                        T.C. Memo. 1998-49



                      UNITED STATES TAX COURT



        MICHAEL J. HECKLER, A.K.A. MICHAEL VONHECKLER AND
         CHARLOTTE A. MISKA, Petitioners v. COMMISSIONER
                 OF INTERNAL REVENUE, Respondent



     Docket No. 26742-95.                    Filed February 9, 1998.



     Michael J. Heckler, pro se.

     Kevin M. Murphy, for respondent.



                        MEMORANDUM OPINION


     PAJAK, Special Trial Judge:   This case was heard pursuant to

section 7443A(b)(3) of the Code and Rules 180, 181, and 182.    All

section references are to the Internal Revenue Code in effect for

the year in issue.   All Rule references are to the Tax Court

Rules of Practice and Procedure.
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     Respondent determined additions to petitioners' Federal

income tax as follows:

                                 Additions to Tax
Tax Year    Sec. 6653(a)(1)(A)      Sec. 6653(a)(1)(B)   Sec. 6661
                                             1
1986              $303                                     $1,514
1
     50 percent of the interest due on $6,054.

     The issues for decision are: (1) Whether petitioners are

liable for the additions to tax for negligence under section

6653(a)(1)(A) and (B); and (2) whether petitioners are liable for

an addition to tax under section 6661.

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

For clarity and convenience, the findings of fact and opinion

have been combined.      Petitioner Michael J. Heckler (petitioner)

resided in Kenmore, New York, and petitioner Charlotte A. Miska

resided in Oyster Bay, New York, at the time they filed their

petition.    Petitioner and Miska were husband and wife during the

taxable year in issue.

     As this Court previously observed in ruling on procedural

matters in this case, our jurisdiction is limited to

redetermining petitioners' liability for the additions to tax set

forth in the affected items notice of deficiency.         Heckler v.

Commissioner, T.C. Memo. 1996-521.         The notice of deficiency

shows it was based on a corrected tax liability of $18,366 and

that the tax shown on the return or as previously adjusted was

$12,312.
                                - 3 -


     In 1986, petitioners invested $3,000 in a partnership known

as Irving & Co.   Petitioners invested this money with Fred

Schneider (Schneider), their accountant and principal of

Schneider & Associates.    Schneider was the promoter of Irving &

Co. and one of its members.   On their 1986 Federal income tax

return, petitioners reported a loss in the amount of $15,432,

which represented their net loss from Irving & Co.

     Section 6653(a)(1)(A) provides that if any part of any

underpayment of tax is due to negligence or intentional disregard

of rules or regulations, there shall be added to the tax an

amount equal to 5 percent of the underpayment.   Section

6653(a)(1)(B) provides for an addition to tax in the amount of 50

percent of the interest payable under section 6601 with respect

to the portion of such underpayment which is attributable to

negligence.

     Negligence is defined as the lack of due care or the failure

to do what a reasonable and ordinarily prudent person would do

under the circumstances.    Neely v. Commissioner, 85 T.C. 934, 947

(1985).   Petitioners bear the burden of proving that respondent's

negligence determination is erroneous.   Rule 142(a); Bixby v.

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

     Petitioners argue they are not liable for the negligence

additions to tax because they relied on their accountant for
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professional advice with regard to the investment in Irving & Co.

We disagree.

     Under certain circumstances, reliance on the advice of a

competent professional adviser may overcome respondent's finding

of negligence.    United States v. Boyle, 469 U.S. 241 (1985);

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).   Reliance on

professional advice, standing alone, is not an absolute defense

to negligence, but rather a factor to be considered.      Freytag v.

Commissioner, supra at 888.    A taxpayer's reliance on

professional advice is an acceptable excuse from the negligence

additions to tax where such reliance was reasonable.      United

States v. Boyle, supra.

     Reliance on representations by insiders, promoters, or

offering materials generally is not an adequate defense to

negligence.    Gollin v. Commissioner, T.C. Memo. 1996-454.   A

taxpayer must be able to show that the adviser reached his or her

decision independently.    Leonhart v. Commissioner, 414 F.2d 749

(4th Cir. 1969), affg. T.C. Memo. 1968-98.   A taxpayer ordinarily

may not reasonably rely on someone with an inherent conflict of

interest.   Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir.

1994), affg. T.C. Memo. 1993-480.

     As the promoter of Irving & Co., Schneider had an inherent

conflict of interest.   Whatever advice Schneider gave
                               - 5 -


petitioners, they have not shown that it was given without due

regard to his own personal stake in Irving & Co.   As the

promoter, Schneider had a motive to say what was necessary in

order to get petitioners to invest in Irving & Co.   Because

Schneider was not a disinterested source, petitioners should have

investigated or sought independent professional advice regarding

the validity or viability of the investment.   They did not do so.

     In support of their position, petitioner stated that he was

only a limited partner in Irving & Co. and that he did not have

any material knowledge of the business.   He never saw a

prospectus, any books or records, or met any of the principals in

Irving & Co., other than Schneider.    He testified that he simply

gave Schneider $3,000 with the hope of making a profit.     He

considered himself an engineer with no experience in business

investments.   When petitioner was questioned regarding how he was

going to make money, his response was that he would receive a

share of the profits from the business.   He did not know how the

business would generate any profits.

     We believe that a reasonable investor would have done more

to protect his investment than what petitioner did in the instant

case.   Although petitioner claimed that he lacked knowledge

regarding business investments, a reasonable person, especially

one as educated as petitioner, would be prudent enough to at

least question the genuineness of the business before investing
                                - 6 -


$3,000.    At the very least, the fact that a $3,000 investment

yielded a $15,432 loss deduction for the year of the investment

should have alerted petitioners that their deductions were "too

good to be true."    McCrary v. Commissioner, 92 T.C. 827, 850

(1989).    We find that petitioners' actions, in failing to conduct

anything approaching a meaningful investigation of Irving & Co.,

were not the actions that a reasonable and ordinarily prudent

person would have taken under the circumstances.

     Petitioner also testified the reason why they invested in

Irving & Co. was to make money, and not because it was a tax

shelter.    However, the evidence clearly supports a finding that

petitioners invested in Irving & Co. because it was a tax

shelter.    This evidence includes: (1) A May 29, 1986 letter from

Schneider to petitioner that states "Now is the time to plan your

tax shelters for 1986"; (2) a July 7, 1986 handwritten letter

from Schneider to petitioner that states "You can expect tax

savings per our discussion"; and (3) petitioners' check

transaction register indicating a $3,000 payment that states, in

petitioner's own handwriting, "Fred Schneider 1986 Tax Shelter".

We are convinced that petitioners knew they were participating in

a tax shelter.    Nevertheless, petitioners' reliance on

Schneider's advice, as the tax shelter promoter, is not

reasonable or prudent.    Goldman v. Commissioner, supra at 408.
                                - 7 -


By failing to seek outside or independent counsel, petitioners

negligently failed to investigate the business properly.

     On this record, we conclude that the underpayment of tax was

due to negligence.    Accordingly, respondent is sustained on this

issue.

     Respondent also determined that petitioners are liable for

the addition to tax for substantial understatement of tax

pursuant to section 6661.    Section 6661 imposes an addition to

tax, for additions assessed after October 21, 1986, equal to 25

percent of any underpayment of income tax attributable to a

substantial understatement.    Omnibus Budget Reconciliation Act of

1986, Pub. L. 99-509, sec. 8002, 100 Stat. 1874, 1951; Pallottini

v. Commissioner, 90 T.C. 498 (1988).       Petitioners bear the burden

of proving they are not liable for this addition to tax.      Rule

142(a); Kings's Court Mobile Home Park, Inc. v. Commissioner, 98

T.C. 511, 517 (1992).

     An understatement is defined as the excess of the amount of

tax required to be shown on the return over the amount of tax

imposed which is shown on the return, reduced by any rebate.

Sec. 6661(b)(2)(A).    There is a substantial understatement if the

amount of the understatement for the taxable year exceeds the

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

return or $5,000.    Sec. 6661(b)(1)(A).    For the taxable year in
                                - 8 -


issue, petitioners' understatement was substantial within the

meaning of section 6661(b)(1)(A).

     The amount of the understatement may be reduced by that

portion of the understatement which is attributable to either:

(1) The tax treatment of any item by the taxpayer if there is or

was substantial authority for such treatment; or (2) any item

with respect to which the relevant facts affecting the item's tax

treatment are adequately disclosed in the return or in a

statement attached to the return.   Sec. 6661(b)(2)(B).   However,

if the understated item is attributed to a "tax shelter", within

the meaning of section 6661(b)(2)(C)(ii), a reduction in the

understatement is not permitted unless the tax treatment of the

item used is supported by substantial authority and the taxpayer

believed that the tax treatment of such item was more likely than

not the proper tax treatment.   Sec. 6661(b)(2)(C)(i)(II).

     We conclude that Irving & Co. was a tax shelter within the

meaning of section 6661(b)(2)(C)(ii).   Therefore, even if

petitioner adequately disclosed the nature of the understated

items on their return, which they did not do, they could not have

avoided the addition for substantial understatement.   Sec.

6661(b)(2)(C)(i)(I).

     The question now is whether petitioners have substantial

authority for their treatment of the items in question and did
                                - 9 -


they reasonably believe that such treatment was more likely than

not the proper tax treatment.

     As petitioners failed to cite any authority or present any

evidence to overcome respondent's determination on this issue, we

conclude that no substantial authority exists for the tax

treatment of items related to Irving & Co. and that petitioners

did not reasonably believe that their treatment of the items was

more likely than not correct.   Accordingly, respondent is

sustained on this issue.

                                        Decision will be entered

                                for respondent.
