                     T.C. Memo. 1997-535



                   UNITED STATES TAX COURT



   CATHERINE CHIMBLO AND ESTATE OF GUS CHIMBLO, DECEASED,
        CATHERINE CHIMBLO, EXECUTRIX, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent

JOSEPHINE CHIMBLO AND ESTATE OF ANTHONY J. CHIMBLO, DECEASED,
          ROSALIE MONAHAN, EXECUTRIX, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent


   Docket Nos. 16546-96, 16804-96.      Filed December 3, 1997.



   Tobias Weiss, for petitioners.

   Andrew M. Winkler, for respondent.
                                     - 2 -


                             MEMORANDUM OPINION


       DINAN, Special Trial Judge:        These consolidated cases were

heard pursuant to the provisions of section 7443A(b)(3) and Rules

180, 181, and 182.1

       Respondent determined additions to petitioners' Federal

income taxes for the years as indicated:

Catherine Chimblo and Estate of Gus Chimblo, Deceased, Catherine
Chimblo, Executrix, docket No. 16546-96

Year          Sec. 6653(a)(1)        Sec. 6653(a)(2)           Sec. 6661

1980               $479                        *                  ---
1982                 60                        *                  ---
1983                619                        *                $3,097
1984                629                        *                 3,144

              *50% of the interest due on the deficiency.

Josephine Chimblo and Estate of Anthony J. Chimblo, Deceased,
Rosalie Monahan, Executrix, docket No. 16804-96

       Year        Sec. 6653(a)(1)           Sec. 6653(a)(2)

       1980               $595                      *
       1981               $334                      *

              *50% of the interest due on the deficiency.

       The issues for decision are:      (1) Whether respondent

properly notified petitioners of the underlying partnership

proceeding which led to the deficiencies upon which the additions

to tax in these cases are based; (2) whether petitioners are

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

liable for the section 6653(a) additions to tax as determined by

respondent; and (3) whether petitioners Catherine Chimblo and

Estate of Gus Chimblo are liable for the section 6661 additions

to tax for substantial understatements of income tax for 1983 and

1984.

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioner Catherine Chimblo resided

in Stamford, Connecticut, and petitioner Josephine Chimblo

resided in Cos Cob, Connecticut, on the dates their respective

petitions were filed in these cases.

     Petitioner Catherine Chimblo (Catherine) was married to Gus

Chimblo (Gus) until his death on March 22, 1988.   Petitioner

Josephine Chimblo (Josephine) was married to Anthony J. Chimblo

(Anthony) until his death on March 21, 1984.

     In December of 1983, Gus and his sister-in-law Josephine

each invested $25,000 in Barrister Equipment Associates Series

151 (the Barrister partnership).   Their respective Schedules K-1

from the Barrister partnership show their capital contributed

during 1983 as such amounts.   The investments were made on the

advice of the Chimblos' family accountant, John Santella.    Mr.

Santella died in 1996, prior to the trial in this case.   After

his death, Mr. Santella's son, John Santella Jr., acted as the

Chimblos' accountant.
                               - 4 -

     On its 1983 and 1984 returns, the Barrister partnership

claimed ordinary losses in the amounts of $848,599 and

$1,059,623, respectively, and qualified investment credit

property in the amounts of $18,809,500 and $6,110,000,

respectively.   The Barrister partnership attached disclosure

statements to its 1983 and 1984 returns which state that its sole

business was "the printing and sale of 49 different literary

works and microcomputer disks aimed at a general public market,

using leased films, plates and disks to produce said products."

     On their 1983 return, Catherine and Gus claimed an ordinary

loss in the amount of $10,477 and an investment tax credit in the

amount of $18,578 with respect to their $25,000 investment.

Since the alternative minimum tax nullified the benefit of part

of the investment tax credit for 1983, Catherine and Gus filed

amended returns for 1980 and 1982 to carry back portions of the

1983 credit to offset their previously reported tax liability for

the 1980 and 1982 taxable years.2   They also claimed an ordinary

loss in the amount of $13,083 and an investment tax credit in the

amount of $6,035 for their 1984 taxable year with respect to

their investment in the Barrister partnership.


     2
          The parties stipulated that the amounts of the
investment tax credit carrybacks for 1980 and 1982 are $9,571 and
$1,190, respectively, which differ from the amounts claimed on
the 1980 and 1982 amended returns ($4,577 and $6,184). Since we
have found no explanation in the record for these differences,
and the parties have not made any reservations to their
stipulations, we accept the amounts stipulated as correct.
                                - 5 -

     On their 1983 return, Josephine and Anthony claimed an

ordinary loss in the amount of $10,477 and an investment tax

credit in the amount of $18,578 with respect to their $25,000

investment.    Since the alternative minimum tax nullified the

entire benefit of the investment tax credit for 1983, Josephine

and Anthony filed amended returns for 1980 and 1981 to carry back

portions of the 1983 credit to offset their previously reported

tax liability for the 1980 and 1981 taxable years.

     Pursuant to the agreement of the parties in the underlying

partnership proceeding, this Court entered a stipulated decision

on February 17, 1995, which decided that the none of the losses

claimed by Barrister partnership for 1983 and 1984 were allowed

and the amounts of its qualified investment credit property for

1983 and 1984 were zero.3   Respondent thereafter made

computational adjustments disallowing the losses and investment

tax credits claimed by petitioners with respect to the Barrister

partnership.

     The first issue for decision is whether respondent properly

notified petitioners of the Barrister partnership proceeding for

its 1983 and 1984 taxable years.    We have jurisdiction in these

cases to decide whether respondent complied with the notice

requirements of section 6223(a) allowing petitioners the


     3
          Anderson Equipment Associates, et al, Barrister
Associates, Tax Matters Partner v. Commissioner, docket No.
27745-89.
                               - 6 -

opportunity to participate in the partnership level proceeding.

Crowell v. Commissioner, 102 T.C. 683, 691 (1994).

     Section 6223(a) generally provides that respondent shall

mail to each partner notice of the beginning of an administrative

proceeding at the partnership level with respect to a partnership

item, as well as notice of the final partnership administrative

adjustment (FPAA) resulting from any such proceeding.     It is the

mailing of the FPAA that triggers the time period for a partner

to object to the partnership level adjustments by filing a

petition for readjustment.   Sec. 6226(a).   Failure by respondent

to provide notice of a partnership level proceeding to a partner

may result in that partner's share of the partnership items being

treated as nonpartnership items.    Secs. 6223(e)(2),

6231(b)(1)(D).   In light of petitioners' arguments, respondent

must be prepared to demonstrate compliance with the section

6223(a) notice requirements.   Crowell v. Commissioner, supra at

691-692.

     At trial, Josephine did not recall receiving an FPAA with

respect to the Barrister partnership proceeding.     Catherine did

not testify as to whether or not she received one.      However, the

validity of a properly mailed FPAA is not contingent upon actual

receipt by the partner of the FPAA.    Id. at 692.

     Respondent submitted certified records that show that FPAAs

for the Barrister partnership for 1983 and 1984 were mailed to

petitioners on September 5, 1989.    We are convinced by evidence
                                - 7 -

introduced by respondent that the FPAAs were properly mailed in

these cases, and we so find.    We find Josephine's and Catherine's

self-serving testimony on this matter to be vague and

insufficient to overcome respondent's evidence.

       Having found that petitioners were properly notified of the

partnership proceeding, we lack jurisdiction to redetermine the

deficiencies on which the additions to tax in these cases are

based.    Brookes v. Commissioner, 108 T.C. 1, 5 (1997), on appeal

(9th Cir., March 25, 1997).    The deficiencies are attributable to

partnership items, properly considered solely in the partnership

proceeding.    Saso v. Commissioner, 93 T.C. 730, 734 (1989);

Maxwell v. Commissioner, 87 T.C. 783, 788 (1986).    Likewise,

petitioners' arguments that respondent failed to comply with the

applicable periods of limitation at the partnership level are

affirmative defenses that could have been raised in the

partnership level proceeding and may not be considered by the

Court at the partner level.    Crowell v. Commissioner, supra at

693.

       The second issue for decision is whether petitioners are

liable for the section 6653(a) additions to tax as determined by

respondent.

       Section 6653(a)(1) provides for an addition to tax equal to

5 percent of the entire underpayment of tax if any part of the

underpayment is due to negligence or intentional disregard of

rules and regulations.    Section 6653(a)(2) provides for an
                                - 8 -

addition to tax equal to 50 percent of the interest payable on

the deficiency with respect to the portion of the underpayment

which is attributable to negligence or intentional disregard of

rules and regulations.

     Negligence under section 6653 is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the same circumstances.    Neely v. Commissioner, 85

T.C. 934, 947 (1985).    Petitioners bear the burden of proving

that no part of the underpayments for the years in issue is due

to negligence or intentional disregard of rules and regulations.

Rule 142(a); Matthews v. Commissioner, 92 T.C. 351, 362 (1989),

affd. 907 F.2d 1173 (D.C. Cir. 1990); Luman v. Commissioner, 79

T.C. 846, 860-861 (1982).

     Before dealing with the question of whether petitioners were

negligent in these cases, we must address the question of whether

respondent properly asserted the section 6653(a)(1) and (2)

additions to tax for petitioners' 1980 taxable years.

     The version of section 6653(a)(1) and (2) relied upon by

respondent was enacted by section 722(b) of the Economic Recovery

Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 172, 342.    ERTA

section 722(b)(2), 95 Stat. 342, provides that section 6653(a)(1)

and (2) "shall apply to taxes the last date prescribed for

payment of which is after December 31, 1981."    The last date

prescribed for the payment of taxes for petitioners' 1980 taxable

years was April 15, 1981.    Secs. 6072(a), 6151(a); Jacobs v.
                                - 9 -

Commissioner, T.C. Memo. 1997-429.      Therefore, section 6653(a) as

in effect prior to the ERTA amendments is applicable to

petitioners' 1980 taxable years.

     The pre-ERTA section 6653(a) and the "new" section

6653(a)(1) have substantially identical language.     Respondent's

erroneous citation does not affect the validity of his

determination that petitioners' underpayments of tax for 1980

were due to negligence or intentional disregard of rules and

regulations.    Burrill v. Commissioner, 93 T.C. 643, 670 n.28

(1989).   However, the section 6653(a)(2) addition to tax asserted

by respondent for 1980 is without any statutory authority.     The

addition to tax equal to 50 percent of the interest attributable

to a negligent underpayment was first introduced into the Code by

ERTA.   Accordingly, we hold that petitioners are not liable for

the section 6653(a)(2) additions to tax for 1980 as determined by

respondent.    Skyrms v. Commissioner, T.C. Memo. 1997-69.

     We now turn to the question of whether petitioners'

underpayments for the taxable years in issue were due to

negligence or intentional disregard of rules and regulations.

Petitioners contend that they did not act negligently because

they relied on the advice of Mr. Santella.     Under some

circumstances, a taxpayer may avoid liability for negligence if

reasonable reliance on a competent professional adviser is shown.

United States v. Boyle, 469 U.S. 241 (1985); Freytag v.
                              - 10 -

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991).

     Based on the record, we find that petitioners have not

proved that their reliance on Mr. Santella was reasonable under

the circumstances.   There is no evidence in the record that Mr.

Santella was qualified to render a professional opinion to

Josephine and/or Gus as to the business merits and tax

consequences of the Barrister partnership investments.

     Petitioners did not establish that Mr. Santella had any

expertise in the publishing industry which he advised petitioners

to invest in for alleged business reasons.4   Although Josephine

and Catherine each testified that the motivation for their

investments was enhanced income flow, neither of them ever voiced

any concern to Mr. Santella over the absence of any income and

eventual complete loss of their $25,000 investments.   We find

that petitioners' investment of $25,000 in an industry that

neither they nor their adviser knew anything about without even a

cursory review of the offering materials was negligent.

     We are also not convinced that Mr. Santella's advice

regarding the tax consequences of the investment was competent.

In their petitions to this Court, petitioners state that Mr.

Santella mentioned tax benefits which might be obtained from the

investment, for which he had an opinion from legal counsel.

     4
          Josephine and Catherine also admit to having no
personal knowledge of the publishing industry.
                              - 11 -

However, the tax opinion that Mr. Santella purportedly relied

upon is not in the record for our consideration.   No testimony

was offered by petitioners from any individual, including Mr.

Santella's son, the successor to the Chimblo accounts, to

establish Mr. Santella's competence to render advice with respect

to the tax consequences of petitioners' investments.

     We conclude that petitioners were negligent because their

reliance on Mr. Santella was not reasonable under the

circumstances.   They did not prove that he was competent to

render advice concerning the business merits or tax consequences

of the investments, or that he reasonably relied upon competent

professional advice in rendering his own advice.   Accordingly, we

hold that petitioners are liable for the section 6653(a)

additions to tax as determined by respondent except for the

6653(a)(2) additions to tax for 1980 discussed supra.

     The third issue for decision is whether petitioners are

liable for the section 6661 additions to tax for substantial

understatements of income tax for 1983 and 1984.   For purposes of

this issue, all references to petitioners hereinafter are to

Catherine Chimblo and the estate of Gus Chimblo.

     Section 6661(a) provides for an addition to tax if there is

a substantial understatement of income tax for the taxable year.

In the case of additions to tax assessed after October 21, 1986,

the amount of the addition to tax is equal to 25 percent of the

amount of any underpayment attributable to such understatement.
                                - 12 -

Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec.

8002(c), 100 Stat. 1874, 1951; Licari v. Commissioner, 946 F.2d

690, 692 (9th Cir. 1991), affg. T.C. Memo. 1990-4; Pallottini v.

Commissioner, 90 T.C. 498 (1988).

     Section 6661(b)(1)(A) provides that a substantial

understatement of income tax exists if the amount of the

understatement exceeds the greater of:    (1) 10 percent of the tax

required to be shown on the return; or (2) $5,000.    An

understatement is defined as the excess of the amount of tax

required to be shown on the return for the taxable year over the

amount of tax imposed which is shown in the return, reduced by

any rebate.   Sec. 6661(b)(2)(A).   In the instant case,

petitioners' understatements of income tax for 1983 and 1984 are

$12,387 and $12,577, respectively, and are therefore substantial.

The entire amounts of the understatements are due to petitioners'

disallowed losses and investment tax credits claimed with respect

to the Barrister partnership.

     In general, section 6661(b)(2)(B) provides that the

understatement is deemed to be reduced to the extent it is

attributable to:   (1) The tax treatment of an item for which

there was substantial authority; or (2) any item with respect to

which the relevant facts affecting the item's tax treatment are

adequately disclosed in the return or in a statement attached to

the return.   In the case of items attributable to a tax shelter,

the understatement may not be reduced by reason of disclosure,
                                - 13 -

and may only be reduced by reason of substantial authority if the

taxpayer reasonably believed that the tax treatment of the tax

shelter item was more likely than not the proper treatment.      Sec.

6661(b)(2)(C).

     Petitioners do not argue that substantial authority exists

for their tax treatment of the items in issue or that they

adequately disclosed the relevant facts with respect to the

Barrister partnership investment.    Rather, they contend that

respondent should have waived the additions to tax pursuant to

section 6661(c).

     Section 6661(c) authorizes respondent to waive any part of

the addition to tax imposed under section 6661(a) upon a showing

by the taxpayer of reasonable cause for the understatement and

that the taxpayer acted in good faith.    The most important factor

in determining whether to grant a waiver is the extent of the

taxpayer's effort to assess the taxpayer's proper tax liability

under the law.     Mailman v. Commissioner, 91 T.C. 1079, 1083-1084

(1988); sec. 1.6661-6(b), Income Tax Regs.    Reliance upon the

advice of a professional will not constitute reasonable cause and

good faith, unless under all the circumstances, such reliance was

reasonable.   Sec. 1.6661-6(b), Income Tax Regs.    The appropriate

standard of review for denial of a waiver is whether respondent's

refusal to waive the section 6661 addition to tax constitutes an

abuse of discretion.     Mailman v. Commissioner, supra at 1083-

1084.
                               - 14 -

     There is no evidence in the record that petitioners

requested respondent to waive the section 6661 additions to tax

pursuant to section 6661(c).   Petitioners first raised this issue

in their post-trial brief.   It was not raised in their petition

or their pre-trial memorandum.   Under such circumstances we

decline to find that respondent abused his discretion, since such

discretion was never requested to be exercised.    McCoy

Enterprises, Inc. v. Commissioner, 58 F.3d 557, 563 (10th Cir.

1995), affg. T.C. Memo. 1992-693; Reinke v. Commissioner, 46 F.3d

760, 765 (8th Cir. 1995), affg. T.C. Memo. 1993-197; The Escrow

Connection, Inc. v. Commissioner, T.C. Memo. 1997-17; Selig v.

Commissioner, T.C. Memo. 1995-519; Dugow v. Commissioner, T.C.

Memo. 1993-401, affd. without published opinion 64 F.3d 666 (9th

Cir. 1995); Magnus v. Commissioner, T.C. Memo. 1990-596.

     Even if we were to assume that such a request was made and

that the evidence in this record was available to respondent, see

Reile v. Commissioner, T.C. Memo. 1992-488; Rogers v.

Commissioner, T.C. Memo. 1990-619, we are not persuaded that

respondent's denial of a request for a waiver would constitute an

abuse of discretion under the facts.    As discussed supra,

petitioners have not proved that their reliance on Mr. Santella

was reasonable.5

     5
          Although the stipulated decision in Anderson Equipment
Associates, et al, Barrister Associates, Tax Matters Partner v.
Commissioner, docket No. 27745-89, see supra note 3 and related
text, does not explain the basis of the decision, we have
                             - 15 -

     We hold that petitioners are liable for the section 6661

additions to tax for 1983 and 1984 as determined by respondent.

     To reflect the foregoing,



                                        Decisions will be entered

                                   under Rule 155.




previously found that the Barrister Equipment Associates Series
162 partnership, the partnership involved in the stipulated
decision, lacked economic substance and was a sham. Connell v.
Commissioner, T.C. Memo. 1996-349.
