                        T.C. Memo. 1996-271



                      UNITED STATES TAX COURT



                ROBERT D. SPARROW, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                 N. LARAE SPARROW, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 7127-94, 7128-94.              Filed June 12, 1996.



     Robert D. Sparrow and N. LaRae Sparrow, prosese.

     Fred E. Green, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Robert D. Sparrow (Mr. Sparrow) and N. LaRae

Sparrow (Mrs. Sparrow) separately petitioned the Court to

redetermine respondent’s determinations with respect to their

1986, 1987, and 1988 Federal income taxes.    Respondent made a

separate determination for Mr. Sparrow and a separate
                                      - 2 -

determination for Mrs. Sparrow, and respondent reflected each of

these determinations in separate notices of deficiency.

Respondent determined the following deficiencies in, and

additions to, petitioners’ taxes:

Robert D. Sparrow, docket No. 7127-94

                                        Additions to Tax
                           Sec.                Sec.             Sec.
Year     Deficiency      6653(b)(1)       6653(b)(1)(A)         6661

1986        $12,742         ---               $9,557        $3,186
1987         71,509         ---               53,632        17,877
1988         49,835        $37,376              ---         12,459

N. LaRae Sparrow, docket No. 7128-94

                                    Additions to Tax
                                 Sec.             Sec.
Year     Deficiency           6651(a)(1)          6661

1986        $12,742             $3,186                 $3,186
1987         71,742               ---                  17,877
1988         49,835             12,459                 12,459

Respondent also determined that Mr. Sparrow was liable for the

addition to tax under section 6653(b)(1)(B) on the entire

deficiency for 1986 and 1987, and that petitioners were liable

for increased interest under section 6621(c) on the entire

deficiency in each year.

       Following a consolidation of the cases, we must decide:

       1.    Whether petitioners underreported their gross income for

1986, 1987, and 1988, by failing to report proceeds from the

sales of stock.       We hold they did.

       2.    Whether petitioners failed to report $10,000 in

consulting fees received by Mr. Sparrow in 1986, and, if they
                               - 3 -

did, whether this amount is subject to self-employment tax.

We hold they did, and it is.

     3.   Whether petitioners are liable for the additions to tax

for substantial understatements determined by respondent under

section 6661.   We hold they are.

     4.   Whether Mrs. Sparrow is liable for the additions to her

1986 and 1988 taxes for delinquency determined by respondent

under section 6651(a)(1).   We hold she is.

     5.   Whether Mr. Sparrow is liable for the additions to tax

for fraud determined by respondent under section 6653(b).    We

hold he is not.

     6.   Whether petitioners are liable for the increased rate of

interest determined by respondent under section 6621(c) for

substantial underpayments attributable to tax motivated

transactions.   We hold they are not.

     Unless otherwise stated, section references are to the

Internal Revenue Code in effect for the taxable years in issue.

Rule references are to the Tax Court Rules of Practice and

Procedure.   Dollar amounts are rounded to the nearest dollar.

                         FINDINGS OF FACT1

     Petitioners resided in St. George, Utah, when they

petitioned the Court.   They filed a 1986 Form 1040, U.S.


     1
       Some of the facts have been stipulated and are so found.
The stipulations and attached exhibits are incorporated herein by
this reference.
                                - 4 -

Individual Income Tax Return, on October 1988, using the status

of “Married filing joint return”.    They filed a 1987 Form 1040 on

April 15, 1988, using the status of “Married filing joint

return”.    They filed a 1988 Form 1040, on October 17, 1990, using

the status of “Married filing joint return”.    They did not

receive an extension of time to file any of these returns.

     During 1986, Mr. Sparrow owned at least 1.5 million shares

of NRG Intl., Inc. (NRG), and Mrs. Sparrow owned at least 150,000

shares of NRG.

     During 1986, petitioners sold to the husband of Dorothy S.

Hall, 10,000 shares of NRG for $2,000.    Mr. Sparrow received a

$2,000 check from Mrs. Hall, dated February 22, 1986, which was

payable to “Bob Sparrow”.    Petitioners did not include this

$2,000 in their 1986 gross income.

     On July 10, 1986, Mr. Sparrow sold to Norman C. Hall, 10,000

shares of NRG for $500.   Petitioners received a $500 check from

Mr. Hall, dated July 10, 1986, which was made payable to “Bob

Sparrow”.   The $500 was gain from the sale of stock.   Petitioners

did not include this $500 in their 1986 gross income.

     During 1986, Mr. Sparrow sold to Stanley L. Evans some

shares of NRG for $11,800.    Mr. Sparrow received a $11,800 check

from Mr. Evans, dated July 21, 1986, which was payable to “Bob

Sparrow”.   Petitioners did not include this $11,800 in their 1986

gross income.
                               - 5 -

     During 1986, Mr. Sparrow maintained a stock account at

Anderson Bryant & Co. (Anderson Bryant).   Mr. Sparrow received a

$9,998 check from Anderson Bryant, dated August 1, 1986, which

was payable to “Robert D. Sparrow”.    Petitioners did not include

this $9,998 in their 1986 gross income.

     During 1986, the brokerage firm of Wilson-Davis & Co.

(Wilson-Davis), purchased and sold stock for petitioners.    On

August 12, 1986, Wilson-Davis sold 40,000 shares of NRG on behalf

of petitioners for $11,284, and purchased 1,300 shares of

Centurion stock on behalf of Mr. Sparrow for $985.   The cost of

the purchase was deducted from the proceeds from the sale, and

Mr. Sparrow received a $10,299 check from Wilson-Davis, dated

August 19, 1986.   Petitioners did not include the $11,284 in

their 1986 gross income.

     On August 25, 1986, Wilson-Davis sold 40,000 shares of NRG

on behalf of Mr. Sparrow for $7,020.   On August 26, 1986,

Mr. Sparrow purchased 1,000 shares of Centurion for $665, which

amount was deducted from the proceeds of the prior day’s sale.

Mr. Sparrow received a $6,354 check from Wilson-Davis dated

August 29, 1986.   Petitioners did not include this $7,020 in

their 1986 gross income.

     On September 18, 1986, Wilson-Davis sold 10,000 shares of

National Division stock on behalf of Mr. Sparrow for $557.

Mr. Sparrow received a $557 check from Wilson-Davis dated
                               - 6 -

September 25, 1986.   Petitioners did not include this $557 in

their 1986 gross income.

     On October 10, 1986, Wilson-Davis sold 30,000 shares of NRG

on behalf of Mr. Sparrow for $4,205.   On October 13, 1986,

Wilson-Davis sold 20,000 shares of NRG on behalf of Mr. Sparrow

for $3,496.   Mr. Sparrow received a $7,701 check from

Wilson-Davis dated October 20, 1986.   Petitioners did not include

this $7,701 in their 1986 gross income.

     On October 21, 1986, Wilson-Davis sold 20,000 shares of NRG

on behalf of Mr. Sparrow for $2,788.   Mr. Sparrow received a

$2,788 check from Wilson-Davis dated October 28, 1986.

Petitioners did not include this $2,788 in their 1986 gross

income.

     On October 14, 1986, Wilson-Davis sold 30,000 shares of NRG

on behalf of Mr. Sparrow for $4,205.   Mr. Sparrow received a

$4,205 check from Wilson-Davis dated October 29, 1986.

Petitioners did not include this $4,205 in their 1986 gross

income.

     On November 3, 1986, Wilson-Davis sold 20,000 shares of NRG

on behalf of Mr. Sparrow for $3,496.   Mr. Sparrow received a

$3,496 check from Wilson-Davis dated November 11, 1986.

Petitioners did not include this $3,496 in their 1986 gross

income.

     On November 6, 1986, Wilson-Davis sold 20,000 shares of NRG

on behalf of Mr. Sparrow for $3,496.   Mr. Sparrow received a
                               - 7 -

$3,496 check from Wilson-Davis dated November 13, 1986.

Petitioners did not include this $3,496 in their 1986 gross

income.

     On November 12, 1986, Wilson-Davis sold 5,000 shares of NRG

on behalf of Mr. Sparrow for $841.     Mr. Sparrow received an $841

check from Wilson-Davis dated November 20, 1986.    Petitioners did

not include this $841 in their 1986 gross income.

     On November 17, 1986, Wilson-Davis sold 20,000 shares of NRG

on behalf of Mr. Sparrow for $4,990.    Petitioners did not include

this $4,990 in their 1986 gross income.

     On November 21, 1986, Wilson-Davis sold 20,000 shares of NRG

on behalf of Mr. Sparrow for $7,490.    Petitioners did not include

this $7,490 in their 1986 gross income.

     On November 24, 1986, Mr. Sparrow received a $10,000 check

made payable to him, from H. T. Shepherd.    The $10,000 was paid

to Mr. Sparrow for consulting services.    Petitioners did not

include this $10,000 in their 1986 gross income.

     During 1987, Mr. Sparrow sold securities to individuals, and

he engaged Wilson-Davis to purchase and sell securities on his

behalf.   On August 24, 1987, Wilson-Davis sold 12,000 shares of

NRG on behalf of Mr. Sparrow for $1,994.    Mr. Sparrow received a

$1,994 check from Wilson-Davis dated August 31, 1987.

Petitioners did not include this $1,994 in their 1987 gross

income.
                              - 8 -

     On October 1, 1987, Wilson-Davis sold 50,000 shares of NRG

on behalf of Mr. Sparrow for $6,490.   Mr. Sparrow received a

$6,490 check from Wilson-Davis dated October 8, 1987.

Petitioners did not include this $6,490 in their 1987 gross

income.

     On October 7, 1987, Wilson-Davis sold 50,000 shares of NRG

on behalf of Mr. Sparrow for $5,990.   Mr. Sparrow received a

$5,990 check from Wilson-Davis dated October 19, 1987.

Petitioners did not include this $5,990 in their 1987 gross

income.

     On November 16, 1987, Wilson-Davis sold 4,500 shares of NRG

on behalf of Mr. Sparrow for $181.    Mr. Sparrow received a $181

check from Wilson-Davis dated November 23, 1987.    Petitioners did

not include this $181 in their 1987 gross income.

     On December 16, 1987, Wilson-Davis sold 10,000 shares of

Noble Corp., Inc. (Noble), on behalf of Mr. Sparrow for $370.

On December 16, 1987, Wilson-Davis sold another 9,000 shares of

Noble on behalf of Mr. Sparrow for $350.   Mr. Sparrow received a

$720 check from Wilson-Davis dated December 24, 1987.

Petitioners did not include this $720 in their 1987 gross income.

     On December 23, 1987, Wilson-Davis sold 10,000 shares of

Noble on behalf of Mr. Sparrow for $790.   Petitioners did not

include this $790 in their 1987 gross income.

     On June 15, 1987, Mr. Sparrow entered into a written

agreement with Greg Slazis (Mr. Slaziz) to “trade $230,346.00
                               - 9 -

worth of appraised gems for 767,820 shares of NRG International

Stock at .30/share.”   Pursuant to this agreement, Mr. Sparrow and

Mr. Slaziz exchanged 767,820 shares of NRG for gems valued by

Mr. Slazis at $230,346.   Petitioners did not include this

$230,346 in their 1987 gross income.

     During 1987, Mr. Sparrow transferred to Leroy J. Isaac, Jr.

2,500 shares of Noble.

     During 1987, Michael Allred (Mr. Allred) sold NRG on behalf

of petitioners.   Mr. Sparrow received a $1,750 check from

Mr. Allred, dated March 17, 1987, and payable to Mr. Sparrow.

Mr. Sparrow received a $200 check from Mr. Allred, dated

March 27, 1987, and payable to Mr. Sparrow.   Mr. Sparrow received

a $2,500 check from Mr. Allred, dated April 6, 1987, and payable

to Mr. Sparrow.   Mr. Sparrow received a $1,500 check from

Mr. Allred, dated April 22, 1987, and payable to Mr. Sparrow.

Petitioners did not include the $5,950 of aggregate proceeds from

Mr. Allred in their 1987 gross income.

     Petitioners maintained control over Noble’s bank account

during 1987.   During 1987, Mr. Sparrow sold to Gordon LaMont

shares of Noble for $900.   Mr. Sparrow received a $900 check for

this sale.

     Petitioners engaged the brokerage firm of Piper, Jaffray

& Hopwood, Inc. (Piper, Jaffray) to sell stock on their behalf

during 1987.   On January 6, 1987, Piper, Jaffray sold 1,300

shares of Centurion Mines Corp. on behalf of petitioners for
                              - 10 -

$366.   Petitioners received a $366 check from Piper, Jaffray,

dated January 7, 1987.

     Petitioners also engaged the brokerage firm of Wilson-Davis

to purchase and sell stock on their behalf during 1987.

On September 2, 1987, Wilson-Davis sold 9,000 shares of NRG on

behalf of Mrs. Sparrow for $1,484.     Petitioners received a $1,484

check from Wilson-Davis dated September 8, 1987.    The $1,484

check was petitioners' proceeds and gain from the sale of NRG,

and it should have been included in determining their 1987 gross

income.   Petitioners failed to include this $1,484 in their 1987

gross income.

     On September 21, 1987, Wilson-Davis sold 30,000 shares of

NRG on behalf of Mrs. Sparrow for $5,267.    Petitioners received a

$5,267 check from Wilson-Davis dated September 28, 1987.    The

$5,267 check was petitioners' proceeds and gain from the sale of

NRG, and it should have been included in their 1987 gross income.

Petitioners failed to include this $5,267 in their 1987 gross

income.

     On November 16, 1987, Wilson-Davis sold 22,800 shares of NRG

on behalf of Mrs. Sparrow for $959.    Petitioners received a $959

check from Wilson-Davis dated November 23, 1987.    The $959 check

was petitioners' proceeds and gain from the sale of NRG, and it

should have been included in their 1987 gross income.

Petitioners failed to include this $959 in their 1987 gross

income.
                              - 11 -

     On November 23, 1987, Wilson-Davis sold 50,000 shares of NRG

on behalf of Mrs. Sparrow for $1,843.   Petitioners received a

$1,843 check from Wilson-Davis dated December 1, 1987.     The

$1,843 check was petitioners' proceeds and gain from the sale of

NRG, and it should have been included in their 1987 gross income.

Petitioners failed to include this $1,843 in their 1987 gross

income.

     During taxable year 1988, Mr. Sparrow continued to sell

stocks and securities.   On May 26, 1988, Mr. Sparrow entered into

a second written agreement with Mr. Slaziz to “exchange appraised

gemstones for [500,000 shares of Noble worth $125,000 and 660,823

shares of NRG worth $33,041].”   Pursuant to this second

agreement, Mr. Sparrow and Mr. Slaziz exchanged the 1,160,823

shares of the above mentioned stock for gems valued at $158,154

by Mr. Slazis’ appraisal.

     During 1988, Mr. Sparrow maintained a stock account at

Securities Settlement Corp. (Securities).   On December 19, 1988,

Securities sold 403 shares of General Electric Company on behalf

of Mr. Sparrow for $18,257.

                              OPINION

     Except with respect to respondent's allegation of fraud, the

burden of proof is on petitioners to prove that respondent's

determinations set forth in the notices of deficiency are wrong.

Rule 142(a) and (b); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Respondent must prove by clear and convincing evidence
                                  - 12 -

that Mr. Sparrow is liable for the additions to tax for fraud.

Sec. 7454(a); Rule 142(b).       With these basic principles in mind,

we turn to the issues for decision.

1.   Proceeds from Sales of Stock

       Gross income includes all income from whatever source

derived, including gains derived from dealings in property.

Sec. 61(a)(3).       Respondent determined that petitioners failed to

report capital gains of $31,467, $268,968, and $177,181 for 1986,

1987, and 1988, respectively.2      Petitioners did not present any

persuasive evidence at trial to disprove this determination.

In addition, petitioners did not squarely address this issue in

their brief.       The thrust of petitioners’ position on brief is

that they have enough net operating losses (NOLs) to offset any

tax that is payable on their unreported income.3      We are

unconvinced that this is true.       Petitioners must prove their

right to deduct an NOL in any of the subject years.       United

States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235

(1955).       Petitioners must also prove the amount (if any) of an

NOL.       Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd.

       2
       For 1986, respondent determined that petitioners realized
$84,804 of long-term capital gains in 1986, rather than the
$10,127 that they reported on their 1986 Form 1040.
       3
       Section 172 allows a taxpayer to deduct an NOL for a
taxable year. The amount of the NOL deduction equals the sum of
the NOL carryovers plus NOL carrybacks to that year. Sec.
172(a). Absent an election to the contrary, an NOL for any
taxable year must first be carried back 3 years and then forward
15 years. Sec. 172(b)(1)(A), (2), and (3).
                                - 13 -

and remanded on other grounds 259 F.2d 300 (5th Cir. 1958);

Vaughan v. Commissioner, 15 B.T.A. 596 (1929).     Petitioners have

failed to meet either of these burdens.   We sustain respondent’s

determination on this issue.

2.   Service Income/Self-Employment Tax

     Respondent determined that petitioners failed to report

$10,000 of personal service income for 1986.     Respondent also

determined that this amount was subject to self-employment tax.

A self-employment tax is imposed on income in excess of $400

derived by an individual from a trade or business.     Secs. 1401,

1402(b) and (c).

     Petitioners presented no evidence on these issues, and the

record does not otherwise disprove respondent’s determination on

the issues.   We sustain respondent's determination.

3.   Substantial Understatements--Section 6661

     Section 6661 imposes an addition to tax for substantial

understatements.   The amount of the section 6661 addition to tax

for additions assessed after October 21, 1986, equals 25 percent

of the amount attributable to the substantial understatement.

Pallottini v. Commissioner, 90 T.C. 498, 500-503 (1988).     An

understatement is substantial if it exceeds the greater of

10 percent of the tax required to be shown on the return or

$5,000.   Sec. 6661(b)(1)(A).   An understatement is reduced to the

extent it is:   (1) Based on substantial authority, or (2)
                                 - 14 -

adequately disclosed in the return or in a statement attached to

the return.   Sec. 6661(b)(2).

     Petitioners have failed to meet their burden of proof on

this issue.   The record does not disprove respondent’s

determination that the understatements are substantial, and it

does not establish that any of the understatements are reduced

under section 6661(b)(2).   We sustain respondent’s determination.

4.   Delinquency--Section 6651(a)(1)

      Respondent determined an addition to tax under section

6651(a)(1) for Mrs. Sparrow’s 1986 and 1988 taxable years,

asserting that she failed to file timely Federal income tax

returns.   In order to avoid this addition to tax, Mrs. Sparrow

must prove that her failure to file was:    (1) Due to reasonable

cause and (2) not due to willful neglect.   Sec. 6651(a);

Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985);

Catalano v. Commissioner, 81 T.C. 8 (1983).    A failure to file

timely is due to reasonable cause if the taxpayer exercised

ordinary business care and prudence, and, nevertheless, was

unable to file the return within the prescribed time.     Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.    Willful neglect means a

conscious, intentional failure or reckless indifference.

United States v. Boyle, supra at 245.

      Petitioners filed their 1986 and 1988 Forms 1040 on

October 12, 1988, and October 17, 1990, respectively, and they

did so without the benefit of any extensions to the statutory
                              - 15 -

filing period.   We conclude that these returns were filed

untimely.   Because Mrs. Sparrow has also failed to prove that

either of these untimely filings was due to reasonable cause and

not due to willful neglect, we sustain respondent's

determination.

5.   Fraud--Section 6653(b)

     Respondent must meet her burden of proving fraud through

affirmative evidence; fraud is never imputed or presumed.

Beaver v. Commissioner, 55 T.C. 85, 92 (1970).     Whether fraud

exists in a given situation is a factual determination that must

be made after reviewing the particular facts and circumstances of

the case.   DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), affd.

959 F.2d 16 (2d Cir. 1992).   Respondent must show clearly that

petitioner intended to evade a tax known or believed to be owing.

Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968).

     Based on our review of the record, we are not convinced that

Mr. Sparrow is liable for fraud for any of the years in issue.4

We so hold.

6.   Increased Rate of Interest--Section 6621(c)

     Section 6621(c) applies if there is a substantial

underpayment attributable to tax-motivated transactions.     The

term “tax motivated transaction” connotes a sham or fraudulent


     4
       We find little to no value in the testimony of the two
witnesses that respondent called at trial to support her
determination.
                                 - 16 -

transaction.   Skeen v. Commissioner, 864 F.2d 93 (9th Cir. 1989);

sec. 6621(c)(3)(A)(v).   When section 6621(c) applies, the annual

rate of interest payable on the tax-motivated substantial

underpayment is increased to 120 percent of the underpayment rate

under section 6621(b).

     We find that petitioners’ underpayments were not

attributable to tax-motivated transactions.       We hold the same.

*        *         *         *            *          *         *

     We have considered all arguments made by the parties and, to

the extent not discussed above, find them to be without merit.

To reflect the foregoing,

                                              Decisions will be entered

                                      for respondent for the

                                      deficiencies, the additions to

                                      tax under sec. 6661, and, with

                                      respect to N. LaRae Sparrow,

                                      the additions to tax under

                                      sec. 6651(a)(1), and for

                                      petitioners for the increased

                                      interest under sec. 6621(c),

                                      and, with respect to Robert D.

                                      Sparrow, the additions to tax

                                      under sec. 6653(b).
