                        T.C. Memo. 2000-188



                      UNITED STATES TAX COURT



        EDWARD D. LANG AND SHARON A. LANG, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7280-97.                        Filed June 27, 2000.



     Kevin Phillip Kennedy, for petitioners.

     T. Richard Sealy III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes in the amounts of $104,221 for

1989, $136,986 for 1990, $161,458 for 1991, $93,890 for 1992, and

$76,200 for 1993.   Respondent also determined that petitioners

are liable for the fraud penalty under section 6663 for each

year, but respondent now concedes they are not.     Respondent
                                  - 2 -

determined in the alternative that petitioners are liable for the

accuracy-related penalty for negligence under section 6662 for

each year.

       Petitioner1 and Donald J. Trisch (Trisch) formed a

partnership called Diversified Resources and Development (DRD) in

the early 1980's to own rental property.      After concessions, the

issues for decision are:

       1.     Whether petitioner and Trisch continued to be partners

in DRD during the years in issue (1989-93).      We hold that they

did.

       2.     Whether certain engineering income that Trisch earned

during the years in issue was income of the DRD partnership.        We

hold that it was not.      Thus, petitioners are not liable for tax

on that income.

       3.     Whether certain income and losses from real estate

rental property owned by DRD were partnership income and losses.

We hold that they were.

       4.     Whether tax years 1992 and 1993 should be dismissed

from this case.      We hold that they should not.

       5.     Whether petitioners are liable for the accuracy-related

penalty under section 6662 for each year.      We hold that they are

not.




       1
            References to petitioner are to Edward D. Lang.
                                 - 3 -

                         I.   FINDINGS OF FACT

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

A.   Petitioners

     Petitioners lived in San Antonio, Texas, when they filed the

petition.   Petitioner graduated from high school and completed 2

years of college.   He then worked for several years as a steel

fabrication draftsman.    He later worked for a machine shop and a

container business.

B.   Formation and Early Years of the Diversified Resources and
     Development Partnership

     In the mid-1970's, petitioner met Trisch, a petrochemical

furnaces consultant.   In the early 1980's, Trisch, petitioner,

and Ronnie Pace (Pace) orally agreed to form the DRD partnership

to hold and rent real estate.     DRD bought real property with

mobile homes in Truth or Consequences, New Mexico, to rent to

skiers during the winter.

     DRD lent money to two people during the 1980's.     Before

1990, DRD had no business activity other than the mobile home

rental activity and the two loans.

     Pace withdrew from DRD in 1986, leaving Trisch and

petitioner as equal partners.     The partnership distributed some

partnership assets to Pace when he left DRD, leaving DRD

primarily with the property in Truth or Consequences.     On

December 29, 1987, Trisch, in DRD’s name, bought mobile homes in

Kerr County, Texas.
                               - 4 -

     On January 5, 1988, Trisch registered DRD as an assumed name

in Kerr County.   Trisch listed only himself on the assumed name

certificate for DRD.

     Petitioner moved from Houston to San Antonio in 1988.   He

received rental payments and deposited them in a bank account for

DRD in San Antonio in 1989.   Petitioner closed this account in

late 1989 or early 1990.   After 1989, Trisch handled all DRD

activities, and petitioner was not involved in DRD.    Trisch told

petitioner (on a date not stated in the record) that DRD was

being dissolved and had been inactive since about 1990.

C.   Trisch’s Engineering Services

     During the years in issue, DRD received about $4.8 million

for engineering services that Trisch provided to various

companies (engineering income).2   Petitioner never agreed that

DRD would provide engineering services.   Petitioner did not know

about or perform any of these engineering services, or know about

or control any of the engineering income.

     Pace paid DRD for engineering services that Trisch performed

for Pace’s business from 1989 to 1993.    Pace understood that DRD

was Trisch’s sole proprietorship during those years.   Bankers who




     2
        Respondent determined that DRD received a total of
$4,818,314 in engineering income: $713,775 in 1989; $1,018,500
in 1990; $1,134,377 in 1991; $782,000 in 1992; and $1,169,662 in
1993.
                                - 5 -

dealt with Trisch in the years in issue believed that DRD was

Trisch’s sole proprietorship.

     From 1989 through 1993, Trisch maintained an account at the

Bank of Kerrville in the name of "Don Trisch dba Diversified

Resources and Development" (DRD Bank of Kerrville account).

Petitioner was not authorized to deal with that account.

     Trisch and Linda Lashley (Lashley) were friends during the

years in issue and were married to each other at the time of

trial.    Trisch or Lashley deposited most of the income from

Trisch’s engineering services in the DRD Bank of Kerrville

account during the years in issue.      They also deposited a

substantial part of the DRD income in Lashley’s personal account.

Petitioner never authorized Lashley to act for him.      During the

years in issue, Trisch and Lashley used DRD funds solely for

themselves and their family members.      Petitioner received no

distributions of DRD funds during those years.

D.   Trisch’s Purchase of Thistlewood Farm With DRD Funds

     During the years in issue, Trisch put some assets he had

bought with money he earned doing business as DRD in Lashley’s

name.    The most significant of those assets was a 207-acre farm

known as Thistlewood Farm (Thistlewood).      Trisch and Lashley used

$525,000 of the DRD funds in the Bank of Kerrville to buy

Thistlewood on July 8, 1991.    The source of these funds was a

payment by Brandon & Sons for engineering services provided by
                                 - 6 -

Trisch doing business as DRD.     Petitioner did not know about this

payment or the purchase of Thistlewood.     Trisch and Lashley

operated the farm.

E.   Income Tax Returns

     1.   DRD’s Returns

     Petitioner sent DRD records that he had for 1989 to Dennis

Brady (Brady), DRD’s tax preparer at the time.     Brady sent DRD’s

Form 1065, U.S. Partnership Return of Income, for 1989 to

petitioner.    Petitioner sent it to Trisch.   Trisch and Brady made

changes in the return.     Petitioner did not see the 1989 return

after he sent it to Trisch.     Trisch reported engineering income

on DRD’s 1989 return.     The record does not show whether the

engineering income was reported on the DRD return petitioner saw,

and DRD’s 1989 return does not specify that the amount reported

is engineering income.     John L. Givens III (Givens), C.P.A., who

was Trisch and Lashley’s accountant, replaced Brady as DRD’s

accountant on a date not stated in the record.

     Trisch gave the accountants who prepared DRD’s tax returns

for 1990 through 1993 summaries of DRD’s income and expenses for

those years.    The engineering income reported on DRD’s tax

returns was largely offset by the deduction of payments made for

personal expenses of Trisch, Lashley, and their family members.

Trisch signed DRD’s tax returns for the years in issue.
                                 - 7 -

     On October 16, 1997, Trisch filed amended Forms 1065 and

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

etc., for DRD for 1992 and 1993 showing that all DRD income,

deductions, losses, and credits were attributable to him.

     2.      Petitioners’ Individual Income Tax Returns

     Petitioners timely filed joint Federal income tax returns

for 1989 through 1993.     Petitioners received Schedules K-1 for

DRD that showed the following:

                                                          Net
                Capital     Capital        Ordinary   income(loss)
                account     account         income      rental
               beginning      end          trade or   real estate
     Year       of year     of year        business   activities
     1989      $139,590     $159,264       $55,964     ($38,754)
     1990       159,263      188,127        21,099      (15,472)
     19901      159,263      187,777        70,746      (32,432)
     1991       187,777      154,783        (5,105)     (23,394)
     1992       154,783      341,030       223,893      (44,493)
     19922      154,783        -0-           -0-           –-
     19933      279,171      351,003        88,796      (36,876)
     19934        -0-          -0-           -0-          -0-
1
   The amounts for the second entry for 1990 are those reported
on DRD’s amended return for 1990.
2
   The amounts for the second entry for 1992 are those reported
on DRD’s amended return for 1992 filed in October 1997.
3
   There is no explanation in the record for why the capital
account beginning in 1993 is not the same as the ending capital
account for 1992.
4
   The amounts for the second entry for 1993 are those reported
on DRD’s amended return for 1993 filed in October 1997.

     Petitioners received the Schedules K-1 each year after they

had prepared their individual returns for the year, except for

1989.   Petitioners believed that their income tax returns had to

be consistent with the Schedules K-1, so they filed amended
                                 - 8 -

returns that conformed to the Schedules K-1.   Petitioner did not

understand from the Schedules K-1 that DRD had a substantial

amount of business activity other than real estate.

F.   Petitioners’ Lawsuit Against Trisch and DRD

     Petitioners wrote letters to Trisch or Givens late in 1993

or early in 1994 to ask for copies of DRD’s Federal income tax

returns but they did not get them until after the years in issue.

     On May 23, 1996, petitioners sued Trisch, Lashley, DRD, and

others.3   Petitioners asserted that petitioner and Trisch were

equal partners in DRD until 1995, and sought a termination of

DRD, an accounting of DRD’s assets, and a distribution to

petitioner of 50 percent of DRD’s assets.   Petitioners first

learned the amounts of engineering income and deductions Trisch

and Lashley had received and reported when petitioners received

responses to their requests for discovery in their lawsuit

against Trisch.

                           II.    OPINION

A.   Whether Petitioner and Trisch Were Partners in DRD in the
     Years in Issue

     The parties agree that DRD was a partnership until 1989.

However, petitioners contend that petitioner and Trisch were not


     3
        Petitioners also sued Gary Broach and Ouida Broach, and
High Wilderness Land & Cattle Co., a Texas partnership. Ouida
Broach was an assistant for Lashley. Gary Broach was Ouida
Broach’s husband. Petitioner, Trisch, Lashley, and Gary Broach
were partners in High Wilderness Land & Cattle Co.
                                - 9 -

partners in DRD after 1989 because petitioner intended their

partnership to cease in 1989.   We disagree.

     A partnership terminates for Federal tax purposes if (1) no

part of any business, financial operation, or venture of the

partnership continues to be carried on by any of its partners in

a partnership; or (2) within a 12-month period there is a sale or

exchange of 50 percent or more of the total interest in

partnership capital and profits.   See sec. 708(b)(1).    Neither of

these requirements was met during the years in issue.     To

withdraw as a partner under Texas law, a partner must notify the

partnership of his or her intent to withdraw, or another event of

withdrawal (e.g., expulsion, death, or bankruptcy) must occur.

See Tex. Rev. Civ. Stat. Ann. art. 6132b, sec. 6.01 (Vernon

1990).   Petitioners do not contend that any of these things

occurred during the years in issue.     Thus, we conclude that

petitioner was a partner in DRD during the years in issue.4




     4
        Respondent offered the settlement agreement for
petitioners’ suit against Trisch (see par. I-F, above) into
evidence to show that petitioner and Trisch were partners during
the years in issue. At trial, we ruled that it was not
admissible under Fed. R. Evid. 408 because it was offered to show
the validity of petitioner’s representation in his suit against
Trisch that they were partners during the years in issue.
Respondent’s request that we admit the settlement agreement is
moot because we have concluded that petitioner and Trisch were
partners in the years in issue based on other evidence in the
record.
                                - 10 -

B.   Whether Engineering Income That Trisch Earned From 1989
     Through 1993 in the Name of DRD Was Partnership Income

     1.        Whether Providing Engineering Services Was a
               Partnership Activity

     Income from personal services earned outside the scope of a

partnership is not partnership income.    See Hamm v. Commissioner,

683 F.2d 1303, 1304 (10th Cir. 1982) (because the partnership

existed solely to practice law, the income from Mr. Hamm's

services as a judge was not partnership income because those

services were outside the scope of his partnership duties), affg.

T.C. Memo. 1980-154; Commissioner v. Smith, 285 F.2d 91, 96-98

(5th Cir. 1960) (receipts from whiskey sales that one partner

illegally collected without the knowledge of or benefit to the

other partners were not partnership income), affg. Griffin v.

Commissioner, T.C. Memo. 1958-210.

     In Schneer v. Commissioner, 97 T.C. 643, 654-656 (1991)

(Court reviewed), we discussed Hamm v. Commissioner, supra, and

stated that the language in that opinion about the scope of a

partnership was unnecessary because the partnership had ceased to

exist before any of the income in question was earned.    The issue

in Schneer was whether a law partner was personally liable for

tax on income he had earned before he assigned it to a

partnership.    Although we held that the income at issue in

Schneer was partnership income, it is clear that the issue in

Hamm, Smith, Schneer, and in the instant case is whether a
                                - 11 -

partner earned income as part of the partnership’s activity or on

his own.

     Respondent contends that the engineering income that Trisch

earned doing business as DRD from 1989 through 1993 was DRD

partnership income.    We disagree.   Petitioner, Trisch, and Pace

established DRD as a partnership to buy and hold rental real

estate.     Trisch’s engineering services were outside the scope of

his partnership with petitioner.      Petitioner and Trisch did not

combine their money or labor to provide engineering services, and

there was no community of interest in the profits or losses from

engineering services.    Trisch and Lashley concealed Trisch’s

engineering services activities from petitioners, used the

engineering income for personal purposes, and concealed from

petitioners income and assets that they bought with that income.

Petitioner did not receive any benefit from the income from

engineering services.    He did not intend that the engineering

income be a DRD activity because he did not know about that

activity.

     Respondent speculates that Trisch’s real purpose in

concealing income may have been to conceal it or DRD’s assets

from his former spouse.    There is no evidence to support that

theory.

     Respondent contends that, under Commissioner v. Culbertson,

337 U.S. 733, 741-742 (1949), Trisch’s engineering services were
                                 - 12 -

partnership income.    We disagree.   The issue in Culbertson was

whether to recognize a family partnership for Federal tax

purposes.   Here, our inquiry is whether a particular activity was

within the scope of an existing partnership.

     2.      The Schedules K-1

     Respondent contends that petitioners knew about Trisch’s

engineering income because Trisch reported that income on DRD’s

tax return, and allocated 50 percent of it to petitioner on the

Schedules K-1 which petitioner belatedly received from DRD.     We

disagree.   First, petitioner did not realize from the Schedules

K-1 that Trisch had engineering income.     Second, knowledge of the

engineering income does not necessarily make it partnership

income.   See Mayes v. United States, 207 F.2d 326 (10th Cir.

1953) (partners knew of wages from an accounting firm that were

found not to be partnership income); Mayes v. Commissioner, 21

T.C. 286, 288-289 (1953) (partners knew of income from services

provided as an airplane mechanic that was found not to be

partnership income).

     3.      The Rapid Manufacturing Sign

     Respondent points out that petitioner testified that he

asked that a sign with the name Rapid Manufacturing on it be

placed at a business called Diversified Fabricators Insulators

and Constructors (DFIC), which respondent contends DRD owned.
                                - 13 -

Respondent contends that this shows that petitioner knew about

the engineering income.    We disagree.

     Petitioner testified that he owned 50 percent of the

outstanding shares of Rapid Manufacturing, a corporation that

sold materials to DFIC.    Petitioner asked to have a sign with

Rapid Manufacturing’s name on it installed at the DFIC plant to

help Rapid Manufacturing.     Petitioner did not connect DRD to

DFIC.

     Respondent’s agent testified that DRD owned DFIC.       She said

that DRD became a partner in the DFIC partnership, but she did

not say when that occurred.     She then vaguely suggested that

petitioner was involved with DFIC, without describing how, except

through her belief that DRD owned DFIC.     Respondent cites Exhibit

104-R to support the claim that DRD owned DFIC.     Exhibit 104-R is

a diagram that respondent’s agent prepared which was not admitted

into evidence.    Respondent’s argument about the Rapid

Manufacturing sign is at best speculation, and it is not more

persuasive than other evidence showing that petitioner did not

know about the engineering income.

     4.        Capital Contributions

        Respondent contends that Trisch’s contribution to DRD was to

perform engineering services and that petitioner’s contribution

was to provide capital.     While that might be a possible
                              - 14 -

arrangement between two partners, the record shows that was not

the arrangement here.

     Respondent points out that the Schedules K-1 show that

petitioner had a beginning capital account for 1989 of $139,590

and an ending capital account for 1993 of $351,003.   However, we

do not infer from the Schedules K-1 that DRD provided belatedly

to petitioner that petitioner and Trisch intended the engineering

services to be a partnership activity.

     5.     Lack of Testimony From Trisch

     Respondent contends that we should infer from Trisch’s

failure to testify in this case that, if he had testified, he

would have testified against petitioners.   We disagree.

     If a witness is equally available to both parties and

neither party calls that witness at trial, then no adverse

inference is warranted.   See United States v. Rollins, 862 F.2d

1282, 1297-1298 (7th Cir. 1988); Kean v. Commissioner, 469 F.2d

1183, 1187-1188 (9th Cir. 1972), affg. on this issue and revg. on

another issue 51 T.C. 337 (1968).   An uncalled witness is not

equally available to the party requesting that the inference be

drawn against the other party if that witness’ relationship to

that other party suggests that the witness is likely to favor

that other party.   See United States v. Rollins, supra; Kean v.

Commissioner, supra; McClanahan v. United States, 230 F.2d 919,

925 (5th Cir. 1956).
                                  - 15 -

     Trisch’s relationship to petitioner does not suggest that

Trisch’s testimony would favor petitioner.      Respondent listed

Trisch as a witness on the pretrial memorandum submitted to the

Court; petitioners did not.      Neither party called Trisch to

testify.     We infer that Trisch was equally available to both

parties, and we do not apply the adverse inference rule.

     6.        Conclusion

     We conclude that Trisch’s engineering income was not income

of the DRD partnership in the years in issue.5

C.   Whether Real Estate Rental Income Earned Doing Business as
     DRD From 1989 Through 1993 Was Outside the Scope of the
     Partnership

     Petitioners contend that any DRD real estate rental income

or loss in the years in issue was not partnership income because

Trisch owned the properties that generated rental income or loss

during the years in issue.      We disagree.

     Trisch bought mobile homes in New Mexico and Texas in DRD’s

name.     Real property acquired in the name of the partnership is

partnership property.       See Tex. Rev. Civ. Stat. Ann. art. 6132b,

sec. 2.05(a)(1) (West 1990).      DRD was formed to own rental real

property.     DRD did not terminate for Federal tax purposes before

Trisch acquired that property.      See par. II-A, above.   Income

earned within the scope of a partnership is partnership income.


     5
        For similar reasons, we conclude that farming was not a
DRD activity.
                               - 16 -

See Starr v. Commissioner, 267 F.2d 148, 149 (7th Cir. 1959),

affg. on this issue and others and revg. and remanding on another

issue T.C. Memo. 1958-50.   We conclude that DRD’s real estate

rental income earned and losses incurred during the years in

issue were within the scope of the partnership.

D.   Whether Tax Years 1992 and 1993 Should Be Dismissed From
     This Case as Moot

     Petitioners contend that tax years 1992 and 1993 should be

dismissed from this case as moot on the grounds that Trisch filed

amended returns for DRD for those years in which he reported that

all DRD income, deductions, losses, and credits were attributable

to him.   We disagree.   DRD’s amended returns do not convince us

to disregard the rest of the record in this case, which shows

that DRD had real estate rental income earned and losses incurred

in 1992 and 1993 within the scope of the partnership.   See par.

II-C, above.

E.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty

     Respondent contends that petitioners are liable for the

accuracy-related penalty under section 6662 for each year.   We

disagree.   Petitioners filed amended returns based on the

Schedules K-1 that they belatedly received each year from DRD.

There was nothing in the schedules that reasonably alerted them

to the fact that the schedules were based on understated income
                              - 17 -

or overstated deductions.   We conclude that petitioners are not

liable for the penalties for negligence under section 6662.

     To reflect the foregoing and concessions,


                                           An order will be

                                    issued denying petitioners’

                                    motion to dismiss tax years

                                    1992 and 1993, and decision

                                    will be entered under Rule

                                    155.
