T.C. Memo. 1997-507
UNITED STATES TAX COURT
SAM E. SCOTT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21525-94. Filed November 12, 1997.
Sam E. Scott, pro se.
Marshall R. Jones, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined a $73,055 deficiency in
petitioner's 1991 Federal income tax, a $12,313 addition to tax for
failure to timely file a 1991 Federal income tax return pursuant to
section 6651(a)(1), and a $14,611 accuracy-related penalty for
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substantial understatement of tax pursuant to section 6662. The
deficiency primarily relates to Sam E. Scott's (petitioner)
withdrawal from his law firm partnership.
After concessions, the following issues remain for decision:
(1) Whether petitioner was entitled to a $121,500 loss deduction
due to his withdrawal from his law firm partnership; (2) whether
petitioner received an $85,455 taxable distribution from his law
firm's 401(k) plan; (3) whether petitioner is entitled to a $33,943
interest expense deduction; (4) whether petitioner is liable for an
addition to tax for failure to timely file his 1991 Federal income
tax return pursuant to section 6651(a)(1); and (5) whether
petitioner is liable for an accuracy-related penalty for the
substantial understatement of tax pursuant to section 6662.
All section references are to the Internal Revenue Code as in
effect for the year in issue, unless otherwise indicated. All Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference.
Petitioner resided in Hazlehurst, Mississippi, at the time he
filed his petition.
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Heidelberg & Woodliff Law Partnership
In 1963, petitioner joined the law firm of Heidelberg,
Woodliff & Franks (which later became Heidelberg & Woodliff), a
general partnership in Jackson, Mississippi, as an associate
attorney. Petitioner's practice primarily was confined to general
civil litigation.
In 1968, petitioner became a partner in Heidelberg, Woodliff
& Franks (hereinafter referred to as the firm, law firm, or the
partnership). Upon becoming a partner, petitioner purchased his
interest in the law firm by making monthly payments to the three
named partners. During his tenure there, petitioner was active in
the firm's management, serving as managing partner for a time.
In 1983, Messrs. Woodliff and Franks sold their interests
(totaling 46 percent) in the partnership for approximately $500,000
to seven junior partners. (Junior partners received a percentage
of the law firm profits to the extent they exceeded a certain
amount, plus a salary, but did not own an interest in the
partnership.) Four of the junior partners who bought Messrs.
Woodliff's and Franks' interests left the firm in 1985 and refused
to pay the balance due. Thereafter, the remaining partners at the
firm (including petitioner) assumed the obligation owed to Messrs.
Woodliff and Franks.
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Sometime during the late 1980's, the firm adopted a new
partnership agreement that granted partners only income interests
in the firm rather than specific interests in the firm's assets.
Partners under the old partnership agreement were bought out by the
partnership. Thus, under the new partnership agreement, partners
did not make capital contributions when they entered the
partnership, and received no liquidating distributions when they
left. The income interests were based on an annual evaluation of
each partner through a point system used by the firm's compensation
committee. In 1990, petitioner had an 8.86-percent interest in the
partnership.
On January 2, 1991, petitioner gave notice of his termination
from the firm, effective retroactively to December 31, 1990.
Petitioner then left Heidelberg & Woodliff, and together with
several other individuals who had earlier left the firm, started a
new law firm. At the time petitioner left Heidelberg & Woodliff,
he was the firm's largest producer.
Petitioner's 1990 Schedule K-1 on Form 1065 (Partner's Share
of Income, Credits, Deductions, Etc.) from Heidelberg & Woodliff
reported petitioner's capital account adjustments as follows:
(a) Capital account at $(21,369)
beginning of year
(b) Capital contributed ---
during year
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(c) Income (loss) from 223,264
* * * below
(d) Income not included 647
in column (c) plus
nontaxable income
(e) Losses not included (19,672)
in column (c), plus
unallowable deductions
(f) Withdrawals and (182,870)
distributions
(g) Capital account at end of ---
year (combine columns
(a) through (f))
The Schedule K-1 reflected that petitioner had a capital account
balance of zero at the end of 1990. Petitioner did not receive any
payments from Heidelberg & Woodliff with respect to the termination
of his interest in the law firm. Heidelberg & Woodliff continued
to exist following petitioner's departure.
Petitioner did not receive a Schedule K-1 for 1991. The only
distribution petitioner received in 1991 from Heidelberg & Woodliff
was from the firm's 401(k) plan.
Salary Reduction Plan Distribution
Petitioner participated in Heidelberg & Woodliff's 401(k)
salary reduction plan (the plan) which was administered by a firm
committee. The plan's funds were held in trust at Deposit Guaranty
National Bank (Deposit Guaranty).
In July 1989, petitioner borrowed $36,510.38 from the plan and
executed a promissory note to the plan. Later that month,
petitioner borrowed an additional $12,521.04 from the plan, for a
total of $49,031.42, and executed a new note to the plan. The note
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provided for quarterly repayments of the borrowed funds at 12-
percent interest, with the final installment due on July 5, 1994.
The note further provided:
It is agreed that in case of default in any payment of
interest, or termination of the employment of maker, or
the death of maker, the entire debt shall immediately
become due and payable at the option of the holder
hereof.
Petitioner never made any repayments of the borrowed funds to the
plan.
At the end of 1990, Jessie Homan, an account administrator for
Deposit Guaranty, contacted Jerard Pitts, the business manager at
Heidelberg & Woodliff, to discuss petitioner's delinquent payments
on his loan. Ms. Homan inquired whether the loan should be
declared in default and charged off. Mr. Pitts informed Ms. Homan
that petitioner was leaving the firm; they decided to charge off
the loan in January 1991 in accordance with the terms of the note.
On February 7, 1991, Deposit Guaranty issued a check for
$36,424.07 payable to petitioner. The check represented
petitioner's balance in the plan, $85,455.49, less the amount of
unrepaid funds borrowed from the plan, $49,031.42. The check was
mailed to Mr. Pitts and was negotiated by petitioner in 1991.
Petitioner failed to roll over any of the distributed funds into
another qualified tax-deferred account within 60 days.
A Form 1099-R (Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRA's, Insurance Contracts,
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etc.) was issued to petitioner for 1991 reporting a taxable
distribution of $85,455.49. The address on the Form 1099 was the
same as that on petitioner's notice of termination submitted by
Heidelberg & Woodliff to Deposit Guaranty. At no time did Deposit
Guaranty personally notify petitioner that his loan was charged off
or that the bank deemed the loan repaid.
1991 Federal Tax Return
On his 1991 Federal tax return, petitioner reported adjusted
gross income of $69,424. On his Schedule E (Supplemental Income
and Loss) under income or loss from partnerships and S
corporations, petitioner reported a $121,500 loss from Heidelberg
& Woodliff. Petitioner calculated the loss based on his 8.86-
percent interest in the firm's accounts receivable, work in
progress, cash on hand, and furniture and equipment that he never
received upon his departure from the firm.
Petitioner also reported $40,100 in taxable individual
retirement account distributions.1 On his Schedule A, petitioner
claimed $33,943 in investment interest expense deductions.
In April 1992, petitioner filed Form 4868 (Application for
Automatic Extension of Time To File U.S. Individual Income Tax
Return) requesting an automatic 4-month extension of the time to
file his 1991 tax return. Petitioner estimated his total 1991 tax
1
The distributions were actually from the Heidelberg &
Woodliff 401(k) salary reduction plan, not from any individual
retirement accounts.
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liability to be $25,000, which was fully paid through withholdings.
In August 1992, petitioner filed Form 2688 (Application for
Additional Extension of Time To File U.S. Individual Income Tax
Return) seeking an additional 2-month extension of the time to file
his 1991 tax return because he was still awaiting records necessary
to complete his return from Heidelberg & Woodliff. Petitioner
requested a new filing deadline of October 15, 1992, which was
approved by the Internal Revenue Service (IRS). Petitioner mailed
his 1991 tax return no later than October 15, 1992, and it was
received on October 19, 1992, by the IRS Service Center in Memphis,
Tennessee.
Notice of Deficiency
In the notice of deficiency, respondent disallowed
petitioner's $121,500 loss claim from Heidelberg & Woodliff because
he could not establish his basis in the partnership. Respondent
determined that petitioner received an $85,455 taxable distribution
from Heidelberg & Woodliff's salary reduction plan and accordingly
increased petitioner's taxable income by $40,355. Moreover,
respondent disallowed all but $211 of petitioner's $33,943
investment interest expense deductions on the basis that
petitioner's offsetting investment income was only $211.
Respondent also determined that petitioner had only substantiated
$29,443 of the interest expenses.
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Respondent also determined (1) a 25-percent addition to tax
for failure to timely file the 1991 tax return pursuant to section
6651(a)(1) on the basis that the estimated total tax liability
reported on Form 4868 was unreasonable, and thus the automatic 4-
month extension for filing the tax return was void, and (2) an
accuracy-related penalty for substantial understatement of tax
pursuant to section 6662.
OPINION
Issue 1. Loss From Law Firm Partnership
The first issue for decision is whether petitioner was
entitled to a $121,500 loss deduction due to his withdrawal from
the Heidelberg & Woodliff law firm partnership. Petitioner asserts
that the $121,500 loss represents the value of accounts receivable
and work in progress, along with other assets, he "left on the
table" when he departed the law firm. Respondent disagrees,
contending that (1) petitioner left the law firm in 1990, and thus
there was no event in 1991 (the year in issue) upon which
petitioner could recognize a loss, and (2) assuming arguendo that
petitioner left the law firm in 1991, petitioner failed to prove
his basis in the partnership. For the reasons set forth below, we
sustain respondent's determination with respect to this issue.
In order to prevail and recognize a loss, petitioner must show
that upon withdrawing from the law firm his basis in the firm
exceeded the amount he received. Sec. 731. See Harris v.
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Commissioner, T.C. Memo. 1988-195; Lynch v. Commissioner, T.C.
Memo. 1982-305; Abraham v. Commissioner, T.C. Memo. 1970-304. A
partner's adjusted basis in his partnership interest is determined
under section 705.
A partner's initial basis in a partnership is determined by
the amount of money contributed and the adjusted basis of any other
type of property contributed. Sec. 722. The partner's basis in
the partnership is then adjusted upward for the partner's
distributive share of separately stated income items, and downward
by distributions of money (including the relinquishment of
liabilities) or the adjusted basis of other property distributed,
and the partner's distributive share of losses and nondeductible
expenses. Sec. 705; La Rue v. Commissioner, 90 T.C. 465, 477
(1988).
Petitioner claims a $121,500 basis2 in the partnership due to
the "value" of his interest in accounts receivable and work in
progress for work he performed for clients of the law firm.
Petitioner explains on brief:
A partner's basis for his interest in a
partnership depends on how he acquired it. It
may consist of the amount of cash he
2
At trial, petitioner calculated his basis in his
partnership interest by adding the amount of accounts receivable
and costs associated with petitioner's clients ($93,744.68) with
current work in progress ($65,485.20), for a total of
$159,229.88. Petitioner then applied a collection rate which
reduced the total figure to $121,500.
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contributed to the property [sic], it may
consist of property contributed to the
partnership on the amount paid to a retiring
partner for his interest.
The testimony and exhibits show that
Petitioner purchased an interest in 1968 and
paid a portion of debt due to retiring
partners after the 1985 consumption of 4/7 of
the former junior partners' debt to the named
partners who had sold their interests.
The contribution to the partnership by
the Petitioner of work in process and accounts
receivable are contributions of property.
This is recognized by IRC § 724 which deals
with unrealized receivables and inventory.
Work in process is the inventory of a law firm
and accounts receivable are unrealized
receivables. The value of those two items
alone produced and contributed by Petitioner
are significantly more than the deduction
claims.
Petitioner's reasoning is flawed. Petitioner is not entitled
to a deduction for failure to realize anticipated income. Hort v.
Commissioner, 313 U.S. 28 (1941). Petitioner has not acquired a
basis in the accounts receivable and work in progress under section
705 unless the amounts of these items had been reflected in the
income of the partnership and in petitioner's distributive share in
1990 or in prior years. Holman v. Commissioner, 66 T.C. 809, 816-
817 (1976), affd. 564 F.2d 283 (9th Cir. 1977). But as a cash
basis taxpayer, Heidelberg & Woodliff's accounts receivable and
work in progress are not reflected in the partnership's income (nor
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in petitioner's distributive share thereof) until collected;3
consequently, these items do not affect petitioner's capital
account or his basis in the partnership. See Thatcher v.
Commissioner, 61 T.C. 28, 36 (1973), affd. in part and revd. in
part on other grounds 533 F.2d 1114 (9th Cir. 1976); Raich v.
Commissioner, 46 T.C. 604, 610 (1966); Pinson v. Commissioner, T.C.
Memo. 1990-234.
To the extent that petitioner may have had other sources which
affected his basis in the partnership (such as capital
contributions), he has failed to prove such basis. Rule 142(a);
Welch v. Helvering, 290 U.S. 111 (1933). And in this regard, we
are mindful that when the law firm adopted a new partnership
agreement in the late 1980's, partners under the old partnership
agreement (which presumably included petitioner) were bought out by
the partnership, and partners under the new partnership agreement
did not make capital contributions. Additionally, petitioner has
failed to adjust his claimed basis in the partnership by the
distributive share items and cash distributions made by the
partnership that were reported on Schedule K-1 for 1990, or the
deemed distribution of any partnership liabilities assumed by the
3
Petitioner conceded that neither he nor the firm
received or reported any income from accounts receivable and work
in progress during 1990.
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partnership upon petitioner's retirement. See secs. 705, 752(b);
Lynch v. Commissioner, supra; Abraham v. Commissioner, supra.
Thus, we hold that petitioner is not entitled to a $121,500
loss deduction due to his withdrawal from the Heidelberg and
Woodliff partnership because he failed to prove that he had any
basis in the partnership.
However, assuming arguendo that petitioner did have basis in
the Heidelberg & Woodliff partnership when he left the law firm,
petitioner has not shown that he is entitled to a loss deduction in
1991.
Section 1.736-1(a)(1)(ii), Income Tax Regs., provides:
A partner retires when he ceases to be a partner under
local law. However, for purposes of subchapter K,
chapter 1 of the Code, a retired partner or a deceased
partner's successor will be treated as a partner until
his interest in the partnership has been completely
liquidated.
A retiring partner's entire interest in a partnership is terminated
through the liquidation of the partner's interest by means of a
distribution or series of distributions to the partner by the
partnership. Secs. 736(b), 761(d); sec. 1.761-1(d), Income Tax
Regs. The liquidation is complete upon the final distribution to
the partner. Sec. 1.761-1(d), Income Tax Regs.
Here, the parties stipulated that petitioner left the firm at
the end of 1990; indeed, petitioner testified that he was not a
partner after December 31, 1990. Petitioner introduced no evidence
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that under Mississippi law he was a partner after December 31,
1990.4 Hence, for Federal tax purposes, petitioner is deemed to
have retired from the partnership on December 31, 1990.
Petitioner claims that he was entitled to a liquidating
distribution in 1990 which he never received and which could not
have been discovered from the firm's financial records until their
completion in 1991. Thus, he asserts he is entitled to recognize
a tax loss in 1991. Petitioner's argument must fail. Although
petitioner may have believed he was entitled to a liquidating
distribution in exchange for his partnership interest, the fact is
he never received one in 19915 nor was he entitled to one. Indeed,
Luther Thompson, a partner in Heidelberg & Woodliff during
petitioner's tenure with the firm, testified that the firm's
partnership agreement, as amended in the late 1980's, did not
4
Mississippi law provides that retiring partners may
seek an accounting of their interests in their former
partnerships. Miss. Code Ann. secs. 79-12-83, 79-12-85 (1989).
5
Heidelberg & Woodliff's Schedule K-1 issued to
petitioner indicates that petitioner's share of partnership
liabilities at the end of 1990 was $69,756. Luther Thompson, a
partner at Heidelberg & Woodliff, testified that he could not
vouch for the accuracy of that figure because it was handwritten
and not typewritten like the remainder of the schedule. To the
extent petitioner was relieved of partnership liabilities, such
would constitute a distribution of money to petitioner by the
partnership and hence a deemed liquidating distribution at the
end of 1990. Sec. 752(b); see O'Brien v. Commissioner, 77 T.C.
113 (1981); Pietz v. Commissioner, 59 T.C. 207 (1972); Stilwell
v. Commissioner, 46 T.C. 247 (1966).
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provide for capital contributions or liquidating distributions, but
only granted profit interests in the partnership.
Because petitioner received no liquidating distributions in
1991, petitioner's gain or loss in the partnership must be
calculated as of the time he withdrew from the partnership on
December 31, 1990. See sec. 1.736-1(a)(5), Income Tax Regs.
Consequently, petitioner cannot deduct in 1991 the amount of any
loss due to his withdrawal from the Heidelberg & Woodliff
partnership.
Issue 2. Salary Reduction Plan Distribution
The second issue for decision is whether petitioner must
include $85,455 in income as a taxable distribution from the
Heidelberg & Woodliff salary reduction plan upon his termination
from the law firm. Petitioner contends that he was not properly
notified of the cancellation of the note and that equity requires
leniency. Respondent asserts that under the terms of the plan and
the note, there were three separate grounds for requiring immediate
repayment of petitioner's note and treating it as having been
repaid and satisfied in 1991: (1) Petitioner failed to make the
required quarterly payments, and thus, was in default of payment;
(2) petitioner's employment with Heidelberg & Woodliff had
terminated; and (3) because petitioner's plan balance was to be
distributed to him in 1991, the plan's terms required that the note
be paid first. We agree with respondent's assertions.
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The amount of any distribution to a taxpayer from a qualified
pension plan described in section 401(a) generally is includable in
gross income in the year of distribution. Sec. 402(a)(1). Such
distribution includes the outstanding balance of any loan at the
time of the beneficiary's separation from service or default on the
note. Murtaugh v. Commissioner, T.C. Memo. 1997-319; see also
Minnis v. Commissioner, 71 T.C. 1049, 1056 (1979); Dean v.
Commissioner, T.C. Memo. 1993-226. However, if a portion of the
amount distributed is rolled over to another qualified pension plan
within 60 days following receipt of the distribution, that portion
is not includable in gross income in the year of distribution.
Sec. 402(a)(5).
If the taxpayer fails to roll over distributed funds within 60
days, and the distribution is made before the date the taxpayer
attains the age of 59-1/2, and none of the other exceptions in
section 72(t)(2) applies, the tax on the distribution is increased
by an amount equal to 10 percent of the portion includable in gross
income. Sec. 72(t).
Petitioner was 54 years old at the time he received his
distribution from Heidelberg & Woodliff's salary reduction plan; he
did not roll over such funds into another qualified plan. See
Rodoni v. Commissioner, 105 T.C. 29, 32-34 (1995); Clark v.
Commissioner, 101 T.C. 215, 224-225 (1993). He unquestionably
received and negotiated the $36,424.07 distribution check from
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Deposit Guaranty in 1991. The check represented petitioner's
balance in the plan, $85,455.49, less the amount of unpaid funds
borrowed from the plan, $49,031.42. Thus, the check included a
deemed distribution of the loan's outstanding balance. See
Murtaugh v. Commissioner, supra.
To conclude, the entire $85,455.49 is includable in
petitioner's 1991 gross income as a taxable distribution from
Heidelberg & Woodliff's salary reduction plan, and petitioner,
having failed to show that any of the exceptions in section
72(t)(2) apply, is liable for the additional 10-percent tax for
early distributions imposed by section 72(t).
Issue 3. Interest Expense Deduction
The third issue for decision is whether petitioner is entitled
to deduct $33,943 for interest expenses. Petitioner argues that
such amount, to the extent substantiated,6 should be allowed
pursuant to section 163 as interest incurred in the conduct of a
trade or business. Respondent asserts that petitioner's interest
expense deductions are for investment interest and therefore are
limited to net investment income pursuant to section 163(d).
Section 163 generally allows the deduction of interest paid on
indebtedness during the taxable year. Section 163(d)(1) limits the
deduction for investment interest to the extent of net investment
6
Respondent determined in the notice of deficiency that
petitioner had substantiated $29,443 of the interest expenses.
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income. Investment interest means interest paid on indebtedness
allocable to property held for investment. Sec. 163(d)(3)(A).
Property held for investment includes any interest held by the
taxpayer involving the conduct of a trade or business which is not
a passive activity and with respect to which the taxpayer did not
materially participate. Sec. 163(d)(5)(A)(ii). Net investment
income means investment income (gross income from property held for
investment and net gain from the disposition of property held for
investment) over investment expenses. Sec. 163(d)(4)(A) and (B).
On his 1991 Federal tax return, petitioner reported that the
interest expenses incurred were investment interest. In his
petition and on brief, petitioner described the interest as
incurred from business loans. At trial, petitioner described the
interest as incurred on loans borrowed to support his interest in
an automobile dealership.
Petitioner offered no evidence of his involvement in the
automobile dealership and thus failed to sustain his burden with
respect to the nature of the interest paid. Rule 142(a);
Cannizzaro v. Commissioner, T.C. Memo. 1982-633; see also King v.
Commissioner, 89 T.C. 445, 456-467 (1987). Consequently, we hold
that petitioner is entitled to deduct investment interest expenses
only to the extent of net investment income pursuant to section
163(d).7
7
In the notice of deficiency, respondent allowed $211 of
(continued...)
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Issue 4. Failure To File Addition to Tax
The fourth issue for decision is whether petitioner is liable
for an addition to tax for failure to timely file his 1991 Federal
tax return. Petitioner claims that he timely filed the return
following two extensions granted by the IRS. Respondent contends
that any extensions granted were invalid because petitioner failed
to make a bona fide and reasonable attempt to estimate his proper
tax liability.
Section 6651(a)(1) imposes an addition to tax of 5 percent of
the amount of tax due per month for each month that a tax return is
not timely filed, not to exceed 25 percent. An exception is made
for reasonable cause not due to willful neglect.
Petitioner's 1991 Federal tax return was due on April 15,
1992, but petitioner received an automatic 4-month extension
through his filing of Form 4868. In August 1992, petitioner sought
and received an additional 2-month extension to October 15, 1992.
Petitioner subsequently filed his return on October 15, 1992.
Petitioner reported a total 1991 estimated tax liability of
$25,000 on Form 4868, which was approximately one-third of the
final tax liability of $75,354 determined by respondent.
Respondent argues that petitioner failed to estimate properly his
7
(...continued)
investment interest expenses. This figure was based on $157 of
unreported dividend income, $36 of reported interest income, and
$18 of unreported interest income. Due to respondent's
concession regarding the $157 of dividend income, however, the
amount of net investment income must be reduced to $54.
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tax liability on Form 4868 when he filed for the automatic
extension, and thus such extension is invalid.
One of the requirements for the automatic extension of time to
file an individual tax return is the proper estimation of the final
tax liability for the taxable year. Sec. 1.6081-4(a)(4), Income
Tax Regs. The failure to estimate properly the final tax liability
on Form 4868 can invalidate the automatic extension and subject the
taxpayer to an addition to tax pursuant to section 6651(a)(1) for
failure to timely file the return. Crocker v. Commissioner, 92
T.C. 899 (1989); see also Berlin v. Commissioner, 59 F.2d 996 (2d
Cir. 1932), affg. a Memorandum Opinion of this Court.
To establish a proper estimate of the tax liability for
purposes of the automatic extension, the taxpayer must make "a bona
fide and reasonable estimate of his tax liability based on the
information available to him at the time he makes his request for
extension." Crocker v. Commissioner, supra at 908. The taxpayer
must determine his tax liability generally, but carefully. Id.
Further, the taxpayer must make a bona fide and reasonable attempt
to locate, gather, and consult information that will enable him to
make a proper estimate of his tax liability. Id.
Petitioner testified that he acted reasonably in estimating
his tax liability and utilized the information he had available to
him. According to petitioner's request for a second extension of
time to file his 1991 return, he was waiting for records from
Heidelberg & Woodliff that were necessary to prepare the return.
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The failure to obtain the necessary information when filing Form
4868, however, does not lead to the conclusion that petitioner
properly estimated his tax liability. See Arnaiz v. Commissioner,
T.C. Memo. 1992-729.
Petitioner knew that he terminated his interest in Heidelberg
& Woodliff as of the end of 1990; he also knew that he did not
receive a Schedule K-1 for 1991 from the firm. Moreover, he was a
partner in the firm when the partnership agreement was amended to
eliminate partner capital contributions upon admission and
liquidating distributions upon retirement. And he should have been
aware that no deduction is allowable for leaving his share of the
law firm's anticipated but not realized income (i.e., the firm's
accounts receivable and work in progress) on the table. See Hort
v. Commissioner, supra.
As to the tax consequences of the distribution from the
Heidelberg & Woodliff salary reduction plan, petitioner claims that
he never received the Form 1099 issued to him reflecting such
distribution. Yet, petitioner never inquired as to why he did not
receive a Form 1099, nor did he inquire as to the status of the
note executed in favor of the plan for the loan proceeds he
borrowed. Even a cursory review of the note would have alerted
petitioner to the fact that his termination from the firm would
cause an acceleration of the debt; moreover, he knew that he was in
default on the note. Additionally, the notice of termination from
Heidelberg & Woodliff states that petitioner is to receive 100
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percent of his vested interest in the partnership's salary
reduction plan, which should have indicated to him that the
distribution was not limited to the proceeds from the check he
received and negotiated.
Petitioner failed to make a bona fide and reasonable estimate
of his tax liability when he filed Form 4868. See Crocker v.
Commissioner, supra at 908. He underestimated his tax liability by
two-thirds. Cf. Boatman v. Commissioner, T.C. Memo. 1995-356. His
failure to obtain the necessary information to estimate properly
his tax liability, as well as his failure to properly investigate
the law regarding his tax issues, does not excuse the error in
petitioner's estimate. Arnaiz v. Commissioner, supra. Petitioner's
mistaken belief that he was entitled to a loss deduction for the
value of accounts receivable and work in progress "left on the
table" when he departed Heidelberg & Woodliff does not constitute
reasonable cause for failure to make a proper estimate. See Mayhew
v. Commissioner, T.C. Memo. 1994-310. Thus, we sustain
respondent's voiding of the tax filing extensions obtained by
petitioner.
Because petitioner's reliance on the filing extensions
constituted his sole defense to the section 6651 (a)(1) addition to
tax, petitioner has not shown that his failure to timely file his
1991 tax return was due to reasonable cause and not willful
neglect. See Crocker v. Commissioner, supra at 913. Accordingly,
we hold that petitioner is liable for the section 6651(a)(1) 25-
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percent addition to tax for failure to timely file his 1991 tax
return.
Issue 5. Accuracy-Related Penalty
The final issue for decision is whether petitioner is liable
for the accuracy-related penalty for the substantial understatement
of tax pursuant to section 6662. Petitioner asserts that he had
reasonable cause for the understatement of tax.
Section 6662 imposes an accuracy-related penalty equal to 20
percent of any portion of an understatement attributable to a
substantial understatement. A substantial understatement means an
understatement which exceeds the greater of 10 percent of the tax
required to be shown on the return or $5,000. Sec. 6662(d)(1).
The understatement is reduced by that portion of the understatement
for which the taxpayer had substantial authority or for which the
taxpayer adequately disclosed the relevant facts in the return.
Sec. 6662(d)(2)(B). Additionally, no penalty is imposed with
respect to any portion of an understatement as to which the
taxpayer acted with reasonable cause and in good faith. Sec.
6664(c)(1).
Petitioner provided no disclosures in his return and supplied
this Court with no substantial authority for his positions. See
sec. 1.6662-4(d)(3), Income Tax Regs. Also, he failed to prove
that his effort to assess his proper tax liability was sufficient
to establish reasonable cause and good faith. See sec. 1.6664-
- 24 -
4(b), Income Tax Regs. Thus, we hold that petitioner is liable for
the accuracy-related penalty for the substantial understatement of
tax.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.