                       T.C. Memo. 1995-497



                    UNITED STATES TAX COURT



     ANDREW ZARDS AND MARGITA ZARDS, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 20388-91, 20389-91,      Filed October 16, 1995.
                20390-91, 2277-93.



         GS is an S corporation, and Ps' claimed losses
    passed through from GS. R disallowed Ps' losses on
    various grounds including Ps' failure to (1) establish
    that the losses were incurred in a trade or business
    for the production of income and (2) substantiate that
    the expenses giving rise to the losses actually were
    incurred or paid.
         Held: R's disallowance is sustained. Ps failed
    to prove that GS was carrying on a trade or business
    during the years in issue and that GS ever incurred or
    paid its claimed expenses.

    Victoria M. Brown, for petitioners.

    Diane R. Mirabito, for respondent.

1
     Cases of the following petitioners are consolidated
herewith: Janet Weinman, docket No. 20389-91; Vincent Donahue,
docket No. 20390-91; and Valdis and Vaida Vipulis, docket No.
2277-93.
                                      - 2 -


               MEMORANDUM FINDINGS OF FACT AND OPINION

     HALPERN, Judge:       These cases have been consolidated for

trial, briefing, and opinion.           Respondent has determined

deficiencies in income tax and additions to tax as follows:

    Andrew and Margita Zards - Docket No. 20388-91

                                           Additions To Tax
                                       Sec.             Sec.
            Year   Deficiency      6653(a)(1)(A)    6653(a)(1)(B)
            1986     $2,580            $129               *


    Janet Weinman - Docket No. 20389-91

                                           Additions To Tax
                           Sec.        Sec.         Sec.           Sec.
     Year   Deficiency     6661     6653(a)(1) 6653(a)(1)(A)   6653(a)(1)(B)
     1986    $42,113     $10,528        ---        $2,106            *
     1987     13,206       3,302        ---           660            *
     1988      5,824       1,456       $291          ---            ---


    Vincent Donahue - Docket No. 20390-91

                                            Additions To Tax
                           Sec.       Sec.         Sec.            Sec.
     Year   Deficiency     6661    6653(a)(1) 6653(a)(1)(A)    6653(a)(1)(B)
     1986    $193,361    $48,408       ---        $9,682             *
     1987      56,203     14,051       ---         2,810             *
     1988      27,341      6,835     $1,367         ---             ---


    Valdis and Vaida Vipulis - Docket No. 2277-93

                                  Additions To Tax
                            Sec.          Sec.         Sec.
              Year       6653(a)(1)    6653(a)(2)       6661
              1985         $2,290          **        $11,449

     *   50% of sec. 6601 interest due on the deficiency amount.
    **   50% of the interest due on $45,797.

     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.
                               - 3 -

     The common denominator in these consolidated cases is the

claim of tax losses arising from an investment in Good Shepherd

Home, Inc. (Good Shepherd), an S corporation within the meaning

of section 1361.   We must determine whether such losses are

allowable, and, if not, whether petitioners are liable for the

additions to tax determined by respondent.2

                         FINDINGS OF FACT

Introduction

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

The stipulation of facts filed by the parties and the

accompanying exhibits are incorporated herein by this reference.

Petitioners Andrew and Margita Zards are individuals who made a

joint return of income for 1986 and who resided in Lisle,

Illinois, at the time their petition was filed.   Petitioner

Andrew Zards became a shareholder of Good Shepherd on March 17,

1986.   Petitioners Janet Weinman and Vincent Donahue are

individuals who resided in New York, New York, at the time their

petitions were filed.   Petitioners Weinman and Donahue both


2
     We need determine no deficiency for petitioners Vipulis for
1985. Their losses from Good Shepherd Home, Inc., for that year
were subchapter S items, within the meaning of sec. 6245. The
tax treatment of those items is determined at the corporate
level. See sec. 6242. The proper treatment of those items was
the subject of a proceeding before this Court: Good Shepherd
Home, Inc., Valdis Vipulis, Tax Matters Person v. Commissioner,
docket No. 28415-89. Our decision in that case resulted in the
disallowance of substantially all of the losses from Good
Shepherd Home, Inc., claimed by petitioners Vipulis for 1985. We
must still, however, decide the additions to tax.
                               - 4 -

became shareholders of Good Shepherd on January 6, 1986.

Petitioners Valdis and Vaida Vipulis are individuals who made a

joint return of income for 1985 and resided in Cold Springs, New

York, at the time their petition was filed.   Petitioner Valdis

Vipulis became a shareholder of Good Shepherd on December 8,

1985.

     Good Shepherd is an Indiana corporation, incorporated on

December 30, 1985.

     All of petitioners, and Good Shepherd, are calendar year

taxpayers.   (We will use the term "shareholders" to refer to

those petitioners who were shareholders of Good Shepherd.)

The Property, Ona Pranckeviciute, and Lithuanian Good Shepherd
Home

     Central to our discussion is a parcel of real property

located in Cedar Lake, Indiana (the property).   Sometime during

the summer of 1982, Ona Pranckeviciute (Ona) purchased the

property from the Salesian Society, Inc. (Salesian).   In the

contract of sale between Ona and Salesian, the property is

described as an approximately 86-acre tract containing the

following improvements:   scholastic building, cafeteria,

dormitories, gymnasium, chapel, and water plant.   Ona agreed to

pay $1 million for the property.   She paid $100,000 immediately,

and she agreed to pay the remaining $900,000 in installments,

without interest, her installment obligation (the Salesian

obligation) being secured by a mortgage against the property (the
                                - 5 -

first mortgage).    Ona subsequently conveyed title to the property

to Lithuanian Good Shepherd Home, Inc. (Lithuanian), an Illinois

corporation.    Ona was president of Lithuanian.    Lithuanian is a

corporation unrelated to Good Shepherd.    Ona intended to convert

the property from a school to a nursing home serving the

Lithuanian community.

     Ona was unsuccessful in obtaining a license to operate a

nursing home on the property.    Nevertheless, sometime prior to

1985, three or four elderly individuals took up residence on the

property.   Ona charged each a fee of $10,000, in advance, for

5 years of residency.    The fee was to cover the expense of room

and board during the 5-year period.

     In 1984, Kasa Lithuanian Federal Credit Union (Kasa) loaned

$250,000 to Lithuanian to be used to bring the first mortgage

current and for improvements on the property.      Lithuanian's

obligation to Kasa (the first Kasa obligation) was secured by a

second mortgage against the property (the first Kasa mortgage).

Litas, Vebeliunas, and Good Shepherd

     Litas Investing Co., Inc. (Litas), is a New York

corporation.    In September 1985, Litas purchased the property

from Lithuanian.    The property was conveyed to Litas by quitclaim

deed.   The president of Litas was Vytautas Vebeliunas

(Vebeliunas).

     Vebeliunas was also president of Good Shepherd during each

of the years in issue.    Moreover, Vebeliunas was the founder of
                                - 6 -

Kasa, one of its original directors, and its first president.     On

October 2, 1985, Vebeliunas, as president of Good Shepherd,

executed a note obligating Good Shepherd to pay Kasa $160,000

(the second Kasa obligation).   On that same date, also as

president of Good Shepherd, Vebeliunas executed a mortgage on the

property (the second Kasa mortgage) to secure payment of the

second Kasa obligation.   The second Kasa mortgage recites that it

is subordinate to the first mortgage, which is stated to have an

approximate principal balance of $900,000.   Also on October 2,

1985, Vebeliunas, as president of Good Shepherd, and Kasa entered

into a mortgage consolidation agreement (the consolidation

agreement), whereby the first and second Kasa mortgages were

consolidated, to secure total debts of $410,000 (the consolidated

Kasa mortgage).   The consolidation agreement also recites that it

is subordinate to the first mortgage, which is stated to have an

approximate principal balance of $900,000.

     In December 1985, Vebeliunas, as president of Litas,

executed an indenture in favor of Salesian under which (1) Litas

agreed to pay to Salesian $760,000 and (2) accorded to Salesian a

mortgage in the property to secure that obligation (the first

Litas indenture).   In December 1986, Vebeliunas, as president of

Litas, executed a second and similar indenture in favor of

Salesian, except that the amount of debt was recited to be

$600,000 (the second Litas indenture).
                               - 7 -

     On December 12, 1985, Vebeliunas, as president of Litas,

executed a mortgage assumption agreement whereby Litas assumed

the first Kasa obligation (the Litas assumption).

Good Shepherd:   Organization and Operations

     The articles of incorporation of Good Shepherd provide that

Good Shepherd is formed for the following purposes:

          Clause (a). To carry on the business of
     acquiring, constructing, owning, managing or operating
     nursing homes and other health care facilities,
     including health care facilities licensed by the
     Indiana Health Facilities Licensing Council, and
     performing all other legal activities related thereto.

          Clause (b). To act as agent of or representative
     for any one or more corporations, associations,
     partnerships, individuals, or other legal entities, to
     the extent that such activities are lawful under the
     Act.

          Clause (c). To transact any or all lawful
     business for which corporations may be incorporated
     under the Act.

     Prior to its involvement with the property, Good Shepherd

had never operated a nursing home or a health care or medical

facility.   None of Good Shepherd's officers had operated a

nursing care, elder care, or health care facility.    Good Shepherd

has never received a license from the State of Indiana to operate

the property as a nursing home, nursing care facility, or other

medical facility.   Good Shepherd has never received a license to

operate an elder care facility on the property.   Good Shepherd

has never obtained Medicaid or Medicare certification for the
                                    - 8 -

property.    Good Shepherd did not operate a nursing home or other

medical facility in any of the years in issue.

     For 1986, 1987, and 1988, Good Shepherd reported small

amounts of income, received either from the sale of livestock

raised on the property or timber harvested from the property.              No

income was reported from individuals residing on the property.

The elderly individuals residing on the property when it was

acquired from Ona remained in residence until at least 1987.              The

obligation to provide room and board to those individuals was

assumed as part of, and reduced proportionately, the purchase

price of the property.

     For 1986 through 1988, Good Shepherd made its returns of

income on Form 1120S, U.S. Income Tax Return for an

S Corporation.    For 1986 and 1988, Good Shepherd entered the

description "Nursing home" on the line requiring a description of

its business activity.    For 1987, it left that line blank.             Good

Shepherd reported income of $7, $486, and $697 for 1986 through

1988, respectively.    Good Shepherd claimed the following

deductions for 1986 through 1987:

            Interest                          Other
   Year     Expense    Depreciation         Deductions   Tax   Repairs

   1986     $110,013      $57,167            $311,106    ---     ---
   1987      130,952       49,011              89,299    ---     ---
   1988      119,430       44,258             133,618    $66   $2,102

Good Shepherd itemized its "Other Deductions" for 1987 and 1988, as

follows:
                                     - 9 -

                                  1987

   Management fees    $60,000         Legal & professional      $14,797
   Travel expense       2,833         Entertainment                 359
   Advertising          1,000         Outside services            4,522
   Repairs and maint.   5,788

                                  1988

   Outside services     $18,600      Telephone & utilities $ 6,930
   Misc. expenses           953      Engineering expenses       50
   Management fees       60,000      Professional & legal   35,931
   Travel expenses       10,544      Entertainment expenses    610

Shareholders' Investments in Good Shepherd; Petitioners'
Deductions

     Each petitioner was informed by Vebeliunas that it was

possible to buy shares in Good Shepherd, and information from

Vebeliunas was the only information each of the shareholders

considered in deciding to invest in Good Shepherd.

     On account of the investments of the shareholders in Good

Shepherd, petitioners claimed losses for the years in issue as

follows:

     Petitioner(s)      1985         1986       1987     1988

     Zards              ---        $6,791       ---       ---
     Weinman            ---        84,225     $33,629   $20,392
     Donahue            ---       387,263     143,118    96,733
     Vipulis          $126,483      ---         ---       ---

Vebeliunas

     Vebeliunas was indicted in 1992 on more than 40 counts of

violating Federal statutes prohibiting conflicts of interest,

fraud, witness tampering, racketeering, interstate transportation

of money and securities obtained by fraud, and misapplication of
                                - 10 -

funds.     Vebeliunas was found guilty on virtually all of those

counts.

                                OPINION

I.   Introduction

      Under section 1366, a shareholder in an S corporation is

entitled to take into account his or her pro rata share of the

corporation's losses.     See sec. 1366(a).   Respondent has conceded

that Good Shepherd is an S corporation, and we must determine the

extent, if any, of Good Shepherd's allowable losses for 1986

through 1988.     We must also determine whether petitioners are

liable for certain additions to tax.

      In support of her notices of deficiency that underlie these

cases, respondent explained her adjustments with regard to Good

Shepherd for 1986 through 1988 as follows:

      It is determined that the losses claimed on your income
      tax returns from Good Shepherd Home, Inc. are
      disallowed in full because you failed to establish:

      1.     That the losses were incurred in a trade or
             business for the production of income.

      2.     That the S-corporation was formed, entered into,
             operated or conducted for the purpose of making a
             profit, rather than for tax avoidance.

      3.     That the S-corporation status is valid.
             Alternatively, if it is established that your S-
             corporation is valid, you have not verified
             expenses allegedly giving rise to the losses were
             ever paid or incurred.

      In the petitions, petitioners assign error to respondent's

adjustments and to her determinations of additions to tax.
                               - 11 -

Petitioners have failed, however, to provide statements of fact

on which they base their assignments of error as to respondent's

determinations of additions to tax, as required by Rule 34(b).

II.   Deficiencies in Tax

      A.   Ordinary and Necessary Business Expenses

      In pertinent part, section 162(a) provides:     "There shall be

allowed as a deduction all the ordinary and necessary expenses

paid or incurred during the taxable year in carrying on any trade

or business".    To qualify for deduction under section 162(a), an

item must (1) be paid or incurred during the taxable year, (2) be

for carrying on any trade or business, (3) be an expense, (4) be

a necessary expense, and (5) be an ordinary expense.      INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 85 (1992).    By raising an

issue of verification, respondent challenges whether petitioners

have met the first qualification set forth above.     Respondent has

also challenged whether petitioners have met the second

qualification.    An item fails to meet the second qualification

that it be for carrying on a trade or business if it is a

preopening expense.    A preopening expense is an expense incurred

between the decision to establish a business and the actual

beginning of business operations.    See, e.g, Richmond Television

Corp. v. United States, 345 F.2d 901, 907 (4th Cir. 1965),

vacated and remanded on other issues 382 U.S. 68 (1965), original

holding on this issue reaffd. 354 F.2d 410, 411 (4th Cir. 1965),
                                - 12 -

overruled on other grounds NCNB Corp. v. United States, 684 F.2d

285, 289 (4th Cir. 1982); Hardy v. Commissioner, 93 T.C. 684,

687-688 (1989); Jackson v. Commissioner, 86 T.C. 492, 514 (1986).

As the Court of Appeals for the Fourth Circuit said in Richmond

Television Corp. v. United States, 345 F.2d at 907:

          The uniform teaching of * * * [certain prior]
     cases is that, even though a taxpayer has made a firm
     decision to enter into business and over a considerable
     period of time spent money in preparation for entering
     that business, he still has not "engaged in carrying on
     any trade or business" within the intendment of section
     162(a) until such time as the business has begun to
     function as a going concern and performed those
     activities for which it was organized. [Fn. refs.
     omitted.]

     Except for the interest, depreciation, and taxes deducted by

Good Shepherd, all of Good Shepherd's deductions for 1986 through

1988 are deductions governed by section 162(a).

     Petitioners bear the burden of proof.

          1.     Verification

     Respondent has challenged whether expenditures claimed by

Good Shepherd were ever paid or incurred.    Petitioners have

failed adequately to verify, or substantiate, those expenditures.

For 1987 and 1988, Good Shepherd claimed deductions for travel

and entertainment.    Petitioners have introduced no evidence that

would satisfy the special substantiation requirements imposed by

section 274(d) with regard to expenditures for travel and

entertainment.    With regard to Good Shepherd's other expenditures

claimed for deduction under section 162(a), for the most part,
                               - 13 -

petitioners apparently rely on a stipulated exhibit to satisfy

their burden of proof.   That stipulated exhibit (Exhibit 52) is

described as "a copy of ledger sheets pertaining to expenses

relating to the property in issue in the taxable years 1986,

1987, and 1988."   Respondent, however, stipulates "only that

Petitioners' Exhibit 52 represents a listing of expenses relating

to the property in issue and does not stipulate that petitioners'

Exhibit 52 had any legal substance or represented bona fide debts

incurred by Good Shepherd."   Petitioners have made no attempt to

tie the entries on Exhibit 52 to the deductions claimed on Good

Shepherd's returns.   Petitioners have provided virtually no

documents, such as canceled checks, invoices, or bank statements

to back up the entries on Exhibit 52.      Only one canceled check is

in evidence, a check in the amount of $25,000, drawn to Lino

Engineering Co.    Vebeliunas testified that Lino Engineering was

contracted for "renovation and change" at the property.       Thus, it

is not clear that the payment is deductible at all, because it

may well be a capital expenditure.      See sec. 263(a).   Also in

evidence are statements showing payments of $1,625, $2,887,

$6,250, $2,025, $325, $820, and $12,143 to various individuals in

1988.   Since there are no deductions on Good Shepherd's return

for 1988 for (1) compensation to officers or (2) salaries or

wages, we assume that those payments, if made, were for
                              - 14 -

management services.   Again, we do not know whether such

payments, if made, are properly deductible under section 162(a).

     If a claimed deduction is not adequately substantiated, we

are permitted to estimate expenses when we are convinced from the

record that the taxpayer has incurred such expenses.     Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930).   However, we require a

basis upon which an estimate may be made.   Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).   Here, for the most part,

we have no such basis.   Moreover, since any expense we would

estimate would constitute a nondeductible preopening expense, no

estimate is necessary.

          2.   Preopening Expenses

     The parties have stipulated, and we have found, that Good

Shepherd did not operate a nursing home or other health care

facility in any of the years in issue.   On brief, petitioners

state that, beginning in 1985:

     The corporate business of Good Shepherd was to buy and
     sell distressed properties, fix them, and resell or
     operate them. In the case of the Property, "fixing" at
     first meant getting approval for a nursing home license
     since at or near the time of purchase the nursing home
     had 90% of improvements needed to operate a nursing
     home. It was the most logical way to turn this
     distressed Property around. Unfortunately, the nursing
     home approval was never obtained. Every time it seemed
     near at hand, another problem would crop up. Even
     though a licensed health facility manager was in place,
     unexpected environmental and construction problems had
     to be dealt with. Efforts to obtain a nursing home
     license began in 1985 and continued through 1988, the
     years in question in this case. * * *
                              - 15 -

In support of an averment that the business of good Shepherd was

to buy, fix-up, and sell distressed properties, petitioners offer

the testimony of Vebeliunas, president of Good Shepherd during

the years in issue.   Vebeliunas testified that the purpose of

Good Shepherd was "to own and operate real estate properties and

services related to the real estate properties."

     Vebeliunas' testimony on that point strikes us as

enlightened hindsight, and we give it no credence.   First, the

articles of incorporation of Good Shepherd specifically provide

that it is formed for the purpose of carrying on the business of

nursing homes and health care facilities.   Only generally may it

carry on other businesses.   There is no evidence that the

directors of Good Shepherd ever authorized it to engage in the

business described on brief by petitioners.   Second, Vebeliunas

was indicted in 1992 on more than 40 counts of violating Federal

statutes prohibiting conflicts of interest, fraud, witness

tampering, racketeering, interstate transportation of money and

securities obtained by fraud, and misapplication of funds.

Vebeliunas was found guilty on virtually all of those counts.

Although, in many respects, we found Vebeliunas' testimony

forthright and convincing, in other respects we found it lacking

in credibility.   He played a role in each of Good Shepherd,

Litas, and Kasa, and his was the only information relied on by

the shareholders in deciding whether to invest in Good Shepherd.
                                - 16 -

Petitioners also rely on Vebeliunas to avoid the additions to tax

for negligence.   We believe that he has an interest in seeing

petitioners prevail.

     We find that at no time during the years in issue was Good

Shepherd in the business of buying, fixing-up, and selling

distressed properties.    Moreover, we find that at no time during

those years did Good Shepherd carry on any trade or business

within the meaning of section 162(a).    Expenditures that

otherwise would have qualified for deduction under section

162(a), and that related to the establishment of a nursing home

or health care facility, were preopening expenses, which for that

reason, are nondeductible.    Moreover, any expenditures that Good

Shepherd may have made with regard to the elderly individuals

remaining in residence on the property when it was acquired from

Ona Pranckeviciute were expenditures that constitute part of the

cost of the property.    For that reason, such expenditures are

nondeductible.    See sec. 263(a).

     B.   Taxes

     Section 164(a) allows a deduction for certain taxes paid or

accrued during the taxable year.     For 1986, Good Shepherd claimed

a deduction for taxes of $66.    Petitioners have failed to

substantiate that such taxes were paid.    For that reason, no

deduction is allowed.
                                - 17 -

     C.    Depreciation

     Section 167(a) allows "as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear * * * of

property used in the trade or business, or * * * of property held

for the production of income."    The depreciable basis of property

acquired by purchase is cost.    See sec. 167(g).   If depreciable

and nondepreciable property, such as improved real estate, is

bought for a lump sum, the purchase price must be allocated

between the land (nondepreciable property) and the depreciable

improvements (e.g, buildings).    See sec. 1.167(a)-5, Income Tax

Regs.     Depreciation deductions may not be claimed until an asset

is placed in service.     Rybak v. Commissioner, 91 T.C. 524, 561

(1988); sec. 1.167(a)-10(b), Income Tax Regs.

     On its 1985 return, Good Shepherd claimed a deduction for

depreciation of $13,583, based on a total cost basis for

depreciable property of $833,000.    We assume that such

depreciable property is a portion of the property.    Deductions

for depreciation as set forth in our findings of fact were

claimed by Good Shepherd for 1986 through 1987.     In our findings

of fact, we have recited a description of the property as an

improved 86-acre tract.    Petitioners have proposed, although we

have not found, that the purchase price paid by Good Shepherd for

the property was over $1 million.    Petitioners have failed to

show on what basis Good Shepherd allocated the purchase price of
                                - 18 -

the property between land and any depreciable buildings or other

depreciable improvements.    Thus, petitioners have failed to

substantiate Good Shepherd's deductions for depreciation.

Moreover, petitioners have failed to show that any buildings or

other depreciable improvements were placed in service in any

trade or business or profit-making activity during the years in

issue.    We already have concluded that, during those years, Good

Shepherd was engaged in preopening activities with regard to the

business of operating a nursing home.    Good Shepherd was not then

engaged in any trade or business or other profit-making activity,

and, for that reason alone, Good Shepherd may not claim any

deductions for depreciation for those years.

     D.   Interest

     Section 163(a) states:    "There shall be allowed as a

deduction all interest paid or accrued within the taxable year on

indebtedness."    Deductible interest is a payment for the use or

forbearance of money.     Deputy v. du Pont, 308 U.S. 488, 497

(1940).    It is well settled that the indebtedness referred to in

section 163(a) must be genuine, and economic realities govern

over the form in which a transaction is cast.     Knetsch v. United

States, 364 U.S. 361, 365-366 (1960).    An indebtedness is an

existing, unconditional, and legally enforceable obligation for

the payment of a principal sum.    E.g., Landry v. Commissioner, 86

T.C. 1284, 1308 (1986).
                              - 19 -

     A taxpayer may deduct as interest on its indebtedness

interest paid by the taxpayer on a mortgage upon real estate of

which the taxpayer is the legal or equitable owner even though

the taxpayer is not directly liable upon the bond or note secured

by such mortgage.   Sec. 1.163-1(b), Income Tax Regs.   However,

only interest paid or accrued on a mortgage on property for the

period after the taxpayer becomes the legal or equitable owner of

the property is deductible under section 163.     Hyde v.

Commissioner, 64 T.C. 300, 306 (1975) (interest accruing before,

but paid by the taxpayer, must be capitalized).

     We are unconvinced that Good Shepherd either made any

payments of interest during the years in question or had any

genuine indebtedness that would entitle it a tax deduction for

interest paid or accrued.   No schedule particularizes the

interest deducted on the Good Shepherd returns.    Petitioners have

not introduced into evidence any check or other direct evidence

that shows that Good Shepherd paid either principal or interest

on any indebtedness.   Indeed, journal entries made by Good

Shepherd regarding 1985, 1986, and 1987 indicate that no payments

of principal were made on either the first or second Kasa

obligations during such periods.

     We assume that the indebtedness with regard to which

petitioners claim interest deductions are (1) the Salesian

obligation, (2) the first Kasa obligation, and (3) the second

Kasa obligation.
                              - 20 -

     We are convinced that, on some date, Good Shepherd acquired

title to the property.   A title insurance policy effective

December 13, 1990, states that title to the property is, on that

date, in the name of Good Shepherd.    Nevertheless, we have in

evidence no deed or other document conveying title to Good

Shepherd on that date or before.   We know that title to the

property passed to Litas by quitclaim deed in September 1985.     We

also know that, in December 1985, Litas made the first Litas

indenture in favor of Salesian.    We also know that, in December

1986, Litas made the second Litas indenture in favor of Salesian.

There is no evidence that, during the years in question, Good

Shepherd assumed that Salesian obligation.    Petitioners' position

is that Litas, on behalf of Good Shepherd, assumed the Salesian

obligation.   Vebeliunas testified that Litas acted on behalf of

Good Shepherd in that respect.    Again, such testimony strikes us

as enlightened hindsight, and we give it no credence.    More

importantly, if Litas was acting on behalf of Good Shepherd, it

was putting its own credit on the line when it made the two

indentures.   There is, however, no evidence of any agreement by

Good Shepherd to reimburse Litas for any payments it was required

to make pursuant to the indentures.    The logic of that omission

is that Litas was an obligor on its own behalf, and not on behalf

of Good Shepherd.   We do not understand all that went on here,

but that is petitioners' fault.    They have the burden of proof.

Suffice it to say that they have not convinced us that Good
                               - 21 -

Shepherd either paid or was obligated to pay any amount on the

Salesian obligation during the years in question, and we so find.

     We reach a similar conclusion with regard to the first Kasa

obligation.    We are aware, of course, of the consolidation

agreement, entered into by Kasa and Good Shepherd, and purporting

to consolidate the mortgages securing the first and second Kasa

obligations.   Nevertheless, we have no evidence that Good

Shepherd ever assumed the first Kasa obligation, and we have the

Litas assumption, whereby Litas did assume the first Kasa

obligation.    As with the Salesian obligation, we are not

convinced that Good Shepherd either paid or was obligated to pay

any amount on the first Kasa obligation during the years in

question, and we so find.

     The second Kasa obligation was executed by Good Shepherd.

There is no evidence of an assumption by Litas.    To be entitled

to a deduction for interest paid or accrued on the second Kasa

obligation, petitioners have the burden of showing that the

indebtedness is genuine.    In the stipulation of facts entered

into by the parties, respondent stipulated to copies of the

second Kasa obligation and second Kasa mortgage.    Respondent

added, however, that she did not stipulate that those documents

had any legal substance or represented a bona fide debt incurred

by Good Shepherd.   Beyond petitioners' promissory note to Kasa,

petitioners have introduced no evidence, such as bank statements

or other documents, to show that any sum actually was received by
                               - 22 -

Good Shepherd in consideration of the second Kasa obligation.

More importantly, as we have said, petitioners have introduced no

evidence that Good Shepherd paid anything, either principal or

interest, with regard to the second Kasa obligation.    We are not

convinced that the second Kasa obligation represented true

indebtedness or that Good Shepherd paid any interest with respect

thereto, and we so find.

       For the reasons stated, we determine that Good Shepherd may

not claim any interest deductions for either 1986, 1987, or 1988.

       E.   Conclusion

       We sustain the deficiencies in tax determined by respondent

for the reasons stated.    Therefore, we need not address

respondent's alternative grounds that Good Shepherd was organized

and operated for purposes of tax avoidance rather than to make a

profit.

III.    Additions to Tax

       A.   Negligence

       Section 6653(a) imposes one or more additions to tax where

an underpayment of tax is due to negligence or intentional

disregard of rules or regulations (hereafter, without

distinction, negligence).    Respondent has determined additions to

tax for negligence with respect to all petitioners.     Section

6653(a)(1), for returns due in 1989, section 6653(a)(1)(A), for

returns due in 1987 and 1988, and section 6653(a)(1), for returns

due in 1986, impose an addition to tax equal to 5 percent of the
                              - 23 -

entire underpayment if any portion of such underpayment is due to

negligence.   Section 6653(a)(1)(B), for returns due in 1987 and

1988, and section 6653(a)(2) for returns due in 1986, impose 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 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) (quoting Marcello v. Commissioner, 380 F.2d 499, 506

(5th Cir. 1967), affg. in part, revg. in part 43 T.C. 168

(1964)).   Petitioners bear the burden of proof.   Rule 142(a).

     As we said in section I., supra, petitioners have failed to

plead facts in support of their assignment of error with regard

to respondent's determinations of additions to tax.    On brief,

petitioners argue that they did not act negligently because they

relied "on the advice of their accountant", whom we assume was

Vebeliunas.   None of petitioners testified.   Vebeliunas testified

that he was never an accountant for the Zardses.    The parties

have stipulated that information from Vebeliunas was the only

information each of petitioners considered in deciding whether to

invest in Good Shepherd.   When asked what information he gave

petitioners, Vebeliunas testified as follows:

          It's a difficult task to remember that many years
     ago and to reconstruct the conversation. If the Court
     would permit me, we have as much as 500 people invested
     with us and many of them talk to me.
                              - 24 -

          To the best of my recollection, this was presented
     as a distressed property with the possibility of profit
     and each distressed property acquired is usually
     employed for whatever was built.

          We had apartment houses. We had hotels.    This was
     the first one that was a health facility.

          I addressed myself to the value of the property,
     to the placement of the property and so explained it to
     the investors. The actual narrative of it, I do not
     remember.

     It is true that reliance on the advice of an expert can, in

some circumstances, defeat a claim of negligence.   E.g.,

Industrial Valley Bank & Trust Co. v. Commissioner, 66 T.C. 272,

283 (1976).   The long and the short of it, however, is that this

is not one of those cases.   Not only could Vebeliunas not

remember well what he advised petitioners, petitioners have not

pointed out to us any testimony by Vebeliunas that relates at all

to the tax consequences of their investments.   Petitioners have

failed to carry their burden of proving that they were not

negligent, and we so find.   We uphold respondent's determinations

of negligence in all respects.

     B.   Substantial Understatement

     Respondent has determined additions to tax under section

6661 for all years in issue and for all petitioners except for

petitioners Zards.   For returns due before January 1, 1990,

section 6661 provides for an addition to tax equal to 25 percent

of the amount of any underpayment attributable to a substantial
                                - 25 -

understatement.   An understatement is "substantial" when the

understatement for the taxable year exceeds the greater of

(1) 10 percent of the tax required to be shown or (2) $5,000.

The understatement is reduced to the extent that the taxpayer

has (1) adequately disclosed his or her position, or (2) has

substantial authority for the tax treatment of an item.    Sec.

6661; sec. 1.6661-6(a), Income Tax Regs.    Petitioners bear the

burden of showing that they are not subject to the addition to

tax determined by respondent.    Rule 142(a).

     Petitioners have averred no facts in support of their

assignment that respondent erred in determining an addition to

tax under section 6661.   Moreover, on brief, petitioners make no

argument disputing respondent's section 6661 determinations.      We

assume that petitioners have abandoned their claims of error with

regard to section 6661.   On that basis, respondent's

determination of additions to tax under section 6661 are

sustained.

                                           Decisions will be entered

                                     for respondent.
