                        T.C. Memo. 1996-117



                      UNITED STATES TAX COURT



    DANIEL R. LEAVELL AND EVA LOVENE LEAVELL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20032-92.              Filed March 11, 1996.



     David T. Lumerman, for petitioners.

     John W. Duncan, for respondent.



                        MEMORANDUM OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes for 1985, 1986, and 1987 and

additions to tax as follows:
                                     - 2 -

                                        Additions to Tax
                                      Sec.             Sec.
                        Sec.       6653(a)(1)/     6653(a)(2)/     Sec.
Year   Deficiency    6651(a)(1)   6653(a)(1)(A)   6653(a)(1)(B)   6661(a)

1985   $352,825       $88,206        $17,641             *        $ 88,206
1986     85,404        21,351          4,270             *          21,351
1987    526,354         __            26,318             *         131,589


               *    50 percent of interest due on portion of
                    underpayment attributable to negligence.


       Unless otherwise indicated, all section references are to

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

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

Procedure.

       After concession of some issues by each party, the primary

issues remaining for decision are:             (1) The amount, if any, of

net operating loss, investment interest, and investment credit

carryovers from 1984 to which petitioners are entitled for the

years in dispute; (2) whether a residence sold by petitioners in

1986 was used by petitioners as a personal residence; (3) the

amount of gain petitioners realized in 1985, 1986, and 1987 in

connection with two transactions relating to the sale of stock;

(4) whether petitioners have substantiated claimed operating

expenses and costs-of-goods sold with regard to various

businesses; (5) whether Eva Leavell has substantiated for 1986 a

claimed net operating loss of $20,378 relating to oil production;

and (6) whether petitioners are liable for the additions to tax.
                                - 3 -

     Trial and resolution of this case have been complicated by

the failure of petitioners to cooperate with respondent's

representatives during respondent's audit and by petitioners'

failure to comply with important aspects of this Court's pretrial

and trial rules.

     For convenience, we combine our findings of fact and

opinion on each issue.

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

At the time they filed their petition in this case, petitioners

resided in Carmi, Illinois.

     During 1980 through 1985, petitioner Daniel R. Leavell

(Daniel) was engaged in the conduct of various businesses

involving oil production, the sale of oil field equipment, and

the maintenance of oil wells.   In 1984, petitioner Eva Lovene

Leavell (Eva), under the name of L & L Supply, began a separate

business involving the sale of oil field equipment.    In 1986, Eva

operated a separate business involving oil production.


Filing of Petitioners' 1985, 1986, and 1987 Joint Federal
Income Tax Returns, Respondent's Audit, and Trial

     On October 17, 1988, petitioners untimely filed their joint

Federal income tax return for 1987.     On May 10, 1990, petitioners

untimely filed their joint Federal income tax returns for 1985

and 1986.   On September 27, 1990, petitioners filed an amended

joint Federal income tax return for 1987.
                               - 4 -

     During the audit by respondent's representatives of

petitioners' Federal income tax returns for 1985, 1986, and 1987,

petitioners did not cooperate with respondent's representatives.

In spite of requests therefor, petitioners did not make available

to respondent's representatives any meaningful books and records

or other credible documentation regarding the various items that

were examined.   As a result of petitioners' failure to cooperate,

respondent's audit adjustments and deficiency determinations at

issue in this case were made on the basis of limited information

and in some instances estimates.    Respondent's deficiency

determinations against petitioners for 1985, 1986, and 1987 were

not arbitrary and capricious, and such deficiency determinations

are entitled to the usual presumption of correctness.    Welch v.

Helvering, 290 U.S. 111, 115 (1933); Gatlin v. Commissioner, 754

F.2d 921, 923 (11th Cir. 1985, affg. per curiam T.C. Memo.

1982-489); Mendelson v. Commissioner, 305 F.2d 519, 522 (7th Cir.

1962), affg. T.C. Memo. 1961-319.

     After granting petitioners' request for a continuance, this

case was tried at a special trial session beginning on

January 10, 1994.    At trial, petitioners submitted no credible

and little understandable evidence relating to the adjustments at

issue.   Petitioners were unprepared.   They offered incomplete and

disorganized documentation.   Many documents that were admitted at

trial were objected to by respondent's counsel because the

documents had not been exchanged with respondent's counsel prior
                                - 5 -

to trial.   Witnesses that should have been called were not

called.

     At the end of the second day of trial, petitioners brought

into the courtroom 22 dirty, worn-out, mildewy boxes that

allegedly contained records and documents relating to

petitioners' businesses that petitioners speculated, if organized

and examined, would support petitioners' entitlement to many of

the items at issue in this case.   These documents, however, were

not organized.    The documents were not presented or offered into

evidence in an organized manner that related to the specific

issues in the case.   Petitioners' attorney had known about the

documents for at least 2 or 3 weeks before trial, and probably

for much longer, but had not disclosed the existence thereof to

respondent's counsel nor to the Court, nor were the documents

made available to respondent as required under our Rules and

pretrial order.   Petitioners and their attorney could not

describe or explain in any specific, coherent, or meaningful

manner the nature of the documents in the boxes, the relationship

of the documents to the issues in the case, nor what the

documents allegedly proved with regard to the issues in the case.

     After trial, the Court held the record open for a period of

time to allow petitioners to organize the documents in the 22

boxes, to make a presentation to respondent's representatives as

to what the contents of the boxes established with regard to the

adjustments at issue in this case, to confer with respondent
                               - 6 -

concerning what stipulations might be reached with regard to the

documents, and to attempt to settle as many issues as possible.

     Although petitioners' attorney and petitioners' accountant

met with respondent's representatives a number of times after the

trial to discuss the documents in the boxes, the parties reached

no agreement as to the significance of the documents and no

settlement or further stipulation with regard to any of the

evidence or issues in this case.    On August 31, 1994, the record

in this case was closed, and we did not admit into evidence the

contents of the 22 boxes nor any summaries that petitioners had

purportedly made therefrom.

     Petitioners now move to reopen the record and to admit into

evidence the contents of the 22 boxes and/or the purported

summaries of the contents of the boxes that their accountant

allegedly prepared after trial.    Petitioners assert that by

holding the record open after trial and by suggesting that the

parties meet to review the documents, to attempt to settle

issues, and to attempt to stipulate to further evidence, the

Court misled petitioners.   Petitioners allege that they incurred

substantial additional costs and that the Court thereby has

become obligated to admit into evidence in this case the

documents in the 22 boxes and the purported summaries thereof

that petitioners belatedly produced.    We disagree.

     Petitioners have done little in this case to assist

respondent and the Court to evaluate the issues before us in a
                               - 7 -

timely fashion and on the merits.   Petitioners' late and

incomplete submissions under the Court's discovery rules, their

untimely filed motions to amend their petition, their raising new

issues in their briefs that have not been raised either in the

original or amended petitions, and their implausible explanations

of their conduct in on- and off-the-record conferences with the

Court have consistently frustrated the resolution of the issues

in this case.

    Perhaps the most serious violation of the Court's Rules

occurred when petitioners attempted to have admitted en masse

into evidence on the last day of trial, the 22 boxes of

disorganized documents.   By holding the record open, the Court

simply attempted to give petitioners the opportunity to organize

the documents and to make presentations to respondent's

representatives that might result in a settlement of issues or in

a stipulation of admissibility of some of the documents.

Petitioners failed to negotiate any settlement or a stipulation

with regard to any of the belatedly submitted documents, and we

do not believe it appropriate now to admit such documents into

evidence.   We shall deny petitioners' motion for reconsideration

of the Court's Order granting respondent's motion to close the

record.

    Also, in their opening posttrial briefs, petitioners attempt

to raise new issues not previously raised in their original or
                               - 8 -

amended petition, or otherwise preserved.    Petitioners’ untimely

attempt herein to raise new issues will be denied.

    Taxpayers have a duty to maintain accurate and credible

books and records that relate to their income and deductions for

each year and that are necessary for a proper determination of

their Federal income tax liability.    Sec. 6001.   As has been

said, "The United States has relied for the collection of its

income tax largely upon the taxpayer's own disclosures * * *.

This system can function successfully only if those within and

near taxable income keep and render true accounts."     Spies v.

United States, 317 U.S. 492, 495 (1943).    The burden of proof is

on petitioners to prove by a preponderance of the evidence their

entitlement to the deductions, losses, credits, and other

adjustments that are in dispute in this case.    Rule 142(a); Welch

v. Helvering, 290 U.S. 111 (1933).

    With the exception of a $21,222 trucking expense, discussed

below, petitioners have failed to satisfy their burden of proof

on each issue, and, with the exception noted, we hold for

respondent on each issue.   Many of petitioners' arguments in

their posttrial briefs are barely comprehensible.     Below, we

attempt to make some sense out of petitioners’ arguments and to

discuss further the sparse and confusing facts in the record

relating to each primary issue.
                                - 9 -

Carryover of NOL’s, Investment Interest, and Investment Credit

    Under Rule 142(a), petitioners have the burden of proof with

regard to each of the adjustments still at issue in this case

involving claimed carryovers (namely, a claimed $1,064,164 net

operating loss carryover from 1984, a claimed $479,000 investment

interest carryover from 1984, and a claimed $38,839 investment

credit carryover from 1984).1

    Petitioners, however, have presented no credible evidence

and have not established the existence of, nor their entitlement

to, any of the claimed carryovers.      Petitioners and their counsel

appear to seriously misunderstand the placement of the burden of

proof on these issues.   For example, with regard to the

investment interest carryover, the following statement appears in

petitioners' opening posttrial brief --


    respondent did not recompute or establish the proper
    investment interest amount, and [respondent is] therefore
    estopped from asserting that it may not be carried forward.


To the contrary, with regard to each of the claimed carryovers,

petitioners have the burden of proof, and they have failed to

satisfy it.   Hill v. Commissioner, 95 T.C. 437, 439-444 (1990);

Lone Manor Farms, Inc. v. Commissioner, 61 T.C. 436, 440-442




1
     On brief, petitioners concede a claimed charitable
contribution carryover from 1984.
                              - 10 -

(1974), affd. without published opinion 510 F.2d 970 (3d Cir.

1975).

    Alternatively, both parties dispute the effect of bankruptcy

proceedings that Daniel initiated in 1985 on the claimed net

operating loss, investment interest, and investment credit

carryovers.   On July 17, 1985, Daniel filed a petition with the

Bankruptcy Court for the Southern District of Illinois under

Chapter 11 of the Bankruptcy Code.     11 U.S.C. sec. 1101 (1988).

On December 12, 1985, Daniel's bankruptcy case was converted to a

Chapter 7 bankruptcy.   11 U.S.C. sec. 701 (1988).   On March 19,

1986, the Bankruptcy Court entered a discharge order in Daniel's

bankruptcy case (thereby terminating as of the date of the

discharge any stay that would have been in effect with regard to

this Tax Court proceeding under 11 U.S.C. section 362(a)(8)

(1988)), and in 1995 Daniel's bankruptcy case was closed.

    Under section 1398(g)(1) and (4), the bankruptcy estate of

Daniel would have succeeded to any net operating loss, investment

interest, and investment credit carryovers to which Daniel would

have been entitled.   Any such carryovers that Daniel could

substantiate and to which Daniel would have been entitled at the

time the bankruptcy petition was filed, determined as of the

first day of January 1985 (the year in which petitioner filed for

bankruptcy), would have remained with the bankruptcy estate until

the bankruptcy estate terminated in 1995.    Sec. 1398(i).
                             - 11 -

Petitioners herein have made no attempt to establish the amount,

if any, of the above-claimed carryovers that were recognized and

used by the bankruptcy estate in Daniel's bankruptcy proceedings,

and petitioners have not established the amount of any such

carryovers to which Daniel succeeded at the termination of the

bankruptcy.

    Also, respondent, in the alternative, disputes Eva's

entitlement to any portion of the claimed $1,064,164 net

operating loss and $38,839 investment credit carryovers.   Eva

apparently did not file for bankruptcy, but even if petitioners

established that some of the claimed net operating loss and

investment credit carryovers were attributable to Eva,2 Eva has

not established the amount of any portion of the claimed net

operating loss and investment credit carryovers to which she

would be entitled.

    Further, in 1984, Eva apparently received a discharge with

respect to whatever liability she had on a $16.8 million

indebtedness to Northern Trust Co.    Eva's discharge with respect

to this liability occurred as part of a 1984 settlement of a

lawsuit petitioners had filed against Northern Trust Co.   Eva



2
     We note that net profits were reported on the Schedules C
relating to each of Eva's separate businesses that were attached
to petitioners’ joint Federal income tax returns for 1984 and
earlier years that are in evidence. Thus, no portion of the
claimed carryovers appears to belong to Eva.
                              - 12 -

thereby, in 1984 (to the extent she was liable at all on the

indebtedness to Northern Trust Co.), arguably realized discharge

of indebtedness income taxable to her under section 61(a)(12).

No such income was reported by petitioners on their 1984 joint

Federal income tax return (nor charged to petitioners on audit by

respondent), and such additional income would likely offset any

portion of the claimed $1,064,164 net operating loss carryover if

any such carryover were established in this case and if Eva were

otherwise entitled thereto.

    Eva, however, has not established the existence of the

claimed carryovers or that any portion of the claimed carryovers

should be attributable to her.

    In the alternative and in a characteristically vague and

unclear manner, petitioners apparently claim that they were not

actually indebted to Northern Trust Co.   If that is so, in now

calculating the very large net operating loss carryover from 1984

to which petitioners claim to be entitled, petitioners would be

required to recalculate the very large interest deductions

(cumulatively in excess of $4.5 million) that they claimed in

1984 and prior years with respect to the purported indebtedness

to Northern Trust Co.   As a result, the claimed net operating

loss carryover from 1984 (that is based largely on such claimed

interest deductions) would be eliminated or substantially
                               - 13 -

reduced, thereby in all likelihood eliminating the claimed

carryover loss.

    The claimed $479,000 investment interest carryover from 1984

relates to interest paid on a loan petitioners allegedly made to

LCOR, a corporation owned and controlled by petitioners and by

petitioners' relatives and/or friends.    The evidence in this case

establishes neither the existence of a loan to LCOR nor the

existence or character of payments made by petitioners to LCOR.

    Daniel and Eva are not entitled to any of the carryovers in

dispute.   Respondent's disallowance of the claimed 1984 net

operating loss, investment interest, and investment credit

carryovers is sustained.


Gain on Sale of Residence

    In 1986, petitioners sold a residence located in McPherson,

Kansas.    At trial, Daniel acknowledged that he, Eva, and other

family members had often made personal use of this residence.      On

petitioners' 1985 and 1986 joint Federal income tax returns, no

rental income was reported by petitioners relating to the rental

of this residence.

    On their 1986 joint Federal income tax return, petitioners

claimed a $24,582 ordinary loss with regard to the sale of this

residence.
                                - 14 -

       Section 1.165-9(a), Income Tax Regs., provides that a loss

sustained on the sale of a residence used by a taxpayer as his or

her personal residence up to the time of sale is not deductible

under section 165(a).    Harris v. Commissioner, T.C. Memo. 1982-

410, affd. on other issues 745 F.2d 378 (6th Cir. 1984).

       In light of the evidence indicating petitioners' personal

use of this residence, we sustain respondent's disallowance of

this claimed loss.    The fact that petitioners may have worked in

the vicinity of this residence at the offices of LCOR does not

convert petitioners' personal use of this residence into business

use.    Further, petitioners' alleged rental of this residence to

their son in 1984 does not qualify the 1986 sale of the residence

as a sale of business property.    We sustain respondent's

adjustment on this issue.


Gain on Transactions Relating to Christa Oil Co. Stock

       On November 26, 1985, Eva sold back to Christa Oil Co.

(Christa Oil), a closely held family company, 333 shares of

Christa Oil stock.    In exchange, Eva received from Christa Oil

$100,000 in cash and a partial interest in three oil leases.

       Petitioners state that Eva's tax basis in the 333 shares of

stock sold to Christa Oil was $333.      On petitioners' 1985 joint

Federal income tax return, petitioners reported a capital gain of

$647,973 relating to the sale of this stock.
                              - 15 -

    On November 4, 1986, Eva, for a total stated consideration

of $1,828,000, sold back to Christa Oil the above partial

interests in the three oil leases that she had received in

November of 1985.   Of the total stated consideration, $100,000

was to be paid to Eva in cash, and the $1,728,000 balance due

under the contract with Christa Oil was to be reflected by the

assignment to Eva of a specified number of barrels of oil to be

produced from wells owned by Christa Oil, and by Christa Oil's

commitment to make cash payments to Eva to the extent the barrels

of oil Eva actually received under this contract and the $100,000

downpayment were not adequate to fully pay Eva the total

$1,828,000 due under this contract.

    On audit and based on records of Christa Oil, respondent

determined that Eva received under the above 1985 and 1986

transactions with Christa Oil, $66,913 in 1985, $165,923 in 1986,

and $518,278 in 1987, in additional payments from Christa Oil.

Respondent treated these payments as additional capital gain

income to petitioners for each respective year.

    During the audit, petitioners provided respondent's

representatives no information regarding the amount Eva received

on the above transactions.   Petitioners have not established that

these payments were reported anywhere on their joint Federal

income tax returns.
                              - 16 -

    At trial and on brief, petitioners provide confusing

information and ambiguous arguments concerning these two

transactions with Christa Oil.   During the trial, in response to

a question from the Court as to whether petitioners had attempted

to obtain the original records of Christa Oil, or its successor,

regarding these transactions, the following dialogue occurred

between the Court and petitioners' counsel:


    THE COURT: Mr. Lumerman, do you know the status of Christa
    Oil and the records? Have you made any attempt to get the
    records of Christa Oil with regard to the purchase by it of
    the stock from Mrs. Leavell?

    MR. LUMERMAN:   No, Your Honor, frankly, we haven't.


    We sustain respondent's determination on this issue in its

entirety.


Expenses of Various Businesses

                           L & L Supply

    As indicated, in 1984, Eva started an oil equipment sales

business under the name of L & L Supply.   On Schedules C attached

to petitioners' joint Federal income tax returns for 1985, 1986,

and 1987, Eva claimed operating and/or trucking expenses of

$106,801, $53,941, and $124,454, respectively, relating to this

business.   On audit, respondent disallowed for lack of

substantiation these claimed expenses of L & L Supply.
                               - 17 -

    At trial, little evidence was presented with regard to these

claimed expenses.   With regard, however, to the $106,801 claimed

for 1985, there was admitted into evidence at trial an exhibit

that does appear to substantiate $21,222 in trucking expenses

incurred in 1985 by L & L Supply, which amount we allow.

    The burden of proof with regard to petitioners' entitlement

to these claimed expenses is on petitioners.     Rule 142(a); Welch

v. Helvering, 290 U.S. 111 (1933).      Petitioners have provided no

basis for further estimating the operating and trucking expenses

of L & L Supply.    With the exception noted of $21,222 in trucking

expenses for 1985, we deny petitioners' claim to additional

operating and trucking expenses with regard to L & L Supply.

    With regard to claimed additional inventory or cost-of-

goods-sold expenses of L & L Supply, petitioners, on brief,

concede the figures respondent used each year for beginning and

ending inventory of L & L Supply.    At trial, petitioners offered

exhibit 26 as to 1986 purchases and exhibits 6 and 24 as to 1987

purchases of L & L Supply.   Information, however, in those

exhibits is suspect.   For example, in exhibit 26 a claimed

payment of $22,779 for an inventory item appears actually to be a

payment to an attorney.   In exhibits 6 and 24, certain claimed

payments for inventory items are represented by cashier's checks

that show petitioners as payees.    Petitioners claim that since

many suppliers would only deal with them in cash, by cashing the
                               - 18 -

cashier's checks, petitioners obtained cash necessary to make

cash purchases.   Petitioners, however, have submitted no receipts

reflecting the alleged cash purchases.    With regard to a claimed

purchase of $260,000 from one Ralph Bassett, a bill of sale

establishes that the purchase was for only $130,000.

    Petitioners have failed to meet their burden of proof, and

respondent's determinations of the ending inventory, purchases,

and cost-of-goods sold of L & L Supply are sustained for each

year in issue.    Rule 142(a); Welch v. Helvering, supra at 115;

Cheesman v. Commissioner, T.C. Memo. 1994-509.


      Claimed $200,810 NOL Re:   Sales & Servicing Business

    For 7 months in 1985, Daniel operated a business that sold

repair parts for and that made repairs to oil field drilling

equipment.

    On a Schedule C attached to petitioners' 1985 joint Federal

income tax return, Daniel claimed a net operating loss of

$200,810 relating to this business.     On the Schedule C, Daniel

indicated that the expenses claimed were estimates.    At trial,

Daniel testified that the $711,055 cost-of-goods sold claimed

on this 1985 Schedule C was estimated based on seven-twelfths

of total purchases and seven-twelfths of 1984 labor costs for

this business.    On this same Schedule C for 1985, however,

Daniel also claimed a separate and additional $156,392 expense
                              - 19 -

relating to labor costs for this business.    Petitioners’

calculation thus appears to reflect a duplicate deduction for

labor costs.

    Petitioners also claim that the estimated gross receipts of

$855,500 that petitioners reported on the 1985 Schedule C

relating to this business were overreported.    In support of

their claim, petitioners offer a document that Daniel submitted

to the Illinois Department of Revenue that indicates 1985 sales

of $611,544 from this business.    That document, however, only

purports to reflect income from equipment sales of this

business.    It does not reflect service income, and it reflects

sales for only 6 months of 1985.

    On audit, due to lack of substantiation, respondent

disallowed the claimed $711,055 cost-of-goods sold for 1985

relating to this business.    In their opening posttrial brief,

petitioners appear to concede that the claimed $200,810 loss

relating to Daniel's sales and service business is not

allowable.

    As already mentioned, where a taxpayer fails to maintain

adequate records regarding a business, respondent is entitled

to adopt any reasonable method to determine income.    Bradford

v. Commissioner, 796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo.

1984-601.    We sustain respondent’s adjustment on this issue.
                             - 20 -

         Eva's Claimed $20,678 NOL Re:   Oil Production

    With petitioners' 1986 joint Federal income tax return, Eva

filed a Schedule C claiming a net operating loss from oil

production of $20,678.   On audit, respondent disallowed this

claimed loss on the grounds that no portion thereof had been

substantiated.

    At trial, petitioners offered documentation in support of

claimed oil production expenses that indicates that many of the

purported expenses reflected on the Schedule C relate to the

business of L & L Supply.   Accordingly, the claimed expenses

may already have been claimed by L & L Supply on the Schedule C

relating to that separate business.   Further, based on the

referred-to documentation, $12,000 of the expenses giving rise

to the claimed $20,678 loss from oil production appear to

constitute a payment to G.R. Penn Production Co., a company

controlled by petitioners' son, and $5,000 of the claimed

expenses appear to represent not expenses, but rather receipts

or income petitioners received from G.R. Penn Production Co.

    We disallow Eva’s claimed $20,678 net operating loss for

1986 relating to oil production.


Additions To Tax

    Petitioners have offered no credible excuse for the late

filing of their 1985 and 1986 joint Federal income tax returns.
                              - 21 -

Having business problems does not relieve taxpayers of the

obligation to file timely Federal income tax returns.     We

sustain respondent's imposition of the addition to tax under

section 6651(a)(1) for 1985 and 1986.

    Petitioners argue that they relied on their accountant to

prepare proper income tax returns.     The evidence, however,

indicates that petitioners did not provide their accountant

with accurate and complete records from which accurate tax

returns could be prepared.    See Hull v. Commissioner, T.C.

Memo. 1991-582; Auld v. Commissioner, T.C. Memo. 1978-508.      We

sustain respondent's imposition of the additions to tax under

section 6653(a)(1) and (2) for 1985, and under section

6653(a)(1)(A) and (B) for 1986 and 1987.

    Petitioners have not established that they had substantial

authority for the positions taken on their joint Federal income

tax returns, nor that the relevant facts were adequately

disclosed on their returns.    For each year in issue, we sustain

the additions to tax under section 6661.


                                     An appropriate order denying

                                petitioners' motion for

                                reconsideration will be issued,

                                and decision will be entered

                                under Rule 155.
