                        T.C. Memo. 1999-17



                      UNITED STATES TAX COURT



             ABRAHAM AND DINA WEISS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23567-95.                    Filed January 28, 1999.



     Abraham and Dina Weiss, pro sese.

     Rosemary D. Camacho, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined deficiencies and an

addition to tax with respect to petitioners’ Federal income taxes

as follows:
                                - 2 -


                                        Addition to Tax
         Year        Deficiency           Sec. 6653(a)

         1976          $5,635                  ---
         1977           8,100                  ---
         1978           7,258                 $363

Respondent has also determined that petitioners are liable for

increased interest on underpayments attributable to a tax-

motivated transaction as defined in section 6621(c).1

     After concessions, the issues for decision are:      (1) Whether

the Oshtemo-Kalamazoo Associates partnership (Oshtemo-Kalamazoo),

in which petitioner Abraham Weiss was a general partner, engaged

in a cable television activity for profit, with the result that

petitioners should be allowed to claim their proportionate share

of the losses and investment tax credits generated by that

activity for the years in issue; (2) whether petitioners failed

to establish their ownership interests in the partnership, so as

to be entitled to the deductions or credits in question, or

whether the transactions were instead shams, devoid of substance;

(3) whether respondent may disallow the losses from Oshtemo-

Kalamazoo claimed as deductions on petitioners' tax returns for

the taxable years 1976, 1977, and 1978 without proof that

adjustments were made to the partnership returns of Oshtemo-

Kalamazoo; (4) whether petitioners are liable for the negligence

addition to tax pursuant to section 6653(a) for the taxable year


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 3 -


1978; and (5) whether petitioners are liable for increased

interest on the deficiencies, if any, pursuant to section

6621(c).

                         FINDINGS OF FACT2

     At the time petitioners filed their petition herein, they

were residents of Brooklyn, New York.    During the taxable years

1976, 1977, and 1978, petitioner Abraham Weiss was employed as a

certified public accountant.   He has substantial experience in

preparing tax returns.   During the same years, he was also a

general partner in Oshtemo-Kalamazoo, a partnership involved in a

cable television activity.   Before he became a general partner in

Oshtemo-Kalamazoo, petitioner Abraham Weiss' only experience in

the cable television industry arose from providing accounting

services for clients in that industry.   He prepared the tax

returns for Oshtemo-Kalamazoo for the years in issue.   At the

time of trial, petitioners had no documents, such as bank records

or other business records, relating to Oshtemo-Kalamazoo, nor

were they able to locate witnesses other than Mr. Weiss himself

who could testify regarding their investment in Oshtemo-Kalamazoo

and his becoming a general partner therein.

     Oshtemo-Kalamazoo issued a note to acquire a cable

television system in 1976.   The note was nonrecourse, and

petitioners did not have personal liability on the note.


     2
       Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
                               - 4 -


Oshtemo-Kalamazoo did not ask the limited partners to make any

cash investments during the years in issue.

     Petitioners filed joint Federal income tax returns for their

taxable years 1976, 1977, and 1978 on which they claimed losses

from Oshtemo-Kalamazoo in the amounts of $12,234, $10,462, and

$8,012, respectively.   They also claimed a share, in the amount

of $1,950, of an investment tax credit relating to Oshtemo-

Kalamazoo for the taxable year 1976.

     In 1985, Acton CATV, Inc. (Acton CATV), as part of a joint

venture agreement, assumed all partnership obligations of

Oshtemo-Kalamazoo.   Acton CATV agreed to indemnify petitioner

Abraham Weiss for any partnership obligations incurred by

Oshtemo-Kalamazoo.

     During respondent's audit of the partnership returns,

petitioners agreed to extensions of the period of limitations.

In the notice of deficiency, issued August 18, 1995, respondent

disallowed the losses claimed by petitioners on their tax returns

for the taxable years 1976, 1977, and 1978 relating to Oshtemo-

Kalamazoo.   Respondent also determined that petitioners’ claim to

the $1,950 share of an investment tax credit relating to Oshtemo-

Kalamazoo for the taxable year 1976 should be disallowed.

     The petition in this case was filed on November 13, 1995.

Respondent filed a request for admissions, with service upon

petitioners, on December 20, 1996.     Petitioners filed no

response, and the matters in respondent's request were deemed

admitted, pursuant to Rule 90(c).    On February 4, 1997, the Court
                                 - 5 -


issued an order in response to respondent's earlier filed

motions, requiring petitioners, by February 18, 1997, to produce

requested documents and to respond to respondent's

interrogatories.   The Court held in abeyance respondent's motion

for sanctions regarding petitioners' failure to respond to the

discovery requests.

     Petitioners, however, filed no response to the request for

production of documents.   They did not provide answers to

interrogatories or respond to the request for admissions until

March 12, 1997, 5 days before trial.

     When the case was called on March 18, 1997, respondent

agreed to the Court's vacating petitioners' deemed admissions, in

view of petitioners’ submission, albeit tardy, of responses to

those requests for admissions.    Additionally, based upon

petitioners' representations that they had no documents in

response to respondent's request for production of documents,

respondent agreed to abandon that part of the earlier filed

motion that sought sanctions relating to the request for

production of documents.   Respondent continued to seek sanctions

for petitioners’ untimely filing of responses to interrogatories.

In response to the motion for sanctions, the Court agreed to bar

petitioners' testimony covering matters that would have been

addressed in timely responses to interrogatories, pursuant to

Rule 104(c).   Before excluding such testimony, however, the Court

required respondent to demonstrate, in each instance, not only

that the proffered testimony involved information sought in the
                                 - 6 -


interrogatories, but also that petitioners' failure to produce

that information had prejudiced respondent's ability to prepare

for trial.   At trial the Court sustained respondent's objections

to proffered testimony with respect to two interrogatories--one

relating to the specific amount of time petitioner Abraham Weiss

spent working on Oshtemo-Kalamazoo's business affairs, and the

other relating to specific information regarding Acton CATV's

entry into the partnership business.      The Court overruled another

objection relating to Mr. Weiss' testifying about the specific

duties he performed for Oshtemo-Kalamazoo during the years in

issue.   The latter ruling was based upon Mr. Weiss'

representation that he had earlier revealed such information to

one of respondent's counsel.

     The parties filed seriatim briefs.     Petitioners’ reply brief

asserted, for the first time in these proceedings, that

respondent had lost their documentary records relating to the

matters at issue.   Respondent then sought, and was granted,

permission to file a supplemental brief addressing the asserted

loss of petitioners' records.    Following submission of that

brief, Mr. Weiss sent to the Court a letter in which he further

discussed the issue of respondent's alleged loss of petitioners'

records.

                                OPINION

     Respondent's statutory notice of deficiency disallowed

petitioners' claimed distributive share of "all income, losses,

deductions and tax credits" from Oshtemo-Kalamazoo.     Respondent
                               - 7 -


grouped the reasons for disallowance into three general

categories.   The first is petitioners' asserted failure to

demonstrate that Oshtemo-Kalamazoo was an activity entered into

for profit.   Respondent accordingly disallowed the claimed

deductions for failure to meet the requirements of sections 162,

212, and 183.

     Alternatively, respondent contended that petitioners did not

establish the requisite ownership interest in the Oshtemo-

Kalamazoo program; instead, respondent determined that the

Oshtemo-Kalamazoo transactions were shams or lacked substance.

Finally, respondent determined that petitioners had not

established the cost or basis of assets amortized by the

partnership and that the cost used "was unreasonable and

excessive and was not incurred for the stated purpose and that

the assets have an indeterminate useful life."

     Petitioners bear the burden of proof on all pertinent items.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).     All

claimed deductions and credits are matters of legislative grace

and must have a basis in the statute.   New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).   We are not required to find that

petitioner Abraham Weiss’ self-serving testimony meets that

burden.   Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).    Even

if respondent does not present contradictory evidence, we may

still find, on the basis of the record, that petitioners’

evidence falls short of meeting their burden of proof.     Fleischer
                               - 8 -


v. Commissioner, 403 F.2d 403, 406 (2d Cir. 1968), affg. T.C.

Memo. 1967-85.

Profit Objective

     Section 162 allows the deduction of ordinary and necessary

expenses incurred in carrying on a trade or business.    An

activity qualifies as a trade or business capable of generating

deductions under section 162 only if the taxpayer engaged in the

activity with the intention of making a profit.     Brook, Inc. v.

Commissioner, 799 F.2d 833, 838 (2d Cir. 1986), affg. T.C. Memo.

1985-462.   Section 212 allows a deduction for expenses incurred

in transactions entered into for profit, although the activities

do not amount to a trade or business.

     Section 183 allows a deduction for activities not motivated

by profit, but it subjects such deductions to a variety of

limitations.   Section 183(a) first permits deductions of items

that, by their terms, are not dependent upon a profit motive,

such as certain deductions for interest or taxes.    Section

183(b)(1) also allows deductions which would otherwise be

permitted only if the activity was engaged in for profit.

Section 183(b)(2), however, limits these latter deductions to the

amount by which the gross income exceeds the deductions that are

not dependent upon a profit motive.

     In addition to the deductions disallowed, respondent

disallowed a claimed investment tax credit.   Section 38 permits a

credit against Federal income taxes, allowable as a percentage of

an investment in "section 38 property".   This is generally
                                 - 9 -


tangible personal property that is subject to the allowance for

depreciation.   Sec. 48(a)(1).   Depreciation is allowable on

property subject to wear and tear or obsolescence and used in a

trade or business or for the production of income.    Sec. 167(a).

The credit is limited to a percentage of a taxpayer's "qualified

investment" in such property.    Qualified investment is a

percentage of basis, and basis is generally cost.    Secs. 46(c),

1011.

     As the foregoing discussion indicates, common to the tax

benefits claimed--whether deductions or credits--is the

requirement that the activity at issue be a trade or business or

a transaction otherwise entered into for profit.    If this

requirement is not met, section 183 limits deductions to the

amount of income from the activity, and no investment tax credits

are allowed.    Soriano v. Commissioner, 90 T.C. 44, 52-53 (1988).

     Section 183(c) defines an activity which is "not engaged in

for profit" as "any activity other than one with respect to which

deductions are allowable for the taxable year under section 162

or under paragraph (1) or (2) of section 212."    Deductions under

section 162 or 212(1) or (2) require the "actual and honest

objective of making a profit."     Dreicer v. Commissioner, 78 T.C.

642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir.

1983).   Profit means economic profit independent of tax savings.

Antonides v. Commissioner, 91 T.C. 686, 694 (1988), affd. 893

F.2d 656 (4th Cir. 1990).   Although the expectation of making a

profit need not be reasonable, the facts and circumstances must
                               - 10 -


indicate that the taxpayer entered into the activity, or

continued it, with the actual and honest objective of making a

profit.   Id.; Dreicer v. Commissioner, supra at 645; sec. 1.183-

2(a), Income Tax Regs.

     Whether a taxpayer has an actual and honest profit objective

is decided on the basis of all surrounding circumstances.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(b), Income

Tax Regs.   In making our determination, we give greater weight to

objective factors than to a taxpayer's statement of intent.

Dreicer v. Commissioner, supra at 645; sec. 1.183-2(a), Income

Tax Regs.

     Partnership activities present special considerations in

determining whether they are entered into for profit.

"Partnerships are mere formal entities.    Obviously, they do not

have independent minds of their own."     Fox v. Commissioner, 80

T.C. 972, 1007 (1983), affd. without published opinion 742 F.2d

1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner, 731

F.2d 230 (4th Cir. 1984), affd. without published opinions sub

nom. Hook v. Commissioner, Kratsa v. Commissioner, Leffel v.

Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner,

734 F.2d 5-9 (3d Cir. 1984).   In determining partnership intent,

we often focus on the actions taken by the general partner.

Finoli v. Commissioner, 86 T.C. 697, 722 (1986).

     Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of objective factors to be considered in

deciding whether an activity is engaged in for profit.     Allen v.
                              - 11 -


Commissioner, 72 T.C. 28, 33-34 (1979).    The factors are:    (1)

The manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or the taxpayer's advisers; (3) the

time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other similar activities; (6) the taxpayer's history

of income or loss with respect to the activity; (7) the amount of

occasional profits, if any, which are earned; (8) the financial

status of the taxpayer; and (9) whether elements of personal

pleasure or recreation are involved.

     Petitioners have offered little, if any, evidence regarding

most of these factors.   They have not shown that petitioner

Abraham Weiss, in his capacity as a general partner, carried on

his activities in a businesslike manner.    Nor, despite

respondent's repeated requests, have petitioners brought forward

any books and records relevant to the activity; nor is there any

proof that any such books and records were properly maintained.

Notwithstanding Mr. Weiss' role as the general partner of a

partnership that owned a cable television operation, he has

demonstrated no expertise in the cable television field, other

than making vague representations that he provided accounting

services to cable television customers.    Nor is there direct

evidence that the operation of Oshtemo-Kalamazoo was guided by

anyone with demonstrated expertise or knowledge of the cable

television industry.
                               - 12 -


     Mr. Weiss has represented that he spent adequate time with

the Oshtemo-Kalamazoo undertaking, but we have no basis to accept

his representations.   When respondent sought information

pertaining to this issue pursuant to this Court's discovery

rules, Mr. Weiss failed to provide that information, despite this

Court's order that he do so, to the prejudice of respondent's

preparation of a defense as to this issue.   Accordingly, on

respondent's motion, we prohibited Mr. Weiss from introducing

further evidence as to the time spent in this activity, pursuant

to Rule 104(c)(2).

     We did permit Mr. Weiss to testify that, as general partner

for Oshtemo-Kalamazoo, he was actively involved in negotiations

relating to acquisition of equipment, negotiations for the

broadcast of programs and related materials, logistics, contacts

with the municipality, environmental analysis and studies, and

day-to-day administration.   He did not, however, "manage" the

system.   Management was instead handled by a management "team".

The degree of Mr. Weiss' involvement is, ultimately, unclear.

     Petitioners also failed to provide any specifics as to the

nature of the Oshtemo-Kalamazoo assets acquired or their value.

They have not provided any basis for concluding that such assets

would appreciate in value.   Petitioners do, however, assert that

Acton CATV's acquisition of the cable television activity in 1985

is an indication that it was a profitable operation.   We decline

to follow that reasoning.    The fact that Acton CATV acquired the
                              - 13 -


business does not impute a profit motive to its previous owners.

See Finoli v. Commissioner, supra at 716-718, 726.

     Additionally, other than Mr. Weiss' representation that he

provided accounting services for unspecified other cable

television clients, there is no basis to assume that petitioners

have ever had any particular success in similar or dissimilar

activities.

     The scant evidence presented indicates that petitioners

earned no profits whatsoever from their Oshtemo-Kalamazoo

activities; they only incurred losses.   Petitioners' tax returns

indicate that they used these losses to offset taxable income

generated by Mr. Weiss' unrelated activities.   Finally, although

we doubt that considerations of personal pleasure entered into

petitioners' decision to engage in cable television activity, the

absence of such considerations does not appreciably aid

petitioners' attempt to demonstrate a profit objective in that

activity.

     Petitioners ultimately have failed to produce evidence

showing that the Oshtemo-Kalamazoo activities were entered into

with the requisite profit motive.   Accordingly, we sustain

respondent’s determination on this issue.

Economic Substance

     Respondent has also disallowed the claimed loss deductions

because of petitioners' asserted failure to show the necessary

attributes of ownership required to claim the Oshtemo-Kalamazoo

assets.   Instead, respondent asserts the partnership activities
                                - 14 -


were a sham and lacked economic substance.     A transaction is

without its intended effect for Federal income tax purposes if it

is devoid of economic substance consonant with its intended tax

effects.   Frank Lyon Co. v. United States, 435 U.S. 561, 573

(1978); Knetsch v. United States, 364 U.S. 361, 364 (1960).       The

substance of the transaction, not its form, determines its tax

consequences.    The transaction must have economic substance which

is "compelled or encouraged by business or regulatory realities,

is imbued with tax-independent considerations, and is not shaped

solely by tax-avoidance features that have meaningless labels

attached".     Frank Lyon Co. v. United States, supra at 583-584;

Estate of Thomas v. Commissioner, 84 T.C. 412 (1985); Hilton v.

Commissioner, 74 T.C. 305 (1980), affd. per curiam 671 F.2d 316

(9th Cir. 1982).

     The test for economic substance is based on objective

factors.     We take into account whether the taxpayer acquired a

bona fide equity interest in the property and whether the

taxpayer had a reasonable opportunity for economic success.       Levy

v. Commissioner, 91 T.C. 838, 856 (1988); Packard v.

Commissioner, 85 T.C. 397, 417 (1985).     We have found the

following factors to be particularly important in determining

whether a transaction possesses economic substance:     The presence

or absence of arm's-length price negotiations, Helba v.

Commissioner, 87 T.C. 983, 1005-1007 (1986), affd. without

published opinion 860 F.2d 1075 (3d Cir. 1988); the relationship

between the sale price and the fair market value, Zirker v.
                              - 15 -


Commissioner, 87 T.C. 970, 976 (1986); the structure of the

financing, Helba v. Commissioner, supra at 1007-1011; whether

there was a shifting of the burdens and benefits of ownership,

Rose v. Commissioner, 88 T.C. 386, 410 (1987), affd. 868 F.2d 851

(6th Cir. 1989); the degree of adherence to contractual terms,

Helba v. Commissioner, supra at 1007-1011; and the reasonableness

of the income projections, Rice's Toyota World, Inc. v.

Commissioner, 81 T.C. 184, 204-207 (1983), affd. in part, revd.

in part and remanded 752 F.2d 89 (4th Cir. 1985).

     Petitioners presented no pertinent evidence regarding their

equity in Oshtemo-Kalamazoo or the prospect of economic success

beyond very conclusory assertions that Mr. Weiss thought that

investing in a cable television system would be profitable.    They

gave no hint as to the content or nature of any negotiations

employed in acquiring the property, nor did they establish the

sale price or the actual value of the assets at issue.    As to the

structure of the financing, we are told only that Oshtemo-

Kalamazoo issued a note to acquire a cable television system in

1976.   The note was nonrecourse, and petitioner Abraham Weiss did

not have personal liability on the note.   This information is not

particularly instructive as to the issue of profit objective.

     Petitioners have given us no specifics as to any shifting of

the burdens and benefits of ownership, except for our being told

that an entity named Acton CATV acquired the assets some years

after those in issue.   Nor have they provided information

regarding the degree of adherence to contractual terms or the
                               - 16 -


reasonableness of the income projections, if any--other than Mr.

Weiss' assurances to us that he thought that Oshtemo-Kalamazoo

had a tremendous “upside” potential.    In sum, petitioners'

evidence falls far short of demonstrating that the Oshtemo-

Kalamazoo program possessed the economic substance needed to

support the tax deductions and credits at issue.    We sustain

respondent's determination as to this issue.

Bases of Amortizable Assets

       The Internal Revenue Code permits taxpayers to claim

deductions for amortization in specific situations, for example,

the amortization of the cost of acquiring a lease under section

178.    Section 1016 requires adjustments to basis with respect to

amounts deducted as amortization expenses.    Petitioners have

provided no evidence with respect to the bases or costs of assets

amortized by Oshtemo-Kalamazoo.    We therefore have no cause to

question respondent's disallowance of amortization deductions.

Examination of Partnership Return

       On brief, petitioners attack respondent's disallowance by

insisting that respondent disallowed the losses and credits

claimed on their returns without initially making adjustments to

the partnership Federal income tax returns.    Even if true,

petitioners' assertion does not avail them here.    A trial before

this Court is a proceeding de novo, and our determination as to

petitioners' tax liability must be based on the merits of the

case and not on any record developed at the administrative level.

Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 328
                              - 17 -


(1974).   The question whether respondent made adjustments to the

partnership Federal income tax returns before issuing the notice

of deficiency to petitioners is thus irrelevant here.   As noted

above, petitioners have the burden of proving to this Court that

they are not liable for the determined deficiencies.    When they

fail to meet this burden, as they have done here, we will sustain

a deficiency notice disallowing a partnership loss even though

the audit of the partnership was not yet final.    Chaum v.

Commissioner, 69 T.C. 156, 163-164 (1977).3

     Petitioners also argue that there is a presumption that

business deals take place at arm’s length.    They conclude that,

because respondent has not disproved their claims that the

Oshtemo-Kalamazoo transactions were conducted at arm’s length,

their Oshtemo-Kalamazoo transactions are presumptively valid and

must be accepted for purposes of Federal income taxation.

Petitioners again fail to recognize that it is their burden, and

not respondent’s, to prove each fact needed to substantiate the


     3
       For taxable years beginning after Sept. 3, 1982, the
Internal Revenue Code provides for determining the tax treatment
of items of partnership income, loss, deductions, and credits at
the partnership level in a unified partnership proceeding rather
than in separate proceedings with the partners, pursuant to the
audit and litigation procedures of the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),
96 Stat. 324, 648. Partnership items include each partner's
proportionate share of the partnership's aggregate items of
income, gain, loss, deduction, or credit. Sec. 6231(a)(3); sec.
301.6231(a)(3)-1(a)(1)(i), Proced. & Admin. Regs. These
provisions, however, are effective only for partnership taxable
years beginning after Sept. 3, 1982. See TEFRA sec. 407(a)(1),
96 Stat. 670. Accordingly, they are not in effect for the years
here at issue.
                              - 18 -


deductions and credits at issue and their right to claim them.

See Rule 142(a).4   They have not done so here.

Asserted Loss of Records

     In their reply brief, petitioners assert, for the first time

in these proceedings, that after they had provided respondent

with their only records of the Oshtemo-Kalamazoo activity,

respondent never returned them.   They argue that their failure to

substantiate their right to the deductions and credits at issue

can be traced to the claimed loss of these records by respondent.

Citing Andrew Crispo Gallery, Inc. v. Commissioner, 16 F.3d 1336

(2d Cir. 1994), affg. in part, vacating and remanding in part

T.C. Memo. 1992-106, petitioners contend that, because respondent

lost their records, they are entitled to a presumption that their

records would support their contention that they had an adequate

profit motive for engaging in the Oshtemo-Kalamazoo activity.5

     4
       We note that recent modifications to the burden of proof
requirements in court proceedings are inapplicable here, as the
examination in this case commenced before July 22, 1998. See
sec. 7491, as added by the Internal Revenue Service Restructuring
and Reform Act of 1998 (RRA), Pub. L. 105-206, sec. 3001(a), 112
Stat. 685, 726-727; see also RRA sec. 3001(c), 112 Stat. 727.

     5
       Our practice is not to consider new issues raised for the
first time on reply brief. See Rules 31(a), 41(a); Krause v.
Commissioner, 99 T.C. 132, 177 (1992), affd. sub nom. Hildebrand
v. Commissioner, 28 F.3d 1024 (10th Cir. 1994); DiLeo v.
Commissioner, 96 T.C. 858, 891 (1991), affd. 959 F.2d 16 (2d Cir.
1992). In view of petitioners' pro se status and the nature of
the issue, however, we have exercised our discretion to permit
further briefing with respect to petitioners' assertion that
respondent has lost their records. In this regard, we have
decided to file and consider petitioner Abraham Weiss’ letter
that addresses arguments made in respondent's "Brief in Response
                                                   (continued...)
                                 - 19 -


         We disagree.   The general rule applicable to a party having

the burden of proof is that a loss of records may preclude

proving a material fact.      In Burnet v. Houston, 283 U.S. 223, 228

(1931), the Supreme Court explained:      “The impossibility of

proving a material fact upon which the right to relief depends

simply leaves the claimant upon whom the burden rests with an

unenforceable claim, a misfortune to be borne by him, as it must

be borne in other cases, as the result of a failure of proof.”

     The Court of Appeals for the Second Circuit, in Andrew

Crispo Gallery, Inc. v. Commissioner, supra, acknowledged that

principle, but the majority of the Court of Appeals panel

deciding that case determined that a different rule must apply

when the Government itself is responsible for the taxpayer's

inability to produce documentary evidence.      In such a case, the

majority considered two modifications to the holding of Burnet v.

Houston, supra, appropriate:

     First, where the taxpayer’s records have been seized
     and lost by the government, the trier should at least
     be permitted to infer that the true facts are as
     alleged by the taxpayer to be set forth in the
     documents seized and lost. Second, in those instances
     where the taxpayer can offer credible evidence that the
     seized and lost record was properly maintained by the
     taxpayer, prior to seizure, and accurately reflected
     the facts that the taxpayer alleges it purports to
     reflect, the taxpayer is entitled to a presumption that
     the record would so reflect those alleged facts. * * *
     [Andrew Crispo Gallery, Inc. v. Commissioner, supra at
     1343-1344.]


     5
      (...continued)
to Petitioners' Reply Brief". Cf. Ware v. Commissioner, 906 F.2d
62, 65-66 (2d Cir. 1990), affg. T.C. Memo. 1989-165.
                              - 20 -


In any event, however, "the ultimate burden of persuasion as to

entitlement to a deduction would remain on the taxpayer."      Id. at

1344.

     The Court of Appeals’ holding does not aid petitioners in

this case.   First, we do not accept petitioners' claims that

respondent is responsible for their failure to produce documents

relating to the Oshtemo-Kalamazoo activity.    During the

development of this case, petitioners steadfastly ignored

respondent's valid requests for the production of documents.     At

the beginning of trial, they conceded that they did not have the

records requested, and respondent agreed to rescind the demand

for sanctions.   At no time before trial did petitioners state

that their inability to produce relevant documents was due to

respondent's loss of those records.    During the trial itself, Mr.

Weiss frequently argued that, during the audit process, he had

presented respondent with records relevant to the Oshtemo-

Kalamazoo activity.   Even then, Mr. Weiss did not assert that

respondent had retained, and possibly lost, their records.     The

failure to make such an assertion persisted in petitioners'

opening brief.   It was not until their reply brief--which, in the

normal course, would have been the last document submitted in the

case--that petitioners made such a charge.    Mr. Weiss is a

certified public accountant who has testified as to his

familiarity with respondent's audit processes.    He was certainly

aware of the importance of relevant documentary evidence in this

case.   If petitioners believed in good faith that respondent was
                                - 21 -


responsible for preventing their production of such documentary

evidence, they would not have waited until their reply brief to

say so.

     Moreover, even if respondent had lost petitioners' records,

we still would not hold for petitioners.    Rule 1004 of the

Federal Rules of Evidence provides that secondary evidence of a

"writing, recording, or photograph" is admissible if the original

is unintentionally lost.    This rule alters the type of evidence

that may be admissible.    As the Court of Appeals recognized in

Andrew Crispo Gallery, Inc. v. Commissioner, supra, however, the

rule does not affect petitioners' burden of persuading the Court

as to the existence of asserted facts.    See Malinowski v.

Commissioner, 71 T.C. 1120, 1125 (1979).    The Court of Appeals’

holding in Andrew Crispo Gallery still leaves petitioners both

with the burden of establishing a basis for us to infer that the

missing records contain the facts as alleged by them and with the

requirement of producing credible evidence that the missing

records were properly maintained and accurately reflected the

facts as alleged.   The record before us--consisting of Mr. Weiss'

vague and self-serving testimony--establishes neither.     Andrew

Crispo Gallery does not provide taxpayers entitlement to

otherwise unsubstantiated deductions or credits based on the bare

assertion that their records have been lost by the Government,

without further proof.     See Rodman v. Commissioner, 542 F.2d 845,

853-854 (2d Cir. 1976), affg. in part, revg. in part and
                              - 22 -


remanding T.C. Memo. 1973-277.   Here, petitioners have provided

no such further proof.

Delay of Deficiency Notice

     In evaluating the evidence, we have remained cognizant of

the long period of time between the last of the taxable years in

issue, 1978, and the August 18, 1995, date that respondent mailed

the statutory notice of deficiency to petitioners.     Before trial,

however, petitioners stipulated that they did not contest whether

the statutory period of limitations for assessing the

deficiencies at issue has expired.     Mr. Weiss subsequently

testified that he had executed documents extending indefinitely

the time within which respondent might determine and assess taxes

for the years at issue.   He has made no showing that he sought to

terminate these extensions.   Accordingly, even if the issue of

delay were properly before us, petitioners would not prevail.

The appellate venue for this case would be the Court of Appeals

for the Second Circuit, which has stated:     "the rule in this

circuit * * * is that a long delay will not vitiate an indefinite

extension absent notice from the taxpayer that he desires to

bring the extension to a close."     Stenclik v. Commissioner, 907

F.2d 25, 28 (2d Cir. 1990), affg. T.C. Memo. 1989-516; see also

Mecom v. Commissioner, 101 T.C. 374, 392 (1993) (“‘A deal is

after all a deal, and fairness dictates that both parties adhere

to the provisions of the document they both voluntarily signed.’”
                              - 23 -


(quoting Grunwald v. Commissioner, 86 T.C. 85, 89 (1986))), affd.

without published opinion 40 F.3d 385 (5th Cir. 1994).6

Addition to Tax and Increased Interest

     Section 6653(a) imposes additions to tax where the taxpayer

has acted negligently or with intentional disregard of rules and

regulations.   Petitioners bear the burden of proof on this issue.

Rule 142(a); Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

     Petitioner Abraham Weiss is a certified public accountant

who has testified to substantial experience in preparing tax

returns.   If there were convincing evidence available that

petitioners neither negligently nor intentionally disregarded the

applicable rules and regulations, Mr. Weiss, as an accountant,

plainly knew the importance of producing it.   Petitioners failed

to adduce such evidence.   We accordingly hold that they

intentionally or negligently failed to follow rules and

regulations and that they are chargeable with the addition to tax

under section 6653(a).

     Section 6621(c) (formerly section 6621(d)) provides for an

increase in the interest rate where there is a substantial

underpayment (i.e., one that exceeds $1,000) in any taxable year


     6
       The petition claims that the delay in sending the notice
of deficiency is respondent's fault, and it asserts that interest
that has accrued on the deficiencies should be abated pursuant to
sec. 6404(e). Consideration of petitioners’ request for
abatement of interest is premature, however, as there has been
neither an assessment of interest nor a final determination by
respondent not to abate the interest. See sec. 6404(e), (g), as
currently in effect; see also Bourekis v. Commissioner, 110 T.C.
20, 26 (1998).
                              - 24 -


in which the underpayment is "attributable to 1 or more tax

motivated transactions".   Sec. 6621(c)(2).   Temporary regulations

adopted pursuant to section 6621(c)(3))(B), which are applicable

to interest accruing after December 31, 1984, state that "Any

deduction disallowed for any period under section 183" is subject

to the provision for additional interest set forth in section

6621(c).   Sec. 301.6621-2T, A-4(1), Temporary Proced. & Admin.

Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984).    Here, respondent has

explicitly determined that the deductions at issue are disallowed

under section 183.   Petitioners have not shown that

determination to be erroneous.   Respondent is therefore entitled

to additional interest after December 31, 1984, on the portion of

the deficiencies for 1976, 1977, and 1978 attributable to the

disallowed deductions.

     To give effect to concessions,



                                           Decision will be entered

                                      under Rule 155.
