                         T.C. Memo. 1996-190



                       UNITED STATES TAX COURT



      M. BENNETT MARCUS AND MARIA F. MARCUS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8403-94.               Filed April 22, 1996.



     Robert C. Forst, for petitioners.

     Lisa W. Kuo, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency in

petitioners' 1990 Federal income tax in the amount of $16,532 and
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a penalty under section 6662(a)1 in the amount of $3,306.   After

concessions,2 the issues for decision are:

     (1) Whether $37,898 received by petitioners was a tax-free

inheritance under section 102(a) or the proceeds from the sale of

property;

     (2) whether petitioners may deduct legal expenses in excess

of the amount allowed by respondent; and

     (3) whether petitioners are liable for the accuracy-related

penalty either under section 6662(b)(1) for negligence or

disregard of rules or regulations, or section 6662(b)(2) for any

substantial understatement of income tax.

                         FINDINGS OF FACT

Capital Gain vs. Inheritance

     Petitioners, Maria F. Marcus (Mrs. Marcus) and M. Bennett

Marcus (Mr. Marcus), were married to each other at all relevant

times.   They resided in Anaheim, California, at the time the

petition was filed.   Mrs. Marcus' mother, Matilde Parisi Suvich

(Mrs. Suvich), had two other daughters, Gabriella and Claudia


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
   Petitioners conceded respondent's additions to income of
$13,026 in miscellaneous income, $2,625 in interest income, and
$3,529 in capital gain income from a mutual fund sale.
Petitioners also conceded respondent's reduction of automobile
depreciation from $4,200 to $2,159.
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(collectively referred to hereinafter as the sisters).    Mrs.

Suvich died in 1970 in Rome, Italy.    At the time of her death,

she owned real property (the property) located in Rome and

Trieste, Italy, including an apartment building located in

Trieste.   Italian law controlled the distribution of Mrs.

Suvich's estate.   Mrs. Marcus believed that Italian law called

for a property interest resembling a life estate to first pass to

her stepfather, Fulvio Suvich, with the property ultimately

passing to the three daughters of Mrs. Suvich in equal shares.3

     Fulvio Suvich died in Rome, Italy, in 1980.    Gabriella was a

resident of Switzerland, Claudia was a resident of Italy, and

Mrs. Marcus was a U.S. resident as of August 16, 1980.    After her

stepfather's death, disputes arose between Mrs. Marcus and her

sisters about whether to sell the property.    At least one of the

sisters did not want to sell the property because of a poor real

estate market and Italian tax considerations.    Although Mrs.

Marcus believed she was entitled to one-third of the property,

disputes arose between the sisters as to "who should get what and

how much" and "how much should be given to the one and how much




3
   Although respondent argued on brief that Mrs. Marcus inherited
one-third of the property in 1970 upon her mother's death,
respondent admitted in her answer that Mrs. Marcus inherited
through her stepfather's estate. We do not find the question of
which parent Mrs. Marcus inherited through to be pivotal in
deciding this case.
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to the other".    Mrs. Marcus also was leery of becoming involved

in "local arguments" over how the property should be handled.

     Mrs. Marcus and her sisters decided to resolve their

conflict by entering into an agreement entitled Deed of Family

Arrangement (the arrangement) on August 16, 1980.    The

arrangement provided that the heirs, defined as Mrs. Marcus'

sisters, agreed to pay Mrs. Marcus a portion of the estate (one-

third of the net proceeds) when and as it was liquidated.    In

return, Mrs. Marcus waived, disclaimed, forfeited, and forwent

any interest she might have had in the property.

     Pursuant to the arrangement, Mrs. Marcus received $37,898 in

1990 from the sale of some of the apartments in Trieste, Italy.

Mrs. Marcus was not informed of the particulars of the sales;

i.e., sale price or number of units sold.    The value of the

property at the date of her mother's death in 1970, at Mrs.

Marcus' stepfather's death in 1980, and when she signed the

arrangement was unknown to Mrs. Marcus.    Petitioners did not

include the $37,898 in gross income on their 1990 Federal income

tax return.

Attorney's Fees

     Mr. Marcus worked as an obstetrician/gynecologist for the

Marcus and Staglieno Medical Corp. (the corporation) in 1990.     He

was president of the corporation and wrote checks on its behalf.

He periodically paid attorneys to defend him in lawsuits brought
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against him by former patients.    In 1983, a lawsuit was filed by

Dianna Dall'Occhio against Mr. Marcus (the Dall'Occhio lawsuit).

Mr. Marcus did not carry malpractice insurance at the time of the

Dall'Occhio lawsuit.    An attorney, John DiCaro (DiCaro), handled

the settlement of that lawsuit.    Petitioners deducted $10,112 in

legal expenses on their 1990 individual Federal income tax return

for alleged payments to five attorneys.    Petitioners

substantiated all of the payments to four of the five attorneys,

in the amount of $6,368, by providing copies of canceled checks

during the audit of petitioners' 1990 Federal income tax return.

Petitioners did not provide respondent with copies of canceled

checks made payable to DiCaro.    Respondent disallowed the

remaining amount which petitioners allegedly paid to DiCaro.

                       ULTIMATE FINDINGS OF FACT

     As a substitute for a bequest of property and in settlement

of all claims which she had against her stepfather's estate, the

sisters agreed to pay Mrs. Marcus one-third of the net proceeds

from the estate when and as it was liquidated.

     Petitioners did not provide any substantiation for the

alleged payments to DiCaro.

                                OPINION

     This case deals with two separate and distinct issues, a

capital gain versus tax-free inheritance issue and a

substantiation of attorney's fees issue.    Should we find for
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respondent on either of the two issues, we must decide whether a

penalty under section 6662(a) is appropriate.

     Capital Gain vs. Inheritance

     As evidenced by respondent's admission in her answer and

stipulation No. 17, it is undisputed that Mrs. Marcus received

$37,898 pursuant to the arrangement.    Petitioners allege that the

$37,898 was received in lieu of an inheritance from her parents

and in settlement of claims against her stepfather's estate.

Therefore, under the principles of Lyeth v. Hoey, 305 U.S. 188

(1938), and its progeny, petitioners assert that the $37,898 is

excludable from gross income under section 102(a).    Section

102(a) states:

          SEC. 102(a). General Rule.--Gross income does not
     include the value of property acquired by gift,
     bequest, devise, or inheritance.

     Despite admitting as much in her answer, respondent argues

that Lyeth is inapplicable because there was no dispute as to

Mrs. Marcus' inheritance.4    Respondent argues that Mrs. Marcus

sold property in 1990 that she had already inherited.    Since

petitioners have offered no proof as to their basis in the

property, respondent argues that the entire proceeds are

includable in gross income.    The arrangement, according to

4
   Respondent, in par. 5(a) of her answer, admits that the
arrangement was entered into by Mrs. Marcus as a "substitute for
a bequest of property" and "in settlement of all claims * * *
against the estate". This admission was inexplicably ignored by
respondent at trial and in her briefs.
                               - 7
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respondent, was simply an accommodation to relieve Mrs. Marcus of

the details of handling the property until it was sold.

Consequently, the parties dispute whether the arrangement is more

properly characterized as a settlement document by which Mrs.

Marcus resolved her claims against her stepfather's estate or as

a vehicle that simply facilitated the handling of the property.

The parties do not disagree as to the law on this point; however,

they have a fundamental disagreement as to the facts.

     Respondent further argues that even if the rationale of

Lyeth controls, it does not automatically make the cash received

in compromise of a claim as an heir a tax-free inheritance.

Although the settlement of a claim for a portion of the corpus of

an estate is excludable from an individual's gross income, the

settlement of a claim for lost income results in gross income to

the individual.   Lyeth v. Hoey, supra; Parker v. United States,

215 Ct. Cl. 773, 573 F.2d 42, 49 (1978); Delmar v. Commissioner,

25 T.C. 1015, 1021 (1956).   Respondent fails to fully develop

this alternative argument; she apparently believes that

petitioners have not shown that any claims compromised were

solely for a share of the property.

     Respondent's final argument is that the arrangement, by

using an amount contingent on the future sale price of the

property, necessarily contains the potential for an appreciation

component that would not be a tax-free inheritance.   This
                                  - 8
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argument adopts the rationale of the Court of Claims in Parker v.

United States, supra, discussed infra.

     It is petitioners' burden to show that the $37,898 should be

excluded from gross income.   Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).   Exclusions from income are narrowly construed:

"Accordingly, any funds or other accessions to wealth received by

a taxpayer are presumed to be gross income and are includable as

such in the taxpayer's return, unless the taxpayer can

demonstrate that the funds or accessions fit into one of the

specific exclusions created by the Code."   Getty v. Commissioner,

913 F.2d 1486, 1490 (9th Cir. 1990) (citing Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 429-431 (1955)), revg. 91 T.C.

160 (1988).   "We agree that the taxpayer bears the burden of

establishing that proceeds of a settlement are what the taxpayer

contends them to be, in this case property rather than income

from property."    Id. at 1492.

     Resolution of the first issue depends on, among other facts

and circumstances, the motivation of Mrs. Marcus when she entered

into the arrangement.5   If it was entered into by Mrs. Marcus as

a compromise of her claims as an heir against the estate, then

the principles established by Lyeth v. Hoey, supra, and its

5
   We note at the outset that the record contains no evidence
that we are dealing with a distribution of capital from an estate
which has already reported the gain or loss from the sale of the
property or that Mrs. Marcus' sisters reported such gain or loss
on their individual tax returns.
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progeny will apply.   The Supreme Court in Lyeth established the

doctrine whereby proceeds received in compromise of a dispute are

characterized for tax purposes in accordance with the nature of

the claims which were compromised.     In order to have Lyeth

control, there must be a compromise of a disputed claim by the

estate or its heirs, as opposed to a voluntary rearrangement of

property interests amongst heirs.    The U.S. Court of Appeals for

the Ninth Circuit, to which this case would be appealable,

considered this question in Commissioner v. Estate of Vease, 314

F.2d 79 (9th Cir. 1963), revg. and remanding 35 T.C. 1184 (1961).

     In Estate of Vease, the decedent's father died 18 months

after executing a will and very shortly after informing his

attorney of modifications he wished to be made to it.    The

attorney incorporated these modifications into a new will, which

the decedent's father did not have an opportunity to execute

before he died.   Shortly after the father's death, his attorney

met with his widow and children, including the decedent.    The

attorney told the family that there was an executed will and an

unexecuted will but did not reveal the contents of either

document to the family members.   The family decided unanimously

to abide by the father's last wishes as expressed by the terms of

the more recent, unexecuted will.

     The executed will provided for specific bequests to the

decedent with 20 percent of the residue of her father's estate to
                              - 10
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be placed in a trust from which she was to receive the income

annually, the principal to be distributed to her when she

attained the age of 30.   The unexecuted will made no specific

bequests to the decedent, but provided that 25 percent of the

residue of the father's estate was to be placed in trust from

which she was to receive the income for life.    The principal of

the trust was never to be distributed to the decedent.

     The issue in Estate of Vease was whether the decedent's

income interest in two trusts6 resulted from a transfer of

property by the decedent during her lifetime, as the Commissioner

argued, or whether the trusts resulted from the transfer of

assets by the decedent's father's estate, due to the decedent's

standing as an heir, as the estate argued.

     The Tax Court held that the decedent received her life

estate in the trusts by reason of her standing as an heir,

relying on Lyeth.   The Court of Appeals for the Ninth Circuit

disagreed, finding that Lyeth did not control:

     One who has standing as an heir by intestacy, or as a
     beneficiary under a previous will, may make such
     standing the basis for a challenge of the will as a
     whole, or a claim with regard to some provision
     thereof. Property received from the estate in
     settlement of a bona fide challenge or claim of this
     kind, in whatever amount and however conditioned as to
     disbursement or otherwise, may properly be said to be
     received by reason of such standing. Lyeth v. Hoey and

6
   Litigation subsequent to the father's death established two
trusts rather than the single trust contemplated by either of the
wills.
                              - 11
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    the cases decided in accord with it are all instances
    of this kind. * * *

    The basis of the family agreement was therefore not the
    standing of an heir or heirs to contest the will as a
    whole, or of a beneficiary under a previous will to
    question a provision of a later will. Rather, it was
    the standing of each, as a beneficiary under the
    executed will, to agree upon a disposition of the
    property bequeathed and devised to all of them
    thereunder in a manner different from that provided in
    the will.

         The resulting agreement was nothing more than a
    voluntary rearrangement of property interests acquired under
    an admittedly valid will, concluded without duress of
    unsatisfied claims. * * * [Commissioner v. Estate of Vease,
    supra at 86-87; emphasis added; fn. ref. omitted.]

     There is evidence in the record to support both

interpretations, a "bona fide challenge" and a "voluntary

rearrangement of property interests".   However, we are not forced

to choose between them as respondent has, in effect, already

conceded this issue in the pleadings in which she admits:

          5a. * * * As a substitute for a bequest of
     property from Fulvio Suvich to Maria F. Marcus and in
     settlement of all claims which Maria F. Marcus had
     against the estate of Fulvio Suvich (the "Estate"), his
     heirs agreed to pay Maria F. Marcus a portion of the
     Estate when and as it was liquidated. The estate
     settlement agreement ("Settlement Agreement") was
     evidenced by a written agreement dated August, 1980.
     [Emphasis added.]

          5b. In 1990, Maria F. Marcus received US
     $37,898.00 from the Estate pursuant to the Settlement
     Agreement.

We will not ignore pleadings of fact that are not directly

contradicted by the record:   "Such admissions of fact are binding

upon this Court and the parties to the action."   Shea Co. v.
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Commissioner, 53 T.C. 135, 158 (1969) (citing Poro v.

Commissioner, 39 T.C. 641, 644 (1963)).    In a similar situation,

the Court of Appeals for the Ninth Circuit has stated:    "The

allegation quoted was certainly not so incredible as to justify

the Tax Court in ignoring the Commissioner's flat admission of

it.   It was supported by the testimony of the taxpayer's

accountant in the prior proceeding."    Gensinger v. Commissioner,

208 F.2d 576, 580 (9th Cir. 1953), remanding 18 T.C. 122 (1952).

In Gensinger, the Commissioner had admitted in the answer that

"'all corporate obligations were paid on or before July 15,

1943.'"   Id. at 579.   The Court of Appeals stated:   "The taxpayer

had a right to rely upon the Commissioner's admission, and the

record indicates that he did so.    We think it was settled on the

pleadings that all corporate obligations were paid on or before

July 15, 1943, and that the Tax Court was bound to so find."      Id.

at 580.   Petitioners, in the case at bar, likewise relied on the

pleadings.    Although there is evidence that Mrs. Marcus had a

dual purpose when she entered into the arrangement, the admitted

allegation that she did so "as a substitute for a bequest of

property" and "in settlement of all claims" against the estate is

not "incredible"; there is evidence to support the admitted

allegation.   The Court of Appeals for the Ninth Circuit has given

substantial deference to an admission in the pleadings.

Handeland v. Commissioner, 519 F.2d 327, 329 (9th Cir. 1975).
                              - 13
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Respondent simply ignores the admission rather than seeking to be

relieved of it.

     The Court of Appeals for the Fifth Circuit has also dealt

with this issue; it acknowledges that a compromise of an heir's

claim against an estate can resemble an exchange.   However, that

Court of Appeals concludes that a dual purpose does not

disqualify a compromise from the application of Lyeth v. Hoey,

305 U.S. 188 (1938):

          But all compromises, and therefore all
     transactions within the potential ambit of Lyeth v.
     Hoey, are in some measure exchanges. * * * we have
     concluded that so long as the settlement is in
     substantial measure to resolve an underlying and
     disputed claim based upon a purported gift, bequest,
     inheritance or the like, what is received in settlement
     must be characterized, for tax purposes, by the nature
     of the underlying and disputed claim resolved. Thus,
     in circumstances such as those presented by this
     record, where the rationale of Lyeth is implicated but
     where, in addition, the transaction resembles a sale or
     exchange of property, we think that Lyeth governs
     unless it may be said that the circumstances
     surrounding the transaction fairly exclude the
     possibility that the exchange is in reality a
     compromise of an underlying and controverted claim such
     as one of gift, bequest or inheritance. [Early v.
     Commissioner, 445 F.2d 166, 169-170 (5th Cir. 1971),
     revg. 52 T.C. 560 (1969); fn. ref. omitted; emphasis
     added.]

As stated above, there is evidence to support the existence of a

"controverted claim".   Consequently, we cannot "exclude the

possibility that the exchange is in reality a compromise of an

underlying and controverted claim".    Respondent has admitted in

the answer that the arrangement was entered into as a substitute
                               - 14
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for a bequest of property and in settlement of all claims against

Fulvio Suvich's estate.   Therefore, respondent's first argument

fails.

     Respondent's argument that even if the rationale of Lyeth v.

Hoey, supra, controls, petitioners must still show that the

settlement was for lost inheritance and not for lost income is

likewise undermined by the same admissions (5a. and 5b.) in her

answer.    There can be no dispute as to in lieu of what the

$37,898 was paid because respondent admits, in paragraph 5b. of

her answer, that it was paid "pursuant to the Settlement

Agreement" which, when read in conjunction with her admission in

paragraph 5a, means it was "as a substitute for a bequest of

property".    Mrs. Marcus did not settle any claims for lost

income; the arrangement made no mention of lost income.      The

stepfather, having an interest similar to a life estate, had the

rights to income from the property during his life.    Since the

arrangement was entered into in August of 1980, the same year as

the stepfather's death, lost income from the property was not an

issue.    Again, there is evidence to support the admitted

allegations.

     Respondent's final argument likens the case at bar to Parker

v. United States, 215 Ct. Cl. 773, 573 F.2d 42 (1978).       In

Parker, the plaintiffs, brother and sister, sued various family

members on the grounds that the plaintiffs had been improperly
                               - 15
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excluded from sharing in the estate of their grandmother, Bertha

Segerstrom (Bertha).    C.J. Segerstrom (C.J.), the husband of

Bertha, was a farmer.    He and his wife, Bertha, had eleven

children, one of whom was the mother of the plaintiffs.    Some

years before his death in 1928, C.J. had formed a partnership

with four of his sons.    The sons continued the partnership after

C.J.'s death.   By 1944, the partnership was farming about 2,000

acres, all of which were located in Orange County, California.

The partnership filed tax returns after C.J.'s death in which

Bertha was listed as owning a one-fifth partnership interest.

However, Bertha's status as a partner was not recognized by her

sons, except possibly for tax purposes.    Bertha died intestate in

1944, survived by eight of her children and by the plaintiffs,

children of a deceased daughter.

     Although the grandmother had died in 1944, the plaintiffs

did not discover their possible lost inheritance and file suit

until 1964.   The 2,000 acres owned by the partnership had

dramatically appreciated and were worth about $60 million by

1964.   Litigation developed to quiet title to the partnership

property.   The plaintiffs filed a cross-complaint and sued for a

share of the land represented by Bertha's one-fifth partnership

interest, $5 million of lost income since 1944, and $10 million

of punitive damages.
                              - 16
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    The suit was settled in 1965; the plaintiffs each received

$175,000.   In Parker v. United States, supra at 43-44, the Court

of Claims stated:

     The Internal Revenue Service determined that the
     settlement transaction resulted in the sale or exchange
     of a capital asset, namely, the taxpayers' "claim"
     against Bertha's estate, that a substantial amount of
     capital gain, attributable to the appreciation of the
     claim over the some twenty years it remained unasserted
     was thereby realized, and that this gain amounted to 75
     percent of the settlement proceeds.

The plaintiffs paid the income tax deficiencies asserted by the

IRS, filed claims for refund which were disallowed, and then

filed a petition in the Court of Claims seeking a refund under

the doctrine of Lyeth v. Hoey, supra.

     The Court of Claims, citing Lyeth, framed the issue as "In

lieu of what did Marilyn and Robert [the plaintiffs] receive

$350,000 in settlement of their cross-complaint against the other

members of the Segerstrom family."     Parker v. United States,

supra at 47.   The court eliminated the claim for $10 million of

punitive damages from consideration since the plaintiffs conceded

the issue at settlement.   Aided by appraisals of the land in 1944

and 1965, the court calculated the 1965 value of the plaintiffs'

claim to a 1944 inheritance of real property by applying an

appreciation factor of 500 percent.    The court found the 1965

adjusted land value to be $290,000.    The court found the

plaintiffs' demands for lost profits to be inflated and
                                - 17
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fictional.     Accordingly, rather than applying a ratio of land

value to alleged lost profits, the court concluded:

     [The] more reasonable choice is to subtract the
     adjusted land values [$290,000] from the total
     settlement proceeds [$350,000] and treat the remainder
     [$60,000] as compensation for allegedly lost income.
     By this calculation, $290,000 of the settlement
     proceeds would have been received in lieu of the
     ownership interests asserted in the real property, and
     the remainder of $60,000 would be attributable to the
     claimed compensatory damages for lost income. [Id. at
     50-51.]

     The court then separated the $290,000 received for the

interest in land into an appreciation component and an original

1944 value component.     The original value component was excluded

from income under section 102, as interpreted in Lyeth v. Hoey,

supra.   The    appreciation component was taxable since "this

remaining amount was received in lieu of the rather spectacular

appreciation of the properties over the 21-year period between

the date of death and the date of settlement."     Parker v. United

States, supra at 51.     In effect, the court found that the

plaintiffs' 1965 settlement encompassed the land's appreciation

since 1944.

     In our case, Mrs. Marcus made no claim against the estate of

Fulvio Suvich for lost income.     Respondent has admitted that the

$37,898 was received as a substitute for a bequest of property,

thus invoking the rule of Lyeth v. Hoey, supra, and its progeny.

However, when Mrs. Marcus entered into the agreement, she did not

settle for a sum certain to be paid upon the eventual sale of the
                               - 18
                                 18 -


property; she settled for one-third of the net proceeds from the

future sale of the property.   If the property increased in value

after the death of Fulvio Suvich, Mrs. Marcus would share in the

appreciation.    Likewise, if the property decreased in value, Mrs.

Marcus would share in its depreciation.     The potential

appreciation or depreciation would not be part of an inheritance,

or received in lieu of an inheritance, but simply the effect of

market forces.   As in Parker v. United States, supra, Mrs. Marcus

must show what her basis in the property would have been had she

inherited her share (one-third) of the property.

     Respondent determined that petitioners failed to establish

Mrs. Marcus' basis in the property and that consequently, the

entire $37,898 is taxable.   Where the Commissioner has determined

in a statutory notice of deficiency that a taxpayer's basis in

property is zero, the taxpayer bears the burden of proving basis

for the purpose of calculating gain or loss on the sale of the

underlying property.   Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933); Counts v. Commissioner, 42 T.C. 755, 760 (1964).

That principle applies to this case.    If petitioners cannot

establish what Mrs. Marcus' basis would have been had she

inherited her share of the property, then the entire amount she

received in settlement would be taxable.7

7
   Respondent also makes the argument that depreciation, allowed
or allowable, would have reduced whatever basis Mrs. Marcus had
                                                   (continued...)
                                - 19
                                  19 -


     Petitioners admitted that they did not know the value of the

property when Mrs. Marcus' mother died or when Mrs. Marcus'

stepfather died.     However, under appropriate circumstances, if

the record provides sufficient evidence that the taxpayer has

some basis in property, but the taxpayer is unable to prove the

exact amount, we can estimate the taxpayer's basis in the

property, "bearing heavily * * * upon the taxpayer whose

inexactitude is of his own making."      Cohan v. Commissioner, 39

F.2d 540, 544 (2d Cir. 1930).    However, in order for the Court to

make such an estimate, we must have some basis in fact upon which

an estimate may be made.     Vanicek v. Commissioner, 85 T.C. 731,

743 (1985).   Without such a basis, any allowance would amount to

unguided largesse.     Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).   Mrs. Marcus testified, without objection from

respondent, that her sister in Italy, an owner of the property,

told her the property had decreased in value from 1970 to 1990.

Mrs. Marcus, although not the legal owner of the property,

certainly had a beneficial interest in the property pursuant to

the arrangement.   An owner of property generally is qualified to

testify as to the property's value.      LaCombe v. A-T-O, Inc., 679


7
 (...continued)
in the property. This argument is misguided as Mrs. Marcus never
had a depreciable interest in the property; her stepfather had a
life estate, and upon his death Mrs. Marcus promptly entered into
the agreement wherein she gave up all rights to inherit the
property. Cf. Currier v. Commissioner, 51 T.C. 488, 492 (1968).
                                - 20
                                  20 -


F.2d 431, 433 (5th Cir. 1982).    Consequently, based on Mrs.

Marcus' credible testimony, and bearing heavily against her, we

find that she received $25,000 in lieu of her inheritance.

Therefore, we hold that $25,000 of the amount received pursuant

to the agreement is tax free under section 102, and $12,898 is a

taxable capital gain in 1990.

Attorney's Fees

     Respondent disallowed $3,744 of attorney's fees for failure

of petitioners to substantiate them with canceled checks.8      All

of the disallowed amount is attributable to alleged payments to

John DiCaro.   At trial, Mr. Marcus testified that he could not

find the checks showing payment to DiCaro because the checks were

lost when he closed up his medical practice.

     Petitioners' burden of proving that respondent's

determinations in her deficiency notice are erroneous includes

the burden of substantiation.    See Hradesky v. Commissioner, 65

T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976).   Deductions are a matter of legislative grace; petitioners

have the burden of showing that they are entitled to any

deduction claimed.   New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934).   Section 6001 requires taxpayers to maintain



8
   Petitioners' position at trial was that they paid DiCaro
$8,993 in 1990, and they are seeking to deduct the entire
payment.
                               - 21
                                 21 -


adequate records from which their tax liability may be

determined.   Petzoldt v. Commissioner, 92 T.C. 661, 686 (1989).

     Petitioners have failed to establish that they are entitled

to the additional deduction for attorney's fees.    They presented

no documentary evidence such as canceled checks.9   Petitioners

failed to call DiCaro as a witness or any other person who could

corroborate their claimed payments to him.   Also unexplained is

how petitioners managed to have every canceled check to

substantiate payments to four other attorneys but could not

produce a single canceled check for the claimed payments to

DiCaro.   If Mr. Marcus' records were lost closing up his office,

why were the only legal fee checks misplaced the ones to DiCaro?

Why didn't petitioners get copies of the canceled checks from

their bank?   Under these circumstances, Mr. Marcus'

uncorroborated testimony is not sufficient to substantiate the

deduction:    "We know of no rule that uncontradicted testimony

must be accepted by a court finding the facts, particularly

where, as here, the testimony is given by interested parties."

Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41

T.C. 593 (1964).


9
   Petitioners attempted to enter into the record a "recreated
fee statement" from DiCaro's office to show that the fees had
been paid, but failed to authenticate the statement by having
anyone from DiCaro's office testify. Also, the recreated
statement only purports to show that payments were made, not by
whom payments were made.
                              - 22
                                22 -


Section 6662(a) Accuracy-Related Penalty

     Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b), including

negligence or disregard of rules or regulations.    Respondent

asserts that the entire underpayment of petitioners' tax was due

to negligence or intentional disregard of rules or regulations.

Sec. 6662(b)(1).   As under the predecessor section covering the

addition to tax for negligence, section 6653(a), petitioners bear

the burden of proof on the penalty in issue.    Rule 142(a); Neely

v. Commissioner, 85 T.C. 934, 947 (1985).    "Negligence" includes

a failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws.    Sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.   Negligence is the failure to

exercise due care or the failure to do what a reasonable and

prudent person would do under the circumstances.    Neely v.

Commissioner, supra.   "Disregard" includes any careless,

reckless, or intentional disregard of rules or regulations.      Sec.

6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

     The accuracy-related penalties of section 6662 do not apply

with respect to any portion of an underpayment if it is shown

that there was reasonable cause for such portion and the

taxpayers acted in good faith with respect to such portion.      Sec.

6664(c)(1).   The determination of whether the taxpayers acted
                               - 23
                                 23 -


with reasonable cause and in good faith depends upon the

pertinent facts and circumstances.      Sec. 1.6664-4(b)(1), Income

Tax Regs.

     Petitioners have conceded that they failed to include

significant amounts of miscellaneous income, interest income, and

capital gain income.    Petitioners have offered no evidence that

they were not negligent in omitting such items or that they had

reasonable cause to do so.    Petitioners have offered no evidence

that they were not negligent or had reasonable cause to deduct

attorney's fees in excess of the amount allowed by respondent or

in failing to include any portion of the $37,898 in taxable

income.    In fact, petitioners' briefs fail to address the

negligence issue at all.    We cannot be sure that petitioners

intended to abandon the issue, but in any case respondent's

determination of the applicable penalty must be sustained with

respect to the underpayment redetermined herein as petitioners

have not met their burden of proof on this matter.     Respondent's

alternative argument for the substantial understatement penalty

is rendered moot by our finding sustaining the negligence

penalty.

     To reflect the foregoing and concessions of the parties,

                                     Decision will be entered

                                under Rule 155.
