                                  T.C. Memo. 1995-572



                               UNITED STATES TAX COURT



               DON C. RESER AND REBECCA JO RESER, Petitioners v.
                  COMMISSIONER OF INTERNAL REVENUE, Respondent



          Docket No. 23464-91.                         Filed November 29, 1995.



          Richard H. Tye, for petitioner Don C. Reser.

          J. Scott Morris, for petitioner Rebecca Jo Reser.

          Joni D. Larson, for respondent.



                     MEMORANDUM FINDINGS OF FACT AND OPINION

          KÖRNER, Judge:       Respondent determined deficiencies in and

    additions to petitioners' Federal income taxes as follows:
                              Additions to Tax Under Section
Year Deficiency 6651(a) 6653(a)(1)/6653(a)(1)(A) 6653(a)(2)/6653(a)(1)(B) 6661

1987 $66,597    $3,330          $3,605                    *              $16,649
1988 15,326        --              766                   --                3,832

       *Equal to 50 percent of the interest that is computed on the portion of the
underpayment which is attributable to negligence or intentional disregard of rules and
regulations.

          All statutory references are to the Internal Revenue Code in

    effect for the years in issue, and all Rule references are to the
                                   2

Tax Court Rules of Practice and Procedure, except as otherwise

noted.

       Petitioners have conceded that they are liable for a 10-

percent early distribution penalty applied to a $28,000

distribution from an individual retirement account during 1987.

The remaining issues for our decision are:

       (1) Did petitioners have sufficient basis in Don C. Reser,

P.C., a solely owned subchapter S corporation, to claim

distributive losses greater than the amount allowed by

respondent?    We hold that they did not.

       (2) Is petitioner husband liable for self-employment tax due

on $15,000 of income which was earned by petitioner wife during

1987?    We hold that he is not.

       (3) Are petitioners liable for an addition to tax under

section 6651(a) for failure to timely file an income tax return

for 1987?    We hold that they are.

       (4) Are petitioners liable for additions to tax under

section 6653(a)(1) and section 6653(a)(1)(A) and (B) for the

intentional or negligent disregard of rules and regulations in

filing their 1987 and 1988 income tax returns?    We hold that they

are.

       (5) Are petitioners liable for additions to tax under

section 6661 for 1987 and 1988 for substantial understatement of

taxes?    We hold that they are.
                                  3

       (6) Is petitioner wife entitled to the innocent spouse

treatment provided for by section 6013(e)?    We hold that she is

not.

                          FINDINGS OF FACT

       Some of the facts are stipulated and are so found.   The

stipulation of facts and exhibits attached thereto are

incorporated herein by this reference.    Petitioners resided in

San Antonio, Texas, at the time the petition was filed.

Petitioner husband (hereinafter petitioner) received an A.B. in

economics from Stanford University, an M.B.A. from the University

of Texas, and a J.D. from the University of Houston Law School.

Petitioner wife received her undergraduate degree in history from

Stanford and her J.D. from the University of Texas Law School in

December 1975.    Petitioners were married on March 30, 1974.     They

had two children prior to their divorce on August 5, 1991.

       In 1984, petitioner filed articles of incorporation for Don

C. Reser, P.C. (hereinafter DRPC), which elected subchapter S

status in that year.    Petitioner was the sole shareholder of

DRPC, which was initially capitalized with $6,000.    During the

years in issue, DRPC's main business purpose was to broker a real

estate transaction.

       During 1985, petitioner and DRPC together obtained a line of

credit from North Frost Bank of San Antonio, Texas (later known

as Frost National Bank and hereinafter referred to as Frost

Bank), in the name of petitioner and DRPC.    Petitioner and DRPC
                                  4

submitted financial statements to Frost Bank.    The credit line

was documented by 14 promissory notes, each payable 90 days after

execution.    They were dated from October 7, 1985, through January

10, 1989.    The final note, dated January 10, 1989, states a

cumulative principal loan balance of $467,508.54.    Petitioner and

DRPC were jointly and severally liable on the notes for repayment

of the loan.

      The loan was not collateralized with any property of

petitioner or DRPC.    On November 16, 1986, a guaranty agreement

was executed by petitioner, DRPC, and Don Test, under which Don

Test would guarantee the loan for a fee of $14,998.50 for each

90-day period that the guaranty was outstanding.    Petitioner and

DRPC were jointly and severally liable to Don Test for payment of

the fee.    Frost Bank would have granted the line of credit to

either petitioner or DRPC individually, but to neither without

Don Test's guaranty.    In addition to the guaranty, Don Test

provided common stock of the Genuine Parts Co. as collateral.

Don Test was not a shareholder or otherwise related to the

corporation.    DRPC paid the guaranty fees and claimed $60,994 and

$59,994 as expenses on its income tax returns for 1987 and 1988,

respectively.    It does not appear that petitioner paid any part

of the guaranty fees.

     Petitioner had total discretion as to the use of the

proceeds, and Frost Bank did not monitor such use.    The line of

credit was used both as a source of operating capital for DRPC
                                  5

and for petitioner personally.    The credit line funds went

directly into DRPC's account, and any proceeds petitioner used

were drawn out of DRPC.

     Petitioner apparently did not make any repayments on the

notes to Frost Bank; DRPC may have made the only principal

payments on the notes.    In 1989, pursuant to the guaranty

agreement, Don Test apparently paid the balance of the notes.

     Petitioner contributed $6,000 in capital to the formation of

DRPC in 1984.   Petitioner contributed an additional $11,045 to

DRPC during 1984.   The parties have stipulated that petitioner's

basis in DRPC as of December 31, 1984, was $5,362.

     During 1985, without considering the disputed loans to DRPC

from Frost Bank, the net effect of petitioner's withdrawals and

contributions to capital was a withdrawal of $801.    Petitioner

claimed losses of $37,890 from DRPC.    Such losses were not

contested by respondent, causing losses in excess of basis as of

December 31, 1985, of $33,329.

     Excluding respondent's disallowed Frost Bank loans, the net

effect of petitioner's withdrawals and contributions for 1986 was

a contribution of $43,579.    Petitioner claimed a loss of $23,942

from DRPC, which respondent did not contest.    There was

accordingly a loss in excess of basis at December 31, 1986, of

$13,692.
                                  6

     During 1987, the net effect of petitioner's withdrawals and

contributions to DRPC, excluding the contested amounts,1 was a

contribution to capital in the amount of $50,546.    Petitioner

claimed losses in 1987 from DRPC in the amount of $257,354, of

which $36,855 was allowed by respondent.   Excluding the contested

amounts, petitioner's basis as of December 31, 1987, was zero.

     During 1988, the net effect of petitioner's withdrawals and

contributions to DRPC was a withdrawal of $11,279.    Petitioner

claimed a loss in 1988 of $333,581.   Respondent disallowed the

whole loss on the grounds that there was no basis during 1988 to

support such loss.   The disallowed amounts for 1988 consist of

guaranty fees allegedly paid to Don Test in the amount of

$43,106, and loan proceeds from Frost Bank in the amount of

$12,580.   With such amounts disallowed, petitioner's basis in

DRPC was zero at December 31, 1988.

     Petitioner filed for bankruptcy in 1991.   No loans to the

corporation by petitioner were reflected on his bankruptcy

schedules.   Nor were any such loans reflected on the amended

final decree of divorce and division of property between

petitioner and petitioner wife.



     1
        The contested amounts in 1987 are $38,501, which were the
alleged guarantee fees paid to Don Test from Don C. Reser, P.C.,
and $172,457, which was actual loan proceeds from Frost Bank.
                                  7

Self-Employment Tax

     In August 1987, petitioner wife received a $15,000 fee from

an attorney.    Petitioner wife (a practicing attorney) referred

Helen Pawlick to a plaintiff's personal injury attorney and

received a referral fee.    Because she was employed by a personal

injury defense firm, her firm could not ethically receive such a

fee, and it was paid to her.    She then paid the money to DRPC.

Petitioner concedes that income tax is due on such income for

1987, but contests respondent's determination that such income

was taxable to him for self-employment tax purposes.

     Petitioners likewise contest respondent's determination of

additions to tax under sections 6651(a), 6653(a), 6653(a)(1)(A)

and (B), and 6661.

     Petitioner wife alleges that she was an innocent spouse

under section 6013(e) and should not be held liable for the

deficiencies determined herein.

                               OPINION

     Petitioner was the sole shareholder of DRPC, a subchapter S

corporation, and claimed deductions in 1987 and 1988 under

section 1366(a) to reflect losses incurred by DRPC.2   Section

     2
         Sec. 1366 in part provides:

            (a) Determination of Shareholder's Tax Liability.--

                 (1) In General.--In determining the tax under this
            chapter of a shareholder * * * there shall be taken
            into account the shareholder's pro rata share of the
            corporation's--
                                                     (continued...)
                                     8

1366(d) limits the total amount of deductions and losses that can

be passed through to the shareholder to the sum of the

shareholder's adjusted basis in the stock of the corporation and

the shareholder's adjusted basis in indebtedness owed by the

corporation to the shareholder.3         Respondent disallowed the


     2
      (...continued)
                      (A) items of income (including tax exempt
                 income), loss, deduction, or credit the separate
                 treatment of which could affect the liability for
                 tax of any shareholder, and

                       (B) non-separately computed income or loss.

     For purposes of the preceding sentence, the items referred
     to in subparagraph (A) shall include amounts described in
     paragraph (4) or (6) of section 702(a).

                 (2) Nonseparately Computed Income or Loss
            Defined.--For purposes of this subchapter, the term
            "nonseparately computed income or loss" means gross
            income minus the deductions allowed to the corporation
            under this chapter, determined by excluding all items
            described in paragraph (1)(A).

                 *     *    *    *        *    *    *
     3
         Sec. 1366(d)(1) provides as follows:

            (d) Special Rules For Losses and Deductions.--

                 (1) Cannot Exceed Shareholder's Basis in Stock and
            Debt.--The aggregate amount of losses and deductions
            taken into account by a shareholder under subsection
            (a) for any taxable year shall not exceed the sum of--

                      (A) the adjusted basis of the shareholder's
                 stock in the S corporation (determined with
                 regard to paragraph (1) of section 1367(a) for the
                 taxable year), and

                      (B) the shareholder's adjusted basis of any
                 indebtedness of the S corporation to the
                 shareholder (determined without regard to any
                                                     (continued...)
                                  9

deductions based on the determination that petitioner had no

basis in DRPC to support them.   The central issue in this case is

whether petitioner's basis in DRPC should be increased to reflect

amounts lent from Frost Bank or from petitioner to DRPC.

     In order for petitioner to obtain basis from such loans, it

must be proven that petitioner has made an economic outlay of

some kind.   Harris v. United States, 902 F.2d 439, 443 (5th Cir.

1990); Estate of Leavitt v. Commissioner, 875 F.2d 420, 423 (4th

Cir. 1989), affg. 90 T.C. 206 (1988); Underwood v. Commissioner,

63 T.C. 468, 476 (1975), affd. 535 F.2d 309 (5th Cir. 1976).     A

mere guaranty will not constitute the required economic outlay

until such time that the shareholder is actually called upon to

pay all or part of the obligation.    Estate of Leavitt v.

Commissioner, supra at 423.

     In Harris v. United States, supra, the taxpayers formed

Harmar, an S corporation, which was initially capitalized by its

two shareholders with $1,000 and a loan for $475,000.   Harmar

received a $700,000 loan from Hibernia National Bank to purchase

a movie theater.   To secure the loan with Hibernia, Harmar

executed two notes in the amount of $350,000.   One was secured by

assets of the first shareholder, while the second was secured by

a mortgage on the theater.    The mortgage also secured any other

debt of Harmar to Hibernia.   Each shareholder also executed


     3
      (...continued)
               adjustment under paragraph (2) of section 1367(b)
               for the taxable year).
                                10

personal guaranties of Harmar's debt.   The Commissioner

disallowed a loss claimed by the shareholders as it exceeded

their bases.   The taxpayers sought to have the court ignore the

form of the transaction and look to what they claimed was the

substance of the transaction, namely, that the $700,000 loan was

to them and that they subsequently contributed such amounts to

Harmar's account.   This allegation was supported by a bank

officer's testimony that the bank looked primarily to the

shareholders for repayment.

     Harmar received the interest notices, paid all principal

payments, and deducted those interest payments on its income tax

returns.   Harmar's books and records reflected that the loan was

not made by Hibernia until 1986, 4 years after the year in

question, when it was reflected as being made by the taxpayers.

Harmar's 1982 return showed no loan repayments to the

shareholders, which it would have done if the loan had been one

from the taxpayers to Harmar.   The loan made by Hibernia was

earmarked by Hibernia for a specific use by Harmar.   Finally, the

return indicated a $2,000 capital investment and a $68,000 loan

from the taxpayers, which fell far short of the claimed $700,000

loan.   The court concluded that the return was wholly

inconsistent with the position of the taxpayers and, refusing to

recast the bank loan to Harmar as being substantively from the

bank to the shareholders to Harmar, found that no economic outlay

had been made.
                                11

     In Estate of Leavitt v. Commissioner, supra, the Court of

Appeals for the Fourth Circuit, affirming the Tax Court, refused

to find that the taxpayers had bases in loans from a bank to an S

corporation where the taxpayers had personally guaranteed those

loans.   At the time of the loan, the corporation's liabilities

exceeded its assets, it had virtually no cash flow, and it

offered no assets as collateral.     The bank would not have made

the loan without the shareholder guaranties.     The corporation's

returns and financial statements reflected that the loan was from

the shareholders.   The court focused on how the parties actually

treated the loan, not on how they nominally reported it on their

returns and financial statements.     The corporation paid the

principal and interest to the bank, and neither the corporation

nor the shareholders treated the corporate payments on the loan

as corporate payments to the shareholders.     The taxpayers argued

that the loan was in substance a loan to them and then a

subsequent loan to the corporation.

     The court found the taxpayers' position inconsistent with

the true form of the transaction and concluded that there had

been no economic outlay, as the shareholders had not been called

upon to make payment on the guaranty.

     We must decide here whether there was a legitimate debt

between petitioner and DRPC.   With regard to the bank notes, DRPC

paid some of the principal payments and guaranty fees.     Without

the guaranty of Don Test, Frost Bank would not have made the
                                  12

loan, as neither the corporation nor petitioner posted any

collateral, and DRPC had no assets.       Petitioner apparently did

not make any principal payments, nor did he pay any of the

guaranty fees.   The proceeds of the loan were directed into the

account of DRPC, and then petitioner drew from DRPC for any

desired personal use of the proceeds.       Such an arrangement is

inconsistent with petitioner's position that he borrowed the

money and then lent it to DRPC.    Rather, such an arrangement is

wholly consistent with a finding that the proceeds were primarily

for the use of DRPC, with some of the proceeds used by

petitioner.

     Petitioner claims that he borrowed the money from Frost

Bank, some of which he kept, and advanced the rest to DRPC.         To

support this position, petitioner produced 14 promissory notes

payable to Don C. Reser individually by DRPC.       These notes

corresponded exactly with the dates and amounts of the bank

notes.   The notes required interest payments to be paid to

petitioner, and like the bank notes, were due within 3 months.

     Other than this second set of 14 notes, there is no evidence

of a debt between petitioner and DRPC.       There is no evidence that

petitioner ever received nor that DRPC ever paid any interest or

principal payments on the notes.       Rather, petitioner claims to

have reduced the principal balance of the notes in amounts equal

to his distributive losses from DRPC.       Petitioner failed to

produce any record of such reductions.       Furthermore, despite
                                 13

numerous oral and written requests during the audit process, in

which he produced the bank notes and the guaranty agreement with

Don Test, petitioner did not produce the alleged notes between

himself and DRPC until after the statutory notice of deficiency

had been issued.

     DRPC did not make any "loan" repayments to petitioner, and

petitioner did not report any interest income with regard to the

alleged notes.   Petitioner argues that any interest, principal,

or guaranty fees were made "on the account of" petitioner, were

for his benefit, and were recorded as a decrease in the amount of

indebtedness of the corporation to petitioner.   He argues that

any interest due to him from the corporation was treated as an

increase in the amount owed to him based on the notes from DRPC

to him.    He asserts that the interest charged by the bank was not

the same as that charged by him to DRPC, and the difference

between the two interest amounts "represent[s] the guaranty fees,

interest, and principal paid by petitioner".   We have no evidence

of any accounting whatsoever as to interest paid or owed by DRPC

to petitioner.   In evidence is one computer printout of the

general account of DRPC.   Petitioner may have derived these

figures from the register, but he has failed to prove to this

Court how he accounted for any separate debt between DRPC and

himself.

     On its returns, DRPC reflected notes as payable to Frost

Bank, not petitioner, despite the fact that it had listed other
                                14

notes payable to petitioner.   Petitioner explains that the loan

was not listed as one to him from DRPC for internal bookkeeping

purposes, i.e., the other loan was from his own funds, and the

one shown as from Frost Bank actually was from the proceeds

petitioner obtained from Frost Bank.   Similarly, petitioner

claims that the bank notes were executed by himself and DRPC for

bookkeeping purposes.   We are not persuaded by this argument.   We

acknowledge that the bank was not concerned with who took out the

loan so long as Don Test offered collateral and a personal

guaranty.   We are not persuaded that DRPC listed the loans on its

returns as it did for internal bookkeeping purposes; rather, it

seems that such loans were shown as coming from Frost Bank

because they were in fact from Frost Bank to DRPC.

     Petitioner argues that he alone had the power to decide how

to capitalize DRPC.   He also argues that he obtained the loan in

his individual capacity.   We agree that he obtained the loan, but

note that he was the only officer and shareholder of DRPC, and

therefore he was the only agent who could obtain a loan for that

corporation.   The fact is that petitioner executed the notes both

personally and as the president of DRPC; we find that rather than

obtaining the credit line from Frost Bank while acting in his

personal capacity, he obtained the loans while acting in his

personal capacity and as the agent of DRPC.

     Respondent determined that this alleged debt from DRPC to

petitioner will not give rise to basis under section 1366(d)(1).
                                  15

Petitioner bears the burden of proof to establish facts that will

support his position, that there was a debt owed by DRPC to

petitioner and one from petitioner to Frost Bank.    Although these

notes are evidence of such a debt, in light of the other

objective circumstances present, we fail to find that petitioner

has established that there was an actual, substantive debt owed

by DRPC to petitioner.

     We now turn to whether petitioner was an accommodation

party.    In Harrington v. United States, 605 F. Supp. 53 (D. Del.

1985), the taxpayers' basis in their stock of a corporation at

the end of the 1980 tax year was $2.50, but they claimed that

they had a pro rata share of indebtedness to shareholders of

$5,000.   During 1980, the taxpayers and four other shareholders

executed a $200,000 note to secure a credit line with a bank.

The proceeds were to be used for equipment for the corporation,

which was added as a signatory to the note at the insistence of

the bank to enable the bank to get a lien on the equipment.      The

wives of the shareholders were also added to the note at the

insistence of the bank.    The court, quoting Raynor v.

Commissioner, 50 T.C. 762, 770-771 (1968), stated that "'No form

of indirect borrowing, be it guaranty, surety, accommodation,

comaking or otherwise, gives rise to indebtedness from the

corporation to the shareholders until and unless the shareholders

pay part or all of the obligation'".      Harrington v. United

States, supra at 56.     The taxpayers argued that since they
                                  16

provided the collateral and were comakers on the note, they

substantively received the loan and then made a separate loan to

the corporation.   The court indicated that Raynor would apply

only if it was first determined that there was no economic

outlay.   There, because no loan repayments had been made by the

shareholders, the court found that no economic outlay had been

made and applied Raynor.

     Next the court analyzed whether the taxpayers were

accommodation parties or principal debtors on the note.    An

accommodation party "'is one who signs the instrument in any

capacity for the purpose of lending his name to another party to

it'".   Harrington v. United States, supra at 57 (quoting Del.

Code. Ann. tit. 6, sec. 3-415).    A surety is an accommodation

party, while a principal obligor is not.    Finding that the

parties there were comakers on the note, the court looked to the

actual note to discern the intent of the parties.    Unable to find

such an intent, the focus shifted to who was the principal

beneficiary of the proceeds of the note.    The court there found

that the corporation was the primary beneficiary, despite some

draws by the shareholders personally on the line of credit, and

therefore the shareholders were accommodation parties.

     If there is not an economic outlay, then we must determine

whether petitioner was an accommodation party on the notes to

which he was a comaker.    If petitioner is an accommodation party

to DRPC on the bank notes, then he is not entitled to basis for
                                17

any amount of the debt with Frost Bank for the years in issue.

On the bank notes, petitioner and DRPC are cosigners.    Respondent

asserts that petitioner is an accommodation party to the notes,

while petitioner claims that the corporation was the

accommodation party.   The notes themselves, as in Harrington v.

United States, supra, do not shed light on who the actual debtor

may be.   The principal beneficiary of the proceeds in this case

was the corporation.   While petitioner may have received a

portion of the proceeds for his personal use, the corporation was

the primary beneficiary.

     In this case, there is one factor different than in

Harrington, and that is rather than a shareholder making a

personal guaranty, as in Harrington, here there was a third-party

guarantor, Don Test, who was actually paid by the corporation.

We feel that this is much stronger evidence that the corporation

was the primary obligor, and that petitioner was the

accommodation party.   In Harrington, the shareholders themselves

guaranteed the debt, and this did not give rise to basis.     Here,

the shareholder did not even pay for the third-party guaranty.

The debt was allegedly ultimately extinguished by Don Test, the

paid guarantor, after the years in issue.   At that time,

petitioner says he paid Don Test.    If this payment had been made

during the years in issue, we might have found that it gave rise

to basis, but that question is not properly before us.   We

therefore find that petitioner is an accommodation party to the
                                18

corporation, in the years in issue, and therefore he is not

entitled to basis for any amount of the debt with Frost Bank.

Self-Employment Tax

     Petitioner argues that no additional self-employment tax is

due from him for 1987 because petitioner wife had already

reported and paid the maximum self-employment tax for 1987, which

was $5,387.4

     There is an upward limit on the amount upon which a Social

Security self-employment tax is assessed, sec. 1402,5 but this in

no way diminishes the obligation to report and pay income tax on

self-employment income, sec. 1401(a).   Petitioner wife received

income of $15,000 on account of a referral fee from another

lawyer.   It was her self-employment income, not petitioner's.

For income tax purposes, it was reportable by petitioners, and it

is conceded it was not done.   On this, respondent's determination

of additional income is sustained.   It was not, however, income

of petitioner Don C. Reser for self-employment tax purposes, and

it was error for respondent to determine a deficiency of $1,845

on account of it.




     4
        The pleadings here are not entirely clear, but the
parties have treated and argued the issue of petitioner's self-
employment tax as properly raised, and we will so treat it.
     5
        The maximum amount of self-employment income subject to
self-employment tax in 1987 was $43,800.
                                 19

Negligence

     Respondent determined that petitioners are liable for

additions to tax for negligence under section 6653(a)(1) and

section 6653(a)(1)(A) and (B).    Section 6653(a)(1)(A), for 1987,

and section 6653(a)(1) for 1988, impose an addition to tax equal

to 5 percent of the entire underpayment if any portion of such

underpayment is due to negligence.    Section 6653(a)(1)(B), which

applies to 1987, imposes an addition to tax equal to 50 percent

of the interest payable under section 6601 with respect to the

portion of the underpayment due to negligence.    Negligence is the

failure to make a reasonable attempt to comply with the

provisions of the Code.    Sec. 6653(a)(3).   Petitioners have the

burden of proof to establish that they made a reasonable attempt

to file accurate Federal income tax returns and that they were

not negligent.    Rule 142(a); Enoch v. Commissioner, 57 T.C. 781

(1972).

     Petitioners' returns were prepared by certified public

accountants.    Petitioner argues that where a taxpayer has

reasonably relied on financial advisers, he will not be liable

for an addition to tax based on negligence.     Heasley v.

Commissioner, 902 F.2d 380, 384 (5th Cir. 1990), revg. T.C. Memo.

1988-408.    While reliance on a professional who has prepared a

tax return may shield the taxpayer in some instances from

additions to tax due to negligence, we do not believe that any

reliance was reasonable in this case.    The general rule is that
                                20

the duty of filing accurate returns cannot be avoided by placing

responsibility on an agent.   Pritchett v. Commissioner, 63 T.C.

149, 174 (1974).   As was recently pointed out by the Court of

Appeals for the Fifth Circuit, reliance on a professional must be

reasonable, and the professional must have the necessary

information regarding the matter upon which his or her advice is

given.   See Chamberlain v. Commissioner, 66 F.3d 729 (5th Cir.

1995), affg. in part and revg. in part T.C. Memo. 1994-228.

     Stewart Goodson, the certified public accountant who

prepared the returns here, testified that John Gwaltney, DRPC's

accountant, told him to treat loans listed on the financial

statements as coming from the bank as loans from petitioner, and

that such loans were in fact from petitioner.   Mr. Goodson, an

agent of DRPC, thus treated the loans as loans from petitioner.

In light of our finding that there was no separate loan from

petitioner to the corporation, we find that petitioner's reliance

on Mr. Goodson was not reasonable, as based on inaccurate

information that Mr. Goodson made no effort to verify, and that

appears to have been furnished to him on petitioner's

instructions.   See Zermeno v. Commissioner, T.C. Memo. 1991-550.

Substantial Understatement

     Respondent determined that petitioners are liable for an

addition to tax under section 6661 for substantial

understatements of tax.   Section 6661 provides for an addition to

tax equal to 25 percent of the amount of any underpayment
                                21

attributable to a substantial understatement.    An understatement

of tax is considered substantial if the understatement exceeds 10

percent of the proper income tax for the year.    Sec.

6661(b)(1)(A).   The 25-percent addition will not apply to any

items for which there was substantial authority or items which

were adequately disclosed on the Federal income tax return.     Sec.

6661(b)(2)(B).

     Petitioner primarily cites Selfe v. United States, 778 F.2d

769 (11th Cir. 1985), as substantial authority for the position

that there was basis in DRPC.   The Selfe opinion, which was

rejected by this Court in Estate of Leavitt v. Commissioner, 90

T.C. 206 (1988), held that a guaranty by the shareholders of an S

corporation which borrowed money would give rise to basis.

Petitioner also argues that at the time of filing of the returns,

Selfe had not yet been rejected.     See Doe v. Commissioner, T.C.

Memo. 1993-543; Keech v. Commissioner, T.C. Memo. 1993-71; Nigh

v. Commissioner, T.C. Memo. 1990-349.    Petitioners filed their

1987 return on November 4, 1988, and their 1988 return on October

17, 1989.

     We are not persuaded by petitioner.    This Court rejected

Selfe in Estate of Leavitt v. Commissioner, supra, on February

10, 1988, and was affirmed on May 19, 1989.    Petitioners can no

longer depend upon Selfe.   We think there was no substantial

authority supporting of petitioners' position, and we hold for

respondent.
                                 22

Failure To Timely File

     Section 6651(a)(1) provides for an addition to tax of 5

percent of the tax for each month or fraction thereof for which

there is a failure to file, not to exceed 25 percent.    A tax

return for an individual normally must be filed before April 15

of the following tax year to be considered timely.    Sec. 6072(a).

The Secretary may grant a reasonable extension of time for filing

any return.   Sec. 6081(a).   Petitioners were granted an extension

of time to file.   Their return for 1987 was due on October 17,

1988, but was not filed until November 4, 1988.

     The addition to tax for failure to timely file a return will

be imposed if a return is not timely filed unless the taxpayer

shows that the delay was due to reasonable cause and not willful

neglect.   Sec. 6651(a)(1).   Willful neglect is a conscious,

intentional failure or reckless indifference.    Reasonable cause

is established where it is proven that the taxpayer exercised

ordinary business care and prudence but nevertheless was unable

to file the return within the prescribed time.    United States v.

Boyle, 469 U.S. 241 (1985).    Congress has placed the duty to

timely file upon the taxpayer.    That the taxpayer may rely on a

professional will not relieve the taxpayer of his duty to comply

with the statute, id., and the burden of proof is still on him.

Estate of DiRezza v. Commissioner, 78 T.C. 19 (1982).

     Petitioner contends that the delay in filing arose when the

return preparer declined to file the return as a result of a
                                  23

dispute with petitioner concerning the fee.     Petitioner then

allegedly exercised ordinary business care and prudence in

obtaining another professional, who did file the return on

November 4, 1988.     We are unpersuaded by petitioner's argument.

Although he has effectively explained why the return was not

timely filed, such explanation does not excuse the late filing.

We hold that their reliance on the first return preparer is not

reasonable cause, and therefore petitioners will be liable for

the addition for failure to timely file.

Innocent Spouse

       Petitioner wife argues that she is entitled to treatment as

an innocent spouse for the 1987 tax year pursuant to section

6013(e).6    Generally, if a husband and wife file a joint return,

the tax is computed on their aggregate income, and they become

jointly and severally liable for payment of such tax.        Sec.

6013(d)(3).     A spouse may be relieved of such liability if the

requirements of section 6013(e)(1) are met.     Those requirements

are:

            (A) a joint return has been made under this section for
       a taxable year,

            (B) on such return there is a substantial
       understatement of tax attributable to grossly erroneous
       items of one spouse,

            (C) the other spouse establishes that in signing the
       return he or she did not know, and had no reason to know,
       that there was such substantial understatement, and



       6
           Petitioner wife has waived this issue for 1988.
                                  24

          (D) taking into account all   the facts and
     circumstances, it is inequitable   to hold the other spouse
     liable for the deficiency in tax   for such taxable year
     attributable to such substantial   understatement * * *


The burden is on petitioner wife to prove that she is entitled to

innocent spouse relief.     Bokum v. Commissioner, 94 T.C. 126, 138

(1990), affd. 992 F.2d 1132 (11th Cir. 1993).    The parties have

stipulated that for the 1987 tax year a joint return was filed,

and there was a substantial understatement of tax.    We are left

to decide if there was a grossly erroneous item attributable to

petitioner husband, and if petitioner wife did not know, and had

no reason to know, of such substantial understatement, and if it

would be inequitable to hold petitioner wife liable.    Failure to

prove any one of the four elements set forth in section

6013(e)(1) prevents a taxpayer from qualifying for relief under

the innocent spouse rule.    Park v. Commissioner, 25 F.3d 1289,

1292 (5th Cir. 1994), affg. T.C. Memo. 1993-252.

     The requirement of section 6013(e)(1)(C) is that petitioner

wife establish that she did not know, or have reason to know, of

such understatement.   Petitioner wife is a practicing attorney.

At trial she testified that she did not know the specific details

of DRPC, but that she nonetheless lent petitioner husband money

and often called DRPC and made general inquiries into how things

were going.   Petitioner wife claimed that she did not think that

there was any problem with the losses reported from DRPC because

it was a new enterprise, and she expected a loss considering the
                                 25

startup costs.   Although we agree that startup expenses can be

expected, we feel that petitioner wife should nonetheless have

inquired as to whether the losses were properly claimed, given

the size of the losses and their continuing nature.    There was no

claim that any of this information was kept from her, only that

she did not have any actual knowledge of the nature of the

losses, and apparently did not inquire more than casually.       We

are not persuaded by such arguments.

     Petitioner wife, an attorney, signed the 1987 tax return.

She undoubtedly noticed that the losses attributable to her

husband's corporation would act to shelter her income.    Given the

circumstances, we find that a reasonably prudent taxpayer should

have known that the tax liability stated was erroneous, or that

further investigation was warranted.     Park v. Commissioner, supra

at 1298.7   We find that petitioner wife should have investigated

whether the losses were properly deductible.

     Since we hold that petitioner wife should have known, or was

on reasonable notice, that the loss was improper, we must

conclude that she does not qualify for treatment as an innocent

spouse under section 6013(e).

                                      Decision will be entered

                                under Rule 155.



     7
        Cf. Erdahl v. Commissioner, 930 F.2d 585 (8th Cir. 1991),
revg. T.C. Memo. 1990-101; Chandler v. Commissioner, T.C. Memo.
1993-540, affd. without published opinion 46 F.3d 1131 (6th Cir.
1995).
