1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Memo. 1997-152

UNITED STATES TAX COURT

PAMELA O'ROURKE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6575-95. Filed March 24, 1997.

Kevin J. Mirch, for petitioner.

David W. Sorensen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DEAN, Special Trial Judge: This case was assigned pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

Respondent determined additions to petitioner's 1982 Federal

income tax as follows:
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2Mr. Maerki was not an attorney or a C.P.A., and no evidence

was offered regarding his professional credentials or his

knowledge of the Barbados venture.

 Additions to Tax 

Year Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661

1982 $321 50 percent of $643

 the interest due

 on $6,426

The issues for decision are: (1) Whether the notice of

deficiency was issued after the period of limitations for the

assessment and collection of taxes for petitioner's 1982 tax year

expired; and (2) whether petitioner is liable for additions to

tax under section 6653(a)(1) and (2) and section 6661 for the

1982 tax year.

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. Petitioner resided in

Reno, Nevada, at the time she filed her petition.

FINDINGS OF FACT

During 1982, petitioner worked for Cal-Sierra Financial

Services, and also for Spectra Financial Network (Spectra), a

financial planning company. Spectra was involved in the

marketing of limited partnership interests in Barbados #6 Ltd.

(Barbados). Petitioner invested in Barbados on the

recommendation of her then-boss, Kent Maerki.2 On her 1982

Federal income tax return, petitioner reported a $21,676 Schedule
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E loss attributable to her investment as a limited partner in Barbados.

OPINION

Respondent's determinations, contained in the notice of

deficiency, are presumed correct, and petitioner bears the burden

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

111, 115 (1933).

1. Statute of Limitations

The notice of deficiency was issued to petitioner on

February 3, 1995, for additions to tax associated with

petitioner's distributive share of partnership items. Respondent

determined that petitioner is liable for additions to tax

provided in sections 6653(a) and 6661(a). Petitioner contends

that she is not liable because, having filed her 1982 Federal

income tax return on October 19, 1983, the 3-year statutory

period of limitations provided in section 6501 expired before

issuance of the notice of deficiency.

Under the general rule set forth in section 6501, the

Secretary is required to assess the tax within 3 years after the

taxpayer's return is filed. Sec. 6501(a). In the case of the

tax imposed on partnership items, however, section 6229 sets

forth special rules to extend the period of limitations

prescribed by section 6501. See sec. 6501(o).

Section 6229(a) provides that the period for assessing

income tax attributable to a partnership item (or affected item)

for a partnership taxable year shall not expire before 3 years
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3The additions to tax determined by respondent are affected

items. Sec. 301.6231(a)(5)-1T(d), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987).

after the later of (1) the date the partnership return for such

year was filed or (2) the last day for filing such return for

such year (without regard to extensions).3 However, section

6229(d) provides that the mailing of a final partnership

administrative adjustment suspends the running of the 3-year

limitations period for the period during which an action may be

brought under section 6226 (and, if an action is brought, until

the decision of the court has become final) and for 1 year

thereafter.

The stipulation of facts includes a copy of the decision

entered regarding Barbados, which is dated December 6, 1993. 

Under section 6229(d)(2), the running of the 3-year period of

limitations for assessing a deficiency attributable to a 1982

partnership item was suspended for 1 year after the date the

decision entered on December 6, 1993, became final. The decision

became final no earlier than March 6, 1994 (90 days after it was

entered). Secs. 7481(a)(1), 7483. The notice of deficiency was

issued to petitioner on February 3, 1995. Consequently, the

notice of deficiency relating to the affected items (the

additions to tax) was timely issued.

2. Negligence

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

of an underpayment is due to negligence or intentional disregard
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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. 

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, petitioner must prove that her actions in connection with

the loss from the Barbados venture were reasonable in light of

her 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.

Petitioner offered very little evidence to refute

respondent's determination of negligence. The only evidence in

the record regarding petitioner's evaluation of the investment

consists of her testimony that she read certain "documents" and

that she relied on the recommendation of Mr. Maerki. No

prospectus or offering memorandum was introduced, no evidence of

the nature of the investment was offered, and no witnesses save

for petitioner testified at trial. Petitioner asserted in her

petition that she was not negligent because she "acted under

advice of counsel in the preparation of the return", yet she

offered no evidence to support this assertion.

Based upon the record in this case, we find that petitioner

has not overcome respondent's determination of negligence. We
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therefore sustain respondent's determination that petitioner is

liable for the additions to tax under section 6653(a)(1) and (2)

for the 1982 tax year.

3. Section 6661 Addition to Tax

In the notice of deficiency, respondent determined the

section 6661 addition to tax at a rate of 10 percent of the

underpayment for that year. As originally enacted, section 6661

provided for an addition to tax of 10 percent of the amount of

any underpayment attributable to a substantial understatement of

income tax liability, applicable to returns due after

December 31, 1982. Tax Equity and Fiscal Responsibility Act of

1982, Pub. L. 97-248, sec. 323, 96 Stat. 324, 615. In 1986,

Congress amended section 6661(a) and provided for an addition to

tax of 25 percent, where the assessment is made after October 21,

1986. Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, 

sec. 8002, 100 Stat. 1874, 1951; see also Pallottini v.

Commissioner, 90 T.C. 498 (1988). Although respondent correctly

refers to the rate of the addition as 25 percent in her synopsis

of legal authorities in her trial memorandum, she made no mention

of the discrepancy between this rate and the 10 percent rate used

in the notice of deficiency, and has not sought to amend the

pleadings to assert an increase.

Section 6214(a) grants this Court jurisdiction to determine

a deficiency or addition to tax larger than that stated in the

notice of deficiency, if respondent claims the increased amount
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"at or before the hearing or a rehearing." We may not, however,

determine a greater deficiency where respondent has not pleaded

an increased deficiency. Moise v. Burnet, 52 F.2d 1071, 1073

(9th Cir. 1931), revg. 13 B.T.A. 525 (1928); Estate of Petschek

v. Commissioner, 81 T.C. 260, 271-272 (1983), affd. 738 F.2d 67

(2d Cir. 1984); Koufman v. Commissioner, 69 T.C. 473, 475-476

(1977).

In the instant case respondent has not specifically

addressed the issue and has not requested an increase in the

addition to tax under section 6661. In these circumstances we

cannot conclude that respondent has asserted a claim for the

increased amount as required by section 6214(a), nor that the

issue has been tried by consent of the parties within the meaning

of Rule 41(b)(1). Thus, we shall apply the addition, if

determined to be applicable, at the rate set forth in the notice

of deficiency.

Section 6661(a) provides that an addition to tax is imposed

on any underpayment attributable to a substantial understatement

of income tax. Petitioner bears the burden of proving that she

is not liable for this addition to tax. Rule 142(a); King's

Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 517

(1992).

An understatement is substantial if it exceeds the greater

of 10 percent of the amount required to be shown on the return

for the taxable year or $5,000. Sec. 6661(b)(1). An
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understatement is the amount by which the amount required to be

shown on the return exceeds the amount actually shown on the

return. Sec. 6661(b)(2). Petitioner's case meets this threshold

requirement.

Petitioner admitted in her petition that Barbados was a tax

shelter. Thus, the adequate disclosure exception of section

6661(b)(2)(B)(ii) does not apply. Sec. 6661(b)(2)(C). Moreover,

even if Barbados was not a tax shelter, petitioner does not

qualify for the adequate disclosure exception because she has not

shown that she provided sufficient information on her return to

enable the Commissioner to identify the potential controversy

involved.

If, however, a taxpayer has substantial authority for the

tax treatment of a tax shelter item on her return and reasonably

believed her tax treatment of the item was more likely than not

the proper tax treatment, the understatement is reduced by the

amount attributable to such item. Sec. 6661(b)(2)(B)(i). The

only evidence in the record concerning petitioner's evaluation of

the economic aspects of the partnership is her testimony that she

"overlooked their documents" and relied on Mr. Maerki's

recommendation. In short, petitioner presented insufficient

evidence to show that she or her adviser made the kind of

independent factual analysis of Barbados that would enable her to

formulate a reasonable belief as to the tax treatment of the item

and to determine whether the claimed loss was more likely than
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not the proper tax treatment. Accordingly, we hold that

petitioner is liable for the section 6661 addition to tax (as

determined by respondent using the 10 percent rate) for the 1982

tax year.

To reflect the foregoing,

Decision will be entered

for respondent.