                       T.C. Memo. 1997-130



                     UNITED STATES TAX COURT



   SPENCER MEDICAL ASSOCIATES, AUTOMOTIVE VENTURES, INC. F/K/A
    SPENCER TOYOTA, INC., TAX MATTERS PARTNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17212-95.                    Filed March 12, 1997.



     D. Christopher Ohly and Kevin F. Leahy, for petitioner.

     Karen E. Chandler, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Chief Judge:    By Notice of Final Partnership

Administrative Adjustment (FPAA) dated June 6, 1995, respondent

determined an upward adjustment in Spencer Medical Associates'

ordinary income for 1990 in the amount of $1,084,547.   Unless

otherwise indicated, all section references are to the Internal
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Revenue Code in effect for the year in issue, and all Rule

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

     The issue for decision is whether Spencer Medical Associates

has a duty of consistency in its treatment of a tax shelter

investment on its Federal income tax returns for 1983 and 1990.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.     At the

time the petition was filed, Spencer Medical Associates (Spencer

Medical) was a Maryland general partnership with its principal

place of business in St. Mary's, West Virginia.

     Spencer Medical was formed on November 18, 1983.   Spencer

Toyota, Inc., now known as Automotive Ventures, Inc.,

(petitioner) was the tax matters partner for Spencer Medical in

1990.    Spencer Toyota, Inc., was also the tax matters partner for

Spencer Medical Associates II, a Texas general partnership.

     On December 1, 1983, Spencer Medical entered into a contract

with Coral Sociedade Brasileira de Pesquisas e Desenvolvimento

Ltda. (Coral) (the 1983 Coral contract) under which Coral was to

conduct medical research and development with respect to four

specified reagents.   The total consideration to be paid by

Spencer Medical to Coral as stated in the 1983 Coral contract was

2,873,600,000 Brazilian cruzeiros (Cr$), which amount was

equivalent on December 1, 1983, to $3.2 million U.S. dollars

(US$).    One-eighth of the stated consideration was paid in U.S.
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dollars ($400,000) when the contract was executed.   The balance

of the stated consideration was reflected in a Cr$2,514,400,000

promissory note from Spencer Medical to Coral (the Coral note),

the equivalent (in 1983) of US$2.8 million.

     The Coral note was payable in Brazilian cruzeiros in four

equal payments on December 1 of each of the years 1990, 1991,

1992, and 1993.   Each payment was to consist of one-fourth of the

original Coral note principal (Cr$628,600,000) and all accrued

interest as of the date of the payment.   At the time the Coral

note was executed, the principal payment due on December 1, 1990,

was the equivalent of US$700,000.

     Spencer Medical's Federal income tax return for the calendar

year ended December 31, 1983, was timely filed with the Internal

Revenue Service Center in Philadelphia, Pennsylvania.   On its

1983 return, Spencer Medical claimed a research expense deduction

in the amount of $3.2 million.    The return did not disclose that

the research expense arose out of a promissory note or out of a

transaction with Coral.   Spencer Medical's 1983 return was not

examined by the Internal Revenue Service (IRS) prior to April 15,

1987.

     Spencer Medical's Federal income tax return for the calendar

year ended December 31, 1990, was filed with the Internal Revenue

Service Center in Philadelphia, Pennsylvania, on October 21,

1991.
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     The December 31, 1990, conversion rate of the Brazilian

cruzeiros was Cr$16,020,000 to US$1, and the conversion rate did

not vary significantly from the rate on the due date of the 1990

Coral note payment.   Spencer Medical did not report the

difference between the 1983 value (US$700,000) and the 1990 value

(approximately US$39) of the Coral note principal payment due to

Coral in 1990 as gain on its 1990 return.   Spencer Medical's 1990

return reflected a liability for interest in the total amount of

$384,586, payable on December 1, 1990.   Spencer Medical did not

report the difference between the 1983 value (US$384,586) and the

1990 value (approximately US$0) of the Coral note accrued

interest payment due to Coral in 1990 as gain on its 1990 return.

     Spencer Medical never paid the Coral note principal or the

interest accrued as of December 1, 1990, due on December 1, 1990.

Spencer Medical never received a demand for payment nor has any

other action been initiated by Coral to collect the principal and

accrued interest payment due from Spencer Medical on December 1,

1990.

     Coral investments were sold by Allen F. Campbell (Campbell)

of Dallas, Texas, during 1982, 1983, 1984, and 1985 to more than

170 different entities throughout the United States.    In March

1984, James I. Gibb (Gibb), a revenue agent, was assigned to the

"injunction group" in Dallas.   The job of the injunction group

was to investigate promoters of abusive tax shelters.
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Thereafter, Gibb was assigned to investigate Coral and Campbell

for violating sections 6700 and 6701.

     An injunction case was filed by the Government against

Campbell on April 2, 1984, in the United States District Court,

Northern District of Texas, Dallas Division (District Court).

Gibb was assigned to assist the Department of Justice attorneys

with the Campbell case.

     In response to interrogatories in the Campbell case, a list

of all U.S. entities contracting with Coral (the project list)

was filed with the District Court on January 14, 1987.   The

project list did not contain taxpayer identification numbers,

addresses, or individuals involved in any of the listed entities

that had entered into contracts with Coral or the year that such

contracts were entered.   Spencer Medical's 1983 contract is

reflected as client number "89 Spencer Medical Associates".

     The project list was first located by Gibb in February 1987.

Of the 172 contracts on the project list, approximately 125 had

been identified prior to the location of the list.    Prior to the

discovery of the project list, Spencer Medical had not been

identified by the IRS as one of the entities contracting with

Coral.

     Partnership adjustments attributable to contracts entered

into by other entities, unrelated to Spencer Medical, with Coral

in 1982 were litigated in Agro Science Co. v. Commissioner, T.C.

Memo. 1989-687, affd. 934 F.2d 573 (5th Cir. 1991).   Spencer
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Medical neither was a party to the Agro Science Co. litigation

nor agreed to be bound by our opinion in Agro Science Co.     The

Agro Science Co. case was not decided until after the period of

limitations for Spencer Medical's 1983 tax year had expired.

     Spencer Medical timely executed a Consent to Extend the Time

to Assess Tax Attributable to Items of a Partnership for 1990,

extending the time for such assessment to June 30, 1995.

Respondent timely sent to Spencer Medical a FPAA for 1990.

                              OPINION

     Respondent determined that Spencer Medical realized foreign

currency transaction gain in 1990 due to the devaluation of the

Brazilian cruzeiro between 1983 and 1990.   Respondent's

adjustments are based on treating the Coral note as bona fide

indebtedness.   Petitioner argues that respondent's determination

is incorrect because promissory notes similar to the Coral note

on which she based her adjustments were determined in Agro

Science Co. v. Commissioner, supra, to be invalid.    Thus,

petitioner contends that it can have no foreign currency

transaction gain because the Coral note is invalid.   Respondent

does not deny that, in Agro Science Co., certain Coral notes were

determined to be invalid.   Respondent argues that she relied on

Spencer Medical's 1983 return, wherein the Coral note was treated

as valid and research expenses equaling the 1983 value of the

Coral note (US$3.2 million) were deducted, and that Spencer
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Medical has a duty of consistency to continue to report the Coral

transaction in 1990 as if the Coral note were valid.

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

appeal in this case would lie, has recognized the existence of a

duty of consistency.   See Interlochen Co. v. Commissioner, 232

F.2d 873, 877-878 (4th Cir. 1956), affg. 24 T.C. 1000 (1955).

The duty of consistency applies when:    (1) The taxpayer made a

representation or reported an item for Federal income tax

purposes in one year, (2) the Commissioner acquiesced in or

relied on that representation or report for that year, and

(3) the taxpayer attempts to change that representation or report

in a subsequent year, after the period of limitations has expired

with respect to the year of the representation or report, and the

change is detrimental to the Commissioner.    Herrington v.

Commissioner, 854 F.2d 755, 758 (5th Cir. 1988), affg. Glass v.

Commissioner, 87 T.C. 1087 (1986); Unvert v. Commissioner, 72

T.C. 807, 815 (1979) (quoting Beltzer v. United States, 495 F.2d

211, 212 (8th Cir. 1974)), affd. 656 F.2d 483 (9th Cir. 1981).

When the duty of consistency applies, the Commissioner may

proceed as if the representation or report on which she relied

continues to be true, although, in fact, it is not.    Herrington

v. Commissioner, supra at 758.

     The parties agree that the first and third elements of duty

of consistency are present.   The parties disagree as to the

presence of the second element.
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     The second element exists when a taxpayer files a return

that contains an inadequately disclosed item and respondent

accepts that return and allows the period of limitations to

expire without an audit of that return.   Id.; Mayfair Minerals,

Inc. v. Commissioner, 56 T.C. 82, 88 (1971), affd. per curiam 456

F.2d 622 (5th Cir. 1972); see Hughes & Luce, L.L.P. v.

Commissioner, T.C. Memo. 1994-559, affd. on another issue 70 F.3d

16 (5th Cir. 1995).

     Spencer Medical indisputably did not provide sufficient

facts to give the IRS actual knowledge of the 1983 Coral

contract.   Spencer Medical's 1983 return did not disclose that

the claimed research expense arose out of a promissory note or

out of a transaction with Coral.   The transaction was not

examined in any prior examination of Spencer Medical.    Compare

Erickson v. Commissioner, T.C. Memo. 1991-97; Gmelin v.

Commissioner, T.C. Memo. 1988-338, affd. without published

opinion 891 F.2d 280 (3d Cir. 1989).

     Petitioner argues, however, that the project list that was

discovered by Gibb in February 1987 provided the IRS with a

reason to know on or before April 15, 1987, that Spencer Medical

invested in Coral in 1983 and claimed erroneous expenses.    In

addition, petitioner argues that the IRS had the capabilities to

identify the necessary information regarding the clients on the

project list by using the IRS computer data bases.   (Proffered

expert testimony on this subject was excluded because petitioner
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failed to comply with Rule 143(f).)    Petitioner also argues that,

because respondent issued a FPAA to Spencer Medical Associates

II, a partnership with the same tax matters partner as Spencer

Medical, concerning adjustments related to a 1985 Coral

investment, respondent had knowledge of Spencer Medical.

     In all of the cited cases dealing with the duty of

consistency and specifically addressing whether the Commissioner

had actual or constructive knowledge of the erroneously reported

item, the focus was on information supplied by the taxpayer on

the return for the year of the erroneous reporting or otherwise

developed upon audit of that return.   In Mayfair Minerals, Inc.,

moreover, the Court rejected the taxpayer's contention that

reporting of the transaction on a return for a subsequent year,

filed by the same taxpayer, gave notice to the Commissioner of

the relevant facts in time to disallow the deductions for earlier

years.   The Court stated that "this argument borders on the

facetious."   Mayfair Minerals, Inc. v. Commissioner, supra at 91.

     Petitioner seeks to equate information fortuitously

discovered during the investigation of another person with

information provided by the taxpayer on the return or during an

audit of the return on which the item was erroneously reported.

Petitioner's position supposes that the agent assisting the

Department of Justice in an investigation of Campbell should have

turned immediately to tracking down Spencer Medical upon receipt
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of one of many documentary exhibits collected in that

investigation.

     Here the taxpayer is attempting to turn the shield of the

statute of limitations into a sword and to turn on its head a

doctrine intended to minimize the availability of a double

deduction.   The disputed element of the duty of consistency is

the Government's reliance on the taxpayer's representation as to

the treatment of an item on the return; if the taxpayer has

disclosed on the return or during an audit questions about that

treatment, the Government cannot show reliance.   Under the

circumstances of this case, we do not believe that disclosure of

facts suggesting possibly erroneous treatment of an item 2 months

prior to the expiration of the period of limitations is

sufficient to terminate reliance for purposes of the duty of

consistency doctrine.

     Finally, petitioner argues that respondent should be

estopped from making the adjustment in issue here because of the

success of the argument in Agro Science that the deduction

allowed to similarly situated partnerships was invalid.     In this

regard, this case is indistinguishable from Herrington, and the

result should be the same.   See also Alling v. Commissioner, 102

T.C. 323, 333-336 (1994), affd. without published opinion sub

nom. Handelman v. Commissioner, 57 F.3d 1063 (2d Cir. 1995),

affd. without published opinion sub nom. Eisenman v.

Commissioner, 67 F.3d 291 (3d Cir. 1995) ("the substance of * * *
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[taxpayers'] position is that, under the guise of a duty of

consistency on the part of respondent, they are entitled to 'the

practical equivalent of a double deduction'.   See United States

v. Skelly Oil Co., [394 U.S. 678, 684 (1969)]").

     Petitioner failed to present any evidence at trial or any

other argument at trial or on brief contesting the correctness of

the adjustments as determined by respondent.   Respondent's

adjustments will be sustained.

     To reflect the foregoing,

                                        Decision will be entered

                                   for respondent.
