                        T.C. Memo. 2000-99



                      UNITED STATES TAX COURT



      MICHAEL C. HOLLEN AND JOAN L. HOLLEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5586-97.                      Filed March 24, 2000.



     Paul F. Christoffers, for petitioners.

     Lisa K. Hartnett, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     MARVEL, Judge:   Respondent determined a deficiency in

petitioners' Federal income tax for the taxable year 1988 of

$79,308 and additions to tax under sections 6653 and 6661(a) of
                                 - 2 -


$3,965 and $19,827, respectively.1       After concessions,2 the

issues for decision are:    (1) Whether petitioners were required

to report and pay income tax on a one-third distributive share of

partnership income from Blue Bird Ranch Partnership (the

partnership) in 1988, and (2) whether petitioners are liable for

the additions to tax determined by respondent.       We resolve both

issues in favor of respondent.

                           FINDINGS OF FACT

     Some of the facts have been stipulated.       The stipulated

facts are incorporated in our findings by this reference.

     On the date the petition in this case was filed, petitioners

were married and resided in Waterloo, Iowa.       Michael C. Hollen

(petitioner) is a dentist who, during all relevant periods,

operated a professional dental practice through his professional




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
      In the notice of deficiency, respondent determined that
petitioners had unreported taxable gain of $280,275, representing
50 percent of the partnership’s gain from the sale of the ranch
property. Respondent now concedes that only one-third of the
gain from the sale of the property in 1988; i.e., $195,425, is
allocable to petitioners. Petitioners concede that they received
taxable income of $150 from Hawkeye Institute of Technology, $833
from petitioner’s professional corporation, and $89 of interest
from the Blue Bird Ranch Partnership that was not reported on
their Federal income tax return for 1988.
                               - 3 -


corporation, Michael C. Hollen, D.D.S., Professional Corporation

(P.C.).

     On March 17, 1982, petitioners and two other married couples

purchased a fruit and flower farm in San Diego County,

California, from Hugh D. and Bonnie B. Lentz (Mr. and Mrs.

Lentz).   The property was known as the Blue Bird Ranch (the

ranch) and was acquired for $1,138,750.   Petitioners and the

other purchasers executed a promissory note in the amount of the

purchase price and a deed of trust to secure payment of the note.

Title to the ranch was conveyed to petitioners and the other

purchasers as tenants in common.

     On or about April 1, 1982, petitioner and the other two

husbands formed the partnership to operate and manage the ranch.

The wives did not participate in the partnership.3

     Although the partners did not reduce their partnership

agreement to writing, they orally agreed that each couple would

contribute its one-third interest in the ranch to the

partnership.   Petitioner believed that title to the property had

been transferred to the partnership until he was advised to the



     3
      Although petitioner testified that the wives were not
partners, whether or not the wives contributed capital to the
partnership or were partners as a matter of law is not material
to the decision we reach in this case. Consequently, we do not
make specific findings of fact regarding whether the wives were
partners.
                               - 4 -


contrary by his attorney in 1998.   In fact, title to the property

was never formally transferred to the partnership.

     From the inception of the partnership in 1982 to the sale of

the ranch in 1988, the partnership operated as if it owned the

ranch.   The partnership paid the expenses of operating the ranch

and claimed them as deductions on its Federal partnership tax

returns.   The partnership listed the ranch and all improvements

thereon as assets on its partnership tax returns and depreciated

the improvements.   Petitioner signed each partnership tax return.

     The partnership was not profitable.   From 1982 to 1987,

petitioners claimed flowthrough losses from the partnership

totaling $695,047 on their individual income tax returns.   To

keep the partnership afloat, petitioner and one of the other

partners made several additional capital contributions during

this period.   Finally, in 1988, the partnership’s financial

problems came to a head because Mr. and Mrs. Lentz refused to

modify the payment obligations under the promissory note and the

deed of trust and threatened to foreclose on the ranch.

     In October 1988, petitioners and the other two couples

entered into a purchase and sale agreement in which they agreed

to sell the ranch to Cele and Norma Pou (Mr. and Mrs. Pou).     As

consideration for the sale, Mr. and Mrs. Pou paid each couple
                               - 5 -


$10,0004 and assumed the sellers' liability to Mr. and Mrs.

Lentz.   The sellers executed a grant deed conveying title to Mr.

and Mrs. Pou in October 1988, and the partnership dissolved

thereafter.

     On or about March 15, 1989, the partnership filed its 1988

partnership return in which it recognized gain of $631,507 from

the sale of the ranch.   The partnership also issued to

petitioner, in his individual name, a Schedule K-1, Partner’s

Share of Income, Credits, Deductions, Etc., showing his

distributive share of partnership income, which included a one-

third share of the gain from the sale of the ranch.   The

partnership’s return was prepared by the partnership’s

accountant, David Evans, and filed as its final return.

     In April 1989, petitioners filed Form 4868, Application for

Automatic Extension of Time to File U.S. Individual Income Tax

Return, requesting an extension of time to file their 1988

Federal income tax return.   The Form 4868 was prepared by

petitioners’ accountant, Louis Fettkether.   It reported an

estimated tax liability for 1988 of $80,000, which petitioners

paid with the extension request.   Petitioners' estimated tax


     4
      The check was made payable to petitioners personally and
not to the partnership or the P.C. However, the payment was
treated as a partnership distribution on the partnership’s 1988
return and on the Schedule K-1, Partner’s Share of Income,
Credits, Deductions, Etc., issued to petitioner.
                                 - 6 -


liability was calculated using the information from petitioner’s

Schedule K-1.

     In July 1989, petitioner filed his P.C.'s Federal income tax

return for the fiscal year ended October 31, 1988.    This return

was also prepared by Mr. Fettkether.     It did not include any gain

from the sale of the ranch or income from the partnership.

     In October 1989, petitioner filed an amended corporate

income tax return for the P.C.    The amended return was prepared

by a different return preparer, John Henss.    It contained the

following statement:

     Reason for Amended Return.

          On August 1, 1988 it was the intent of Michael C.
     Hollen to transfer to Michael C. Hollen, D.D.S., P.C.
     certain investment assets including an interest in
     Bluebird Ranch, a partnership. That partnership equity
     was in a deficit position. It was the intent of the
     parties that Michael C. Hollen would issue his note
     payable to Michael C. Hollen, D.D.S., P.C. in an amount
     equal to the deficit in Bluebird Ranch which was
     assumed by Michael C. Hollen, D.D.S., P.C. over the
     value of the other assets assumed by Michael C. Hollen,
     D.D.S., P.C. Due to a scrivener error the assumption
     of the Bluebird Ranch deficit was not recorded in the
     corporate records. Upon detection of said scrivener
     error the verbal agreement was confirmed and made a
     matter of record.[5]

     5
      At trial, petitioner testified that he took steps to
protect petitioners’ personal assets in the event that Mr. and
Mrs. Lentz foreclosed on the note and obtained a judgment against
petitioners. Specifically, petitioner claimed that, in August
1988, petitioners transferred most of their personal assets to
his P.C. in connection with the establishment of an Employee
Stock Ownership Plan (ESOP). Although petitioner testified that
                                                   (continued...)
                                - 7 -


No gain from the sale of the ranch or income from the partnership

was reported on the amended return.

     Also in October 1989, petitioners filed their 1988 Federal

income tax return.    This return was prepared by Mr. Henss.

Petitioners did not report any gain from the sale of the ranch or

any partnership income on this return and did not make any

disclosure with respect to either the sale of the ranch or the

Schedule K-1 issued to petitioner.      Instead, on Schedule D of

their return, petitioners reported a sale of petitioner's

partnership interest on August 1, 1988, to the P.C. at a purchase

price equal to petitioner’s alleged adjusted basis.      No gain or

loss was realized on the purported sale.      Petitioners reported

taxable income of $7,013, total tax of $1,054, and an overpayment

of $78,946.

     In 1992 or 1993, respondent audited the partnership's tax

return for 1988.6    During the audit of the 1988 partnership

     5
      (...continued)
his interest in the partnership and/or the ranch was included in
the transfer, petitioner admitted that neither petitioner's
partnership interest nor any ownership interest in the ranch was
included on the original list of assets allegedly transferred to
the P.C. No documentation regarding the alleged transfer to the
P.C. was introduced into evidence at the trial. Petitioner
testified that the failure to list his partnership interest or
any interest in the ranch was a scrivener's error and that the
omission was later corrected. The record is silent as to when
this alleged amendment occurred.
     6
      Respondent also audited the partnership’s 1982 tax return
                                                   (continued...)
                                - 8 -


return, petitioner represented that the ranch was a partnership

asset, that petitioner was a partner in the partnership, and that

the sale of the ranch had been reported correctly on the

partnership return.   Relying on petitioner's representations and

on the previously filed partnership returns, respondent did not

make any adjustments to the partnership's return.

     Respondent also audited petitioners' Federal income tax

return for 1988.    Upon completion of the audit, respondent issued

a notice of deficiency in which respondent disregarded the

alleged transfer of petitioner’s partnership interest to the P.C.

and determined that petitioner was a partner when the ranch was

sold in 1988, that petitioner was required to report his

distributive share of partnership income for 1988, and that

petitioners were liable for additions to tax under section 6653

and section 6661.

                               OPINION

     Petitioners make two arguments in an effort to avoid

reporting and paying income tax on petitioner’s 1988 distributive

share of partnership income.   First, petitioners argue that,

although the partnership operated the ranch from 1982 to 1988,

     6
      (...continued)
several years earlier. Petitioner participated in the audit but
did not inform the auditing agent that the ranch was titled in
the name of the individuals and not in the partnership's name.
Petitioner explained this failure by claiming that he did not
know title was held in the names of the individuals until 1998.
                                    - 9 -


the partners and their wives, as individuals, owned the ranch.

Therefore, petitioners contend that when the ranch was sold in

1988, petitioners and their cotenants were required to report the

gain realized on the sale after taking into account their cost

basis in the property unreduced by depreciation claimed in prior

years by the partnership.7       Second, petitioners argue that, even

if the partnership is deemed to have owned the ranch prior to its

sale in 1988, petitioner’s interest in the partnership was

transferred to the P.C. prior to the sale, and petitioners are

not individually liable for income tax on any portion of the

gain.

            Respondent urges us to reject petitioners’ arguments,

contending, among other things, that the duty of consistency

binds the partnership and petitioners to their original reporting

position--that the ranch was partnership property.




        7
      We question the premise on which petitioner relies in
making this argument. Petitioner assumes that if he can convince
us that the ranch was not partnership property, he can calculate
the gain from the sale of the ranch in 1988 using his cost basis
unreduced by depreciation because, in his capacity as the owner
of the ranch, he never claimed depreciation on the ranch. Sec.
1016(a)(2) requires that a taxpayer’s basis in property must be
reduced by depreciation allowed or allowable. Even if petitioner
did not claim depreciation with respect to the ranch,
petitioner’s basis in the ranch must still be reduced by the
depreciation allowable under sec. 167 if the requirements of sec.
167 are met.
                                - 10 -




The Duty of Consistency

     The "duty of consistency", sometimes referred to as quasi-

estoppel, is an equitable doctrine that Federal courts

historically have applied in appropriate cases to prevent unfair

tax gamesmanship.     Beltzer v. United States, 495 F.2d 211, 212

(8th Cir. 1974); Cluck v. Commissioner, 105 T.C. 324 (1995);

LeFever v. Commissioner, 103 T.C. 525 (1994), affd. 100 F.3d 778

(10th Cir. 1996).    The duty of consistency doctrine “is based on

the theory that the taxpayer owes the Commissioner the duty to be

consistent in the tax treatment of items and will not be

permitted to benefit from the taxpayer’s own prior error or

omission.”   Cluck v. Commissioner, supra at 331.    It prevents a

taxpayer from taking one position on one tax return and a

contrary position on a subsequent return after the limitations

period has run for the earlier year.     See id.   If the duty of

consistency applies, a taxpayer who is gaining Federal tax

benefits on the basis of a representation is estopped from taking

a contrary return position in order to avoid taxes.     See id.

     This case is appealable to the Court of Appeals for the

Eighth Circuit.     In Beltzer v. United States, supra at 212, the

Court of Appeals for the Eighth Circuit held that a taxpayer is

placed under a duty of consistency when:
                              - 11 -


          (1) the taxpayer has made a representation or
     reported an item for tax purposes in one year,

          (2) the Commissioner has acquiesced in or relied
     on that fact for that year, and

          (3) the taxpayer desires to change the
     representation, previously made, in a later year after
     the statute of limitations on assessments bars
     adjustments for the initial year.

Id. at 212; see also LeFever v. Commissioner, supra at 543

(quoting Beltzer v. United States, supra).     Because the duty of

consistency is an affirmative defense, respondent bears the

burden of proving that it applies.     See Rule 142(a).

     Throughout the life of the partnership, petitioner

consistently represented to respondent that the ranch was

partnership property.   Petitioner did so by causing the

partnership to file tax returns claiming depreciation deductions

with respect to the ranch and by asserting the ranch was

partnership property during audits of the partnership’s Federal

income tax returns.   Consistent with the partnership’s reporting

position, petitioners filed individual Federal income tax returns

for each of the taxable years 1982 through 1987 claiming

petitioner’s distributive loss from the partnership.      The loss

was calculated, in part, by deducting depreciation on ranch

buildings and other improvements.    When petitioners filed their

Federal income tax return for 1988, however, they changed their

representation with respect to the ranch, taking the position
                              - 12 -


instead that the ranch was not partnership property and that the

gain from the sale of the ranch was not income to them.    Several

years later, during the audit of the 1988 partnership return,

petitioner failed to inform respondent that title to the ranch

was held individually or that he had changed his prior reporting

position that the ranch was partnership property.

     These facts satisfy the three elements necessary to invoke

the duty of consistency under Beltzer v. United States, supra.

First, petitioner consistently represented that the ranch was

partnership property, from the filing of the first partnership

return to the filing of the partnership’s final return.    That

representation carried over to petitioner’s Federal income tax

returns for 1982 through 1987.   Second, respondent acquiesced in

and relied upon these representations to respondent’s detriment

by allowing the period of limitations on assessment to run on

petitioners’ income tax returns without adjusting their

distributive share of partnership income and deductions.    See

sec. 6501.   Third, petitioner now claims that his previous

representations were in error and seeks to change the

representation on his 1988 Federal income tax return.

     Petitioners argue that the duty of consistency should not

apply because they are innocent of any intentional wrongdoing.

They contend that they did not learn that title to the ranch was
                              - 13 -

held individually until after the period of limitations had run.

This defense is without merit because the duty of consistency

applies equally to a taxpayer who innocently misrepresents a fact

in a time-barred year and one who misleads intentionally.    See

Beltzer v. United States, supra at 212; Unvert v. Commissioner,

72 T.C. 807, 816 (1979), affd. 656 F.2d 483 (9th Cir. 1981).8

     Petitioners also argue that the duty of consistency does not

apply because whether they own a property interest for Federal

tax purposes is controlled by State law.9   We reject this

argument.   Determining whether the ranch was owned by the


     8
      In Demirjian v. Commissioner, 54 T.C. 1691, 1696 (1971),
affd. 457 F.2d 1 (3d Cir. 1972), a case presenting similar facts,
we rejected the taxpayers’ arguments using a burden of proof
analysis. The taxpayers in Demirjian, like the taxpayers in this
case, claimed that they held title to certain real property as
tenants in common rather than as partners. They had filed
partnership tax returns and various correspondence which
represented that the partnership owned the real property.
Although we did not apply the duty of consistency to resolve the
case, we analyzed the applicable burden of proof and concluded
that the taxpayers had failed to demonstrate that the property in
question was not partnership property. We held that “the record
shows that * * * [the taxpayers] intended to and in fact did
carry on their prior corporate venture in partnership form, and
that they operated the business property conveyed to them as
partners. Petitioners have failed to prove otherwise.” Id. at
1697-1698. Here, too, the taxpayers “have failed to prove
otherwise.” Id. at 1698; see also McManus v. Commissioner, 583
F.2d 443 (9th Cir. 1978) (a taxpayer is estopped from denying
that real property is partnership property even though the
property is held as a tenancy in common), affg. 65 T.C. 197
(1975); Smith v. Commissioner, T.C. Memo. 1978-416 (land was
partnership property despite the fact that legal title to the
land was held as a tenancy in common).
     9
      Petitioners alleged on brief that the partnership is a
California partnership and that California law applies.
                              - 14 -

partners as individuals or by the partnership is simply not

necessary to our decision regarding the duty of consistency.     The

duty of consistency is an affirmative defense grounded in equity

and is designed to prevent taxpayers from changing a tax-

significant representation benefiting the taxpayer at a time when

the Commissioner is prevented by law from correcting the

taxpayer’s tax reporting position based on that representation.

We need not decide whether the representation in question is true

or false in order to decide whether petitioners are bound by the

duty of consistency.   We need only decide if petitioners are

attempting to change a representation for tax purposes after

respondent has relied on that representation and the applicable

period of limitations has expired.     The duty of consistency

applies even if the original representation is erroneous, as long

as respondent demonstrates that the three elements necessary to

invoke the duty of consistency have been satisfied.     See

Herrington v. Commissioner, 854 F.2d 755, 757 (5th Cir. 1988),

affg. Glass v. Commissioner, 87 T.C. 1087 (1986).     In this case,

once we determine that the duty of consistency applies, we no

longer care who actually owned the ranch since, for Federal

income tax purposes, the duty of consistency requires petitioners

to be bound by their prior representations regarding the ranch’s

ownership.   For this reason, we need not and do not decide who
                             - 15 -



actually owned the ranch or whether State law applies in deciding

that issue.

     On these facts, we hold that the duty of consistency

applies, and, therefore, petitioners are estopped from claiming

that the ranch was not partnership property at the time of its

sale in 1988.

The Alleged Transfer of the Partnership Interest
to the P.C. in 1988

     Petitioners’ second argument assumes that the ranch was

partnership property and focuses on whether petitioner was the

owner of his partnership interest for Federal tax purposes when

the ranch was sold in October 1988.   Petitioner claims that he

transferred his partnership interest to his professional

corporation in August 1988 and that his professional corporation

was required to report the distributive share of income reflected

on the Schedule K-1 issued to petitioner for 1988.   Petitioners

cite Evans v. Commissioner, 54 T.C. 40, 49 (1970), affd. 447 F.2d

547 (7th Cir. 1971), and Baker v. Commissioner, T.C. Memo. 1991-

331, in support of their position.    Their reliance on these cases

is misplaced.

     In Evans, the taxpayer transferred his partnership interest

to a corporation that he formed to operate his own business.      The

transfer was pursuant to a detailed written assignment.     The

corporation listed the partnership interest as an asset of the
                                - 16 -



corporation on its balance sheet, deposited all partnership

income, and reported the partnership’s income on the corporate

tax returns.   Several years later, the partnership was severed

and dissolved.   Both the taxpayer and the corporation were

parties to the dissolution agreement, and the corporation

reported all gain from the disposition of the partnership

interest.   We held on these facts that the corporation, rather

than the taxpayer, was taxable on the gain from the sale of the

partnership interest.

     In Baker, the taxpayer was a partner in a real estate

development partnership.     After he encountered financial

problems, he executed a series of promissory notes to a related

corporation as part of an arrangement to sever his business ties

with his partner.   The issue we resolved was whether the

promissory notes provided additional basis in the taxpayer’s

partnership interest.     We held that they did.

     Both Evans and Baker are distinguishable from this case.     In

each of those cases, the taxpayer satisfactorily proved that the

transaction in question actually occurred and that it had

economic substance.     In addition, the taxpayers and related

entities did not attempt to avoid a tax liability that otherwise

would have been owed by some taxpayer.     In the present case, the

P.C. failed to report any partnership income on its 1988 return
                              - 17 -



or to list the partnership interest as one of its assets.10

Other than petitioner’s self-serving testimony, there is

absolutely no evidence of the alleged transfer in the record.

Petitioners did not introduce any contract, assignment, deed, or

contemporaneous written documentation to prove that the alleged

transfer occurred.   We are not required to accept a taxpayer’s

self-serving, unverified, and undocumented testimony, and we

decline to do so here.   See Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).

     Petitioners have failed to prove that petitioner transferred

either his partnership interest or petitioners’ alleged ownership

interest in the ranch property to his P.C. prior to the sale of

the ranch in October 1988.   We hold, therefore, that the ranch

was partnership property at the time of its sale in October 1988,

that the gain from the sale of the ranch was properly included in

calculating the partnership’s income for 1988, and that

petitioner was required to report his distributive share of

partnership income for 1988 in accordance with the Schedule K-1

issued to him.   In view of our conclusions, it is not necessary


     10
      On brief, petitioners, for the first time, claim that the
P.C. reported gain from the sale of the ranch on its Federal
income tax return for FYE Oct. 31, 1989. Petitioners failed to
introduce this return into evidence at trial or to produce any
evidence that would corroborate this assertion. We conclude on
this record, therefore, that petitioners have failed to prove
that the P.C. reported any gain from the sale of the ranch.
                              - 18 -



to determine what the basis of the ranch would be in the hands of

either petitioners or the P.C.

Additions to Tax

     In the notice of deficiency, respondent determined that

petitioners are liable for additions to tax for negligence under

section 6653(a) and for substantial understatement of income tax

under section 6661.

     For 1988, section 6653(a)(1) provides that, if any part of

an underpayment of tax is due to negligence or disregard of rules

or regulations, an amount equal to 5 percent of the underpayment

shall be added to the tax.   For purposes of section 6653(a),

negligence is defined as a “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 and remanding in part 43 T.C. 168

(1964)).   The taxpayer has the burden of proving that

respondent’s determination is erroneous.    See Rule 142(a); Bixby

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

     Petitioners assert that their actions were not negligent.

They argue that they were relying on the advice of their

accountants in determining what to report as income.     While it is

true that a taxpayer may avoid liability for the addition to tax
                              - 19 -



under section 6653(a) if reasonable reliance in good faith on a

competent and experienced return preparer is shown, reliance on

professional advice, standing alone, is not an absolute defense

to negligence.   See United States v. Boyle, 469 U.S. 241, 250-251

(1985); Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd.

904 F.2d 1011 (5th Cir. 1990), affd. 498 U.S. 1066 (1991).

Rather, it is a factor to be considered.    See Freytag v.

Commissioner, supra.   In order to claim that he reasonably relied

in good faith on a competent and experienced return preparer, a

taxpayer must demonstrate that he supplied all necessary

information to the preparer, and the incorrect return was a

result of the preparer’s mistakes.     See Weis v. Commissioner, 94

T.C. 473, 487 (1990) (citing Pessin v. Commissioner, 59 T.C. 473,

489 (1972)).

     Petitioners have failed to prove that they supplied all

necessary information to their return preparer, that the advice

they claimed to have received from their return preparer, Mr.

Henss, was reasonable, or that they relied on the advice in good

faith.   The partnership’s accountant prepared the partnership tax

return for 1988 in a manner consistent with prior years’ returns

and included on the 1988 partnership return gain from the sale of

the ranch.   Schedules K-1 consistent with the partnership’s

return were issued to petitioner and the other partners.
                              - 20 -



Petitioners’ regular accountant, Mr. Fettkether, estimated

petitioners’ Federal income tax liability for 1988 by taking into

account the information from the Schedule K-1 and prepared Form

4868, which petitioners signed and filed.   Petitioners offered no

evidence regarding whether they informed Mr. Henss, when they

hired him to prepare their 1988 income tax return, that the

partnership and its partners consistently had claimed the ranch

as partnership property or whether Mr. Henss did any analysis

whatsoever regarding a taxpayer’s duty of consistency.   Even if

petitioner or his adviser had performed any credible analysis of

the relevant facts and law, the failure of both petitioner and

his P.C. to report the income shown on petitioner’s 1988 Schedule

K-1 undercuts any argument that petitioner and his adviser acted

reasonably under the circumstances.

     On this record, we conclude that petitioner was negligent in

attempting to avoid paying income tax on petitioner’s share of

partnership income.   Petitioners have failed to prove their

position was reasonable under the circumstances or that they had

reasonable cause for their failure to report petitioner’s

distributive share of partnership income.

     Petitioners also are liable for the addition to tax for

substantial understatement of their tax liability authorized by

section 6661.   Section 6661, in effect for returns due in 1988,
                              - 21 -



provides that, if there is a substantial understatement of income

tax for any taxable year, an amount equal to 25 percent of the

underpayment attributable to such understatement must be added to

the tax.   For purposes of section 6661, there is a substantial

understatement of income tax if the amount of the understatement

exceeds the greater of 10 percent of the tax required to be shown

on the return for the taxable year in issue or $5,000.   See sec.

6661(b)(1)(A).

     In cases not involving tax shelters, the addition to tax

under section 6661 is mandatory if there is a substantial

understatement of income tax as defined by section 6661(b)(1)

unless, and to the extent that, the taxpayer has substantial

authority for the tax treatment of the disputed item or the

relevant facts affecting the tax treatment of the disputed item

are adequately disclosed within the meaning of section

6661(b)(2)(B)(ii).   See sec. 6661(b)(2)(B).

     Although petitioners attempted to show that certain case law

supported their positions, petitioners failed to research or

analyze their obligation to file consistently with prior returns.

In addition, they failed to introduce any evidence showing that

they or their return preparer did any investigation of

petitioners’ tax reporting obligations prior to filing their 1988
                             - 22 -



income tax return, and they failed to make a disclosure within

the meaning of section 6661(b)(2)(B)(ii).

     For all of these reasons, therefore, we hold that

petitioners have failed to carry their burden of proof with

respect to the addition to tax under section 6661.   If the

recomputed deficiency under Rule 155 attributable to respondent’s

determinations and the parties’ concessions in this case

satisfies the definition of substantial understatement under

section 6661(b)(1), petitioners will be liable for the addition

to tax under section 6661.

     We have considered carefully all remaining arguments made by

petitioners for a result contrary to that expressed herein,

including arguments involving documents not in the record, and,

to the extent not discussed above, we find them to be irrelevant

or without merit.

     To reflect the foregoing and the concessions of the parties,


                                   Decision will be entered

                              under Rule 155.
