                          T.C. Memo. 1999-250



                        UNITED STATES TAX COURT



                  S. ROBERT DAVIS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 4449-92, 5744-92,             Filed July 29, 1999.
                 25088-96.



      Michael Quigley, Donald C. Alexander, and Laura D. Byrne,
for

petitioner.

      John E. Budde and Joseph P. Grant, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

      VASQUEZ, Judge:    Respondent determined the following

deficiencies in and additions to petitioner's Federal income

taxes:
                                             - 2 -

                                                     Additions to Tax
    Year       Deficiency     Sec. 6653(b)    Sec. 6653(b)(1)   Sec. 6653(b)(2)   Sec. 6661

    1976       $263,353.75     $131,676.88           --               --             --
                                                                       1
    1984         20,255.00         --             $10,113                          $5,056
    1985        244,848.00         --                --               --             --
    1987         24,986.00         --                --               --             --
     1
         50 percent of the interest on $20,255.

Respondent also determined that increased interest pursuant to

section 6621(d) applied to the 1976 deficiency.

     By three amendments to answer for the year 1985, respondent

(1) increased the deficiency by $367,776 (resulting in a total

deficiency of $612,624), (2) asserted additions to tax pursuant

to (a) section 6653(b)(1) in the amount of 50 percent of the

underpayment, (b) section 6653(b)(2) in the amount of 50 percent

of the interest payable with respect to the deficiency

attributable to fraud, and (c) section 6659 in the amount of

$94,950, and (3) asserted increased interest pursuant to section

6621(d).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.      After concessions, the primary issues for decision

are as follows:

     (1) Whether petitioner is liable for additions to tax for

fraud for 1976, 1984, and 1985;
                              - 3 -


     (2) whether petitioner is entitled to a net operating loss

(NOL) carryback from 1988 to 1985 greater than the amount allowed

by respondent; and

     (3) whether petitioner is entitled to deduct certain

expenses incurred in 1987.

     If we decide that petitioner's tax returns for 1976, 1984,

and 1985 are not fraudulent, we must decide whether the periods

of limitations for these years have expired.   If we conclude that

petitioner's tax returns for 1976, 1984, and 1985 are fraudulent,

we must decide the following issues:

     (1) The fair market value of Strata Corp. (Strata) stock for

1985;

     (2) the fair market value of an 18-acre parcel of real

estate located at 1450 Brown Road, Columbus, Ohio (Brown Road

property), and a 274+ acre parcel of land in McKean Township,

Licking County, Ohio (the Licking County property), for 1976;

     (3) whether petitioner is entitled to certain depreciation

deductions for 1976;

     (4) whether the "Riverview" sales are capital transactions

for 1985;

     (5) whether petitioner is liable for interest on a

substantial understatement attributable to a tax-motivated

transaction for 1976 and 1985 pursuant to section 6621(d);
                                 - 4 -


     (6) whether petitioner is liable for the addition to tax

pursuant to section 6661 for 1984; and

     (7) whether petitioner is liable for the addition to tax

pursuant to section 6659 for 1985.

                          FINDINGS OF FACT

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

The stipulations of facts and the attached exhibits are

incorporated herein by this reference.   At the time he filed his

petition in docket Nos. 4449-92 and 5744-92, petitioner (Mr.

Davis) resided in Amlin, Ohio.    At the time he filed his petition

in docket No. 25088-96, petitioner resided in Tampa, Florida.

Mr. Davis' Professional Activities

     Mr. Davis was born on October 31, 1938, in Columbus, Ohio.

In his youth, he often chauffeured his mother, a real estate

agent, around Columbus in connection with her business.    Mr.

Davis observed his mother attentively and learned about real

estate.   As his knowledge increased, he grew anxious to enter the

real estate business.   In February 1955, Mr. Davis applied for,

and received, a real estate license.

     Initially, Mr. Davis actively and successfully sold

residential real properties.   Soon thereafter, his emphasis

shifted from selling real estate to constructing, remodeling, and

developing real estate.   Originally, this business operated as a

sole proprietorship.    Gradually, the business expanded, and Mr.
                               - 5 -


Davis formed two corporations--one for residential construction

and sales and the other for commercial development and leasing.

     During the 1960's, Mr. Davis' corporation that engaged in

the commercial development and leasing business was extremely

successful and grew substantially.     In 1965, he formed a new

corporation, S. Robert Davis & Co., Inc. (Davis Co.), to conduct

business as a developer and builder of real estate projects.

     Since the 1960's, apart from his real estate activities, Mr.

Davis has started and promoted various companies.     In the 1960's,

Mr. Davis acquired Kentucky Fried Chicken (KFC) franchises in

Manhattan and Westchester County, New York.

     In 1968, Mr. Davis and three other individuals formed

National Diversified Corp. (National Diversified).     Mr. Davis was

elected chief executive officer (CEO).     KFC was National

Diversified's first national account.

     In 1969, National Diversified changed its name to National

Fast Food Corp.   National Fast Food Corp. formed a wholly owned

subsidiary named Arthur Treacher's Fish & Chips (Arthur

Treacher's).   Arthur Treacher's grew from an entity owning one

restaurant to an entity owning more than 700 restaurants.     Mr.

Davis was an employee and the chairman of Arthur Treacher's.

     In the early 1970's, National Fast Food Corp. changed its

name to NFF Corp.   In 1971, NFF Corp. purchased the stock of Lake

Hamilton Citrus Co. (LHCC).   LHCC owned large citrus groves in
                               - 6 -


Florida and produced citrus products.    Around 1972 or 1973, NFF

Corp. changed its name to Orange Co., Inc. (Orange Co.), and

changed LHCC's name to Orange Co. of Florida, Inc.    In 1976,

Orange Co. was listed on the New York Stock Exchange.    In 1978,

Orange Co. sold the Arthur Treacher's chain.

     By 1985, Orange Co. had revenues approximating $70 to $80

million a year.   During Mr. Davis' involvement with Orange Co.,

it produced approximately 5 percent of the orange juice consumed

in the United States.

     In 1970, Mr. Davis, R. David Thomas (Dave Thomas), and Len

Imke started Wendy's International, Inc. (Wendy's).     Mr. Davis

was a board member, adviser, and investor of Wendy's.    Mr. Davis

held more than 20 percent of the stock of Wendy's at its

inception, and he facilitated financing for the company.    He

built the first freestanding building used by a Wendy's

restaurant and, during the company's first year of operation,

raised $1 million.   Two years later, Mr. Davis raised an

additional $3 million and facilitated additional financing.

     In 1976, Buckeye Federal Savings & Loan (Buckeye) was

contemplating a public offering.   Mr. Davis decided to make a

substantial investment in Buckeye.     He went to separate brokerage

firms and informed them that he wished to acquire their allotment

of Buckeye shares.   Through these firms, Mr. Davis acquired 20
                               - 7 -


percent of Buckeye's shares.   Sometime thereafter, he was elected

chairman of the board of Buckeye.

     In 1981, Mr. Davis (and others) founded Big Bite, Inc. (Big

Bite), to promote fast food franchises serving pita sandwiches.

Mr. Davis was a primary investor in Big Bite.   In 1983, he was

elected to Big Bite's board of directors.   By 1982 or 1983, Big

Bite expanded to a chain of approximately 30 restaurants.    In the

mid-1980's, Big Bite's restaurants fell out of favor with

consumers.

     Mr. Davis also was instrumental in the formation and

financing of other corporations traded on the national over-the-

counter market.   One of these corporations was Strata.   Strata

was in the oil and gas exploration and drilling business.    Mr.

Davis was the first chairman of the board of Strata and one of

its three majority shareholders.

     Over the years, Mr. Davis solicited investments in the

various entities he promoted from a large group of potential

investors.   Mr Davis gave away shares he personally held in the

promoted entities (1) to ensure important potential investors

would be enthusiastic to invest in the next venture/entity he

promoted and (2) in the hope that these investors would help Mr.

Davis in his promotion of certain businesses.

     Petitioner held a substantial number of shares in the

entities he promoted with a zero basis in those shares.    Thus, he
                                - 8 -


felt it cost him nothing to give away his shares (which he did)

to potential investors or people who could refer potential

investors.

     In 1985, Mr. Davis resigned from all positions he held in

public entities and prominent charitable organizations in which

he had been involved to direct his attention to defending himself

in various governmental proceedings that were underway.    Mr.

Davis was under investigation by the Immigration and

Naturalization Service, the Environmental Protection Agency, and

the Securities and Exchange Commission (SEC).    He also was under

investigation for criminal mail fraud.    The Internal Revenue

Service (IRS) was conducting a "TCMP" audit, and State and city

officials also were conducting income tax audits.

     These various proceedings garnered Mr. Davis a lot of

unfavorable local publicity on radio and television and in

newspapers and magazines.    During this time, Mr. Davis' ability

to generate income from the public entities he was associated

with was limited.

Mr. Davis' Employees

     1.     Jean Davis

     In 1964, Jean Davis began working for Mr. Davis as a

secretary.1    In the early 1970's, her duties expanded to include



     1
          Jean Davis and Mr. Davis are not related.
                                - 9 -


bookkeeping.    Since the early 1970's, Jean Davis has maintained

Mr. Davis' books and records including his invoice, payroll,

payroll tax, and real estate files.

     2.     Kathleen Blair

     Kathleen Blair (Ms. Blair) worked for Strata as executive

secretary for the president.    In 1981, she began working for Mr.

Davis.    Ms. Blair had primary responsibility for maintaining

books and records regarding Mr. Davis' Strata stock transactions.

Mr. Garrison

     From 1946 until 1954, Robert Garrison's (Mr. Garrison)

primary business was developing and selling real estate in

Columbus, Ohio.    Since the late 1950's, Mr. Garrison has been

appraising real estate in Ohio, and at least 70 to 80 percent of

his work was in appraising (the rest was in sales).    During the

years in issue, Mr. Garrison and his partner Gerald King owned

the independent appraisal firm of Garrison & King (G & K).

     During his career, Mr. Garrison's appraisal work has

included approximately 400 eminent domain cases.    He worked on

only two of these cases for Mr. Davis.

     During his career, Mr. Garrison has conducted numerous

appraisals of Ohio properties for many large private and publicly

listed companies.    He also has done appraisals for the IRS.

     Mr. Garrison's appraisal work for Mr. Davis, and companies

connected with Mr. Davis, constituted a very small percentage (1
                                - 10 -


to 2 percent at a maximum) of Mr. Garrison's appraisal work.

Other than obtaining appraisals from Mr. Garrison, Mr. Davis had

no business dealings with Mr. Garrison except for the purchase of

one lot of real estate more than 30 years ago.

       Mr. Garrison always charged Mr. Davis the normal hourly or

flat fee for appraisals.    The fees were reasonable and

competitive.    Mr. Garrison's fee was never contingent on the

outcome of an appraisal.    Neither Mr. Davis nor his employees

ever suggested or implied to Mr. Garrison the conclusion as to

value that Mr. Davis wished the appraisal to reach.     Mr. Davis

never paid Mr. Garrison any compensation other than the appraisal

fee.

       Mr. Davis rarely spoke with Mr. Garrison.   Generally, Mr.

Davis' staff--usually Jean Davis--contacted and dealt with Mr.

Garrison or other appraisers.    Since meeting Mr. Garrison in the

1960's, Mr. Davis has met with Mr. Garrison only a few times.

Mr. Davis' Philanthropy

       Mr. Davis has made many charitable contributions of stock,

realty, and personalty.    His gifts have included thousands of

shares of Wendy's stock, a 1919 Model T Ford Four Door Touring

Car, and 3 air conditioners and 23 tons of coolant.
                               - 11 -


     1.    Mr. Davis' Gifts of Real Property to Charities

            a.   Brown Road Property

     On or about April 21, 1971, Davis Co. purchased the Brown

Road property.    In 1974, Davis Co. liquidated and distributed its

assets, including the Brown Road property, to Mr. Davis.

     Paul Eddy (Mr. Eddy), Mr. Davis' brother-in-law, was a

founding member of, and a deacon at, the Maranatha Baptist Church

(MBC).    Mr. Davis was not a member of the MBC.   During 1976, Mr.

Eddy solicited a gift from Mr. Davis to the MBC.     On or about

December 22, 1976, Mr. Davis donated the Brown Road property to

the MBC.

     In response to Mr. Eddy's solicitation of Mr. Davis'

donation of the Brown Road property, the MBC's pastor (Pastor

Brock) offered a tuition waiver to Mr. Eddy for his children

attending a school operated by the MBC.     Mr. Eddy declined the

offer because he felt that accepting it was improper for a deacon

of the church.

     Mr. Eddy suggested to Pastor Brock that he make the offer to

Judy Mascari (Ms. Mascari) instead.     Ms. Mascari is Mr. Eddy's

sister-in-law and Mr. Davis' sister.     Ms. Mascari and her family

were members of the MBC, and during 1976, some of Ms. Mascari's

children (Mr. Davis' nieces and nephews) attended the school

operated by the MBC.    The offer was made to Ms. Mascari, and she

accepted it.
                               - 12 -


     Mr. Davis did not condition his gift of the Brown Road

property to the MBC on the MBC's granting to Mr. Eddy or Ms.

Mascari a tuition waiver.    Pastor Brock never discussed this

issue with Mr. Davis.

     Mr. Garrison prepared an appraisal of the Brown Road

property as of December 20, 1976.    Mr. Davis and Mr. Garrison had

no conversations regarding the Brown Road property.    Neither Mr.

Davis nor his employees provided G & K with any comparable sales

information concerning the appraisal of the Brown Road property.

The appraisal concluded that the Brown Road property's fair

market value was $400,000.

     On Mr. Davis' 1976 Federal income tax return (the 1976

return), Mr. Davis claimed a charitable contribution deduction in

the amount of $400,000 in connection with his donation of the

Brown Road property to the MBC.    The donation of the Brown Road

property was reported and identified on Schedule A of the 1976

return.   Two additional pages concerning the donation also were

attached to the 1976 return:    (1) An acknowledgment letter from

Pastor Brock and (2) a letter from G & K opining that the fair

market value of the Brown Road property as of December 20, 1976,

was $400,000.   The G & K opinion letter made explicit reference

to the contemporaneous appraisal report that detailed the

valuation methodology, but it was not attached.
                               - 13 -


            b.   Licking County Property

     On May 5, 1976, Mr. Davis purchased the Licking County

property.    Mr. Davis partitioned the Licking County property into

four parcels:    (1) A 20-acre parcel that contained buildings and

fences, (2) a 220-acre parcel (the 220 acres), (3) a 12.82-acre

parcel, and (4) a 21.7-acre parcel.

     Since 1963, Juan Sotos (Dr. Sotos) has been a faculty member

of the Ohio State University Medical School.    Dr. Sotos

specializes in pediatric endocrinology.    Since this time, Dr.

Sotos has been a doctor on the staff of Children's Hospital.

     In 1977, Dr. Sotos and his family became neighbors and

friends of Mr. Davis and his family.

     In July or August of 1984, Arthur Krobacher (Mr. Krobacher),

the president-elect of Children's Hospital's board of trustees,

requested that Dr. Sotos discuss with Mr. Davis the possibility

of Mr. Davis' making a donation to Children's Hospital.     Mr.

Krobacher approached Dr. Sotos about soliciting the donation from

Mr. Davis because Mr. Krobacher was aware that Dr. Sotos and Mr.

Davis were neighbors, and Mr. Davis had previously contributed to

the hospital.2

     Dr. Sotos felt uncomfortable asking Mr. Davis for a

contribution; however, at a social dinner not long after his


     2
        Mr. Davis had previously donated 10,000 to 12,000 shares
of Wendy's stock and $100,000 cash.
                              - 14 -


meeting with Mr. Krobacher, he solicited a donation from Mr.

Davis.   Mr. Davis immediately committed to making a donation to

be dedicated to Dr. Sotos' research.   On November 14, 1985, Mr.

Davis donated the 220 acres to the Children's Hospital

Foundation.

     Mr. Garrison prepared an appraisal (the 1985 appraisal) of

the 220 acres as of May 1, 1985.   Neither Mr. Davis nor his

employees provided G & K with any comparable sales information

concerning the appraisal of the 220 acres.   The 1985 appraisal

concluded that the fair market value of the 220 acres was

$605,000.

     On Mr. Davis' 1985 Federal income tax return (the 1985

return), Mr. Davis claimed a $605,000 charitable contribution

deduction for the donation of the 220 acres to Children's

Hospital.

     The 1985 appraisal used three comparable sales to determine

the fair market value of the 220 acres.   Two of the three

comparable sales never occurred.

     Around 1993, Mr. Garrison first learned that two comparable

sales were nonexistent.   Mr. Garrison obtained this information

from a "runner" at the Licking County Courthouse.   Mr. Garrison

used the runner to obtain comparable sales because the real

property records in Licking County were not readily available.
                                   - 15 -


     Sometime after the commencement of the case at bar, Mr.

Davis learned of the two nonexistent comparable sales used in the

1985 appraisal.

     2.     Gifts of Strata Stock

            a.    Conrad Ottelin

     For many years, Conrad Ottelin (Dr. Ottelin) has practiced

dentistry in Columbus, Ohio.       In late 1983 or early 1984, he

performed a minor adjustment to the dentures of Mr. Davis'

mother.    The adjustment took only 4 to 5 minutes to perform.       Dr.

Ottelin customarily performed this kind of minor service without

charge as a gesture of goodwill.       Dr. Ottelin did not bill Mr.

Davis or his mother for these services.

     Sometime afterwards, as a gesture of thanks, Mr. Davis sent

Dr. Ottelin 500 shares of Strata stock.       Dr. Ottelin believed

that the stock was a gift and treated it as such.       In February

1984, Strata stock's traded price was approximately $5 per share.

            b.    Ed Walker

     Ed Walker (Mr. Walker) was a former professional baseball

player and well-known businessman in Las Vegas, Nevada.3      He had

many influential acquaintances.

     Mr. Walker and Mr. Davis were longtime friends.       During

their friendship, Mr. Walker introduced Mr. Davis to many rich



     3
          Mr. Walker is deceased.
                                - 16 -


and famous people including Gene Autry, Art Linkletter, and Danny

Thomas.    Some of the people Mr. Walker introduced to Mr. Davis

invested hundreds of thousands of dollars in companies that Mr.

Davis promoted.

     Mr. Walker also invested in several companies promoted by

Mr. Davis including Buckeye, Big Bite, and Orange Co.

     In 1984, Mr. Davis gave Mr. Walker 100,000 shares of Strata

stock.    Mr. Davis never received any payment for these shares.

            c.    Ohio Dominican College

     On January 7, 1985, Mr. Davis donated 40,000 shares of

unregistered class A common stock of Strata to Ohio Dominican

College (ODC).    He gave ODC four stock certificates, dated

November 30, 1983, each of which represented 10,000 shares.    Each

certificate bore a restrictive legend that set forth the

following:

          THE SHARES OF CLASS A COMMON STOCK EVIDENCED BY
     THIS CERTIFICATE WERE SOLD WITHOUT REGISTRATION UNDER
     THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW
     IN RELIANCE ON EXEMPTIONS THEREFROM. THE SHARES MAY
     NOT BE SOLD UNLESS REGISTERED OR EXEMPT PURSUANT TO THE
     SECURITIES ACT OF 1933 AND ALL APPLICABLE STATE
     SECURITIES

ODC acknowledged that the stock was restricted within the meaning

of rule 144 of the Securities Act of 1933 and agreed not to

dispose of the Strata stock in violation of rule 144.
                               - 17 -


     On January 6 and 7, 1985, the bid and asked prices for

registered, publicly traded Strata stock were $4.50 and $4.75,

respectively.

     Mr. Davis claimed a $190,000 charitable contribution

deduction on the 1985 return for the donation of the Strata stock

to ODC.   The 1985 return fully disclosed the contribution of the

Strata stock to ODC on Form 8283, Noncash Charitable

Contributions.   Attached to the 1985 return also were Mr. Davis'

letter to the president of ODC (Sister Mary Andrew), Sister Mary

Andrew's acknowledgment letter, and a certificate, signed by

Sister Mary Andrew, concerning her understanding of the

application of rule 144 of the Securities Act of 1933 to the

donated stock.

Mr. Davis' Legal Expenses

     1.    Squirrel Bend Litigation/Mail Fraud

     From 1968 through 1985, with the exception of a 10-12 month

period during 1980 and 1981, Mr. Davis resided on Squirrel Bend

Road in the City of Upper Arlington, Ohio.    This area is known as

"Squirrel Bend".

     In the spring of 1981, Mr. Davis constructed a waterline

along Squirrel Bend to provide fire protection for the

neighborhood.    In accordance with procedures set forth by the

City of Upper Arlington for construction of the waterline, Mr.
                               - 18 -


Davis built the waterline under the supervision of Harold Hyrne

(Mr. Hyrne), the city manager of Upper Arlington, and his staff.

     In September 1981, Mr. Davis sold 1,500 shares of Big Bite

to Mr. Hyrne.

     On June 12, 1985, in a four-count indictment, the United

States charged Mr. Davis with violating 18 U.S.C. sections 1341

and 1342 (mail fraud).   The indictment alleged that Mr. Hyrne

permitted Mr. Davis to inflate the cost of the waterline in

exchange for Mr. Davis' providing Mr. Hyrne a $3,000 credit for,

and an opportunity to purchase, common stock in Big Bite.     Mr.

Davis pleaded not guilty to the charges, and eventually he was

acquitted of all wrongdoing (altogether, the Squirrel Bend

litigation).

     2.   SEC Litigation

     In late 1984 or early 1985, the SEC commenced an inquiry

into the unusual amount of trading of Orange Co. securities in

late August 1984.    This period surrounded Orange Co.'s public

announcement concerning the termination of acquisition talks with

potential suitors.

     In February 1985, the president of Orange Co. received

notice of this inquiry from the SEC.    The SEC requested a

chronology of events leading up to the public announcement, a

list of all persons aware that the talks had been terminated

before the announcement, and a description of any relationship
                              - 19 -


between Jack Binion (Mr. Binion) and Orange Co.   Orange Co.

voluntarily cooperated with the SEC investigation and provided

the SEC with all requested information.

     In January 1986, the SEC issued a subpoena to Orange Co.

requesting documents and information regarding the acquisition

talks and matters related to Mr. Binion.   At the time Orange Co.

received the subpoena, it was unaware of the SEC's investigation

of Orange Co. securities trades of Mr. Davis' sons.

     Throughout 1986 and through September 1987, Mr. Davis

participated in the SEC investigation of Orange Co.   During the

fall of 1987, Mr. Davis learned that the SEC was no longer

investigating trading in Orange Co. securities by Mr. Binion, but

instead it was focusing on transactions in Orange Co. securities

by his sons.

     In September 1987, the SEC filed a civil complaint (SEC

complaint) against petitioner alleging violations of the

Securities Act of 1933 and the Securities Exchange Act of 1934.

The SEC alleged that certain trading in Orange Co. stock by Mr.

Davis' sons was based on material, nonpublic information provided

to them by Mr. Davis.

     Mr. Davis denied all allegations of wrongdoing contained in

the SEC complaint.   On February 3, 1989, the SEC complaint was

dismissed with prejudice after obtaining an agreement from Mr.
                              - 20 -


Davis not to pursue collection of his costs and attorney's fees

from the SEC.

     3.    Orange Co. Litigation

     In 1987 and 1988, Mr. Davis was involved in litigation

(Orange Co. litigation) with Stoneridge Resources, Inc.

(Stoneridge)--the successor to Orange Co.   Mr. Davis and the

other directors of Orange Co. were ousted as the result of a

hostile proxy fight.   The new management of Stoneridge alleged

breach of fiduciary duty and breach of contract by the former

officers/directors (including Mr. Davis) in connection with the

proxy fight and the transition of management in the company.    Mr.

Davis was represented in the Orange Co. litigation regarding

these matters by the firm of Squire, Sanders & Dempsey.

     Mr. Davis counterclaimed alleging (1) damages from breach of

certain contract rights and (2) unjust enrichment relating to the

conditions and benefits of his employment with Orange Co.     These

additional claims included claims for:   (1) Breach of options he

had to purchase company airplanes, (2) severance pay, (3)

continuation of health benefits, (4) vacation pay, and (5)

accrued salary through his date of termination.   Mr. Davis

retained additional counsel (Laura Byrne) to litigate these

matters.

     Mr. Davis also counterclaimed for indemnification for

attorney's fees arising from the Orange Co. litigation.   Orange
                                - 21 -


Co.'s certificate of incorporation required indemnification of

officers for expenses arising from acts performed in good faith

and in a manner reasonably believed to be in the best interest of

Orange Co.    All of the SEC litigation expenses Mr. Davis deducted

in 1987 and 1988, see infra, were included in the demand for

indemnification in the Orange Co. litigation.

     In 1992, the Orange Co. litigation was resolved.    Stoneridge

agreed to pay Mr. Davis $47,500.

     In a letter dated May 18, 1995, Orange Co.'s directors' and

officers' insurance company informed the IRS that it reimbursed

Squire, Sanders & Dempsey for its representation of Mr. Davis and

reimbursed Laura Byrne for her work as counsel for various

officers and directors.

Legal Fees Charts

     In 1987, Mr. Davis paid, incurred, and deducted on his

Schedule C for 1987 the following legal fees:4

                Matter                     Amount

     Squirrel Bend litigation             $179,726
     SEC litigation                         51,285
     Orange Co. litigation                  36,163
     Tax matters                             3,493
     General business matters                3,115

            Total                          273,782




     4
          For convenience, all figures are rounded to the nearest
dollar.
                             - 22 -


     In 1988, Mr. Davis paid, incurred, and deducted on his

Schedule C for 1988 the following legal fees:

          Matter             Incurred         Paid        Deducted

Squirrel Bend litigation     $252,972       $133,082     $252,972
SEC litigation                 11,646         11,646       11,646
Orange Co. litigation           3,221          3,221        3,221
Tax matters                     7,447          7,447        7,447
General business matters        4,225          4,225        4,225
Hong Kong venture              32,368         32,368       14,823

     Total                    311,879        191,989      294,334

Consulting Fees

     On his Schedules C for 1987 and 1988, Mr. Davis deducted as

professional expenses payments he made to his son, Charles Davis,

in the amounts of $16,600 and $36,000, respectively.

Tax Returns

     Mr. Davis timely filed Federal income tax returns, Forms

1040, for 1976, 1984, 1985, and 1987.   On April 17, 1989, Mr.

Davis filed Form 1045, Application for Tentative Refund, on which

he carried back an NOL in the amount of $489,696, generated in

1988, to 1985 (1988 NOL).

Preparation of Mr. Davis' Tax Returns

     1.    Mr. Fenn

     Donald Fenn (Mr. Fenn) is a public accountant in Ohio.    He

received a bachelor of science from Bowling Green State

University, where he majored in accounting.    Since 1958, Mr. Fenn

has been employed as a public accountant.    He prepares Federal
                              - 23 -


and State income tax returns for individuals, corporations, and

nonprofit organizations.

     Mr. Fenn prepared the 1976 return including Schedule B,

which disclosed Mr. Davis' charitable contributions.    In

preparing the 1976 return, he had full and unrestricted access to

all of Mr. Davis' books and records.   Jean Davis gave Mr. Fenn

all of Mr. Davis' books and records necessary for the preparation

of the 1976 return.   Mr. Davis' books and records for 1976 were

kept in good and regular order.

     Mr. Fenn was provided a copy of the full and complete G &

K appraisal of the Brown Road property.   Mr. Fenn compiled and

marked the attachments to the 1976 return concerning Mr. Davis'

donation of the Brown Road property to the MBC.   Mr. Fenn

determined that it was not necessary to attach the entire G &

K appraisal of the Brown Road property to the 1976 return and

that just the G & K opinion letter was sufficient.

     2.   Mr. Stimmel

     Richard Stimmel (Mr. Stimmel) is a certified public

accountant.   In 1967 or 1968, he received a business degree from

Franklin University, where he majored in accounting.    Until 1978,

Mr. Stimmel was an accountant with Coopers & Lybrand.    In 1979,

he began working for Mr. Davis.

     Mr. Stimmel prepared, or directed the preparation of, Mr.

Davis' 1984, 1985, and 1987 Federal income tax returns.      In
                                - 24 -


preparing Mr. Davis' tax returns for 1984, 1985, and 1987, Mr.

Stimmel worked with Jean Davis and Ms. Blair.   Mr. Stimmel had

full and unrestricted access to all of Mr. Davis' books and

records.

     Mr. Stimmel determined the attachments to include in the

1985 return concerning Mr. Davis' charitable donations.     He

determined that it was not necessary to attach the entire 1985

appraisal to the 1985 return.

     During the years in issue, Mr. Davis relied on professional

accountants, Mr. Fenn and Mr. Stimmel, to prepare his Federal tax

returns.

                                OPINION

I.   Addition to Tax for Fraud

     The addition to tax in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from a taxpayer's fraud.

See Helvering v. Mitchell, 303 U.S. 391, 401 (1938).    Fraud is

intentional wrongdoing on the part of the taxpayer with the

specific purpose to evade a tax believed to be owing.   See McGee

v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121

(5th Cir. 1975).

     The Commissioner has the burden of proving fraud by clear

and convincing evidence.   See sec. 7454(a); Rule 142(b).    To
                                - 25 -


satisfy the burden of proof, the Commissioner must show:     (1) An

underpayment exists; and (2) the taxpayer intended to evade taxes

known to be owing by conduct intended to conceal, mislead, or

otherwise prevent the collection of taxes.    See Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990).    The Commissioner must

meet this burden through affirmative evidence because fraud is

never imputed or presumed.     See Beaver v. Commissioner, 55 T.C.

85, 92 (1970).

     A.    Fraudulent Intent

     The Commissioner must prove that a portion of the

underpayment for each taxable year in issue was due to fraud.

See Professional Servs. v. Commissioner, 79 T.C. 888, 930 (1982).

The existence of fraud is a question of fact to be resolved from

the entire record.   See Gajewski v. Commissioner, 67 T.C. 181,

199 (1976), affd. without published opinion 578 F.2d 1383 (8th

Cir. 1978).   Because direct proof of a taxpayer's intent is

rarely available, fraud may be proven by circumstantial evidence,

and reasonable inferences may be drawn from the relevant facts.

See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson

v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331

(6th Cir. 1984).   A taxpayer's entire course of conduct can be

indicative of fraud.   See Stone v. Commissioner, 56 T.C. 213,

223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106

(1969).   The sophistication, education, and intelligence of the
                              - 26 -


taxpayer are relevant to determining fraudulent intent.      See

Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Stephenson

v. Commissioner, supra at 1006; Iley v. Commissioner, 19 T.C.

631, 635 (1952).

     Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent.    These badges of

fraud include:   (1) Understating income, (2) maintaining

inadequate records, (3) implausible or inconsistent explanations

of behavior, (4) concealment of income or assets, (5) failing to

cooperate with tax authorities, (6) engaging in illegal

activities, (7) an intent to mislead which may be inferred from a

pattern of conduct, (8) lack of credibility of the taxpayer's

testimony, (9) filing false documents, (10) failing to file tax

returns, and (11) dealing in cash.     See Spies v. United States,

supra at 499; Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir.

1990); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986), affg. T.C. Memo. 1984-601; Recklitis v. Commissioner, 91

T.C. 874, 910 (1988).   Although no single factor is necessarily

sufficient to establish fraud, the combination of a number of

factors constitutes persuasive evidence.    See Solomon v.

Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603.   We note that some conduct and

evidence can be classified under more than one factor.
                             - 27 -


     B.   The Allegedly Fraudulent Items

     Respondent claims that the following five items were

fraudulent:

     (1) Mr. Davis' charitable contribution deduction for the

donation of the Brown Road property to the MBC in 1976;

     (2) Mr. Davis' gift of Strata stock to Mr. Walker in 1984;

     (3) Mr. Davis' gift of Strata stock to Dr. Ottelin in 1984;

     (4) Mr. Davis' charitable contribution deduction for the

donation of the 220 acres to Children's Hospital in 1985; and

     (5) Mr. Davis' charitable contribution deduction for the

donation of Strata stock to ODC in 1985.

     C.   General Real Estate Matters

     Respondent argues that Mr. Davis' donations of the Brown

Road property and the 220 acres were part of a pattern by Mr.

Davis of donating real estate to charities, inflating the values

of the properties, and reporting the inflated values as

charitable contribution deductions on his tax returns.

Respondent alleges that Mr. Davis was able to inflate the values

of the properties he donated to charities by (1) hiring a pliable

and/or accommodating appraiser who he manipulated and (2) telling

the appraiser, in advance, the conclusions that the appraiser

should reach regarding the value of the property in question.

Respondent further contends that (1) Mr. Garrison was a

discredited appraiser and an old associate of Mr. Davis, (2) Mr.
                                    - 28 -


Garrison and Mr. Davis had had a collusive relationship since the

1960's, (3) Mr. Davis controlled Mr. Garrison, and (4) Mr.

Garrison lied to respondent's agents and at the trial of this

case.     Respondent also points to testimony in the record that Mr.

Garrison had a reputation for appraisals on the high side.

             1.      Mr. Garrison

        On the basis of the record and our opportunity to observe

Mr. Garrison at trial, we found him credible.        Mr. Garrison was a

confident World War II veteran, and no one told him what to do or

what to think.

        Mr. Garrison was not financially dependent on Mr. Davis.

Mr. Davis did not suggest values for properties he needed

appraised.        Respondent has failed to establish a conspiracy or

any collusive relationship between Mr. Garrison and Mr. Davis.

        Assuming arguendo that his appraisals were on the high side,

Mr. Garrison believed his opinions were correct on the basis of

the property's highest and best use.         Mr. Davis believed that Mr.

Garrison was a qualified and experienced appraiser and had no

reason to doubt the values determined by Mr. Garrison.        We fail

to see how Mr. Garrison's alleged reputation establishes fraud on

the part of Mr. Davis.

             2.      Valuation

        Respondent, on brief, repeatedly states that "this is not a

valuation case".        We agree.   The parties, however, devote much of
                                  - 29 -


their briefs to the issue of the correct fair market value of the

Brown Road property, the 220 acres, and other real properties not

in issue.

     Determining fair market value is an exercise in judgment on

the part of the trier of fact.      See Colonial Fabrics, Inc. v.

Commissioner, 202 F.2d 105, 107 (2d Cir. 1953).     Rarely would a

good faith disagreement by the parties over fair market value

establish fraudulent intent.

     Seven experts testified at trial regarding the valuation of

the 220 acres and the Brown Road property.     Ken Wilson and Ray

Jackson, two of the experts, testified that appraisers could

disagree and reach different conclusions.

     Even if Mr. Garrison had negligently or fraudulently

overvalued the properties he appraised, the record in this case

does not demonstrate that Mr. Davis was aware of such negligent

or fraudulent behavior on the part of Mr. Garrison.

            3.   Conclusion

     We conclude that Mr. Davis' use of Mr. Garrison as an

appraiser and his reliance on Mr. Garrison's appraisals do not

establish that Mr. Davis had the requisite fraudulent intent.

     D.     Brown Road Property

     Respondent also argues that the donation of the Brown Road

property was a barter transaction in which Mr. Davis had an

understanding with the MBC, before he made the donation, that his
                               - 30 -


nieces and nephews would be able to attend the MBC's school

tuition free.    Furthermore, respondent contends that any

testimony to the contrary by Mr. Davis, Mr. Eddy, and Pastor

Brock is not credible.   We disagree.

     We found as a fact that the tuition waiver was Pastor

Brock's idea.    Mr. Davis did not make the tuition waiver a

condition to the donation of the Brown Road property to the MBC.

Mr. Davis never asked for a tuition waiver or implied that one

should be given to his relatives.    This is corroborated by the

testimony of Pastor Brock, Mr. Eddy, and Mr. Davis, and we find

them to be credible witnesses.    We conclude that the gift of the

Brown Road property to the MBC was not part of a barter

transaction.

     E.     220 Acres

     To establish fraud, respondent also argues that Mr. Garrison

created two false comparable sales and used them in the 1985

appraisal.

     Two of the three comparable sales used in the 1985 appraisal

never occurred.    However, contrary to respondent's assertion, Mr.

Garrison's use of the nonexistent sales was an innocent (or

negligent) mistake, and Mr. Garrison first learned of the mistake

many years after he prepared the 1985 appraisal.    Neither Mr.

Davis nor his employees provided these comparable sales to Mr.

Garrison.    Furthermore, Mr. Davis had no knowledge of the
                             - 31 -


nonexistent comparable sales until many years after Mr. Garrison

prepared the 1985 appraisal and Mr. Davis deducted the donation.

We conclude that Mr. Garrison's use of the nonexistent comparable

sales does not establish fraud on the part of Mr. Davis.

     Respondent also implies that Mr. Davis improperly "bought"

Dr. Sotos' testimony in the Squirrel Bend litigation via the

donation of the 220 acres to Children's Hospital.

     In the Squirrel Bend litigation, Dr. Sotos testified to the

grand jury and at the trial; however, Mr. Davis agreed to make

the donation to Children's Hospital long before he was indicted

in, or Dr. Sotos became aware of, the Squirrel Bend litigation.

Furthermore, Dr. Sotos credibly testified the his integrity was

not for sale.

     We conclude that Mr. Davis' donation of the 220 acres to

Children's Hospital was for charitable purposes and was not an

attempt to influence Dr. Sotos' testimony in the Squirrel Bend

litigation.

     Respondent also asserts that the 1985 return was fraudulent

because on Form 8283, filed as part of the 1985 return, the basis

of the 220 acres was left blank.

     Mr. Stimmel testified that not completing the entry on Form

8283 under donor's cost or adjusted basis was an oversight and

that any blanks were his actions.   See also infra (regarding Mr.

Davis' reliance on return preparers).   He further testified that
                               - 32 -


the records that reflected the donor's cost or adjusted basis

were available to him.    We find this testimony to be credible and

conclude his minor oversight does not establish fraud on the part

of Mr. Davis.

     F.     Dr. Ottelin

     Respondent contends that Mr. Davis' transfer of Strata stock

to Dr. Ottelin was part of a barter transaction (i.e., Dr.

Ottelin adjusted the dentures of Mr. Davis' mother in exchange

for shares of Strata stock) and was not a gift, and any testimony

by Dr. Ottelin or Mr. Davis to the contrary is not credible.     We

disagree.

     Dr. Ottelin credibly testified that the adjustment he

performed to the dentures of Mr. Davis' mother was a minor

adjustment, and it was his normal practice not to bill for such

services--they were gestures of goodwill.    Furthermore, the gift

of stock Mr. Davis made to Dr. Ottelin was worth at least

hundreds, if not thousands, of dollars--an amount extremely

disproportionate in comparison to the services Dr. Ottelin

performed for Mr. Davis' mother.    We conclude that the gift of

Strata stock to Dr. Ottelin was not part of a barter transaction.

     G.     Mr. Walker

     Respondent contends that Mr. Davis sold Mr. Walker 100,000

shares of Strata stock.    Respondent relies on a stock ledger
                                - 33 -


which respondent contends shows that the transaction was a sale.

We disagree.

     Ms. Blair maintained this ledger.   The ledger contained a

page captioned "S. Robert Davis - Strata".    Ms. Blair testified

that the purpose of this page was to keep track of how much

Strata stock Mr. Davis owned.    She further testified that she

made the entries in the ledger referencing the transfer of

100,000 shares of Strata stock to Mr. Walker and that the

transfer was not a sale of stock.    Ms. Blair was credible, and

her testimony corroborates Mr. Davis' testimony.

     Furthermore, Mr. Davis testified that he was always

promoting companies and that he made a practice of giving stock

to people or investors in order to encourage them to send other

investors to him or to keep them as investors.    Mr. Walker was an

important investor and a source of investors, and we believe that

Mr. Davis made the gift to Mr. Walker in order to keep Mr. Walker

as a potential future investor and source of potential future

investors.   Additionally, there is no evidence that petitioner

received any money from Mr. Walker for the Strata stock.

     H.   ODC

     Respondent claims that petitioner fraudulently overstated

the value of the Strata stock he donated to ODC.    Respondent

argues that the stock was unregistered, and petitioner's claimed

deduction was based on the registered, traded, asked price.
                                - 34 -


     The 1985 return fully disclosed on Form 8283 the

contribution of the Strata stock to ODC and the method used to

determine the stock's fair market value.    Furthermore, Mr. Davis

relied on Mr. Stimmel to prepare the 1985 return and the Form

8283 regarding the donation of Strata stock to ODC.     See infra.

     I.    Reliance on Return Preparers

     Respondent argues that petitioner knew about the erroneous

and fraudulent nature of the information provided to his return

preparers, and the return preparers were not in a position to

discover any errors or fraud.    Petitioner argues that his

reliance on his employees and return preparers negates any

fraudulent intent on his part.    We agree with petitioner.

     Petitioner's reliance upon third parties to keep his books

and records and to prepare his returns indicates the absence of

fraudulent intent.   See Hill v. Commissioner, T.C. Memo. 1982-

143; see also Marinzulich v. Commissioner, 31 T.C. 487, 490

(1958).   Petitioner, in good faith, relied on members of his

staff to turn over all of his books and records and otherwise

make a full and complete disclosure to his third party return

preparers.   See Merritt v. Commissioner, 301 F.2d 484, 487 (5th

Cir. 1962), affg. T.C. Memo. 1959-172.

     Mr. Davis was a busy man who relied on his employees and

professionals.   Jean Davis credibly testified that all
                               - 35 -


information was provided to Mr. Fenn and Mr. Stimmel and nothing

was concealed from them.

     Respondent's argument that the return preparers were not in

a position to uncover Mr. Davis' influence over the appraisers is

without merit.    Mr. Davis did not control, or conspire with, the

appraisers hired to value the Brown Road property or the 220

acres.    On the basis of the entire record, we conclude that Mr.

Davis (via his employees) provided complete information to his

return preparers, and his reliance on them was reasonable.   This

indicates the absence of fraudulent intent.5

     J.     Respondent's Remaining Arguments

     Respondent also attempts to establish fraudulent intent by

pointing to the fact that IRS records reflect that Mr. Davis has

not filed any gift tax returns for the years 1970 through 1993

and that Mr. Davis was uncooperative.

     While the failure to file gift tax returns for the gifts to

Mr. Walker and Dr. Ottelin might be troubling in a vacuum, we

previously found that Mr. Davis relied on professional




     5
        Respondent also argues that Mr. Stimmel did not prepare
Mr. Davis' tax returns. This argument is without merit. We
found as a fact that Mr. Stimmel prepared Mr. Davis' tax returns
for 1984, 1985, and 1987. Furthermore, in respondent's proposed
finding of fact No. 307, respondent requested that the Court find
"Richard Stimmel prepared petitioner's income tax returns during
the relevant time period" as a fact.
                               - 36 -


accountants, Mr. Fenn and Mr. Stimmel, to prepare his tax

returns.

     We also do not believe that Mr. Davis' alleged "failure to

cooperate" is the kind of uncooperativeness envisioned as a badge

of fraud.    One example of uncooperativeness alleged by respondent

relates to pretrial motion practice and discovery requests.     In

this case, we do not believe that asserting privilege, having to

be compelled to comply with discovery requests, and hiring

numerous counsel to represent oneself are badges of fraud.

     Furthermore, we do not find Mr. Davis's lack of memory about

certain events to be uncooperative.     The transactions in issue

took place between 15 and 25 years ago, and many witnesses had

difficulty remembering events from so long ago.     In the instant

case, a lack of memory about the distant past is understandable.

     K.     Conclusion

     After reviewing all of the facts and circumstances, we

conclude that respondent has failed to prove clearly and

convincingly that for 1976, 1984, or 1985 Mr. Davis intended to

evade taxes known to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of taxes.

Accordingly, we do not sustain the additions to tax for fraud for

these years.
                                 - 37 -


II.   Period of Limitations

      Respondent concedes that 1976 and 1984 are closed if the

Court determines that petitioner did not file fraudulent tax

returns for those years.      We have so found, and we agree with

respondent.

      The parties agree that pursuant to section 6501(h) the

period of limitations on assessment for 1985 remains open for the

deficiency attributable to the carryback of the 1988 NOL.

Respondent, however, argues that 1985 is open not only for the

deficiency attributable to the 1988 NOL carryback, but for any

deficiency for 1985 up to the amount of the NOL carryback.      We

are unable to agree with respondent's interpretation of this

provision.

      Section 6501(h) provides an extended period for assessment

in the case of a deficiency attributable to an NOL carryback.

Such a deficiency may be assessed at any time before the

expiration of the period within which a deficiency for the year

generating the NOL carryback may be assessed.      See sec. 6501(h).

      The extended period for the assessment of deficiencies under

section 6501(h) applies only to deficiencies attributable to NOL

carrybacks.   See Bouchey v. Commissioner, 19 T.C. 1078, 1081

(1953); Leuthesser v. Commissioner, 18 T.C. 1112, 1125 (1952).

Thus, deficiencies for 1985, the NOL carryback year, that are

attributable to other items (i.e., non-NOL carryback items) are
                               - 38 -


barred by the 3-year period of limitations provided by section

6501(a).

III.   1987 Deficiency and 1985 Deficiency Attributable
       to the 1988 NOL Carryback

       The deficiency for 1985 attributable to the 1988 NOL

carryback consists of, in part, "consulting fees" paid to Charles

Davis and legal expenses for tax matters, the Squirrel Bend

litigation, the SEC litigation, the Orange Co. litigation, and

general business matters.

       The deficiency for 1987 consists of "consulting fees" paid

to Charles Davis, a $24,000 travel expense, and legal expenses

for tax matters, the Squirrel Bend litigation, the SEC

litigation, the Orange Co. litigation, the Hong Kong venture, and

general business matters.

       Petitioner presented no evidence at trial regarding the

travel expense, and petitioner did not address this issue, or the

consulting fees paid to his son, on brief.    Therefore, we find

that petitioner abandoned these issues.    See Petzoldt v.

Commissioner, 92 T.C. 661, 683 (1989).

       A.   Deductibility of Legal Expenses

       Deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to the deductions

claimed.    See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).    Section 162 allows a deduction for ordinary
                              - 39 -


and necessary expenses paid or incurred in carrying on a trade or

business.   Section 212 allows an individual to deduct all of the

ordinary and necessary expenses paid or incurred in:    (1)

Producing income, (2) managing, conserving, or maintaining

property held for the production of income, or (3) determining,

collecting, or refunding a tax.   Personal expenses are not

deductible.   See sec. 262.

     Whether an ordinary and necessary litigation expense is

deductible under section 162(a) or section 212 depends on the

origin and character of the claim for which the expense was

incurred and whether the claim bears a sufficient nexus to the

taxpayer's business or income-producing activities.    See Woodward

v. Commissioner, 397 U.S. 572 (1970); United States v. Gilmore,

372 U.S. 39, 44-45 (1963); see also Peckham v. Commissioner, 327

F.2d 855, 856 (4th Cir. 1964), affg. 40 T.C. 315 (1963); Guill v.

Commissioner, 112 T.C. 325 (1999).     Ordinary and necessary

litigation costs are generally deductible under section 162(a)

when the matter giving rise to the costs arises from, or is

proximately related to, a business activity.    See Woodward v.

Commissioner, supra; Kornhauser v. United States, 276 U.S. 145,

153 (1928).   Litigation costs must be "attributable to a trade or

business carried on by the taxpayer" in order to be deductible as

a business expense.   Sec. 62(a)(1); see Guill v. Commissioner,

supra.
                               - 40 -


     The ascertainment of a claim's origin and character is a

factual determination that must be made on the basis of the facts

and circumstances of the litigation.     See United States v.

Gilmore, supra at 47-49.   The most important factor to consider

is the circumstances out of which the litigation arose.       See

Guill v. Commissioner, supra; Boagni v. Commissioner, 59 T.C. 708

(1973).   In passing on this factor, the fact finder must take

into account, among other things, the allegations set forth in

the complaint, the issues which arise from the pleadings, the

litigation's background, nature, and purpose, and the facts

surrounding the controversy.   See Guill v. Commissioner, supra;

Boagni v. Commissioner, supra at 713.

     B.    Squirrel Bend Litigation

     Petitioner argues that (1) the origin of the claim in the

Squirrel Bend litigation was Mr. Davis' sale of Big Bite stock to

Mr. Hyrne, and (2) this was directly related to Mr. Davis' trade

or business of promoting Big Bite.      Respondent counters that the

origin of the claim was the construction of the waterline at

Squirrel Bend.   We agree with respondent.

     The Squirrel Bend litigation was a mail fraud case.       Mr.

Davis used the U.S. mail to transmit documents associated with

the construction of the waterline at Squirrel Bend.     The

indictment alleged that he improperly inflated the cost of the

waterline.   Mr. Davis was not charged with bribing Mr. Hyrne.
                                - 41 -


     Although Mr. Hyrne allegedly allowed Mr. Davis to inflate

the cost of the waterline because Mr. Hyrne acquired the

opportunity to purchase Big Bite stock, the sale of the stock

itself was not alleged to be improper; rather, the cost inflation

was allegedly improper.     We conclude, therefore, that the origin

of the claim was the construction of the waterline at Squirrel

Bend.

     The parties stipulated that Mr. Davis' activity at Squirrel

Bend was not a trade or business, and petitioner presented no

evidence suggesting that he managed, conserved, or maintained his

personal residence at Squirrel Bend for the production of income.

Therefore, we conclude that petitioner is not entitled to deduct

the legal fees associated with the Squirrel Bend litigation in

any amount greater than that which was allowed by respondent in

the notices of deficiency.

     C.      SEC and Orange Co. Litigation Expenses

        Petitioner argues that the SEC and Orange Co. litigation

expenses were related to his "business of promoting" or his

business of being an employee of Orange Co. (as an officer and

director).     Respondent contends that the SEC litigation was not

related to a business activity.     In the alternative, respondent

argues that if petitioner's actions were in the course of

petitioner's trade or business of being an employee of Orange

Co., he was entitled to reimbursement of the SEC and Orange Co.
                                - 42 -


litigation expenses from Orange Co.      Therefore, respondent

contends that petitioner is not entitled to deduct the SEC and

Orange Co. litigation expenses.

     Assuming arguendo that Mr. Davis was in the "business of

promoting"6--which he alleges entailed the starting and promoting

of businesses--the SEC and Orange Co. litigation did not arise

from, were not proximately related to, and did not bear a nexus

to a "business of promoting".    The SEC litigation arose out of

the SEC's investigation of an unusual amount of trading of Orange

Co. stock in August of 1984 by Mr. Binion and Mr. Davis' sons.

The complaint the SEC filed alleged that certain trading by Mr.

Davis' sons was based on material, nonpublic information provided

to them by their father.   The Orange Co. litigation arose out of

a hostile proxy fight, an alleged breach of fiduciary duty and

breach of contract by Orange Co.'s former officers and directors,

and the ouster of the directors of Orange Co.      The Orange Co.

litigation also involved Mr. Davis' additional breach of contract

and unjust enrichment claims.

     Assuming arguendo that the aforementioned claims in the SEC

and Orange Co. litigation were related to his position as an

employee of Orange Co., the performance of services as an




     6
        We make no finding regarding whether Mr. Davis was in the
"business of promoting".
                              - 43 -


employee constitutes a trade or business.    See O'Malley v.

Commissioner, 91 T.C. 352, 363-364 (1988).

     When an employee, however, has a right to reimbursement for

expenditures related to his status as an employee but fails to

claim such reimbursement, the expenses are not deductible because

they are not "necessary" within the meaning of section 162; i.e.,

it is not necessary for an employee to remain unreimbursed for

expenses to the extent he could have been reimbursed.       See Orvis

v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.

Memo. 1984-533; Lucas v. Commissioner, 79 T.C. 1, 7 (1982);

Kennelly v. Commissioner, 56 T.C. 936, 943 (1971), affd. without

published opinion 456 F.2d 1335 (2d Cir. 1972).    The employee has

the burden of establishing that the employer would not reimburse

the expense had the employee requested reimbursement.       See Podems

v. Commissioner, 24 T.C. 21, 23 (1955).     Moreover, the

prohibition of deductions for reimbursable expenses is a "bright

line rule" and applies even when the employee is unaware that the

expenses are reimbursable.   See Orvis v. Commissioner, supra at

1408.

     Orange Co.'s certificate of incorporation required

indemnification of officers for expenses arising from acts

performed in good faith and in a manner reasonably believed to be

in the best interest of Orange Co.     All of the SEC and Orange Co.

litigation expenses Mr. Davis deducted in 1987 and 1988 were
                              - 44 -


included in the demand for indemnification in the Orange Co.

litigation.   Furthermore, Orange Co.'s directors' and officers'

insurance company paid these attorney's fees, and petitioner has

failed to produce any credible evidence that he was not

reimbursed in full or that during the years in issue the prospect

of being reimbursed was insubstantial.7   Therefore, we conclude

that petitioner was not entitled to deduct the SEC or Orange Co.

litigation expenses for 1987 or 1988.

     D.   Hong Kong Legal Fees, General Business Matters,
          and Tax Matters

     On brief, petitioner merely conclusively asserts that the

Hong Kong legal fees were related to, and a continuation of, his

"business of promoting" and that he incurred the legal fees for

tax matters and general business matters in connection with a

trade or business.

     Petitioner neglected to cite any facts and failed to present

any evidence that would support these assertions.   We conclude

that petitioner has failed to meet his burden of proof with

regard to these expenses.   See Rule 142(a).




     7
        Petitioner contends that he was not reimbursed for the
work Laura Byrne, who represented petitioner in part of the
Orange Co. litigation, did for him. On the basis of the record,
however, petitioner has failed to prove that he was not
reimbursed or that he did not have a right to be reimbursed for
these expenses.
                        - 45 -


To reflect the foregoing,

                                  Decision will be entered

                             for respondent in docket No.

                             4449-92.

                                  Decision will be entered

                             under Rule 155 in docket No.

                             5744-92.

                                  Decision will be entered

                             for petitioner in docket No.

                             25088-96.
