                        T.C. Memo. 2001-187



                      UNITED STATES TAX COURT



                PAUL A. BILZERIAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10201-95.                       Filed July 24, 2001.


     Paul A. Bilzerian, pro se.

     Michael A. Pesavento, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined additions to

petitioner’s1 1986 Federal income tax as follows:




     1
      Petitioner and his wife, Terri L. Steffen, filed a joint
return for 1986. Separate notices of deficiency were sent to
petitioner and Ms. Steffen and separate petitions were filed.
This Opinion addresses the liability of petitioner.
                                 - 2 -

                           Additions to tax
                Sec. 6653(a)(1)(A)   Sec. 6653(a)(1)(B)
                    $100,233        50% of the interest
                                    due on $2,004,465

After concessions,2 the issue for decision is whether petitioner

is liable for additions to tax for negligence pursuant to section

6653(a)(1)(A)3 and (B) for the taxable year 1986.

     On September 11, 1998, respondent moved, pursuant to Rule

91(f), to compel petitioner to enter into a proposed stipulation

of facts.   We ordered petitioner to show cause why the matters

covered by respondent’s motion should not be deemed admitted for

purposes of this case.    Petitioner failed to respond to the order

to show cause.    We, therefore, granted respondent’s motion and

deemed the matters contained in the proposed stipulation to be

facts for purposes of this case.    Rule 91(f).

                           FINDINGS OF FACT

     Petitioner resided in Tampa, Florida, at the time he filed

his petition.

     Petitioner graduated from Stanford University.       After

graduating from Stanford, he attended Harvard University and

graduated in 1977 with a master’s degree in business



     2
      Petitioner concedes that he is not entitled to carry back a
worthless stock loss of $23,366,705 from 1989 to 1986.
     3
      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.
                               - 3 -

administration.   After graduating from Harvard, petitioner worked

in the real estate business.   In 1982, he began trading

securities.   Before 1987, petitioner either explored the

possibility of taking over control, or attempted to take over

control, of several publicly traded companies, including

Hammermill Paper Co. (Hammermill), Armco, Cluett Peabody, H.H.

Robertson, and Syntex Corp.

     In 1986, petitioner and Earl and Billy Mack (the Macks)

formed a partnership, Bilzerian & Mack Associates (Bilzerian &

Mack), for the purpose of launching a takeover of Hammermill.

Petitioner was a general partner of Bilzerian & Mack, and he

signed the partnership return for 1986 on March 23, 1987.   Mack

Asset Co. and Bilzerian Investors, two partnerships, were

reported on Bilzerian & Mack’s 1986 Form 1065, U.S. Partnership

Return of Income, as other general partners.   Petitioner was

involved in Bilzerian Investors and another partnership named

Bilzerian Ventures.   Although Hammermill was eventually acquired

by International Paper Co. in August of 1986, petitioner realized

substantial gains in 1986 through Bilzerian & Mack, Bilzerian

Investors, and Bilzerian Ventures from the purchase and sale of

Hammermill stock.

     During 1986, petitioner also maintained interests in South

Bay Fashion Center and South Bay Fashion One, two partnerships,

and various other entities.
                                - 4 -

     For the taxable year 1986, petitioner was involved in the

preparation of Federal income tax returns for some of the

entities he was involved in.    Additionally, a former accountant

from Price Waterhouse worked full time in petitioner’s office

handling some of the returns.   Peat, Marwick, Mitchell & Co.,

C.P.A.s (Peat Marwick) prepared partnership tax returns for

Bilzerian & Mack, Bilzerian Investors and Bilzerian Ventures.

Another accountant and a tax attorney were involved in preparing

tax returns for other entities which petitioner was involved in.

     While Peat Marwick was not engaged by petitioner to prepare

or do any work on the 1986 individual income tax return, Peat

Marwick did prepare a schedule, entitled “Paul Bilzerian’s 1986

Tax Estimate”.   This schedule was prepared for the purpose of

helping petitioner make an estimated tax payment for 1986.    The

schedule reported the following gains from petitioner’s stock

dealings in Hammermill:

                         Item               Amount
                 Bilzerian & Mack         $1,840,003
                 Bilzerian Investors      10,216,579
                 Bilzerian Ventures            3,107
                 Personal Gain             4,170,093
                   Total                  16,229,782

     On June 15, 1987, petitioner signed and filed a Form 4868,

Application for Automatic Extension of Time to File U.S.

Individual Income Tax Return, for the taxable year 1986, along

with a payment of $5 million.   Petitioner was in possession of

the schedule prepared by Peat Marwick at that time.    On August
                               - 5 -

12, 1987, petitioner filed a Form 2688, Application for

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

Return.

     On October 15, 1987, petitioner filed his 1986 Form 1040,

U.S. Individual Income Tax Return.     On Schedule E, Supplemental

Income and Loss, petitioner reported the following net income

from petitioner’s stock dealings in Hammermill:

                       Item                  Amount
               Bilzerian & Mack            $1,840,003
               Bilzerian Investors         10,216,579
               Bilzerian Ventures               3,107
                 Total                     12,059,689

On the Schedule C, Profit or Loss from Business, petitioner

reported gross income of $8,063,277 from the sale of securities.4

On the Form 1040, petitioner reported adjusted gross income and

tax liability of $6,099,966 and $3,005,166, respectively.

Petitioner reported an overpayment of tax of $2,053,708.

     Petitioner’s 1986 individual tax return was prepared by

Dwight Norris (Mr. Norris).   Mr. Norris prepared petitioner’s

individual tax returns for the taxable years 1982 through 1986.

Mr. Norris also prepared partnership tax returns for 1986 for

South Bay Fashion Center and South Bay Fashion One.5    Mr. Norris

graduated from Ohio State University in 1956 and has been working


     4
      Petitioner reported deductions of $14,101,394, resulting in
a net loss of $6,038,117.
     5
      In 1982, Mr. Norris was a business partner with petitioner
in South Bay Fashion One.
                               - 6 -

as a certified public accountant since that time.   At the time he

prepared petitioner’s 1986 return, Mr. Norris worked for the

accounting firm of Porterfield & Co., C.P.A.s, located in

Sacramento, California.6   In connection with his preparation of

petitioner’s 1986 tax return, Mr. Norris received a package of

information from petitioner’s office consisting of Schedules K-17

and other various schedules necessary to prepare petitioner’s

individual return, including the schedule prepared by Peat

Marwick.

     In the fall of 1988, Mr. Norris was contacted by Mike Shaw

(Mr. Shaw), an attorney representing Mr. Norris at the time,

concerning an omission of income on petitioner’s 1986 return.      As

a result, Mr. Norris learned that petitioner had failed to

include $4,170,1858 of taxable income from gain realized by

petitioner from the purchase and sale of Hammermill stock.    Mr.

Norris informed petitioner of this.    Mr. Shaw was alerted to the

omission of income on petitioner’s 1986 return by an agent of the

Federal Government.



     6
      At the time of trial, Mr. Norris resided in California.
     7
      A Schedule K-1 is a schedule attached to a Form 1120S, U.S.
Income Tax Return for an S Corporation, or a Form 1065, U.S.
Partnership Return of Income, to report a shareholder’s or a
partner’s share of income, credits, deductions, etc., from the S
corporation or the partnership.
     8
      The total omission from income was reduced to $4,008,928,
due to miscellaneous adjustments.
                                 - 7 -

     At petitioner’s request, Mr. Norris prepared an amended

return for petitioner for 1986.    On January 5, 1989, petitioner

filed a Form 1040X, Amended U.S. Individual Income Tax Return,

for 1986.   On the Form 1040X, petitioner increased his taxable

income by $4,008,928 and reported adjusted gross income and total

tax liability of $10,108,894 and $5,009,631, respectively.    The

increase to income was described on petitioner’s amended return

as follows:

     NET CHANGE TO INCOME                 Federal

     ADJUSTMENTS TO SCHEDULE C
          INCOME FROM SALES               4170185
          INTEREST EXPENSE                -161257

     ADJUSTMENTS TO SCHEDULE B
          INTEREST INCOME
               ADD JEFFRIES & CO               91
               LESS ON SCHEDULE C             -91

                                          4008928

     On December 21, 1988, petitioner was indicted by a Federal

grand jury on charges that he conspired to defraud the Internal

Revenue Service and the Securities and Exchange Commission (SEC)

with respect to several of his attempted corporate acquisitions

which he engaged in during the 1980s.    The charges related to

transactions petitioner carried out between April 1985 and

November 1986.   The nine-count indictment charged petitioner with

misrepresenting the source of funds used to purchase stock on

Schedule 13D filed with the SEC (funds were not personal),

accumulating stock in the name of nominees (parking securities),
                                 - 8 -

making numerous false statements, and creating false invoices to

substantiate false deductions on his 1985 Federal income tax

return.    On September 27, 1989, the United States District Court

for the Southern District of New York entered a judgment of

conviction on all the counts contained in the indictment, and the

judgment was affirmed by the Court of Appeals for the Second

Circuit.   United States v. Bilzerian, 926 F.2d 1285 (2d Cir.

1991).

     On October 21, 1991, respondent issued a notice of

deficiency to petitioner for the taxable year 1986.   In the

notice of deficiency, respondent determined that petitioner was

liable for additions to tax for negligence due to the omission

from the originally filed 1986 return of the approximately $4

million of taxable income from gains related to the purchase and

sale of Hammermill stock.   Petitioner filed a petition to this

Court seeking a redetermination.

     In 1992, petitioner sued Mr. Norris for malpractice for the

omission of the $4 million of taxable income from petitioner’s

originally filed 1986 return.    In connection with the malpractice

lawsuit, Mr. Norris denied any liability with respect to the

preparation of petitioner’s 1986 tax return.

                                OPINION

     As in effect for 1986, section 6653(a)(1)(A) imposed an

addition to tax equal to 5 percent of the underpayment of tax
                                - 9 -

where any part of the underpayment was due to negligence or

disregard of rules or regulations.      Section 6653(a)(1)(B) imposed

an addition to tax in an amount equal to 50 percent of the

interest payable under section 6601 with respect to the portion

of the underpayment which was attributable to negligence.

Negligence within the meaning of section 6653(a) has been defined

as the 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) (citing Marcello

v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. in part

and remanding in part 43 T.C. 168 (1964)).     Respondent’s

determination is presumed correct, and petitioner bears the

burden of proving that he was not negligent.     Rule 142(a);

Stovall v. Commissioner, 762 F.2d 891, 895 (11th Cir. 1985),

affg. T.C. Memo. 1983-450; Bixby v. Commissioner, 58 T.C. 757,

791-792 (1972).

     Petitioner claims that he provided his accountant, Mr.

Norris, with all necessary information to prepare an accurate tax

return and that Mr. Norris mistakenly omitted the $4 million of

taxable income from the return.   Petitioner contends that he

reviewed the return before signing and filing it, but he did not

notice any errors.   Respondent argues that petitioner knew of the

omission of the $4 million of taxable income at the time he filed

the original return for 1986.   Respondent claims that even if
                              - 10 -

petitioner supplied Mr. Norris with the necessary information to

file an accurate return, he has not shown that the incorrect

return was a result of Mr. Norris’s mistake.   Respondent argues

that an omission of $4 million in these circumstances is so

substantial that petitioner could not have reasonably relied on

the return and should have made further inquiries as to its

accuracy.

      The general rule is that taxpayers have a duty to file

complete and accurate tax returns and cannot avoid this duty by

placing responsibility with an agent.   United States v. Boyle,

469 U.S. 241, 250-251 (1985); Metra Chem Corp. v. Commissioner,

88 T.C. 654, 662 (1987).   However, in limited situations, the

section 6653(a) additions to tax may be avoided if the taxpayer

shows good faith reliance on the advice of a competent and

experienced accountant or attorney in the preparation of the tax

return.   Weis v. Commissioner, 94 T.C. 473, 487 (1990); Conlorez

Corp. v. Commissioner, 51 T.C. 467, 474 (1968).   In order to show

good faith reliance, the taxpayer must establish that all

necessary information was supplied to the return preparer and

that the incorrect return resulted from the preparer’s mistakes.

Weis v. Commissioner, supra at 487; Pessin v. Commissioner, 59

T.C. 473, 489 (1972).

     The evidence in the record indicates that Mr. Norris is a

competent and experienced accountant.   The parties agree that Mr.
                              - 11 -

Norris received a package of information from petitioner’s office

consisting of Schedules K-1 and other various schedules in order

to prepare petitioner’s individual return, including the schedule

prepared by Peat Marwick.

     Petitioner claims that Peat Marwick characterized a portion

of the gain attributable to Hammermill stock transactions as

personal gain to petitioner when the gains were actually

attributable to the activities of Bilzerian & Mack.   Petitioner

contends that this was done for the purpose of accommodating the

Macks’ tax planning objectives and that he did not consent to

participation in this activity.9   As a result, petitioner claims

that the $4 million was improperly omitted from the Schedule K-1

for petitioner attached to Bilzerian & Mack’s 1986 Form 1065.

Petitioner argues that neither he nor Mr. Norris had any way of

knowing that Peat Marwick was characterizing approximately $4

million of gains from Hammermill stock transactions as personal

gain to petitioner instead of reporting it on the Schedule K-1

for petitioner.   Petitioner further argues that he was involved

in several hundred million dollars of financial transactions

during 1986, which diminished his ability to recognize that

approximately $4 million of taxable income was omitted from the

return.


     9
      Petitioner claims that the characterizations of personal
gain or gain through Bilzerian & Mack were merely paper entries
to accommodate the Macks.
                              - 12 -

     Petitioner did not introduce testimony or other evidence

from either Peat Marwick or the Macks.    In fact, petitioner

failed to present any evidence, other than his own testimony, to

corroborate his argument that Peat Marwick improperly omitted the

$4 million from the Schedule K-1 for the Bilzerian & Mack

partnership return for 1986 and that petitioner was not aware of

the characterizations made by Peat Marwick.    In addition,

petitioner’s amended 1986 return reports the previously omitted

$4 million as “Adjustments to Schedule C - Income From Sales”.

This is consistent with Peat Marwick’s original characterization

of this amount as “Personal Gain” and inconsistent with

petitioner’s argument that it was income from the partnership.

In this situation, we are not required to, and we do not, rely on

petitioner’s self-serving testimony.     Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).

     Petitioner argues that Mr. Norris’s testimony supports his

claim that the $4 million omission was a result of Mr. Norris’s

mistake.   Mr. Norris testified that he learned in 1988 that he

had made a mistake in preparing petitioner’s 1986 return because

he “missed about $4 million in income”.    However, Mr. Norris’s

testimony was vague, evasive, and contradictory.10    The following



     10
      We note that Mr. Norris was previously a partner of
petitioner’s, and Mr. Norris, a resident of California, testified
that at the time of trial he stayed at petitioner’s personal
residence in Tampa, Florida.
                             - 13 -

discussion of the 1992 malpractice lawsuit that petitioner

brought against Mr. Norris for the omission of the $4 million

from petitioner’s 1986 return occurred on the cross-examination

of Mr. Norris:

     Q     All right. And is it true that you denied
     liability –- any liability for malpractice in that
     case?
     A     I really don’t remember what I said or didn’t say.
     I would assume that that’s true, but I don’t know for
     sure. I don’t remember the case now at all.

     Q    This would’ve been about eight years ago.
     A    Yes.

     Q    Did you get sued often?
     A    No, I have never been sued before.

     Q    And your testimony then is: you got sued and
     don’t remember anything.
     A    What I’m saying is that I turned it over to the
     attorney who is representing me and the insurance
     company, and he did whatever he needed to do, and I was
     involved to a very small degree.

     Q    What was the result of the lawsuit?
     A    It was, I think, withdrawn, I believe.   I think it
     was withdrawn.

     Q    And you didn’t have to pay any money, did you, as
     a result of this lawsuit to Paul Bilzerian.
     A    No, not to him.

     Q    To anybody?
     A    Oh, I paid legal fees, and if it would’ve been my
     insurance company would’ve paid. I wouldn’t have paid
     him anyhow.

     Q    Do you remember any depositions in connection with
     that lawsuit?
     A    I don’t, but I won’t say that there wasn’t, but
     the thing is is that, as I said, that whole thing is
     just been –- I have forgot it all. It was not
     important for me to remember, and I haven’t gone back
     and reviewed any papers.
                               - 14 -

     Q    Do you remember accepting liability or denying
     liability in that lawsuit?
     A    I am assuming that if I went to the attorney I
     probably denied liability.

     Q     Okay.   Didn’t we speak about a week ago or so?
     A     Yes.

     Q    And in that conversation you told me that you deny
     liability?
     A    I don’t remember if I said that to you. I
     probably said that to you, though. But you are asking
     me questions that I really, in my memory since, I don’t
     know. I can only tell you what I think.

     Mr. Norris further testified that at the time he prepared

petitioner’s 1986 return, he believed it was accurate and correct

and that he did not have any reason to believe that there was any

error committed in the preparation of the return.   When

petitioner sued Mr. Norris for malpractice in 1992, Mr. Norris

denied any liability in the malpractice proceeding.   Finally,

petitioner has not alleged that prior to the preparation of the

1986 return, he informed Mr. Norris that either Peat Marwick or

the Macks asked petitioner to participate in recharacterizing a

portion of the gain from the Hammermill stock transactions

attributable to Bilzerian & Mack in order to accommodate the

Macks’ tax planning objectives.    Considering these circumstances,

we do not find either petitioner or Mr. Norris credible with

respect to their testimony in support of petitioner’s position

that the $4 million omission was attributable to a mistake by Mr.

Norris.   Tokarski v. Commissioner, 87 T.C. at 77; see McCann v.
                              - 15 -

Commissioner, T.C. Memo. 2001-153; Garrett v. Commissioner, T.C.

Memo. 1997-231.

     Assuming arguendo that all necessary information was

provided to Mr. Norris before his preparation of petitioner’s

1986 return, we still would not deviate from the general rule

that the duty of filing accurate returns cannot be avoided by

placing responsibility on an agent.    Even if all necessary

information is supplied to the return preparer, the taxpayer

still has a duty to review the return prior to signing and filing

it in order to ensure that all income items are included.      Metra

Chem Corp. v. Commissioner, 88 T.C. at 662; Magill v.

Commissioner, 70 T.C. 465, 479-480 (1978), affd. 651 F.2d 1233

(6th Cir. 1981); Bailey v. Commissioner, 21 T.C. 678, 687 (1954);

Magee v. Commissioner, T.C. Memo. 1993-305; Fraley v.

Commissioner, T.C. Memo. 1993-304.11

     Petitioner claims that he carefully reviewed the return and

that there was no way he could have recognized that approximately



     11
      See Loftus v. Commissioner, T.C. Memo. 1992-266 n.3,
wherein we stated:

     The responsibility to review a return cannot be
     trivialized. In Morrow v. Commissioner, T.C. Memo.
     1991-101, we held that supplying records to an
     accountant and relying on the accountant to prepare a
     return was not sufficient to relieve a taxpayer of the
     ‘ultimate responsibility for the correctness of their
     returns.’ Based on the taxpayers’ failure to
     adequately review their returns, we sustained the
     Commissioner’s negligence determination.
                              - 16 -

$4 million of taxable income was omitted from the return.

However, petitioner also testified that he received the return on

October 15, 1987, and, due to requests for extension filed by

petitioner, the return was due on that same day.   Petitioner

stated that he could not recall whether he called Mr. Norris to

question the accuracy of the return on October 15, 1987, nor

could he recall discussing with Mr. Norris at any time the $2

million discrepancy between the estimated payment by petitioner

and the tax liability as reported on the original 1986 return.

In his criminal trial, petitioner testified that he was delighted

that the return he received from Mr. Norris showed a tax

liability of only $3 million, and he never challenged the

accuracy of the return.

     Petitioner is a well-educated individual who was involved in

trading securities for several years prior to 1986.   He was

provided with a schedule from Peat Marwick outlining petitioner’s

estimated tax liability for 1986, and the schedule specifically

identified the $4 million in gains from the purchase and sale of

the Hammermill stock.   Petitioner accepted the return as prepared

by Mr. Norris without questioning its accuracy or inquiring as to

the approximately $2 million difference between the tax liability

stated on the return and the amount paid as an estimate of the
                               - 17 -

tax liability for 1986.12   Under these circumstances, petitioner

cannot insulate himself from the negligent omission of $4 million

of taxable income from the return.      Accordingly, we hold that

petitioner is liable for the additions to tax for negligence for

1986.


                                            Decision will be entered

                                     under Rule 155.




     12
      The $2 million difference is attributable to the fact that
petitioner’s adjusted gross income and tax liability shown on the
original return was underreported by approximately 40 percent.
