake), and Sandlake owned an 80-

percent interest in a partnership known as Chancelor Concourse

Joint Venture (CCJV).   CCJV had been formed to purchase, develop,

and sell a particular parcel of real property.   Around June or

July 1990, the Orange County School Board and Orange County,

Florida, condemned the real property owned by CCJV (CCJV real

property), and OIP received certain cash proceeds (condemnation

proceeds) as a result of that condemnation.

     The terms of a document entitled "Warranty Deed", which

bears the date of February 28, 1992, was signed by Mr. Canty as

president of OIP, and was recorded on September 10, 1993 (re-

corded Vero Beach property warranty deed), recite that OIP was

transferring the Vero Beach property to FIIC for $10 and other

valuable consideration.6   That document also recites that $2,520

in document stamps was paid to the State of Florida with respect

to the transfer recited in that document.   Based on the amount of

such document stamps, the value of the Vero Beach property for

Florida document stamp purposes was $360,000.

     The terms of a document entitled "Assumption of Obligations

Under Promissory Note and Mortgage Deed", which also bears the

date of February 28, 1992, was signed by Mr. Canty as president

of FIIC, and was never recorded, recite that FIIC agreed (1) to

     6
      As discussed above, OIP had purchased the Vero Beach prop-
erty on Dec. 11, 1990. Petitioners claim that OIP acquired that
property on that date as part of a like-kind exchange under sec.
1031.
                              - 22 -

be bound by the promissory note in the amount of $367,500 and the

purchase money mortgage with respect to that note that OIP had

executed in favor of General on December 11, 1990, when OIP had

acquired the Vero Beach property, and (2) "to meet the obliga-

tions created thereby and does hereby release and hold harmless

OIP from any and all liability associated therewith."

     The terms of a document entitled "Warranty Deed", which also

bears the date of February 28, 1992, was signed by Mr. Canty as

president of FIIC, and was never recorded, recite that FIIC was

transferring the Vero Beach property to IRF, one of FIIC's wholly

owned subsidiaries, for $10 and other valuable consideration.    As

of February 28, 1991, IRF had assets of $96.

     The terms of a document entitled "Quit-Claim Deed", which

bears the date of January 20, 1994, was signed by Mr. Canty as

president of IRF, and was never recorded (IRF quitclaim deed

document), recite that IRF

     in consideration of the sum of $950,000.00 * * * does
     hereby * * * quitclaim unto [OIP] * * * all the right,
     title, interest, claim and demand which [IRF] * * * has
     in * * * all of government lot three, lying in section
     29, township 33, range 40 east, Indian River County,
     Florida.

The government lot three referred to in the IRF quitclaim deed

document consisted of approximately 34.3 acres (34.3-acre parcel

of the Vero Beach property) of the approximately 174.5-acre Vero

Beach property which OIP had acquired from General on December

11, 1990.   There is no road access to the 34.3-acre parcel of the
                              - 23 -

Vero Beach property, which is bounded on the eastern side by the

Indian River and is landlocked on the remaining three sides.

     The terms of the IRF quitclaim deed document state that the

consideration of $950,000 recited therein was to be evidenced by

a purchase money note and a mortgage in that amount, which also

were to bear the date of January 20, 1994.   The terms of a

document entitled "NOTE" (OIP note), which also bears the date of

January 20, 1994, was signed by Mr. Canty as president of OIP,

and was never recorded, recite that OIP promised to pay IRF

$950,000 on a date that is 36 months after January 20, 1994,

"with interest after maturity at the rate of 8 per cent per annum

until paid".   The terms of a document entitled "This Indenture",

which also bears the date of January 20, 1994, was signed by Mr.

Canty as president of OIP, and was never recorded, recite that

OIP, as mortgagor, "for and in consideration of * * * nine

hundred fifty thousand Dollars * * * has granted, bargained and

sold to the * * * Mortgagee [IRF]" the 34.3-acre parcel of the

Vero Beach property as security for the payment of the OIP note.

     Except as described above with respect to the $2,520 in

document stamps that the recorded Vero Beach property warranty

deed recites was paid to the State of Florida, no Florida trans-

fer tax or Florida intangibles tax was paid with respect to the

various transactions and indebtedness among OIP, FIIC, and/or IRF

that were recited in the above-described documents regarding the

Vero Beach property and regarding the 34.3-acre parcel of the
                                - 24 -

Vero Beach property.   Nor was any real estate tax paid as of

October 4, 1994, on the Vero Beach property for any of the years

1990, 1991, 1992, and 1993.

     During the examination in 1993 by respondent of petitioners'

consolidated returns for the years at issue, Mr. Canty informed

respondent's examining agent that no replacement property had yet

been purchased with respect to the condemnation proceeds that OIP

received as a result of the condemnation of the CCJV real prop-

erty.

     Around October 4, 1994, CCC, one of FIIC's subsidiaries

which was engaged in auto sales during the years at issue, used

the Vero Beach property as collateral with respect to a loan that

it was seeking from the Bank.

     In December 1994, Mr. Canty, as president of OIP and IRF,

contracted to have an appraisal done of the 174.5-acre Vero Beach

property and approximately 54 acres of land adjacent to that

property consisting of three parcels (54-acre real property).

The property appraised had approximately 1¼ miles of waterfront

on the Indian River and approximately 2,000 feet of frontage on

U.S. Highway 1.   In a report dated December 15, 1994, the ap-

praiser concluded that the highest and best use for the property

appraised was "future residential development or as an alterna-

tive highest and best use as [sic] for conservation."   In de-

scribing the 54-acre real property, the appraiser stated:
                              - 25 -

     The owner of the subject property has under contract
     three parcels of land that abut the original 174.5
     acres [Vero Beach property] to the west. These parcels
     under contract make up the balance of the 228.05 acres
     of the subject property and are considered to be cru-
     cial attributes of the subject property by which the
     acquisition of this property will provide additional
     upland acreage, increased ingress and egress to the
     eastern portion of the subject and frontage for future
     commercial development on U.S. Highway One. Two of
     three parcels have disclosure provisions within the
     contract which prevent the buyer or seller from dis-
     closing information such as price, terms or closing
     date etc. * * * The third parcel of land under contract
     is from J.C. Enterprises, Inc. (Grantor) to Indian
     River Farms, Inc. (Grantee) for $552,000 cash to the
     seller. This parcel has frontage on U.S. Highway One
     and contains approximately 8.51 acres or 370,695 square
     feet. This parcel like the other two parcels is zoned
     RM-6 by Indian River County allowing residential devel-
     opment at a maximum density of six units per acre. The
     sales price results in a value per acre of $64,864 or
     $10,823 per unit.

The appraiser estimated that the "as is" value of the appraised

property as proposed to be developed was $10,250,000.

     On September 19, 1994, Atlantic Gulf Communities sent a

letter to OIP as the borrower of the loan that General had made

to OIP on December 11, 1990, in order to finance in part OIP's

acquisition from General of the Vero Beach property.    That letter

stated in pertinent part:   "The following information is provided

to you pursuant to your request of September 19, 1994 for payoff

information".

     Petitioners reflected the condemnation of the CCJV real

property and the receipt by OIP of the condemnation proceeds

(collectively, the condemnation transaction) in both their books

and records and their consolidated return for the taxable year
                             - 26 -

ended February 28, 1991, as the elimination of OIP's 50-percent

interest in Sandlake and the realization by OIP of a deferred

gain under section 1033 in the amount of $819,566.

Notice of Deficiency

     In the notice of deficiency (notice) issued to petitioners,

respondent determined, inter alia, that the aggregate gains

realized by OIP, and not just the boot reported by petitioners,

on its sales of lots 11 and 12 and OIP's 25-percent interests in

lots 14 and 15 during the taxable year ended February 28, 1991,

must be recognized and included in petitioners' consolidated

return for that year because those gains do not qualify for

nonrecognition treatment under section 1031.   Respondent also

determined in the notice that the gain realized by OIP as a

result of the condemnation transaction must be recognized and

included in petitioners' consolidated return for the taxable year

ended February 28, 1991, because that gain does not qualify for

nonrecognition treatment under section 1033.

     Respondent further determined in the notice, inter alia,

that petitioners are liable for all the taxable years at issue

except the taxable year ended February 28, 1993, (1) for addi-

tions to tax under section 6651(a)(1) for failure to file timely

their consolidated returns for those years and (2) for accuracy-

related penalties under section 6662(a) because of negligence or

disregard of rules and regulations.

                             OPINION
                                  - 27 -

     Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.         See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

Claimed Section 1031 Real Estate Transactions

     Petitioners claim that, except for the boot which they

recognized in their consolidated return for the taxable year

ended February 28, 1991, they are entitled to nonrecognition

treatment under section 1031 with respect to the aggregate gains

realized during that taxable year as a result of OIP's disposi-

tion of lots 11 and 12 and OIP's 25-percent interests in lots 14

and 15.       Respondent counters that the record does not support

petitioners' position.7

     Section 1031 provides in pertinent part:

          (a) Nonrecognition of Gain or Loss From Exchanges
     Solely in Kind.--

                    (1) In general.--No gain or loss shall be
               recognized on the exchange of property held for
               productive use in a trade or business or for in-
               vestment if such property is exchanged solely for
               property of like kind which is to be held either
               for productive use in a trade or business or for
               investment.

          *         *       *        *        *       *       *

                    (3) Requirement that property be identified
               and that exchange be completed not more than 180
               days after transfer of exchanged property.--For

     7
      We note that the parties do not rely on sec. 1.1031(k)-1,
Income Tax Regs., in advancing their respective positions under
sec. 1031. In general, those regulations are effective for
transfers of property occurring on or after June 10, 1991. See
sec. 1.1031(k)-1(o), Income Tax Regs.
                              - 28 -

          purposes of this subsection, any property received
          by the taxpayer shall be treated as property which
          is not like-kind property if--

                    (A) such property is not identified as
               property to be received in the exchange on or
               before the day which is 45 days after the
               date on which the taxpayer transfers the
               property relinquished in the exchange, or

                    (B) such property is received after
               the earlier of--

                         (i) the day which is 180 days after
                    the date on which the taxpayer transfers
                    the property relinquished in the ex-
                    change, or

                         (ii) the due date (determined with
                    regard to extension) for the trans-
                    feror's return of the tax imposed by
                    this chapter for the taxable year in
                    which the transfer of the relinquished
                    property occurs.

     Transactions that take the form of a cash sale and reinvest-

ment cannot, in substance, qualify as an exchange under section

1031, even though the end result may be the same as a reciprocal

exchange of properties.   See Bell Lines, Inc. v. United States,

480 F.2d 710, 714 (4th Cir. 1973); Carlton v. United States, 385

F.2d 238, 241 (5th Cir. 1967).   As we indicated in Barker v.

Commissioner, 74 T.C. 555, 561 (1980),

          The "exchange" requirement [under section 1031]
     poses an analytical problem because it runs headlong
     into the familiar tax law maxim that the substance of a
     transaction controls over form. In a sense, the sub-
     stance of a transaction in which the taxpayer sells
     property and immediately reinvests the proceeds in
     like-kind property is not much different from the
     substance of a transaction in which two parcels are
     exchanged without cash. Bell Lines, Inc. v. United
     States, 480 F.2d 710, 711 (4th Cir. 1973). Yet, if the
                              - 29 -

     exchange requirement is to have any significance at
     all, the perhaps formalistic difference between the two
     types of transactions must, at least on occasion,
     engender different results. Accord, Starker v. United
     States, 602 F.2d 1341, 1352 (9th Cir. 1979).

     Petitioners argue (1) that the four properties acquired by

OIP (i.e., the Brentwood property, Mr. Canty's residence, the

Vero Beach property, and the Quail Ridge property) are like-kind

properties within the meaning of section 1031(a) and (2) that

those properties (a) were identified, as required by section

1031(a)(3)(A), within 45 days after OIP disposed of lots 11 and

12 and OIP's 25-percent interests in lots 14 and 15 and (b) were

acquired within the time prescribed by section 1031(a)(3)(B).

According to petitioners, OIP's disposition of lots 11 and 12 and

OIP's 25-percent interests in lots 14 and 15 and its acquisition

of those four properties were steps in an integrated transaction,

the substance of which was an exchange of properties qualifying

under section 1031.   In support of that position, petitioners

rely on cases involving multiparty transactions which the courts

have characterized as exchanges under section 1031, including

Biggs v. Commissioner, 632 F.2d 1171 (5th Cir. 1980), affg. 69

T.C. 905 (1978); W.D. Haden Co. v. Commissioner, 165 F.2d 588

(5th Cir. 1948), affg. on this issue a Memorandum Opinion of this

Court dated Apr. 9, 1946; Garcia v. Commissioner, 80 T.C. 491

(1983); and Barker v. Commissioner, supra.

     Respondent does not dispute that the Brentwood property, the

Vero Beach property, and the Quail Ridge property are like-kind
                               - 30 -

properties within the meaning of section 1031(a).    Respondent

contends, however, that Mr. Canty's residence does not qualify as

like-kind property within the meaning of section 1031(a).8

Respondent also disputes that the four properties acquired by OIP

were identified within the time prescribed by section

1031(a)(3)(A).   Although respondent acknowledges that "Petition-

ers did attempt to structure their July 26, 1990 sales of real

property to take the form of a Section 1031 like-kind exchange",

respondent maintains that "the substance of those transactions

shows that they do not qualify for Section 1031 treatment."

Respondent also argues that the cases relied on by petitioners

involving multiparty transactions are distinguishable from the

present case in that the record in the present case "does not

show any single, integrated plan at the time of the July 26,

1990" disposition by OIP of lots 11 and 12 and OIP's 25-percent

interests in lots 14 and 15.     Moreover, according to respondent,

          Unlike the situations in Garcia, Barker, and
     Haden, petitioners here had effective control over the
     sales proceeds. The sales proceeds were subject to the
     control of Canty's longtime friend and attorney,
     Heffernan [sic]. * * * Heffernan [sic] wrote checks to

     8
      According to respondent,

     petitioners' [sic] attempt to stretch Section 1031 to
     cover the "purchase" of Canty's home. The property
     petitioners sold were commercial real estate lots.
     * * * Canty continued to live in the home after the
     purchase, and did not pay rent to petitioners. * * *
     This transaction appears to be more of another draw to
     Canty than an acquisition of real estate for investment
     purposes.
                              - 31 -

     Canty from the proceeds. * * * Rather than an exchange,
     the transaction was a sale with the proceeds put into
     an account subject to Canty's control.

     On the instant record, we reject for various reasons dis-

cussed below petitioners' position that they are entitled to

nonrecognition treatment under section 1031 with respect to the

gains at issue.   First, on that record, we find that petitioners

have failed to establish that Mr. Canty's residence qualifies as

like-kind property under section 1031(a).   Mr. Canty testified

that OIP acquired that residence in order to establish a rental

operation consisting of single-family residential units in

southeast Orlando, Florida.   Based on our observation of Mr.

Canty's demeanor, we have reservations about his credibility.

Moreover, we have found that Mr. Canty continued to live rent

free in his residence after OIP acquired it on November 20, 1990,

and that OIP acquired no other residential properties during the

early 1990's.   We are not required to, and we shall not, rely on

Mr. Canty's uncorroborated testimony about the reason for OIP's

acquisition of Mr. Canty's residence, which testimony serves the

interests of petitioners.   See Lerch v. Commissioner, 877 F.2d

624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger

v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per

curiam T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).

     Second, on the instant record, we find that petitioners have

failed to establish that OIP identified within 45 days after July
                              - 32 -

26, 1990, as required by section 1031(a)(3)(A), three of the four

properties that it ultimately acquired with a portion of the

escrow fund (i.e., Mr. Canty's residence, the Vero Beach prop-

erty, and the Quail Ridge property) as properties to be received

by OIP, along with the Brentwood property, in exchange for lots

11 and 12 and OIP's 25-percent interests in lots 14 and 15.     As

for the Brentwood property, OIP acquired that property on July

27, 1990, the day after the sales of the real estate interests in

question were effected.   We conclude that that property was

timely identified as required by section 1031(a)(3)(A).

     To support their position that OIP complied with section

1031(a)(3)(A), petitioners rely on (1) Mr. Canty's testimony

that, prior to July 26, 1990, the date on which OIP sold the real

estate interests in question and on which the escrow agreement

was entered into, he notified Mr. Kaplan, the president of Xway

who did not testify at the trial in this case, of the identity of

all of the properties that OIP ultimately acquired with a portion

of the escrow fund and (2) the parties' stipulation that Mr.

Kaplan believes that at approximately the time of the sales by

OIP of lots 11 and 12 and OIP's 25-percent interests in lots 14

and 15, and probably within 45 days thereafter, Mr. Canty made

Mr. Kaplan generally aware of properties that Mr. Canty was

interested in purchasing, including the properties in Vero Beach,

Florida, and Texas that were ultimately purchased with a portion

of the escrow fund.
                              - 33 -

     With respect to Mr. Canty's testimony on which petitioners

are relying, as we stated above, we have reservations about his

credibility.   Moreover, Mr. Canty's testimony that he notified

Mr. Kaplan prior to July 26, 1990, of the identity of the proper-

ties that OIP intended to acquire with the escrowed sales pro-

ceeds is belied by the escrow agreement itself.   That agreement

recited that as of July 26, 1990, OIP was "in the process of

identifying a parcel or parcels of real property to be acquired".

In addition, the escrow agreement did not identify any particular

property to be purchased thereunder and did not identify what

portion of the escrowed sales proceeds would be used to purchase

such property and what portion would remain as boot under section

1031.   Furthermore, although the escrow agreement required OIP to

identify within 45 days after July 26, 1990, any property that it

wanted Interstate to acquire pursuant to the escrow agreement by

notifying Interstate in writing of the identity of any such

property, OIP did not comply with that requirement.   We are not

required to, and we shall not, rely on Mr. Canty's uncorroborated

testimony that, prior to July 26, 1990, he informed Mr. Kaplan of

the identity of the properties to be received by OIP in exchange

for lots 11 and 12 and OIP's 25-percent interests in lots 14 and

15, which testimony serves the interests of petitioners.   See

Lerch v. Commissioner, supra; Geiger v. Commissioner, supra;

Tokarski v. Commissioner, supra.
                               - 34 -

     With respect to the parties' stipulation on which petition-

ers are relying, we find that stipulation to be vague, general,

and inconclusive in establishing that OIP complied with section

1031(a)(3)(A).   That stipulation merely shows that Mr. Kaplan

believes that at approximately the time of the sales by OIP of

the real estate interests in question, and probably within 45

days thereafter, Mr. Canty made Mr. Kaplan generally aware of

properties that he was interested in purchasing including, but

not limited to, the properties that were ultimately purchased

with a portion of the escrow fund.      In this connection, it is

noteworthy that Mr. Canty, who negotiated all real estate trans-

actions on behalf of the various petitioners involved in real

estate investment, testified that, as a negotiating tactic, he

sometimes intentionally stalled the closing of real property on

which a real estate contract had been signed in order to attempt

to lower the purchase price.   As far as Mr. Canty was concerned,

his negotiations on real estate transactions on behalf of OIP and

other petitioners were not final until a real estate deal was

actually closed.

     Third, on the record before us, we find that petitioners

have failed to show that OIP, acting through its president Mr.

Canty, did not have control over the escrowed sales proceeds.

See Coupe v. Commissioner, 52 T.C. 394, 409 (1969) ("The statute

[section 1031] only requires that as the end result of an agree-

ment, property be received as consideration for property trans-
                              - 35 -

ferred by the taxpayer without his receipt of, or control over,

cash.").   On that record, we further find that although the terms

of the escrow agreement imposed controls on OIP's access to the

escrowed sales proceeds prior to the expiration of 180 days after

July 26, 1990, Mr. Hefferan violated those terms and permitted

Mr. Canty, acting on behalf of OIP, to control the disbursement

of those proceeds prior to the expiration of that 180-day period

for purposes other than the acquisition of replacement property.

Consequently, the present case is distinguishable from the cases

on which petitioners are relying involving taxpayers who did not

receive, or have control over, cash in multiparty transactions

that the courts characterized as exchanges under section 1031.

     To support their position that OIP did not have control over

the escrowed sales proceeds, petitioners rely on the testimony of

Mr. Hefferan and "his clear fiduciary obligations under the

ethical canons of the Florida Bar."    Although Mr. Hefferan

(1) signed the escrow agreement as Interstate's trustee,

(2) testified that he understood his position under the escrow

agreement to be that of Interstate's trustee, and (3) had fidu-

ciary obligations to Interstate as Interstate's trustee, we find

certain of Mr. Hefferan's actions with respect to the escrow fund

and the escrow agreement to be inconsistent with the terms of

that agreement.

     The record establishes that Mr. Hefferan had no recollection

of ever consulting with Mr. Kaplan, Xway's president, or any
                             - 36 -

other representative of Xway or Interstate regarding disburse-

ments from the escrow fund or any other matter relating to that

fund or the escrow agreement and that all Mr. Hefferan's contacts

regarding those matters were with Mr. Canty.   The record also

shows that Mr. Hefferan's actions with respect to the escrow fund

and the escrow agreement complied with the wishes of Mr. Canty,

regardless whether those actions violated certain provisions of

that agreement.

     To illustrate, the terms of the escrow agreement did not

permit any withdrawals to be made from the escrow fund except

(1) to pay for any replacement property acquired by OIP; (2) to

pay OIP the "Agreed Amount" as defined in paragraph 5(e)(1) of

the escrow agreement within three business days after Interstate

received written notice from OIP that OIP did not identify all or

any of the replacement property within 45 days after July 26,

1990; (3) to pay OIP no later than five business days after the

expiration of the 180-day period after July 26, 1990, any portion

of the "Agreed Amount" as defined in paragraph 5(e)(2) of the

escrow agreement that had not been expended by Interstate within

that 180-day period to purchase replacement property or that had

not previously been paid to OIP pursuant to paragraph 5(d)(1) of

the escrow agreement relating to OIP's failure to identify all or

any of the replacement property within 45 days after July 26,

1990; and (4) to pay any remaining portion of the escrow fund to

Interstate within five days after the expiration of the 180-day
                               - 37 -

period after July 26, 1990.    The record does not disclose that,

pursuant to paragraph 5(d)(1) of the escrow agreement, OIP gave

written notice to Interstate subsequent to the expiration of the

45-day period after July 26, 1990, that it did not identify all

or any of the replacement property within that 45-day period.

Nonetheless, in violation of the terms of the escrow agreement,

after the expiration of that 45-day period and before the expira-

tion of the 180-day period after July 26, 1990, the following

withdrawals were authorized by Mr. Hefferan and made from the

escrow fund, which were not used to acquire a replacement prop-

erty:    Mr. Hefferan signed a $50,000 check drawn on the escrow

account, payable to OIP, and dated November 26, 1990.    The

purpose for that withdrawal as stated on that check was "Draw Re:

Canty".    Mr. Hefferan signed a $50,000 check drawn on the escrow

account, payable to Canti Carriage Company, and dated December

11, 1990.    The purpose for that withdrawal as stated on that

check was "Draw".9   On December 20, 1990, Mr. Hefferan signed a

$490,000 check drawn on the escrow account which was to be used

to pay the $482,521.48 balance due with respect to OIP's acquisi-

tion of the Quail Ridge property after debits and credits re-

flected in the closing statement.    The portion of that $490,000

check which was not used to pay that amount due, i.e., $7,478.52,


     9
      Although the $50,000 check payable to Canti Carriage Com-
pany was signed by John Hefferan, Mr. Canty wrote both the name
of the payee and the amount on that check.
                             - 38 -

was not redeposited into the escrow account.   On January 8, 1991,

OIP received a distribution of $12,740.10 from the escrow fund,

which was all the moneys remaining in that fund as of that date.

In addition, on July 27, 1990, even prior to the expiration of

the 45-day period after July 26, 1990, Mr. Hefferan authorized a

$200,000 wire transfer drawn on the escrow account which was to

be used to pay the $170,688.17 balance due with respect to OIP's

acquisition of the Brentwood property after debits and credits

reflected in the closing statement.   The portion of that $200,000

wire transfer that was not used to pay that amount due, i.e.,

$29,311.83, was not redeposited into the escrow account.   In

summary, in violation of the terms of the escrow agreement, prior

to the expiration of 180 days after July 26, 1990, Mr. Hefferan

authorized withdrawals from the escrow fund totaling $149,530.45,

which were paid to OIP, to OIP's affiliate CCC, or otherwise not

used to acquire a replacement property pursuant to the escrow

agreement.10

     10
      Other examples of noncompliance with the terms of the
escrow agreement to which Mr. Hefferan acquiesced include the
following: Although the escrow agreement required OIP to iden-
tify within 45 days after July 26, 1990, any replacement property
that it wanted Interstate to acquire pursuant to the escrow
agreement by notifying Interstate in writing of the identity of
any such property, OIP did not comply with that requirement. In
addition, although the escrow agreement required Interstate, upon
identification by OIP of replacement property, to execute with
the owner of such property an assignable contract to purchase
such property (provided that Interstate's total potential liabil-
ity on default under such a contract did not exceed an amount
payable with respect to such property that was equal to the
                                                   (continued...)
                               - 39 -

     Petitioners contend that the foregoing withdrawals subse-

quent to the expiration of the 45-day period after July 26, 1990,

and prior to the expiration of the 180-day period after that date

were permissible under paragraph 5(d)(1) of the escrow

agreement.11   That is because, according to petitioners, that

paragraph "could reasonably be interpreted" to permit Mr.

Hefferan as Interstate's trustee to disburse any funds that were

not necessary to acquire replacement property to OIP at its

election after the expiration of 45 days after July 26, 1990.    We

disagree and reject petitioners' construction of paragraph

5(d)(1) of the escrow agreement as an unreasonable interpretation

of that paragraph.   Paragraph 5(d)(1) of the escrow agreement

provided:

          (d) Disposition of Funds If Some or All Like Kind
     Properties Are Not Acquired. In the event that the non
     simultaneous like kind exchange of the Exchange Prop-
     erty contemplated hereunder is not consummated in whole
     or in part in accordance with the provisions of this
     paragraph 5, Buyer and Exchangor agree that the Escrow
     Agent shall distribute the Escrow Fund as follows:


     10
      (...continued)
"Agreed Amount" as defined in paragraph 5(e) of the escrow
agreement), Interstate did not comply with that requirement with
respect to at least three of the four replacement properties that
were ultimately purchased by OIP with a portion of the escrow
fund. Instead, OIP acquired at least those three properties
through preexisting contracts in its own name or without any
contract at all.
     11
      Petitioners do not address the withdrawal of $29,311.83 on
July 27, 1990, before the expiration of the 45-day period after
July 26, 1990, that was supposed to have been, but was not, used
to purchase the Brentwood property.
                             - 40 -

          (1) In the event Exchangor does not identify all
     or any of the Like Kind Property within the forty-five
     (45) day period referred to in (a) above, then Exchang-
     or shall notify Buyer in writing at any time after the
     expiration of such forty-five (45) day period and
     Buyer, within three (3) business days of receipt of
     said written notice, shall cause Escrow Agent to pay to
     Exchangor an amount equal to the Agreed Amount.

It was only in the event that OIP did not identify all or any of

the replacement property within 45 days after July 26, 1990, that

OIP had the right under that paragraph to notify Interstate in

writing at any time after the expiration of that 45-day period,

in which event Mr. Hefferan as Interstate's trustee became

obligated to pay OIP the "Agreed Amount" as defined in paragraph

5(e)(1) of the escrow agreement within three business days after

receipt of such written notice.   In this connection, it is

significant that the escrow agreement did not identify what

portion of the escrowed sales proceeds was to be used to purchase

replacement property and what portion was to remain as boot under

section 1031, and the record does not disclose the date after

July 26, 1990, on which the parties to the escrow agreement knew

what portion of those proceeds would remain as boot under section

1031.

     It is also significant that if, as petitioners contend, OIP

complied with paragraph 5(a) of the escrow agreement and notified

Interstate in writing within 45 days after July 26, 1990, of the

identity of all four of the properties that it ultimately ac-

quired with a portion of the escrow fund, it would not have been
                              - 41 -

entitled under paragraph 5(d)(1) of the escrow agreement to give

written notice to Interstate after that 45-day period that it did

not identify all or any of the replacement property and Inter-

state would not have been obligated to pay OIP within three

business days after having received such notice the "Agreed

Amount" as defined in paragraph 5(e)(1) of that agreement.

Instead, OIP would have been required to wait until the expira-

tion of the 180-day period after July 26, 1990, in order to have

been entitled to receive no later than five days thereafter any

moneys remaining in the escrow fund to which it was entitled

under paragraph 5(d)(2) of the escrow agreement.12

      Based on our examination of the entire record in this case,

we find that petitioners have failed to establish that they are

entitled to nonrecognition treatment under section 1031 with

respect to the aggregate gains at issue that were realized on the

disposition by OIP of lots 11 and 12 and OIP's 25-percent inter-

ests in lots 14 and 15.   Accordingly, we sustain respondent's

determination with respect to those gains.

Claimed Section 1033 Real Estate Transaction

     The sole dispute between the parties is whether the alleged

purchase by OIP from IRF of the 34.3-acre parcel of Vero Beach

     12
      If, as we have found, OIP did not comply with par. 5(a) of
the escrow agreement and did not identify in writing all or any
of the replacement property within 45 days after July 26, 1990,
it would have been required to give written notice to Interstate
after that 45-day period. However, no such written notice is in
the record.
                              - 42 -

property on January 20, 1994, should be recognized for purposes

of determining whether petitioners are entitled to nonrecognition

treatment under section 1033 with respect to the condemnation

proceeds that OIP received.   Respondent contends that the record

shows that there was no valid nontax business reason for the

alleged purchase by OIP from IRF and that that alleged purchase

"was not bona fide, but was a sham transaction for tax purposes."

In support of that contention, respondent maintains, inter alia,

that there was no valid nontax business reason for the purported

transfers of the Vero Beach property by OIP to FIIC and by FIIC

to IRF; those purported transfers also were sham transactions for

tax purposes; the deed relating to the alleged sale by IRF to OIP

of the 34.3-acre parcel of the Vero Beach property was not

recorded, nor was the deed relating to the alleged transfer by

FIIC to IRF recorded; OIP allegedly paid $950,000 for the 34.3-

acre parcel of the Vero Beach property, through issuance of a

note, which was "264% of the cost of the larger parcel [the

entire 174.5-acre Vero Beach property] four months earlier", when

the deed was recorded purportedly transferring the entire Vero

Beach property from OIP to FIIC for only $360,000, the value of

that entire property based on the amount of Florida document

stamps paid; no Florida intangibles tax or Florida transfer tax

was paid with respect to the purported transfer of the Vero Beach

property from FIIC to IRF or with respect to the purported

transfer by IRF to OIP of the 34.3-acre parcel of the Vero Beach
                               - 43 -

property; and the Vero Beach property was used around October

1994 as security for a loan to CCC, an affiliate of OIP, which

shows that the various members of petitioners' consolidated group

were not kept separate.

     Petitioners claim that OIP transferred the Vero Beach

property to FIIC in order to protect that property from the

creditors of OIP.   Petitioners also contend that OIP transferred

the Vero Beach property to FIIC and that FIIC transferred it to

IRF in contemplation of IRF's using that property in a joint

venture with another entity.   In that regard, petitioners assert

that "joint venture partners and lending banks required the use

of discrete entities to hold development properties, such as IRF,

for bankruptcy protection and other reasons.”   According to

petitioners, "the anticipated joint venture never came to pass",

and consequently IRF transferred the 34.3-acre parcel of the Vero

Beach property to OIP "for a sales price of $950,000, which was

paid by a purchase money note secured by a mortgage."

     The only evidence in the record with respect to the alleged

reasons for the purported transfers of the Vero Beach property

from OIP to FIIC and from FIIC to IRF and the purported transfer

of the 34.3-acre parcel of the Vero Beach property from IRF to

OIP is the testimony of Mr. Canty, the president of those various

corporations.   As we indicated above, based on our observation of

his demeanor, we have questions about Mr. Canty's credibility.

Moreover, other evidence in the record belies his testimony.    By
                               - 44 -

way of illustration, the deed reciting that OIP was transferring

the Vero Beach property to FIIC on February 28, 1992, was not

recorded until September 10, 1993.      Under Florida law, a convey-

ance of real property will not be effective against the trans-

feror's creditors unless it is recorded.     See Fla. Stat. Ann.

sec. 695.01(1) (West 1994).    The failure to record the deed

purportedly transferring the Vero Beach property from OIP to FIIC

until almost 19 months after the transfer allegedly took place

belies petitioners' contention based on Mr. Canty's testimony

that OIP transferred the Vero Beach property to FIIC on February

28, 1992, in order to protect that property from the creditors of

OIP.   We are not required to, and we shall not, rely on Mr.

Canty's uncorroborated testimony about the reasons for the

purported transfers in question, which testimony serves the

interests of petitioners.    See Lerch v. Commissioner, 877 F.2d at

631-632; Geiger v. Commissioner, 440 F.2d at 689-690; Tokarski v.

Commissioner, 87 T.C. at 77.

       It is also noteworthy that, when OIP allegedly transferred

the Vero Beach property to FIIC on February 28, 1992, the only

consideration that it purportedly received from FIIC was an

agreement by FIIC to be bound by the promissory note in the

amount of $367,500 and the purchase money mortgage with respect

to that note which OIP had executed in favor of General on

December 11, 1990, when OIP acquired the Vero Beach property.

The record does not show that FIIC made any payments with respect
                               - 45 -

to that promissory note, which indicates to us that the purported

transfer from OIP to FIIC should not be respected for tax pur-

poses.

     In addition, Mr. Canty testified that he believed that the

Vero Beach property was worth much more than the $490,000 that

OIP paid to acquire it on December 11, 1990.    Thus, according to

Mr. Canty's own testimony, the alleged transfer by OIP to FIIC of

the Vero Beach property on February 28, 1992, must have been for

less than that property's fair market value, another indication

that that transfer should not be respected for tax purposes.

     Finally, we note that petitioners presented no evidence

showing that OIP made any payments on the alleged note in the

amount of $950,000 that it claims it paid to acquire the 34.3-

acre parcel of the Vero Beach property from IRF, another reason

supporting respondent's position that that alleged transfer

should not be respected for tax purposes.

     Based on our examination of the entire record before us, we

find that petitioners have failed to show that OIP's alleged

purchase of the 34.3-acre parcel of the Vero Beach property on

January 20, 1994, should be recognized for purposes of section

1033.    Consequently, we sustain respondent's determination with

respect to the gain realized by OIP as a result of the condemna-

tion of the CCJV real property.

Addition to Tax Under Section 6651(a)(1)
                                - 46 -

     Respondent determined that petitioners are liable for the

addition to tax under section 6651(a)(1) for each of the taxable

years at issue except for the taxable year ended February 28,

1993.     In support of petitioners' position that respondent's

determinations are wrong, petitioners assert only:     "Petitioners

believe that no additional tax is due and owing, and that there-

fore no deficiency penalties apply with respect to any year

because of the operation of the net operating loss carryover."

     We have sustained respondent's determinations in the notice

regarding petitioners' consolidated return positions under

section 1031 and under section 1033, and petitioners conceded all

of the remaining determinations in the notice in the stipulation

of settled issues that the parties filed in this case (stipula-

tion of settled issues).     On the record before us, we find that

petitioners have failed to show that respondent erred in making

the determinations in the notice under section 6651(a)(1).

Consequently, we sustain those determinations.

Accuracy-Related Penalty Under Section 6662(a)

        Respondent determined that petitioners are liable for the

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

taxable years at issue except the taxable year ended February 28,

1993.     Petitioners contend that those determinations are wrong

because (1) "no additional tax is due and owing, and * * *

therefore no accuracy related penalty applies"; (2) "there was

substantial authority for the position taken on the consolidated
                               - 47 -

tax returns"; and (3) "there is a sufficient, uncontroverted

basis in the record to conclude that Petitioners relied in good

faith on Petitioners' professional return preparer, C.P.A.

Clarence Riggs, in taking the positions on Petitioners' returns".

     Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax resulting from a substan-

tial understatement of income tax.      An understatement is equal to

the excess of the amount of tax required to be shown in the tax

return over the amount of tax shown in the tax return, see sec.

6662(d)(2)(A), and is substantial in the case of a corporation if

it exceeds the greater of 10 percent of the tax required to be

shown or $10,000, see sec. 6662(d)(1)(A) and (B).

     The amount of the understatement is reduced to the extent

that it is attributable to an item for which there was substan-

tial authority.   See sec. 6662(d)(2)(B)(i).    In order to satisfy

the substantial authority standard of section 6662(d)(2)(B)(i),

petitioners must show that the weight of authorities supporting

their position is substantial in relation to those supporting a

contrary position.   See Antonides v. Commissioner, 91 T.C. 686,

702 (1988), affd. 893 F.2d 656 (4th Cir. 1990); sec. 1.6662-

4(d)(3)(i), Income Tax Regs.   The substantial authority standard

is not so stringent that a taxpayer's treatment must be one that

is ultimately upheld in litigation or that has a greater than 50-

percent likelihood of being sustained in litigation.     See sec.

1.6662-4(d)(2), Income Tax Regs.   A taxpayer may have substantial
                              - 48 -

authority for a position even where it is supported only by a

well-reasoned construction of the pertinent statutory provision

as applied to the relevant facts.   See sec. 1.6662-4(d)(3)(ii),

Income Tax Regs.   There may be substantial authority for more

than one position with respect to the same item.    See sec.

1.6662-4(d)(3)(i), Income Tax Regs.

     The accuracy-related penalty under section 6662(a) does not

apply 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.   See sec. 6664(c)(1).   The determination of

whether a taxpayer acted with reasonable cause and in good faith

depends on the pertinent facts and circumstances, including the

taxpayer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and the reliance on the

advice of a professional, such as an accountant.    See sec.

1.6664-4(b)(1), Income Tax Regs.    In the case of claimed reliance

on the accountant who prepared the taxpayer's tax return, the

taxpayer must establish that correct information was provided to

the accountant and that the item incorrectly claimed or reported

in the return was the result of the accountant's error.    See Ma-

Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978).

     We have held above that petitioners have failed to show that

they are entitled to nonrecognition treatment under section 1031

and under section 1033.   Moreover, petitioners adduced no evi-

dence and make no argument with respect to the various other
                               - 49 -

determinations in the notice that petitioners conceded in the

stipulation of settled issues.    Consequently, we reject petition-

ers' position that respondent's determinations under section

6662(a) are erroneous because there is no additional tax due for

any of the taxable years for which respondent determined that

petitioners are liable for the accuracy-related penalty under

section 6662(a).

       On the record before us, we find that petitioners have

failed to show that there was substantial authority for the

position that they took in the consolidated returns under sec-

tions 1031,13 under section 1033, and with respect to the other

determinations in the notice which petitioners conceded.

       As for petitioners' claim that they relied on the advice of

Mr. Riggs, their return preparer, in taking the positions re-

flected in the consolidated returns, the record does not estab-

lish what specific information petitioners allegedly provided to

him.    Petitioners did not call Mr. Riggs as a witness.   The only

evidence regarding petitioners' reliance on Mr. Riggs is the

following general and conclusory testimony of Mr. Canty:

       Well, we put everything in a box and we took it over to
       him. We gave him all the information on the sales that
       we had and tried to answer all his questions. He took
       it all in the back room and did whatever they do -- did
       the books, did the tax returns.

       13
      As we previously indicated, we find the cases on which
petitioners rely to support their position under sec. 1031 to be
distinguishable from the present case. Consequently, their
reliance on those cases is misplaced.
                                - 50 -

We are unwilling to rely on the foregoing testimony to establish

that there was reasonable cause and that petitioners acted in

good faith in taking their consolidated return positions under

section 1031, under section 1033, and with respect to the other

determinations in the notice which petitioners conceded.

     On the record before us, we find that the petitioners have

failed to establish any error in respondent's determinations that

they are liable for the accuracy-related penalty under section

6662(a) for each of the taxable years at issue except the taxable

year ended February 28, 1993.

     To reflect the foregoing and the concessions of petitioners,

                                Decision will be entered for

                         respondent.
