COHEN v. COMMISSIONER

                        T.C. Memo. 1996-546



                      UNITED STATES TAX COURT



             STANLEY AND JEAN COHEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3956-93.                 Filed December 18, 1996.



     Bernard S. Mark and Richard S. Kestenbaum, for petitioners.

     Halvor N. Adams III, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined deficiencies in, and

additions to, petitioners' Federal income taxes as follows:1



     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                                  - 2 -


                                                      Additions to Tax
                           Sec.         Sec.           Sec.          Sec.        Sec.        Sec.
Year   Deficiency       6651(a)(1)   6653(a)(1)   6653(a)(1)(A) 6653(a)(2)   6653(a)(1)(B)   6661
                                                                   1
1985       $96,919      $19,480      $4,846           --                        --      $24,230
                                                                                   2
1986        59,044       14,611         --          $2,952         --                    14,761
                                                                                   3
1987       116,370       29,093         --           5,819         --                    28,414
1988        25,576        2,558       1,279           --           --           --        6,394
       1
           Fifty percent of the interest due on $96,919
       2
           Fifty percent of the interest due on $59,044.
       3
           Fifty percent of the interest due on $113,657.


               Pursuant to six stipulations of settled issues, the parties

       resolved, by mutual concessions, all substantive issues in this

       case and agreed that petitioners are liable for deficiencies in

       the amounts of $96,919 for 1985, zero for 1986, $92,439 for 1987,

       and $12,544 for 1988.            The only issues that remain for decision

       concern petitioners' liability for additions to tax, based on the

       agreed underpayments for 1985, 1987, and 1988, for failure to

       file timely returns under section 6651(a)(1), for negligence or

       (intentional) disregard of rules or regulations under section

       6653(a), and for substantial understatement of tax under section

       6661.         We hold petitioners liable for each of the additions to

       tax.

                                          FINDINGS OF FACT

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

       The stipulation of facts and attached exhibits are incorporated

       by this reference.            At the time the petition was filed,

       petitioners resided in Great Neck Estates, New York.                  All

       references to petitioner are to petitioner Stanley Cohen.
                                - 3 -


     For several years petitioner was employed as manager of the

Wall Street office of Loeb Rhodes & Co., a securities brokerage

firm.    Subsequently, he was affiliated with Tyz-All Plastics,

Inc., as an employee, officer, director, and shareholder.      His

affiliation with this corporation ended in 1986.      Prior to and

during the years at issue, petitioner traded securities for his

own account.    The parties have stipulated that he did not engage

in these securities transactions as a dealer.2

     During the years at issue petitioner held an interest in

several partnerships and S corporations.      In 1986 he and two

other individuals incorporated KRS Restaurant Corp. (KRS) for the

purpose of operating a restaurant.      Later that year petitioner

and his two associates formed the Carlisle Inn Joint Venture

(CIJV) and Harrisburg Inn Joint Venture (HIJV) to operate two

motels.    Acquisition of the motel and restaurant businesses was

financed in part by loans that petitioner and his associates

guaranteed.    The Forms 1065 filed by CIJV and HIJV reflect that a

50-percent interest in each joint venture was owned by an S

corporation called KBS Motel Corp. (KBS).      The Forms 1120S filed


     2
      The record contains additional facts concerning
petitioner's background and trading activity that may be relevant
to the reasonableness of petitioner's reliance on his
accountant's substantive tax advice for purposes of sec. 6653(a)
and to the existence of reasonable cause for a waiver under sec.
6661. In view of our disposition of both of these issues,
however, further details would be superfluous, and we have
therefore omitted them.
                               - 4 -


by KBS show petitioner and his two associates as equal one-third

shareholders.3   Petitioner actively participated in the

management of each of the entities and signed their tax returns.

     Petitioners' Federal income tax returns for the years at

issue were prepared by Edward Leuschner (Leuschner).   Leuschner

has been a certified public accountant since 1964.   Tax return

preparation constitutes half of his practice.   Leuschner prepared

petitioners' returns on the basis of information provided by

petitioner, including Schedules K-1 and worksheets prepared by

petitioner showing the results of his securities transactions

during the year.

     Petitioner had net losses from his investments in S

corporations and partnerships for each of the years at issue.

The largest losses for 1987 and 1988 arose from the motel and

restaurant businesses reported on the Schedules K-1 issued by KBS

and KRS.   Leuschner advised petitioner that he had sufficient

basis and amount at risk to deduct fully his distributive share

of loss from each of the entities for each year.   With respect

to the losses reported by KBS and KRS in particular, Leuschner

     3
      Whether the tax returns of CIJV, HIJV, and KBS accurately
reflect the actual ownership relationships among these entities
and petitioner is disputed by the parties. Petitioners contend
that the tax returns are inaccurate. Respondent takes the
position that this question is subject to resolution in a TEFRA
partnership-level proceeding and thus not properly before this
Court. There is no dispute, however, that the Schedules K-1 used
to prepare petitioners' returns were based on the ownership
structures reflected on the entities' returns.
                              - 5 -


explained to petitioner that the amounts of the loan guarantees

he had furnished in connection with the motel and restaurant

acquisitions were properly credited to his basis and amount at

risk and would absorb the deductions.

     For each of the years at issue, petitioner also sustained

net losses from his securities trading.   Leuschner advised

petitioner that his securities trading was substantial enough

to constitute a trade or business entitling him to deduct his

trading losses in full on Schedule C.   On the basis of similar

advice that he had received from other accountants, in prior

years petitioner had reported his trading losses as ordinary

losses on Schedule C rather than capital losses on Schedule D

depending on the level of his trading activity during the year.

     Preparation of petitioners' return for 1985 was delayed by

an Internal Revenue Service audit of one of the entities in which

petitioner held an interest, a limited partnership called

Barrister Equipment Associates (or Trust).   It was Leuschner's

practice to advise his clients not to file a return until it

could be filed on the basis of complete and accurate information.

In his opinion, the alternative strategy of filing a timely but

incorrect return and subsequently amending it was unwise, because

it tended to expose the client to a greater risk of audit.

Moreover, he determined from the available information that

petitioners would have no tax liability for 1985 owing to sizable
                                 - 6 -


current losses and loss carryforwards.       He advised petitioner

that since no tax would be due, there would be no financial

disadvantage to filing a late return.       Petitioner knew that he

had a duty to file timely returns, but adopted the course of

action that Leuschner recommended.       Petitioners requested and

received extensions of the due date for their 1985 return until

October 15, 1986.    They did not file their 1985 return until

January 11, 1988.

     The returns for 1987 and 1988 were untimely filed for

similar reasons.    Not all the information relevant to

petitioners' tax liabilities for these years had been collected

before the prescribed dates for filing.       Leuschner informed

petitioner that in view of the "overwhelming" losses passed

through to him from the motel and restaurant businesses, he would

certainly have no tax liability for these years, and hence no

reason to be concerned about meeting the filing deadlines.         Once

again petitioner was persuaded by the logic of his accountant's

advice.   Petitioners sought and received extensions of the due

date for filing their return for 1987 until October 15, 1988.

They filed the return on December 5, 1989.       Petitioners sought

and received extensions of the due date for filing their 1988

return until October 15, 1989.    They filed the return on

December 4, 1989.
                               - 7 -


     The results of petitioner's securities trading for each of

the years at issue were reported on Schedule C using a method

that tracked changes in an aggregate trading account.   The ending

balance of this account was reported as "gross receipts" for the

taxable year, while the sum of the initial balance plus losses

incurred during the taxable year was reported as "cost of goods

sold".   The Schedule C for each year showed a net loss equal to

the excess of the amount of cost of goods sold and certain

business expenses over gross receipts (gross receipts were not

reported for 1985).   No information provided on the returns

identified what "gross receipts" and "cost of goods sold"

represented.   The reported amounts, taken from the worksheets

that Leuschner had received from petitioner, overstated the

actual losses by $184,598 for 1985, $76,910 for 1987, and $46,281

for 1988.   The Forms 1040 for each year described petitioner's

occupation as "trader" and the Schedules C for 1985 and 1988

further identified the business activity to which the cost items

were attributable using simply the word "trading".   The type of

asset traded was not disclosed.   In addition, for 1985 and 1987

petitioners reported on Schedule C certain expenses that should

have been reported on Schedule A, and they claimed losses from

partnerships and S corporations in amounts that exceeded

petitioner's basis and amount at risk by $5,444 for 1985,

$154,468 for 1987, and $379,613 for 1988.
                                 - 8 -


                                OPINION

     Petitioners bear the burden of proving that they are not

liable for additions to tax under sections 6651(a)(1), 6653(a),

and 6661.   Rule 142(a).

1.   Section 6651(a)(1)

     Section 6651(a)(1) imposes an addition to tax for failure to

file an income tax return by the prescribed due date (including

any extensions).   The amount of the addition is 5 percent of the

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

that the delinquency continues, up to a maximum of 25 percent.

The addition to tax does not apply when the failure to file was

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

6651(a)(1).   To establish reasonable cause a taxpayer must

demonstrate that he exercised ordinary business care and prudence

but was nevertheless unable to file within the prescribed time

period.   Sec. 301.6651-1(c), Proced. & Admin. Regs.

     Petitioners contend that they exercised ordinary business

care and prudence in relying on the advice of a certified public

accountant that it was more appropriate to file a late return

than to file a timely return on the basis of incomplete and

inaccurate information.     They argue that such reliance

constitutes reasonable cause, citing United States v. Boyle, 469

U.S. 241, 251 (1985).     We disagree.
                                 - 9 -


     In United States v. Boyle, supra, the Supreme Court

suggested that a taxpayer's reliance on professional advice that

there is no obligation to file would generally establish

reasonable cause for purposes of section 6651.      Id. at 250-251.

On the other hand, the Court affirmed that the orderly operation

of our system of self-assessment depends on strict compliance

with known filing obligations.     Id. at 249.   Leuschner did not

advise petitioner that he need not file a return.     Petitioner is

a sophisticated businessman.   He exercises responsibility for the

tax compliance of partnerships and S corporations whose business

he manages.   He was aware of his obligation to file returns and

of the applicable deadlines.   The advice he received from

Leuschner was that failure to comply with filing deadlines would

have no adverse consequences because he would have no tax to pay.

Leuschner also may have explained to petitioner that his

recommendation was based in part on the concern that filing an

amended return would prompt an audit of the return.     The argument

that reliance on such advice constitutes reasonable cause for

delinquency has been rejected repeatedly by this Court and

others.   Jackson v. Commissioner, 864 F.2d 1521, 1527-1528 (10th

Cir. 1989), affg. 86 T.C. 492, 538-539 (1986); Becker v.

Commissioner, T.C. Memo. 1990-120; Estate of Smith v. United

States, 589 F. Supp. 836, 840 (E.D. La. 1984); cf. Lilley v.

Commissioner, T.C. Memo. 1989-602, affd. without published
                                 - 10 -


opinion 925 F.2d 417 (3d Cir. 1991).        The addition to tax under

section 6651 is accordingly sustained.

2.   Section 6653(a)

     Section 6653(a) provides for an addition to tax if any part

of an underpayment is due to negligence or (intentional)

disregard of rules or regulations.        For taxable years 1985 and

1987 the amount of the addition to tax is 5 percent of the entire

underpayment plus 50 percent of the interest payable with respect

to the portion of the underpayment attributable to negligence.

Sec. 6653(a)(1) and (2) (taxable year 1985); sec. 6653(a)(1)(A)

and (B) (taxable year 1987).     For the 1988 taxable year the

addition is equal to 5 percent of the underpayment.        Sec.

6653(a)(1).    For purposes of section 6653(a), "underpayment" has

the same meaning as "deficiency", as defined in section 6211(a),

except that the amount shown on the return is treated as zero if

the return was filed after the prescribed deadline, including any

extension.    Sec. 6653(c)(1).   "Negligence" includes any failure

to make a reasonable attempt to comply with provisions of the

Code.   Sec. 6653(a)(3); cf. Neely v. Commissioner, 85 T.C. 934,

947 (1985).

     Failure to comply with filing deadlines without reasonable

cause within the meaning of section 6651(a)(1) constitutes

negligence.    Sullivan v. Commissioner, 985 F.2d 704, 706 (2d Cir.

1993), affg. in part and revg. on another issue T.C. Memo. 1991-
                               - 11 -


492; Emmons v. Commissioner, 92 T.C. 342, 349 (1989), affd. on

other grounds 898 F.2d 50 (5th Cir. 1990); Eyefull Inc. v.

Commissioner, T.C. Memo. 1996-238; Ellwest Stereo Theatres v.

Commissioner, T.C. Memo. 1995-610.      Petitioners' failure to

comply with filing deadlines created underpayments for each of

the years at issue equal to the amount of tax due.       Since they

were unable to show reasonable cause for the delinquencies, it

follows that the underpayment for each year was attributable to

negligence.4

3.   Section 6661

     Section 6661 imposes an addition to tax equal to 25 percent

of the amount of any underpayment attributable to a substantial

understatement of tax.   Sec. 6661(a).    An understatement is

substantial if 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).   The understatement is reduced by any portion

attributable to:    (1) The tax treatment of an item for which the

taxpayer had substantial authority, or (2) an item with respect

to which the relevant facts affecting the item's tax treatment

are adequately disclosed in the return or in a statement attached

to the return.   Sec. 6661(b)(2)(B).    Respondent is authorized to

     4
      Our disposition of the negligence issue obviates the need
to consider petitioners' contention that they were not negligent
with respect to the substantive errors on their tax returns
because they relied reasonably and in good faith on professional
advice.
                               - 12 -


waive the addition to tax, in whole or in part, upon a showing

that the taxpayer had reasonable cause for the corresponding

portion of the understatement and acted in good faith.      Sec.

6661(c).    It is undisputed that petitioners substantially

understated their tax liability for 1985, 1987, and 1988.

     Petitioners advance two arguments to contest their liability

under section 6661.   First, they argue that the substantial

understatements should be reduced to the extent that they are

attributable to the securities trading losses deducted on

Schedule C, because petitioners disclosed sufficient relevant

facts to enable respondent to identify the potential controversy.

We disagree.   Petitioners did not follow the procedures for

making adequate disclosure on Form 8275 or on a statement

attached to the return as provided for in the regulations.       See

sec. 1.6661-4(b), Income Tax Regs.      The returns themselves

contained no reference to section 6661 or other acknowledgment

that petitioners were taking a potentially controversial

position.   They did not explicitly identify petitioners' position

with respect to the losses.    Nor could respondent reasonably be

expected to infer that the characterization of losses was at

issue, where the losses were identified only as "cost of goods

sold".   The Forms 1040 reflected that petitioner's occupation was

"trader" and the Schedules C for 1985 and 1988 reflected that his

principal business was "trading".    When used properly in their
                              - 13 -


technical legal sense, these terms denote activities inconsistent

with the use of Schedule C for reporting of losses, see, e.g.,

Kemon v. Commissioner, 16 T.C. 1026, 1032-1033 (1951); Kelly v.

Commissioner, T.C. Memo. 1996-529, and might therefore suggest a

potential controversy.   But inasmuch as respondent had no way of

ascertaining whether these terms were being used as legal terms

of art or in some nontechnical sense, these terms could not serve

as a substitute for disclosure of the fact that petitioner was

reporting losses from the sale of property that he had not held

as inventory or primarily for sale to customers.    Cf. Lester v.

Commissioner, T.C. Memo. 1995-317.     Petitioners did not

adequately disclose any items contributing to the substantial

understatements for the years at issue.

     Petitioners' second argument is that respondent should have

waived the additions to tax for substantial understatement

because the errors on their returns (or most of them) were the

result of reasonable and good faith reliance upon the mistaken

judgments of their accountant.   See sec. 1.6661-6(b), Income Tax

Regs.   Respondent's failure to waive the addition to tax under

section 6661 is reviewable by this Court for abuse of discretion.

Mailman v. Commissioner, 91 T.C. 1079, 1083-1084 (1988).     In

order to establish abuse of discretion, the taxpayer must

demonstrate that he specifically requested a waiver or otherwise

presented his claim to respondent at some time during the
                              - 14 -


administrative stage of the proceedings so as to afford her the

opportunity to exercise her discretion.     McCoy Enterprises v.

Commissioner, 58 F.3d 557, 563 (10th Cir. 1995), affg. T.C. Memo.

1992-693; Estate of Reinke v. Commissioner, 46 F.3d 760, 765 (8th

Cir. 1995), affg. T.C. Memo. 1993-197; Sisson v. Commissioner,

T.C. Memo. 1994-545; Myers v. Commissioner, T.C. Memo. 1994-529;

Klieger v. Commissioner, T.C. Memo. 1992-734.

     Petitioners concede that they did not seek a waiver prior

to trial, but contend that there is case authority for the

proposition that respondent should have granted a waiver sua

sponte.   On brief they cite Fisher v. Commissioner, 45 F.3d 396

(10th Cir. 1995), revg. and remanding T.C. Memo. 1992-740;

Vorsheck v. Commissioner, 933 F.2d 757 (9th Cir. 1991), affg. in

part and revg. in part an Oral Opinion of this Court; and Daoust

v. Commissioner, T.C. Memo. 1994-203.     Petitioners' reliance on

these cases is misplaced.   In the Fisher case, the Court of

Appeals found that the Commissioner abused her discretion by

failing to respond to the taxpayer's request for a waiver, not by

refusing to grant a waiver sua sponte.    In neither of the other

decisions cited by petitioners is there any indication of whether

an administrative remedy was in fact sought or any discussion of

the need to follow such a procedure as a matter of law.

Petitioners have not proven their entitlement to a waiver.     The

addition to tax is accordingly sustained.
                        - 15 -


To reflect the foregoing,


                                     Decision will be entered

                                 under Rule 155.