                          T.C. Memo. 2002-229



                        UNITED STATES TAX COURT



                    TERRI L. STEFFEN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 1296-92.                 Filed September 13, 2002.


     B. Gray Gibbs,* for petitioner.

     Michael A. Pesavento, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:     Respondent determined additions to

petitioner’s1 1986 Federal income tax as follows:


     *
      Mr. Gibbs represented petitioner at trial and on brief. On
Aug. 19, 2002, he was granted leave to withdraw as counsel of
record.
     1
         Petitioner and her husband, Paul A. Bilzerian, filed a
                                                      (continued...)
                                 - 2 -

                           Additions to tax
                Sec. 6653(a)(1)(A)   Sec. 6653(a)(1)(B)
                    $100,233        50% of the interest
                                    due on $2,004,465

After concessions,2 the issue for decision is whether petitioner

is liable for additions to tax for negligence pursuant to section

6653(a)(1)(A)3 and (B) for the taxable year 1986.

     On September 11, 1998, respondent moved, pursuant to Rule

91(f), to compel petitioner to enter into a proposed stipulation

of facts.   We ordered petitioner to show cause why the matters

covered by respondent’s motion should not be deemed admitted for

purposes of this case.    Petitioner failed to respond to the order

to show cause.    We, therefore, granted respondent’s motion and

deemed the matters contained in the proposed stipulation to be

facts for purposes of this case.    Rule 91(f).

                           FINDINGS OF FACT

     Petitioner resided in Tampa, Florida, at the time she filed

her petition.    Petitioner and Paul A. Bilzerian (Mr. Bilzerian)


     1
      (...continued)
joint return for 1986. Separate notices of deficiency were sent
to petitioner and Mr. Bilzerian, and separate petitions were
filed. We addressed the liability of Mr. Bilzerian in a prior
opinion. See Bilzerian v. Commissioner, T.C. Memo. 2001-187.
This Memorandum Opinion addresses the liability of petitioner.
     2
      Petitioner concedes that she is not entitled to carry back
a worthless stock loss of $23,366,705 from 1989 to 1986.
     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -

were married in 1978 and remained married at the time of trial.

     Petitioner and Mr. Bilzerian both graduated from Stanford

University.   After graduating from Stanford, Mr. Bilzerian

attended Harvard University and graduated in 1977 with a master’s

degree in business administration.     After graduating from

Harvard, Mr. Bilzerian worked in the real estate business.     In

1982, Mr. Bilzerian began trading securities.     Before 1987, Mr.

Bilzerian either explored the possibility of taking over control,

or attempted to take over control, of several publicly traded

companies, including Hammermill Paper Co. (Hammermill), Armco,

Cluett Peabody, H.H. Robertson, and Syntex Corp.

     In 1986, Mr. Bilzerian and Earl and Billy Mack (the Macks)

formed a partnership, Bilzerian & Mack Associates (Bilzerian &

Mack), for the purpose of launching a takeover of Hammermill.

Mr. Bilzerian was a general partner of Bilzerian & Mack, and he

signed the partnership return for 1986 on March 23, 1987.      Mack

Asset Co. and Bilzerian Investors, two partnerships, were

reported on Bilzerian & Mack’s 1986 Form 1065, U.S. Partnership

Return of Income, as other general partners.     Mr. Bilzerian was

involved in Bilzerian Investors and another partnership named

Bilzerian Ventures.   Although Hammermill was eventually acquired

by International Paper Co. in August of 1986, Mr. Bilzerian

realized substantial gains in 1986 through Bilzerian & Mack,
                               - 4 -

Bilzerian Investors, and Bilzerian Ventures from the purchase and

sale of Hammermill stock.

     During 1986, Mr. Bilzerian also maintained interests in

South Bay Fashion Center and South Bay Fashion One, two

partnerships, and various other entities.

     For the taxable year 1986, Mr. Bilzerian was involved in the

preparation of Federal income tax returns for some of the

entities in which he was involved.     Additionally, a former

accountant from Price Waterhouse worked full time in Mr.

Bilzerian’s office handling some of the returns.     Peat, Marwick,

Mitchell & Co., C.P.A.s (Peat Marwick), prepared partnership tax

returns for Bilzerian & Mack, Bilzerian Investors, and Bilzerian

Ventures.   Another accountant and a tax attorney were involved in

preparing tax returns for other entities in which Mr. Bilzerian

was involved.

     While Peat Marwick was not engaged by petitioner and Mr.

Bilzerian to prepare or do any work on their 1986 individual

income tax return, Peat Marwick did prepare a schedule, entitled

“Paul Bilzerian’s 1986 Tax Estimate”.     This schedule was prepared

for the purpose of helping petitioner and Mr. Bilzerian make an

estimated tax payment for 1986.   The schedule reported the

following gains from Mr. Bilzerian’s stock dealings in

Hammermill:
                              - 5 -

                       Item                Amount
               Bilzerian & Mack          $1,840,003
               Bilzerian Investors       10,216,579
               Bilzerian Ventures             3,107
               Personal Gain              4,170,093
                 Total                   16,229,782

     On June 15, 1987, petitioner and Mr. Bilzerian signed and

filed a Form 4868, Application for Automatic Extension of Time to

File U.S. Individual Income Tax Return, for the taxable year

1986, along with a payment of $5 million.   Petitioner and Mr.

Bilzerian were in possession of the schedule prepared by Peat

Marwick at that time, and Mr. Bilzerian discussed their estimated

tax liability payment with petitioner.   On August 12, 1987,

petitioner and Mr. Bilzerian filed a Form 2688, Application for

Additional Extension of Time To File U.S. Individual Income Tax

Return.

     On October 15, 1987, petitioner and Mr. Bilzerian filed

their 1986 Form 1040, U.S. Individual Income Tax Return.   On

Schedule E, Supplemental Income and Loss, they reported the

following net income from Mr. Bilzerian’s stock dealings in

Hammermill:

                       Item                Amount
               Bilzerian & Mack          $1,840,003
               Bilzerian Investors       10,216,579
               Bilzerian Ventures             3,107
                 Total                   12,059,689

On their Schedule C, Profit or Loss From Business, petitioner and

Mr. Bilzerian reported gross income of $8,063,277 from the sale
                                 - 6 -

of securities.4    On their Form 1040, they reported adjusted gross

income and tax liability of $6,099,966 and $3,005,166,

respectively.     Petitioner and Mr. Bilzerian reported an

overpayment of tax of $2,053,708.     Petitioner knew that a

considerable portion of the income realized by petitioners in

1986 was related to the purchase and sale of the Hammermill

stock.

     Petitioner and Mr. Bilzerian’s 1986 individual tax return

was prepared by Dwight Norris (Mr. Norris).     Mr. Norris prepared

their individual tax returns for the taxable years 1982 through

1986.    Mr. Norris also prepared partnership tax returns for 1986

for South Bay Fashion Center and South Bay Fashion One.5       Mr.

Norris graduated from Ohio State University in 1956 and has been

working as a certified public accountant since that time.       At the

time he prepared petitioner and Mr. Bilzerian’s 1986 return, Mr.

Norris worked for the accounting firm of Porterfield & Co.,

C.P.A.s, located in Sacramento, California.6    In connection with

his preparation of the 1986 tax return, Mr. Norris received a

package of information from Mr. Bilzerian’s office consisting of




     4
      Petitioner and Mr. Bilzerian reported deductions of
$14,101,394, resulting in a net loss of $6,038,117.
     5
      In 1982, Mr. Norris was a business partner with Mr.
Bilzerian in South Bay Fashion One.
     6
        At the time of trial, Mr. Norris resided in California.
                                - 7 -

Schedules K-17 and other various schedules necessary to prepare

the Bilzerians’ individual return, including the schedule

prepared by Peat Marwick.

     In the fall of 1988, Mr. Norris was contacted by Mike Shaw

(Mr. Shaw), an attorney representing Mr. Norris at the time,

concerning an omission of income on petitioner and Mr.

Bilzerian’s 1986 return.    As a result, Mr. Norris learned that

petitioner and Mr. Bilzerian had failed to include $4,170,1858 of

taxable income from gain realized by Mr. Bilzerian from the

purchase and sale of Hammermill stock.     Mr. Norris informed Mr.

Bilzerian of this.   Mr. Shaw was alerted to the omission of

income on the 1986 return by an agent of the Federal Government.

     At Mr. Bilzerian’s request, Mr. Norris prepared an amended

return for the Bilzerians for 1986.     On January 5, 1989,

petitioner and Mr. Bilzerian filed a Form 1040X, Amended U.S.

Individual Income Tax Return, for 1986.     On the Form 1040X, they

increased their taxable income by $4,008,928 and reported

adjusted gross income and total tax liability of $10,108,894 and

$5,009,631, respectively.    The increase to income was described



     7
      A Schedule K-1 is a schedule attached to a Form 1120S, U.S.
Income Tax Return for an S Corporation, or a Form 1065, U.S.
Partnership Return of Income, to report a shareholder’s or a
partner’s share of income, credits, deductions, etc., from the S
corporation or the partnership.
     8
      The total omission from income was reduced to $4,008,928,
due to miscellaneous adjustments.
                                 - 8 -

on the amended return as follows:

     NET CHANGE TO INCOME                 Federal

     ADJUSTMENTS TO SCHEDULE C
          INCOME FROM SALES               4170185
          INTEREST EXPENSE                -161257

     ADJUSTMENTS TO SCHEDULE B
          INTEREST INCOME
               ADD JEFFRIES & CO               91
               LESS ON SCHEDULE C             -91

                                          4008928

     On December 21, 1988, Mr. Bilzerian was indicted by a

Federal grand jury on charges that he conspired to defraud the

Internal Revenue Service and the Securities and Exchange

Commission (SEC) with respect to several of his attempted

corporate acquisitions which he engaged in during the 1980s.    The

charges related to transactions Mr. Bilzerian carried out between

April 1985 and November 1986.    The nine-count indictment charged

Mr. Bilzerian with misrepresenting the source of funds used to

purchase stock on Schedule 13D filed with the SEC (funds were not

personal), accumulating stock in the name of nominees (parking

securities), making numerous false statements, and creating false

invoices to substantiate false deductions on his 1985 Federal

income tax return.   On September 27, 1989, the United States

District Court for the Southern District of New York entered a

judgment of conviction on all the counts contained in the

indictment, and the judgment was affirmed by the Court of Appeals
                               - 9 -

for the Second Circuit.   United States v. Bilzerian, 926 F.2d

1285 (2d Cir. 1991).

     On October 21, 1991, respondent issued separate notices of

deficiency to petitioner and Mr. Bilzerian for the taxable year

1986.   In the notices of deficiency, respondent determined that

petitioner and Mr. Bilzerian were liable for additions to tax for

negligence due to the omission from their originally filed 1986

return of the approximately $4 million of taxable income from

gains related to the purchase and sale of Hammermill stock.

Petitioner filed a petition to this Court seeking a

redetermination.

     In 1992, Mr. Bilzerian sued Mr. Norris for malpractice for

the omission of the $4 million of taxable income from the

Bilzerians’ originally filed 1986 return.   In connection with the

malpractice lawsuit, Mr. Norris denied any liability with respect

to the preparation of petitioner and Mr. Bilzerian’s 1986 tax

return.

                              OPINION

     In Bilzerian v. Commissioner, T.C. Memo. 2001-187, we

sustained respondent’s determination that Mr. Bilzerian was

liable for the additions to tax for negligence under section

6653(a)(1)(A) and (B) for 1986.   We found that Mr. Bilzerian

failed to establish that he reasonably relied on his return
                              - 10 -

preparer.   Additionally, we found that Mr. Bilzerian failed to

review the return adequately prior to signing and filing it.

     Petitioner contends that the additions to tax for negligence

for 1986 should be determined separately.   Petitioner cites Reser

v. Commissioner, 112 F.3d 1258 (5th Cir. 1997), affg. in part and

revg. in part T.C. Memo. 1995-572, to support her contention.        In

that case, the Tax Court originally held that jointly filing

taxpayers had not reasonably relied on their tax return

preparers; thus, they were liable for the additions to tax for

negligence.   Reser v. Commissioner, T.C. Memo. 1995-572.      The

wife appealed; however, the husband did not.    The Court of

Appeals for the Fifth Circuit concluded that the wife had acted

reasonably in relying on the return preparers and that she was

not liable for the additions to tax for negligence.    Reser v.

Commissioner, 112 F.3d at 1271.

     We find Reser v. Commissioner, supra, distinguishable

because the husband in that case was not a party on appeal, and

the Court of Appeals did not analyze whether the additions to tax

for negligence should be determined separately in the case of

spouses who file joint returns.

     If a joint return is filed, the liability with respect to

the tax is normally joint and several.   Sec. 6013(d)(3); Gordon

v. United States, 757 F.2d 1157, 1160 (11th Cir. 1985); Hedrick

v. Commissioner, 63 T.C. 395, 403-404 (1974).    For 1986, the
                              - 11 -

reference to “tax” included additions to tax, additional amounts,

and penalties.   Sec. 6662(a)(2).   Thus, the additions to tax for

negligence in this case apply jointly and severally because a

joint return was filed.9   Pesch v. Commissioner, 78 T.C. 100,

128-129 (1982); Davenport v. Commissioner, 48 T.C. 921, 926

(1967); Fleming v. Commissioner, T.C. Memo. 1989-10.

     Petitioner and Mr. Bilzerian filed a joint return for the

taxable year 1986.   Under these circumstances, a determination

that one spouse is liable for additions to tax results in the

other spouse’s also being liable therefor.    Estate of Sperling v.

Commissioner, T.C. Memo. 1963-260, affd. 341 F.2d 201 (2d Cir.

1965); see also Dillin v. Commissioner, 56 T.C. 228, 248    (1971).

Accordingly, we hold that petitioner is liable for the additions

to tax for negligence for 1986.


                                          Decision will be entered

                                     under Rule 155.




     9
      Petitioner has not raised entitlement to relief from joint
liability under either sec. 6013 or sec. 6015, which replaced
sec. 6013.
