                  T.C. Memo. 1996-270



                UNITED STATES TAX COURT



    RICHARD A. AND CAROL B. LITTLE, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 27374-93.                    Filed June 12, 1996.



     P owned stock in Dondi Financial (DF). DF held 97
percent of the stock of Vernon (V). V was a savings
and loan. The FHLBB seized V, terminated its
operations, and appointed the FSLIC as its receiver in
March 1987. DF filed for bankruptcy in May 1987.

     P owned stock in Texana (T). T held 98 percent
of the stock of Texana Savings & Loan (TSL). The FHLBB
put TSL in receivership and appointed the FSLIC to
liquidate TSL in August 1988. P deducted losses for
worthless stock from DF in 1987 and T in 1988. R
disallowed part of the DF loss and all of the T loss.
R amended the answer, contending that P owed an
additional deficiency because the DF stock became
worthless in 1985.

     R called two FBI agents as witnesses and offered
into evidence 264 pages of interview notes. In
response to P's hearsay objection, R argued that the
agents' oral testimony and notes were records or
                               - 2 -

     reports of a public agency admissible under Fed. R.
     Evid. 803(8) or (24).
          Held: R's contention in the amended answer is
     new matter upon which R bears the burden of proof.
     Rule 142(a), Tax Court Rules of Practice and Procedure.

          Held, further, oral testimony of the two FBI
     agents is not a record or report of a public agency of
     Fed. R. Evid. 803(8).

          Held, further, oral testimony of the two FBI
     agents is not admissible under Fed. R. Evid. 803(24)
     because respondent did not satisfy the notice
     requirement of the rule.

          Held, further, the interview notes are not
     admissible because they were not exchanged before trial
     contrary to the Court’s standing pretrial order.

          Held, further, P may deduct $727,600 for DF stock
     in 1987.

          Held, further, P may deduct $199,600 for T stock
     in 1988.



     John D. Copeland, for petitioners.

     Steven Walker and Barbara Leonard, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COLVIN, Judge:   Respondent determined that petitioners had

deficiencies in Federal income tax of $162,761 for 1987 and

$57,199 for 1988.   Respondent filed an amended answer asserting

an additional deficiency of $31,170 for 1987.

     The issues for decision are:

     1.   Whether respondent's contention that petitioners'

worthless stock deduction for Dondi Financial Corp. (Dondi
                                 - 3 -

Financial) stock in 1987 was taken in the wrong year is new

matter on which respondent bears the burden of proof.      We hold

that it is.

     2.   Whether testimony in the trial of this case by Federal

Bureau of Investigation (FBI) special agents is a record or

report of a public agency, admissible under rule 803(8) or (24)

of the Federal Rules of Evidence.    We hold that it is not.

     3.   Whether 264 pages of interview notes made by FBI

special agents which were not exchanged before trial are

admissible.   We hold that they are not.

     4.   Whether petitioners may deduct $727,600 for a loss from

Dondi Financial stock in 1987.    We hold that they may.

     5.   Whether petitioners may deduct $199,600 for a loss from

Texana Capital Corp. stock in 1988.      We hold that they may.

     Section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure unless otherwise stated.

                         FINDINGS OF FACT

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

A.   Petitioners

     Petitioners are married and lived in Scottsdale, Arizona,

when they filed their petition.

     Richard A. Little (petitioner) graduated from the University

of Michigan in 1957 with a bachelor's degree in economics.

Petitioner was an officer in the U.S. Air Force.      He was
                               - 4 -

stationed in France from 1959 to 1961.     He returned to the United

States in 1961 and worked for 6 months as a registered

stockbroker in Santa Barbara, California.     He then worked for a

home builder in Ventura, California, for about a year and a half.

From 1961 to 1970, he operated his own building company and joint

ventured with another person for 3 years.

     After succeeding in the home building business in

California, petitioner moved to New York City to work for Levitt

& Sons, one of the nation's largest single-family-home builders.

After about 3 years, he took a position in Columbus, Ohio, with a

company that built apartment buildings.     Petitioner then worked

in Jacksonville, Florida, for a company that built apartment and

condominium buildings.

     In 1970, petitioner moved to the San Francisco area to work

for Builders Resources (Builders).     Builders' primary business

was providing venture capital to small builders throughout the

United States.   Petitioner worked for Builders for about 2 years.

During that time he met Donald R. Dixon (Dixon).     Dixon was then

the third largest single-family-home builder in Dallas, Texas.

Builders financed Dixon's Dallas home-building activities.

     From 1970 to 1978, petitioner worked on several real estate

developments and syndications and became the chief financial

officer of a residential real estate firm.     In 1978, petitioner

moved to France.   In 1980, he moved to London and helped to
                                 - 5 -

establish the U.S. Property Trust, which invested money from

English and Scottish pension funds.

     Petitioner was financially successful.     In 1974, he bought

50 acres of land in Sonoma County, California.     He started a

vineyard which produced about $50,000 per year net of expenses

and taxes starting in 1979.     Petitioner sold the vineyard in

1988.

B.   Dondi Financial Corp.

     1.      Petitioner's Association With Dondi Group, Inc.,
             From January to September 1981

     Dixon contacted petitioner in 1980.     Dixon wanted petitioner

to work for him.     At Dixon's request, petitioner went to Dallas

in January 1981 to see Dixon's home building business.

Petitioner decided to work for Dixon.     Petitioner joined Dixon's

organization, Dondi Group, Inc., and ran a subsidiary financing

company called Dondi Equities.     Petitioner commuted between

London and Dallas from February to May and moved to Dallas in

June 1981.     While working at Dondi Equities, petitioner met Woody

Lemons (Lemons).     Lemons was president of Vernon Savings & Loan

(Vernon) at the time.

     Petitioner stopped working for Dondi Equities in September

1981.     He moved to Houston, Texas, and started building single-

family homes and an apartment project with a friend.

     2.      Dixon's Purchase of Vernon
                                 - 6 -

     During the summer of 1981, Dixon decided that he wanted

to buy a savings and loan.     Dixon researched various financial

institutions and chose Vernon.     Dixon proposed that he buy 70

percent of Vernon's stock, and that petitioner, Lemons, and Rick

Ramsey (not otherwise identified in the record) each buy 10

percent.

     Dixon bought 97 percent of Vernon in January 1982 for an

amount not stated in the record.     Dixon paid 20 percent of the

purchase price in cash and financed 80 percent.

     Dixon transferred Vernon's stock to Dondi Financial in June

1982.     Dondi Financial was a holding company formed to hold

Vernon stock.     Dondi Financial had no other assets.   Dondi

Financial assumed Dixon's obligation to pay the rest of the

purchase price.     Dondi Financial paid significant amounts on this

obligation while it owned Vernon.

     3.      Petitioner's Reassociation With Dondi Group, Inc.

     Dixon contacted petitioner in June 1983.     Petitioner needed

additional capital for his apartment project.     Dixon convinced

petitioner to work for him again by agreeing to provide capital

for the project.     Petitioner moved to Dallas and started working

for Dixon at Dondi Financial in June 1983.

     Petitioner became president of Dondi Financial shortly after

he returned.     Lemons was Vernon's chairman when petitioner

returned to Dondi Financial.

C.   Texana Savings & Loan
                                 - 7 -

     1.    Lemons' Purchase of Tomanet Stock

     In mid-1983, Lemons approached petitioner about buying

another savings and loan.    Lemons suggested that he, petitioner,

and several other Dondi Financial and Vernon executives buy the

stock of a holding company named Tomanet.     Tomanet owned about

98 percent of the stock of Texana Savings & Loan (Texana).

     Lemons negotiated an option to buy Tomanet stock.     Lemons

bought Tomanet stock with purchase money mortgages from Tomanet

stockholders and financial institutions such as First City

Savings.   Petitioner and the other investors were to give Lemons

a downpayment and execute a note payable to him for the balance

of the purchase price if they wanted to buy the Tomanet stock.

     2.    Petitioner's Purchase of Tomanet Stock From Lemons

     Petitioner bought 34,900 shares of Tomanet stock for

$199,600 on December 12, 1983.    Petitioner paid $77,200 as a

downpayment.   Petitioner borrowed the downpayment from State

Savings & Loan (not further identified in the record) through an

unsecured loan.    Petitioner executed notes, payable to Lemons,

for $106,795 and $15,605 on December 12, 1983.

      Lemons gave petitioner quarterly reminders of the amounts

due under the notes.    Petitioner paid Lemons about $31,795 on the

$106,795 note.    Petitioner had no agreement with Lemons to not

make payments on the $106,795 note.      Petitioner paid about $4,100

on the $15,605 note.
                                - 8 -

     On December 13, 1983, Tomanet issued stock certificates to

petitioner for 14,535 shares and 20,365 shares.   Petitioner

pledged 20,365 shares to Lemons as security for his note.

     On August 2, 1984, Tomanet changed its name to Texana

Capital Corp. (Texana Capital).    Petitioner was not involved in

any of Texana's activities and did not receive Texana's financial

statements.

D.   Petitioner's Transfer to Vernon's California Subsidiary and
     Dixon's Offer To Sell Dondi Financial Stock to Dondi Group,
     Inc., Employees

     Petitioner left Dallas in August 1984 to become president of

Vernon Asset Management Corp., a Vernon subsidiary in southern

California.   While in California, petitioner did not control

Vernon's day-to-day operations or know about every loan Vernon

made.

     On August 16, 1984, Vernon entered into a supervisory

agreement (not otherwise described in the record) with the

Federal Savings and Loan Insurance Corporation (FSLIC).

     Dixon offered to sell Dondi Financial stock to Dondi Group,

Inc. employees in December 1984.   Dixon required any employee who

wanted to buy the stock to pay 15 percent down and execute a

purchase money mortgage for 85 percent.   The purchase money

mortgage was a 5-year note.    Employees were to pay only interest

during the 5 years and make a balloon payment of the principal

after 5 years.   Dixon held at least 51 percent of Dondi Financial

stock at all relevant times.
                                 - 9 -

     Petitioner bought 6,800 shares of Dondi Financial stock

on January 1, 1985.   Petitioner paid $727,600 for the stock.

Petitioner paid $109,140 in cash and executed a note for

$618,460.   The cash consisted of $6,975 from deferred

compensation, $3,083 from interest on the deferred compensation,

$30,600 from accrued dividends, and $68,482 from a loan from

Vernon.   The loan from Vernon was evidenced by a 5-year note for

$68,482 and secured by petitioner's savings account.     Petitioner

paid the $68,482 note in 1986.

     The $618,460 note was payable to Dondi Financial.    The note

required petitioner to make quarterly payments and had an

interest rate of 11.25 percent.    The note was fully recourse.

Petitioner pledged his Dondi Financial stock as security for the

note.   From February 28, 1985, to July 14, 1986, petitioner paid

$107,160.92 on the note.

     Petitioner agreed to give Dixon, Dondi Financial, and the

other Dondi Financial shareholders an option to buy petitioner's

Dondi Financial stock if he stopped working for Dondi Financial.

Dixon had the first right to buy the shares.    If Dixon did not

buy the stock within 30 days, Dondi Financial could exercise its

option.   If Dondi Financial did not do so, the shareholders could

buy the stock pro rata.    If neither Dixon, Dondi Financial, nor

the other shareholders exercised their option, Dondi Financial

had to buy the stock.
                               - 10 -

E.   Initial Actions by Bank Regulators

     1.   The Cease and Desist Order

     On June 16, 1986, the Federal Home Loan Bank Board (FHLBB)

issued a cease and desist order (FHLBB order) to Vernon because

of its improper lending practices.      The FHLBB order required

Vernon to correct its loan approval process, to evaluate its

portfolio, and to bring its operations into compliance with

regulatory standards.    The FHLBB order required Vernon to prepare

a plan detailing its projected business strategies and operations

through June 30, 1989.

     2.   Petitioner's Resignation From Dondi Financial

     Petitioner resigned from Dondi Financial on August 15, 1986.

Petitioner wanted to sell his Dondi Financial stock for about

$1.3 million as provided by the shareholder agreement.      In

December 1986, Dondi Financial offered to buy petitioner's stock

for an amount not disclosed in the record.      Petitioner rejected

this offer.   Petitioner and Dondi Financial could not agree on a

selling price, and petitioner did not sell the stock.

     3.   Vernon's Financial Troubles

     In September 1986, the State of Texas appointed Earl Hall

(Hall), a State regulatory agent, to run Vernon.      Hall and the

remaining directors tried to continue Vernon's operations.

     On December 11, 1986, respondent issued a refund check to

Dondi Financial for $6,054,581.   On January 15, 1987, Dondi

Financial endorsed the check to Vernon.
                              - 11 -

F.   The Attempted Sale of Texana Capital

     In late 1986, petitioner and other Texana Capital

shareholders tried to sell Texana Capital's Texana stock.      The

shareholders held about 93 percent of Texana Capital's shares and

Texana Capital held about 98 percent of Texana's shares.    Texana

Capital had no assets other than Texana stock.

     In November or December of 1986, Lemons negotiated the sale

of Texana Capital's Texana stock.   In February of 1987, Lemons

and petitioner signed agreements to sell the stock.    However, the

parties did not make a final agreement, and petitioner never sold

his stock.   Petitioner would have made a profit of about $44,000

if the agreement had been completed.

G.   Termination of Vernon's Operations and Bankruptcy of
     Dondi Financial

     1.   The Seizure of Vernon

     The FHLBB seized Vernon, terminated its operations, and

appointed the FSLIC as receiver on March 20, 1987.    Vernon

disavowed all of its obligations to pay its creditors.    Vernon

was reconstituted as Vernon Federal Savings Association (VFSA).

VFSA did not issue stock to Dondi Financial to replace Dondi

Financial's holdings in Vernon.

     On April 27, 1987, the FSLIC sued seven Vernon officers,

including petitioner, for $350 million.
                                - 12 -

     2.     The Bankruptcy of Dondi Financial

     Dondi Financial filed for bankruptcy on May 9, 1987.

Petitioner filed a claim against Dondi Financial for $577,626.

This amount was the difference between the repurchase price of

his stock and the balance on the note.     The bankruptcy trustee

(trustee) sued petitioner for $659,118 plus interest on

petitioner's note.     These suits were settled on June 22, 1990.

Petitioner paid the bankruptcy estate $2,500 and withdrew his

suit.     The trustee also withdrew his suit.

     Philip Palmer (Palmer) was the attorney for Dondi

Financial's bankruptcy trustee.     Palmer examined Dondi

Financial's books and records during his investigation of Dondi

Financial.     Palmer saw Vernon's financial statements, including

those which had been certified by audit and others that had been

prepared by Government regulatory authorities for each year

before the bankruptcy, monthly reports from 1984 to 1986, and

regulatory reports.     Palmer used these documents to estimate

Vernon's fair market value from about 1982 to 1986.     Palmer took

into account the fair market value of Vernon and about three of

its small subsidiaries in estimating when Dondi Financial became

insolvent.     Palmer focused on Vernon's commercial and residential

loans because Vernon's and Dondi Financial's insolvency resulted

from the improper granting and reporting of these loans.
                              - 13 -

     3.   The FSLIC's Seizure of Petitioner's Assets

     On June 29, 1987, the FSLIC obtained a preliminary

injunction against seven Vernon directors, including petitioner.

The injunction sequestered the directors' assets.     The injunction

allowed petitioner to spend $2,000 each month.    That amount was

increased a few days later to $3,500.    Because of the injunction,

petitioner could no longer make payments on the $106,795 note to

Lemons.   The injunction made petitioner insolvent.   The

injunction was still in effect at the time of the trial of this

case.

     4.    The Closing of Texana

     On August 19, 1988, the FHLBB put Texana in receivership and

appointed the FSLIC as receiver to liquidate Texana.

H.   Criminal Prosecution and Conviction of Some Vernon Officers
     and Directors

     Some Vernon officers and directors (not including

petitioner) were convicted of crimes relating to their activities

at Vernon or its subsidiaries.     On September 8, 1988, Roy Dickey,

a former Vernon president, was convicted of falsifying a

delinquent loan list submitted to the FSLIC.    On August 29, 1989,

James R. Veteto, the former president of Vernon Service Corp.,

was convicted of falsifying Vernon loans.    On October 5, 1989,

Pat L. Malone, a Vernon executive vice president, was convicted

of misapplying Vernon funds, using false documents to conceal the

misapplication of funds, and using the misapplied funds to make
                              - 14 -

illegal political campaign contributions.    On November 8, 1989,

Patrick King, a former vice chairman of Vernon's board of

directors, was convicted of making false entries in Vernon books,

reports, and statements, and of using Vernon funds to make

illegal campaign contributions.   On April 10, 1990, Lemons was

convicted of misapplying Vernon funds and accepting a bribe.

Petitioner was not indicted for or convicted of any crimes

relating to Vernon.

                             OPINION

A.   Burden of Proof

     We first decide whether respondent's contention that

petitioners' worthless stock deduction for Dondi Financial stock

in 1987 was taken in the wrong year is new matter on which

respondent bears the burden of proof.

     1.   Burden of Proof If Respondent Raises New Matter
          or An Increased Deficiency in An Amended Answer

     The taxpayer generally bears the burden of proof.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     However,

if the Commissioner pleads new matter or an increased deficiency

in the answer, the Commissioner has the burden of proof as to the

new matter or increased deficiency.    Rule 142(a).   A new position

taken by the Commissioner is not new matter if it clarifies and

is consistent with the original determination and does not

increase the deficiency.   Estate of Jayne v. Commissioner, 61

T.C. 744, 748-749 (1974); McSpadden v. Commissioner, 50 T.C. 478,
                                   - 15 -

492-493 (1968).    However, if the new position requires the

taxpayer to present different evidence, it is new matter, and the

Commissioner bears the burden of proof.       Achiro v. Commissioner,

77 T.C. 881, 890 (1981); Estate of Falese v. Commissioner, 58

T.C. 895, 899-900 (1972).

     2.      Notice of Deficiency

     Petitioners deducted $727,600 for worthless Dondi Financial

stock in 1987 and $199,600 for worthless Texana Capital stock in

1988.     In the notice of deficiency, respondent disallowed

$618,460 of petitioners' deduction for 1987 and all of their

deduction for 1988.     Respondent determined that petitioners "did

not establish that the amount shown, i.e. $618,460 and $199,600

was (a) a loss, and (b) sustained by you".      The notice of

deficiency also included the following calculation:

        1987                                   1988

Purchase cost         $727,600         Purchase cost       $199,600
Less cash paid         109,140         Payments verified          0
Adjustment             618,460         Adjustment           199,600

     3.      Amendment to Answer

     In the petition, petitioners contended that respondent erred

in disallowing the worthless stock deductions.        In the answer,

respondent denied that respondent's determination was in error.

About 11 months later and 14 days before trial, respondent moved

to amend the answer and lodged an amended answer.        We granted

respondent's motion.
                              - 16 -

     In the amended answer, respondent asserted that petitioners

were liable for an increased deficiency of $31,170 for 1987

because they were not entitled to deduct the $109,140 respondent

had previously allowed for the Dondi Financial stock.   In the

amended answer, respondent asserted for the first time that,

because Dondi Financial "became insolvent in a year earlier than

1987, * * * the stock in Dondi Financial Corp. became worthless

no later than August 1, 1985".

     4.   Increased Deficiency and New Matter Under Rule 142

     Respondent contends that the amended answer did not raise

new matter for purposes of Rule 142 and that the notice of

deficiency required petitioners to prove that the Dondi Financial

stock became worthless in 1987.   Respondent argues that

respondent discovered that the notice of deficiency mistakenly

failed to disallow all of the deduction, and that respondent's

error was computational.   Respondent also contends that the

notice of deficiency was broadly worded and that the amended

answer is consistent with that broad language.

     Respondent bears the burden of proof if respondent asserts

an increased deficiency.   Rule 142(a).   Thus, respondent bears

the burden of proving that petitioner is liable for the

additional deficiency of $31,170.

     We also conclude that respondent raised new matter in the

amended answer.   Respondent allowed petitioners' deduction in

1987 for part of the Dondi Financial stock loss ($109,140).
                               - 17 -

Petitioner would not be entitled to any worthless stock

deductions for Dondi Financial in 1987 unless it became worthless

in 1987.    We can only conclude that respondent was not

challenging petitioners' claim that the Dondi Financial stock

became worthless in 1987.    In the amended answer, respondent

contends that the Dondi Financial stock became worthless no later

than August 1, 1985.    Petitioners would be required to present

different evidence to contest this allegation than they would

have been required to present to contest the notice of

deficiency.    Thus, respondent's contention in the answer is

new matter upon which respondent bears the burden of proof.

     Respondent contends that the amended answer corrected a

mathematical computation in the notice of deficiency.      We

disagree.    Respondent has not identified a mathematical error

in the notice of deficiency.

     Respondent contends that petitioners bear the burden of

proof because they are not prejudiced if they are required to

prove the year their Dondi Financial stock became worthless.

Respondent contends that petitioners are not prejudiced because

they amended their petition after respondent amended the answer

to claim that, if their Dondi Financial stock did not become

worthless in 1987, then it became worthless in 1985 or 1986.

We disagree.    First, Rule 142(a) provides that the burden of

proof on new matter is on the Commissioner; Rule 142(a) does not

limit this to cases where the taxpayer would be prejudiced by
                               - 18 -

bearing the burden of proof.   Rule 142(a).   Second, petitioners

would be prejudiced by being first told 14 days before trial that

they have the burden of proving when their Dondi Financial stock

became worthless.

     5.   Conclusion

     Petitioners bear the burden of proving that their basis in

Dondi Financial stock was as claimed on their 1987 tax return.

Respondent bears the burden of proving that the Dondi Financial

stock became worthless before 1987.

B.   Evidentiary Matters

     We next decide whether certain evidence is admissible.

     1.   Testimony by FBI Special Agents

     In the pretrial memorandum, respondent listed two FBI

special agents as witnesses, Curt L. Hodges (Hodges) and Dale V.

Hogue (Hogue).   Respondent's memo said only that both agents

would testify about their "investigation of the facts surrounding

this case and to the truthfulness or untruthfulness of the

petitioner's witnesses".

     In 1987, Hodges and Hogue were assigned to a task force

created to investigate suspected criminal activity in the Texas

savings and loan industry.   Hogue was the agent in charge of the

Vernon investigation from 1987 to 1991.   Hodges investigated

Vernon from 1987 to 1992.
                              - 19 -

     Respondent called Hodges and Hogue to testify about their

investigation.   Petitioner objected that the testimony was

hearsay.

     2.    Whether Hodges' and Hogue's Testimony Is a Record of
           a Public Agency for Purposes of Rule 803(8) of the
           Federal Rules of Evidence, the Public Records Exception
           to the Hearsay Rule

     The Federal Rules of Evidence generally apply to proceedings

of this Court.   Sec. 7453; Rule 143(a); Conti v. Commissioner, 99

T.C. 370, 373 (1992), affd. 39 F.3d 658 (6th Cir. 1994); Estate

of Shafer v. Commissioner, 80 T.C. 1145, 1151 (1983), affd. 749

F.2d 1216 (6th Cir. 1984).   Respondent concedes that Hodges' and

Hogue's testimony is hearsay but contends that it is admissible

under rule 803(8)(C) of the Federal Rules of Evidence, as a

report or statement of a public agency.

     Records, reports, statements, or data compilations of a

public agency setting forth factual findings resulting from an

investigation made pursuant to authority granted by law are

admissible as an exception to the hearsay rule unless the sources

of information or other circumstances indicate lack of

trustworthiness.1   Fed. R. Evid. 803(8)(C).


     1
       Fed. R. Evid. 803(8) provides an exception to the hearsay
rule for:

     Records, reports, statements, or data compilations, in
     any form, of public offices or agencies, setting forth
     (A) the activities of the office or agency, or (B)
     matters observed pursuant to duty imposed by law as
     to which matters there was a duty to report, excluding,
                                                   (continued...)
                              - 20 -

     Respondent contends that the trial testimony of Hodges and

Hogue is a statement of a public agency for purposes of rule

803(8)(C) of the Federal Rules of Evidence.   We recognize that

the word "statement", viewed in isolation, could refer to an oral

communication.   If rule 803 of the Federal Rules of Evidence

referred to statements by "an employee of" a public agency, we

might agree with respondent that oral testimony could be a

"statement" for purposes of that rule.   However, the phrase "an

employee of" does not appear in rule 803(8) of the Federal Rules

of Evidence.   Thus, we think the phrase a "statement * * * by a

public agency" does not include an oral statement by an

individual agency employee; instead, we think it refers to a more

formal, written document which was reviewed, approved, or subject

to a clearance process of some sort that transforms it from a

statement by an employee of an agency to a statement "by" the

agency.

     Respondent does not cite and we have not found a case where

trial testimony was admissible as a record or report of a public



(...continued)
     however, in criminal cases matters observed by police
     officers and other law enforcement personnel, or (C)
     in civil actions and proceedings and against the
     Government in criminal cases, factual findings
     resulting from an investigation made pursuant to
     authority granted by law, unless the sources of
     information or other circumstances indicate lack of
     trustworthiness.
                              - 21 -

agency under rule 803(8) of the Federal Rules of Evidence.    The

cases respondent cites all involve written documents.   See Yaich

v. United States, 283 F.2d 613, 616 (9th Cir. 1960) (selective

service file); Olender v. United States, 210 F.2d 795, 801-802

(9th Cir. 1954) (file containing affidavits, investigator

reports, and bank reports); Wong Wing Foo v. McGrath, 196 F.2d

120, 123 (9th Cir. 1952) (transcript of an administrative

hearing); Vanadium Corp. of Am. v. Fidelity & Deposit Co., 159

F.2d 105, 108-109 (2d Cir. 1947) (written interdepartmental

communications).   Contrary to respondent's position, Professor

Wigmore concludes that a statement should be in writing to be

admitted under the common law public records exception.   Wigmore

on Evidence, sec. 1633(5), at 623 (1974).

     We conclude that Hodges' and Hogue's oral testimony is not

admissible under rule 803(8)(C) of the Federal Rules of Evidence.

     3.   Whether Hodges' and Hogue's Oral Testimony Is
          Admissible Under Rule 803(24) of the Federal Rules
          of Evidence, the Residual Exception to the Hearsay Rule

          a.   Background

     Respondent contends that Hodges' and Hogue's testimony is

admissible under rule 803(24) of the Federal Rules of Evidence,2


     2
       Fed. R. Evid. 803(24) provides an exception to the hearsay
rule for:

     A statement not specifically covered by any of
     the foregoing exceptions but having equivalent
     circumstantial guarantees of trustworthiness, if
     the court determines that (A) the statement is
                                                    (continued...)
                               - 22 -

the residual exception to the hearsay rule.   To admit a statement

under rule 803(24) of the Federal Rules of Evidence, the

proponent must show that it:   (1) Has circumstantial guarantees

of trustworthiness equivalent to those required to qualify for

other hearsay exceptions; (2) is offered as evidence of a

material fact; (3) is more probative on the point for which it is

offered than any other evidence which the proponent could obtain

through reasonable efforts; (4) serves the general purposes of

the Federal Rules of Evidence and the interests of justice if

admitted; and (5) was provided with particulars of the testimony

to the other party sufficiently in advance of trial so that the

other party has a fair opportunity to prepare to meet it.   Fed.

R. Evid. 803(24).   Rule 803(24) of the Federal Rules of Evidence

is narrowly construed and applies only in exceptional

circumstances.   SEC v. First City Fin. Corp., 890 F.2d 1215 (D.C.

Cir. 1989); United States v. Kim, 595 F.2d 755 (D.C. Cir. 1979);



(...continued)
     offered as evidence of a material fact; (B) the
     statement is more probative on the point for which
     it is offered than any other evidence which the
     proponent can procure through reasonable efforts;
     and (C) the general purposes of these rules and the
     interests of justice will best be served by admission
     of the statement into evidence. However, a statement
     may not be admitted under this exception unless the
     proponent of it makes known to the adverse party
     sufficiently in advance of the trial or hearing to
     provide the adverse party with a fair opportunity to
     prepare to meet it, the proponent's intention to offer
     the statement and the particulars of it, including the
     name and address of the declarant.
                               - 23 -

Powers v. Commissioner, 100 T.C. 457, 485 (1993); Goldsmith v.

Commissioner, 86 T.C. 1134, 1140 (1986).

           b.    Notice Requirement

      Rule 803(24) of the Federal Rules of Evidence requires the

offering party to notify the opposing party of the particulars of

the testimony sufficiently in advance of trial to prepare to meet

it.

      Respondent contends that petitioner had adequate notice of

Hodges' and Hogue's testimony.   We disagree.   Respondent's only

notice to petitioner was a statement in the pretrial memorandum

that the two agents would testify about the truthfulness or

untruthfulness of petitioners' witnesses and the facts

surrounding this case (i.e., this civil tax case), a case which

Hodges said at trial was not the subject of the task force's

investigation.   Respondent did not give notice to petitioners of

any of the particulars of the direct examination, which covered

106 transcript pages.

      Respondent cites United States v. Brown, 770 F.2d 768, 771

(9th Cir. 1985), and Piva v. Xerox Corp., 654 F.2d 591, 596 (9th

Cir. 1981), in which the U.S. Court of Appeals for the Ninth

Circuit interpreted the notice requirement of rule 803(8)(C) of

the Federal Rules of Evidence.

      In Brown, the Court of Appeals held that the trial court

properly admitted the defendants' passports where the Government

did not tell the defendants before trial that it intended to
                               - 24 -

offer the passports into evidence.      United States v. Brown,

supra.   The Government's failure to meet the notice requirement

did not prevent admission of the passports because the defendants

had a fair opportunity to attack the trustworthiness of their own

passports.    Id.

     In Piva, work sheets and information about job applicants

were held to be admissible even though the notice requirement was

not met.    The trial lasted more than a year after the evidence

was admitted, during which the other party could have moved to

strike it or could have rebutted it with additional evidence.

Also, the opposing party had ample opportunity to attack the

trustworthiness of the evidence through extensive cross-

examination, and the trial court found that the evidence was

reliable.    Piva v. Xerox Corp., supra at 595-596.

     This case is very different from Brown and Piva.     Respondent

elicited very detailed testimony from Hodges and Hogue.

Petitioner had no notice of the testimony except for a general

reference in respondent's pretrial memorandum.     Respondent

contends that petitioner had a fair opportunity to cross-examine

Hodges and Hogue.    We disagree.   Although petitioners' counsel

had cross-examined Hodges and Hogue, respondent's pretrial

memorandum did not help petitioners to prepare for it.

Petitioners' counsel telephoned both Hodges and Hogue about a

week before trial to ask about their testimony.     However, neither

agent responded to his inquiry.     We hold that respondent did not
                               - 25 -

give petitioners notice as required by rule 803(24) of the

Federal Rules of Evidence.

          c.     Circumstantial Guarantees of Trustworthiness

     Respondent must also show that Hodges' and Hogue's testimony

has circumstantial guarantees of trustworthiness equivalent to

those required to qualify for other hearsay exceptions.    Fed. R.

Evid. 803(24).   Respondent contends that the testimony meets this

requirement because the FBI agents had an adequate basis for

their factual findings, the results of the FBI's investigation

support the truthfulness of the FBI agents' factual findings,

petitioner extensively cross-examined the FBI agents, and

statements made by public officials based on their factual

findings from an investigation made pursuant to authority granted

by law are generally believed to be trustworthy.    We disagree

that these points establish circumstantial guarantees of

trustworthiness equivalent to those required to qualify for other

hearsay exceptions.

     Respondent's only reference to another hearsay exception is

to rule 803(8) of the Federal Rules of Evidence.    We held above

that rule 803(8) of the Federal Rules of Evidence does not apply

here.   See par. B-2, p. 18.   The rules of evidence do not provide

a blanket hearsay exception for testimony by public officials.

Respondent has not shown that the FBI agents' testimony has

circumstantial guarantees of trustworthiness that are equivalent

to other hearsay exceptions.
                                  - 26 -

     We hold that the testimony of Hodges and Hogue is not

admissible under rule 803(24) of the Federal Rules of Evidence.

     4.    Whether Statements Made by Witnesses to FBI Agents
           Are Admissible

            a.   FD-302 Reports

     Hodges and Hogue testified that the FBI agents assigned to

the task force prepared memoranda of interviews with 300 to 400

people during their investigation of Vernon.      These documents are

FD-302 reports (302 reports).

     Respondent offered into evidence 302 reports for 25

witnesses, covering 264 pages.      Respondent first gave the 302

reports to petitioner at 2 p.m. on the second (and last) day of

trial.    Respondent also asked that the 302 reports be sealed.

Respondent asked that the 302 reports be used only for the

instant case and that the copy petitioner was to receive be

returned by petitioners' counsel with a statement, under penalty

of perjury, that it had not been copied or released and that no

additional copies of which he was aware were made.

      Petitioner objected to admitting the 302 reports on the

grounds that they were not exchanged before trial as required by

the standing pretrial order and that they are hearsay.

            b.   Standing Pretrial Order

     About 5 months before this case was calendared for trial,

we sent a copy of the Court's standing pretrial order to the
                                - 27 -

parties.   It stated in part:    "Any documents or materials which

a party expects to utilize in the event of trial (except for

impeachment), but which are not stipulated, shall be identified

in writing and exchanged by the parties at least 15 days before

the first day of the trial session."

     Materials not provided in compliance with our pretrial

orders may be excluded from evidence.     Moretti v. Commissioner,

77 F.3d 637 (2d Cir. 1996).     Exclusion of documents under the

standing pretrial order is particularly justified if they are

complex and voluminous, as here.     See Kodak v. Commissioner, T.C.

Memo. 1991-485, affd. without published opinion 14 F.3d 47 (3d

Cir. 1993).   The 302 reports are not admissible because they were

not exchanged at least 15 days before the first day of the trial

session as required by our standing pretrial order.

     In light of our ruling that the 302 reports are not

admissible because they were not exchanged before trial, we need

not consider petitioner's hearsay objection.

C.   Dondi Financial Stock

     As stated above, petitioners bear the burden of proving that

their basis in the Dondi Financial stock was as they claimed on

their 1987 tax return, and respondent has the burden of proving

that the Dondi Financial stock became worthless before 1987.       See

par. A-5, p. 17.

     1.    Basis
                                - 28 -

     Petitioner paid $109,140 in cash and executed a $618,460

note for 6,800 shares of Dondi Financial stock.     Respondent

concedes and we find that petitioners' basis in the Dondi

Financial stock was $727,600.

     2.     Worthlessness

            a.   Background

     Respondent contends that the Dondi Financial stock became

worthless in 1985 or earlier.    We disagree, and we conclude that

the Dondi Financial stock became worthless in 1987.     We reach

this conclusion regardless of which party has the burden of

proof.

     Stock is worthless if it has neither liquidating value nor

potential value.    Austin Co. v. Commissioner, 71 T.C. 955, 970

(1979).    A corporation's stock has liquidating value if its

assets exceed its liabilities.    Id.    A corporation's stock has

potential value if there is a reasonable expectation that it will

become valuable in the future.    Morton v. Commissioner, 38 B.T.A.

1270, 1278 (1938), affd. 112 F.2d 320 (7th Cir. 1940).     A

corporation's stock may be worthless if the corporation declares

bankruptcy, ceases to operate, liquidates, or has a receiver

appointed, because these events can destroy the stock's potential

value.    Id.

     Whether stock becomes worthless in a particular year is a

question of fact.    Boehm v. Commissioner, 326 U.S. 287, 293

(1945); Finney v. Commissioner, 253 F.2d 639, 642 (9th Cir.
                                - 29 -

1958), affg. in part and revg. in part T.C. Memo. 1956-247;

Austin Co. v. Commissioner, supra at 969.     The standard for

deciding when stock becomes worthless varies according to the

circumstances of each case.     Boehm v. Commissioner, supra; Lucas

v. American Code Co., 280 U.S. 445, 449 (1930).     The taxpayer's

attitude and conduct are considered, but are not dispositive.

Boehm v. Commissioner, supra at 293; Aagaard v. Commissioner, 56

T.C. 191, 209 (1971).

            b.   Collapse of Vernon and Dondi Financial

     Respondent contends that Dondi Financial became insolvent by

1985 because the real estate market crashed in 1984, Vernon paid

millions of dollars of compensation to Vernon officers and

directors from 1983 to 1986, and Vernon paid other flamboyant

expenses.    We disagree.   We think other, more significant facts

show that Dondi Financial stock did not become worthless in 1985.

The FHLBB order required Vernon to change its financial practices

to meet Federal regulatory standards.    The FHLBB order required

Vernon to prepare a comprehensive plan detailing business

strategies and operations through June 30, 1989.    These actions

show that an effort was made by the FHLBB and Vernon to keep

Vernon operating.    It is reasonable to conclude that Dondi

Financial stock had value as long as Vernon operated.     We

conclude that Vernon had value until the FHLBB appointed a

receiver and ordered its liquidation and Dondi Financial declared

bankruptcy in May 1987.
                                - 30 -

            c.    Palmer's Testimony

     Respondent contends that Dondi Financial stock had no

liquidating value after 1984 because Palmer, the bankruptcy

trustee's attorney during Dondi Financial's bankruptcy

proceedings, testified that Dondi Financial was insolvent by

1984.    Respondent asserts that Palmer's opinion is convincing

because he was independent and his findings are supported by a

reasonable foundation (the real estate downturn from 1982 to

1984, and crash by early 1984; Vernon's liability for the loans

owned by Dondi Residential Properties, Inc., for its property;

and Vernon's extensive lending of money on commercial real estate

projects).    We disagree.

     Palmer believed that the FSLIC appraisers underappraised

property, yet he relied on the FSLIC appraisals and did not use

an independent appraiser.    Palmer did not consider Vernon's non-

Texas assets.    Palmer was reviewing whether Dondi Financial had

made any fraudulent conveyances within the last 4 years before

its insolvency.    Under the then-applicable Texas fraudulent

conveyances law, a transfer was void if a debtor (Dondi

Financial) did not have enough assets in Texas to pay all of its

debts.    Tex. Bus. & Com. Code Ann. sec. 24.03(a) (West 1986).3

Thus, Palmer's valuation of Vernon and Dondi included only Texas

assets.    See In re Dondi Financial Corp., 119 Bankr. 106, 108



     3
       This statute was amended in 1987. See Tex. Bus. & Com.
Code Ann. sec. 24.003, Historical Note (West 1987).
                                - 31 -

(N.D. Tex. 1990).    About 46 percent of the amount of Vernon loans

was non-Texas loans; i.e., out-of-State loans made in Florida,

California, Louisiana, and Oklahoma.

     Palmer recognized that Vernon failed gradually.    He said:

          Vernon Savings & Loan died by degrees. The first
     was the notice in '81, as I recall, to see if the
     Vernon Savings & Loan people could correct their own
     problems.
          The second * * * was [in 1986] when the federal
     government went in there and put their people in, to
     see if the supervision would help.
          The third was * * * [also in 1986] when the
     federal government actually took over the running of
     it, to see whether or not it could be sold.
          * * * The final take over, [in 1987] is after
     you've determined that none of those others will work.
     The patient is dead and it's time for a funeral. * * *

     On March 20, 1987, the FHLBB seized Vernon, appointed the

FSLIC as receiver, and reconstituted Vernon as VFSA.    Dondi

Financial filed its bankruptcy petition on May 9, 1987.     We hold

that this was when Dondi Financial stock became worthless.

          d.      Petitioner's Testimony About Dondi Financial
                  Assets and Liabilities

     Dondi Financial received a $6 million tax refund check in

December 1986.    Petitioner testified that as of January 1987,

Dondi Financial had liabilities of about $1.5 to $2 million.

Respondent did not introduce evidence to rebut petitioner's

testimony.     Petitioner was knowledgeable about Vernon's and Dondi

Financial's finances and was Dondi Financial's president from

1983 to 1984 and president of Vernon's California operations from

1984 to 1986.    Petitioner estimated that Vernon had between $30
                                - 32 -

and $80 million in assets when Dixon bought it in 1981 and that

those assets had grown to more than $200 million when petitioner

returned to Dondi Financial in 1983.     Petitioner also testified

that a monthly report submitted to the FHLBB showed that Vernon

had a positive net worth as of September 1986.    While

petitioner's testimony is less reliable than Vernon's or Dondi

Financial's financial statements, we disagree with respondent's

view that we should disregard it.

          e.   Respondent's Other Contentions

     Respondent points out that petitioner did not provide

documents or expert testimony to establish the amount of Vernon's

or Dondi Financial's liabilities for any year.

     Petitioner testified to these points, but respondent urges

us to disregard his testimony as self-serving.    We may not

arbitrarily disregard testimony that is competent, relevant,

credible, and uncontradicted.    Conti v. Commissioner, 39 F.3d at

664; Ansley v. Commissioner, 217 F.2d 252, 257 (3d Cir. 1954);

Loesch & Green Constr. Co. v. Commissioner, 211 F.2d 210, 212

(6th Cir. 1954).   We found petitioner's testimony to be credible

and uncontradicted.   Respondent contends that we should infer

that any documentary evidence or testimony from prospective

witnesses would have been unfavorable to petitioner.      Respondent

points out that where a party fails to introduce evidence in his

or her possession, which, if true, would be favorable, there is a

presumption that the evidence, if produced, would favor the
                                - 33 -

opposing party.     Wichita Terminal Elevator Co. v. Commissioner,

6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

We do not apply that presumption here for several reasons.

First, petitioner offered Vernon's monthly reports for March,

June, and August 1986 and an unaudited statement of Vernon's

financial condition for July and August 1986.     These exhibits

were admitted to show their effect on petitioner and not for

their truth.   However, since petitioners offered the documents,

the rationale behind the negative inference under Wichita

Terminal does not apply.    Second, petitioners introduced evidence

that the Dondi Financial stock became worthless in 1987.        Wichita

Terminal does not apply to situations where a party provides

evidence sufficient to meet the burden of proof.     See Ianniello

v. Commissioner, T.C. Memo. 1991-415; Cohen v. Commissioner, T.C.

Memo. 1991-413.    Third, respondent, not petitioner, had the

burden of proving that the Dondi Financial stock became worthless

no later than August 1, 1985.    The Wichita Terminal presumption

generally applies where the party failing to produce the evidence

has the burden of proof.     Wichita Terminal Elevator Co. v.

Commissioner, supra at 1165.     Fourth, respondent's contention

that we infer that testimony by prospective witnesses not called

at trial would be unfavorable to petitioner seems hypothetical at

best since respondent did not identify any available witnesses

who petitioners should have called.

          f.      Testimony of Hodges and Hogue
                               - 34 -

     Respondent contends that testimony by Hodges and Hogue

shows that Dondi Financial stock lost its value before 1984.

As stated above, Hodges' and Hogue's testimony is inadmissible.

See par. B, p. 17.    However, even if we considered their

testimony, our conclusion would remain the same.

     Hodges and Hogue testified about criminal activities by

Vernon officers.   Hodges said that the FBI agents did not

consider the financial impact those activities had on Vernon

or Dondi Financial.    Their testimony about Vernon's financial

status consisted of examples of bad loans and accounting

misrepresentations of delinquent loans to the Federal regulatory

authorities and was based on the 302 reports, some of which were

prepared by other agents.    The testimony, although marginally

relevant to the liquidating value analysis, is not helpful in

deciding whether Dondi Financial stock had potential value.

     As stated above, we conclude that petitioners' Dondi

Financial stock became worthless in 1987.

     3.   Conclusion

     We hold that petitioners may deduct $727,600 in 1987 for

worthless Dondi Financial stock.4

D.   Texana Capital Stock

     1.   Notice of Deficiency


     4
       Respondent does not contend, and we therefore need not
consider, whether petitioners had any debt-forgiveness income in
respect of the Dondi Financial stock in 1987 or 1988.
                              - 35 -

     In the notice of deficiency, respondent calculated the

amount of petitioners' Texana Capital stock loss by subtracting

what respondent determined petitioners' basis to be (zero) from

the amount petitioners deducted ($199,600).   Respondent gives no

reason for making this calculation if respondent was intending to

challenge the timing of petitioners' deduction.    Respondent also

determined that petitioners did not establish that the amount

deducted "was (a) a loss, and (b) sustained by you."   Respondent

describes the determination as "broadly worded".   While the

language in the previous sentence is broad, the notice of

deficiency also included the computation described earlier in

this paragraph.   As we concluded above regarding the Dondi

Financial stock, we conclude that the notice of deficiency

challenged petitioners' basis in their Texana Capital stock, but

not that it became worthless in 1988.   See par. A-4, p. 15.

Thus, we need not address respondent's argument on brief that

petitioners did not prove that their Texana Capital stock became

worthless in 1988.

     If we had to decide whether 1988 was the year in which

petitioners' Texana Capital stock became worthless, however, we

would find that 1988 was the appropriate year.    In February 1987,

petitioner agreed to sell his Texana Capital stock.    Although a

final agreement was never executed, petitioners would have made a

$44,000 profit on the sale.   This suggests that the Texana

Capital stock had value in 1987.   There is no indication in the
                                - 36 -

record that the stock became worthless until August 19, 1988,

when the FHLBB placed Texana into receivership and appointed the

FSLIC to liquidate Texana.    Thus, if the year of worthlessness

were in issue, every indication from the record, although sparse,

is that the Texana Capital stock became worthless in 1988.

       2.   Basis

       Petitioners' basis in the Texana Capital stock is the amount

petitioner paid for it.    Sec. 1012.    The amount he paid includes

cash and other property given in exchange for the property and

any liabilities petitioner assumed or to which the property is

subject.    Commissioner v. Tufts, 461 U.S. 300, 307 (1983); Crane

v. Commissioner, 331 U.S. 1, 11 (1947).

       Petitioner bought 34,900 shares of Texana Capital stock for

$199,600 on December 12, 1983.    Petitioner borrowed $77,200 for

the downpayment and executed notes for $106,795 and $15,605 to

buy the stock.

       Respondent contends that petitioners have not proven that

they had basis in the Texana Capital stock because they did

not provide a copy of the $15,605 promissory note or other

documentary evidence showing how much petitioner paid and that

petitioner's only evidence of payment is his testimony.     We may

not arbitrarily disregard testimony that is competent, relevant,

credible, and uncontradicted.    Conti v. Commissioner, 39 F.3d at

664.    We found petitioner's testimony to be generally credible.
                              - 37 -

     Respondent also contends that petitioner did not provide

documentary evidence that he paid interest or principal on the

$106,795 promissory note.   Respondent finally contends that

petitioner did not prove that the $77,200 he says that he paid in

cash to buy Texana Capital stock went to Lemons to buy the stock.

     Petitioner testified that he paid Lemons $31,795 on the

$106,795 note and about $4,100 on the $15,605 note, and that he

stopped paying Lemons when the FSLIC's injunction made him

insolvent.   Despite respondent's skepticism, we found petitioner

to be credible.   We believe that petitioner made payments on the

$106,795 and $15,605 notes and that he used those notes and the

$77,200 he borrowed to buy Texana Capital stock.

     3.   Conclusion

     We hold that petitioners' basis in the Texana Capital stock

was $199,600 and conclude that petitioners are entitled to a

$199,600 worthless stock deduction for Texana Capital stock in

1988.5

     To reflect the foregoing and concessions,


                                         Decision will be entered

                                    under Rule 155.




     5
       Respondent does not contend that, and we need not consider
whether, petitioners had any debt-forgiveness income in respect
of the Texana Capital stock in 1987 or 1988.
