                       T.C. Memo. 1997-245



                     UNITED STATES TAX COURT



                 DONALD A. ROBINS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12422-95.                      Filed June 2, 1997.



     Donald A. Robins, pro se.

     Randall P. Andreozzi, for respondent.



                       MEMORANDUM OPINION

     PAJAK, Special Trial Judge:    This case was heard pursuant to

section 7443A(b)(3) of the Code, and Rules 180, 181, and 182.

All section references are to the Internal Revenue Code in effect

for the taxable years in issue.    All Rule references are to the

Tax Court Rules of Practice and Procedure.
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     Respondent determined additions to petitioner's Federal

income taxes as follows:

                         Additions to Tax
                  Sec.           Sec.
               6653(a)(1)/    6653(a)(2)/      Sec.
     Year      6653(a)(1)(A) 6653(a)(1)(B)     6661
                                         1
     1985           $407                      $2,035
                                         2
     1986            241                        --
     1
       50 percent of the interest due on $8,138, which represents
the portion of the underpayment attributable to negligence or
intentional disregard of rules or regulations.
     2
       50 percent of the interest due on $4,825, which represents
the portion of the underpayment attributable to negligence or
intentional disregard of rules or regulations.

     The Court must decide whether petitioner is liable for

additions to tax under section 6653(a) for 1985 and 1986, and

whether petitioner is liable for an addition to tax under section

6661(a) for 1985.

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

For clarity and convenience, our findings of fact and opinion

have been combined.    Petitioner resided in Fairport, New York,

when his petition was filed.

     The issues in this case result from the Court's decision to

sustain respondent's disallowance of charitable contribution

deductions claimed by Mount Mercy Associates, a limited

partnership, in 1985 and 1986.    See Mount Mercy Associates v.

Commissioner, T.C. Memo. 1994-83, affd. without published opinion

50 F.3d 2 (2d Cir. 1995).    Our decision in Mount Mercy Associates
                                - 3 -

has been made a part of the record in the instant case, and to

the extent necessary to decide the issues before us, we rely on

the facts found by the Court in that decision.

     Mount Mercy Associates (Mount Mercy or the partnership) was

formed to acquire property which overlooked the Hudson River in

Westchester County, New York.   The partnership planned to build

residential condominium units on the property.   The property was

owned by the Institution of Mercy, a not-for-profit corporation

wholly owned by the Sisters of Mercy (Sisters), a religious

order.   The Sisters resided at and operated a nursing home in the

Mount Mercy convent building on the property offered for sale.

The convent building and surrounding grounds were situated on

approximately 5 acres (the convent property).    As a condition of

the sale, the Sisters desired continued use of the convent

property.   The Institution of Mercy offered the entire property

for sale at a $7.5 million asking price.

     The partnership's Confidential Private Placement Memorandum

(Memorandum) outlined plans to purchase the property from the

Institution of Mercy.   There were no plans to develop the convent

property.   Instead, the partnership intended to build up to 250

luxury condominiums on the remaining unimproved property.    It was

anticipated and understood, in accordance with the Sisters'

desire to remain in possession of the convent property, that the

partnership intended to deed the convent property back to the

Institution of Mercy.   To maximize anticipated tax benefits, 50
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percent of the convent property was to be donated in 1985 and the

remainder in 1986.

     The Memorandum outlined the tax benefits and the tax risks

to investors attributable to the donation of the convent

property.   The Memorandum explained that:

     The Partnership has engaged an independent real estate
     appraiser to determine the fair market value of the
     convent building. His appraisal is not expected to be
     completed before this offering closes. The value of
     the proposed gift is a question of fact, and there can
     be no assurance that, if the Partnership is audited by
     the Internal Revenue Service, such value will be
     accepted. The Internal Revenue Service may engage on
     its own an independent appraiser to value the
     charitable gift, and it is possible that the Service
     will arrive at a different value. The Partnership may
     have to resort to litigation to settle the issue.

The Memorandum repeatedly cautioned that the Internal Revenue

Service might challenge the valuation of the convent property.

     In a section entitled "Risk Factors", the Memorandum warned

that:

          There can be no assurance that the value the
     Partnership will claim for the charitable deduction
     will be accepted by the Internal Revenue Service in the
     event of an audit of the Partnership's tax return. If
     the valuation is contested and a lower valuation
     results, the Partnership (and, hence, each Partner),
     will have disallowed, to that extent, a portion of its
     charitable deduction. * * * along with the assessment
     of interest on the deficiency and also the possible
     assessment of penalties, including the substantial
     overvaluation penalty (see Tax Aspects) which is equal
     to 30% of the deficiency in tax caused by the
     overvaluation.

     In the subsection "Additions to Tax - Penalties & Interest",

the Memorandum explained in detail that the substantial
                              - 5 -

understatement penalty under section 6661 or the valuation

overstatement penalty under section 6659 could apply to the

proposed charitable contributions.    The Memorandum stated that:

     Investors should be aware, however, that these
     penalties exist, and, that the activities in which the
     Partnership will engage, and certain of the tax
     positions which it intends to take, are of the sort at
     which the penalties are directed. For example, a
     substantial charitable deduction will be claimed, the
     amount of which is based upon an appraisal. The value
     of the charitable contribution could be the subject of
     a valuation dispute, and there is no assurance that the
     Partnership would ultimately prevail in a dispute on
     this issue. If questioned by the Service, the issue of
     valuation may be resolvable only by litigation.

     The Memorandum warned that "A PROSPECTIVE INVESTOR SHOULD

OBTAIN PROFESSIONAL GUIDANCE FROM HIS OWN TAX ADVISOR IN

EVALUATING THE TAX RISKS INVOLVED."   This warning was made

repeatedly throughout the Memorandum.

     The Memorandum also stated that the summary of the Federal

income tax consequences "was prepared under the direction of the

law firm of Petralia, Webb & Bersani, P.C. * * * which has agreed

to make itself available to answer the questions of potential

investors, and which will develop, at closing, its opinion of the

major tax consequences of an investment".

     Attached as an exhibit to the Memorandum was a copy of the

November 1, 1985, purchase and sale agreement between the

partnership's initial general partner and the Institution of

Mercy.

     After the November 1, 1985, purchase and sale agreement was
                                 - 6 -

signed, the partnership renegotiated the provisions of the sale

with the Institution of Mercy.    The purchase price remained at $9

million but cash to be paid at closing was reduced from $2

million to $400,000, and the $6 million note and mortgage were

correspondingly increased to $7.6 million.       On December 30, 1985,

the Institution of Mercy conveyed the property to the partnership

for $9 million under the following terms:       $80,000 deposit paid

December 1985; $10,000 additional deposit paid December 1985;

$310,000 paid December 30, 1985; $1 million note and mortgage

secured by the convent property; and $7.6 million note secured by

the remaining unimproved property.       The $7.6 million note and

mortgage was nonrecourse and had an interest rate equal to the

greater of 10 percent or 2 percent plus the prime commercial rate

of the Bank of New York.   The $1 million note and mortgage was

nonrecourse, had no stated interest rate, and was subordinate to

all mortgages which existed at the closing or arose thereafter.

Payment of the $1 million note was due December 30, 1988.

     As of the date of trial in Mount Mercy Associates v.

Commissioner, supra, the mortgage note secured by the covenant

property was not paid, even though all other obligations

concerning the transactions were fully executed.

     This Court found that the donation to the Institution of

Mercy lacked economic substance and held that the partnership was

not entitled to charitable deductions for 1985 and 1986.       Mount

Mercy Associates v. Commissioner, supra.       We found that the
                               - 7 -

"substance of the transaction, considered in its entirety, is

that the partnership purchased only the unimproved land for $8

million."   Mount Mercy Associates v. Commissioner, supra.     The

Court found that the partnership attempted to structure a

transaction which had the appearance, but not the substance, of a

gift to charity.   The Court stated that "The partnership's

purchase of an unwanted and unnecessary asset with no additional

cost to it should not result in a tax benefit where none was

actually intended by the statutes or, as a matter of substance,

the donee received nothing more than it already possessed."

Mount Mercy Associates v. Commissioner, supra.    The Court went on

to observe that:   "It was the partnership that produced the

subterfuge we must ignore."   Mount Mercy Associates v.

Commissioner, supra.   Consequently, we sustained respondent's

disallowance of the partnership's charitable contribution

deductions.

     Petitioner was issued Schedules K-1 for the years in issue,

reflecting, among other items, his distributive shares of the

partnership's charitable deductions.    Petitioner gave these to

his tax return preparer.   Petitioner deducted $16,277 in 1985 and

$15,626 in 1986 as his share of Mount Mercy's charitable

deductions.

     As a result of our decision in Mount Mercy Associates v.

Commissioner, supra, respondent disallowed petitioner's claimed

charitable contribution deductions.    The corresponding
                               - 8 -

deficiencies, plus interest, were assessed, and then paid by

petitioner.

     With respect to the claimed charitable contribution

deductions, respondent determined that petitioner is liable for

additions to tax for negligence under section 6653(a) for 1985

and 1986.

     Section 6653(a)(1) (section 6653(a)(1)(A) for 1986) provides

that if any part of any underpayment of tax is due to negligence

or intentional disregard of rules or regulations, there shall be

added to the tax an amount equal to 5 percent of the

underpayment.   Section 6653(a)(2) (section 6653(a)(1)(B) for

1986) provides for an addition to tax in the amount of 50 percent

of the interest payable on the portion of the underpayment of tax

attributable to negligence.

     Negligence is defined as lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.   Neely v. Commissioner, 85 T.C. 934, 947

(1985).   Petitioner bears the burden to prove that respondent's

determinations are in error.   Rule 142(a); Bixby v. Commissioner,

58 T.C. 757, 791 (1972).

     Reasonable and good faith reliance on the advice of an

accountant or attorney may offer relief from the imposition of

the negligence addition.   United States v. Boyle, 469 U.S. 241,

250-251 (1985).   However, reliance on professional advice is not

an absolute defense to negligence, but rather a factor to be
                               - 9 -

considered.   Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

     Reliance on representations by insiders, promoters, or

offering materials has been held an inadequate defense to

negligence.   Goldman v. Commissioner, 39 F.3d 402, 408-409 (2d

Cir. 1994), affg. T.C. Memo. 1993-480; LaVerne v. Commissioner,

94 T.C. 637, 652-653 (1990), affd. without published opinion 956

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

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

     Our focus in this case is only with respect to the

charitable contributions deductions claimed by petitioner, which

were part of the Mount Mercy partnership transaction.

     Petitioner asserts that he is not liable for the additions

to tax under section 6653 because of reasonable, good faith

reliance on professional advice, which he received from Arnold R.

Petralia (Petralia), an attorney.

     Petralia is an attorney with offices in Rochester, New York.

The parties stipulated that Petralia is an attorney with

expertise in tax law.

     In 1985, Petralia was retained by the Mount Mercy

partnership to write the Memorandum, including the portions

relating to the charitable contribution deductions.   Petralia and

his firm were to answer the tax questions of potential investors.

Petralia was paid by Mount Mercy for his legal services.

Petralia was not a salesman for the partnership and did not
                               - 10 -

receive any other compensation for the sale of interests in the

partnership.

     Petralia also was a limited partner in Mount Mercy.   As a

limited partner, Petralia had an interest in seeing that the

partnership would be fully subscribed.   According to Petralia,

one of the special limited partners could have brought in enough

New York City area investors to fully subscribe the partnership.

Petralia had to fight to get available units for the Rochester

investors he would be bringing into the partnership.

     Petralia discussed the Mount Mercy partnership with

petitioner and other investors.   Petralia did not offer any

significant opinion on the validity of the contemplated

charitable contribution deductions beyond what was stated in the

Memorandum.    Petitioner was aware of Petralia's relationship with

Mount Mercy at the time of these discussions.   Petralia did not

charge petitioner for legal or tax advice pertaining to his

discussions regarding Mount Mercy, because according to Petralia,

that would have constituted a conflict of interest with his work

for Mount Mercy.

     Petralia stated he had done legal work for petitioner and

his partner.   The parties stipulated that Petralia was outside

counsel for petitioner's business, Flexseal Packaging, providing

a wide range of legal services to the business and its principals

since 1980.

     It is obvious from the above that Petralia considered
                              - 11 -

himself the attorney for Mount Mercy in every respect insofar as

the partnership aspects were concerned.   Petralia's response to

petitioner with respect to the partnership was consistent with

his obligations to his client, Mount Mercy.    Where an adviser is

so closely tied to a promoter, and the taxpayer knows of this, we

do not believe the taxpayer received independent advice.      Cf.

Horn v. Commissioner, 90 T.C. 908 (1988).     Petralia perceived

there was the possibility of a conflict and did not offer any

significant opinion beyond that in the Memorandum.    The Court of

Appeals for the Second Circuit has stated that a party "cannot

reasonably rely for professional advice on someone they know to

be burdened with an inherent conflict of interest."     Goldman v.

Commissioner, supra (this is the circuit to which an appeal in

this case will lie).

     Petitioner, a successful businessman, was a sophisticated,

aggressive investor.   Petitioner reported wage income of $410,089

and $340,559 in 1985 and 1986, respectively.    He deducted

partnership losses of $175,395 and $205,973 from a number of

partnerships for those years, respectively.    It appears to us

that petitioner was familiar with partnership transactions.

     Petitioner reviewed the Memorandum and the Investor

Analysis.   With all the warnings in the Memorandum, some of which

we have set forth, it is clear that the purported charitable

deduction was dubious at best and might have to be defended in

court.   Yet petitioner did not hesitate to take advantage of what
                               - 12 -

he termed in his testimony a "nice extra".      Petitioner was

willing to take advantage of this nice extra to reduce his tax

liability despite the numerous warnings in the Memorandum.       This

Court has referred to that nice extra as a subterfuge.        We find

that the Memorandum advertised improbable tax advantages with

respect to the charitable contribution.

     Petitioner actually paid $7,500 in 1985 and $12,018.73 in

1986 for his partnership share.   For those 2 years, he deducted

$16,277 and $15,626 as cash contributions on the Schedules A of

the respective returns.   At his tax bracket, these specific

deductions almost paid for his investment in the partnership

during the 2 years in issue.

     Moreover, petitioner is a sophisticated businessman who, on

his own, had reason to doubt whether the charitable contribution

deductions were proper deductions.      Instead, petitioner

admittedly considered the deductions a little extra tax benefit.

We believe petitioner knew that the deductions were at the least

problematic.   For all the foregoing reasons, we find that

petitioner is liable for the negligence additions to tax for 1985

and 1986.

     We turn to the question of whether petitioner is liable for

the addition to tax for a substantial understatement of income

tax under section 6661(a) for 1985.      Section 6661(a) provides for

an addition to tax in the amount of 25 percent of any

underpayment attributable to a substantial understatement of tax.
                              - 13 -

An understatement is substantial if it exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

Sec. 6661(b)(1)(A).   In general, if a taxpayer had substantial

authority for his tax treatment of the item in question, or if

the taxpayer adequately disclosed the tax treatment of the item

on his return, then the taxpayer may escape liability for the

addition to tax with respect to that liability.    Sec.

6661(b)(2)(B).   However, if the item in question is attributable

to a tax shelter, the substantial authority exception will apply

only if there was substantial authority for the treatment of the

item on the return and the taxpayer reasonably believed that the

treatment of the item was more likely than not the proper

treatment.   Sec. 6661(b)(2)(B) and (C).   Petitioner bears the

burden to prove that respondent's determination is in error.

Rule 142(a).

     It is clear from the record that a substantial

understatement exists for 1985.   Petitioner appears to concede

that there was no substantial authority for the treatment of the

charitable contribution on his 1985 return.    Rather, petitioner

argues that respondent abused his discretion by failing to waive

the addition to tax for a substantial understatement of tax

liability.

     Section 6661(c) provides that the Secretary may waive all or

part of the addition to tax under section 6661(a) "on a showing

by the taxpayer that there was reasonable cause for the
                               - 14 -

understatement * * * and that the taxpayer acted in good faith."

The denial of a waiver under section 6661(c) is reviewable by the

Court, and the appropriate standard of review is whether

respondent has abused his discretion in not waiving the addition

to tax.   Mailman v. Commissioner, 91 T.C. 1079, 1083 (1988).

     We have found that petitioner failed to prove that he acted

reasonably in claiming the charitable loss deduction in 1985.      On

the record before us, we further find that, assuming arguendo

that petitioner sought a waiver under section 6661(c), he has not

established that respondent abused his discretion in not granting

any such request.

     Based on the record before us, we find that petitioner has

failed to satisfy his burden of proving that he had substantial

authority for claiming on his 1985 return the charitable

deduction of $16,277 with respect to Mount Mercy.    He has also

failed to prove that that return position was more likely than

not the proper treatment.    In addition, assuming arguendo that

petitioner requested a waiver under section 6661(c), petitioner

has failed to prove that respondent abused his discretion in not

granting any such request.    Accordingly, we sustain respondent's

determination imposing the addition to tax under section 6661(a)

for 1985.

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent.
