                       T.C. Memo. 1999-38



                     UNITED STATES TAX COURT



     JAMES H. PUGH, JR., AND ALEXIS C. PUGH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27237-96.             Filed February 8, 1999.



     Charles H. Egerton and Jane D. Callahan, for petitioners.

     Judith C. Winkler, for respondent.



                       MEMORANDUM OPINION


     COHEN, Chief Judge:    Respondent determined deficiencies in

petitioners' Federal income tax of $83,181 and $76,723 and

penalties under section 6662(c) of $16,636 and $15,432 for the

taxable years 1990 and 1991, respectively.   After concessions,

the issues for decision are:

     (1) Whether petitioner James H. Pugh, Jr. (petitioner), may

increase his basis in stock of an S corporation by the amount of
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discharge of indebtedness income (also referred to as

cancellation of debt (COD) income) excluded from gross income

under section 108(a), and (2) whether petitioners are liable for

the accuracy-related penalties for negligence or disregard of

rules or regulations for 1990 and 1991.    Respondent has conceded

that portion of the penalty for each year that relates to the

first issue to be decided in this case.    Unless otherwise

indicated, all section references are to the Internal Revenue

Code as in effect for the years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

       This case was submitted fully stipulated pursuant to Rule

122.    The stipulated facts are incorporated herein by this

reference.    Petitioners resided in Orlando, Florida, at the time

they filed the petition.

Background

       The first issue in this case concerns petitioner's interest

in Epoch Capital Corporation (ECC).     ECC was incorporated in the

State of Florida on December 10, 1987.     ECC had properly elected

to be treated as an S corporation pursuant to section 1362 prior

to 1990, and such election was effective for ECC's taxable year

ended December 31, 1990.

       ECC realized COD income during 1990 in the amount of

$661,357.    ECC was liquidated in 1990.   Articles of Dissolution

were filed with the State of Florida on December 18, 1990.

Petitioner did not receive any distributions from ECC upon
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liquidation.    Petitioner's ECC common stock became worthless

during 1990.

     In completing its 1990 Form 1120S, U.S. Income Tax Return

for an S Corporation, ECC properly excluded the COD income from

its income pursuant to section 108.      On petitioner's Schedule K-1

(Form 1120S), Shareholder's Share of Income, Credits, Deductions,

Etc., ECC separately stated the COD income and reported

petitioner's pro rata share in the amount of $612,245.

Petitioner increased his basis in his ECC stock in 1990 by the

$612,245.    Petitioner's basis in his ECC stock on December 31,

1990, taking into account all adjustments other than that for

ECC's COD income, was $394,802.    On petitioners' 1990 Federal

income tax return, they reported a capital loss with respect to

the ECC stock commensurate with petitioner's reported basis in

the stock.    On their 1991 return, petitioners carried forward and

reported capital losses from 1990.      Coopers & Lybrand, a

certified public accounting firm, prepared petitioners' tax

returns for 1990 and 1991 and ECC's return for 1990.

     Respondent disallowed the inclusion of the COD income in

petitioner's basis in his ECC stock and reduced Mr. Pugh's loss

accordingly.    Respondent also determined increases in

petitioners' income in the amounts of $60,077 and $5,763 for 1990

and 1991, respectively, for gain on the sale of stock in Epoch

Management, Inc., which sale petitioners failed to report on

their returns.    Petitioners have conceded the latter adjustments.

Respondent determined accuracy-related penalties for 1990 and
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1991, having determined that the underpayments of tax were "due

to negligence or intentional disregard of rules and regulations."

Discussion

     Inclusion of COD Income in Basis

     Petitioners argue that petitioner was correct in increasing

the basis in his ECC stock by his share of the COD income.   In

Nelson v. Commissioner, 110 T.C. 114 (1998), we held that COD

income realized and excluded from gross income under section

108(a) does not pass through to shareholders of an S corporation

as an item of income in accordance with section 1366(a)(1) so as

to enable an S corporation shareholder to increase the basis of

his stock under section 1367(a)(1).    Petitioners do not

distinguish this case from Nelson v. Commissioner, supra.    They

ask us to overrule a recent Court-reviewed opinion, as being

decided incorrectly.   We decline to do so.   Accordingly, we hold

that petitioner may not increase the basis in his ECC stock by

his share of the COD income.

     Accuracy-related Penalties

     Section 6662(a) imposes an accuracy-related penalty of 20

percent on any portion of an underpayment of tax that is

attributable to items set forth in section 6662(b).    Included in

those items is negligence or disregard of rules or regulations.

Sec. 6662(b)(1).   Section 6662(c) provides that for purposes of

section 6662, "the term 'negligence' includes any failure to make

a reasonable attempt to comply with the provisions of this title,
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and the term 'disregard' includes any careless, reckless, or

intentional disregard."

     The accuracy-related penalty will not be imposed with

respect to any portion of an underpayment if it is shown that

there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion.     Sec.

6664(c)(1).    The determination of whether a taxpayer acted with

reasonable cause and in good faith depends upon the facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.    The most

important factor is the extent of the taxpayer's effort to

determine the taxpayer's proper tax liability.     Id.

     Respondent determined that petitioners' underpayments of tax

were due to negligence or intentional disregard of rules or

regulations.   Respondent since has conceded the portions of the

penalties related to the COD issue.     The remaining portions of

the penalties relate to the income conceded by petitioners; i.e.,

the gain on the sale of stock in Epoch Management, Inc.

     Petitioners argue that they were not negligent, but merely

mistaken, in their reporting position with respect to the Epoch

Management, Inc. stock.   They state in their brief that they

concluded they could recover all of their basis before reporting

any gain.   They also allege that their failure to include the

gain was inadvertent, in view of the amounts of the adjustment

resulting from this omission ($60,077 and $5,763 for 1990 and

1991, respectively) as compared to the total income reported

($778,781 and $1,215,732, respectively).
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     Petitioners have supplied us with no evidence with respect

to the Epoch Management, Inc., stock transaction or with respect

to their decision that the gain on the sale of the stock was not

includable in income.   Petitioners have the burden of proof on

this issue.   Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933).   The fact that this case was submitted fully stipulated

does not alter the burden of proof.     Rule 122(b); Alumax Inc. v.

Commissioner, 109 T.C. 133, 160 (1997), affd. __ F.3d __ (11th

Cir., Jan. 21, 1999).   Petitioners have failed to establish that

they were not negligent with respect to the underpayments

stemming from the omission of the gain from the sale of the Epoch

Management, Inc., stock.   Therefore, we hold that they are liable

for the portions of the accuracy-related penalties related to

that gain.

     In keeping with the parties' concessions and our holdings as

set forth above,

                                            Decision will be entered

                                       under Rule 155.
