Harrison v. Commissioner

T.C. Memo. 1998-417

UNITED STATES TAX COURT

WILLIAM O. HARRISON, JR. AND
CATHY L. HARRISON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24616-95. Filed November 18, 1998.

Robert G. Wheeler, for petitioners.

Franklin R. Hise, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHALEN, Judge: Respondent determined the following

deficiencies in and additions to petitioners' Federal

income tax:

Addition to Tax
Year Deficiency Sec. 6651(a)(1)

1988 $136,933 $34,233
 - 2 -

1989 179,964 44,991
1990 14,324 3,581

Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect for the years in issue.

After concessions, the issue for decision is whether

petitioners are liable for additions to tax under section

6651(a)(1) for failure to file timely income tax returns

for 1988 and 1989.

FINDINGS OF FACT

Some of the facts have been stipulated and are so

found. The stipulation of facts and the exhibits attached

thereto are incorporated herein by this reference.

Petitioners are husband and wife who filed joint individual

income tax returns for 1988, 1989, and 1990. At the time

the petition was filed in this case, petitioners resided

in Corpus Christi, Texas. In this opinion, references to

petitioner are to Mr. William O. Harrison, Jr.

Petitioner received a bachelor's degree in 1967 from

Texas Christian University where he majored in history. He

received a law degree in 1970 from the University of Texas

Law School where, among other courses, he took a tax course

and a required course in legal accounting. After

graduating from law school, petitioner was employed from

1971 through 1975 by a law firm in Corpus Christi, Texas.
 - 3 -

He then practiced law for several years as a sole

practitioner before he formed a law firm in Corpus Christi

in 1979. He worked at that firm until it dissolved in

1983. Petitioner served as an elected representative in

the Texas House of Representatives from 1979 through 1980,

and again from 1983 through 1984.

In 1984, petitioner moved to Houston where he joined

Perdue, Brandon, Blair & Fielder. At that law firm, he

devoted great effort to obtaining contracts with State and

local governments for the collection of delinquent tax

accounts. Several months after petitioner's arrival, the

firm dissolved.

In 1985, petitioner participated in the formation of

Blair, Williams & Harrison. At the end of the year, that

firm combined with another firm to form Heard, Goggan,

Blair, Williams & Harrison (hereinafter referred to as the

Houston firm). Petitioner held a one-ninth interest in the

Houston firm. Petitioner was successful on behalf of the

firm in obtaining a number of lucrative contracts with

municipal governments for the collection of delinquent tax

accounts.

In 1987, petitioner became concerned about the manner

in which the firm was being managed. He withdrew from the

firm in December 1987, and commenced negotiations with the
 - 4 -

firm to value his interest therein, including the govern-

ment contracts that he had originated. In April 1988,

petitioner filed suit against the firm. On October 25,

1988, petitioner and the firm resolved their dispute.

Under the settlement, the firm agreed to pay petitioner

3 percent of the gross income realized by the firm during

the years 1989 through 1992. The firm also paid petitioner

$500,000 in October 1988.

After petitioner withdrew from the Houston firm, he

returned to Corpus Christi to engage in the practice of

law as a sole practitioner. During 1989, petitioner made

expenditures of approximately $300,000 with respect to his

law practice in Corpus Christi, of which approximately

$80,000 were for furniture and leasehold improvements.

Other Businesses

From 1984 through 1988, petitioner held an investment

in a cattle feeding business in Oklahoma that was operated

by Mr. Sam Gilmore. The business earned income or incurred

loss from the purchase and sale of cattle. Petitioner was

not directly involved in managing the business. He relied

on Mr. Gilmore to decide which cattle to purchase, how much

to feed them, and when to sell them. Mr. Gilmore operated

the business through a bank line of credit. Petitioner
 - 5 -

had met Mr. Gilmore through a partner at the Houston firm,

Mr. Les Williams.

The record does not document the amount of income or

loss petitioner realized during the years 1984 through 1986

from his investment in the cattle feeding business. The

Schedule F filed with petitioners' 1987 return reports net

farm profit of $11,595 from the cattle feeding business.

During the period 1986 through 1989, petitioner was

involved in a number of other businesses. In 1977, he

started Cooper's Alley, a restaurant and bar. Cooper's

Alley operated restaurants in Corpus Christi, Texas, and

in Port Arkansas, Arkansas. It incurred losses and ceased

business in July 1986. In 1983, petitioner and Mr. Hank

Parkinson started Compuprint, Inc. and Parkinson

Associates. Those entities ceased business in 1989 when

Mr. Parkinson died. Petitioner was also engaged in

another restaurant, Lighthouse Restaurant, in Corpus

Christi, a real estate business called T-Head Marina

which owned the real estate for the restaurant, and a

partnership, Bayview I. Finally, throughout the period

in issue, petitioner owned a one-third interest in a

family partnership, Harrison, Harrison & Harrison. That

partnership owned a furniture store, a funeral home,

an automobile dealership, and it engaged in ranching.
 - 6 -

Petitioner's Books and Records

Ms. Lynn Cates was petitioner's bookkeeper from 1983

through the years in issue. She worked in an office that

petitioner maintained during the years in issue in Corpus

Christi. Ms. Cates used a journal bookkeeping system

referred to as the "One Write System" to record

petitioner's cash disbursements and deposits. All of

the checks in petitioner's checkbook were made with a

carbon backing so that anything written on a check was

automatically copied into a journal. Ms. Cates reconciled

the entries in the journal with petitioner's bank account

each month. In 1989, she established a general ledger

system which she used in addition to the "One Write

System".

Ms. Cates had no bookkeeping experience when she

started working for petitioner in 1983. She received

some initial training from petitioner's previous bookkeeper

and some additional training from Ms. Elizabeth Ruble, a

certified public accountant, who was involved in the

preparation of petitioners' 1988, 1989, and 1990 returns,

as further described below. Ms. Cates took a basic

accounting class and a computer accounting class in 1985.
 - 7 -

Petitioners' Accountants

Since 1971 when petitioner graduated from law school,

he has retained certified public accountants to prepare his

individual income tax returns. From 1977 through the years

at issue, petitioners have retained Mr. Gary Whittington, a

certified public accountant, to prepare their individual

income tax returns and the returns of some of the

businesses with which petitioner was involved.

Petitioners' personal returns for 1978 through the years

in issue were prepared by Mr. Whittington and Ms. Elizabeth

Ruble, whom Mr. Whittington employed. As mentioned above,

Ms. Ruble is a certified public accountant who began

working closely with Ms. Cates soon after Ms. Cates was

employed by petitioner.

The preparation of each of petitioners' individual

returns followed a similar pattern. Typically, Ms. Ruble

would contact Ms. Cates in March or early April to

determine whether petitioners had sufficient information to

file a return for the prior calendar year by April 15th, or

whether it would be necessary to file application for an

extension of the filing deadline. If, as was often the

case, an extension was necessary, Ms. Ruble would work with

Ms. Cates to estimate petitioners' tax liability for the
 - 8 -

year. Typically, they would discuss by telephone the

changes to the taxable income reported on petitioners' last

tax return that were necessary to estimate petitioners'

taxable income for the calendar year under review. During

these discussions, Ms. Ruble would review petitioners' last

tax return, and Ms. Cates would review petitioners' books

and records, and other tax information. Ms. Ruble would

make an adding machine tape that showed the additions to

and subtractions from the taxable income reported on

petitioners' last tax return. The total on the tape was

petitioners' estimated taxable income for the calendar year

under review.

During the years in issue, Mr. Whittington's office

had a policy concerning the manner in which Forms 4868,

Application for Automatic Extension of Time To File U.S.

Individual Income Tax Return, were to be completed if a

client had no taxable income for the year. In that event,

the accountants in Mr. Whittington's office would enter the

amount of any income tax withheld, plus any estimated tax

payments, on the Form 4868 on the line provided for the

taxpayer's total tax liability, and they would show a

balance due of zero, rather than a negative amount.
 - 9 -

Petitioners' Joint Return for 1987

Petitioners filed a joint Federal income tax return

for 1987 on Form 1040. They paid $119,585 with the return,

consisting of $117,799 in tax, and a penalty of $1,786

for underpayment of estimated tax. On the Schedule E,

Supplemental Income Schedule, filed with the return,

petitioners reported receiving $445,375 in nonpassive

income from the Houston firm. On the Schedule F, Farm

Income and Expenses, filed with the return, petitioners

reported a net farm profit of $11,595 from the cattle

feeding operation.

Petitioners' Joint Return for 1988

In April 1989, Mr. Whittington and Ms. Ruble prepared

and filed, on petitioners' behalf, a Form 4868, requesting

an automatic extension of time to file petitioners' 1988

return. The Form 4868 states that petitioners' total

income tax liability for 1988 is $1,408, that they had

Federal income tax withheld for the year of $1,408, and

that they had a balance due of zero. The Form W-2, Wage

and Tax Statement, for petitioner's wife reports $1,408 in

Federal income tax withheld. Petitioners' accountants

estimated that petitioners would incur a loss for 1988,
 - 10 -

and, pursuant to their office policy, they entered the

amount of income tax withheld from Mrs. Harrison's salary

as petitioners' total tax liability for 1988.

In estimating petitioners' income for 1988,

petitioners' accountants took into account Mr. Harrison's

share of partnership income from the Houston firm.

Petitioner, Ms. Cates, and Ms. Ruble all attempted to

contact Mr. Greg Dewinney, the C.P.A. for the Houston firm,

prior to April 15, 1989, in order to obtain information

about Mr. Harrison's income from the firm for 1988, but

they were unsuccessful.

Petitioners' accountants knew that Mr. Harrison had

finally withdrawn from the firm in early April 1988

and that he had reported income from the firm for the

prior year of approximately $400,000. Accordingly, they

estimated that he would realize approximately $100,000

from the firm for the first 3 months of 1988 before his

withdrawal from the firm (i.e., $400,000 x 3/12ths).

Subsequently, petitioners received a Schedule K-1,

Partner's Share Of Income, Credits, Deductions, Etc., from

the Houston firm in a letter from the firm dated August 15,

1989. The Schedule K-1 reports that Mr. Harrison's income

from the firm for 1988 is $261,309. Petitioners and their
 - 11 -

accountants were surprised that the income was so high,

approximately $160,000 more than the accountants had

estimated.

In estimating petitioners' taxable income for 1988,

petitioners' accountants also took into account the

income from Mr. Harrison's interest in the cattle feeding

business, described above. Petitioner, Ms. Cates, and

Ms. Ruble all attempted to contact Mr. Gilmore prior to

April 15, 1989, in order to obtain information about

Mr. Harrison's income from the cattle feeding business for

1988, but they were unsuccessful.

Petitioners' accountants estimated that Mr. Harrison

had realized a loss from this business for 1988. This was

based upon the fact that losses had been realized in prior

years and upon a letter written by Mr. Gilmore to

Mr. Harrison in August 1988. In that letter, Mr. Gilmore

stated that the operations of the business during fall of

1987 and spring of 1988 had not gone well and that

Mr. Harrison's letter of credit had been exhausted and he

needed to pay approximately $64,600 to replenish the letter

of credit. Based upon that letter, petitioners and their

accountants believed that the operating results for 1988

would show a loss.
 - 12 -

In July or August 1989, petitioners received a

statement referred to as the "W.O. Harrison Income

Statement Cash Basis 1988" that reports the following

income and expenses from the cattle feeding business for

1988:

Income:
Sale of cattle $1,880,166.94
Cost of cattle sold 1,123,070.95

757,095.99
Expenses:
Interest
Leadership Banks $52,360.77
Ralph Grounds 9,500.00
Futures loss 4,584.38
Feed expense 402,862.12

Total expenses 469,307.27

1988 Taxable income 287,788.72

Petitioners and their accountants were surprised by the

amount of income shown on this statement. Petitioner's

participation in this business came to an end at the close

of 1988.

In August 1989, petitioners' accountants filed, on

their behalf, Form 2688, Application for Additional

Extension of Time To File U.S. Individual Income Tax

Return, requesting an additional extension of time to

file petitioners' 1988 return. The Form 2688 gives the
 - 13 -

following reason why the extension was needed: "[t]he

taxpayer's C.P.A. has currently been experiencing an

extremely heavy workload. Although additional staff have

been employed, they have been unable to complete all

returns."

On or about October 17, 1989, petitioners filed their

joint individual income tax return for 1988 on Form 1040,

U.S. Individual Income Tax Return. They paid $101,093 with

the return. This amount consists of total tax of $96,418,

less Federal income tax withheld of $1,408, plus a penalty

for underpayment of estimated tax reported on Form 2210,

Underpayment of Estimated Tax by Individuals and

Fiduciaries, in the amount of $6,083.

On the Schedule E, Supplemental Income Schedule, filed

with their return, petitioners reported net income from the

Houston firm in the amount of $120,374, consisting of the

income reported on the Schedule K-1 sent by the firm to

Mr. Harrison, $261,309, less aggregate expenses of

$140,935. On the Schedule F, Farm Income and Expenses,

filed with their return, petitioners reported net farm

profit of $287,789 from the cattle feeding business.

Petitioners' 1988 return included a Form 6252,

Installment Sale Income, and a Form 8308, Report of a Sale
 - 14 -

or Exchange of Certain Partnership Interests. These forms

state that a sale of Mr. Harrison's partnership interest in

the Houston firm took place on October 25, 1988, for an

"estimated" selling price of $3,740,000. Form 6252 also

reports a cost or other basis in the partnership interest

of $195,351. Petitioners did not report the $500,000

payment that Mr. Harrison received in 1988 from the

partnership. They treated this payment as a loan, rather

than as income.

Petitioners' Joint Return for 1989

In April 1990, Mr. Whittington and Ms. Ruble prepared

and filed, on petitioners' behalf, a Form 4868 requesting

an automatic extension of time to file petitioners' 1989

return. The Form 4868 states that petitioners' total

income tax liability for 1989 is $2,200, that they had

Federal income tax withheld for the year of $2,200, and

they had a balance due of zero. The Form W-2, Wage and

Tax Statement, issued to petitioner's wife for 1989 by

her employer reports $2,374 in Federal income tax withheld,

and respondent's records show a payment in the same amount.

The record of this case does not explain why $2,200, rather

than $2,374, was entered on Form 4868.
 - 15 -

In computing petitioners' estimated tax liability for

1989, petitioners' accountants, Mr. Whittington and

Ms. Ruble, followed the practice that they had established

in prior years. Ms. Ruble contacted Ms. Cates in March or

early April 1990, and they discussed the changes to

petitioners' taxable income for 1988 that were necessary to

estimate petitioners' taxable income for 1989. During this

discussion, Ms. Ruble reviewed petitioners' 1988 return and

Ms. Cates reviewed petitioners' books, records, and other

tax information. They identified a number of changes that

were necessary in estimating petitioners' 1989 taxable

income. These included subtracting the profit reported for

1988 from the cattle feeding business to reflect the fact

that Mr. Harrison had disposed of his investment in the

business during 1988, subtracting the income reported from

the Houston firm to reflect Mr. Harrison's withdrawal from

the firm in 1988, adding payments attributable to the sale

of Mr. Harrison's interest in the Houston firm, as offset

by a carryover of capital losses from the termination of

Cooper's Alley Restaurant, and subtracting the expenses

incurred by Mr. Harrison in connection with his law firm in

Corpus Christi.
 - 16 -

In discussing the last item by telephone, Ms. Cates

told Ms. Ruble that the total expenditures for

Mr. Harrison's Corpus Christi law firm, as reflected in

her journal, amounted to approximately $300,000. Ms. Ruble

used this amount in computing petitioners' 1989 estimated

tax liability. She did not discuss with Ms. Cates the

composition of the amounts in that total, and she failed to

take into account the fact that a substantial portion of

that total consisted of capital expenditures, including

$64,000 for leasehold improvements, $6,982 for reception

room furniture, and $8,000 for office furniture, that were

not fully deductible in 1989.

In August 1990, petitioners' accountants filed, on

their behalf, a Form 2688, Application for Additional

Extension of Time To File U.S. Individual Income Tax

Return, requesting an additional extension of time to file

petitioners' 1989 return. The Form 2688 states that the

extension is needed because petitioners' accountant has an

extremely heavy workload and has been unable to complete

the return.

On or about October 16, 1990, petitioners filed a

joint individual income tax return for 1989 on Form 1040.

They paid $41,915 with the return. This amount consists
 - 17 -

of a total tax of $38,702, less Federal income tax withheld

of $2,374, plus a penalty for the underpayment of estimated

tax of $2,438, and a penalty and interest for late payment

in the aggregate amount of $3,149.

On the Schedule C, Profit or Loss From Business, filed

with their return, petitioners reported a net loss of

$208,542 from Mr. Harrison's law practice in Corpus

Christi. They reported gross income of $28 and total

expenses of $208,570 from this business, including

depreciation of $3,319. Included among the assets on which

depreciation is claimed are expenditures during 1989 for

furniture in the aggregate amount of $17,982 and leasehold

improvements of $64,199. On a Form 6252, Installment Sale

Income, filed with their return, petitioners reported that

they had received $552,218 from the sale of Mr. Harrison's

interest in the Houston firm, of which 94.77 percent or

$523,337 was long-term capital gain from an installment

sale.

Petitioners' Joint Return for 1990

In April 1991, petitioners' accountant filed, on their

behalf, a Form 4868, requesting an automatic extension of

time to file petitioners' 1990 return. The Form 4868
 - 18 -

states that petitioners' total income tax liability for

1990 is $2,560, that they had Federal income tax withheld

for the year of $2,560, that they had a balance due of

zero. The Form W-2, Wage and Tax Statement, for

petitioner's wife for 1990 lists $2,560 in Federal income

tax withheld.

In August 1991, petitioners' accountants filed,

on their behalf, a Form 2688 requesting an additional

extension of time to file petitioners' 1990 return.

The Form 2688 states that petitioners' accountant was

overworked and was unable to complete petitioners' return.

On or about October 18, 1991, petitioners filed a

joint individual income tax return for 1990 on Form 1040.

They paid $124,186 with the return. This amount consists

of total tax of $124,103, less the Federal income tax

withheld of $2,560, plus a penalty for underpayment of

estimated tax of $2,643.

On the Schedule C, Profit or Loss From Business, filed

with the return, petitioners reported gross income of

$50,331, total expenses of $61,267, and a loss of $10,936

from Mr. Harrison's law practice in Corpus Christi.

Petitioners also reported on Schedule E, Supplemental

Income and Loss, a loss of $113,338 from W.O. Harrison,
 - 19 -

P.C., an S corporation. On Form 6252, Installment Sale

Income, petitioners reported that they had received

$617,482 from the sale of Mr. Harrison's interest in the

Houston firm, of which 94.77 percent or $585,188 was long-

term capital gain from an installment sale.

The following schedule deals with petitioners' returns

for the years 1986 through 1992. It shows the filing date

of each return, the total tax shown on each return, the

amount of tax, interest, and penalty paid with each return,

and the amount of tax paid on or before April 15th of the

following year:

Return Total Tax Amount Paid Amount Paid
Year Filed Per Return With Return Prior to 4/15

1986 10/16/87 $26,449 $26,801 $118
1987 10/15/88 117,799 119,585 -0-
1988 10/17/89 96,418 101,093 1,408
1989 10/16/90 38,702 41,915 2,374
1990 10/18/91 124,103 124,186 2,560
1991 10/19/92 113,316 107,966 5,350
1992 10/18/93 79,675 -0- -0-

Notice of Deficiency

Respondent issued a notice of deficiency to

petitioners with respect to their 1988, 1989, and 1990

returns. Among the other adjustments made in the notice,

respondent determined that the payment of $500,000
 - 20 -

petitioner received from the Houston firm in 1988 was not

a loan, as petitioners claimed, and should have been

included in petitioners' income as ordinary income, less

petitioner's basis of $195,351 (i.e., net ordinary income

of $304,649). Respondent also determined that the payments

of $552,218 and $617,482 petitioner received in 1989 and

1990, respectively, from the Houston firm, are ordinary

income, rather than capital gain, as reported by

petitioners on their tax returns.

Respondent also determined that petitioners are liable

for the addition to tax under section 6651(a)(1) for

failure to timely file their 1988, 1989, and 1990 returns.

Respondent determined that the extension of time to file

each of petitioners' tax returns for 1988, 1989, and 1990

was invalid because in filing Form 4868, for each of those

years, petitioners did not properly estimate their correct

tax. The notice of deficiency describes this determination

as follows:

Since your income tax returns for 1988, 1989 and
1990 were not filed within the time prescribed
by law, and it is determined that the extensions
you filed were invalid since you did not properly
estimate your correct tax, 25 percent of the
total underpayment of tax is added as provided
by section 6651(a)(1) of the Internal Revenue
Code * * *
 - 21 -

Prior to trial, the parties stipulated to reduced tax

deficiencies and additions to tax for 1988 and 1989. The

revised deficiencies and additions to tax for those years

are as follows:

Revised
Revised Additions to Tax
Year Deficiency Sec. 6651(a)(1)

1988 $79,268 $19,817
1989 77,687 19,422

With respect to 1990, the parties stipulated that there was

an overassessment of tax of $11,472 and an overassessment

of the addition to tax of $2,868.

Set out below is a summary to the adjustments made by

respondent in the notice of deficiency and the adjustments

agreed to by the parties:
 - 22 -

Summary of Income Tax Changes by Notice of Deficiency
and Agreed Computation of Deficiencies

Adjustments to Income-- Years Ending
Notice of Deficiency 12/31/88 12/31/89 12/31/90

A. Agreed item--adjustment to
income from the Houston firm $4,593

B. Schedule F income
(cattle feeding business) 46,000

C. Schedule F expenses
(cattle feeding business) 9,803

D. Schedule E passive activity loss
(loss from condominiums) 1,827 $1,305 $660

E. Income
(payments by the Houston
firm of partnership interest) 304,649 552,218 617,482

F. Whipsaw adjustment to income
(related to income from the
Houston firm) (166,667)

G. Partnership expense (claimed
as offset to petitioner's
income from the Houston firm) 140,935

H. Other gains and losses
(from sale of airplane) (17,403)

I. Constructive dividend
(life insurance proceeds) 190,943

J. Schedule C expenses (disallowed
expenses attributable to
Corpus Christi office) 208,570 61,267

K. Schedule K-1 1120S flow-through
(disallowed expenses from
professional corporation) 54,929

L. Capital gains and losses (disallowed
capital loss carryover and losses
claimed for worthless stock in
Cooper's Alley & Compuprint and
disallowed capital gains claimed
for sale of partnership interest
in the Houston firm) 3,000 (314,272) (535,018)
 - 23 -

M. Itemized deductions (17,074) 64,884 16,742

Total adjustments per
notice of deficiency: 493,733 686,245 49,395

Taxable income per return: 319,525 82,640 438,332

Adjusted taxable income
per notice of deficiency: 813,258 768,885 487,727

Adjustments to Income--Agreed
Computation of Deficiencies

A. Income
(various capital losses from
Cooper's Alley & Compuprint allowed) (178,305) (158,020) (76,918)

B. Partnership expenses (87,447)

C. Constructive dividend (190,943)

D. Schedule C expenses (41,978) (16,258)

E. Schedule K-1 1120S flow-through (6,769)

F. Capital gains and losses -- -- --

G. Itemized deductions 59,804 25,665 7,817

Total adjustments per
agreed computation: (205,948) (365,276) (92,128)

Total taxable income as revised: 607,310 403,609 395,599

OPINION

The addition to tax under section 6651(a)(1) applies

in the case of a failure to file any return "on the date

prescribed therefor (determined with regard to any

extension of time for filing)". Sec. 6651(a)(1). As

stated above, petitioners' liability for the additions

under section 6651(a)(1) that were determined by respondent

for 1988 and 1989, turns on whether petitioners'
 - 24 -

accountants "properly estimated" petitioners' tax liability

on the Forms 4868, Application for Automatic Extension of

Time to File U.S. Individual Income Tax Return, that were

filed for those years. See sec. 1.6081-4(a)(4), Income

Tax Regs. If petitioners' tax liability was not properly

estimated, then the extensions of time to file are invalid

and petitioners' returns are delinquent. Crocker v.

Commissioner, 92 T.C. 899, 910 (1989). In that event,

petitioners are liable for the addition to tax under

section 6651(a)(1), unless they establish that the failure

to file their returns by the date prescribed by law is due

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

at 912-914.

Generally, individuals who compute their Federal

income tax on the basis of the calendar year are required

to file their return on or before April 15th following

the close of such year. Sec. 6072(a). The Secretary of

the Treasury or his delegate may grant a reasonable

extension of time for filing a return. Sec. 6081(a).

Regulations promulgated pursuant to that authority

state that individual taxpayers may obtain an automatic

4-month extension of time to file their return. Sec.

1.6081-4(a)(1), Income Tax Regs. In order to do so, the

taxpayer must prepare and sign a Form 4868, Application
 - 25 -

for Automatic Extension of Time to File U.S. Individual

Income Tax Return, and file the form with the appropriate

internal revenue officer on or before the due date

prescribed for filing the taxpayer's income tax return.

Sec. 1.6081-4(a)(2) and (3), Income Tax Regs. Section

1.6081-4(a)(4), Income Tax Regs., as in effect during

the years in issue, provided that such application for

extension:

must show the full amount properly estimated as
tax for such taxpayer for such taxable year, and
such application must be accompanied by the full
remittance of the amount properly estimated as
tax which is unpaid as of the date prescribed for
the filing of the return.

A taxpayer will be treated as having "properly

estimated" his tax liability, within the meaning of

section 1.6081-4(a)(4), Income Tax Regs., quoted above,

when he makes 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 an extension. Crocker

v. Commissioner, supra at 908. As a prerequisite for this

treatment, however, the taxpayer must make a bona fide and

reasonable attempt to locate, gather, and consult informa-

tion which will enable him to make a proper estimate of

his tax liability. Crocker v. Commissioner, supra.
 - 26 -

As stated in section 1.6081-4(a)(4), Income Tax Regs.,

quoted above, the granting of an automatic extension of

time within which a taxpayer may file an income tax return

does not operate to extend the time for payment of any tax

due on such return. See Crocker v. Commissioner, supra at

905; sec. 1.6081-4(b), Income Tax Regs. A taxpayer who

computes his taxes on a calendar year basis must pay his

taxes by the 15th of April following the close of such

calendar year regardless of whether he has been granted

an extension of time to file his return. Secs. 6151(a);

6072(a).

In this case, petitioners ask the Court to find that

the estimates of their tax liability made by their

accountants on the Forms 4868 filed for 1988 and 1989 were

proper. According to petitioners, they made a "bona fide

and reasonable estimate of their tax liability based upon

the information available to petitioners at the time of the

making of the extension requests." Petitioners also assert

that their accountants made "a bona fide and reasonable

attempt to locate, gather and consult information which

would enable them to make a reasonable estimate."

In the case of their 1988 tax liability, petitioners

note that neither the Schedule K-1 from the Houston firm,

nor the income statement from the cattle feeding business
 - 27 -

was available until July or August 1989, after the Form

4868 was filed in April 1989, and petitioners argue that

the estimates of their income from those activities were

reasonable. Furthermore, petitioners contend that

Mr. Harrison and their accountants made reasonable

attempts to obtain accurate information from both the

Houston firm and the cattle feeding business before the

Form 4868 for 1988 was filed.

In the case of their 1989 tax liability, petitioners

argue that their accountants also made a reasonable

estimate of their tax liability based upon available

information and that they made a reasonable attempt to

obtain accurate information. They argue that Ms. Ruble's

"oversight regarding capitalization of leasehold improve-

ments" which caused the estimate to be understated should

not cause the estimate to be considered improper.

Alternatively, petitioners argue, if the Court finds

that proper estimates were not made for 1988 or 1989,

then the Court should find that the additions to tax under

section 6651(a)(1) determined by respondent are not

applicable because petitioners' failure to timely file was

due to reasonable cause and not due to willful neglect.

Petitioners argue that they relied upon their accountants,

Ms. Cates, Ms. Ruble, and Mr. Whittington "to prepare
 - 28 -

proper estimates so as to cause the tax returns to be filed

on time" and "[A]ny failure of Petitioners to file tax

returns on time would have been the result of the failure

of their accountants to make a proper estimate."

Respondent contends that the Forms 4868 filed by

petitioners for the years 1988 and 1989 were invalid

because petitioners failed to estimate properly their tax

liability as required by section 1.6081-4(a)(4), Income Tax

Regs. Respondent points out that petitioners' Forms 4868

for 1988 and 1989 estimated their tax liability to be

$1,408 and $2,200, respectively, whereas petitioners paid

$101,093 and $41,915 with their 1988 and 1989 returns,

respectively. Respondent also notes that the parties have

agreed that petitioners' corrected income tax liabilities

for 1988 and 1989 are $176,998 and $116,389, respectively.

Respondent contends that petitioners have a history

of failing to make proper estimates of their Federal tax

liability. According to respondent, "[F]or each of the

years 1986 through 1992, petitioners filed both Form 4868

and Form 2688 extension agreements" and "[F]or each of

these years, petitioners paid 99 percent of their Federal

income tax liability with their filed return in October."

Respondent asserts that petitioners' allegations that

their estimates for the years in issue were reasonable,
 - 29 -

"are not supported by any evidence." To find otherwise,

according to respondent, the Court would have to disregard

"petitioners' past conduct in filing extensions and failing

to make proper estimated tax payments" and the Court would

have to "accept the unsupported testimony of petitioners

and their representatives." Finally, respondent argues

that petitioners cannot avoid the delinquency addition

by claiming reasonable reliance on their accountants.

According to respondent, petitioners have not shown "'that

the advisor had sufficient knowledge of the taxpayer's

relevant financial circumstances to make an informed

decision.'" (quoting Stovall v. Commissioner, T.C. Memo.

1983-450, affd. 762 F.2d 891 (11th Cir. 1985)).

Respondent's position in this case places great

emphasis on "the past history of petitioners' failure

to make proper estimates of Federal tax liability".

However troubling we find that history to be, we are

mindful of our opinion in Crocker v. Commissioner, 92 T.C.

899, 906 (1989), which states that "a mere comparison of

estimated tax liabilities with true tax liabilities will

not reveal whether petitioners' estimates were 'proper.'"

In that case, we continued with the following:

An estimate is no more than that. It is, "A
valuing or rating by the mind, without actually
 - 30 -

measuring, weighing or the like. A rough or
approximate calculation only." Black's Law
Dictionary, 494 (5th ed. 1979).

To require exactitude in the estimation
called for under section 1.6081-4(a)(4), Income
Tax Regs., would be unreasonable. The taxpayer
would have no need for an extension of time
within which to file his return if he could
determine his true tax liability at the time
he submits the Form 4868. The mere fact that
petitioners underestimated their 1981 and 1982
tax liabilities, standing alone, does not cause
their applications to be invalid and the auto-
matic extensions to be void. See Hudspeth v.
Commissioner, T.C. Memo. 1985-628.

Id. at 906-907; see also Arnaiz v. Commissioner, T.C. Memo.

1992-729. ("The mere fact that petitioners in fact

underestimated their 1985 tax finally shown to be due does

not mean that they did not properly estimate their tax; the

standard is whether they made a 'bona fide and reasonable

attempt' to secure information * * * necessary to make a

'bona fide' and reasonable estimate' of their tax

liabilities. Crocker v. Commissioner, supra at 907-908.")

Respondent's position that petitioners' allegations

"are not supported by any evidence" disregards the evidence

advanced by petitioners, consisting of Mr. Harrison's

testimony, the testimony of his bookkeeper, Ms. Cates, and

the testimony of the certified public accountants,

Mr. Whittington and Ms. Ruble, whom petitioners retained

to prepare and submit their income tax returns. We found
 - 31 -

the testimony of petitioners' witnesses to be credible and

decline respondent's invitation to dismiss it as "simply

the unsupported self-serving testimony of petitioners."

In this regard, we note that, as of the time of trial,

Ms. Ruble had no ongoing business or other connection

with petitioners or her former employer, Mr. Whittington.

The problem with petitioners' evidence, however, is

that it does not go far enough. Petitioners have shown

that for the year 1988, after making reasonable inquiry

of petitioner's former law firm and petitioner's cattle

feeding business, petitioners' accountants estimated

petitioners' income from those activities. According to

petitioners: "These two items alone accounted for more

than the difference between the amount of tax shown due on

the 1988 return and the amount of tax estimated on Form

4868 for 1988." In effect, petitioners have limited their

case to showing the reasonableness of their estimated tax

liability for 1988, $1,408, as compared to the total tax of

$96,418 reported on their 1988 return. Petitioners have

not addressed the adjustments determined in the notice of

deficiency, as revised by the agreed computation of the

1988 deficiency, on the basis of which their total

tax liability is $175,686, or $79,268 more than the tax

reported on their return. Nor have petitioners shown any
 - 32 -

reason to conclude that it is unnecessary to evaluate the

reasonableness of petitioners' estimate for 1988 in terms

of their full tax liability, what Crocker v. Commissioner,

supra at 906, referred to as the taxpayer's "true tax

liability." As a result, petitioners have not established

the reasonableness of the estimate made on petitioners'

behalf on Form 4868 for 1988. Accordingly, we find that

petitioners have not met their burden of disproving

respondent's determination that the Form 4868 for 1988

was void and that petitioners failed to make a timely

return for 1988.

Similarly, petitioners' evidence for 1989 shows that

in computing petitioners' estimated tax liability

Ms. Ruble assumed that all of the amounts classified by

Ms. Cates as office expenses for petitioners' Corpus

Christi law office were fully deductible, whereas that

total included approximately $80,000 of capital

expenditures. According to petitioners: "That

classification difference, capitalized vs. deductible

leasehold improvements, accounted for the difference in

tax liability between the amount estimated and that shown

due on the return." As was true in the case of 1988,

petitioners have limited their case to showing the

reasonableness of their estimated tax liability for 1989,
 - 33 -

$2,200, as compared to total tax of $38,702 reported on

their 1989 return. Petitioners have not addressed the

adjustments determined in the notice of deficiency, as

revised by the agreed computation of the 1989 deficiency,

on the basis of which their total tax liability is

$116,389, or $77,687 more than the tax reported on their

return, nor have petitioners shown any reason to conclude

that it is unnecessary to evaluate the reasonableness of

petitioners' estimate for 1989 in terms of their true tax

liability. As a result, petitioners have not established

the reasonableness of the estimate made on petitioners'

behalf on Form 4868 for 1989. Accordingly, we find that

petitioners have not met their burden of disproving

respondent's determination that Form 4968 for 1989 was void

and that petitioners failed to make a timely return for

1989.

This brings us to petitioners' alternative contention

that, even if we find that petitioners failed to file

timely returns, we should, nevertheless, find that the

additions to tax under section 6651(a)(1), as determined by

respondent, are not applicable because petitioners' failure

to timely file was due to reasonable cause and not due to

willful neglect. In this regard, petitioners assert that

they relied upon their accountants to compute their
 - 34 -

estimated tax liability for each of the subject years.

Respondent asks the Court to reject this contention and

suggests that petitioners failed to supply their

accountants with complete and accurate records from which

to make a reasonable estimate of their tax liability.

As a preliminary matter, we note that there is no

evidence in the record of this case that petitioners'

failure to file timely returns for 1988 and 1989 resulted

from "willful neglect" in the sense of "a conscious,

intentional failure or reckless indifference." United

States v. Boyle, 469 U.S. 241, 245 (1985). Thus, this

issue turns on whether there was "reasonable cause" within

the meaning of section 6651(a)(1) for petitioners' failure

to file timely returns for 1988 and 1989. According to

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

"reasonable cause" is found "If the taxpayer exercised

ordinary business care and prudence and was nevertheless

unable to file the return within the prescribed time".

See generally Roberts v. Commissioner, 860 F.2d 1235, 1240-

1241 (5th Cir. 1988), affg. T.C. Memo. 1987-391.

The late filing in this case was not due to the

failure by petitioner's accountants to ascertain the

correct deadline for filing petitioners' 1988 and 1989

returns or to the accountants' failure to file the subject
 - 35 -

returns through oversight. If it were, petitioners could

not escape the application of section 6651(a)(1) by

claiming reliance on their accountants. See United States

v. Boyle, supra at 252; McGee v. Commissioner, 979 F.2d 66,

70-71 (5th Cir. 1992), affg. per curiam T.C. Memo. 1991-

510; Denenburg v. United States, 920 F.2d 301 (5th Cir.

1991). For example, in United States v. Boyle, supra, the

executor of an estate, argued that reliance on an attorney

was "reasonable cause" for failure to meet the filing

deadline for an estate tax return. The Court stated that

it was not "reasonable" for the executor to "assume" that

the attorney would comply with the statute. United States

v. Boyle, supra at 250. The Supreme Court held: "The

failure to make a timely filing of a tax return is not

excused by the taxpayer's reliance on an agent, and such

reliance is not 'reasonable cause' for a late filing under

§6651(a)(1)." United States v. Boyle, supra at 252. In

its opinion, the Supreme Court made it clear that the case

before it was not one in which "a taxpayer has relied on

the erroneous advice of counsel concerning a question of

law", such as the advice of an accountant or attorney that

it was unnecessary to file a return. Id. at 250.

In this case, petitioners and their accountants did

more than the executor and his lawyer in United States
 - 36 -

v. Boyle, supra. In this case, petitioners' accountants

prepared Forms 4868, including the accountants' computation

of petitioners' estimated tax liability, and filed the

forms on petitioners' behalf before the filing deadline.

The filing of each of these forms on which petitioners'

accountants had estimated petitioners' tax liability for

the year constituted the advice of petitioners' accountants

not only as to petitioners' estimated tax liability but

also as to petitioners' filing obligations. This is the

type of substantive advice of an accountant as to which it

is reasonable for a taxpayer to rely. Id. at 251. The

late filing in this case was not due to an oversight or

inattention on the part of petitioners or their

accountants. It was due to the advice of petitioners'

accountants that petitioners' tax liability was properly

estimated on the Forms 4868 filed for 1988 and 1989, and

that they had validly claimed an automatic extension to

file the return for each year. This advice, on which

petitioners relied, constitutes "reasonable cause" for

petitioners' failure to file timely returns. See

Commissioner v. American Association of Engrs. Employment,

Inc., 204 F.2d 19, 21 (7th Cir. 1953), affg. a Memorandum

Opinion of this Court; Burton Swartz Land Corp. v.

Commissioner, 198 F.2d 558, 560 (5th Cir. 1952), affg. in
 - 37 -

part and revg. in part a Memorandum Opinion of this Court;

Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769,

771 (2d Cir. 1950), modifying 12 T.C. 735 (1949); Orient

Inv. & Fin. Co. v. Commissioner, 166 F.2d 601, 603-604

(D.C. Cir. 1948); Furman v. Commissioner, T.C. Memo. 1998-

157.

The only argument made by respondent regarding

petitioners' reliance on their accountants is the

following:

Petitioners cannot simply lay the blame
on accountants or bookkeepers for failing to
obtain the information necessary to make a proper
estimate. "It is the taxpayer's obligation to
supply his or her accountant with complete and
accurate records from which to make a reasonable
estimate of the tax liability." Boatman v.
Commissioner, T.C. Memo. 1995-356 (citing Estate
of Duttenhofer v. Commissioner, 49 T.C. 200, 205
(1967), aff'd, 410 F.2d 302 (6th Cir. 1969)).
Neither can petitioners avoid the I.R.C. § 6651
(a)(1) penalty by attempting to lay the blame
on a representative for failing to timely file
a return. "To demonstrate reasonable reliance,
it must be shown that the advisor had sufficient
knowledge of the taxpayer's relevant financial
circumstances to make an informed decision."
Stovall v. Commissioner, T.C. Memo. 1983-450
(citing Yale Avenue Corp. v. Commissioner, 58
T.C. 1062 (1972) and Railroad Realty Co. v.
Commissioner, 25 T.C. 458 (1955)).

We find no support in the record for respondent's argument.

Petitioners' accountants had a longstanding relationship
 - 38 -

with petitioners and a close working relationship with

petitioners' bookkeeper, Ms. Cates. There is no evidence

that petitioners or their bookkeeper withheld any

information from their accountants.

Based on the foregoing and concessions of the parties,

Decision will be entered

under Rule 155.