                       T.C. Memo. 2000-322



                     UNITED STATES TAX COURT



         HENRY AND ESTHER MISLE, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14157-97, 22920-97,      Filed October 16, 2000.
                 16657-98, 16658-98.



     Paul J. Peter, Gary J. Nedved, and Gary L. Young, for

petitioners Henry and Esther Misle.

     Allen Daubman, M. Shaun McGaughey, and David M. Dvorak, for

petitioners HJA, Inc., & Subsidiaries.

     Henry N. Carriger, for respondent.




     1
      Cases of the following petitioners are consolidated
herewith for purposes of trial, briefing, and opinion because
they present common questions of fact and law: HJA, Inc., &
Subsidiaries, docket No. 22920-97; Henry and Esther Misle, docket
No. 16657-98; and Henry Misle, docket No. 16658-98. The cases
are referred to as this case in this opinion.
                                   - 2 -



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   In separate notices of deficiency,

respondent determined the following income tax deficiencies,

penalties, and additions to tax with respect to petitioners’

Federal income tax returns:2

Henry and Esther Misle, Docket No. 14157-97

                                                Penalty
            Year         Deficiency           Sec. 6662(a)

            1989         $19,906                 $3,981
            1990         106,768                 21,354
            1991          66,964                 13,393
            1992          25,733                  5,147
            1993          31,803                  6,361

Henry and Esther Misle, Docket No. 16657-98

                                                Penalty
            Year         Deficiency           Sec. 6662(a)

            1994         $67,902                $13,428
            1996          71,900                 14,380

Henry Misle, Docket No. 16658-98

                                      Additions to Tax
     Year     Deficiency        Sec. 6651(a)         Sec. 6654

     1995      $62,797              $15,591               $3,422




     2
      All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. Monetary amounts are
rounded to the nearest dollar.
                                 - 3 -

HJA, Inc., & Subsidiaries, Docket No. 22920-97

                       Year              Deficiency

                       1991                $6,473
                       1992                83,578
                       1993               253,656

         Following concessions,3 the issues for decision are:

     1.     Whether payments made by HJA, Inc., in connection with

an option and stock purchase agreement that were applied to

certain liabilities are taxable to Henry and Esther Misle as

ordinary income and deductible by petitioner HJA, Inc., &

Subsidiaries;

     2.     whether petitioner Henry Misle may reduce, for income

tax purposes, the gross amount of the option price paid to him or

for his benefit pursuant to the option and stock purchase

agreement by $150,000;

     3.     whether petitioners Henry and Esther Misle are liable

for accuracy-related penalties for tax years 1989 through 1994

and 1996 under section 6662(a);

     4.     whether petitioner Henry Misle is liable for an addition

to tax under section 6651(a) for failure to file a return for tax

year 1995; and




     3
      The parties have settled most of the issues raised in the
notices of deficiency issued to petitioners. The only other
issues to be resolved are computational.
                               - 4 -

     5.   whether petitioner Henry Misle is liable for an addition

to tax under section 6654 for failure to make estimated tax

payments for tax year 1995.

                         FINDINGS OF FACT4

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

Stipulations of Fact Nos. 1 and 2 are incorporated into our

opinion by this reference.

A.   Background

     Petitioners Henry Misle (Henry or HM) and Esther Misle

(Esther) are husband and wife who resided in Lincoln, Nebraska,

at the time the petitions at docket Nos. 14157-97, 16657-98, and

16658-98 were filed.   HJA, Inc. (HJA), is a corporation which had

its principal place of business in Lincoln, Nebraska, at the time

the petition at docket No. 22920-97 was filed.   For the years at




     4
      Contrary to Rule 151(e), which governs the form and content
of briefs submitted to the Tax Court, petitioners Henry and
Esther Misle failed to include, among other things, proposed
findings of fact in their opening brief. Instead, petitioners
Henry and Esther Misle set forth their proposed findings of fact
in their reply brief. Presenting proposed findings of fact for
the first time in a reply brief strips opposing parties of the
opportunity to make objections to those proposed findings of
fact. Because petitioners Henry and Esther Misle failed to
include proposed findings of fact in their opening brief, as
required by Rule 151(e), we do not consider them. By failing to
follow the Court’s Rules, “petitioners have assumed the risk that
we have not considered the record in a light of their own
illumination.” Monico v. Commissioner, T.C. Memo. 1998-10.
                                - 5 -

issue, HJA filed consolidated Federal income tax returns with its

subsidiaries.   The consolidated group is the petitioner in docket

No. 22920-97.

     During all relevant periods, members of the Misle family

operated motor vehicle dealerships (the Misle dealerships) and

related businesses (collectively the Misle group).    The Misle

dealerships were located on the north and south sides of O Street

in Lincoln, Nebraska.    Until 1990, the three Misle brothers–-

Henry, Abram Misle (Abram or AM), and Julius Misle (Julius or

JM)–-were the primary family members involved in the operation of

the Misle dealerships.    Henry controlled and operated the

dealerships on the south side of O Street through a corporation,

Misle Chevrolet & Imports, Inc. (Chevrolet), and Abram controlled

and operated the dealerships on the north side of O Street

through a corporation, Park Place Pontiac-Cadillac-GMC, Inc.

(Park Place).   Julius operated other businesses in the Misle

group.

B.   The 1986 Reorganization

     Before 1986, the Misle group operated through various

partnerships and corporations, ownership of which varied from

entity to entity.   Effective August 14, 1986, the Misle group was

reorganized under a unified corporate structure (the

reorganization).    A new holding company, HJA, and several

subsidiary corporations, wholly owned either directly or
                               - 6 -

indirectly by HJA, were incorporated in connection with the

reorganization.   The subsidiary corporations owned the operating

assets used in the Misle group.   The prereorganization

partnerships and corporations either were included in the new

corporate structure or were dissolved and liquidated.

     1.   Dissolution of the Misle Brothers Partnership

     The Misle Brothers Partnership was one of the partnerships

dissolved and liquidated as part of the reorganization.     Pursuant

to and in furtherance of the reorganization, Henry, Abram, and

Julius executed a dissolution of partnership agreement dated

April 14, 1986.   In the dissolution of partnership agreement,

Henry agreed to assume personal liability for $686,467 of

intercompany loans owed by the Misle group to Chevrolet and

another company in the Misle group (the Chevrolet debt).5    Henry

also agreed to hold Abram and Julius harmless and to indemnify

them in the event they were ever required to pay any of the

liabilities Henry agreed to assume.

     2.   The Reorganization Documents

     Various documents and agreements, described below, were

entered into contemporaneously with the reorganization.




     5
      According to the dissolution of partnership agreement,
Abram and Julius collectively assumed personal liability for
$2,224,942 of intercompany loans owed to Park Place and other
businesses in the Misle group.
                                 - 7 -

          a.   Commercial Loan Agreement, FirsTier Notes,
               Security Agreement, and Related Guaranties

     FirsTier Bank (FirsTier), Chevrolet, BHM Corp. (BHM),6 and

Henry and Esther individually executed a commercial loan

agreement dated June 30, 1986.    In accordance with the commercial

loan agreement, Henry and Esther executed a $600,000 term note in

their individual capacities payable to FirsTier dated June 30,

1986 (the FirsTier note), and a security agreement to secure the

FirsTier note.   Chevrolet and BHM each executed separate

guaranties of the FirsTier note.    During the years at issue, the

FirsTier note was not included as a liability of HJA in HJA’s

books and records.

     Chevrolet and BHM executed a separate $756,708 term note

payable to FirsTier dated June 30, 1986 (the companies’ term

note), and a $100,000 revolving credit note payable to FirsTier

dated June 30, 1986.   Chevrolet and BHM each executed a separate

security agreement to secure the companies’ term note and the

revolving credit note.   Henry and Esther each executed an




     6
      BHM Corp. was a wholly owned subsidiary of Chevrolet that
owned real estate on which Chevrolet operated.
                                   - 8 -

individual guaranty of the companies’ term note and the revolving

credit note.7   The companies’ term note was included as a

corporate liability in HJA’s books and records.

          b.    Escrow Agreement

     Contemporaneously with the commercial loan agreement,

Chevrolet, BHM, FirsTier, Henry, and Esther8 executed an escrow

agreement in which FirsTier agreed to hold the sum of $750,000 in

escrow (the escrow fund) and to disburse the fund in accordance

with the escrow agreement.9   The escrow fund consisted of

$600,000 borrowed by Henry and Esther pursuant to the FirsTier

note and another $150,000, the source of which was not described

in the escrow agreement.    The escrow agreement provided that the

escrow fund would be disbursed upon the execution and transfer of



     7
      In the ensuing years, the parties to these documents
executed several amendments to the commercial loan agreement
extending or modifying the companies’ term note, the revolving
credit note, and/or the FirsTier note (the notes). All of the
parties to the notes, including Henry, executed each amendment
except that Henry did not execute a sixth amendment to commercial
loan agreement dated Apr. 5, 1995 (the sixth amendment), and
related documents.
     8
      Bryan Misle and Laurie Misle, Henry and Esther’s son and
daughter-in-law, also signed the escrow agreement in their
individual capacities; however, they were not referred to in the
escrow agreement other than in one clause, which read, “WHEREAS,
Borrowers [defined earlier in the document only as Henry and
Esther] desires [sic] to execute all loan documents to be entered
into by himself, Misle Chevrolet & Imports, Inc. and/or Bryan
Misle”.
     9
      Both the commercial loan agreement, dated June 30, 1986,
and the escrow agreement were executed on Aug. 12, 1986.
                                 - 9 -

all documents in accordance with an agreement for contribution of

assets, dated September 17, 1985, which was not made part of the

record in this case.

     The source of the additional $150,000 deposited into the

escrow account was Henry’s son, Bryan Misle (Bryan or BM).     Bryan

refinanced some personal real estate to obtain the remaining

$150,000 needed to complete the funding of the escrow.    On

several occasions, both Henry and Bryan characterized the

$150,000 transfer as a loan.10

     3.   Ownership of HJA Following the Reorganization

     Upon completion of the reorganization, Henry, Abram, and

Julius each owned 10,000 shares of HJA common stock, representing

a one-third ownership interest in HJA.

C.   Henry’s Sale of His HJA Stock

     1.   HJA’s Option To Acquire Henry’s Stock Under Exclusive
          Option Agreement

     On March 15, 1990, HJA, Henry, Abram, Julius, and Bryan

entered into an exclusive option agreement (EOA) pursuant to

which Henry, in consideration for the payment of $300,000 (the




     10
      In this litigation, Henry claimed that Bryan purchased
some of Henry’s HJA stock for $150,000 in 1990 and offered into
evidence a stock certificate in support of his claim. Although
we admitted the stock certificate into evidence, petitioners
failed to prove that it was a valid stock certificate or that it
represented a genuine and completed sale.
                              - 10 -

option price), granted HJA the option to purchase Henry’s stock

in HJA for $1,030,000.   The option price was to be paid as

follows:

                (i) The sum of Forty-Eight Thousand Six
           Hundred Fifty-Three and 62/100 Dollars
           ($48,653.62), already received by HM prior to
           execution of this Agreement;

                (ii) The sum of One Hundred Seventy-Five
           Thousand Three Hundred Forty-Six and 38/100
           ($175,346.38) at the time of the mutual
           execution and delivery of this Agreement;

                (iii) Transfer and relinquishment by AM
           and JM of all of their right, title and
           interest in and to the securities currently
           in the possession of HM, valued at
           approximately Seventy-Six Thousand Dollars
           ($76,000.00).

     Pursuant to the EOA, HJA transferred funds and assets with

an aggregate value of $286,41111 to Henry for the option to

purchase his stock.   The parties agree that $136,411 of this

amount was investment income to Henry in 1990.   The tax treatment

of the remaining $150,000 is at issue in this case.

     The EOA required that Henry’s HJA stock be placed in escrow

until the option to purchase Henry’s stock was exercised and the

sale closed.   The EOA, however, gave Abram and Julius effective

control over Henry’s HJA stock beginning in March 1990.


     11
       The parties agree that the amount actually paid was
$286,411, despite language in the EOA stating that the aggregate
option price was $300,000. The parties also agree that the
entire payment is taxable in 1990. The only issue regarding the
option payment is to whom the disputed balance of $150,000 is
taxed.
- 11 -
                                - 12 -

     2.   The Restrictive Covenant

     On the condition that HJA pay the option price to Henry as

required by the EOA, Henry agreed to be bound by a restrictive

covenant clause, which provided that Henry must not engage in

competition directly or indirectly with HJA, Abram, Julius,

Chevrolet, or Park Place for 5 years commencing on April 1, 1990

(covenant not to compete).12    In consideration for the covenant

not to compete and as an inducement for Henry to enter into the

EOA, HJA agreed to compensate Henry as follows:

     HJA shall pay to HM the sum of Two Million Eight
     Hundred Fifty-Two Thousand Dollars ($2,852,000.00),
     payable in one hundred twenty (120) equal consecutive
     monthly installments of Twenty-Three Thousand Seven
     Hundred Sixty-Six and 67/100 Dollars ($23,766.67) each,
     such payments to compensate HM for his agreement not to
     compete, as herein provided.

     3.   Related Agreements

     In order to coordinate the covenant not to compete payments

HJA owed to Henry with the payments Henry owed on the FirsTier

note and the Chevrolet debt, the parties to the EOA entered into

two additional agreements.     First, HJA, Henry, Abram, and Julius

entered into a side letter agreement dated March 15, 1990 (the

side letter agreement).   The side letter agreement provided for

the establishment of a “sweep account” at National Bank of

Commerce (NBC), into which the covenant not to compete payments



     12
      The parties have stipulated that the covenant not to
compete is a legal and enforceable covenant under Nebraska law.
                               - 13 -

were to be deposited.13   Second, HJA, NBC, Henry, Abram, and

Julius entered into an agreement dated August 27, 1990 (the sweep

account agreement), which established the sweep account agreed

upon in the side letter agreement.      The sweep account agreement

required HJA to deposit the covenant not to compete payments

($23,767 per month for 120 months) into the sweep account.      It

also required NBC to make specified disbursements of those

deposited funds, including $7,999 per month to FirsTier and

$6,393 per month to Chevrolet “until the obligation of HM is

fully paid”.14   The remainder of the sweep account funds was to

be paid to Henry and to the appropriate Federal, State, and city

income tax agencies to satisfy Henry’s tax obligations resulting

from the purchase of his stock and the covenant not to compete

payments.

     4.   The Sweep Account Payments

     Pursuant to the EOA and the side letter agreement, HJA paid

the option price to Henry and began to deposit the covenant not

to compete payments into the sweep account.     HJA continued to




     13
      Henry and Esther attached the side letter agreement to
their 1992 Federal income tax return.
     14
      The monthly payment to FirsTier under the sweep account
agreement equaled the monthly payment required by the FirsTier
note signed by Henry and Esther in their individual capacities,
as modified by the Apr. 5, 1990, term note. The monthly payment
to Chevrolet under the sweep account agreement equaled the
monthly payment Henry was required to make on the Chevrolet debt.
                              - 14 -

deposit the payments until January 1991 when a dispute arose

among the parties to the sale.

     5.   HJA’s Exercise of the Option To Purchase Henry’s Stock

     Under the EOA, if HJA exercised its option, HJA was entitled

to purchase Henry’s 10,000 shares of HJA stock15 for the sum of

$1,030,000, payable in installments as provided in the EOA.      HJA

exercised its option to purchase Henry’s stock on or about

January 11, 1991.

     6.   The Baird, Kurtz Letter

     Baird, Kurtz, & Dobson (Baird, Kurtz), the accounting firm

for HJA and related companies for 25 years, was also Henry and

Esther’s personal accounting firm until 1990 and prepared their

tax returns for the tax years up to and including 1989.   By

letter dated April 10, 1990, Baird, Kurtz wrote to Henry to

explain the tax consequences of payments to be made pursuant to

the EOA (the Baird, Kurtz letter).16   The Baird, Kurtz letter

advised, among other things, that, for tax purposes, (1) payments

received from HJA for Henry’s stock under the EOA would be

treated as proceeds from the sale of a capital asset, and the



     15
      Bryan did not assert any ownership interest in Henry’s HJA
stock in connection with the EOA.
     16
      The letter was written by Robert K. Muehling, partner-in-
charge of Baird, Kurtz, who knew Henry’s financial situation.
Henry claims that he never received this letter, although a copy
of the letter was attached to Henry and Esther’s 1992 income tax
return.
                                - 15 -

resulting capital gain would be recognized using the installment

sale method of accounting, and (2) the covenant not to compete

payments made under the EOA, at $23,767 per month, would be taxed

as ordinary income to Henry in the year received.     The Baird,

Kurtz letter also stated with respect to the $150,000 from Bryan

used to fund the escrow account that “It is our understanding

that you [Henry] owe Bryan $150,000, which will be repaid in

1990.     Any additional amounts transferred to him [Bryan] would

constitute gifts”.     Baird, Kurtz attached a schedule to its

letter entitled “CASH FLOW PROJECTIONS-–HENRY MISLE” which

assumed, among other things, that Henry’s debts to Chevrolet and

FirsTier would remain intact and would be amortized over 10 years

and that Bryan would receive $150,000 from Henry in 1990 as

repayment of Bryan’s loan.

D.   State Litigation

     In January 1991, disputes arose among HJA, Henry, Abram, and

Julius relating to the EOA.     Sometime before January 21, 1991,

HJA stopped making payments into the sweep account under the EOA.

On January 21, 1991, Henry and Bryan filed a lawsuit in the

District Court of Lancaster County, Nebraska, against HJA,

Abram,17 and Julius, alleging breach of the EOA (the State

litigation).     The defendants counterclaimed, alleging

misrepresentation and a breach of covenants made by Henry in the

     17
      During the course of the State litigation, Abram died and
his estate was substituted as a party.
                               - 16 -

EOA.    The primary issues in the State litigation were:   (1)

Whether the defendants breached the EOA by discontinuing payments

into the sweep account, (2) whether the plaintiffs made

misrepresentations when executing the EOA, and (3) whether Henry

breached the covenant not to compete provision of the EOA.

       The State litigation was tried from July 29 through August

1, 1996.    Following the trial, a modified memorandum opinion and

judgment (modified judgment), dated January 3, 1997, was entered

by the State court in which the court held, among other things,

that (1) the covenant not to compete was valid and enforceable,

(2) Henry did not violate the covenant not to compete, and (3)

HJA was obligated to complete the payment obligations under the

covenant not to compete.    The modified judgment was not appealed

by any of the litigants.

       Pending resolution of the State litigation, HJA continued to

make payments directly on the FirsTier note and the Chevrolet

debt.    On December 29, 1997, the State court entered a journal

entry pursuant to motions, filed by the defendants HJA and Abram,

for an order nunc pro tunc and for partial satisfaction of

judgment.    The journal entry provided that HJA was entitled to a

credit against the covenant not to compete payments for certain

payments made by HJA on the FirsTier note and the Chevrolet debt.

The journal entry stated, in part:

            IT IS THEREFORE ORDERED and DECREED as follows:
                                    - 17 -

                     *   *      *     *      *   *   *

          2. That Defendants’ Motion for Partial
     Satisfaction of Judgment for payments made to First
     Bank [FirsTier] and Park Place Chevrolet [Chevrolet] by
     Defendants from and after August 1, 1996 is granted
     with Defendant to be given credit on the Modified
     Judgment for the sum of $216,165.31 representing
     payments from September 1, 1996 through December 17,
     1997 of $216,165.31.

                     *   *      *     *      *   *   *

          4. To settle and resolve certain conflicts which
     have arisen in regards to the amount payable pursuant
     to the * * * Modified Judgment, the Parties, in open
     Court, have indicated their agreement to the following:

                     *   *      *     *      *   *   *

               (b)   The note of First Bank (f/k/a FirsTier
                     Bank), referenced in the “side letter
                     agreement,” dated March 15, 1990, to
                     which Henry Misle was an accommodating
                     Party, has been paid by the Defendants,
                     in full, without Henry Misle’s knowledge
                     or cooperation and the Defendants are
                     due a credit on the Modified Judgment
                     * * *;

               (c)   Between the dates of January 1 and
                     January 8, 1998, the Defendants will
                     cause to be retired the Park Place
                     Chevrolet note, [Chevrolet debt]
                     referenced in the “side letter
                     agreement,” which will satisfy said
                     indebtedness of Henry Misle completely
                     and the Defendants will be given a
                     credit on the Modified Judgment * * *;


E.   HJA’s Payments to or for the Benefit of Henry

     During the years in issue, HJA made covenant not to compete

payments to Henry or for his benefit in the following amounts:

       Year                  Covenant not to compete payments1
                                 - 18 -

         1990                             $213,900
         1991                              182,088
         1992                              164,447
         1993                              176,5032
         1994                              165,003
         1995                              166,410
         1996                              167,817
     1
      The parties stipulated the amounts that HJA paid under the
covenant not to compete, and those amounts are summarized here.
The amounts listed for 1991, 1995, and 1996 differ from the
amounts shown on the relevant Forms 1099 and in the letters of
explanation. The amounts shown for 1994, 1995, and 1996 were
paid by HJA and deducted, but respondent has not yet disallowed
those deductions.
     2
      In 1993, HJA made payments directly to FirsTier and
Chevrolet in the amount of $165,003. HJA also made a direct
payment to Henry in the amount of $3,000 and credited it as a
covenant not to compete payment. In 1993, Chevrolet made an
$8,500 payment on personal insurance for Henry and credited the
payment as a covenant not to compete payment.

Part of the covenant not to compete payments was applied to the

Chevrolet debt and the FirsTier note, either through the sweep

account or directly, as follows:

     Year       Chevrolet debt        FirsTier note    Total

     1990          $38,361                 $31,998    $70,359
     1991            6,394                   7,999     14,393
     1992           76,721                  87,726    164,447
     1993           76,722                  88,281    165,003
     1994           76,721                  88,282    165,003
     1995           76,722                  89,688    166,410
     1996           76,721                  91,096    167,817
                                 - 19 -

Part of the covenant not to compete payments ($17,000 in 199018

and $65,192 in 1991) was disbursed from the sweep account for

other purposes.   The parties agree that these amounts were

ordinary income to Henry and Esther and deductible by HJA.

F.   Tax Treatment of Covenant Not To Compete Payments

     For each taxable year 1990 through 1996, inclusive, HJA

issued a Form 1099 and sent a letter of explanation to Henry that

showed the amount of covenant not to compete payments made to

Henry or for his benefit in that year.    In 1990, Henry and Esther

reported $161,036 of the $213,900 of the covenant not to compete

payments as ordinary income.19    Henry and Esther did not include

any other covenant not to compete payments in income for any of

the years at issue.

     Henry and Esther claimed interest expense deductions on

their joint individual Federal income tax returns for interest

payments made on the Chevrolet debt as follows:

             Year                     Interest deduction

             1989                           Unknown
             1990                           $43,440




     18
      The parties agree that Henry is entitled to deduct, as an
itemized deduction, the trustee fee of $500 paid in 1990 from the
sweep account.
     19
      The parties have agreed that the remainder of the 1990
convenant not to compete payments, which was not disbursed to
Henry until 1991, was ordinary income to Henry in 1991.
                                - 20 -

Henry and Esther claimed interest expense deductions on their

joint individual Federal income tax returns for payments made on

the FirsTier note as follows:

               Year             Amount of deduction

               1986                      Unknown
               1987                      $64,199
               1988                      $57,987
               1989                      Unknown
               1990                      $72,540

Henry and Esther did not claim interest deductions on the

FirsTier note or the Chevrolet debt after 1990; however, they did

continue to carry over their unused interest deductions from 1990

until at least 1996.

G.   Delinquent Returns of Henry and Esther

     Henry and Esther filed their 1989, 1990, 1992, 1994, and

1996 Forms 1040, U.S. Individual Income Tax Return, late.     As

part of their 1992 tax return, Henry and Esther filed a Form

8275, Disclosure Statement, with attachments.      Henry and Esther’s

1996 return also contained a disclosure statement, but the

statement was not made on Form 8275.

     Henry failed to file an individual income tax return for

1995.

H.   Notices of Deficiency

     Respondent examined Henry and Esther’s 1990, 1991, 1992,

1993, and 1994 tax returns and prepared an “Individual Income Tax

Return Substitute for Return” for Henry with filing status
                               - 21 -

“Married Filing Separate” for 1995.     On April 9, 1997, respondent

mailed Henry and Esther a notice of deficiency for 1989, 1990,

1991, 1992, and 1993.   On August 28, 1998, respondent mailed

Henry and Esther a notice of deficiency for 1994 and 1996.    On

August 28, 1998, respondent also mailed Henry a notice of

deficiency for 1995.    In the notices, respondent determined that

the covenant not to compete payments were income to Henry.    In

the notice of deficiency for 1990, respondent also determined

that Henry must report as income the remaining $150,000 of the

option price transferred by Henry to Bryan.

     Respondent also examined HJA’s 1990, 1991, 1992, and 1993

tax years.   After examining HJA’s 1990 return, respondent

proposed increasing HJA’s taxable income, but the adjustment did

not result in a deficiency because HJA had net operating losses

that absorbed the additional income.    For that reason, respondent

did not determine an income tax deficiency for 1990 with respect

to HJA.

     On August 28, 1997, respondent issued a notice of deficiency

to HJA for tax years 1991, 1992, and 1993, in which he disallowed

HJA’s deductions for the covenant not to compete payments.    In so

doing, respondent has taken inconsistent positions with respect

to Henry and Esther, on the one hand, and HJA, on the other, in

order to avoid the possibility of a whipsaw.
                              - 22 -

                              OPINION

I. Whether Payments Made by HJA in Connection With an Option and
Stock Purchase Agreement, Which Were Applied to the FirsTier Note
and the Chevrolet Debt, Are Taxable to Henry and Esther as
Ordinary Income and Deductible by HJA, Inc., & Subsidiaries

     A.   The Parties’ Arguments

     Henry and Esther contend, in effect, that any payments made

by HJA on the FirsTier note and the Chevrolet debt, either

directly or through the sweep account, did not result in taxable

income to them because the payments did not qualify as covenant

not to compete payments, nor did the payments relieve them of any

primary liability under the FirsTier note and the Chevrolet debt.

Rather, Henry and Esther contend that the payments were made by

HJA to pay down HJA’s own liabilities as to which Henry and/or

Esther were only accommodation parties.   HJA disagrees, claiming

that Henry and Esther were primary obligors as to the FirsTier

note and that Henry was the primary obligor as to the Chevrolet

debt; thus, payments made to FirsTier and Chevrolet by HJA from

1990 through 1996 are ordinary income to Henry and Esther and

deductible by HJA.20


     20
      Respondent did not present an argument as to this issue
and makes no assumptions as to Henry and Esther’s status in
relation to the loans. Respondent concedes that if we hold that
Henry and Esther are the primary obligors on the FirsTier note
and the Chevrolet debt, then HJA is entitled to a full deduction
for the payments that were applied to those liabilities, and
Henry and Esther must include the payments as ordinary income on
their tax returns. Alternatively, respondent concedes that if
Henry and Esther are determined to be accommodation parties on
                                                   (continued...)
                              - 23 -

     With respect to the FirsTier note, Henry and Esther contend

that payments made by HJA are not includable in their taxable

income because:   (1) A Nebraska State court already has held that

Henry was merely an accommodation party on the FirsTier note and,

therefore, the doctrine of collateral estoppel requires that this

Court find he was not a primary obligor with respect to that

debt, and (2) even if the doctrine of collateral estoppel does

not apply, Henry was not the primary obligor on the FirsTier

loan, and, therefore, he was not required to recognize income

when the loan was repaid.

     With respect to the Chevrolet debt, Henry and Esther argue

that Henry was not the primary obligor because (1) the Chevrolet

debt consisted of intercompany debts owed to Chevrolet by other

companies in the Misle group; (2) when HJA, the successor parent

corporation in the 1986 reorganization, paid off the Chevrolet

debt, it was paying off its own debt, not Henry’s debt; and (3)

since Henry was not the primary obligor on the Chevrolet debt,

HJA’s repayment of that debt did not relieve Henry of any

personal liability.   Henry also argues that he did not receive




     20
      (...continued)
the FirsTier note and the Chevrolet debt, then HJA is entitled to
a deduction only for the total amount of the covenant not to
compete payments less the payments on the FirsTier note and the
Chevrolet debt (with adjustments in related interest income and
interest expense), and Henry and Esther must report a
corresponding amount as ordinary income on their tax returns.
                                     - 24 -

any of the intercompany loan money personally; rather, the money

was borrowed to finance ongoing corporate operations.

     B.    Collateral Estoppel Argument

     Henry and Esther base their collateral estoppel argument

solely on language in the State court journal entry, which stated

in part:

                 4. To settle and resolve certain conflicts
            which have arisen in regards to the amount payable
            pursuant to the * * * Modified Judgment, the
            Parties, in open Court, have indicated their
            agreement to the following:

                            *    *   *   *   *   *   *

                      (b)       The note of First Bank (f/k/a
                                FirsTier Bank), referenced in
                                the “side letter agreement,”
                                dated March 15, 1990, to which
                                Henry Misle was an
                                accommodating Party, has been
                                paid by the Defendants, in
                                full, * * * [Emphasis added].

HJA responds that collateral estoppel cannot be applied against

it because the issue of whether Henry was an accommodation party

was never litigated in the State litigation, and a final and

binding judgment was not entered on the merits with respect to

that issue.

     The doctrine of collateral estoppel applies to Federal

income tax cases.    See United States v. International Bldg. Co.,

345 U.S. 502, 505 (1953); Commissioner v. Sunnen, 333 U.S. 591,

598 (1948).    “Under collateral estoppel, once an issue is

actually and necessarily determined by a court of competent
                              - 25 -

jurisdiction, that determination is conclusive in subsequent

suits based on a different cause of action involving a party to

the prior litigation.”   Montana v. United States, 440 U.S. 147,

153 (1979).

     In cases raising an issue concerning the preclusive effect

of prior State court litigation on subsequent Federal litigation,

the application of preclusion doctrines such as res judicata

(sometimes referred to as claim preclusion) and collateral

estoppel (sometimes referred to as issue preclusion) is required

by the Full Faith and Credit Act, 28 U.S.C. sec. 1738 (1994),

which provides, in pertinent part, that “judicial proceedings of

any court of any such State * * *.     * * * shall have the same

full faith and credit in every court within the United States and

its Territories and Possessions as they have by law or usage in

the courts of such State”.   See Migra v. Warren City School Dist.

Bd. of Educ., 465 U.S. 75, 81 (1984); see also Allen v. McCurry,

449 U.S. 90, 96 (1980) (“Congress has specifically required all

Federal courts to give preclusive effect to state-court judgments

whenever the courts of the State from which the judgments emerged

would do so”).

     In this case, the State litigation occurred in Nebraska.      We

must apply Nebraska law in determining whether the State

litigation must be given preclusive effect in this case.    See

Migra v. Warren City School Dist. Bd. of Educ., supra at 81.
                               - 26 -

       Under Nebraska law, there are four requirements for the

doctrine of collateral estoppel to apply:    (1) The identical

issue must have been decided in a prior action, (2) a final

judgment must have been rendered on the merits, (3) the party

against whom the rule is applied must have been a party or in

privity with a party to the prior action, and (4) there must have

been an opportunity to litigate the issue fully and fairly in the

prior action.    See Stewart v. Hechtman, 581 N.W.2d 416, 418-419

(Neb. 1998); Cunningham v. Prime Mover, Inc., 567 N.W.2d 178, 181

(Neb. 1997).

       With respect to the third requirement, there is no dispute

that HJA was a party to the State litigation.    See Cunningham v.

Prime Mover, Inc., supra at 181 (as to status of parties, only

requirement is that party against whom rule is being applied was

party or in privity with party to prior action).    There is

considerable disagreement, however, regarding the remaining

requirements.

       In order for collateral estoppel to apply under Nebraska

law, the identical issue must have been litigated in the prior

action.    An issue is considered “identical” in the absence of a

significant factual change.    See Stewart v. Hechtman, supra at

419.    Henry’s liability under the FirsTier note was not an issue

in the State litigation.    The only issues raised in that

litigation related to the enforceability, breach, and validity of
                                - 27 -

the EOA and the covenant not to compete clause therein.    Indeed,

in its modified judgment the State court did not even address

whether Henry was an accommodation party as to the FirsTier

note-–the only reference to Henry’s status as an accommodation

party was in the postjudgment journal entry.    In this case, the

issue we must decide is whether Henry and Esther are the primary

obligors on the FirsTier note.    The issues are not identical;

thus, the first requirement is not met.

       The remaining two requirements for collateral estoppel to

apply also are not met in this case.     In United States v.

International Bldg. Co., supra at 506, the Supreme Court held

that

       A judgment entered with the consent of the parties may
       involve a determination of questions of fact and law by
       the court. But unless a showing is made that that was
       the case, the judgment has no greater dignity, so far
       as collateral estoppel is concerned, than any judgment
       entered only as a compromise of the parties.

In this case, the State court did not enter a judgment regarding

whether Henry and Esther were primary obligors or accommodation

parties with respect to the FirsTier note.    Rather, it simply

made a journal entry that referred to Henry as an “accommodating

Party” in connection with a settlement of “certain conflicts

which have arisen in regards to the amount payable pursuant to

* * * the Modified Judgment”.    Henry and Esther made no showing

whatsoever as to the nature of the journal entry or that it

embodied determinations of fact and law by the State court.
                                - 28 -

Moreover, on the record before us, we cannot conclude that HJA

litigated or had a full and fair opportunity to litigate the

issue of whether Henry and Esther were accommodation parties

rather than primary obligors on the FirsTier note.

     We hold that the doctrine of collateral estoppel does not

preclude HJA from litigating the issue of whether Henry was an

accommodation party on the FirsTier note.

     C.   Accommodation Party Status Under Nebraska Law

     Before 1992, Nebraska law defined “accommodation party” as

“one who signs the instrument in any capacity for the purpose of

lending his name to another party to it.”    Neb. Rev. Stat. U.C.C.

sec. 3-415(1) (Reissue 1980).    In 1991, Neb. Rev. Stat. U.C.C.

sec. 3-415 was revised and renumbered as Neb. Rev. Stat. U.C.C.

sec. 3-419 (Reissue 1992).   Neb. Rev. Stat. U.C.C. sec. 3-419(a)

defines instruments signed for accommodation as follows:

     If an instrument is issued for value given for the
     benefit of a party to the instrument (“accommodated
     party”) and another party to the instrument
     (“accommodation party”) signs the instrument for the
     purpose of incurring liability on the instrument
     without being a direct beneficiary of the value given
     for the instrument, the instrument is signed by the
     accommodation party “for accommodation”. [Emphasis
     added.]

The term “instrument” means a “negotiable instrument.”    See Neb.

Rev. Stat. U.C.C. sec. 3-104(b) (Reissue 1992).

     The intent of the parties determines whether a party is an

accommodation party or the principal obligor of an instrument.
                               - 29 -

See Ashland State Bank v. Elkhorn Racquetball, Inc., 520 N.W.2d

189, 194 (Neb. 1994); Marvin E. Jewell & Co. v. Thomas, 434

N.W.2d 532, 534 (Neb. 1989).   A party claiming accommodation

party status under Nebraska law bears the burden of proving its

right to that status.   See Rule 142(a); Marvin E. Jewell & Co. v.

Thomas, supra at 536.

          1.   FirsTier Note

     Neb. Rev. Stat. U.C.C. section 3-419(a) and its predecessor

require that both the accommodated party and the accommodation

party be parties to the instrument.     We are aware of no cases

that have held otherwise.

     The Court of Appeals for the Eighth Circuit, to which an

appeal in this case would lie, has addressed specifically the

elements necessary to qualify as an accommodation party under

former Neb. Rev. Stat. section 3-415(1).     See Pioneer Ins. Co. v.

Gelt, 558 F.2d 1303, 1310-1311 (8th Cir. 1977).     In Pioneer Ins.

Co., suit was instituted by Pioneer Insurance Co. (Pioneer)

against Harry Gelt to recover on a promissory note.     At the

request of a personal friend, Roger Sack, Gelt agreed to act as

the ostensible buyer of an investment corporation so that Sack

could avoid having to obtain the Securities and Exchange

Commission’s approval of the purchase.     Sack assured Gelt that

Gelt would be held harmless in connection with the overall

transaction and that he would not be exposed to any financial
                                - 30 -

risk.     Gelt executed certain promissory notes at closing, which

were renewed later.    Sack was not a party to the notes.   The

holder of the notes subsequently sued Gelt to recover the unpaid

balance.     Gelt contended he was an accommodation maker of the

notes and, for that reason, was not liable to Pioneer on the

renewal note.

     The Court of Appeals for the Eighth Circuit found that both

the original note and the renewal note were executed by Gelt, as

maker, and the respective payees.     There were no other parties to

the instruments.    The court held that Gelt was not an

accommodation party under Nebraska law because he “did not ‘lend

his name’ to any other parties to the instrument”.     Id. at 1311.

The court noted that “While there is no doubt that Gelt executed

the instruments as an accommodation to Sack, that did not make

him an ‘accommodation party’ within the meaning of [Neb. Rev.

Stat. U.C.C. sec.] 3-415(1) and (5).”     Id.

        In this case, Henry and Esther were the only obligors under

the FirsTier note and the first five extensions or modifications

of that note.     This fact is consistent with other evidence in the

record that overwhelmingly establishes the parties intended for

Henry and Esther to be the primary obligors on the FirsTier note.

See Ashland State Bank v. Elkhorn Racquetball, Inc., supra at

194; Marvin E. Jewell & Co. v. Thomas, supra at 534.
                                - 31 -

     Accordingly, we hold that Henry and Esther were the primary

obligors on the FirsTier note and that the payments made by HJA

on the FirsTier note were taxable as ordinary income to Henry and

Esther in the years determined by respondent and were deductible

by HJA.

          2.   Chevrolet Debt

     Whether Henry was an accommodation party with respect to the

Chevrolet debt depends, in the first instance, on whether the

dissolution of partnership agreement qualifies as a negotiable

instrument under Nebraska law.    See Neb. Rev. Stat. U.C.C. sec.

3-104(b), which defines the term “instrument” used in Neb. Rev.

Stat. U.C.C. sec. 3-419(a) to mean “negotiable instrument.”

     Neb. Rev. Stat. U.C.C. section 3-104(a) provides that an

instrument is negotiable if the following requirements are met:

(1) The promise or order must be unconditional; (2) the amount of

money must be “a fixed amount of money, with or without interest

or other charges described in the promise or order”; (3) the

promise or order must be “payable to bearer or to order”; (4) the

promise or order must be payable “on demand or at a definite

time”; and (5) the promise or order must not state “any other

undertaking or instruction by the person promising or ordering

payment to do any act in addition to the payment of money”, with

exceptions that do not apply in this case.
                                - 32 -

     The pertinent provision of the dissolution of partnership

agreement stated:

          1. Henry hereby agrees to take in full
     satisfaction of his partnership interest in Misle
     Brothers Partnership the assets listed under his name
     on Exhibit A, * * * and to assume the liabilities
     listed on such schedule, which total $686,467. It is
     understood that the $638,186 of liability listed as
     inter-company loans are payable to Misle Chevrolet
     Company in the amount of $592,659 and to Novo Imports,
     Inc. in the amount of $45,527. Henry further agrees to
     hold harmless Abram and Julius and to indemnify them in
     the event they shall ever be required to pay any of the
     liabilities he has agreed hereunder to assume.

This provision fails to satisfy the requirements for a negotiable

instrument since it did not create a debt payable to bearer or

order, and the amounts Henry assumed were not payable “on demand

or at a definite time”.    The dissolution of partnership agreement

is exactly what it purported to be and nothing more.     It was an

agreement to dissolve the Misle Brothers Partnership, wherein

Henry agreed to assume outstanding intercompany liabilities.     It

was not an unconditional promise or order to pay a fixed sum of

money.   See Ford Motor Credit Co. v. All Ways, Inc., 546 N.W.2d

807, 810 (Neb. 1996).     Therefore, the dissolution of partnership

agreement does not meet the requirements of a “negotiable

instrument” under Neb. Rev. Stat. U.C.C. section 3-104.

     Since the liability that Henry assumed for the Chevrolet

debt did not arise from a negotiable instrument under Nebraska

law, Henry was not an accommodation party with respect to the

Chevrolet debt.     We hold that Henry was the primary obligor on
                               - 33 -

the Chevrolet debt and that the payments made by HJA on the

Chevrolet debt were taxable as ordinary income to Henry in the

years determined by respondent and were deductible by HJA.

     D.   Alternative Arguments

     Relying upon Landreth v. Commissioner, 50 T.C. 803 (1968),

Henry and Esther argue that whether a person is a primary obligor

or an accommodation party depends on whether the person, because

of the loan, “receives a nontaxable increase in assets” at the

time of the distribution of the loan proceeds.    Henry and Esther

also cite Payne v. Commissioner, T.C. Memo. 1998-227, revd. on

other grounds 224 F.3d 415 (5th Cir. 2000), and Whitmer v.

Commissioner, T.C. Memo. 1996-83, in support of their argument

that “the repayment of debt that one-–as a guarantor or other

contingent liability debtor-–did not receive the actual benefit

of is not taxable income to the non-benefitting contingent

liability debtor.”    Henry and Esther’s argument based on these

cases is misplaced.

     Our decisions in Landreth v. Commissioner, supra, Payne v.

Commissioner, supra, and Whitmer v. Commissioner, supra, are

distinguishable.   In Landreth, Payne, and Whitmer, the taxpayers

were guarantors, not primary obligors.    Because the taxpayer in

each case was a guarantor, we held that the taxpayer did not

receive discharge of indebtedness income when the liabilities he

had guaranteed were discharged.
                              - 34 -

     Since Henry and Esther were not guarantors of the loans at

issue in this case, their reliance on Landreth, Payne, and

Whitmer does not help them.

II. Whether Henry May Reduce the Gross Amount of the Option
Price Paid to Him or for His Benefit Pursuant to the Option and
Stock Purchase Agreement by $150,000, the Amount Allegedly Owed
and Paid to Bryan

     The clear language of the EOA indicates that “In

consideration of the grant of the Option by HM to HJA, HJA shall

pay to HM the sum of * * * ($300,000.00)”.   Indeed, there is no

dispute that Henry received $286,411 in 1990 for the option.    The

only dispute is whether Henry may exclude from his 1990 taxable

income $150,000 of the $286,411 option payment.

     Henry and Esther claim in this case that the remaining

$150,000 of the option payment was owed to Bryan for HJA stock

that Bryan acquired in 1990 from Henry.   Respondent disagrees,

claiming that the full amount of the option price must be

reported by Henry as investment income on his 1990 Federal income

tax return.   We agree with respondent.

     The record overwhelmingly supports respondent’s position

that Henry received the $150,000 as part of the consideration

paid by HJA for the option to purchase Henry’s stock under the

EOA and that the subsequent payment by Henry to Bryan of a

portion of that consideration was a loan repayment to Bryan.

When the EOA giving HJA an exclusive option to purchase all of

Henry’s 10,000 shares of HJA’s stock was executed, Bryan, a party
                              - 35 -

to the EOA, did not assert any ownership interest in HJA.     Bryan

testified that at the time the EOA was executed, both he and

Henry took the position that Bryan did not own any HJA stock.    By

their signatures on the EOA, Henry and Bryan specifically

warranted that Henry was the sole owner of 10,000 shares of HJA

stock.   There was no statement anywhere in the EOA that Bryan

owned any interest in HJA or that Bryan was entitled to receive

any part of the option payment.   To the extent that Bryan had any

interest in the Misle group, those interests were addressed

specifically in the EOA.   For example, the EOA contained

provisions with respect to Bryan’s ownership interest in BHM, the

allocation of fringe benefits to Bryan in consideration for his

compliance with the terms of the EOA, and the return of funds in

a company bank account belonging to Bryan.   Lastly, Sheryl

Matthes, the controller of HJA since 1990, testified there were

no entries in HJA’s books indicating Bryan ever owned stock in

HJA; the only entries relative to HJA’s stock ownership were the

three original entries indicating that Henry, Abram, and Julius

owned 10,000 shares of HJA stock each.   Accordingly, we sustain

respondent’s determination.

III. Whether Henry and Esther are Liable for Accuracy-Related
Penalties for Tax Years 1989 Through 1994 and 1996 Under Section
6662(a)

     Respondent determined that Henry and Esther are liable for

accuracy-related penalties under section 6662(a) and (b)(2) (for
                               - 36 -

substantial understatement) for each of the years 1989 through

1994 and 1996.   Alternatively, with respect to the years 1989

through 1994, respondent determined that petitioners are liable

for accuracy-related penalties under section 6662(a) and (b)(1)

(for negligence).

     Section 6662(a) and (b)(2) imposes a penalty equal to 20

percent of the portion of an underpayment of income tax

attributable to any substantial understatement of tax.      A

substantial understatement occurs when the amount of the

understatement exceeds the greater of 10 percent of the amount of

tax required to be shown on the return or $5,000 ($10,000 for

corporations).   See sec. 6662(d)(1).    The amount of an

understatement on which the penalty is imposed will be reduced by

the portion of the understatement that is attributable to the tax

treatment of an item (1) that was supported by “substantial

authority” or (2) for which the relevant facts were “adequately

disclosed in the return or in a statement attached to the

return”.   See sec. 6662(d)(2)(B).21    Additionally, no penalty

will be imposed with respect to any portion of an underpayment if

it is shown that there was reasonable cause for such portion and

the taxpayer acted in good faith with respect to such portion.

See sec. 6664(c)(1).


     21
      For 1993 and later years, adequate disclosure must be
coupled with “a reasonable basis for the tax treatment”. See
sec. 6662(d)(2)(B)(ii).
                              - 37 -

     Substantial authority exists when the weight of authority

supporting the treatment of an item is substantial as compared to

the weight of authority for the contrary treatment.   See sec.

1.6662-4(d)(3)(i), Income Tax Regs.    In determining whether there

is substantial authority, all authorities relevant to the tax

treatment of an item, including those authorities pointing to a

contrary result, are taken into account.   See id.    For this

purpose, authorities include statutory and regulatory provisions,

legislative history, administrative interpretations by the

Commissioner, and court decisions, but not conclusions reached in

treatises or legal periodicals.   See Booth v. Commissioner, 108

T.C. 524, 578 (1997); sec. 1.6662-4(d)(3)(iii), Income Tax Regs.

     Adequate disclosure for purposes of section 6662 is made in

one of two ways.   A disclosure is adequate either if the

disclosure is made on a properly completed form attached to the

taxpayer’s return, see sec. 1.6662-4(f)(1), Income Tax Regs., or

if the disclosure is permitted by annual revenue procedure to be

made on the tax return itself and is made in accordance with the

applicable forms and instructions, see sec. 1.6662-4(f)(2),

Income Tax Regs.   If the annual revenue procedure does not permit

the disclosure of an item on the face of the return, disclosure

is adequate only if the disclosure is made on a properly

completed Form 8275, Disclosure Statement, or Form 8275-R,

Regulation Disclosure Statement, attached to the taxpayer’s
                               - 38 -

return for the year the disclosure applies.     See id.   Disclosure

of a recurring item must be made for each year in which the item

is taken into account.    See id.

     In the notices of deficiency for 1989 through 1994 and 1996,

respondent proposed several adjustments with respect to Henry and

Esther’s tax returns.    Most of those adjustments were settled

before trial or are computational.      As to those items settled in

favor of respondent, Henry and Esther made no showing at trial,

and did not argue on brief, that their tax treatment of those

items was supported by substantial authority or by adequate

disclosure as defined by section 1.6662-4(f)(1) and (2), Income

Tax Regs.   Henry and Esther’s only argument in support of their

position that they should not be liable for the penalties was

contained in their reply brief and was limited to the covenant

not to compete payments that were applied to the FirsTier note

and the Chevrolet debt.    Consequently, we hold that Henry and

Esther have failed to prove that the section 6662 penalty should

not apply with respect to the settled and computational issues.

See Rule 149(b).

     With respect to the covenant not to compete payments,

although Henry and Esther failed to address the section 6662

penalties in their opening brief, they did argue in their reply

brief that the accuracy-related penalty should not be imposed

with respect to the HJA payments applied to the FirsTier note and
                               - 39 -

the Chevrolet debt because they had substantial authority for

their position and that they were entitled to relief under

section 6664.   Respondent anticipated these arguments in his

opening and reply briefs.   Although we could treat Henry and

Esther’s failure to address the accuracy-related penalties in

their opening brief as a concession or abandonment of the issue,

we decline to do so under these circumstances.   See Rule

151(e)(5); Lencke v. Commissioner, T.C. Memo. 1997-284.     Instead,

we shall consider the arguments made by Henry and Esther with

respect to the disputed payments.

     Henry and Esther argue that their reporting position

regarding the FirsTier and Chevrolet payments was made on a bona

fide factual belief that they were not the primary obligors of

the FirsTier note or the Chevrolet debt and, therefore, were not

obligated to report as their income the payments made by HJA on

the two liabilities.   Henry and Esther also argue that respondent

has not directed the Court’s attention to any rule, regulation,

or case law that required Henry and Esther to declare the

payments as income.    They assert that there is significant case

law in support of their reporting position; therefore, they had a

reasonable basis for their view, and they should not be liable

for the accuracy-related penalties.

     Henry and Esther did not have substantial authority for

their positions.   See sec. 6662(d)(2)(B)(ii).   Although they rely
                               - 40 -

on Landreth v. Commissioner, 50 T.C. 803 (1968), Payne v.

Commissioner, T.C. Memo. 1998-227, and Whitmer v. Commissioner,

T.C. Memo. 1996-83, as substantial authority for their reporting

position, their position is not supported by any well-reasoned

construction of the relevant authorities.   The cases cited on

brief are readily distinguishable and, to the extent they are

pertinent, actually undermine Henry and Esther’s argument.   See

Estate of Reinke v. Commissioner, 46 F.3d 760, 765 (8th Cir.

1995), affg. T.C. Memo. 1993-197; Antonides v. Commissioner, 91

T.C. 686, 702-703 (1988), affd. 893 F.2d 656 (4th Cir. 1990).      We

have rejected the factual basis of Henry and Esther’s claim that

they were accommodation parties, and, thus, the authority they

cite holding that a guarantor does not realize income when the

underlying debt is paid is not substantial authority for purposes

of section 6662.

     The only other argument made by Henry and Esther in support

of their position that they should be relieved of any penalty

under section 6662 is that they had reasonable cause for their

reporting position and that they acted in good faith.   See sec.

6664(c).22   The determination of whether a taxpayer acted with


     22
      Although Henry and Esther made disclosures that they had
omitted the payments from their 1992 and 1996 returns, they have
not asserted or argued that the disclosures were adequate
disclosures. See Cramer v. Commissioner, 101 T.C. 225, 255
(1993), affd. 64 F.3d 1406 (9th Cir. 1995); sec. 1.6661-4(b)(3),
Income Tax Regs. Even after respondent, anticipating an adequate
                                                   (continued...)
                             - 41 -

reasonable cause and in good faith is made case by case, taking

into account all pertinent facts and circumstances.   See Compaq

Computer Corp. & Subs. v. Commissioner, 113 T.C. 214, 226 (1999);

sec. 1.6664-4(b)(1), Income Tax Regs.   In this case, there is

ample evidence that Henry and Esther knew or had reason to know

that the payments made by HJA on the FirsTier note and the

Chevrolet debt generated taxable income to them as determined in

this opinion, including (1) the Baird, Kurtz letter explaining

the consequences of the EOA, (2) Forms 1099 and letters of

explanation issued by HJA showing the amount of covenant not to

compete payments made to Henry each year, (3) the fact that Henry

and Esther reported as income some of the covenant not to compete

payments made in 1990, (4) the establishment and operation of the

sweep account, which coordinated the covenant payments with

payments on the FirsTier note and the Chevrolet debt, and (5)

Henry’s conflicting positions with regard to his liability for

the FirsTier note and the Chevrolet debt taken in the State




     22
      (...continued)
disclosure claim, argued in his opening brief that Henry and
Esther’s disclosures on their 1992 and 1996 returns were not
adequate, Henry and Esther still did not argue that they made an
adequate disclosure for those years. Since Henry and Esther did
not raise adequate disclosure as a defense to the substantial
understatement prong of the accuracy-related penalty at any point
during the trial or briefing of this case, the issue of whether
the 1992 and 1996 disclosures were adequate is not before us.
                                 - 42 -

litigation and in this case.23    This evidence supports a

conclusion that Henry and Esther’s position regarding the

disputed payments was not asserted in good faith, as required by

section 6664(c).

        We hold that Henry and Esther are liable for the accuracy-

related penalty in each of the years 1989 through 1994 and 1996.

In light of our holding, we do not address respondent’s

alternative position regarding section 6662.

IV. Whether Henry Is Liable for an Addition to Tax Under Section
6651(a) for Failure To File a Return for Tax Year 1995

     Section 6651(a) imposes an addition to tax for failure to

file a return, unless it is shown that such failure is due to

reasonable cause and not due to willful neglect.     See sec.

6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985);

United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994);

Harris v. Commissioner, T.C. Memo. 1998-332.     A failure to file a

timely Federal income tax return is due to reasonable cause if

the taxpayer exercised ordinary business care and prudence and,

nevertheless, was unable to file the return within the prescribed

time.     See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.   Willful

neglect means a conscious, intentional failure to file or

reckless indifference.     See United States v. Boyle, supra at 245.


     23
      In the State trial, Henry admitted that he had a personal
debt to both FirsTier and Chevrolet and that part of the covenant
not to compete payments deposited into the sweep account was
going to FirsTier and Chevrolet to pay his personal debts.
                                - 43 -

Henry bears the burden of proving that respondent erred in

determining the addition to tax applies.   See Rule 142(a).

     Henry concedes that, to date, he has failed to file any 1995

individual income tax return.    Henry argues, however, that during

1995 Henry and Esther sold a significant number of shares in

various companies that had been purchased between 1986 and 1995.

At the time of the sale, Henry and Esther did not know their

original basis in the stock and, therefore, did not have

necessary information upon which to file an accurate return to

reflect their capital gains tax liability.   Henry contends that,

with the help of their tax preparer, Mr. Goeglein, he made a

diligent attempt to locate the additional necessary information

by contacting various financial institutions and research firms,

but the information regarding the stock was difficult to obtain.

According to Henry, Mr. Goeglein “had ongoing dialogue with

Commissioner’s Revenue Agent Glenn Hofer”, who “insisted that

Henry Misle and Mr. Goeglein obtain an accurate basis for the

stock when filing their return.”    Henry essentially contends that

the section 6651(a) addition to tax should not be assessed

because he was acting in good faith to comply with the request of

respondent’s agent and because finding accurate information

necessary to complete a timely return was too difficult.

     As a general matter, the unavailability of information is

not reasonable cause for failing to file a timely return.     See
                              - 44 -

Crocker v. Commissioner, 92 T.C. 899, 913 (1989); Electric &

Neon, Inc. v. Commissioner, 56 T.C. 1324, 1342-1344 (1971), affd.

without published opinion 496 F.2d 876 (5th Cir. 1974); Cook v.

Commissioner, T.C. Memo. 1999-50; Barber v. Commissioner, T.C.

Memo. 1997-206.   Unless a taxpayer applies for and obtains a

timely extension of time to file, a taxpayer is expected to file

a timely return based on the best information available and then

file an amended return if necessary.    See Estate of Vriniotis v.

Commissioner, 79 T.C. 298, 311 (1982); Cook v. Commissioner,

supra; Barber v. Commissioner, supra.    Henry has not proved that

his failure to file a 1995 Federal income tax return was due to

reasonable cause and not to willful neglect.    See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    We hold that Henry

is liable for the addition to tax under section 6651(a)(1) for

1995.

V.   Whether Henry Is Liable for an Addition to Tax Under Section
6654 for Failure To Make Estimated Tax Payments for Tax Year 1995

     Section 6654(a) provides for an addition to tax in the case

of any underpayment of estimated tax by an individual.    The

addition to tax under section 6654(a) is mandatory in the absence

of statutory exceptions.   See sec. 6654(a), (e); Recklitis v.

Commissioner, 91 T.C. 874, 913 (1988); Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980).

     Respondent determined that Henry is liable for the addition

to tax under section 6654 for 1995.    Henry and Esther’s only
                              - 45 -

argument for relief from liability under section 6654 is that

they had reasonable cause for their failure to make estimated tax

payments under section 6654(a).   With limited exceptions,24 “This

section has no provision relating to reasonable cause and lack of

willful neglect.   It is mandatory and extenuating circumstances

are irrelevant.”   Estate of Ruben v. Commissioner, 33 T.C. 1071,

1072 (1960); see also Grosshandler v. Commissioner, supra at 21.

In addition, Henry has offered no evidence that any of the

statutory exceptions under section 6654(e) apply.       Accordingly,

respondent’s determination is sustained.

VI.   Conclusion

      We have carefully considered the remaining arguments of

petitioners for results contrary to those expressed herein and,

to the extent not discussed above, find those arguments to be

irrelevant, moot, or without merit.

      To reflect the foregoing and concessions by the parties,



                                           Decisions will be entered

                                      under Rule 155.



      24
      Sec. 6654(e)(3)(B) provides for an exception for newly
retired or disabled individuals where the taxpayer (1) either is
retired after having attained the age of 62 or became disabled in
the taxable year or the preceding taxable year in which the
estimated payments were required to be made, and (2) can
demonstrate that any underpayment was due to reasonable cause and
not to willful neglect. Sec. 6654(e)(3)(B) does not apply in
this case.
