                         T.C. Memo. 1999-205



                       UNITED STATES TAX COURT



                    FRED HENRY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26254-96.                  Filed June 21, 1999.



     Robert G. Gargiulo, for petitioner.

     Stephen R. Takeuchi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined deficiencies in,

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



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


penalty under section 6662(a) on petitioner's Federal income tax

(tax), as follows:


     Year    Deficiency   Additions to Tax    Accuracy-Related Penalty
     1992      $47,092        $11,773                     --
     1994      664,931         33,247                  $132,986


     The issues for decision are:

     (1)    Is the $150,000 payment that petitioner received from

E.I. du Pont de Nemours & Company, Inc. (du Pont) in 1992 in-

cludible in his income for that year?    We hold that it is to the

extent stated herein.

     (2)    Are the payments totaling $1,623,203 that petitioner

received from du Pont in 1994 excludible from his income for that

year under section 104(a)(2)?    We hold that they are not.

     (3)    Is petitioner liable under section 6651(a)(1) for 1992

for his failure to file a tax return for that year and for 1994

for his failure to file timely his 1994 return?     We hold that he

is not so liable for 1992 and that he is so liable for 1994.

     (4)    Is petitioner liable under section 6662(a) for 1994 for

the accuracy-related penalty?    We hold that he is.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.
                               - 3 -


General Background

     Petitioner Fred Henry (petitioner or Mr. Henry) resided in

Palmetto, Florida, at the time the petition was filed.

     At various times during the late 1960's and the early

1970's, Mr. Henry owned and operated two gasoline service sta-

tions and three pizzerias with respect to which he maintained the

books and records.

Mr. Henry's Orchid Activity

     Mr. Henry first became interested in orchids around the late

1960's.   Since that time, Mr. Henry, who has had no formal

training in horticulture, has spent approximately 28 years

developing unique and high quality orchids, first as a hobby and

then as a business and a hobby.

     In 1978, Mr. Henry purchased certain real property in

Manatee County, Florida.   Mr. Henry, with the assistance of his

former wife Donna Henry, a.k.a. Donna Estes (Ms. Estes), de-

veloped that property into an orchid nursery.   Mr. Henry, as-

sisted by Ms. Estes, operated that orchid nursery under the name

Fred Henry's Paradise of Orchids.   (We shall sometimes refer to

the orchid activity of Mr. Henry and Ms. Estes as Mr. Henry's

orchid activity or Fred Henry's Paradise of Orchids.)    By at

least the late 1980's, Mr. Henry had established that he had the

ability to grow high quality orchids and to overcome the many

problems associated with growing orchids.
                               - 4 -


     At all relevant times, Mr. Henry maintained the books and

records of Fred Henry's Paradise of Orchids and understood that

money received from the sale of orchid plants is taxable income.

Mr. Henry and Ms. Estes retained a tax return preparer (return

preparer) to whom they gave yearend information for use in

preparation of their tax returns.   Mr. Henry and Ms. Estes used

the accrual method of accounting in reporting the income and the

expenses relating to Mr. Henry's orchid activity and reported

that income and those expenses in Schedules C of their tax

returns (Schedules C).   All orchid plants in that activity were

included in the Schedules C as inventory.   Costs associated with

the purchase and raising of those plants were either included in

inventory costs or expensed in the Schedules C.

     At all relevant times, Fred Henry's Paradise of Orchids was

a wholesale, and not a retail, operation, although it occasion-

ally sold orchid plants at retail to members of orchid societies

and certain others who desired to purchase high quality orchids.

During 1991, many of the plants of Fred Henry's Paradise of

Orchids were sold to Selby Botanical Gardens (Selby), an impor-

tant botanical garden and world renowned orchid center whose

customers generally were interested in very high quality plants.

The other principal wholesale customers of Mr. Henry's orchid

activity during 1991 were Sagaert's Orchids in Lake Worth,

Florida, and Log Cabin Garden Center in St. Petersburg, Florida.
                               - 5 -


     For a certain period prior to October 1991, Mr. Henry

exhibited certain of his orchid plants at flower shows and

special events, made presentations to orchid societies and others

interested in growing orchids, and permitted orchid societies to

visit his nursery.   The American Orchid Society awarded prizes to

Fred Henry's Paradise of Orchids for the quality of certain of

its orchid plants.

     Orchid plants take five to nine years to reach maturity, and

certain types of orchid plants may have a very long life ex-

pectancy.   Orchid plants are salable only when they are in

flower.   The age, size, quality, and flowering capacity of the

orchid plant and the reputation of the orchid grower are factors

in determining the value of such a plant.   A large orchid plant

of high quality with excellent flowering capacity increases in

value as it becomes older.

     During the period 1987 through around September 1991, Mr.

Henry purchased and used a chemical fungicide manufactured by du

Pont, which was marketed under the name Benlate DF (Benlate).

Mr. Henry applied Benlate to all orchid plants in his possession

in order to prevent the growth of, or to eradicate, fungus which

was harmful to those plants.   In addition to the orchid plants

owned by Fred Henry's Paradise of Orchids, Mr. Henry had in his

possession orchid plants owned by third parties.   A large portion

of the orchid plants in Mr. Henry's possession were not for sale
                                - 6 -


but were used to propagate orchid plants for future sales or to

develop further unique orchids.    Certain other orchid plants in

Mr. Henry's possession were immature and not ready for sale.

     Sometime during 1990, Mr. Henry noticed diminishing flower

production in at least some of the orchid plants in his pos-

session.    During 1991, Selby and certain others who had purchased

orchid plants from Mr. Henry that became defective returned those

plants to Mr. Henry and/or made complaints about them.    Customers

of Fred Henry's Paradise of Orchids were not interested in

purchasing orchid plants that had Benlate problems.    By October

1991, petitioner had sold plants which had been treated with

Benlate before they showed signs of deformity and which even-

tually developed deformity.    All of the orchid plants in Mr.

Henry's possession became deformed, unmarketable, and useless as

unique plants as a result of his having applied Benlate to them,

and many of them died.

     During 1991, du Pont realized that its fungicide Benlate may

be responsible for damaged plants, established a Benlate claims

process, and retained Crawford & Company (Crawford) as its

representative to work in the field to assist it in evaluating

alleged damage caused by Benlate and processing claims for such

damage.    During that year, Mr. Henry began negotiating with du

Pont concerning the damage to the orchid plants of Fred Henry's

Paradise of Orchids and other orchid plants in his possession,
                               - 7 -


which was allegedly caused by Benlate.    Around September or

October 1991, a representative of du Pont inspected the orchid

plants in Mr. Henry's possession and informed him that those

plants had been damaged by Benlate.    Mr. Henry decided to, and

did, cease making business sales of orchid plants by Fred Henry's

Paradise of Orchids in October 1991, at which time he had between

100 and 150 orchid plants that were in salable condition.    After

Mr. Henry decided to stop making orchid business sales in October

1991, he did not receive requests to sell orchid plants, to

exhibit them, or to make presentations to orchid societies and

other similar groups.

     Beginning in 1991 and continuing into 1992, du Pont made

payments that it referred to as assistance payments (assistance

payments) to persons who filed claims (claimants) with du Pont

for alleged damage caused by Benlate.    The intention of du Pont

in making the assistance payments was to assist the claimants to

pay bills and other expenses that they had difficulty in paying

as a result of the alleged damage to their businesses caused by

Benlate, to help reestablish their businesses, to mitigate

losses, and for goodwill.   Du Pont made an assistance payment to

a claimant only after having received a claim from that claimant

and having it evaluated by Crawford, its claims adjustor.    It was

du Pont's rule of thumb to limit an assistance payment to one-

third of the amount of any anticipated settlement between it and
                               - 8 -


a claimant of that claimant's claim for damage.    Where a claimant

recovered from du Pont, it was expected that the assistance

payment that it had made to that claimant was to be deducted as

having been paid from any ultimate settlement or judgment.

     Du Pont never required a claimant to repay an assistance

payment that it made to such claimant.    Du Pont's Benlate res-

olution manager who was in charge of assistance payments and

certain other du Pont officials considered that du Pont had a

right to ask that an assistance payment be paid back to it.    The

return of an assistance payment to du Pont was discussed by du

Pont officials, but they never sought a formal opinion from du

Pont's attorneys on the question.

     Du Pont requested an opinion from its tax counsel as to

whether it was required to issue a Form 1099 to each claimant who

received an assistance payment and whether it could issue a Form

1099 to such a claimant.   The response of du Pont's tax counsel

to each of those questions was no.     Du Pont never issued a Form

1099 for the assistance payments that it made.

     By letter dated November 20, 1991, Mr. Henry requested

$50,000 from du Pont in order to meet outstanding obligations.

That letter stated in pertinent part:

     Having closed my business on October 7th, 1991, I have
     had no income. Now it is time to arrange for the
     proper disposal of the damaged plant material. In
     order to restock my greenhouses, it is necessary to go
     to Hawaii and Thailand to personally inspect any plants
                               - 9 -


     I am interested in purchasing to assure they are not
     damaged. Currently we need $50,000.00 to meet out-
     standing obligations.

     By letter dated December 27, 1991, Crawford sent Mr. Henry a

check dated December 26, 1991, in the amount of $50,000 ($50,000

assistance payment), which was issued by du Pont to Fred Henry's

Paradise of Orchids.   That letter stated in pertinent part:

     Enclosed is your advance assistance check that you
     requested. Delivery of this check is predicated on our
     agreement that you will deliver the signed Assistance
     Receipt via regular mail as soon as possible to the
     mailing address below.

     Our investigation of your claim is still ongoing and I
     will keep you advised on the progress of our evalua-
     tion. * * *

     On December 27, 1991, Mr. Henry signed the assistance

receipt (assistance receipt) for the $50,000 assistance payment.

That assistance receipt stated in pertinent part:

          This will acknowledge that the undersigned has
     * * * received Fifty Thousand and 00/100 Dollars
     ($50,000.00) from E. I. DuPont De Nemours & Company,
     Inc. This payment represents assistance that I * * *
     requested while E. I. DuPont De Nemours & Company
     evaluates my * * * claim pertaining to:
                             Orchids
     (DESCRIBE HERE THE CROP ON WHICH OUR PRODUCT WAS USED,
     E.G., "ALL ORNAMENTAL BEDDING PLANTS, SHRUBS, TREES, AG
     CROPS, ETC., OWNED BY OR UNDER PRODUCTION BY THE UN-
     DERSIGNED OR SAID FIRM TREATED WITH BENLATE 50 DF IN
     1990 AND 1991).

          I * * * understand and agree that the full amount
     of this payment will be applied to the amount of a
     negotiated settlement, if any, or to any final judge-
     ment that may be entered with respect to my * * *
     claims.
                              - 10 -


     I * * * UNDERSTAND AND AGREE THAT THIS IS NEITHER A
     RELEASE ON MY * * * CLAIM NOR AN ACKNOWLEDGEMENT OF
     LIABILITY BY E. I. DUPONT DE NEMOURS & COMPANY, INC.

     On January 13, 1992, Mr. Henry and Ms. Estes entered into a

partial settlement agreement relating to their contemplated

divorce.   That agreement provided in pertinent part:

          8. Proceeds for Settlement and/or Payment from
     E.I. DuPont De Nemours & Company, Inc. Upon execution
     of this Agreement any monies or proceeds received from
     E.I. DuPont De Nemours & Company, Inc. made payable to
     either or both parties [to either Mr. Henry or Ms.
     Estes or to both of them], or to Fred Henry's Paradise
     of Orchids, or any other entity associated with the
     parties shall be split in a 70:30 proportion, with 70%
     thereof to go to the Husband and 30% to go to the Wife.

     On May 8, 1992, Mr. Henry and Ms. Estes entered into a

marital settlement agreement relating to their contemplated

divorce.   That agreement provided in pertinent part:

          3. PROCEEDS FROM DUPONT. The parties are cur-
     rently negotiating with E.I. DuPont DeNemours & Com-
     pany, Inc. (hereinafter referred to as "DuPont"),
     regarding damages sustained from a chemical produced by
     DuPont. It is specifically agreed that any monies or
     any other proceeds made payable to either or both
     parties, or to Fred Henry's Paradise of Orchids, or to
     Henry and Estes Associates, or any other entity as-
     sociated with the parties, shall be split in a 70:30
     proportion, with 70% thereof to go to the Husband [Mr.
     Henry] and 30% to go to the Wife [Ms. Estes]. * * *

     By letter dated January 21, 1992, Mr. Henry requested an

additional assistance payment of $150,000 from du Pont.     That

letter stated in pertinent part:

          Thank you very much for the assistance check dated
     12-26-91 in the amount of $50,000.00. It certainly
     helped to ease the debt situation I suffer. Now I
                              - 11 -


     request an additional assistance check for $150,000.00.
     In order to: 1) Pay off the remainder of my debts.
     2) To live up to my obligation as required by Florida
     state law to buy back damaged and dead plants from my
     customers. 3) To put deposits on various groups of
     plants from Thailand and Hawaii so that I will have
     plants available to me when the final settlement occurs
     and I can get back into business without further delay.
     * * *

     By letter dated February 4, 1992, Crawford sent Mr. Henry a

check dated February 2, 1992, in the amount of $150,000 ($150,000

assistance payment), which was issued by du Pont to Fred Henry's

Paradise of Orchids.   That letter stated in pertinent part:

     Enclosed is your advance assistance check that you
     requested. Delivery of this check is predicated on our
     agreement that you will deliver the signed Assistance
     Receipt via regular mail as soon as possible to the
     mailing address below.

     Our investigation of your claim is still ongoing and I
     will keep you advised on the progress of our evalua-
     tion. * * *

     On February 4, 1992, Mr. Henry signed the assistance receipt

for the $150,000 assistance payment.   That assistance receipt

stated in pertinent part:

          This will acknowledge that the undersigned has
     * * * received One Hundred Fifty Thousand Dollars
     ($150,000.00) from E. I. DuPont De Nemours & Company,
     Inc. This payment represents assistance that I * * *
     requested while E. I. DuPont De Nemours & Company
     evaluates my * * * claim pertaining to:
                             Orchids
     (DESCRIBE HERE THE CROP ON WHICH OUR PRODUCT WAS USED,
     E. G., "ALL ORNAMENTAL BEDDING PLANTS, SHRUBS, TREES,
     AG CROPS, ETC., OWNED BY OR UNDER PRODUCTION BY THE
     UNDERSIGNED OR SAID FIRM TREATED WITH BENLATE 50 DF IN
     1990 AND 1991).
                               - 12 -


          I * * * understand and agree that the full amount
     of this payment will be applied to the amount of a
     negotiated settlement, if any, or to any final judge-
     ment that may be entered with respect to my * * *
     claims.

     I * * * UNDERSTAND AND AGREE THAT THIS IS NEITHER A
     RELEASE ON MY * * * CLAIM NOR AN ACKNOWLEDGEMENT OF
     LIABILITY BY E. I. DUPONT DE NEMOURS & COMPANY, INC.

     Neither the $50,000 assistance payment that Mr. Henry

received from du Pont in 1991 nor the $150,000 assistance payment

that he received from du Pont in 1992 was evidenced by a prom-

issory note.    Neither of those assistance payments was contingent

upon the pledging of security, and neither of them had any terms

of repayment.   No interest accrued on the respective assistance

payments that du Pont paid Mr. Henry in 1991 and 1992.

     When Mr. Henry received the respective assistance payments

from du Pont in 1991 and 1992, he was unemployed and was re-

ceiving no income.   Mr. Henry was never informed that he was re-

quired to repay those assistance payments.

     At an undisclosed time prior to March 19, 1992, Mr. Henry

submitted to Crawford a claim against du Pont as a result of his

use of Benlate in the total amount of $2,721,700, which consisted

of lost past and future sales, lost inventory, liability to

customers pursuant to Florida law, and miscellaneous costs.    By

letter to Mr. Henry dated March 19, 1992, Crawford proposed on

behalf of du Pont a settlement with respect to that claim in the
                             - 13 -


total amount of $509,742 for projected lost sales and lost

inventory.

     By letter dated June 16, 1992, Lanny W. Tyler (Mr. Tyler), a

certified public accountant retained by Mr. Henry, wrote to

Crawford on behalf of Mr. Henry and countered du Pont's proposed

settlement of $509,742 with a proposed settlement of $5,143,952,

which consisted of $3,264,934 for lost inventory, $231,850 of

interest, $168,168 for liability to customers under Florida law,

$1,095,000 for lost profits and lost sales, and $384,000 for

miscellaneous costs.

     By letter dated June 24, 1992, Crawford wrote to Mr. Henry

on behalf of du Pont and recommended a settlement of $965,678

with respect to his claim against du Pont.   That letter stated in

pertinent part:

     Crawford & Company has been attempting to evaluate your
     claim for economic loss arising from your claimed use
     of Du Pont's registered fungicide, Benlate DF.

     After reviewing the information documentation you have
     provided to date, our recommended claim settlement is
     $965,678.00.

     We are recommending this amount [$965,678] to conclude
     any claim that you may have as a result of your claimed
     use of Du Pont's registered fungicide, Benlate DF.

     Our offer will be withdrawn 10 days from the delivery
     of this letter.

     On October 8, 1992, Mr. Henry and Ms. Estes d/b/a Fred

Henry's Paradise of Orchids (the plaintiffs) commenced a lawsuit
                              - 14 -


(lawsuit) against du Pont, Platt Chemical Corporation (Platt),

Universal Enterprises Supply Corporation (Universal), and Asgrow

Florida Company (Asgrow) by filing a complaint (complaint) in the

Circuit Court of the 17th Judicial District in and for Broward

County, Florida (Florida Court).   Counts I and III of the com-

plaint alleged negligence by du Pont and Platt, respectively.

Counts II, IV, V, and VII of the complaint alleged strict li-

ability in tort of du Pont, Platt, Universal, and Asgrow, re-

spectively.   Counts VI and VIII of the complaint alleged breach

of warranty of Universal and Asgrow, respectively.

     On November 5, 1992, du Pont announced that it had stopped

paying Benlate claims because it was not responsible for losses

since Benlate did not damage plants.    On December 1, 1992, du

Pont filed its answer in the lawsuit (answer).

     Count I of the complaint relating to the claimed negligence

of du Pont alleged in pertinent part:

          18. The Plaintiffs, FRED HENRY and DONNA HENRY
     d/b/a FRED HENRY'S PARADISE OF ORCHIDS, utilized
     Benlate as a fungicide on the products they were grow-
     ing for sale, consisting primarily of orchids.

          19. Subsequent to the use of the Benlate in
     question, the plants developed severe damage * * *

          20. The damages to the Plaintiffs, FRED HENRY and
     DONNA HENRY d/b/a FRED HENRY'S PARADISE OF ORCHIDS',
     plants were a direct and proximate result of the breach
     of duty and negligence of the Defendant, Du PONT, in
     the following regards:
                        - 15 -


          a. The Defendant negligently formulated the
product in such a way that it was hazardous to plant
life.

          b. The Defendant negligently failed to
manufacture the product and/or supervise the manufac-
ture of the product so as to render it safe for use on
plants.

          c. The Defendant negligently failed to test
and analyze Benlate to determine whether it was, in
fact, safe for use on plants.

          d. The Defendant contaminated the Benlate or
allowed it to be contaminated by third persons so as to
render it hazardous to plants.

          e. The Defendant failed to take the proper
precautions to see to it that the Benlate was in a safe
and proper condition for use on plants.

          f. The dangerous chemical properties of
Benlate were known to the Defendant for a sufficient
length of time prior to the sale of the product to the
Plaintiffs such that the Defendant was negligent in
failing to stop the sale of Benlate.

     21. As a direct and proximate result of the
negligence of the Defendant, Du PONT, the Plaintiffs,
FRED HENRY and DONNA HENRY d/b/a FRED HENRY'S PARADISE
OF ORCHIDS, have suffered and continue to suffer lost
profits, loss of business, loss of business reputation,
loss of the reputation of FRED HENRY and DONNA HENRY as
orchid growers, diminution of sales, incurred addi-
tional business expenses, have had a reduction in the
value of the business, have lost plants, have suffered
a diminution in the value of their nursery as a result
of chemical contamination of the soil, and have suf-
fered other consequential losses and damages.

     WHEREFORE, the Plaintiffs, FRED HENRY and DONNA
HENRY d/b/a FRED HENRY'S PARADISE OF ORCHIDS, demand
judgment against the Defendant, Du PONT, including
interest and costs and demand trial by jury of all
issues triable as of right by jury.
                             - 16 -


     In the answer, du Pont denied, inter alia, the plaintiffs'

allegations in count I of the complaint (1) that any Benlate that

the plaintiffs may have purchased or used was defective, (2) that

the damages to the plaintiffs' orchid plants were a direct and

proximate result of the breach of duty and negligence of du Pont,

and (3) that, as a direct and proximate result of the negligence

of du Pont, the plaintiffs suffered and continued to suffer lost

profits, loss of business, loss of business reputation, loss of

their reputation as orchid growers, and diminution of sales and

incurred additional business expenses, had a reduction in the

value of the business, lost plants, suffered a diminution of the

value of their nursery as a result of chemical contamination of

the soil, and suffered other consequential losses and damages.

     In count II of the complaint relating to the claimed strict

liability in tort of du Pont, the plaintiffs alleged in pertinent

part:

          24. The product, when sold by the Defendant, Du
     PONT, was in a defective condition, unreasonably dan-
     gerous to the Plaintiffs, FRED HENRY and DONNA HENRY
     d/b/a FRED HENRY'S PARADISE OF ORCHIDS', plants due to
     the defects in the design of the product as are more
     fully set forth above.

        *       *       *       *       *       *       *

          26. The Defendant, Du PONT, is therefore strictly
     liable to the Plaintiffs, FRED HENRY and DONNA HENRY
     d/b/a FRED HENRY'S PARADISE OF ORCHIDS, for any phys-
     ical damages or economic losses sustained by the Plain-
     tiffs as a result of the defective condition of the
     product in question.
                             - 17 -


          27. As a direct and proximate result of the
     defective condition of the product in question, the
     Plaintiffs, FRED HENRY and DONNA HENRY d/b/a FRED
     HENRY'S PARADISE OF ORCHIDS, have suffered and con-
     tinues [sic] to suffer lost profits, loss of business,
     loss of business reputation, loss of the reputation of
     FRED HENRY and DONNA HENRY as orchid growers, diminu-
     tion of sales, incurred additional business expenses,
     have had a reduction in the value of the business, have
     lost plants, have suffered a diminution in the value of
     their nursery as a result of chemical contamination of
     the soil, and have suffered other consequential losses
     and damages.

In the answer, du Pont denied, inter alia, the foregoing al-

legation in count II of the complaint.

     In du Pont's answer, du Pont also alleged certain affirma-

tive defenses against Fred Henry and Donna Henry d/b/a Fred

Henry's Paradise of Orchids, including that any damages sustained

by the plaintiffs as a result of the incident described in the

complaint were caused solely by their negligence, fault, or want

of care or were substantially contributed to by their actions or

inactions and that Benlate was misused by them or by their

agents.

     Prior to the trial in the lawsuit, depositions were held by

du Pont of possible witnesses, including customers and others.

Among the claims made by du Pont during those depositions were

that Mr. Henry knowingly sold contaminated orchids, that he did

not know how to grow orchids, that he used improper growing

media, that he improperly used fertilizer, that he improperly

used pesticides, that he improperly stored fertilizers and
                               - 18 -


pesticides, that he improperly watered his orchids, that he used

improper sanitation methods, that he improperly cleaned his

equipment, and that he otherwise used other poor growing prac-

tices.   In a report that du Pont had prepared prior to the trial

in the lawsuit, Eugene Moody concluded that "the problems at

Henry's Paradise of Orchids, Florida are [due] to poor plant

management methods".   Du Pont's attacks on Mr. Henry's business

reputation and his reputation as an orchid grower were reported

in 1993 in certain newspapers.

     During the trial in the lawsuit, which lasted from August

23, 1993, through September 23, 1993, du Pont contested Mr.

Henry's ability to grow orchids, his knowledge of growing or-

chids, his growing practices, and his ability to sell orchids.

During that trial, Dr. Poole, one of du Pont's experts, testified

that he found disease in Mr. Henry's orchid nursery and improper

cultural practices.    Another of du Pont's experts, James B. Werle

(Mr. Werle), a certified public accountant, valued the total loss

of the plaintiffs at between $172,995 and $267,803 and valued

their inventory at $75,000.   That was du Pont's position at the

end of the trial in the lawsuit.

     During closing arguments to the jury after the trial in the

lawsuit, one of du Pont's attorneys argued that Mr. Henry's

credibility was at issue and that du Pont had shown that Mr.

Henry did not use good growing practices.
                                - 19 -


     At the trial in the lawsuit, an expert witness of the

plaintiffs, George C. Reavy (Mr. Reavy), an economist, valued

petitioner's total loss at $3,796,118.   In arriving at that total

loss, Mr. Reavy valued (1) the actual inventory of Mr. Henry and

Ms. Estes d/b/a Fred Henry's Paradise of Orchids, which had been

counted by Crawford, at $1,508,052, (2) their inventory which had

been discarded, but which were represented by tags, at

$1,390,078, and (3) their additional orchid plants known as

cattleyas at $356,429, for a total inventory value of $3,254,559.

Mr. Reavy added eight percent interest to that total inventory

value in order to arrive at a total loss of $3,796,118.   That was

the position of the plaintiffs at the end of the trial in the

lawsuit.   The attorneys for the plaintiffs in the lawsuit did not

present any evidence at the trial in that lawsuit concerning

damage allegedly caused by the evidence that du Pont presented

during that trial.

     During closing arguments to the jury after the trial in the

lawsuit, one of the plaintiffs' attorneys argued that the plain-

tiffs were seeking damages only for their lost inventory, and not

for loss of their reputation.    That attorney argued in pertinent

part as follows:

          Now, this is probably the simplest economic chart
     ever presented in a case, but basically what it boils
     down to is this. Remember we had Dr. Reavy come up and
     explain to you that he looked at the inventory, and
     what he did, he only did one thing with the inventory,
                             - 20 -


     and that is, he reduced it from retail to wholesale.
     In other words, when they had done the inventory, they
     did it on a retail basis, and Dr. Reavy said, no, wait
     a minute; if he's going to be a wholesale grower, we'll
     put a wholesale value on it. Dr. Reavy actually re-
     duced the inventory to this 3,254,000 to reflect the
     wholesale value of the plants. Then, if you may re-
     member, what we did then was I said, now, Dr. Reavy, if
     you figure in just eight percent a year on that money
     for the last two years, what are the losses to Fred and
     Donna because of the loss of their inventory. When you
     figure in the eight percent for two years, it comes out
     to $3,796,000.

          Now, I submit to you that that's a very conserva-
     tive figure when you think about it. All we're asking
     for here is the inventory. We're not asking for busi-
     ness - or the loss of the business or loss of reputa-
     tion or any of that sort of stuff. That's purely the
     value of the inventory. [Emphasis added.]

     After closing arguments to the jury at the conclusion of the

trial in the lawsuit, the Florida Court instructed the jury in

relevant part as follows:

          If your verdict is for du Pont and Universal, you
     will not consider the matter of damages, but if you
     find for Fred Henry and Donna Henry, you should de-
     termine and write on the verdict form in dollars the
     total amount of damage which the greater weight of the
     evidence shows that they sustained as a result of the
     incident complained of.

          The total amount of loss or damage may be cal-
     culated either by considering the value of the lost
     inventory or considering the lost value of the business
     immediately before the claimed injury and its value
     immediately after.

     On September 23, 1993, the jury rendered a verdict (jury

verdict) in the trial in the lawsuit.   As part of the jury

verdict, the jury found (1) that du Pont placed Benlate on the
                              - 21 -


market with a defect which was a legal cause of damage to the

plaintiffs, (2) that there was negligence on the part of du Pont

which was a legal cause of damage to them, and (3) that there was

negligence on the part of the plaintiffs which was a legal cause

of damage to them.   The jury charged 80 percent of total re-

sponsibility to du Pont and 20 percent of total responsibility to

the plaintiffs.   In other words, the jury found du Pont 80 per-

cent negligent and the plaintiffs 20 percent negligent.   The jury

further found that the total amount of damages sustained by the

plaintiffs, without any reduction for the percentage of responsi-

bility that the jury charged to them, was $3,796,318.   That total

amount of damages was reduced to $3,037,054 to take account of

the jury verdict that the plaintiffs were 20 percent negligent.

On motion of du Pont, the judgment of $3,037,054 was reduced to

$2,837,054 in order to account for the total of $200,000 in

assistance payments that du Pont had made to Mr. Henry in 1991

and 1992.   On December 8, 1993, the Florida Court entered an

amended final judgment (judgment) in the plaintiffs' favor in the

amount of $2,837,054.

     On December 17, 1993, du Pont, inter alia, filed a notice

of appeal with respect to the judgment.   While the judgment was

on appeal, the plaintiffs and du Pont engaged in settlement

negotiations.   As a result of those negotiations, on April
                              - 22 -


22, 1994, the plaintiffs offered to settle the lawsuit for

$2,800,000, and that settlement offer was accepted by du Pont on

the same date.   The $2,800,000 settlement negotiated between the

parties in the lawsuit was part of a global settlement of some

200 claimants against du Pont and was paid by du Pont as a result

of the jury verdict.   Pursuant to the stipulation of settlement

to which the parties in the lawsuit agreed on April 22, 1994

(stipulation of settlement), (1) du Pont also agreed to pay the

plaintiffs' costs of the lawsuit, (2) those parties executed a

document entitled "RELEASE, INDEMNITY AND ASSIGNMENT", and (3) a

notice of voluntary dismissal of the appeal of that lawsuit was

filed on or about May 13, 1994.

     Of the $2,800,000 that du Pont agreed in the stipulation of

settlement to pay the plaintiffs in the lawsuit (total settlement

amount), du Pont paid $450,000 to their attorneys, $31,139.14 to

various third parties, a total of $695,658.26 to Ms. Estes, and

a total of $1,623,203 to Mr. Henry (settlement payment),

$800,702.60 of which du Pont paid Mr. Henry around June 1994

and $822,500 of which it paid him around August 1994.

     Du Pont prepared two Forms 1099-MISC (one for 1993 and one

for 1994) relating to the $2,800,000 that it paid pursuant to the

stipulation of settlement.   Both of those forms indicated that

that amount was nonemployee compensation and that Fred Henry's

Paradise of Orchids and Krupnick, Campbell (the law firm which
                              - 23 -


represented the plaintiffs in the lawsuit) were the recipients of

that amount.

Petitioner's Tax Treatment of the Amounts at Issue

     Petitioner's Tax Treatment of
     the $150,000 Assistance Payment

     Mr. Henry discussed the tax treatment of the $150,000

assistance payment that he received from du Pont in 1992 with

Edward William Gargiulo (Mr. Gargiulo), an enrolled agent who had

been his return preparer since around 1983.   At the time Mr.

Gargiulo was considering the issue of the tax treatment of the

$150,000 assistance payment, he had never encountered an as-

sistance payment in the preparation of a tax return.   Mr.

Gargiulo did not know what the character of the $150,000 as-

sistance payment was, and he made no effort to determine the

character of that payment.   Neither Mr. Gargiulo nor Mr. Henry

consulted a tax attorney, the Internal Revenue Service (Service),

or a certified public accountant regarding the tax treatment of

the $150,000 assistance payment.

     Although Mr. Gargiulo did not know what the character of the

$150,000 assistance payment was, he nonetheless concluded that no

portion of that payment constituted ordinary income of Mr. Henry

for 1992.   Mr. Gargiulo advised Mr. Henry that he was not re-

quired to, and Mr. Henry did not, file a tax return for 1992
                                - 24 -


since Mr. Henry's income was below the amount at which section

6012 would have required him to file a tax return for that year.

     Henry & Estes Associates filed Form 1065 (U.S. Partnership

Return of Income) for 1992 (1992 Form 1065), which Mr. Gargiulo

prepared.   The partners of Henry & Estes Associates that were

shown in the 1992 Form 1065 were Fred Henry and Donna Henry.     The

$150,000 assistance payment that Mr. Henry received from du Pont

in 1992 was not reflected in the 1992 Form 1065.    Instead, that

form showed an ordinary loss from an orchid activity of Henry &

Estes Associates in the amount of $11,174.

     Petitioner's Tax Treatment of
     the $1,623,203 Settlement Payment

     At some time before the jury verdict was reached in the

trial in the lawsuit, Mr. Henry discussed the tax treatment of

any possible recovery that he might receive from du Pont with the

lead attorney for the plaintiffs at that time.    That attorney was

not an expert in tax matters.    In addition, after the jury

verdict was reached, Mr. Henry raised in a social setting with

Mr. Tyler, the certified public accountant who had represented

him in settlement discussions with du Pont prior to the com-

mencement of the lawsuit, the tax treatment of any possible

recovery that he might receive from du Pont.

     Mr. Henry retained Mr. Gargiulo to prepare his tax return

for 1994.   In preparing that tax return, Mr. Gargiulo asked Mr.
                              - 25 -


Henry about the character of the payments totaling $1,623,203

that he received from du Pont during 1994.    Mr. Gargiulo un-

derstood from Mr. Henry that those payments were made because du

Pont ruined Mr. Henry's character and he thereby suffered a

personal injury.   Having been so informed by Mr. Henry, Mr.

Gargiulo examined the Master Tax Guide, the CCH tax reporter, and

the Service Publication 17.   Based on Mr. Gargiulo's examination

of those materials and his understanding from Mr. Henry that the

payments totaling $1,623,203 that du Pont paid Mr. Henry during

1994 were made because Mr. Henry's character was ruined and he

thereby suffered a personal injury, Mr. Gargiulo concluded that

Mr. Henry was not required to, and Mr. Henry did not, report

those payments as income in his tax return for that year.

Neither Mr. Gargiulo nor Mr. Henry retained a tax attorney or a

certified public accountant, or consulted the Service, regarding

the tax treatment of the $1,623,203 in payments that Mr. Henry

received from du Pont during 1994.

Filing of Petitioner's 1994 Tax Return

     The date, as extended, on which petitioner was required to

file his 1994 tax return was October 15, 1995, which was a

Sunday.   Consequently, the due date of that tax return was the

next business day, which was Monday, October 16, 1995.    The

envelope in which Mr. Henry's 1994 tax return was mailed to the

Service was postmarked on October 17, 1995.
                                - 26 -


Notice of Deficiency

     On September 18, 1996, respondent issued a notice of de-

ficiency (notice) to Mr. Henry.    In the notice, respondent

determined that Mr. Henry had failed to report as income (1) for

1992 the $150,000 assistance payment that he received from du

Pont in that year and (2) for 1994 the $1,623,203 in payments

that Mr. Henry received from du Pont during that year.      Respon-

dent also determined in the notice that Mr. Henry is liable (1)

for additions to tax under 6651(a)(1) for 1992 for failure to

file a tax return and for 1994 for failure to file timely his tax

return and (2) for 1994 for the accuracy-related penalty under

section 6662(a) because of a substantial understatement of income

tax under section 6662(b)(2).

                                OPINION

     Petitioner bears 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).

The $150,000 Assistance Payment

     Petitioner received the $150,000 assistance payment from du

Pont in 1992 and did not report that payment as income for that

year.   Respondent determined that the $150,000 assistance payment

is includible in petitioner's income for 1992.      The parties

stipulated that 70 percent of that payment is allocable to

petitioner and that 30 percent of that payment is allocable to
                               - 27 -


Ms. Estes.    Consequently, in the event that we were to hold, as

we do, that the $150,000 assistance payment is income that must

be reported for 1992, pursuant to the parties' stipulation,

petitioner would be required to include in his gross income for

that year only 70 percent of that payment.

     Petitioner contends that the $150,000 assistance payment is

not income.   In support of that contention, petitioner advances

the following alternative positions:

          The purpose of the payment as stated by Dupont's
     Benlate resolution manager was to mitigate losses, for
     good will, and retain customers. As such it consti-
     tuted a gift. A gift is defined in Black's law dictio-
     nary as a transfer of property without consideration (a
     right, benefit, forbearance, or detriment exchanged).
     There was no consideration here, thus the payment was a
     gift. Gifts are not taxable under IRC §102(a)(2). A
     gift required donative intent but that intent does not
     have to have an altruistic motive and can be motivated
     by self interest.

          A casual reading of the assistance receipt would
     made it appear that there was no need to repay the
     amount. However, a closer reading reveals that the
     "full amount" (emphasis added) of the assistance pay-
     ment will be subtracted from any settlement or judge-
     ment. It does not say that if the settlement or judge-
     ment is less than the amount of the assistance payment
     the difference would not have to be repaid. A zero
     verdict would require the return of the whole assis-
     tance payment. This is consistent with the opinion of
     Dupont's Benlate resolution manager stated he and other
     Dupont officials believed that Dupont has the right to
     be reimbursed for the amount of the assistance payment.

          An alternate way to view the assistance payment
     based on the receipt that it was a no interest loan
     which would have to be repaid. Loans are not income
     and are not taxable. (Loans do not require a prom-
                               - 28 -


       issory note nor interest as suggested by the respondent.)

            A second alternate way of looking at the assis-
       tance payment based on the receipt that it was a con-
       tingent payment on the claim which would have to be
       repaid at the time of settlement or judgement. Since
       Dupont vigorously contested liability before the end of
       1992, thus there was a clear possibility that a re-
       payment would be required. There was no assurance the
       petitioner could retain the funds. It could not have
       been an out right partial payment since there was a
       good chance it would have to be returned. [Reproduced
       literally.]

       Respondent counters that the $150,000 assistance payment

that Mr. Henry received from du Pont in 1992 is income for that

year.    In support of that position, respondent argues on brief

that

       the payment in question was not restricted and was not
       subject to repayment. It was in the nature of a par-
       tial payment which would be accounted for in the final
       settlement or judgment, as it was in this case. The
       petitioner had every claim of right to this money under
       the principles of North American Oil Consolidated v.
       Burnet, 286 U.S. 417 (1932).

          *       *       *       *       *       *       *

            Except as otherwise provided in the Code, a tax-
       payer must include in gross income "all income from
       whatever source derived." I.R.C. § 61(a). The Supreme
       Court has long recognized that the definition of gross
       income sweeps broadly and reflects Congress' intent to
       exert the full measure of its taxing power and to bring
       within the definition of income any "accession to
       wealth." United States v. Burke, 504 U.S. 229, 223
       (1992), rev'g 929 F.2d 1119 (6th Cir. 1991). See also
       Commissioner v. Schleier, 515 U.S. 232 (1995). Ac-
       cordingly, any receipt of funds or other accession to
       wealth received by a taxpayer is presumed to be gross
       income, unless the taxpayer can prove that the acces-
       sion fits into a specific exclusion created by other
                             - 29 -


    sections of the Code. See Commissioner v. Glenshaw
    Glass Co., 348 U.S. 426, 429-431 (1955). * * *

        *       *       *        *      *         *         *

          * * * There is no evidence that the assistance
     payments were gifts. They were paid to persons and
     businesses who were damaged by a product of du Pont.
     As indicated by du Pont, their rough rule of thumb was
     to make assistance payments of no more than one third
     of the value of the damage caused. * * * The record
     establishes that the petitioner was offered settlements
     in excess of $500,000 and $900,000 in 1992. * * *
     Clearly, du Pont and the petitioner recognized that du
     Pont owed petitioner substantially more than the a-
     mounts of the assistance payments. They were not
     gifts, but partial compensation for the damage and made
     in advance to mitigate against further consequential
     loss by the petitioner.

          As to the loan theory, du Pont never required
     repayment. * * * The petitioner was destitute and his
     only valuable asset was the cause of action against du
     Pont. * * * None of the normal indicia of a loan are
     present, no note, no repayment schedule, no interest,
     and no security. * * * Clearly, the assistance payment
     was partial payment in compensation for the damage done
     by Benlate.

     On the record before us, we agree with respondent that the

$150,000 assistance payment is income for 1992.       During 1991, du

Pont realized that its fungicide Benlate may be responsible for

damage to plants, established a Benlate claims process, and

retained Crawford to work in the field to assist it in evaluating

alleged Benlate damage and processing claims for damage payment.

Beginning in 1991 and continuing into 1992, du Pont made as-

sistance payments to persons who filed claims with du Pont for

alleged damage due to Benlate.   The intention of du Pont in
                               - 30 -


making those payments was to assist the claimants to pay bills

and other expenses that they had difficulty in paying due to the

alleged damage to their business as a result of Benlate, to help

reestablish their businesses, to mitigate losses, and for good-

will.    Du Pont made assistance payments to claimants only after

having received their respective claims and after having them

evaluated by Crawford.    As a rule of thumb, du Pont limited the

amount of any assistance payment that it made to one-third of the

amount of any anticipated settlement between it and a claimant of

that claimant's claim for damage.    Thus, at the time du Pont made

an assistance payment to a claimant, it expected that it would be

paying that claimant an additional amount equal to around twice

as much as the amount of that assistance payment.    We believe

that explains why it was expected, and the assistance receipt

provided, that any assistance payment that du Pont had made to a

claimant would be deducted as having been paid from any ultimate

settlement or judgment relating to Benlate claims by that claim-

ant.

       In 1991, Mr. Henry began negotiating with du Pont concerning

the damage to his orchid plants caused by Benlate.    Around

September or October 1991, a representative of du Pont inspected

the orchid plants in Mr. Henry's possession and informed him that

those plants had been damaged by Benlate.    At the end of November

1991, Mr. Henry requested, and at the end of December 1991, Mr.
                               - 31 -


Henry received, the $50,000 assistance payment from du Pont.     In

late January 1992, Mr. Henry requested, and in early February

1992, Mr. Henry received, the $150,000 assistance payment from du

Pont.    On the record before us, we find that petitioner has

failed to show that he was under any restrictions as to how he

used either the $50,000 assistance payment or the $150,000

assistance payment or that he did not have full control over how

he used each of those payments.    We further find on that record

that petitioner has failed to establish that he was under an

obligation (contingent or otherwise) to return either the $50,000

payment2 or the $150,000 payment to du Pont or that there were

any indicia of a loan associated with either of those payments.

The record does show that at the respective times du Pont made

the $50,000 assistance payment and the $150,000 assistance

payment to Mr. Henry it expected to pay him substantial, ad-

ditional amounts with respect to his claimed damage due to his

use of Benlate.    Indeed, the record establishes that du Pont

offered Mr. Henry a settlement of $509,742 by letter dated March


     2
      Although du Pont's Benlate resolution manager, who was in
charge of assistance payments, and certain other du Pont of-
ficials considered that du Pont had a right to ask that an
assistance payment be paid back to it, they never sought a formal
opinion from du Pont's attorneys on the question. Moreover, we
do not believe that, because du Pont's Benlate resolution manager
and certain other du Pont officials considered that du Pont had a
right to ask that an assistance payment be paid back to it, du
Pont had the legal right to require that an assistance payment be
returned to it.
                                - 32 -


19, 1992, from Crawford and a settlement of $965,678 by letter

dated June 24, 1992, from Crawford.      It was not until November 5,

1992, that du Pont announced that it had stopped paying Benlate

claims because it was not responsible for losses since Benlate

did not damage plants.   Although du Pont made that announcement

in early November 1992, it did not require Mr. Henry in 1992 (or

at any other time) to repay the assistance payments that it had

made to him in 1991 and 1992.    In fact, du Pont never required

any person to repay any assistance payments that it had made.

Although du Pont never issued a Form 1099 for any assistance

payment that it made and although its tax counsel advised du Pont

that it was not required to, and could not, issue such a form

with respect to any such payment, those facts do not control our

resolution of whether, under the facts established by the record

in this case and the applicable law, the $150,000 assistance

payment that du Pont made to Mr. Henry in 1992 is income for that

year.

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

we find that petitioner has failed to establish that the $150,000

assistance payment that du Pont made to him in early February

1992 is a gift or, in the alternative, a loan.     We further find

on that record that petitioner has failed to show that the

$150,000 assistance payment is not income.     See Commissioner v.

Glenshaw Glass Co., 348 U.S. 426 (1955).      Moreover, assuming
                              - 33 -


arguendo that petitioner had been under a contingent obligation

to return the $150,000 assistance payment to du Pont, we find on

the instant record that petitioner has failed to establish that

he did not receive the $150,000 assistance payment under a claim

of right.   See North Am. Oil Consol. v. Burnet, 286 U.S. 417, 424

(1932).

     We turn now to Mr. Henry's alternative argument that "if the

[$150,000 assistance] payment could be considered an advance

payment, it is clear under the law as it existed in 1992 that the

payment was excluded from income due [to] damage to the Peti-

tioner's livelihood including reputation."   We presume that

petitioner is arguing that the $150,000 assistance payment is to

be excluded from income under section 104(a)(2).   On the record

before us, we reject any such argument.

     Section 104(a)(2) provides that "gross income does not

include * * * the amount of any damages received (whether by suit

or agreement and whether as lump sums or as periodic payments) on

account of personal injuries or sickness".   There is no evidence

in the record that when petitioner requested in late January

1992, and received in early February 1992, the $150,000 assis-

tance payment he was making any claims of personal injuries or

even any claims of loss of business reputation and/or loss of

reputation as an orchid grower.   To the contrary, the record

establishes that at those times Mr. Henry was negotiating with du
                               - 34 -


Pont concerning the damage to the orchid plants of Fred Henry's

Paradise of Orchids and other plants in his possession, which was

allegedly caused by Benlate.   The record also establishes that

petitioner was requesting an additional assistance payment in the

amount of $150,000 in order to

     1) Pay off the remainder of my debts. 2) To live up to
     my obligation as required by Florida state law to buy
     back damaged and dead plants from my customers. 3) To
     put deposits on various groups of plants from Thailand
     and Hawaii so that I will have plants available to me
     when the final settlement occurs and I can get back
     into business without further delay. * * *

Moreover, the record shows that at an undisclosed time prior to

March 19, 1992, Mr. Henry submitted to Crawford a claim against

du Pont as a result of his use of Benlate in the total amount of

$2,721,700, which consisted of lost past and future sales, lost

inventory, liability to customers pursuant to Florida law, and

miscellaneous costs.   By letter to Mr. Henry dated March 19,

1992, Crawford proposed on behalf of du Pont a settlement with

respect to that claim in the total amount of $509,742 for pro-

jected lost sales and lost inventory.   By letter dated June 16,

1992, Mr. Tyler, the certified public accountant retained by Mr.

Henry, wrote to Crawford on behalf of Mr. Henry and countered du

Pont's proposed settlement of $509,742 with a proposed settlement

of $5,143,952 which consisted of claims for lost inventory,

interest, liability to customers under Florida law, lost profits

and lost sales, and miscellaneous costs.   The record does not
                                - 35 -


show that it was the intention of du Pont when it made the

$150,000 assistance payment to Mr. Henry to compensate him on

account of personal injuries.    To the contrary, the record

establishes that the intention of du Pont in making assistance

payments was to assist the claimants to pay bills and other

expenses that they had difficulty in paying due to the alleged

damage to their businesses caused by Benlate, to help reestablish

their businesses, to mitigate losses, and for goodwill.

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

we find that Mr. Henry has failed to show that the $150,000

assistance payment is not income for 1992.    Pursuant to the

parties' stipulation that 70 percent of that payment is allocable

to Mr. Henry, we hold that Mr. Henry must include in his gross

income for that year 70 percent of the $150,000 assistance

payment, or $105,000.

Addition to Tax Under Section 6651(a)(1)--1992

     Petitioner did not file a tax return for 1992.3   Respondent

determined in the notice that he is liable under section

6651(a)(1) for his failure to file a tax return for that year.




     3
      Henry & Estes Associates, a partnership consisting of Mr.
Henry and Ms. Estes, filed a Form 1065 for 1992. The 1992 Form
1065 did not reflect the $150,000 assistance payment that du Pont
made to Mr. Henry in February 1992. Instead, that form reflected
a loss from the orchid activity of Henry & Estes Associates.
                              - 36 -


Petitioner contends that he was not required to file a tax return

for 1992.   In support of that contention, petitioner asserts:

     If there was no income there was no failure to file.
     Even if there was income, the failure to file penalty
     is not applicable where the failure to file is due to
     reasonable cause and there is no willful neglect. The
     Petitioner did not consider the [$150,000] assistance
     payment income and his tax account[ant] did not con-
     sider it income. The Petitioner['s] livelihood was
     destroyed and it was reasonable for them to conclude
     that any payment relating to that law suit would also
     be excludable from income. To eliminate the penalty
     the Petitioner does not have to win but only have a
     reasonable basis for his actions.

     Respondent counters:

     Petitioner is not disputing the fact of nonfiling, he
     is apparently contending that his failure to file was
     due to reasonable cause. In his defense, petitioner
     contends that he and his return preparer did not know
     what the tax treatment of the assistance payments
     should have been. Petitioner and his return preparer
     failed to consult a tax attorney, the Internal Revenue
     Service, or a certified public accountant concerning
     the tax treatment of the 1992 assistance payment.
     Moreover, at the time * * * he considered the issue of
     the tax treatment of the assistance payment, peti-
     tioner's return preparer had never encountered an
     assistance payment in the preparation of an income tax
     return. * * * Such a defense is no defense at all.
     Clearly petitioner was under a nondelegable duty to
     seek competent tax advice rather than conclude that he
     did not need to file since he did not know what the tax
     treatment of the payment should be. * * *

     The addition to tax under section 6651(a)(1) does not apply

where the failure to file was due to reasonable cause and not to

willful neglect.   See sec. 6651(a)(1).   Reasonable cause under

section 6651 means the exercise of ordinary business care and

prudence.   See sec. 306.6651-1(c)(1), Proced. & Admin. Regs.
                              - 37 -


Willful neglect is defined as a conscious, intentional failure or

reckless indifference.   See United States v. Boyle, 469 U.S. 241,

245 (1985).

     We consider first whether petitioner's failure to file a tax

return for 1992 was due to reasonable cause and not to willful

neglect because of his claimed reliance on his return preparer,

Mr. Gargiulo.   Mr. Gargiulo advised petitioner that he was not

required to file a tax return for that year since he did not have

the amount of income that would require him to file such a tax

return under section 6012.   In this connection, Mr. Gargiulo

testified in pertinent part about the reason why he did not

believe that any portion of the $150,000 assistance payment is

includible in petitioner's income for 1992, as follows:

     There was just nothing that duPont ever told us what's
     that -- what kind of money it was -- whether it was a
     goodwill money for the problems they were causing Mr.
     Henry or whether it was a loan to Mr. Henry to be paid
     later. The character of the money, I didn't know what
     it was.

     Nothing in the record indicates that Mr. Henry, who was

aware of the circumstances surrounding du Pont's decision to make

the $150,000 assistance to him in early February 1992, shared

that information with Mr. Gargiulo.    Nor does the record show

that Mr. Gargiulo asked du Pont to inform him of those circum-

stances.   On the instant record, we find that petitioner has

failed to show that it was reasonable for him to rely on the
                              - 38 -


advice of Mr. Gargiulo that it was unnecessary to file a tax

return for 1992.

     Even though we have found that it was not reasonable for

petitioner to rely on the advice of Mr. Gargiulo with respect to

his failure to file a 1992 tax return, we nonetheless find on the

record before us that that failure was due to reasonable cause

and not to willful neglect.   Although petitioner was aware of the

circumstances relating to du Pont's decision to make the 1992

assistance payment to him, he also knew that du Pont decided in

November 1992 to stop paying Benlate claims.   Du Pont's decision

to stop paying Benlate claims, coupled with the fact that du Pont

did not issue a Form 1099 to petitioner for 1992 with respect to

the $150,000 assistance payment, could have raised a reasonable

question in the mind of petitioner, who is not an expert in tax

matters, as to whether that payment was income for 1992.    On the

record before us, we find that petitioner's failure to file a tax

return for 1992 was due to reasonable cause and not to willful

neglect.   Accordingly, we hold that petitioner is not liable for

1992 for the addition to tax under section 6651(a)(1).

The $1,623,203 Settlement Payment

     Respondent determined that the settlement payment of

$1,623,203 which petitioner received from du Pont during 1994 is

to be included in his gross income for that year.   It is pe-

titioner's position that that payment constitutes an amount of
                              - 39 -


"damages received (whether by suit or agreement and whether as

lump sums or as periodic payments) on account of personal in-

juries or sickness" under section 104(a)(2) and that therefore

that payment is to be excluded from his gross income for 1994.

In support of that position, petitioner contends that du Pont

agreed to pay the total settlement amount of $2,800,000 pursuant

to the stipulation of settlement of the lawsuit as damages for

the loss of the plaintiffs' business reputation and the loss of

their reputation as orchid growers, that such damages are per-

sonal injuries within the meaning of section 104(a)(2), and that

consequently the $1,623,203 settlement payment that he received

out of the $2,800,000 total settlement amount constitutes "the

amount of * * * damages received * * * on account of personal

injuries" that is to be excluded from his gross income under that

section.   Respondent counters that the record does not support

petitioner's contentions.   We agree with respondent.

     In Commissioner v. Schleier, 515 U.S. 323, 336-337 (1995),

the Supreme Court of the United States summarized the require-

ments of section 104(a)(2) as follows:

          In sum, the plain language of § 104(a)(2), the
     text of the applicable regulation, and our decision in
     Burke establish two independent requirements that a
     taxpayer must meet before a recovery may be excluded
     under § 104(a)(2). First, the taxpayer must demon-
     strate that the underlying cause of action giving rise
     to the recovery is "based upon tort or tort type
     rights"; and second, the taxpayer must show that the
                              - 40 -


     damages were received "on account of personal injuries
     or sickness." * * *

     Respondent concedes that Mr. Henry satisfies the first

requirement set forth in Schleier.     However, respondent contends

that Mr. Henry has failed to establish that he satisfies the

second requirement set forth in Schleier because he has failed to

show that the $1,623,203 settlement payment that he received from

du Pont during 1994 was received "on account of personal injuries

or sickness" within the meaning of section 104(a)(2).

     The second requirement set forth by the Supreme Court in

Commissioner v. Schleier, supra (as does the first requirement)

involves dual inquiries.   In this case, those inquiries are

whether the claims of loss of business reputation and loss of

reputation as orchid growers, which Mr. Henry and Ms. Estes d/b/a

Fred Henry's Paradise of Orchids alleged in the complaint in the

lawsuit resulted from the negligence of du Pont and its defective

product Benlate, constitute personal injuries within the meaning

of section 104(a)(2) and, if so, whether the total settlement

amount of $2,800,000, and consequently the $1,623,203 settlement

payment that petitioner received during 1994, are damages re-

ceived on account of those injuries.

     We address first Mr. Henry's contention that the $2,800,000

total settlement amount, and consequently the $1,623,203 set-

tlement payment, which the parties stipulated was paid as a
                              - 41 -


result of the jury verdict, was paid on account of the loss of

the plaintiffs' business reputation and the loss of their rep-

utation as orchid growers.   The record in this case, which

includes portions of the record in the lawsuit, does not support

petitioner's contention that all, or even a portion, of the total

settlement amount, or the settlement payment, was paid on account

of the loss of the plaintiffs' business reputation or the loss of

their reputation as orchid growers.    In fact, the attorney in the

lawsuit for the plaintiffs, Mr. Henry and Ms. Estes d/b/a Fred

Henry's Paradise of Orchids, told the jury in his closing ar-

guments that the plaintiffs were not claiming loss of reputation.

He stated:

     All we're asking for here is the inventory. We're not
     asking for business - or the loss of the business or
     loss of reputation or any of that sort of stuff.
     That's purely the value of the inventory. [Emphasis
     added.]

The foregoing statements by the plaintiffs' attorney to the jury

in the lawsuit are consistent with the evidence submitted by the

plaintiffs to that jury with respect to the loss that they

claimed they suffered as a result of their applying Benlate to

the orchid plants of Fred Henry's Paradise of Orchids.   That

evidence consisted of the testimony of the plaintiffs' expert, an

economist, that the value of the plaintiffs' inventory of orchid

plants was $3,254,559, to which that expert added eight percent

interest in order to arrive at the total loss that the plaintiffs
                               - 42 -


claimed in that lawsuit, or $3,796,118.   Du Pont also presented

evidence in the lawsuit through an expert who valued the plain-

tiffs' inventory at $75,000 and who concluded that the total loss

of the plaintiffs was between $172,995 and $267,803.   No other

witness testified in the lawsuit concerning the amount of damages

sustained by the plaintiffs.

     In advancing his contention that the $2,800,000 total

settlement amount, and consequently the $1,623,203 settlement

payment, was paid on account of the loss of the plaintiffs'

business reputation and the loss of their reputation as orchid

growers, Mr. Henry reasons as follows:

          Proximate cause is the causal connection between
     the tortfeasor actions and the injury. This is the
     traditional "but for" test. Dupont negligently placed
     on [sic] defective product on the market, that product
     caused damage to orchids, those damaged orchids were
     sold by an individual who has a reputation of producing
     and selling high quality orchids, the orchids were
     generally sold to people knowledgeable about orchids,
     the orchids became deformed, failed to flower, and died
     (definitely not high quality orchids), the reputation
     for selling and producing high quality plants was
     destroyed by the selling plants which became deformed
     and died. But for the Dupont's negligence the peti-
     tioner's reputation would not have been damaged. There
     was no intervening cause. * * *

     Not only is petitioner's "but-for" argument rejected by the

record in this case, which establishes that the $2,800,000 total

settlement amount, and consequently the $1,623,203 settlement

payment, was not paid on account of the loss of the plaintiffs'

business reputation or the loss of their reputation as orchid
                              - 43 -


growers, that argument also was rejected, as a matter of law, by

the Supreme Court in O'Gilvie v. United States, 519 U.S. 79

(1996).   In O'Gilvie, the Supreme Court held that the "on account

of" test of section 104(a)(2) requires more than a "but-for"

connection between the damages and a personal injury.    That test,

according to the Supreme Court, requires that the damages be

awarded by reason of, or because of, the personal injury, and not

another cause.   See O'Gilvie v. United States, supra.   On the

record before us, we find that petitioner has failed to establish

that all or any portion of the $2,800,000 total settlement

amount, or the $1,623,203 settlement payment, was paid by reason

of, or because of, the loss of the plaintiffs' business rep-

utation or the loss of their reputation as orchid growers.

     Although we need not do so in order to resolve the question

presented under section 104(a)(2), for the sake of completeness

we shall address petitioner's contention that "Damage to rep-

utation is clearly personal injury for the purpose of IRC

§104(a)(2)."   While not altogether clear, petitioner appears to

be taking the position that damage to reputation is, as a matter

of law, personal injury within the meaning of section 104(a)(2).

We rejected such an argument in Fabry v. Commissioner, 111 T.C.

305 (1998), and we reject any such argument here.

     In Fabry, the taxpayers (the Fabrys) operated a nursery in

which they grew ornamental plants, and they developed a rep-
                               - 44 -


utation for growing quality plants.     See Fabry v. Commissioner,

supra at 306.   In connection with the operation of their nursery,

the Fabrys used Benlate on the plants that they grew and suffered

extensive damage to those plants, which they claimed was a result

of their use of Benlate.   See id. at 307.    The Fabrys sued du

Pont in the Court of the Ninth Judicial Circuit in and for Orange

County, Florida.    In that suit, they alleged that du Pont had

allowed Benlate to become contaminated so as to cause the damages

that they suffered from having used it on their stock of plants.

The Fabrys demanded a judgment for monetary damages from du Pont

under theories of negligence and strict liability in tort.      Under

both theories, the Fabrys claimed that they sustained damages in

the form of the lost value of destroyed or injured plants, damage

to their business reputation, lost income, and the lost value of

their business.    After mediation, the suit which the Fabrys

instituted against du Pont was concluded pursuant to a stip-

ulation under which du Pont agreed to pay them $3,800,000.      See

id. at 307.

       The parties in Fabry v. Commissioner, supra, agreed that

$500,000 of the $3,800,000 which du Pont paid the Fabrys was

allocable to damages for loss of business reputation.    See id. at

307.    The question presented to us in Fabry was whether, as

argued by the Fabrys, that $500,000 payment was to be excluded

from gross income under section 104(a)(2).    See id. at 308.      In
                              - 45 -


advancing their position, the Fabrys maintained that injury to

business reputation is, as a matter of law, a personal injury

within the meaning of section 104(a)(2).   See id. at 309.   We

rejected that argument.   See id. at 310-311.   In so holding, we

stated:

     In Threlkeld v. Commissioner, supra, we decided not to
     follow our decision in Roemer v. Commissioner, 79 T.C.
     398 (1982), revd. 716 F.2d 693 (9th Cir. 1983), in
     which we distinguished between injury to personal
     reputation and injury to business reputation and held
     that damages awarded on account of defamation resulting
     in injury to business reputation did not give rise to
     damages received on account of personal injuries within
     the meaning of section 104(a)(2). We did not, in
     Threlkeld, adopt a per se rule that damages received on
     account of injury to an individual's business reputa-
     tion are excludable under section 104(a)(2). We de-
     scribed the necessary determination as presenting a
     question of fact. Threlkeld v. Commissioner, supra at
     1305. We said that the determination depended on the
     nature of the claim presented, and we looked to all the
     facts and circumstances of the case, including the
     State law characterization of the claim in question (a
     claim for malicious prosecution) to determine the
     nature of that claim. Id. at 1307-1308. We found that
     an action for malicious prosecution is similar to an
     action for defamation and concluded that it would be
     classified as an action for personal injuries under
     Tennessee law. Id. at 1307. We concluded that the
     payment received for the release of the taxpayer's
     claims against the defendant for damage to the tax-
     payer's professional reputation was excludable under
     section 104(a)(2).

Id. at 310.

     Having rejected the taxpayers' argument in Fabry that injury

to business reputation is, as a matter of law, a personal injury

within the meaning of section 104(a)(2), we examined the facts
                                - 46 -


and circumstances surrounding the $500,000 payment at issue in

that case in order to determine whether that payment was made on

account of personal injuries, as that term is used in section

104(a)(2).    See id. at 311-314.   We examined, inter alia, the

complaint that the Fabrys had filed against du Pont in the local

Florida Court and the mediation that preceded settlement of that

suit.   See id. at 312-314.    In that complaint, the Fabrys sought

damages on theories of negligence and strict liability in tort.

See id. at 313.   They alleged as essential facts in that com-

plaint that the Benlate that they purchased was defective and

proved detrimental to their nursery products and that, as the

direct and proximate result of their use of Benlate, they suf-

fered, inter alia, damage to their business reputation.    See id.

at 312-313.    We pointed out in Fabry v. Commissioner, supra at

313, that nowhere in the complaint filed by the Fabrys did they

use the term "personal injuries" to describe the injuries that

they claimed to have suffered as a result of their use of Benlate

and that none of the other injuries alleged in the complaint

(i.e., plant damage, lost profits, or loss of going-concern

value) is a personal injury.    We noted in Fabry that the Fabrys

did not argue, and we did not believe, that all injuries caused

by a defendant's negligence or attributable to a defendant under

a theory of strict liability in tort necessarily are personal

injuries within the meaning of section 104(a)(2).    See id. at
                               - 47 -


313.   We also acknowledged that the plant damage alleged by the

Fabrys against du Pont "no doubt injured their business and,

consequentially, their business reputation."     Id. at 313.   How-

ever, we held that nowhere in the complaint is there any claim of

personal injuries, as that term is used in section 104(a)(2).

See id. at 313.    We further held that there was no evidence of a

claim for personal injuries in our examination of the mediation

that preceded the settlement of the suit brought by the Fabrys

against du Pont.    See id. at 313-314.

       Based on our examination of all the facts and circumstances

surrounding the $500,000 payment that was made on account of the

Fabrys' claim of injury to their business reputation, we held in

Fabry v. Commissioner, supra at 314:

            Since the record of the lawsuit that is before us
       does not include any claim for personal injuries within
       the meaning of section 104(a)(2), we do not believe
       that the claim for injury to business reputation was on
       account of personal injuries, as that term is used in
       section 104(a)(2). * * *

       We have examined all of the facts and circumstances that are

disclosed by the record before us surrounding the lawsuit by Mr.

Henry and Ms. Estes d/b/a Fred Henry's Paradise of Orchids

against, inter alia, du Pont and the settlement of that lawsuit

while the jury verdict was on appeal.     In the complaint in the

lawsuit, Mr. Henry and Ms. Estes d/b/a Fred Henry's Paradise of

Orchids sought damages from, inter alia, du Pont on theories of
                             - 48 -


negligence and strict liability in tort.   The plaintiffs in that

lawsuit alleged as essential facts that they used Benlate on the

orchid plants that they were growing, that those plants suffered

severe damage, that the damages to the plaintiffs' orchid plants

were the direct and proximate result of the breach of duty and

negligence of du Pont, that du Pont sold Benlate in a defective

condition, that du Pont is strictly liable to the plaintiffs "for

any physical damages or economic losses sustained by the Plain-

tiffs as a result of the defective condition of the product in

question", and that, as a direct and proximate result of the

negligence of du Pont and the defective condition of Benlate, the

plaintiffs suffered

     lost profits, loss of business, loss of business rep-
     utation, loss of the reputation of FRED HENRY and DONNA
     HENRY as orchid growers, diminution of sales, incurred
     additional business expenses, have had a reduction in
     the value of the business, have lost plants, have
     suffered a diminution in the value of their nursery as
     a result of chemical contamination of the soil, and
     have suffered other consequential losses and damages.

Nowhere in the complaint in the lawsuit filed by Mr. Henry and

Ms. Estes d/b/a Fred Henry's Paradise of Orchids or in the

documents relating to the settlement of that lawsuit that are

part of the record in the instant case did the plaintiffs use the

term "personal injuries" to describe the injuries that they

claimed to have suffered as a result of their use of Benlate.

See Fabry v. Commissioner, 111 T.C. at 313.   Nor did they allege
                                - 49 -


therein a claim of defamation or any other nonphysical, personal

tort.     See id.

        We do not understand petitioner to be arguing, and in any

event we do not believe, that the injuries alleged in the lawsuit

by the plaintiffs of lost profits, loss of business, diminution

of sales, additional business expenses, a reduction in the value

of the plaintiffs' business, lost plants, and a diminution of the

value of the plaintiffs' nursery as a result of contamination of

the soil are personal injuries.     We do not understand petitioner

to be claiming, and in any event we do not believe, that the

cause of the injuries that the plaintiffs alleged in the lawsuit,

i.e., negligent manufacture and sale of a defective product,

necessarily results in a personal injury within the meaning of

section 104(a)(2).     Although the damage to the orchid plants of

the plaintiffs that they alleged in the complaint in the lawsuit

no doubt injured their business and, consequentially, their

business reputation, nowhere in the complaint in the lawsuit or

in the documents relating to the settlement of that lawsuit that

are before us is there any claim of personal injuries, as that

term is used in section 104(a)(2).       See id. at 313.

        On the record before us, we find that the plaintiffs' claims

for loss of business reputation and loss of reputation as orchid

growers are not on account of personal injuries within the

meaning of section 104(a)(2).     See id. at 314.    On that record,
                              - 50 -


we further find that, assuming arguendo that the $1,623,203

settlement payment which petitioner received from du Pont during

1994 had been paid for loss of his business reputation and loss

of his reputation as an orchid grower, that payment was not made

on account of personal injuries within the meaning of section

104(a)(2).

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

we find that petitioner has failed to establish that the

$1,623,203 settlement payment that he received during 1994 was

made on account of personal injuries within the meaning of

section 104(a)(2).   Accordingly, we sustain respondent's de-

termination to include that payment in petitioner's gross income

for that year.4

Addition to Tax Under Section 6651(a)(1)--1994

     Respondent determined that petitioner did not timely file

his 1994 tax return.   Petitioner concedes that the Service

received that tax return after October 16, 1995, the date on

which it was due, and that the envelope in which it was mailed to

the Service was postmarked on October 17, 1995.   He contends,

however, that he mailed his 1994 tax return on October 16, 1995,


     4
      In the event that we were to hold, as we have, that the
settlement payment is not to be excluded from petitioner's gross
income under sec. 104(a)(2), petitioner advances several al-
ternative theories regarding the characterization of that payment
for tax purposes. We have considered all of those alternative
theories, and on the record before us we reject them.
                              - 51 -


the date on which it was due, and that consequently it should be

treated as timely filed.   We disagree.

     On the instant record, Mr. Henry must comply with the

requirements of section 7502(a), the section of the Code which

permits, inter alia, a tax return that is delivered to the

Service after its due date to be treated as timely filed.

Section 7502(a) provides in pertinent part:

     SEC. 7502(a). General Rule.--

          (1) Date of delivery.--If any return * * * re-
     quired to be filed * * * on or before a prescribed date
     * * * is, after * * * such date, delivered by United
     States mail to the * * * office with which such return
     * * * is required to be filed * * * the date of the
     United States postmark stamped on the cover in which
     such return * * * is mailed shall be deemed to be the
     date of delivery * * *

          (2) Mailing requirements.--This subsection shall
     apply only if--

               (A) the postmark date falls * * * on or be-
          fore the prescribed date--

                    (i) for the filing (including any ex-
               tension granted for such filing) of the re-
               turn * * * and

               (B) the return * * * was, within the time
          prescribed in subparagraph (A), deposited in the
          mail in the United States in an envelope or other
          appropriate wrapper, postage prepaid, properly ad-
          dressed to the * * * office with which the return
          * * * is required to be filed * * *

     Even if, as petitioner testified, he timely mailed his 1994

tax return on October 16, 1995, section 7502(a) does not permit

us to treat that return as timely filed.   That is because the
                             - 52 -


date postmarked on the envelope in which petitioner's 1994 tax

return was delivered to the Service is October 17, 1995, and that

date is after the date on which that return was required to be

filed.

     On the record before us, we find that petitioner has failed

to establish that he timely filed his 1994 tax return.   On that

record, we further find that petitioner is liable for 1994 for

the addition to tax under section 6651(a)(1).5

Accuracy-Related Penalty Under Section 6662(a)--1994

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

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

stantial understatement of income tax.   An understatement is

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



     5
      We note that Mr. Henry had it within his power to avoid the
problem presented in this case. He testified that he mailed his
1994 tax return certified mail because his accountant "always
wants it done certified mail." Indeed, the copy of his 1994 tax
return that is in the record has typewritten at the top of it:
"CERTIFIED MAIL NO. Z 721 020 113". If Mr. Henry had obtained
and introduced into evidence a receipt for the certified mailing
of his 1994 tax return which bore the actual date of the mailing
of that tax return, the date marked on any such receipt would
have been treated as the date of the U.S. postmark for purposes
of sec. 7502(a). See sec. 7502(c)(2); sec. 301.7502-1(c)(2),
Proced. & Admin. Regs. If that date were Oct. 16, 1995 (or an
earlier date), petitioner would have satisfied the requirement of
sec. 7502(a)(2)(A) that the U.S. postmark fall on or before the
date (as extended) on which his tax return was due. Mr. Henry
either chose not to obtain a receipt for the certified mailing of
his 1994 tax return or he chose not to present at trial the
receipt that he did obtain. In either event, he appropriately
bears the risk that such inaction entails.
                                     - 53 -


the tax return less the amount of tax shown in the tax return,

see sec. 6662(d)(2)(A), and is substantial in the case of an in-

dividual if it exceeds the greater of 10 percent of the tax

required to be shown or $5,000, see sec. 6662(d)(1)(A).          The

amount of the understatement is reduced to the extent that it is

attributable to an item for which there was substantial author-

ity.       See sec. 6662(d)(2)(B)(i).6

       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 the taxpayer acted with reasonable cause and in good

faith depends upon the pertinent facts and circumstances.            See

sec. 1.6664-4(b)(1), Income Tax Regs.          The most important factor

is the extent of the taxpayer's efforts to assess his or her

proper tax liability.       See id.    Reliance on the advice of a

professional, such as an accountant, does not necessarily dem-

onstrate reasonable cause and good faith unless, under all the

circumstances, such reliance was reasonable and the taxpayer

acted in good faith.       See id.    In the case of claimed reliance on

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


       6
      The amount of the understatement also is reduced to the
extent that it is attributable to an item that was adequately
disclosed in the tax return and was treated by the taxpayer in a
manner having a reasonable basis. See sec. 6662(d)(2)(B)(ii).
                              - 54 -


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).

     Respondent determined that petitioner is liable for 1994 for

the accuracy-related penalty under section 6662(a) due to a

substantial understatement of income tax under section

6662(b)(2).   Respondent determined that Mr. Henry's substantial

understatement of income tax for 1994 is attributable to the

disallowance of a $3,018 loss that he claimed in Schedule F of

that tax return and his failure to include in his tax return for

1994 the $1,623,203 settlement payment that he received from du

Pont during that year.

     Petitioner makes no argument under 6662(a) with respect to

the accuracy-related penalty attributable to the disallowance of

the loss that he claimed in Schedule F of his 1994 tax return.

With respect to the accuracy-related penalty attributable to his

failure to include the $1,623,203 settlement payment as income in

that tax return, Mr. Henry asserts in his opening brief:

          In regard to the penalties under IRC 6662, the
     taxpayer has reasonable basis for his position. The is
     substantial case law as set forth in this brief, the
     law is changing in regard to exclusions under IRC 102
     based on the U.S. Supreme Courts decision in Scheier
     which was decided in 1995. In addition, the facts in
     this situation is substantially close to the factual
     situations in the cases cited. [Reproduced literally.]
                                    - 55 -


In his reply brief, Mr. Henry further contends:

          In regard to penalties, the petitioner relied on
     the advice of his tax preparer, an enrolled agent. An
     enrolled agent has sufficient training in tax. See
     Treasurer [sic] Circular 230. Thus the petitioner was
     entitled to rely on his advice. The advice given was
     based on the generally available tax information at the
     time and was based on recognized tax publications. The
     Schleier case would not have shown in any publications
     at the time of the advice. * * *

     We address first petitioner's claimed reliance on his return

preparer, Mr. Gargiulo.         In this regard, the following testimony

of Mr. Gargiulo is instructive:

          Q   So who provided you with the characterization
     of the money. In other words, how did you come to
     understand what the character of this money in '94 was?

          A   Through discussions with Mr. Henry.         And he
     had sought other outside help.

        *        *          *         *         *     *       *

            Q   So as far as you were concerned --

        *        *          *         *         *     *       *

          Q   -- it was -- as long as it came from a damage
     award, it was excludable.

            A   For personal injury.         Yes.

          Q   But what did the personal injury have to do
     with the matter?

            A   That's the character of the award.

          Q    In other words, if the damage was for personal
     injury, it was your understanding that it was ex-
     cludable?

            A   Yes, sir.
                               - 56 -


          Q    So consequently, if it was not for personal
     injury, then it would be includable, in your under-
     standing?

          A   Could you readdress that again?   If it wasn't
     --

          Q   If the damage award was received for a cause
     of action which was not for personal injury, would that
     money be includable into income?

          A    Yes. I would think so. Without seeing the
     actual, you know, ramifications of that thing, I would
     think so.

          Q   What is your definition of personal injury?

          A   In the case of Mr. Henry?

          Q   I'm just asking you for a definition of per-
     sonal injury. You --

          A   Okay.   In the case --

          Q   -- referred to that term.

          A   Okay. In the case that we have with Mr. Henry
     it was for, basically, his character. He was ruined.

          Q   He was -- excuse me?

          A   He was ruined.

     The record establishes that Mr. Gargiulo did not make the

determination that Mr. Henry received the $1,623,203 settlement

payment from du Pont as damages for personal injury.   To the

contrary, it was Mr. Henry who informed Mr. Gargiulo about the

character of that payment.   On the instant record, petitioner has

failed to show that he provided correct information to Mr.

Gargiulo, his return preparer, and that the failure to include
                               - 57 -


the $1,623,203 settlement payment in petitioner's 1994 tax return

was the result of Mr. Gargiulo's error.    On that record, we

further find that petitioner's reliance on Mr. Gargiulo was not

reasonable and that he did not act in good faith in relying on

him.

       We now address petitioner's contention that the state of the

law was such when he filed his 1994 tax return in October 1995

that his position to exclude the payments at issue as income from

that tax return was reasonable.   We disagree.   The Supreme Court

decided both United States v. Burke, 504 U.S. 229 (1992), and

Commissioner v. Schleier, 515 U.S. 323 (1995), before petitioner

filed his 1994 tax return.    In both of those cases, the Supreme

Court explained the requirements prescribed by section 104(a)(2)

that damages be received "on account of personal injuries or

sickness."    We have found on the instant record that petitioner

has failed to establish (1) that the $1,623,203 settlement

payment which he received from du Pont during 1994 was received

on account of the loss of his business reputation or the loss of

his reputation as an orchid grower and (2) that such losses

constitute personal injuries within the meaning of section

104(a)(2).    We have also found that du Pont issued Form 1099-MISC

for the $2,800,000 total settlement amount to Fred Henry's

Paradise of Orchids and its attorneys in the lawsuit.
                             - 58 -


     On the record before us, we find that petitioner has failed

to show that there was reasonable cause and that he acted in good

faith when he did not report the $1,623,203 settlement payment as

income in his 1994 tax return.7

     We have considered all of the contentions and arguments of

petitioner that are not addressed herein, and we find them to be

without merit and/or irrelevant.

     To reflect the foregoing and the concessions of the parties,

                                        Decision will be entered

                                   under Rule 155.




     7
      We find no basis whatsoever on the record before us for
petitioner's position that the entire $1,623,203 settlement
payment was paid to him on account of the loss of his business
reputation and the loss of his reputation as an orchid grower.
