Greene v. Commissioner

T.C. Memo. 1998-101

UNITED STATES TAX COURT

CHARLES A. GREENE AND CHRISTINE J. GREENE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5296-94. Filed March 11, 1998.

Michael J. Wenig and M. Robin Davis, for petitioners.

Ross A. Rowley, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7443A(b) and Rules 180, 181, and 182.1

In two separate notices of deficiency respondent determined

additions to petitioners' Federal income taxes for the years 1983

1
All section references are to the Internal Revenue Code in
effect for the taxable years in issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
 - 2 -

and 1984 under section 6653(a)(1) in the amounts of $1,159.70 and

$43.65, respectively. Respondent also determined for both years

additions to taxes under section 6653(a)(2) in the amounts of 50

percent of the interest due on the portion of the underpayments

of taxes attributable to negligence.

Certain issues raised in this case by petitioners' Motion to

Restrain Collection and respondent's Motion to Dismiss for Lack

of Jurisdiction and to Strike the Claims Relating to the

Deficiency Attributable to Partnership Items and Increased

Interest Pursuant to I.R.C. Section 6621(c) were decided by the

Court in Greene v. Commissioner, T.C. Memo. 1995-105 (Greene I).

By an amendment to petition, petitioners attempted to put at

issue the period of limitations for the "deficiencies being

assessed". The Court found that the affected items deficiency

notices here involved were mailed to petitioners within 1 year of

the date of entry of decision in the partnership level

proceedings in docket No. 5757-92. See sec. 6229(d). The Court

also found that petitioners were not entitled to direct notice of

the partnership level proceedings and that any reliance on

Crowell v. Commissioner, 102 T.C. 683 (1994), is misplaced.

On brief petitioners state that they "believe that the Court

has already ruled on the statute of limitations issue" in

Greene I. We agree, and we decline to revisit the issue. See,

e.g., Crocker v. Piedmont Aviation, Inc., 49 F.3d 735, 739 (D.C.
 - 3 -

Cir. 1995); Fagan v. City of Vineland, 22 F.3d 1283, 1290 (3d

Cir. 1994); Sanders v. Sullivan, 900 F.2d 601, 605 (2d Cir.

1990). The issues remaining for decision are: (1) Whether any

part of an underpayment of income taxes for 1983 or 1984 is due

to negligence or intentional disregard of rules or regulations;

and if so, (2) whether the portion of the underpayment due to

negligence is eliminated or reduced by petitioners' filing of an

amended return reporting and paying additional income tax for the

taxable year 1983.

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

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference. At the time the petition

in this case was filed, petitioners were residing in High Point,

North Carolina.

FINDINGS OF FACT

During the years 1983 and 1984, Charles A. Greene

(petitioner) was a limited partner in a partnership known as Mid

Continent Drilling Associates II (Mid Continent or the

partnership). The additions to tax in this case relate to

petitioner’s investment in Mid Continent.

Petitioners' Work and Business History

Petitioner Christine Greene is a high school guidance

counselor.
 - 4 -

Petitioner has a high school diploma and no formal education

in finance, accounting, investing, or in business planning. He

has no specialized knowledge of the oil and gas industry.

Petitioner does, however, have a long work history in the

business world. Petitioner joined the military before graduating

from high school and obtained his GED while serving in the Air

Force. After leaving the Air Force petitioner worked as a

salesman for Advanced Tire and Auto. For about 2½ years

petitioner worked for Pilot Life Insurance Co. as a "debit sales

person", then in the collection department of Dunn & Bradstreet

for 5 years, and for 6 years with the Kay-Lynn Furniture Co.

(Kay-Lynn).

While employed at Kay-Lynn in or around the year 1967,

petitioner met Mr. Irv Corman2 (Corman), an experienced certified

public accountant. Petitioner wanted to start his own furniture

manufacturing business and left employment with Kay-Lynn in 1972.

Petitioner sought Corman's advice on how to start the business

with very limited finances. Petitioner also sought advice from

"Other people in the furniture industry, people who were in the

business of retailing furniture, people who were in the

manufacturing end * * * of furniture manufacturing."

2
Mr. Corman died on May 5, 1992.
 - 5 -

Classic Gallery

Petitioner called his business Classic Gallery, and the

corporation elected to file Federal income tax returns for the

business as an S corporation. After the second or third year of

operations, the business began generating enough income to allow

petitioner to draw a salary. Before 1978 petitioner's average

income was below $75,000. After 1978 the company's profits

"blossomed", generating for petitioner a very substantial six-

figure income in wages and dividends.

Over the years, Corman became petitioner's friend,

associate, and chief adviser. Corman came to be retained on a

monthly basis to provide accounting advice and services to

Classic Gallery. As petitioner's furniture manufacturing

business prospered, Corman began to suggest to petitioner how his

earnings from the corporation might be invested. Although Corman

presented various investment "possibilities" to petitioner, he

was not separately compensated as an investment counselor.

Petitioner discussed the investment proposals with Corman,

reviewed materials that Corman presented, and evaluated them "a

number of different ways". Although petitioner relied on Corman

to tell him if something was a "good investment", he did not

"just blindly accept" Corman's recommendations. Petitioner

rejected some investments presented to him by Corman.
 - 6 -

Partnership Investments

One of the investments Corman recommended was in "GeoVest".

Petitioner "understood" that the GeoVest investments were oil and

gas partnerships. Reported on petitioners' 1981 and 1982 Federal

income tax returns, prepared by Corman, were partnership losses

from investments in "GeoVest Drilling Fund Ltd 1981-A" and

"GeoVest Drilling Fund Ltd 1981-B" (GeoVest).3

In the middle of 1983, Corman recommended to petitioner a

second investment in an oil and gas partnership, the Mid

Continent partnership. Corman told petitioner that he had a

client, William R. Fields (Fields), who had fallen on "hard

times" and was unable to meet his cash investment obligation to

the partnership. Fields had invested in the partnership in 1981.

He was required to make the third of three yearly $10,000 cash

capital contributions in 1983. Corman told petitioner that this

was an opportunity for him to get into the partnership at a

reduced investment amount. Corman said that the Mid Continent

investment was "similar" to GeoVest, "had potential for return",

and looked like it would be a "good investment".

3
Petitioners also reported partnership income of $4,585 each
from the "Green Lindsay Co" for 1981, and in 1982 partnership
income of $2,529 each from the "Green Whiteside Co" and a
partnership loss of $305 from "Hofel [sic] Associates of H. Pt.".
The record contains no other description of these particular
investments.
 - 7 -

Petitioner's Evaluation of Mid Continent

Petitioner discussed with Corman the tax benefits he might

receive from Mid Continent and as a result, he expected some

"flow-throughs" of losses and investment tax credits. Petitioner

"read some paperwork" about Mid Continent that included various

forms and reports. At the time of his investment petitioner

received and reviewed a document that bore the title "Terra

Drill". He reviewed a partnership prospectus for Mid Continent,

and he produced at trial a document the first page of which is

numbered "35" and is entitled "Summary of Partnership Agreement".

The second through eleventh and final pages of the document are

numbered "B9" through "B18" and discuss solely tax aspects of the

partnership.

Petitioner also received a subscription agreement for Mid

Continent that he reviewed at the time he purchased his interest

from Fields. Paragraph 2.(k) at page 3 of the four-page

subscription agreement provides in part:

I understand that no state or Federal governmental
authority has made any finding or determination
relating to the fairness for public investment of the
Units in the Partnership and that no state or Federal
governmental authority has recommended or endorsed, or
will recommend or endorse, these Units.

Petitioner was aware that Corman did not have a "vast

knowledge of oil and gas" matters and that Corman's advice on the

Mid Continent partnership was based solely on his reading of the

prospectus.
 - 8 -

Through Corman, petitioner knew other individuals who were

investors in Mid Continent. Before investing in the partnership

in 1983, petitioner discussed with other investors the nature of

"their involvement with Mid Continent". Petitioner "looked into"

the activities of the partnership in 1981 and 1982 by reading

accounting reports. On the basis of the discussions with other

investors and the recommendations of Corman, petitioner

considered the purchase of Fields' interest in the partnership to

be "reasonable".

The Deal With Fields

When Fields invested in the Mid Continent partnership in

1981, he agreed to make an initial cash payment of $10,000 and to

make subsequent $10,000 cash payments in each of the years 1982

and 1983. Fields also agreed to become liable on a $120,000

"obligation" to Mitchell Petroleum Technology Corp. (Mitchell)

that was to become due 13 years later, on January 15, 1994.

During petitioner's negotiation with Fields over the purchase of

his Mid Continent partnership interest, it was agreed from the

beginning that petitioner would pay the last $10,000 cash capital

contribution. But the negotiation focused on "What the amount of

the investment was that we were to receive in terms of the value

of the balance of the due--the amount that was still due" on

Fields' obligation to Mitchell. They discussed whether Fields
 - 9 -

would retain more than or less than 50 percent of the obligation

to Mitchell.

On or about June 21, 1983, petitioner and Fields came to

terms memorialized in an assignment of interest document.

Petitioner purchased Fields' interest in Mid Continent by paying

the final $10,000 capital call plus $600 interest and by assuming

half of the $120,000 obligation to Mitchell.

Preparation of the 1983 and 1984 Returns

Corman subsequently prepared petitioners' 1983 Federal

income tax return. Petitioners claimed an ordinary loss of

$46,007 and an investment credit of $190 reflecting their share

of Mid Continent losses and credits based upon the Schedule K-1

provided to them by the partnership.4 Corman also prepared

petitioners' 1984 return, on which they claimed a Mid Continent

partnership loss of $1,633.5

The record does not reflect that petitioner made any further

inquiry about or investigation into the operations of Mid

Continent, even after he received notification in 1985 that the

partnership was suing its accountants. Eventually, in early 1986

4
In addition, petitioners reported partnership losses from
"Hotel Associates of High Point" and GeoVest B, as well as
partnership gains from GeoVest A and "Greene Whiteside Co".
5
In addition, petitioners reported partnership gains from
"Greene Whiteside Co" and GeoVest A, and partnership losses from
GeoVest B, "Hotel Associates of High Point", "1600 Market Street
Associates", "Elm Street Associates I", and "Ambassador Real
Estate Investors L.P."
 - 10 -

petitioner "became aware" that the Internal Revenue Service (IRS)

was disallowing deductions related to the partnership. Corman

suggested that petitioner confer with a tax attorney, which he

did.

On the basis of his discussions with his attorney,

petitioner developed "an understanding" that other taxpayers in

his locale who had invested in Mid Continent were settling their

controversies with the IRS. He understood that if they agreed to

forgo their partnership deductions, the IRS would allow Mid

Continent partners to deduct their "[cash] investment", such as

the $10,000 payment he had made.

The Partnership Examination and Petitioners' Amended Return

On August 11, 1986, respondent mailed petitioner a notice of

the beginning of an examination of Mid Continent’s 1983

partnership return.

On or about December 29, 1986, petitioners filed an amended

income tax return for 1983 (the amended return), along with a

Notice of Inconsistent Treatment or Amended Return on Form 8082.

Petitioners amended their 1983 return by reducing the $46,007

partnership loss with respect to Mid Continent by $36,007 and by

eliminating an investment tax credit in the amount of $190.

Petitioners remitted a total of $24,393 with the amended return,

designating $18,194 as tax and $6,199 as interest.
 - 11 -

Petitioners’ reporting position, as set forth in the amended

return and attached Form 8082, was based on their understanding

of settlements purportedly entered into between respondent and

other Mid Continent partners for taxable years 1981 and 1982.

The record in this case includes the transcript of account

that respondent maintained for petitioners’ 1983 taxable year.

The transcript of account indicates that the payment of tax and

interest that was remitted by petitioners with their amended

return was posted to petitioners’ account on December 29, 1986.

Later, on March 9, 1987, respondent assessed $18,194 as an

advance payment of an examination deficiency and $6,181.36 as a

designated payment of interest.

There is no evidence in the record that petitioners filed an

amended return for tax year 1984.

Partnership Litigation and Petitioners' Tax Assessments

In October of 1990 the Court filed its opinion in Webb v.

Commissioner, T.C. Memo. 1990-556, remanded on a jurisdictional

issue 17 F.3d 398 (9th Cir. 1994), holding that the activities of

the partnership in 1981 and 1982 were not engaged in for profit

and that the underpayments of taxes resulting from the

deductions, losses, and credits claimed with respect to the

partnership were attributable to negligence and to tax-motivated

transactions.
 - 12 -

In June 1991, respondent proposed a settlement for taxable

years 1983 and 1984 regarding petitioner’s investment in Mid

Continent. Petitioners rejected the proposed settlement on the

basis of the view that their tax liability was properly reported

on the amended return.

On October 21, 1991, respondent mailed separate notices of

final partnership administrative adjustment (FPAA’s) to Mid

Continent’s tax matters partner (TMP) for the taxable years 1983

and 1984. Respondent did not mail a copy of either of the FPAA’s

to petitioners. A timely petition for readjustment, which was

assigned docket No. 5757-92, was filed by partners other than the

TMP.

On February 11, 1993, a decision was entered by this Court

in the partnership proceeding. The decision served to sustain

respondent’s disallowance of the losses claimed by Mid Continent

on its partnership returns for 1983 and 1984. No appeal was

taken, and this Court’s decision became final on May 12, 1993.

Secs. 7481(a), 7483.

On December 27, 1993, respondent made an assessment against

petitioners, relating to the taxable year 1983, for additional

income tax in the amount of $5,000 and for unpaid interest in the

amount of $13,633.01 computed at the increased rate established

under section 6621(c). The tax assessed in the amount of $5,000

was based on the disallowance of the remaining $10,000
 - 13 -

partnership loss that petitioners had not eliminated on the

amended return. The assessment reflected a total tax liability

for 1983, in respect of partnership items relating to Mid

Continent, of $23,194 less the $18,194 that petitioners had

previously designated as tax and remitted with their amended

return.

On December 29, 1993, and February 9, 1994, respondent

mailed notices of deficiency to petitioners in which there were

determined additions to tax for negligence under section

6653(a)(1) and (2) for the taxable years 1983 and 1984,

respectively. The additions to tax are affected items in that

they are based on tax owing by petitioners as a result of

adjustments to partnership items appearing on Mid Continent’s

partnership returns for 1983 and 1984.

OPINION

Petitioners argue that they are not subject to the additions

to tax for negligence because: (1) The Internal Revenue Code

should not punish negligent investing, only negligence in

reporting tax obligations; (2) they, unsophisticated investors,

relied in good faith upon the advice of a competent, independent

professional on an investment activity known to be risky; and (3)

if they are found to have been negligent, the payment of tax with

the amended return for 1983 eliminates or reduces the 1983 year
 - 14 -

underpayment of tax for purposes of the section 6653(a)(1)

and (2) additions to tax.

Respondent's determinations, contained in the notice of

deficiency, are presumed correct, and petitioners bear the burden

of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). Therefore, petitioners have the burden of

proving that they were not negligent in this case. See Schrum v.

Commissioner, 33 F.3d 426, 437 (4th Cir. 1994), affg. in part and

vacating in part T.C. Memo. 1993-124; Estate of Mason v.

Commissioner, 64 T.C. 651 (1975), affd. 566 F.2d 2 (6th Cir.

1977).

Section 6653(a)(1) imposes an addition to tax if any "part

of any underpayment" of tax is due to negligence or intentional

disregard of rules or regulations. Section 6653(a)(2) imposes an

addition to tax in an amount equal to 50 percent of the interest

due on the portion of the underpayment attributable to

negligence.

Definition of Negligence Under Section 6653(a)

Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would employ

under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Thus, to avoid imposition of the addition to tax,

petitioners must show that their actions in connection with the

deductions and credits from Mid Continent on their 1983 and 1984
 - 15 -

Federal income tax returns were reasonable in light of their

experience and the nature of the investment. See Henry Schwartz

Corp. v. Commissioner, 60 T.C. 728, 740 (1973); Lucas v.

Commissioner, T.C. Memo. 1995-341.

Petitioners, citing Chamberlain v. Commissioner, 66 F.3d 729

(5th Cir. 1995), affg. in part and revg. in part T.C. Memo. 1994-

228, caution the Court to distinguish carefully between

"negligence" in making the underlying investment and the

negligence reached by section 6653(a). We find the correct

standard to be announced in the section itself. If any part of

an underpayment of tax is due to negligence, it is subject to the

additions to tax provided by section 6653(a). See Sacks v

Commissioner, 82 F.3d 918, 920 (9th Cir. 1996) (negligence in

claiming a tax deduction depends upon both the legitimacy of the

underlying investment and due care in claiming the deduction),

affg. T.C. Memo. 1994-217; Novinger v. Commissioner, T.C. Memo.

1991-289; Rogers v. Commissioner, T.C. Memo. 1990-619.

Description of the Underlying Investment

The exact nature of the underlying partnership investment in

this case is not clear directly from the record. Some

partnership documents were introduced into evidence, and the

parties stipulated that the partnership possessed the rights to a

device called the "Terra-Drill", which we discuss below. But no

prospectus or offering memorandum was produced, few facts on the
 - 16 -

exact nature of the investment were stipulated, and no witnesses

save for petitioner testified at trial. A fair reading, however,

of the stipulation of facts and the briefs of the parties shows

that they agree that the underlying facts of the partnership

operations are as discussed in Webb v. Commissioner, T.C. Memo.

1990-556.6

In Webb v. Commissioner, supra, we found that the Mid

Continent promotion offered limited partnership interests for

sale by a confidential placement memorandum dated October 26,

1981. The partnership had an individual and a corporate general

partner.

A related entity, Tround International, Inc. (Tround), was a

company principally owned by David Dardick, who was attempting to

develop a high speed oil and gas drill (the Terra-Drill). In

November of 1980, Tround and Mitchell entered into an agreement

granting to Mitchell for 5 years the right to use, lease, and

6
For example, the parties have stipulated that in Webb v.
Commissioner, T.C. Memo. 1990-556, the Court found that the
activities of Mid Continent had no profit motive in 1981 and 1982
and that underpayments of tax related to partnership deductions,
losses, and credits were attributable to tax-motivated
transactions. In their brief, petitioners request a finding of
fact that in Webb v. Commissioner, supra, the Court found "that
the Partnership was a sham, and in a separate action [docket No.
5757-92] the Court subsequently disallowed all of the items
relating to the Partnership's 1983 and 1984 tax years in a
partnership-level TEFRA proceeding." It would be, in any event,
petitioners' burden to prove the context in which their
deductions and credits were taken. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933); Bixby v. Commissioner, 58
T.C. 757, 791-792 (1972).
 - 17 -

sell Terra-Drills in return for an advance license fee of

$1,600,000. Mitchell thereafter sublicensed its rights to the

Terra-Drill to nine different partnerships, including Mid

Continent. The aggregate sublicense fee of the six partnerships

involved in Webb was $225 million. Pursuant to its sublicense

agreement with Mitchell dated December 31, 1981, Mid Continent

was obligated to pay annual license fees of $8 million in the

first 3 fiscal years commencing October 1, 1982, 1983, and 1984.

The Mid Continent offering memorandum set forth significant

warnings regarding the risk of the investment. It also indicated

that the anticipated tax losses to be incurred by each investor

in the first 3 years would be $40,000 for each $10,000 cash

investment.

The offering memorandum stated that the partnership was

formed to: (1) Exploit the Terra-Drill; (2) conduct exploratory

drilling in the Overthrust Belt in Utah; and (3) develop a

drilling program in Oklahoma and Tennessee. Since a functional

Terra-Drill was never developed, no orders were ever taken by the

limited partnership for the Terra-Drill. No drilling was ever

conducted by the partnership on leases in the Utah Overthrust

Belt. The partnership never developed a drilling program for oil

and gas in Oklahoma and Tennessee.
 - 18 -

Petitioners' Arguments

Petitioners raise a plethora of arguments against their

liability for the negligence addition to tax. Among the

arguments raised are that petitioners: (a) Were

"unsophisticated" investors with no formal training or work

experience in investments; (b) relied on their accountant,

Corman, in making the investment; (c) having obtained the

"approval" of their accountant, should not be required to conduct

a costly, independent investigation of the investment; (d)

determined that the investment in oil and gas was by its nature

"risky", profit-motivated, and "small" with a potentially high

rate of return, and did not offer tax benefits that were "too

good to be true".

Whether a taxpayer had a subjective profit motive is not

dispositive in determining that he acted negligently. Klieger v.

Commissioner, T.C. Memo. 1992-734. Under some circumstances,

however, a taxpayer may avoid liability for the additions to tax

for negligence under section 6653(a) if reasonable reliance on a

competent professional adviser is shown. Leonhart v.

Commissioner, 414 F.2d 749, 750 (4th Cir. 1969), affg. T.C. Memo.

1968-98; Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd.

904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991). Such

reliance is not an absolute defense to negligence but is merely a

factor to be considered. Freytag v. Commissioner, supra.
 - 19 -

For reliance on professional advice to excuse a taxpayer

from the negligence additions to tax, the taxpayer must show that

the professional adviser had the expertise and knowledge of the

pertinent facts to provide informed advice on the subject matter.

Leonhart v. Commissioner, supra; Freytag v. Commissioner, supra;

Stone v. Commissioner, T.C. Memo. 1996-230; Reimann v.

Commissioner, T.C. Memo. 1996-84. Reliance on a professional

adviser can be inadequate when the taxpayer and his adviser knew

nothing about the nontax business aspects of the venture. Beck

v. Commissioner, 85 T.C. 557 (1985); Flowers v. Commissioner, 80

T.C. 914 (1983). In order for reliance on professional advice to

excuse a taxpayer from the negligence additions to tax, the

reliance must be reasonable, in good faith, and based upon full

disclosure. Zfass v. Commissioner, 118 F.3d 184, 188 (4th Cir.

1997), affg. T.C. Memo. 1996-167; Freytag v. Commissioner, supra

at 888.

By the time petitioners purchased their interest in Mid

Continent in 1983, their tax returns show that they had acquired

interests in several partnerships. Petitioner had built "from

nothing" a furniture manufacturing business that was capable of

providing his family with an income of over $800,000 in 1982 and

more than $500,000 in both 1983 and 1984. Although not highly

educated in a formal sense, petitioner is articulate and

intelligent and has a history of financial success in the
 - 20 -

founding and management of his own business. We would hesitate

to call him an "unsophisticated" investor.

Petitioner, however, attempted at trial to demonstrate to

the Court his lack of sophistication. He testified both on

direct and cross-examination that because the partnership was

assigned a tax shelter number by the IRS, he thought the IRS had

"approved" the shelter. He never asked Corman if this were true,

testifying that he believed it as a "matter of trust". Yet,

petitioner identified a Mid Continent subscription agreement that

he introduced into evidence. He testified that he reviewed the

agreement before deciding to invest in Mid Continent. A

paragraph in the agreement cautions the reader that no "Federal

governmental authority has made any finding or determination

relating to the fairness for public investment" in the

partnership and that there has been and will be no Federal

recommendation or endorsement of the partnership.

Petitioner testified that he invested in the partnership

relying on the advice of Corman and other partnership investors.

It appears from the record that Corman was paid to perform

accounting services for Classic Gallery, not to give investment

advice to petitioners. Petitioner's testimony was also rather

vague as to just what specific investment advice Corman gave him

about the partnership other than that it was a "good" investment.
 - 21 -

See, e.g., Illes v. Commissioner, 982 F.2d 163, 166 (6th Cir.

1992), affg. T.C. Memo. 1991-449.

Petitioner's evidence further fails to show that Corman had

any expertise in the nontax, business aspects of Mid Continent,

or that he conferred with experts in the field. When questioned

as to why he thought Corman was qualified to give oil and gas

investment advice, petitioner testified that Corman "served on

committees and various programs for different parties for

investment purposes", such as "B'nai Brith in Greensboro, a

couple of corporations, fabric corporations in Greensboro, and a

couple furniture companies in High Point." Petitioner admitted

that Corman's only knowledge about the oil and gas industry came

from reading partnership investment prospectuses.

Petitioners cite United States v. Boyle, 469 U.S. 241, 251

(1985), for the proposition that taxpayers are entitled to rely

on "expert accountants and attorneys for substantive tax advice".

What petitioners are attempting to do, however, is to justify

relying on the alleged advice of an accountant about an oil and

gas investment, a matter in which he had no expertise. We recall

petitioner's testimony that when he started his furniture

manufacturing business, he did not rely solely on the advice of

his friend Corman (who by petitioner's own description had

extensive accounting experience in the furniture business).

Petitioner, in addition, sought advice from those familiar with
 - 22 -

the retail and manufacturing sides of the furniture industry with

whom he could discuss his new venture. Petitioner was well aware

of what was required for a businesslike approach in order to make

an informed investment.

Any investment advice that Corman provided to petitioner

about Mid Continent was based solely on Corman's reading of the

prospectus and his experience in other than oil and gas ventures.

But to accurately report the Mid Continent deductions and credits

for 1983 and 1984 required verifying facts outside and

independent of the documents presented to Corman. Petitioners

have not shown that it was Corman's responsibility to verify

those facts. See David v. Commissioner, 43 F.3d 788, 789 (2d

Cir. 1995), affg. T.C. Memo. 1993-621; Daugherty v. Commissioner,

78 T.C. 623, 641 (1982). Petitioners cannot avoid the negligence

additions to tax "merely because a tax adviser has read the

prospectus and advised that it is feasible from a tax

perspective, assuming the facts presented are true." Rogers v.

Commissioner, T.C. Memo. 1990-619; accord Novinger v.

Commissioner, T.C. Memo. 1991-289.

Petitioner argues that there was nothing about the

investment that put him on notice that "second-guessing" his

accountant's advice was necessary. The tax losses generated by

the investment were not "too good to be true", he argues. But

for $10,000 petitioner, a high tax bracket taxpayer, purchased
 - 23 -

for 1983 alone $46,007 in tax losses.7 This represents better

than a 4-to-1 writeoff, enough to have put petitioner on "notice

that the investment scheme was primarily for a tax purpose."

Zfass v. Commissioner, 118 F.3d at 190; Barnard v. Commissioner,

731 F.2d 230, 231 (4th Cir. 1984), affg. Fox v. Commissioner, 80

T.C. 972 (1983); see Goldman v. Commissioner, 39 F.3d 402, 407

(2d Cir. 1994) (Mid Continent offering memorandum promised

"improbable tax advantages"), affg. T.C. Memo. 1993-480.

It was a "small" investment, testified petitioner, that did

not warrant an expensive investigation, and besides, he argues,

the problems that caused the partnership to fail were "technical"

in nature. While the investment may have been small to

petitioner, we disagree that a costly investigation was required

to reveal the true nature of the partnership.

Petitioner was not an original investor in Mid Continent

upon its creation in 1981. Unlike Fields, from whom he obtained

his partnership interest in 1983, petitioner had the benefit of 2

years of operations to observe. Petitioner did not have to rely

merely on the representations of the partnership. Petitioner

testified that he "spoke to" other Mid Continent investors in

1983 before buying Fields' interest. The only information they

7
In their brief petitioners state that they received a "tax
benefit of $24,000 over two years."
 - 24 -

and Fields could have given him was that the partnership was

suffering large losses, as apparently had been planned.

Petitioner testified that his investment focus was on

"finding an oil well." It would have taken only modest effort to

determine, likely from the partnership itself, that Mid Continent

had not followed through on any of the three stated "profit

seeking" activities.

In 1983, after 2 years of operations, the partnership had

not drilled for oil and gas in the Overthrust Belt. There was no

drilling by the partnership in Oklahoma and Tennessee.8 And

there was still no operational Terra-Drill in existence 2 years

after commencement of the license payments for the drill. The

nonexistence of the drill is hardly a "technical"9 matter. The

Terra-Drill license payments to Mitchell, financed in large part

by long-term notes, were largely responsible for the partnership

losses that were passed through to the partners.

We have considered the other arguments raised by petitioners

and we find them to be without merit. We find that petitioners

8
Instead of conducting drilling, the partnership substituted
partial working interests in other than the original proposed
sites. The sites evidently had poor production potential.
9
The "technical" problems to which petitioners allude are
substantial engineering problems that must first be overcome
before an operational Terra-Drill can successfully be designed.
Because of the technical problems there was no drill. The
partnership failed because from the start there was no drill and
none was ever developed.
 - 25 -

did not reasonably rely in good faith on the advice of a

competent expert in reporting their deductions and credits from

Mid Continent on their 1983 and 1984 Federal income tax returns.

For each return petitioners failed to exercise the due care that

a reasonable and ordinarily prudent person would employ under the

circumstances.

The Effect of Petitioners' Amended Return for 1983

In December of 1986, several months after learning that the

Mid Continent partnership return for 1983 would be examined by

respondent, petitioners filed an amended joint individual Federal

income tax return for tax year 1983. Petitioners argue that when

deciding the issue of negligence for 1983, the "entire record",

including the amended return, must be considered. According to

petitioners, since they reported and paid additional tax, there

is no negligent underpayment of tax for 1983; it is vitiated by

the amended return.

If the Court nevertheless determines that the negligence

additions to tax apply, they argue that as to the section

6653(a)(2) addition of 50 percent of the interest due on the

portion of the underpayment that is attributable to negligence,

all of the underpayment was paid with the amended return in 1986.

Any deficiency that remained, petitioners argue, relates to their

deduction of "out-of pocket-expenses" and not to any negligence

on their part. Therefore, they argue that the section 6653(a)(2)
 - 26 -

addition should be computed based only on the interest accruing

on the underpayment that existed between the filing of the

original 1983 return and the filing of the amended return in

1986.

Section 6653(a)(1) provides that if any part of any

"underpayment" of tax is due to negligence, there shall be added

to the tax an amount equal to 5 percent of the "underpayment".

Under section 6653(a)(2), in addition to the above amount, there

shall be added to the tax an amount equal to 50 percent of the

interest due with respect to the portion of the "underpayment"

that is due to negligence.

For purposes of section 6653, the term "underpayment" is

defined in section 6653(c)(1) for income tax as:

a deficiency as defined in * * * [section 6211] (except
that, for this purpose, the tax shown on a return
referred to in section 6211(a)(1)(A) shall be taken
into account only if such return was filed on or before
the last day prescribed for the filing of such return,
determined with regard to any extension of time for
such filing) * * *

Therefore, for purposes of determining the existence and amount

of any "underpayment" of tax for purposes of the negligence

additions of section 6653(a)(1) and (2), the additional tax shown

on petitioners' amended return for 1983 cannot be considered.10

Crocker v. Commissioner, 92 T.C. 899, 916 (1989); Emmons v.

10
The last date prescribed for filing petitioners' Federal
income tax return for 1983 was Apr. 15, 1984. Secs. 6672, 6012.
 - 27 -

Commissioner, 92 T.C. 342, 348-349 (1989), affd. 898 F.2d 50 (5th

Cir. 1990); Deel v. Commissioner, T.C. Memo. 1990-545.

Conclusion

We find that petitioners are liable for the section

6653(a)(1) and (2) additions to tax for the years 1983 and 1984

as determined by respondent.

Decision will be entered

for respondent.