                  T.C. Memo. 2008-80



                UNITED STATES TAX COURT



  SHOILEN CHRISTOPHER AND GEETI GHOSE, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 13703-06.               Filed April 2, 2008.



     R determined that Ps are liable for additions to tax
pursuant to sec. 6653(a)(1) and (2), I.R.C., for their 1983
and 1985 taxable years and pursuant to sec. 6661(a), I.R.C.,
for their 1983 taxable year.

     Held: Ps are liable for the additions to tax.



Shoilen Christopher and Geeti Ghose, pro sese.

Andrew R. Moore, for respondent.
                                    - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     This case is before the Court on a petition

for redetermination of two affected items notices of deficiency

in which respondent determined that petitioners are liable for

the following additions to tax:

                                     Additions to Tax
     Year         Sec. 6653(a)(1)     Sec. 6653(a)(2)   Sec. 6661(a)
                                            1
     1983          $272.30                               $1,361.50
                                            1
     1985           92.15                                  ---
            1
            50 percent of the interest due on deficiencies
     of $5,446 and $1,843, for the 1983 and 1985 taxable
     years, respectively.

     Unless otherwise indicated, section references are to the

Internal Revenue Code, as amended and in effect for the taxable

years at issue.    The issue for decision is whether petitioners

are liable for each of the additions to tax determined by

respondent.

                             FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings.      At the time they filed their

petition, petitioners resided in Martinez, California.
                                 - 3 -

     Mr. Ghose earned a college degree in management in 1980.      In

1983, he was employed by Gibbs & Hill, Inc., and Bechtel

Petroleum, Inc.     That year, Mrs. Ghose was employed by the school

system of the County of Contra Costa, California.

     In 1982 or 1983, petitioners’ tax preparer, Francine P.

Silveria (Ms. Silveria), introduced petitioners to Charles B.

Toepfer (Mr. Toepfer), a financial planner.    After attending a

presentation given by Mr. Toepfer regarding jojoba investments,

petitioners acquired eight units in a limited partnership called

Contra Costa Jojoba Research Partners (CCJRP) for $22,000, or

$2,750 per unit.1    They paid $8,800 upon closing and signed a

promissory note for the remaining $13,200.    Petitioners did not

examine Mr. Toepfer’s credentials and never discussed the

investment with anyone other than Mr. Toepfer.    In addition to

their investment in CCJRP, petitioners invested in three or four

other limited partnerships through Mr. Toepfer.

     In 1983 and 1985, the taxable years at issue, CCJRP filed

with the Internal Revenue Service and provided to petitioners

Schedules K-1, Partner’s Share of Income, Credits, Deductions,

Etc., in which CCJRP allocated to petitioners ordinary losses of

$20,000 and $2,067, respectively.    In turn, on their 1983 and

1985 joint Forms 1040, U.S. Individual Income Tax Return,

petitioners claimed ordinary losses relating to their interest in


     1
         Mr. Toepfer was also CCJRP’s tax matters partner.
                                  - 4 -

CCJRP of $20,000 and $2,067, respectively, as deductions in

computing their total income.2

      On May 30, 1989, respondent sent petitioners notices of

final partnership administrative adjustment (FPAA) issued to

CCJRP for the 1983 and 1985 taxable years.      On July 13, 1989, a

petition in the name of CCJRP, Charles B. Toepfer, Tax Matters

Partner, was filed with the Court at docket No. 17323-89.      On

January 28, 1994, to settle the case at docket No. 17323-89, the

tax matters partner and respondent filed a stipulation to accept

and be bound by the result in Utah Jojoba I Research v.

Commissioner (Utah Jojoba I), a test case docketed at No. 7619-

90.

          This Court issued an opinion in Utah Jojoba I on January 5,

1998, in which it held that the partnership at issue was not

entitled to deduct its losses for research and development

expenditures.      See Utah Jojoba I Research v. Commissioner, T.C.

Memo. 1998-6.      On April 11, 2005, the Court entered a decision

against CCJRP upholding as correct, among other things, the

partnership item adjustments as determined and set forth in FPAAs

for CCJRP’s 1983 and 1985 taxable years.      That decision was not

appealed.



      2
       Petitioners’ 1983 joint Federal income tax return was
prepared by Ms. Silveria. Their 1985 joint Federal income tax
return was prepared by Ronald P. Harville, Jr. Both of these
individuals were in the tax return preparation business.
                                 - 5 -

     On April 17, 2006, respondent issued the aforementioned

affected items notices of deficiency.     Petitioners then filed a

timely petition with this Court.    A trial was held on May 14,

2007, in San Francisco, California.

                                OPINION

I.   Statute of Limitations

     In their petition, petitioners appear to raise the statute

of limitations as an affirmative defense.    Respondent, citing

statutes and court opinions, argues that the limitations period

had not expired when the notices of deficiency were mailed to

petitioners in April 2006.    As explained below, we agree with

respondent that the April 2006 notices of deficiency were issued

within the limitations period.

         In general, section 6501(a) provides that the amount of any

tax imposed shall be assessed within 3 years after the return is

filed.     However, with respect to partnership and affected items,

section 6229(a) provides that the period for assessing tax shall

not expire before the date which is 3 years after the later of

the date on which the partnership return for such taxable year

was filed, or the last day for filing such return for such year.3

Section 6229(d)(1) and (2) provides that the mailing of an FPAA


     3
       The additions to tax at issue in this case are affected
items that require partner-level determinations but are subject
to sec. 6229(a). See Ruggiero v. Commissioner, T.C. Memo. 2001-
162.
                               - 6 -

suspends the running of that 3-year limitations period for the

period during which an action for judicial review of the FPAA may

be brought (and, if an action is brought, until the decision of

the court has become final) and for 1 year thereafter.     See

Ruggiero v. Commissioner, T.C. Memo. 2001-162.     A statute of

limitations defense relating to the issuance of an FPAA must be

raised during the partnership-level proceeding and cannot be

raised at the partner-level proceeding.   See Crowell v.

Commissioner, 102 T.C. 683, 693 (1994).     Thus, whether the FPAA

was issued to CCJRP within the limitations period in section

6229(a) is not now at issue.   We look only to whether the notices

of deficiency issued to petitioners in April 2006 were timely.

     In April 2005, the Court entered a decision against CCJRP

upholding as correct the partnership item adjustments as

determined and set forth in the FPAAs for its 1983 and 1985

taxable years.   That decision was not appealed.   Because a

decision becomes final 90 days after it is entered if it is not

appealed, the Court’s decision became final in July 2005.      See

secs. 7481(a)(1), 7483.   Because the limitations period in this

case expired in July 2006, 1 year and 90 days after the Court’s

April 2005 decision was entered, the notices of deficiency mailed

to petitioners in April 2006 were timely.
                               - 7 -

II.   Additions to Tax Under Section 6653(a)(1) and (2)

      Section 6653(a)(1) and (2), as in effect in 1983 and 1985,

imposes additions to tax if any part of any underpayment of tax

is due to negligence or disregard of rules and regulations.4     For

the purposes of this statute, negligence is defined as a “‘lack

of due care or failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.’”   Neely v.

Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. in part

and remanding in part 43 T.C. 168 (1964)).

      The Court of Appeals for the Ninth Circuit, to which an

appeal lies in this case, has held that a determination as to

negligence for purposes of sections 6653(a) and 6661(a) in a case

involving a deduction for loss that results from an investment

“depends upon both the legitimacy of the underlying investment,

and due care in the claiming of the deduction.”   Sacks v.

Commissioner, 82 F.3d 918, 920 (9th Cir. 1996), affg. T.C. Memo.

1994-217.

      Petitioners contend that they were not negligent because

they relied on the advice of a financial adviser in investing in


      4
       Those additions to tax are for (1) an amount equal to 5
percent of the underpayment and (2) an amount equal to 50 percent
of the interest payable under sec. 6601 with respect to the
portion of the underpayment which is attributable to negligence
for the period beginning on the last date prescribed by law for
payment of such underpayment and ending on the date of the
assessment of the tax. Sec. 6653(a)(1) and (2).
                                 - 8 -

CCJRP and because their 1983 and 1985 tax returns were prepared

by professional tax preparers.    As explained below, although

reasonable reliance on professional advice may serve as a defense

to the additions to tax for negligence, see United States v.

Boyle, 469 U.S. 241, 251 (1985), petitioners have not

demonstrated that they acted with due care with respect to their

investment in CCJRP and subsequent deductions claimed in 1983 and

1985 for losses relating to that investment.

     CCJRP’s underlying activity lacked legitimacy, as is

evidenced by our decision in Utah Jojoba I.    See Utah Jojoba I

Research v. Commissioner, T.C. Memo. 1998-6 (“[W]e hold that Utah

I was not actively involved in a trade or business and also

lacked a realistic prospect of entering a trade or business.”);

see also Welch v. Commissioner, T.C. Memo. 2002-39.     Petitioners,

neither of whom had any background or expertise in jojoba

farming, invested in CCJRP solely upon the recommendation of Mr.

Toepfer, a promoter of CCJRP, without ever conducting their own

research or seeking independent advice regarding the risks and

tax implications of that investment.

     Petitioners’ apparent blind faith in Mr. Toepfer constitutes

a failure to exercise due care before investing in CCJRP.        See

LaVerne v. Commissioner, 94 T.C. 637, 652 (1990) (“The failure of

petitioners to look beyond the promotional materials supplied by

the salespeople or to consult independent advisors on so complex
                                 - 9 -

a matter as the proposed investments in The Barbados Partnerships

is unreasonable and is not in keeping with the standard of the

ordinarily prudent person.”), affd. without published opinion 956

F.2d 274 (9th Cir. 1992), affd. without published opinion sub

nom. Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991).5

         The fact that professional tax preparers apparently

prepared petitioners’ 1983 and 1985 Federal income tax returns is

insufficient to shield them from liability for the section

6653(a)(1) and (2) additions to tax.     In all likelihood,

petitioners’ tax preparers merely transferred the losses from the

Schedules K-1 provided by CCJRP onto petitioners’ returns.     There

is no evidence that suggests otherwise.

     In 1983, petitioners invested $8,800 in CCJRP and that same

year claimed a $20,000 deduction for losses relating to that


     5
       We note that this case is distinguishable from Kantor v.
Commissioner, 998 F.2d 1514 (9th Cir. 1993), affg. in part and
revg. in part T.C. Memo. 1990-380, in which the Court of Appeals
for the Ninth Circuit reversed this Court’s affirmance of the
imposition of a sec. 6653(a) addition to tax on the basis that
the experience and involvement of the general partner and the
lack of warning signs could reasonably have led investors to
believe that they were entitled to deductions in light of the
undeveloped state of the law regarding sec. 174. The Court of
Appeals explained that the Supreme Court’s decision in Snow v.
Commissioner, 416 U.S. 500 (1974), left unclear the extent to
which research must be “in connection with” a trade or business
for purposes of qualifying for an immediate deduction under sec.
174. See, e.g., Nilsen v. Commissioner, T.C. Memo. 2001-163.
Unlike the partnership in Kantor, CCJRP was neither engaged in a
trade or business nor conducting research and development, either
directly or indirectly. See Utah Jojoba I Research v.
Commissioner, T.C. Memo. 1998-6.
                               - 10 -

investment.6   The deduction of such a large loss in proportion to

petitioners’ investment claimed so close to when that investment

was made should have raised a red flag to petitioners regarding

the propriety of deductions for losses related to their

investment in CCJRP.   Under the circumstances, petitioners acted

with a lack of due care in claiming as deductions on their 1983

and 1985 Federal income tax returns ordinary losses of $20,000

and $2,067, respectively, relating to their interest in CCJRP.

Consequently, petitioners are liable for the section 6653(a)(1)

and (2) additions to tax.

III. Addition to Tax under Section 6661(a)

     Section 6661(a) provides for an addition to tax of 25

percent of the amount of any underpayment attributable to a

substantial understatement.7   There is a “substantial

understatement” of income tax for any taxable year where the

amount of the understatement exceeds the greater of (1) 10


     6
       Although petitioners also signed a promissory note for
$13,200, there is no evidence as to whether they ever made
payments on that note.
     7
       As a technical matter, in 1983 sec. 6661(a) provided for a
10-percent addition to tax. The amount of the sec. 6661(a)
addition to tax was later increased to 25 percent for additions
to tax assessed after Oct. 21, 1986. Omnibus Budget
Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002, 100 Stat.
1951. The retroactive increase of the amount of the penalty from
10 percent to 25 percent does not violate petitioners’
constitutional rights to equal protection or due process. See
Licari v. Commissioner, 946 F.2d 690, 692-695 (9th Cir. 1991),
affg. T.C. Memo. 1990-4.
                              - 11 -

percent of the tax required to be shown on the return for the

taxable year or (2) $5,000.   Sec. 6661(b)(1).   However, the

amount of the understatement is reduced to the extent

attributable to an item (1) for which there is or was substantial

authority for the taxpayer’s treatment thereof, or (2) with

respect to which the relevant facts were adequately disclosed on

the taxpayer’s return or an attached statement.    See sec.

6661(b)(2)(B).8

     Petitioners do not argue that they possessed substantial

authority for claiming the loss on their 1983 Federal income tax

returns.   Nor have they demonstrated that they adequately

disclosed the facts relevant to their investment in CCJRP on

their 1983 Federal income tax return or on an attached statement.

     Rev. Proc. 83-21, 1983-1 C.B. 680, applicable to tax returns

filed in 1983, lists information which is deemed sufficient

disclosure with respect to certain items, none of which are

involved in this case.   Notwithstanding the inapplicability of

Rev. Proc. 83-21, supra, a taxpayer may make adequate disclosure

if the taxpayer provides sufficient information on the return to

     8
       Where the understatement at issue is attributable to a tax
shelter, adequate disclosure is inconsequential and, in addition
to substantial authority, the taxpayer must demonstrate a
reasonable belief that the tax treatment claimed was more likely
than not proper. Sec. 6661(b)(2)(C). Because the result would
be the same whether or not we label CCJRP a tax shelter, we will
give petitioners the benefit of any doubt and analyze their
entitlement to a reduction of the sec. 6661(a) addition to tax as
though CCJRP were not a tax shelter.
                                - 12 -

enable the Commissioner to identify the potential controversy

involved.    See Schirmer v. Commissioner, 89 T.C. 277, 285-286

(1987).     However, “Merely claiming the loss, without further

explanation,” as petitioners did, was insufficient to alert the

Commissioner to the controversial nature of the partnership loss.

See Robnett v. Commissioner, T.C. Memo. 2001-17.     In addition,

petitioners did not attach any statement to their 1983 return.

As a result, the Court sustains the imposition of a section

6661(a) addition to tax.

     The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.     To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,



                                           Decision will be entered

                                      for respondent.
