McWilliams v. Commissioner

T.C. Memo. 1995-454

UNITED STATES TAX COURT

ROBERT LEE McWILLIAMS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4651-92. Filed September 26, 1995.

Stevan Douglas Looney,1 for petitioner.

T. Richard Sealy III, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined deficiencies in and

additions to petitioner's Federal income taxes as follows:

1
Petitioner was originally represented by Patricia Tucker, as
evidenced by an entry of appearance filed with the Court on Sept.
30, 1992. Ms. Tucker's motion for leave to withdraw as counsel
was granted on Sept. 30, 1993.
 - 2 -

Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(1)(A) 6653(b)(1)(B) 6661(a)
1
1986 $58,761 --- $44,071 $14,690
1
1987 43,247 --- 32,435 10,812
1988 156,393 $117,295 --- --- 39,098
1
50 percent of the interest due on the portion of the underpayment
attributable to fraud.

The issues for decision are:2 (1) Whether petitioner realized income

from a corporation's payment of his personal expenses. We hold that he did.

(2) Whether petitioner understated his gross income by not including deposits

to his personal bank account for tax year 1988. We hold that he did. (3)

Whether petitioner understated his income on Schedule C and Schedule E. We

hold that he did to the extent stated herein. (4) Whether petitioner

understated his capital gain income for tax year 1988. We hold that he did to

the extent stated herein. (5) Whether petitioner is entitled to net operating

loss and/or a business credit carryforward to the years in issue. We hold

that he is not. (6) Whether petitioner is liable for the addition to tax for

negligence under section 6653(a)3 for all the years in issue. We hold that he

is liable. (7) Whether petitioner is liable for the addition to tax for

failure to timely file his Federal tax returns for 1986 and 1987 under section

6651(a). We hold that he is liable. (8) Whether petitioner is liable for the

2
Respondent has made concessions as to Schedule C expenses,
schedule A expenses, and Schedule E expenses to the extent
petitioner was able to substantiate the deductions. Respondent
has conceded that certain amounts asserted as conversion of funds
were in fact gifts and therefore not taxable. Respondent has
conceded that the capital gain income asserted for tax year 1988
was overstated by $150,000. Respondent has conceded that
petitioner is not liable for the addition to tax for fraud.
3
All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
 - 3 -
addition to tax for substantial understatement for Federal income tax under

section 6661(a) for all years in issue. We hold that he is liable.

FINDINGS OF FACT

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

stipulation of facts and attached exhibits are incorporated herein by this

reference. At the time the petition herein was filed, petitioner resided in

Mesquite, New Mexico. Petitioner was married and filed joint income tax

returns for all years in issue.4

Schedule C Business

Petitioner listed his occupation as "minister" on his tax returns.

Furthermore, he reported income and expenses on Schedule C of Forms 1040 for

the years in issue attributable to the business of "ministrial and guidance

center" [sic].

Petitioner's business involved providing food, shelter, and medical care

to various persons in a religious communal group in exchange for payments for

room, board, and trailer rentals. The expenses claimed on Schedule C for the

years in issue were as follows:

1986 1987 1988
Insurance $2,736 $2,468 $1,120
Other interest 13,142 13,985 9,524
Office expense 1,645
Travel 9,248 9,049 5,103
Meals and entertainment5 11,868 10,530 3,986
Utilities and telephone 12,153 12,340 12,664
Guidance 27,937 29,615 6,391
Dues and publications 341
Mortgage interest 9,645
Legal and professional 2,900

4
The statutory notice of deficiency was also addressed to
"Luz Elena McWilliams". Mrs. McWilliams is not a petitioner in
this case. She was originally indicated as a petitioner;
however, she neither signed the original petition nor ratified
its filing on her behalf. Accordingly, we dismissed her for lack
of jurisdiction.
5
This amount reflects the 20 percent disallowance for years
1987 and 1988. Sec. 274(n).
 - 4 -
Education 1,461
Repairs 15,529
Supplies 235
Total 77,084 79,632 68,899

Petitioner has substantiated $47,144, $51,007, and $38,661 of the expenses for

the years 1986, 1987, and 1988, respectively. In addition, respondent has

conceded that $7,767, $5,591, and $8,569 of the expenses are deductible on

Schedule A of the 1986, 1987, and 1988 returns, respectively, subject to

limitations (i.e., personal interest. Sec. 163(d)(6)(B)).

Relationship Between Petitioner And Gilbert

Petitioner and Dr. Alton L. Gilbert (Gilbert) met in 1968. They had a

close personal relationship for many years, and a business relationship during

many of those years. Gilbert and his wife were also members of petitioner's

ministry for 20 years.

Twenty-First Century Corporation (TFC)

TFC was formed in 1979. Petitioner, Gilbert, and their wives owned the

stock in TFC. Petitioner never contributed money or property to TFC, only

services. TFC elected Subchapter S status from its inception. TFC's original

business (to grow and sell pine trees) failed. Gilbert had some experience

with computers so TFC entered the computer services business. TFC's computer

business was sold to Technical Services, Inc., effective April 1, 1984.

Technical Services, Inc. (TSI)

TSI was incorporated on August 18, 1983. It elected subchapter S status

effective January 1, 1984. TSI was also in the business of providing computer

services. The principal shareholders of TSI were Gilbert and Mr. John Robbins

(Robbins).

Sale Of Assets From TFC To TSI

In 1983 and 1984, TFC furnished computer services for TSI's clients.

TFC and TSI attempted to form a joint venture called Systech Management to
 - 5 -
conduct the two businesses in a single entity. However, the venture was

abandoned when it became clear, early on, that it would not succeed. Instead,

TSI and the shareholders of TFC entered into an agreement, effective April 1,

1984, that provided for the purchase of TFC's computer operations by TSI.

Pursuant to the agreement TSI issued shares of its $100 par value stock to the

shareholders of TFC including 245 shares to petitioner. Subsequently,

petitioner received an additional 50 shares of stock in TSI. By May 1, 1985,

petitioner owned 295 shares in TSI equal to 23.54 percent of the 1,253 shares

then issued and outstanding. As of May 1, 1985, the most recent sale price of

TSI stock by the company was $500 per share; the most recent sale price of the

stock by an individual was $1,000 per share.

After the sale, assets remaining in TFC included two tracts of land

comprising 4.589 acres (real estate), tools and equipment. The tools and

equipment were used in providing maintenance and janitorial services to TSI.

On March 31, 1985, TFC sold the real estate to L&A Partnership for

$154,597.84.

L&A Partnership (L&A)

L&A was formed on March 25, 1985, to engage in real estate activities.

Petitioner and Gilbert were equal partners in L&A during the years in issue.

On April 27, 1985, L&A sold 2.546-acres of the real estate to TSI for

$225,000. The purchase price consisted of cash in the amount of $40,000 and a

note in the amount of $185,000.

Petitioner's Dissolution Of His Interest In TSI

On July 25, 1985, two transactions were effected leading to the

elimination of petitioner's interest in TSI. The first transaction, entered

into on behalf of TSI by Robbins and Gilbert (Robbins was president of TSI;

Gilbert was secretary; both were directors), provided for the payment from TSI

to petitioner of $90,000 in 36 monthly payments of $2,500 beginning on August

1, 1985. The stated purpose for such payments was for petitioner's services

rendered as director and under the condition that petitioner was to resign
 - 6 -
from the board of directors.6 Furthermore, the agreement provided that TSI

would not exercise its right of first refusal as to the transfer of

petitioner's stock interest to Gilbert. The second transaction was an

agreement entered into between petitioner and Gilbert. The agreement provided

for the transfer of petitioner's 295 shares in TSI to Gilbert; however, the

purchase price was to be determined at a later date. To this end the

agreement provided, in relevant part:

Whereas the value to the stock cannot be fully ascertained at this
time,
It is agreed that:
1. Any proceeds from the sale of the stock by Alton L. Gilbert to a
third party will, upon receipt, be delivered to Robert L. McWilliams,
his heirs, or assigns; * * *

Petitioner's relationship with Gilbert became estranged. In early 1988,

Gilbert took a leave of absence from petitioner's group to sort things out.

On March 8, 1988, Gilbert returned to the group and executed a document

purporting to transfer back to petitioner 29,500 shares (the 295 shares had

split 100 to 1) of TSI stock. The document was signed by Gilbert, it was

notarized, and witnessed. However, this time, TSI elected to exercise its

right of first refusal. Consequently, a stock purchase agreement dated May 2,

1988 (the Agreement), was entered into among petitioner, Gilbert, and Robbins

as president of TSI and on behalf of TSI.7

The Agreement provided that in exchange for the 29,500 shares of TSI

stock, TSI would transfer to petitioner title to the 2.546-acres of real

6
Petitioner objects to this finding of fact. He asserts that
the consideration for transfer of the TSI stock was a janitorial
service contract with TFC. Petitioner directs the Court to Joint
Exhibits 32-AF and 33-AG in support thereof. However, we find no
reference in these exhibits to the stock transfer or to the
consideration involved.
7
Gilbert did not participate in the agreement on behalf of
TSI, because he was considered an interested party. He did
participate in his individual capacity.
 - 7 -
estate previously transferred to TSI from L&A8, and would pay to petitioner

$5,000 on execution of the Agreement, $20,000 within 60 days of the execution

of the agreement, and $163,803 payable in 90 monthly installments (effectively

paying the mortgage on the 2.546-acres of real estate).9 The Agreement

further provided that all obligations contained in the prior agreements

entered into between petitioner and Gilbert (dated July 24, 198510, and March

8, 1988) relating to the ownership of the TSI stock were to be considered

completely satisfied and released as a result of this agreement. Petitioner

did not report the income attributable to this transaction on his tax return.

Respondent issued a statutory notice of deficiency to petitioner

asserting deficiencies in and additions to petitioner's Federal income tax.

Respondent determined that petitioner failed to report Schedule C gross

receipts, had not substantiated certain amounts of claimed Schedule C business

8
Petitioner objects to this finding of fact. Petitioner
contends that the title report to the tract of land does not
reflect the transfer. We do not find this fact to be
dispositive. As the title report provides:

This report * * * is no way intended to warrant or guarantee
the title, nor is it in any way an opinion to the title.
* * * It is the intention herein only to show a list of
instruments, if any, that might have been placed of record
between the dates shown above * * *.

Furthermore, respondent contends and evidence presented indicates
that it was a "contract of deed arrangement" (i.e., deeds were to
be transferred at a later date). Accordingly, we find the
provision in the agreement executed by petitioner, TSI, and
Gilbert to be controlling and therefore, the real estate was
transferred.
9
Petitioner argues that L&A was the debtor on the mortgage
and therefore one-half of the gain is attributable to Gilbert.
However, the evidence indicates that TFC paid off L&A's note in
order to secure a warranty of deed and recorded a mortgage
against the warranty deed prior to the reconveyance of the
property from TSI to petitioner.
10
The agreement referred to was dated July 25, 1985; however,
the discrepancy is not material.
 - 8 -
expense deductions, was not entitled to net operating loss deductions or

general business credits, had understated his Schedule E rental income, had

not substantiated certain amounts of Schedule E rental expenses, realized and

recognized a capital gain upon the disposition of his TSI stock, and was

liable for the additions to tax for fraud and substantial understatement of

Federal income tax for the years in issue. In the alternative, respondent

determined that petitioner was liable for additions to tax for negligence and

delinquency for failure to timely file Federal income tax returns for years

1986 and 1987.

OPINION

Before dealing with the principal issues in the instant case, we will

deal with two preliminary matters. First, petitioner contends that

respondent's determinations in the notice of deficiency should not be given a

presumption of correctness because the determinations are arbitrary. His

argument implies that because respondent has made a number of concessions, the

notice of deficiency is therefore arbitrary. We find no merit to this

argument. To overcome the presumption of correctness, a taxpayer must prove

by a preponderance of the evidence that the deficiency was arbitrarily

derived. Shriver v. Commissioner, 85 T.C. 1 (1985), affd. per order (7th Cir.

1986); Dellacroce v. Commissioner, 83 T.C. 269 (1984); Llorente v.

Commissioner, 74 T.C. 260 (1980), affd. in part and revd. in part 649 F.2d 152

(2d Cir. 1981). Moreover, a determination that some part of a deficiency is

erroneous does not necessarily make the deficiency notice arbitrary and shift

the burden of proof to respondent. Wells v. Commissioner, T.C. Memo. 1983-

788. Furthermore, before a trial in the Tax Court, both parties are required

to stipulate all matters to the maximum extent possible. See U.S. Tax Court

Standing Pre-Trial Order. Accordingly, we hold that the burden of proof

remains with petitioner.

Second, petitioner argues that respondent is collaterally estopped from

her determinations because respondent has previously approved petitioner's
 - 9 -
1978 and 1979 Federal income tax returns under substantially the same facts

and circumstances. We find this argument to be equally without merit. For

one reason, as respondent correctly points out, collateral estoppel is

inapposite because there was no prior "litigation". The prior proceeding was

merely a settlement made at respondent's Appeals level.

Issue 1. Income from TFC's Payment of Petitioner's Personal Expenses

Respondent asserts that TFC was used to pay personal expenses on

petitioner's behalf. Petitioner argues that the expenses in issue were

expenses of TFC that are deductible as ordinary and necessary expenses.

Taxpayers bear the burden of proving the Commissioner is incorrect in

her determinations. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

Section 162(a) allows a taxpayer to deduct ordinary and necessary expenses

paid or incurred in carrying on a trade or business. "In order to be

deductible, business expenses generally must be the expenses of the taxpayer

claiming the deduction." Gantner v. Commissioner, 91 T.C. 713, 725 (1988),

affd. 905 F.2d 241 (8th Cir. 1990). Generally, it is not ordinary and

necessary for a corporation to pay its shareholders' expenses and obligations.

Greenspon v. Commissioner, 23 T.C. 138, 151 (1954), affd. on this issue 229

F.2d 947 (8th Cir. 1956); Justice Steel, Inc. v. Commissioner, T.C. Memo.

1980-466; Heim v. Commissioner, T.C. Memo. 1978-137. Furthermore, the payment

by a corporation of the personal expenses of its shareholder generally results

in a constructive dividend to the shareholder, to the extent of the

corporation's earnings and profits and to the extent the corporation has no

expectation of repayment. Challenge Manufacturing Co. v. Commissioner, 37

T.C. 650 (1962); Halpern v. Commissioner, T.C. Memo. 1982-31.

Petitioner has not presented any evidence that the expenses in question

were not his personal living expenses. He has not presented books and records

or even bills or receipts in order for us to determine the nature of the

expenses in issue. Accordingly, we hold that petitioner has failed to meet

his burden of proof, and we sustain respondent's determination that the
 - 10 -
personal expenses incurred by TFC on behalf of petitioner were income to

petitioner.

Issue 2. Unreported Income--1988

Respondent argues that petitioner failed to include as income all of the

deposits to his personal account for the 1988 tax year.

Generally, the Commissioner may use a method of reconstruction that

clearly reflects income. Sec. 446(b); Holland v. United States, 348 U.S. 121

(1954). And the reconstruction of income need only be reasonable in light of

all surrounding facts and circumstances. Giddio v. Commissioner, 54 T.C. 1530

(1970). If the taxpayer believes the Commissioner's method of computation is

unfair or inaccurate, the burden is on the taxpayer to show such unfairness or

inaccuracy. DiLeo v. Commissioner, 96 T.C. 858, 871 (1991), affd. 959 F.2d 16

(2d Cir. 1992).

The use of the bank deposits method for computing income has long been

sanctioned by this Court. Clayton v. Commissioner, 102 T.C. 632, 647 (1994);

DiLeo v. Commissioner, supra; Estate of Mason v. Commissioner, 64 T.C. 651

(1975), affd. 566 F.2d 2 (6th Cir. 1977). The taxpayer bears the burden of

proving that the Commissioner's determination of underreported income,

computed using the bank deposits method of reconstructing income, is

incorrect. DiLeo v. Commissioner, supra at 869; Parks v. Commissioner, 94

T.C. 654, 658 (1990).

Petitioner has made no arguments and has presented no evidence to

satisfy his burden of proving error in respondent's determination of

additional income from deposits to petitioner's personal bank account.

Accordingly, we sustain respondent's determination that the deposits made to

petitioner's personal bank account are income for the 1988 tax year.

Issue 3. Schedule C and Schedule E Income

Respondent has determined that petitioner's Schedule C expenses are

overstated; his Schedule E rental income is understated, and his Schedule E

rental expenses are understated. Respondent has made concessions as to each
 - 11 -
determination. Petitioner has made no argument other than the collateral

estoppel argument discussed, supra.

Accordingly, we sustain respondent's determinations adjusted for her

concessions.

Issue 4. Capital Gain--1988

Respondent argues that petitioner realized capital gain income in 1988.

Petitioner argues that there was no capital gain transaction attributable to

the 295 shares of stock in TSI previously owned by petitioner.

Generally, cash basis taxpayers must include all items of income in the

gross income for the taxable year in which actually or constructively

received. Sec. 451(a); sec. 1.451-1(a), Income Tax Regs. "Income although

not actually reduced to a taxpayer's possession is constructively received by

him in the taxable year during which it is credited to his account, set apart

for him, or otherwise made available so that he may draw upon it at any time".

Sec. 1.451-2(a), Income Tax Regs. The sale of stock, other than stock in-

trade of the taxpayer, is the sale of a capital asset. Sec. 1221(1). And the

gain attributable to the sale of a capital asset results in capital gain

income. Sec. 1222. Moreover, the gain from the sale of property is equal to

the excess of the amount realized (i.e., the sum of any money received plus

the fair market value of the property received; sec. 1001(b)) from the sale,

over the taxpayer's adjusted basis in the property. Sec. 1001(a).

Respondent contends that as a result of the repurchase by TSI of its

stock from Gilbert in 1988 and in accordance with the Agreement and the prior

agreements entered into between petitioner and Gilbert, the proceeds from the

sale were payable to petitioner and therefore taxable as capital gain.

Petitioner contends that since a capital transaction did not occur, the

Agreement merely resulted in ordinary income to petitioner.11 Furthermore,

11
Although petitioner seems to be arguing that the character
of the income is ordinary rather than capital, the amount he
(continued...)
 - 12 -
petitioner contends that the 2.546 acres of land to be received by him

pursuant to the Agreement was never received and, therefore, did not result in

a taxable event.

Petitioner's rights to consideration for his stock in TSI were fixed in

the 1988 Agreement. Although petitioner may have negotiated the sale in the

1985 agreement, his right to receive consideration was not determined until

the 1988 Agreement. Furthermore, it is clear to us that the Agreement

provides for petitioner's receipt of cash, real estate, and the assumption of

liabilities in exchange for his stock interest in TSI. Petitioner has not

provided us with evidence to treat the sale otherwise. Moreover, petitioner

has offered no evidence as to his basis, if any, in the TSI stock at the time

of sale.

Accordingly, we sustain respondent's determination adjusted for her

concessions.

Issue 5. Net Operating Loss And Business Credit Carryforward

Respondent has disallowed the utilization of net operating loss and

business credit12 carryforwards.

A net operating loss is the excess of the deductions allowed over the

gross income. Sec. 172(c). A net operating loss for any taxable year may be

carried back to each of the 3 taxable years preceding the taxable year of the

loss and carried forward to each of the 15 taxable years following the taxable

year of the loss. Sec. 172(b). The burden of proof is on the taxpayer to

prove the fact and the amount of the loss. Rule 142(a); Welch v. Helvering,

290 U.S. 111 (1933); Larabee v. Commissioner, T.C. Memo. 1989-298.

11
(...continued)
claims is includable is substantially less than the amount of
capital gain income asserted by respondent.
12
Petitioner asserts that respondent has conceded this issue.
We find no merit to this argument. This was an issue in the
notice of deficiency and has continued to be argued throughout
the proceedings.
 - 13 -
Furthermore, a tax return is merely a statement of the taxpayer's claim and

does not establish the truth of the matters set forth therein. Wilkinson v.

Commissioner, 71 T.C. 633 (1979).

Respondent argues that petitioner has not substantiated the amounts nor

established that such carryforwards would not have been absorbed in prior

years. Petitioner asserts that TFC operated at a loss in 1985 as shown on

TFC's tax return. Furthermore, petitioner made an election to forgo the

carryback on his 1985 individual income tax return.

Petitioner has provided us with nothing more than his individual tax

returns and the corporate tax returns of TFC as proof for the net operating

loss. Petitioner has not provided us with TFC's books and records, or any

other means to substantiate the amount of the loss claimed. We sustain

respondent's disallowance of the net operating loss deduction.

Credits are a matter of legislative grace, and petitioners have the

buren of proving that they are entitled to the credit. Interstate Transit

Lines v. Commissioner, 319 U.S. 590, 593 (1943); Segel v. Commissioner, 89

T.C. 816, 842 (1987). Taxpayers cannot merely rely on prior years' tax

returns in which credits were claimed. Sherwood v. Commissioner, T.C. Memo.

1988-544. Section 38 provides for a credit against tax for the purchase of

qualified property. To the extent such credit was not used in the tax year,

it may be carried back 3 years or forward 15 years. Sec. 39. A credit

carried forward to a tax year beginning after June 30, 1987, must be reduced

by 35 percent. Sec. 49(c).

Respondent argues that petitioner has not substantiated the amounts nor

established that such carryforwards would not have been absorbed in prior

years. Petitioner further asserts that an investment tax credit flowed

through from TSI's 1984 tax return to petitioner and may be offset against

petitioner's tax liabilities for the years in issue.

Petitioner did not provide any invoices to support the purchase of

qualified property upon which a credit could have been claimed. He did not
 - 14 -
provide supporting books and records for purchases and sales. And he has not

provided the Court with enough information to determine whether any allowable

credits would have otherwise been absorbed in the intervening years. We find

that petitioner has not met his burden of proof, and we sustain respondent.

Issue 6. Addition To Tax--Negligence

In her notice of deficiency, respondent determined that, as an

alternative to fraud, petitioner was liable for additions to tax under section

6653(a)(1)(A) and (B) for 1986 and 1987, and section 6653(a)(1) for 1988.

For 1986 and 1987, section 6653(a)(1)(A) provides that if any part of

the underpayment is due to negligence or disregard of rules or regulations,

there shall be added to the tax an amount equal to 5 percent of the

underpayment. Section 6653(a)(1)(B) imposes an addition to tax equal to 50

percent of the interest payable under section 6601 with respect to the portion

of the underpayment attributable to negligence.

For 1988, section 6653(a)(1) provides that if any part of the

underpayment is due to negligence or disregard of rules or regulations, there

shall be added to the tax an amount equal to 5 percent of the underpayment.

Negligence under section 6653(a) is a "lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under the

circumstances." Neely v. Commissioner, 85 T.C. 934, 947 (1985) (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. in part and

remanding in part 43 T.C. 168 (1964)). The taxpayer has the burden of proving

that the Commissioner's determination of the additions to tax under section

6653(a) is erroneous. Rule 142(a); Bixby v. Commissioner, 58 T.C. 757 (1972).

Petitioner has not presented evidence to establish that he was not

negligent or did not disregard rules or regulations. Petitioner did not

maintain records, as required by law, and he failed to sustain his burden of

proof on the disputed issues. Petitioner claims that his ignorance of the
 - 15 -
1988 transaction and a purported physical illness warrants a finding that he

was not negligent. We are unpersuaded. On this record, we sustain

respondent's determination that petitioner is liable for the additions to tax

under section 6653(a)(1)(A) and (B) for 1986 and 1987, and section 6653(a)(1)

for 1988.

Issue 7. Addition to Tax--Failure to Timely File Tax Returns

Respondent has determined an addition to tax under section 6651(a) for

failure to file timely Federal income tax returns for the tax years 1986 and

1987.

In the case of a failure to file an income tax return within the time

prescribed by law, section 6651(a)(1) provides for an addition to tax in the

amount of 5 percent of the tax required to be shown on the return for each

month (or part thereof) during which such failure continues, but not to exceed

25 percent in the aggregate. See sec. 301.6651-1(a)(1), Proced. & Admin.

Regs. The taxpayer is not liable for the addition to tax if the failure to

file is due to reasonable cause and not due to willful neglect. Sec.

6651(a)(1); Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985);

Stovall v. Commissioner, 762 F.2d 891, 895 (11th Cir. 1985), affg. T.C. Memo.

1983-450.

Petitioner's calendar year tax return for 1986 was due on or before

April 15, 1987, and his calendar year tax return for 1987 was due on or before

April 15, 1988. Sec. 6072(a). The tax return for 1986 was filed on or after

August 1, 1987, and the tax return for 1987 was filed on or after August 22,

1988.

Petitioner has presented no evidence that the time for filing either of

the returns was properly extended. Secs. 6081(a), 6651(a)(1); sec. 1.6081-

1(b), Income Tax Regs. Furthermore, petitioner has not presented evidence as

to the reason the returns were filed late.
 - 16 -
Accordingly, we conclude that petitioner has failed to carry his burden

of proof on this issue, and we hold that petitioner is liable for the addition

to tax under section 6651(a)(1).

Issue 8. Addition To Tax--Substantial Understatement of Income Tax

Respondent has determined an addition to tax under section 6661(a) for

substantial understatement of income tax for each of the years in issue.

Section 6661(a) imposes an addition to tax on a substantial

understatement of income tax. The section provides that if there is a

substantial understatement of income tax, there shall be added to the tax an

amount equal to 25 percent of the amount of any underpayment attributable to

such understatement. Sec. 6661(a). The taxpayer bears the burden of proving

that the Commissioner's determination as to the addition to tax under section

6661(a) is erroneous. Rule 142(a).

An understatement is substantial where it exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000. Sec.

6661(b)(1)(A). An understatement is the difference between the amount

required to be shown on the return and the amount actually shown on the

return. Sec. 6661(b)(2); Tweeddale v. Commissioner, 92 T.C. 501 (1989); Woods

v. Commissioner, 91 T.C. 88 (1988). The section 6661 addition to tax is not

applicable, however, if there was substantial authority for the taxpayer's

treatment of the items in issue or if relevant facts relating to the tax

treatment of those items were disclosed on the return. Sec. 6661(b)(2)(B)(i),

(ii).

Neither exception applies here. Accordingly, we hold that petitioner is

liable for the addition to tax under section 6661.

To reflect the foregoing,

Decision will be entered

under Rule 155.