                       T.C. Memo. 1995-601



                     UNITED STATES TAX COURT



TRACY P. STREBER, F.K.A. TRACY C. PARKER, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 345-92, 352-92,          Filed December 20, 1995.
                900-92.


         Petitioner father (P1) entered into certain
    earnest money contracts to purchase land that P1
    intended to develop through a joint venture with third
    parties who would provide the operating capital. P1
    intended for his daughters (P2 and P3) to have an
    interest in both the land and a future joint venture to
    develop the land. To this end, P1 arranged to have an
    agent act on behalf of P2 and P3 with respect to the
    earnest money contracts and the joint venture. After
    the joint venture began, the third parties “bought-out”
    P1, P2, and P3 by giving them promissory notes. Years
    later, subsequent to litigation in which P2 and P3
    participated, the notes were paid.



1
     Cases of the following petitioners are consolidated
herewith: Teresa P. Delony, F.K.A. Teresa R. Davis and
Stephen J. Davis, docket No. 352-92; Larry B. and Martha A.
Parker, docket No. 900-92.
                                 - 2 -

          R asserted inconsistent income tax deficiencies
     with respect to P1, P2, and P3. R claimed that P1
     owned the promissory notes until the time they were
     paid, meaning that only P1 is taxable on the note
     proceeds. In the alternative, R claimed that P1 gave
     P2 and P3 an interest in the joint venture at the time
     of its inception, meaning that only P2 and P3 are
     taxable on the note proceeds. R also imposed additions
     to tax under secs. 6653 and 6661(a), I.R.C., against
     all petitioners.

          1. Held: P1 gave P2 and P3 certain rights under
     the earnest money contracts and is therefore not
     taxable on the note proceeds.

          2. Held, further, P2 and P3 owned the notes at
     the time the notes were paid and are therefore taxable
     on the note proceeds.

          3. Held, further, R’s imposition of additions to
     tax under secs. 6653 and 6661, I.R.C., is not sustained
     as to P1.

          4. Held, further, because P2 and P3 failed to
     carry their burden of proof with respect to the
     additions to tax, R’s imposition of additions to tax
     under secs. 6653 and 6661, I.R.C., is sustained as to
     P2 and P3.


     Timothy O'Dowd and Edwin K. Hunter, for petitioners in

docket Nos. 345-92 and 352-92.

     Robert I. White, Linda S. Paine, and William Grimsinger, for

petitioners in docket No. 900-92.

     Stephen J. Davis, pro se in docket No. 352-92.

     William Bissell, Portia N. Rose, and David B. Mora, for

respondent.
                                - 3 -


              MEMORANDUM FINDINGS OF FACT AND OPINION


     HALPERN, Judge:    For 1985, respondent determined

deficiencies in income tax and additions to tax against

petitioners Larry B. Parker (Parker) and Martha A. Parker

(Martha) resulting from their failure to report gain with respect

to payments received in discharge of two $2 million notes.    For

1985, respondent also determined deficiencies in income tax and

additions to tax against Parker's two daughters, petitioners

Tracy P. Streber (Tracy) and Teresa P. Delony (Teresa), and

against Teresa's husband, petitioner Stephen J. Davis (Davis),

for failure to report gain with respect to those same payments.

Respondent has taken inconsistent positions but does not seek to

tax the same gain twice.   She asks the Court to determine who, as

between the Parkers, on the one hand, and the daughters and

Davis, on the other, is properly taxable with respect to the

payments in question.   Because the cases of those various

petitioners involve common questions of fact, they have been

consolidated for trial, briefing, and opinion.

     Although Teresa and Davis jointly petitioned the Court to

redetermine the deficiency and additions to tax determined by

respondent, Davis, in the prosecution of his case, has failed to

proceed as provided by the Tax Court Rules of Practice and

Procedure.   The Court therefore holds him in default and will
                                         - 4 -

   enter a decision with respect to him consistent with the decision

   to be entered with respect to Teresa.              See Rule 123(a).

         Unless otherwise noted, all section references are to the

   Internal Revenue Code in effect for the year at issue, and all

   Rule references are to the Tax Court Rules of Practice and

   Procedure.

         The deficiencies in income tax and additions to tax

   determined by respondent against petitioners are as follows:
                                                                  Additions to Tax
                                                            Sec.         Sec.       Sec.
Docket No.      Petitioner      Year    Deficiency       6653(a)(1)   6653(a)(2)   6661(a)
  345-92     Tracy              1985    $362,594.10      $18,129.71        *       $90,649
  352-92     Teresa and Davis   1985     365,924.20       18,296.21        *        91,481
  900-92     Parkers            1985   1,482,266.80       74,113.34        *       370,567

* 50 percent of the interest due on the amount of the deficiency.


         The Parkers and respondent have entered into a stipulation

   of settled issues, which the Court accepts.              Certain other issues

   have otherwise been resolved.          The issues remaining for decision

   can be divided into several groups.           The first group is as

   follows:     (1) Whether Parker made gifts to the daughters that

   resulted in the daughters’ having interests in a certain joint

   venture in January 1980, (2) whether Parker owned the interest in

   the joint venture and made gifts to the daughters in March 1981

   of notes resulting from a sale of that interest, or (3) whether

   Parker made gifts of the proceeds from those notes to the
                               - 5 -

daughters in 1985.2   If issue (1) is answered affirmatively, then

(A) gain is recognized to the daughters, not Parker, in 1985,

(B) there is no issue as to the amount of gain recognized to

each, and (C) we must decide whether the daughters are liable for

the additions to tax determined against them.    If issue (2) is

answered affirmatively, then the remaining issues are the same

except that we must also determine the amount of gain recognized

to the daughters in 1985.   If issue (3) is answered

affirmatively, then (A) gain is recognized to Parker, not the

daughters, in 1985 (unless certain admissions of respondent's

estop her from now claiming that the Parkers must report such

gain), (B) we must determine the amount of gain recognized to

Parker in 1985, based on certain arguments made by the Parkers,

(C) we must determine whether Martha is an innocent spouse,

relieved of liability pursuant to section 6013(e), and (D) we

must determine whether Parker is (or the Parkers are) subject to

the additions to tax determined by respondent.

                         FINDINGS OF FACT

Stipulations

     The parties have entered into the following stipulations of

facts that have been filed by the Court:

2
     For simplicity, in describing the various possible gifts, we
have ignored the community property interest of Betty Parker
(Betty) in the property in question. Betty was Parker's wife
from sometime in 1958 until their divorce in 1982. Because it is
not significant to our analysis, we will continue to ignore
Betty's community property interest in such property.
                                 - 6 -

     1.   Stipulation of Facts between respondent and all

      petitioners (except Stephen J. Davis at docket

          No. 352-92).

     2.   Stipulation of Facts between Steven J. Davis and

       respondent.

     3.   Stipulation I.

     4.   Supplement to Stipulation I.

     5.   Stipulation II between respondent and petitioners

       Larry B. and Martha A. Parker.

     6.   Supplement to Stipulation II between respondent and

          petitioners Larry B. and Martha A. Parker.

     7.   Stipulation IV between respondent and all

          petitioners (except Stephen J. Davis at docket No.

          352-92).

All stipulated facts contained in such stipulations are found as

stipulated, and all such stipulations and attached exhibits are

incorporated herein by this reference.       Some of respondent's

proposed findings of fact have been conceded by the daughters

and, accordingly, are so found.3

3
     In part, Rule 151 provides as follows:

                           RULE 151. BRIEFS

                *    *     *     *       *   *    *

     (e) Form and Content:     * * *

                *    *     *     *       *   *    *
                                                        (continued...)
                                 - 7 -

Residences

       At the time the petitions in these cases were filed, the

residence of the Parkers was in Houston, Texas, and the

residences of Tracy, Teresa, and Davis were in Austin, Texas.

Family Background

       Parker married Betty Parker (Betty) during 1958, and they

were divorced on March 12, 1982.    Tracy and Teresa are the

daughters of Parker and Betty.    Tracy was born in 1965, and

Teresa was born in 1960.    Parker, Betty, and the daughters lived

in California during the 1960's and early 1970's.    In 1972, they

moved to Houston, Texas, where Parker continues to reside.      In

1983, following his divorce from Betty, Parker married Martha.




3
    (...continued)

            (3) * * * In an answering or reply brief, the
       party shall set forth any objections, together with the
       reasons therefor, to any proposed findings of any other
       party, showing the numbers of the statements to which
       the objections are directed; in addition, the party may
       set forth alternative proposed findings of fact.

     In the instant case, respondent, the Parkers, and the
daughters filed simultaneous opening and reply briefs. The
daughters' reply brief contains objections to the Parker’s
proposed findings but does not contain any objections to
respondent's proposed findings. Accordingly, we must conclude
that the daughters have conceded respondent's proposed findings
of fact as correct except to the extent that the daughters’
proposed findings are clearly inconsistent therewith. See Fein
v. Commissioner, T.C. Memo. 1994-370 n.1; Estate of Stimson v.
Commissioner, T.C. Memo. 1992-242; Cunningham v. Commissioner,
T.C. Memo. 1989-260 n.6.
                                - 8 -

The Northgate Forest Property

     During 1979, Parker learned of approximately 440 contiguous

acres of undeveloped land (the Northgate Forest property) in a

residential area on the northern outskirts of Houston, Harris

County, Texas.    Parker retained Houston lawyer Martin Nathan

(Nathan) to assist him in the acquisition of the Northgate Forest

property.    Acting at Parker's direction, Nathan executed two

earnest money contracts (the earnest money contracts) with

respect to the Northgate Forest property.    Both contracts were

dated July 11, 1979.    One contract was with respect to

approximately 362 acres, and provided for a purchase price of

$4 million and an earnest money payment to the American Title Co.

(American Title) of $20,000; the other was with respect to

approximately 75 acres, and provided for a purchase price of

$600,000 and an earnest money payment to American Title of

$10,000.    Both contracts provided for seller financing and no

personal liability of the buyer.    Both contracts showed as

purchaser "M. Nathan, his nominees or assigns".    Parker delivered

to Nathan checks to be used to make the two earnest money

payments to American Title.    Those checks were deposited into

Nathan's attorney trust account, and Nathan paid American Title

with checks drawn on that attorney trust account.    When presented

for collection, Parker's checks to Nathan bounced (were

dishonored); Nathan's checks to American Title did not.    A few

days later, Nathan told Parker that he (Nathan) wanted out of the
                                - 9 -

deal and that Parker was to find someone else to put up the

money.   Parker had told Nathan that he wanted his daughters to

have a part of the Northgate Forest property deal.

     Parker did not have sufficient credit or financial resources

to complete the purchase and proceed with the development of the

Northgate Forest property.    Both prior to and after execution of

the earnest money contracts, Parker searched for investors to

contribute to such purchase and development.

The Joint Venture

     J. Robert Bradish (Bradish) is an attorney licensed to

practice law in California.   During the 1960's, Bradish

represented Parker.   Parker contacted Bradish in his attempts to

find investors for the Northgate Forest property.     Bradish

located Jack Thoner (Thoner), a potential investor.     Bradish also

loaned Parker $70,000, $30,000 of which Parker used to reimburse

Nathan for Parker's bounced checks.     Parker negotiated with

Thoner concerning a joint venture to develop the Northgate Forest

property.   By "Joint Venture Agreement" (the joint venture

agreement) made between Bradish and Thoner on January 26, 1980,

Thoner and Bradish created a joint venture (the joint venture) to

acquire, subdivide, and otherwise deal with the Northgate Forest

property.   At about that time, Nathan assigned the earnest money

contracts to Bradish.   Simultaneously, Bradish acquired the

Northgate Forest property and contributed it to the joint

venture.    The joint venture agreement provides that Bradish and
                               - 10 -

Thoner were each to have a 50-percent interest in profits and

losses of the joint venture.   Thoner thought of Parker, rather

than Bradish, as his partner in the joint venture.   Parker had

told Thoner that his children had some interest in the deal

Parker and Thoner were negotiating.

     By a writing dated January 8, 1980, directed to Betty (the

January 8 writing), Bradish described certain aspects of his

participation in the potential joint venture between Thoner and

Parker (the potential joint venture).   The text of the January 8

writing was dictated by Bradish to Mrs. Bradish in the presence

of Parker and Mrs. Betty Parker.   In full, the January 8 writing

is as follows:

     Dear Betty Parker:

     This is to confirm that J. Robert Bradish holds in
     trust for Tracey [sic] Parker and Terry Parker 80% of
     the 50% Venture interest (i.e. 40% of the Venture)
     which is being negotiated between Jack Thoner and
     J. Robert Bradish.

     In the event J. Robert Bradish dies prior to
     termination of the Venture, the trustee will be Larry
     Parker or a person selected by him.

     The trust and J. Robert Bradish are obligated to pay
     Larry Parker a $2,500,000.00 fee upon successful
     conclusion of his negotiations with Jack Thoner. The
     fee is paid as follows:

          1. The net cash proceeds upon close of escrow
     from J. Robert Bradish to the Venture.
          2. Balance, if any, from the first proceeds due
     J. Robert Bradish and the trust.

                                    Sincerely,

Consented to and approved:
                                 - 11 -

           Elaine Bradish            J. Robert Bradish
           January 8, 1980                           1/8/80

     Parker and Bradish had agreed that the remaining 20 percent

of the Parker 50-percent interest in the potential joint venture

(10 percent of the joint venture) would belong to Bradish.

     Bradish believed that Parker wished the daughters to have

some interest in the joint venture to make good on promises that,

previously, he, Parker, had made to Betty to "take care of the

kids, put something away for the kids."     Bradish also believed

that Parker wanted the daughters to have an interest "from the

beginning", that he wanted them to "have their own interests",

and that he wanted those interests "protected from him, so he

couldn't get his hands on the money."

     At or about the time that the January 8 writing was executed

by Bradish, Parker and Betty informed Tracy, then 14, and Teresa,

then 19, that they had an interest in the potential joint

venture.   One or both of Parker and Betty explained to the

daughters certain details of the January 8 writing.     They knew

that Bradish held their interests.

Disputes and Buyout

     By mid-1980, a dispute evolved between (1) Thoner and

(2) Bradish and Parker.      That dispute put the future of the joint

venture in jeopardy.   The parties to the dispute agreed, however,

to modify the joint venture agreement and to settle their

differences.   Among other documents, Thoner, Bradish, Parker, and
                              - 12 -

Betty, entered into a "Joint and Mutual Release".    Among other

things, that document recites:   "Bradish holds a forty percent

(40%) interest in the joint venture in trust for the children of

Larry and Betty Parker".   Among amendments made to the joint

venture agreement, (1) Thoner was given exclusive management

control over most aspects of the joint venture, (2) an additional

joint venture partner, Donald G. Murray, Jr. (Murray), was

admitted to the joint venture, with an interest in profits and

losses of 10 percent, and (3) Bradish's interest was reduced to

40 percent.

     By the end of 1980, disagreements had arisen between Murray,

who was on-site manager for the joint venture, and Parker.

Thoner and Murray determined to buy out Bradish.    Murray

undertook negotiations with Parker concerning that buyout.

Bradish and Parker also began negotiating concerning the division

of the proceeds to be received by Bradish.   Among other things,

Bradish and Parker disagreed concerning the consequence of the

previous reduction in Bradish's interest in the joint venture

from 50 percent to 40 percent.   Bradish argued that he should

receive a share of the proceeds to be received equal to what he

would have received had the Bradish interest not been reduced

from 50 percent to 40 percent.   To end their disagreements,

Bradish and Parker agreed to engage an arbitrator.    An agreement

to arbitrate (the arbitration agreement) was executed on

January 4, 1981.   The arbitration agreement states that Bradish
                              - 13 -

holds an interest in the joint venture as trustee for the

daughters.   It also states that "Bradish and the Parker children

now disagree on the interest each holds in the Joint Venture and

have attempted to negotiate a compromise settlement to no avail."

The arbitration agreement was executed by Bradish, Parker, Betty,

Teresa, and Tracy.   The result of the arbitration agreement was a

decision set forth in a letter dated February 23, 1981, from

Charles L. Laswell, "Arbitrator".   Neither Parker nor Bradish

agreed with that decision.   Negotiations continued between

Bradish and Parker and between Parker and Thoner.

     By an agreement executed on various dates in March 1981,

such agreement entitled "Assignment and Representation and

Warranty Agreement" (the assignment agreement), Thoner, Murray,

Parker, Bradish, both for himself and as "Trustee", Teresa and

certain others agreed that Thoner, Murray, and one John A. Chaky

(Chaky) would purchase Bradish's interest (referred to as the

"Bradish Group Interest" (Bradish group interest)) in the joint

venture.   The assignment agreement states that Bradish holds his

interest partially for his account and partially as a trustee.

The assignment agreement recites certain consideration to be

received in exchange for the Bradish group interest, including

$1,600,000 cash, payable to Parker, and two promissory notes,

each in the amount of $2 million, and each payable to

"R. Bradish, Trustee" (the $2 million notes).
                               - 14 -

     A second, related agreement, entitled "Agreement" (the

related agreement), also was executed on various dates in March

1981 by many of the same parties (including Teresa).    The related

agreement recites that it: “is made as an additional inducement

and consideration for the cash payments [$1,600,000] to Parker

and promissory notes to Bradish and in recognition that money has

been borrowed by Thoner, Murray and Chaky to obtain funds to

purchase the Bradish Group Interest.”    In essence, the related

agreement treats the $1,600,000 cash paid to Parker as a loan

with respect to which Parker never would repay principal but on

which he would pay interest for 4 years.    If he defaulted on his

obligation to pay interest, then he was obligated to pay

liquidated damages.    The sole security for those liquidated

damages was certain of the notes received pursuant to the

assignment agreement, including the $2 million notes.

     Bradish endorsed one of the $2 million notes to the order of

Teresa, and he endorsed the other to the order of Teresa as

custodian for Tracy.    The $2 million notes (so endorsed) were

received by Parker, who delivered them to Teresa sometime in

1981.   Teresa immediately placed the two $2 million notes in her

lock box at a bank.    Sometime after receiving the $2 million

notes, Teresa endorsed to Tracy the one held by her as custodian

for Tracy.
                               - 15 -

The Management Agreement

     Sometime in the later part of 1981, Teresa and Parker

entered into an agreement whereby Teresa appointed Parker "as

manager and consultant investor, to manage and control" the

$2 million notes (the management agreement).    Parker initiated

the management agreement at the time of his divorce from Betty.

He was concerned that Betty would convince the daughters to sell

the $2 million notes for inadequate sums.   Parker never exercised

any authority under the management agreement.

The Daughters' 1981 Tax Returns

     Teresa made a return of income for 1981 on U.S. Individual

Income Tax Return, Form 1040 (Teresa's 1981 return).    Attached to

Teresa's 1981 return is Form 6252, Computation of Installment

Sale Income (Form 6252).    Form 6252 reported the installment sale

of certain real property.   The description of that real property

is identical with the description of the Northgate Forest

property, as described in the assignment agreement.    That real

property is reported to have been acquired on January 26, 1980,

and to have been sold on March 4, 1981.   The stated selling price

is reported to be $2 million, to be paid 4 years after March 4,

1981, with no interest.

      Tracy did not file a tax return for 1981.

Suit and Settlement

     In 1985, when the $2 million notes and certain other notes

described in the related agreement were not paid by the makers
                               - 16 -

thereof--Thoner, Murray, and Chaky (the makers)--a suit was

instigated to force payment (the lawsuit).    The lawsuit was

settled pursuant to a document entitled "Compromise and

Settlement Agreement, Indemnity    Agreement, and Release in Full"

(the settlement agreement).    Both Teresa and Tracy executed the

settlement agreement.    In pertinent part, the settlement

agreement provides as follows:    The makers shall pay $1,700,000

to Teresa and the same amount to Tracy and shall convey to each

certain real property; the $2 million notes shall be delivered to

the makers; each of the daughters represents that she "is the

sole owner and holder of said promissory note, and that she has

not assigned (collaterally or absolutely), pledged or

hypothecated said promissory note".

     Following execution of the settlement agreement, Tracy wrote

in her own handwriting on the face of the $2 million note

endorsed to her:

          Paid in full by cashier's check #202259
          drawn on Allied Champions Bank
                         /s/ Tracy C. Parker

Tracy received a check for $1.7 million upon signing and

surrendering the note.   Likewise, following execution of the

settlement agreement, Teresa wrote in her own handwriting on the

face of the $2 million note endorsed to her:



          Paid in full by cashier’s check #202260
          drawn on Allied Champions Bank.
                         /s/ Terry Parker Davis
                                - 17 -

Teresa received a check for $1,700,000 upon signing and

surrendering her note.

      At or about the time of the settlement of the lawsuit,

Northgate Forest Development Corp. executed and delivered a

warranty deed conveying two lots in the Northgate Forest

subdivision to Tracy and a second warranty deed conveying another

two lots to Teresa.

                                OPINION

I.   Deficiencies

      A.   Introduction

      Respondent has determined inconsistent deficiencies in

income tax against both the Parkers and the daughters.     She asks

the Court to determine who, as between the Parkers and the

daughters, is properly taxable with respect to the proceeds of

certain notes (the $2 million notes).     There is no question that

the proceeds of the $2 million notes ended up in the hands of the

daughters, and that that happened as a result of certain gifts

made to them by Parker.     We must, however, determine when those

gifts occurred.     Put another way, we must determine who, as

between Parker and the daughters, owned the $2 million notes for

Federal income tax purposes at the time the notes were paid.

      The Parkers argue that Parker made gifts to the daughters

either (1) before or at the time that the joint venture was

created in 1980 or (2) when the Bradish group interest in the

joint venture was sold in 1981, and the $2 million notes were
                                 - 18 -

received.    In either case, the Parkers argue, the daughters owned

the $2 million notes when they were paid.    The daughters, on the

other hand, argue that Parker owned the $2 million notes at all

times and made no gifts to them until after he received the

proceeds therefrom.

     B.   State Law Controls

     With respect to income realized upon the payment of notes,

as with respect to other income, Federal income tax liability

follows ownership.     See United State v. Mitchell, 403 U.S. 190,

197 (1971) ("with respect to community income, as with respect to

other income, federal income tax liability follows ownership.").

"In the determination of ownership, state law controls.    The

state law creates legal interests but the federal statute

determines when and how they shall be taxed."     Id. (internal

quotation marks and citations omitted).    We examine Texas law to

determine who owned the $2 million notes when they were paid.

That requires that we determine the nature and timing of Parker's

gifts.

     C.     Elements of a Gift

          Three elements are necessary to establish the
     existence of a gift: (1) intent to make a gift;
     (2) delivery of the property; and (3) acceptance of the
     property. * * * The intent of the donor, however, is
     the principal issue in determining whether a gift has
     been made. * * *

In re Estate of Hamill, 866 S.W.2d 339, 344 (Tex. Ct. App. 1993).
                                - 19 -

     D.    The Gifts

            1.   Nature and Timing of the Gifts; Consequences

     We find that Parker made gifts to the daughters no later

than January 26, 1980, of some or all of his rights under the

earnest money contracts.    The rights of the daughters in the

property subject to the earnest money contracts (the Northgate

Forest property) were contributed to the joint venture in

consideration of a 40-percent interest in the joint venture, as

reflected in the January 8 writing.      The $2 million notes

received by the daughters were in consideration of their

interests in the joint venture.    The daughters owned the

$2 million notes at the time of their redemption in 1985 and,

therefore, are taxable on the proceeds of those notes.        Parker is

not taxable on those proceeds.

            2.   Intent to Make a Gift

     "[T]he intent of the donor * * * is the principal issue in

determining whether a gift has been made."      Id. at 344.

     There is substantial evidence supporting the conclusion

that, sometime before the joint venture was formed on January 26,

1980, Parker formed the intent to make gifts to the daughters,

and we so find.    Parker told both Nathan and Thoner that the

daughters had some part of the Northgate Forest property deal.

Bradish certainly understood that, as evidenced by the January 8

writing.    Indeed, Bradish dictated to Mrs. Bradish the terms of

the January 8 writing.    At or about the time of the January 8
                                   - 20 -

writing, Parker and Betty informed the daughters of their

interests in the potential joint venture.       Parker's actions

subsequent to January 26, 1980, are consistent with the

conclusion that he made a gift to the daughters on or before that

date.     For example, the Joint and Mutual release entered into by

Parker, Bradish, and others recites that "Bradish holds a forty

percent (40%) interest in the joint venture in trust for the

children of Larry and Betty Parker".

             3.    Delivery

        "It has long been the rule in Texas that for a gift to be

effective, title to the item must pass immediately and

unconditionally and the transfer thereof must be so complete that

the donee might maintain an action for the conversion of the

property."        Oadra v. Stegall, 871 S.W.2d. 882, 890 (Tex. Ct. App.

1994) (internal quotation marks and citations omitted).

        Parker never owned the Northgate Forest property.    Acting at

Parker's direction, Nathan entered into the earnest money

contracts, which accorded Nathan, "his nominees or assigns", as

"Purchaser", certain time-sensitive rights to complete the

purchase of the Northgate Forest property.       The earnest money

contracts were assigned to Bradish, who completed the purchase of

the Northgate Forest property and contributed that property to

the joint venture.       Albeit with borrowed funds, Parker made the

escrow payments required under the earnest money contracts.        We

are satisfied that, in making those payments, Parker made a gift
                                - 21 -

to the daughters.   Because Nathan was working at Parker's

direction, and only Nathan's name appears as purchaser on the

earnest money contracts, it is unclear just how much of an

interest in the contracts the daughters had received as a result

of Parker's gift.   The joint venture agreement, when read

together with the January 8 writing, however, makes it clear just

how much of a gift Parker had made to the daughters.    Clearly, as

stated in the January 8 writing, Parker had retained the right to

a substantial cash payment (fee).    In Cox v. Windham, 10 S.W.2d

136, 139 (Tex. Civ. App. 1928) the court stated:    "It is settled

law that where property is delivered to a third person under

conditions indicating the donor intended to make an effective

gift, it will be so treated".    The court also stated a further

rule: "that delivery of personal property is not so strictly

applied to transactions between members of a family residing in

the same house, as is applied to transactions between strangers."

 Id.; see also Bishop v. Bishop, 359 S.W.2d 869, 871 (Tex. 1962)

(citing with approval Cox v. Windham, supra).    In the Bishop

case, in the context of a divorce action, the Texas Supreme Court

dealt with the ex-wife's claim that, while she was married to her

ex-husband, he had told her that certain household furniture was

hers, even though it remained in the house occupied by both of

them.   The court stated:   "Texas is one of the jurisdictions

holding that statements by the donor indicating that he had given

the chattel to the donee are sufficient to raise an issue of fact
                                - 22 -

as to whether there was a delivery."       Id.   In Lord v. New York

Life Ins. Co., 66 S.W. 290 (Tex. 1902), the Supreme Court of

Texas dealt with a deceased donor's declaration that an insurance

policy payable to his estate, at his death, in the possession of

a third party, was for his sister.       The question before the court

was whether such declaration was sufficient evidence on which to

base a finding of delivery of the insurance policy to her.       The

court stated:   “We see no reason why the fact of delivery could

not be as well proved by a declaration as the fact of gift

itself, or any other fact about which a party had made a

declaration against his own interest.”       Id. at 292; see also

Estate of Bridges v. Mosebrook, 662 S.W.2d 116, 121 (Tex. Ct.

App. 1983) (with regard to delivery of certificates of stock:

"Actual delivery is not always necessary; rather, where the

circumstances make actual delivery impractical, delivery may be

symbolical or constructive."); Webb v. Webb, 184 S.W.2d 153, 156

(Tex. Civ. App. 1944) (similar).    The fact of delivery of an

interest in a chose in action, such as Parker obtained by way of

the earnest money contracts, can be proved by declarations alone.

We believe that Parker's declarations to Nathan, Thoner, and

Bradish, as manifest in the January 8 writing are proof of

delivery of a gift to the daughters before the joint venture was

entered into, and we so find.
                                - 23 -

           4.   Acceptance

          An infant is capable of being a donee of property,
     and when the gift is to his advantage a formal
     acceptance is not necessary, since the law implies an
     acceptance, but if the gift is not to his advantage, or
     becomes a burden to him before he becomes sui juris,
     the law implies a repudiation. * * *

Austin v. Burden, 297 S.W. 648, 651 (Tex. Civ. App. 1927);

McMillian v. United States, 24 AFTR2d 69-5699, 69-2 USTC par.

9633 (N.D. Tex. 1969) (similar).

     The daughters argue that they accepted no gifts from Parker

until they received the proceeds of the $2 million notes from him

in 1985.   We disagree.   Parker made gifts to the daughters no

later than January 26, 1980, which, even if they did not signify

formal acceptance, they are deemed to have accepted.    Parker's

gifts were to the daughters’ advantage; the gifts resulted in

each of the daughters receiving $1,700,000 in cash and valuable

real estate.    No repudiation may be implied.   Moreover, there is

substantial evidence that, from about January 8, 1980, the

daughters were aware of the gifts and acknowledged their receipt.

Parker and Betty both informed the daughters about the potential

joint venture, and one or both of Parker and Betty explained to

the daughters some details of the January 8 writing.    The

daughters executed the arbitration agreement.    Teresa executed

both the assignment agreement and the related agreement.      Teresa

received both of the $2 million notes in 1981, and endorsed one

to Tracy sometime thereafter.    Teresa filed a Federal income tax
                                 - 24 -

return for 1981 that reported an installment sale of the

Northgate Forest property in 1981 and stated that the property

had been acquired on January 26, 1980.       Teresa and Tracy both

executed the settlement agreement.        Each wrote on the face of one

of the $2 million notes "Paid in full".       All of those actions are

inconsistent with the daughters’ theory that Parker received the

proceeds of the $2 million notes and then made gifts to the

daughters.    We find that the daughters accepted gifts from Parker

no later than January 26, 1980.

          5.      Other Considerations

             a.   Bradish's Independence

     The daughters argue strenuously that Bradish was no more

than Parker's tool, and, for that reason, Parker did not give up

dominion and control over anything until he (Parker) made a gift

to the daughters of the proceeds of the $2 million notes.       We do

not agree.     The January 8 writing is evidence of Parker's, and

Bradish's, concern that the daughters' interest in the potential

joint venture be differentiated from Parker’s and Bradish’s

interests.     Witness Bradish's testimony with regard to the

meaning of the expression "holds in trust for Tracey [sic] Parker

and Terry Parker" in the January 8, writing:

     Q    Will you state the meaning that you intended,
     please, with the selection of those words?

     A    Well, you know, at the deposition, I mean, we
     talked about guardian, age and trust. My -- assuming
     there was no document and I had died, the kids would
                                 - 25 -

     have been able to enforce a constructive trust against
     my estate, I would think.

     Q     the kids meaning --

     A     Being the Parker children.

     Q     Yes.

     A     And Larry, to the extent he had any interest --

     Q     Yes.

     A    -- against my estate, if my estate tried to claim
     the entire property through those agreements or
     contracts that I acquired from Marty Nathan.

          And so, I felt that I held the bare legal title to
     this entity, the land and then the ultimate entity, and
     held it subject to the Parker children's ownership, and
     Larry Parker's rights.

          Larry Parker having $2.5 million, and the children
     having an interest in this joint venture we were
     putting together.

     Q     The concept, trust, here, had no meaning beyond
     that?

     A    I didn't think of it as that. I am holding title
     for the kids. I am just holding title. And that is my
     feeling.

Bradish further testified about the period from January 1980

until March 1981, when the Bradish group interest was sold and

the $2 million notes were received.       He testified that he acted

independently of Parker.   He testified that he was looking out

for the best interests of the daughters and himself.      He

testified that, "absolutely", he had the authority to act

independently of Parker.   We found Bradish to be a credible

witness.   We find that he acted independently of Parker.      We
                               - 26 -

believe that Bradish carried out what he testified were his

instructions from Parker:    “My instructions were to take title to

the property, for the girls, and Parker was not to get his hands

on their money as it came down the pike.      That was what the

instructions were to me.”

          b.    Management Agreement

     The management agreement gave Parker certain rights with

respect to the $2 million notes.    The daughters argue that the

management agreement indicates that Parker had dominion and

control over the $2 million notes and, thus, had never completed

a gift to the daughters.    We disagree.    In fact, the management

agreement signifies to us that Parker had not retained dominion

and control over the $2 million notes.      If he had, he would not

have needed the management agreement.      We accept Parker's

explanation that the management agreement resulted from his

divorce from Betty and from his concern that the daughters would

be persuaded to sell the notes for inadequate consideration.

           c.   Related Agreement

     The related agreement put the $2 million notes at risk for

Parker's interest obligation under that agreement.      The daughters

argue that such risk shows that Parker controlled the $2 million

notes.   We disagree.   Clearly, the daughters bore some risk of

Parker's default.   Theoretically, Parker's default could have

eliminated all of their equity in the $2 million notes, because

the related agreement contained a five-fold penalty clause
                                   - 27 -

(penalty equal to five times the interest not paid).       We assume

that the daughters could have avoided that penalty by making good

on Parker's default.      The exposure of the $2 million notes under

the related agreement goes to the value of the notes, not to

their ownership.      In any event, the daughters received

substantial compensation for the $2 million notes.       Also, we have

found that Parker's gift to the daughters was made in 1980, not

in 1985.

            d.     Credibility

     We have found that Parker made gifts to the daughters in

1980 based on our analysis of those elements (intent, delivery,

and acceptance) necessary to establish a gift under the law of

Texas.     Necessarily, we have rejected the daughters' proposed

finding that Parker made no gifts to them until 1985, after he

received the proceeds of the $2 million notes.       In finding gifts

in 1980, and not thereafter, we have taken into account the

testimony of Parker, the daughters, and others.       We found Parker

to be a credible witness.        His testimony was straightforward and

consistent with other evidence.       We have given great weight to

his testimony.       We did not find the daughters to be credible

witnesses.       Teresa did not offer oral testimony, but her

testimony was offered by deposition and affidavit.       She also

answered interrogatories.        There are significant inconsistencies

between (1) her testimony and her answers to interrogatories and

(2) other evidence in this case.       We believe that, in various
                                  - 28 -

important respects, Teresa has failed to tell the truth.        For

example, we believe that, with respect to her dealings with the

Internal Revenue Service in 1986, she has failed to tell the

truth.    Accordingly, we have accorded Teresa's testimony and

answers little weight.      Cf. Gerardo v. Commissioner, 552 F.2d

549, 553 (3d Cir. 1977), affg. in part and revg. in part T.C.

Memo. 1975-341, (Tax Court need not give credence to testimony

that it disbelieves).       Tracy did testify orally.   In important

respects, her testimony was vague and indefinite.        She was

contradicted by other witnesses.       We do not have much confidence

in her testimony, and, accordingly, we give it little weight.

     E.     Conclusions

     We have concluded that the daughters are taxable on the

proceeds of the $2 million notes and that Parker is not.        See

supra sec. I.D.1.       That conclusion is based on our finding that

Parker made gifts to the daughters no later than January 26,

1980, of some or all of his rights under the earnest money

contracts.     Id.    The daughters have argued that there were no

gifts in 1980.       They have not, however, argued that, if we were

to find gifts in 1980, respondent’s adjustments for 1985

increasing each daughter’s taxable income by $725,188 otherwise

were in error.       Accordingly, we believe that the daughters have

conceded the amounts of taxable income that result from our

finding that Parker made gifts to them no later than January 26,

1980.     We so find.
                              - 29 -

II.   Additions to Tax

      A.   Parkers

      Respondent determined additions to tax under sections

6653(a)(1) and (2) and 6661 against the Parkers.    We have granted

partial summary judgment in favor of the Parkers with respect to

one aspect of the deficiency in tax determined against them for

1985, and we have here determined that no gain is recognized to

the Parkers on account of the $2 million notes.    We believe that

we have thus resolved favorably to the Parkers all assignments of

error as to deficiencies raised by them in the petition and that,

as a result, we must redetermine a deficiency of zero for 1985.

We are somewhat confused, however, by one item, in the amount of

$1,600,000, described in the stipulation of settled issues as

"cancellation of debt income", and added to respondent's

determination of unreported long-term capital gain.    In

respondent's brief, that $1,600,000 item is described as long-

term capital gain reported by the Parkers "from the sale of the

joint venture interest".   It is further described as an

adjustment respondent was unable to take into consideration in

the notice of deficiency mailed to the Parkers.    Whatever that

item is, and if it gives rise to any increased deficiency (which

we doubt), respondent has failed to carry her burden of proof as

to any necessary facts, and we shall treat respondent as having

abandoned any basis for a deficiency other than those that we

have dealt with here or in our order disposing of the Parkers’
                               - 30 -

motion for summary judgment.    Therefore, having redetermined a

deficiency of zero, respondent's additions to tax must fail, and

we so hold.

     B.   The Daughters

     Respondent determined additions to tax under sections

6653(a)(1) and (2) and 6661 against each of the daughters.

     Section 6653(a)(1) provides that, if any part of the

underpayment of tax is due to negligence or intentional disregard

of rules or regulations, there shall be added to the tax an

amount equal to 5 percent of the underpayment.    Section

6653(a)(2) imposes a separate addition to tax, equal to

50 percent of the interest payable under section 6601, on the

portion of the underpayment that is attributable to the

negligence of the taxpayer.    For purposes of section 6653(a),

negligence is defined as the failure to exercise the due care of

a reasonable and ordinarily prudent person under like

circumstances.   Neely v. Commissioner, 85 T.C. 934, 947 (1985).

     Section 6661 provides for an addition to tax equal to

25 percent of the amount of any underpayment attributable to a

substantial understatement.    An understatement is "substantial"

when the understatement for the taxable year exceeds the greater

of (1) 10 percent of the tax required to be shown or (2) $5,000.

The understatement is reduced to the extent that the taxpayer
                               - 31 -

has (1) adequately disclosed his or her position, or (2) has

substantial authority for the tax treatment of an item.

Sec. 6661; sec. 1.6661-6(a), Income Tax Regs.

     The daughters bear the burden of proof with regard to the

additions to tax determined by respondent.    Rule 142(a).

     In their petitions, both of the daughters assign error to

respondent's determinations of additions to tax under sections

6653(a) and 6661.    Neither of the daughters, however,

specifically avers any facts in support of those assignments of

errors.   On brief, the daughters propose no findings of fact

specifically relating to the additions to tax, nor do they set

forth any arguments with regard to the additions to tax.     We

assume that, in defense to respondent's determinations of

additions to tax, the daughters rely exclusively on our

determining no deficiencies in tax liability.    We have determined

such deficiencies.   The daughters have failed to carry their

burdens of proof.    Respondent's determinations of additions to

tax with respect to the daughters are sustained.



                                     Decisions will be entered

                                for respondent in docket Nos.

                                345-92 and 352-92.

                                     Decision will be entered

                                for petitioners in docket No.

                                900-92.
