                        T.C. Memo. 1996-228



                      UNITED STATES TAX COURT



                HOLDEN C. GUTERMUTH, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25144-93.                       Filed May 21, 1996.



     Holden C. Gutermuth, pro se.

     Tracy A. Murphy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined a deficiency of

$62,648 in petitioner’s individual 1989 Federal income tax and a

$12,530 accuracy-related penalty for negligence under section

6662(a).
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     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1989, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     After settlement, the issues for decision are:   (1) Whether

a claimed $35,000 loss deduction is allowable either as a

partnership loss or as a Schedule C business expense; and

(2) whether petitioner is liable for the accuracy-related penalty

for negligence.


                         FINDINGS OF FACT

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

     At the time the petition was filed, petitioner was married

and resided in Troy, New York.1

     Petitioner is a practicing lawyer and owns and operates a

real estate and apartment rental business.

     From 1984 through May of 1989, petitioner practiced law as a

partner in the law firm of Noonan, Troue, Gutermuth & O’Connor

(NTGO).   On June 1, 1989, the partners of NTGO dissolved the

partnership.

     Upon dissolution of NTGO, petitioner and J. Paul Troue,

another of the former partners in NTGO, began to practice law

together under the firm name of Noonan, Troue & Gutermuth (NTG).


1
     Because petitioner filed his individual 1989 Federal income
tax return as married filing separately, petitioner’s wife was
not named in the notice of deficiency and is not a party to this
case.
                               - 3 -

On June 1, 1989, petitioner and Mr. Troue filed a New York State

certificate of partnership with the County Clerk of Rensselaer

County, New York, the county in which NTG’s office was located.

     During 1989, petitioner and Mr. Troue generally held

themselves out to the public as doing business as partners under

the name of NTG.   Petitioner and Mr. Troue used stationery

bearing the name of NTG and placed advertisements for their legal

services under the name of NTG.   Petitioner and Mr. Troue

maintained a joint bank account under the name of NTG.   During

1989, one set of books and records was maintained with respect to

the income and expenses of NTG.   Although no formal written

partnership agreement was entered into by petitioner and

Mr. Troue regarding NTG, petitioner and Mr. Troue understood that

income and expenses with respect to their practice were to be

shared.

     During the summer of 1989, petitioner made contributions

totaling $16,300 to the capital of NTG.

     On June 9, 1989, petitioner and Mr. Troue obtained a loan of

$15,000 from Marine Midland Bank, N.A., to fund the working

capital and payroll of NTG.   NTG’s books and records reflected

that the $15,000 bank loan was made directly to NTG.   During

1989, payments totaling $5,004 were made on this loan from funds

in the bank account of NTG.

     On August 3, 1989, the former partners of NTGO, as part of

the process of winding up NTGO’s business affairs, transferred
                               - 4 -

$39,000 to the bank account of NTG.    This $39,000 represented

liquidating distributions due petitioner and Mr. Troue with

regard to their former partnership interests in NTGO.    Of the

$39,000 NTGO transferred to NTG, $15,000 was attributable to

petitioner's former interest in NTGO.

     For 1989, Mr. Troue filed with respondent a Form 941

(Federal Employment Tax Return) with respect to NTG.    On the Form

941, Mr. Troue represented that NTG constituted a partnership.

     On March 30, 1990, due to disagreement over management of

the law firm, petitioner and Mr. Troue ceased doing business

together and terminated NTG.

     On his individual 1989 Federal income tax return, petitioner

reported his interest in a number of partnerships including NTG,

and petitioner claimed a $35,000 partnership loss deduction

relating to NTG.

     On audit of petitioner’s individual 1989 Federal income tax

return, respondent disallowed a number of deductions with respect

to petitioner’s real estate business and the claimed $35,000

partnership loss deduction relating to NTG.    Prior to trial,

petitioner and respondent settled all of the adjustments

respondent made to petitioner's individual 1989 Federal income

tax return except for the disallowed $35,000 partnership loss

deduction and the negligence penalty.
                              - 5 -

                             OPINION

     Under sections 761(a) and 7701(a)(2), a partnership is

defined to include a syndicate, group, pool, or joint venture by

means of which a number of individuals or entities jointly

conduct a business, financial operation, or financial venture in

a form other than a corporation, trust, or estate.    Whether a

partnership exists for purposes of Federal income taxation is a

matter of Federal, not local, law.     Estate of Kahn v.

Commissioner, 499 F.2d 1186, 1189 (2d Cir. 1974), affg. T.C.

Memo. 1972-240; sec. 301.7701-1(c), Proced. & Admin. Regs.

     A partnership will be found to exist where two or more

parties, acting in good faith and with a business purpose, intend

to and do join together in the conduct of a business enterprise.

Commissioner v. Culbertson, 337 U.S. 733, 742 (1949).      The

crucial test is whether, based on all the facts and

circumstances, the parties intended to operate as a partnership.

Id.; Estate of Levine v. Commissioner, 72 T.C. 780, 785 (1979),

affd. 634 F.2d 12 (2d Cir. 1980).

     Factors generally considered in determining the parties'

intent to operate as a partnership include the terms of the

agreement, whether each party jointly made financial

contributions, whether the parties had joint control over income

and capital and had the right to make withdrawals, whether the

parties held the activity out to the public as a partnership, and

whether the parties filed Federal partnership returns.      Estate of
                               - 6 -

Kahn v. Commissioner, supra at 1189; Luna v. Commissioner,

42 T.C. 1067, 1077-1078 (1964); Hall v. Commissioner, T.C. Memo.

1993-198.

     We agree with respondent in this case that NTG should be

treated as a partnership for Federal income tax purposes.    By

virtue of NTG's letterhead and advertisements and by filing a

New York State certificate of partnership, petitioner and

Mr. Troue represented to the public that NTG constituted a

partnership.   Although a formal written partnership agreement

between petitioner and Mr. Troue did not exist, petitioner and

Mr. Troue did have an understanding that income and expenses of

NTG would be shared.   Petitioner and Mr. Troue both made

significant financial contributions to NTG.   Both petitioner and

Mr. Troue had control over NTG's bank account.

     Further, on the 1989 Form 941 and on their individual

Federal income tax returns, petitioner and Mr. Troue represented

that NTG constituted a partnership.

     Based on the facts before us, we conclude that petitioner

and Mr. Troue intended to and did form a law partnership and that

NTG is to be treated as a partnership for Federal income tax

purposes.   See Barron v. Commissioner, T.C. Memo. 1992-598.      If

the claimed $35,000 loss has been substantiated and is to be

allowed, it will only qualify as a partnership loss.

Petitioner's alternative claim for a Schedule C business expense

is disallowed.
                              - 7 -

     In general, a taxpayer is entitled to deduct his or her

distributive share of a loss incurred by a partnership to the

extent of the taxpayer's adjusted basis in the partnership.    Sec.

704(d); sec. 1.702-2, Income Tax Regs.

     Deductions and losses, however, are a matter of legislative

grace, and the taxpayer bears the burden of proving that he is

entitled to the claimed deductions and losses.    Rule 142(a); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.

Helvering, 290 U.S. 111, 114 (1933).

     Petitioner argues that, based on the books and records in

evidence, it has been established that NTG was not financially

successful, that it incurred a loss for 1989, and that

petitioner's share of NTG's loss equaled $35,000.

     Respondent argues that petitioner has not satisfied his

burden of establishing that NTG actually incurred a loss in 1989.

     The incomplete and inaccurate financial records of NTG that

are in evidence in this case do not adequately establish the

income and expenses of NTG for 1989.   The records in evidence

provide only inaccurate financial information with respect to

July, August, and September of 1989.   Petitioner acknowledges

that portions of the records submitted are not reliable.   With

respect to these records, petitioner testified:


     THE COURT: What are you saying? The financial
     statements are not accurate, is that what you're
     saying?
                               - 8 -

     PETITIONER: I am suggesting to you that they are
     unbelievable to me * * *. The numbers are internally
     inconsistent in some of these financial statements in
     that they portray an operation which is losing money.
     * * * [NTG] should not have lost money and I can show
     you, by testifying with respect to elements of those
     financial statements, that they were, in fact, false
     financial statements.


     NTG continued in operation until March of 1990, and

petitioner did not present any evidence establishing that prior

to the end of 1989 he abandoned his interest in NTG or that his

interest in NTG became worthless.

     Petitioner has not established that NTG incurred a loss in

1989 nor that for 1989 he is entitled to a $35,000 partnership

loss deduction with respect to his interest in NTG.

     Respondent has determined an accuracy-related penalty under

section 6662(a) for negligence.   The penalty for negligence

equals 20 percent of the amount of the underpayment attributable

to negligence or to disregard of respondent's rules and

regulations.   Sec. 6662(a) and (b)(1).   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).    A taxpayer's

failure to maintain adequate books and records is sufficient to

establish negligence.   Sec. 6001; Zafiratos v. Commissioner, T.C.

Memo. 1992-135, affd. without published opinion 993 F.2d 880 (3d

Cir. 1993); Moran v. Commissioner, T.C. Memo. 1981-352.
                              - 9 -

     Petitioner has practiced law for many years and was aware of

the requirement that complete and accurate books and records be

maintained with respect to the financial activities of NTG.

Petitioner did not present any evidence nor did he make any

argument as to why the penalty for negligence should not apply to

the disallowed $35,000 partnership loss deduction.      Although

neither petitioner nor respondent made any specific argument as

to whether the penalty for negligence should apply to the other

adjustments that have been agreed upon, those other adjustments

were settled largely in a manner favorable to petitioner.      We

conclude that petitioner is liable for the penalty for negligence

only with respect to the portion of the income tax deficiency

attributable to the claimed $35,000 NTG partnership loss.


                                           Decision will be entered

                                      under Rule 155.
