T.C. Memo. 2000-189

UNITED STATES TAX COURT

THOMAS C. SANDOVAL, JR. AND BOBBIE J. SANDOVAL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21220-96. Filed June 27, 2000. 

Thomas C. Sandoval, Jr., pro se.

Elizabeth A. Owen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioners’ Federal income tax and additions to tax and

penalties as follows:
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1 Respondent bears the burden of proof with respect to new

matter alleged in the amended answer. Rule 142(a). 

 Additions to tax and penalties 

Year Deficiency Sec. 6651(a)(1) Sec. 6661(a) Sec. 6662(a)

1985 $27,673 $3,362 $6,918 --

1987 21,865 2,722 5,466 --

1989 10,017 –- –- $2,003

1990 50,643 10,910 –- 10,129

Respondent filed an amended answer asserting that petitioners’

tax liability is as follows:1

 Additions to tax and penalties 

Year Deficiency Sec. 6651(a)(1) Sec. 6661(a) Sec. 6662(a)

1985 $27,642 $3,889 $3,888 --

1987 21,865 2,935 2,935 --

1989 10,017 2,420 –- $1,936

1990 50,643 10,911 –- 10,129

 After concessions, the issues for decision are:

1. Whether petitioners have a basis of $233,408 in

additions to a building. We hold that their basis in the

additions is $20,000.

2. Whether petitioners have a basis of $130,000 (or any

other amount) in real property for two outdoor advertising signs

on the property. We hold that they do not.

3. Whether the Babcock Road and Warfield Drive properties

qualify under section 1033 as replacement property for property

sold under threat of condemnation. We hold that they do not.

4. Whether petitioner placed certain vehicles in service

when he bought them for his business, as respondent contends, or

when he began to use them in his business, as petitioners
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contend. We hold that petitioner placed the vehicles in service

when he bought them for his business.

5. Whether petitioners may deduct depreciation for their

business property in an amount greater than respondent allowed. 

We hold that they may not.

6. Whether petitioners may claim net operating loss

carrybacks or carryforwards or investment tax credit

carryforwards for the years in issue. We hold that they may not.

7. Whether petitioners are liable for an addition to tax 

under section 6651 for failure to timely file their Federal

income tax returns for the years in issue. We hold that they

are.

8. Whether petitioners are liable for additions to tax for

substantial understatement of income tax under section 6661 for

1985 and 1987 and for accuracy-related penalties for substantial

understatement of tax under section 6662(b)(2) and (d) for 1989

and 1990. We hold that they are for the years they substantially

underpaid tax.

References to petitioner are to Thomas C. Sandoval, Jr. 

Section references are to the Internal Revenue Code in effect

during the years in issue. Unless otherwise noted, Rule

references are to the Tax Court Rules of Practice and Procedure.
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FINDINGS OF FACT

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

A. Petitioners

Petitioners lived in San Antonio, Texas, when they filed

their petition.

During the years in issue, petitioner was sole proprietor of

Allied Electric and Air Conditioning Co. (Allied Electric)

located on Hoefgen Avenue (Hoefgen Avenue property) in San

Antonio. There was a billboard and a commercial sign (the two

outdoor advertising signs) on the Hoefgen Avenue property.

Petitioner bought the following vehicles for Allied 

Electric because he thought he needed them for contracts on which

he had bid, but which he did not win:

 Vehicle Date acquired 

 1973 Ford Digger October 1982

 1972 Ford Bucket truck February 1983

 1977 GMC Bobtail April 1983

 1977 GMC Bobtail April 1983

 1985 Ram Charger October 1984

He maintained them, but he did not register or insure them until

he began to use them for his business in 1985.

B. The Hoefgen Avenue Property

1. Addition of Storage Space and Office

Between January 1, 1982, and December 31, 1984, petitioner

added warehouse storage space and an office addition to the

second story of the Hoefgen Avenue property. Richard Zamora

(Zamora) drafted plans for the storage space addition in November
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1981 and plans for the office addition in March 1983 and oversaw

construction of both. Petitioner signed the building permit for

the office addition which stated that the addition was estimated

to cost $10,400.

Petitioners’ county property tax statement states that

improvements (i.e., everything but the land) at the Hoefgen

Avenue property were worth $112,020 in 1984 and $158,800 in 1985

and 1986. 

2. Condemnation Sale of the Hoefgen Avenue Property

The City of San Antonio threatened to condemn the Hoefgen

Avenue property in the summer of 1990. Petitioner hired John

Neal (Neal), a real estate appraiser, to appraise the

improvements on that property. Neal estimated that the

replacement cost of those improvements as of June 8, 1990, was as

follows:

 Structures Replacement cost

 Office building $193,011 

 Transit warehouse 77,012

 Additions (e.g., sheds, fans

 & openers, canopy area, 

 stairs, fencing, etc.) 36,499 

 Total 306,522

The City of San Antonio bought the Hoefgen Avenue property

under threat of condemnation for $425,000 on September 17, 1990. 

Petitioner received net proceeds of $371,486 from the sale (the

condemnation proceeds). Petitioner elected to defer the gain he
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realized from the condemnation sale by buying replacement

property under section 1033.

C. Properties That Petitioners Contend or That Respondent

Concedes Are Replacement Properties

1. Properties That Respondent Concedes Are Replacement

Properties

Petitioner bought real property on Jones Maltsberger Road

(Jones Maltsberger Road property) in San Antonio on September 26,

1990, and 3.164 acres of land in Bexar County on October 7, 1991. 

Respondent concedes that these properties qualify under section

1033 as replacement properties for the Hoefgen Avenue property.

2. The Babcock Road Property

Gary A. Burnett (Burnett) and petitioner each paid a total

of $84,107 to buy 1.329 acres of real property on Babcock Road

(Babcock Road property) in San Antonio. They made those payments

on October 30 and December 2 and 3, 1991. On December 4, 1991,

petitioner and Burnett agreed in writing (Babcock Road property

agreement) to create a joint venture called “TGR Partnership a

Texas general partnership” (TGR I), with a principal place of

business at the Jones Maltsberger Road property. Petitioner and

Burnett signed Exhibit A to the Babcock Road property agreement

which states: “This partnership is formed for the purpose of

purchasing the property as described in Exhibit ‘B’”. Exhibit B

describes the Babcock Road property. The Babcock Road property

agreement provided: (a) “Joint venture I” began on December 3,
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1991; (b) its purpose was short-term investment (6 to 12 months)

in the Babcock Road property; (c) all allocations would be 50

percent each to petitioner and Burnett; (d) real property was to

be owned in the name of the joint venture or any joint venturer

as nominee or trustee of the joint venture; (e) each joint

venturer waived the right to partition joint venture property;

(f) the joint venturers had equal right to control and manage the

Babcock Road property; (g) the joint venturers’ rights to sell,

assign, transfer, encumber, or otherwise dispose of interests in

the Babcock Road property were restricted; and (h) each of the

joint venturers had the option to buy the other’s interest upon

the other’s death, adjudication of the other’s incompetency, the

other’s bankruptcy, or gift of part or all of the other’s

interest in the property.

The Babcock Road property settlement statement dated

December 5, 1991, names TGR I as the borrower for the property.

On March 20, 1992, petitioner registered TGR I as his

assumed name. Petitioner did not include Burnett’s name on the

assumed name certificate. A City of San Antonio statement of

property taxes for 1992 lists the TGR I as the owner of record of

the Babcock Road property.

On December 15, 1992, petitioner and Burnett sold the

Babcock Road property for $318,000 plus $429 in taxes. The

settlement statement listed TGR I as the seller. Petitioner and
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Burnett each signed the settlement statement as a partner of TGR

I. The settlement company issued two checks for $143,250 each

payable to TGR I. Petitioner and Burnett each endorsed one check

payable to the other.

3. The Warfield Drive Property

On May 14, 1993, petitioner and Burnett agreed to form a

joint venture under the name “TGR Partnership a Texas general

partnership” (TGR II) to buy real property to hold for 3 to 5

years to generate rental income.

On May 17, 1993, petitioner and Burnett signed a written

agreement (Warfield Drive property agreement), and bought

property on Warfield Drive (Warfield Drive property) in San

Antonio. On May 17, 1993, petitioner and Burnett each paid about

$123,000 for a 50-percent interest in TGR II. Petitioner and

Burnett signed Exhibit A to the Warfield Drive property agreement

which states: “This partnership is formed for the purpose of

purchasing the property as described in Exhibit ‘B’”. Exhibit B

describes the Warfield Drive property. The Warfield Drive

property settlement statement identified “Gary Burnett and Tom

Sandoval dba TGR and Partnership” as the borrower for the

property. The Babcock Road and Warfield Drive property

agreements are identical except for the description of, and the

stated purpose for holding, the properties.
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D. Petitioners’ Tax Returns

Petitioners asked to extend the times to file, deposited

amounts with their requests, and filed their returns for the

years in issue as follows:

 Date Date

Tax Date of Amount of extension petitioners

year request deposit granted to filed 

1985 Apr. 15, 1986 $14,000 Aug. 15, 1986 Sept. 20, 1993

1987 Apr. 15, 1988 10,000 Aug. 15, 1988 Sept. 27, 1993

1989 Apr. 15, 1990 Aug. 15, 1990

1989 Aug. 15, 1990 Oct. 15, 1990 Oct. 1, 1993

1990 Apr. 15, 1991 7,000 Aug. 15, 1991

1990 Aug. 15, 1991 Sept. 16, 1991 Oct. 1, 1993

The following chart shows the amount of the depreciation and

section 179 deductions that petitioners’ accountant calculated

and that petitioners reported on Schedules C, Profit or (Loss)

From Business or Profession, of petitioners’ returns for 1985,

1987, 1989, and 1990:

Depreciation and Section 179 Deductions

Accountant’s Petitioners’

Year schedules Schedules C 

1985 $48,855 $51,308

1987 54,789 53,513

1989 47,693 53,413

1990 35,741 59,463

Petitioners filed their 1983 return in 1992 and their 1984,

1986, and 1988 returns in 1993. Petitioners claimed 3 months

depreciation for the Ram Charger on their 1984 return.

On Schedules E, Supplemental Income Schedule, of their

Federal individual income tax returns for 1993, 1994, 1996, and
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2 Respondent allowed depreciation deductions for 15-year

property costing $22,895, for 5-year property costing $12,083,

and for 3-year property costing $48,044, which petitioners

reported on their 1982 return was placed in service in 1981 and

1982.

3 Petitioners offered no evidence to prove their contention

that they lost petitioner’s records when moving to the Jones

Maltsberger Road property.

1997, petitioners reported nonpassive income or loss relating to

TGR II in the partnership income section.

OPINION

A. Whether Petitioners Have a Basis of $233,408 in the Storage

and Office Additions to the Hoefgen Avenue Property

Petitioners contend that they paid $233,408 in the early

1980's to add storage and office space to the Hoefgen Avenue

property. Respondent contends that petitioners have failed to

show that they are entitled to any basis in the additions to the

Hoefgen Avenue property.2

Petitioners rely in part on Zamora’s and Neal’s testimony to

substantiate their basis for the storage and office additions.3

Zamora credibly testified that he designed and oversaw the

construction of the storage addition at the Hoefgen Avenue

property in 1981 and 1982, and the office addition in 1983 and

1984. Zamora testified that the storage addition was not

significant because petitioners did not change the exterior or

roof structure of the building. Zamora did not testify about the

cost of the additions. Neal estimated that the replacement cost
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of all improvements to the Hoefgen Avenue property was $306,522

as of June 8, 1990. He did not estimate how much petitioners

spent to build the storage and office additions.

Petitioners point out that the Bexar County property tax

statements for the Hoefgen Avenue property show that the

improvements to that property were worth $112,020 in 1984 and

$158,800 in 1985 and 1986. Petitioners also point out that

petitioner signed a building permit which states that the

estimated cost for the office addition was $10,400. These facts

are not sufficient evidence of basis.

Respondent contends that the record provides no basis to

estimate petitioners’ costs for the storage and office additions. 

We disagree. We may estimate petitioners’ basis in those

additions “bearing heavily * * * upon the taxpayer whose

inexactitude is of his own making." See Cohan v. Commissioner,

39 F.2d 540, 544 (2d Cir. 1930), affg. in part and remanding 11

B.T.A. 743 (1928); see also Bayou Verret Land Co. v.

Commissioner, 450 F.2d 850, 858 (5th Cir. 1971), affg. 52 T.C.

971 (1969). We estimate that petitioners paid $20,000 to add the

office and that it was completed in 1984. Petitioners may

increase their basis in the Hoefgen Avenue property for the

office addition using a 15-year useful life and a placed-inservice date of July 1984.
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4 Future contract value is not a proper grounds for

computing gain. See sec. 1012; Better Beverages, Inc. v. United

States, 619 F.2d 424, 428 (5th Cir. 1980); Winn-Dixie Montgomery,

(continued...)

We do not have sufficient information to estimate how much

petitioners paid for the storage addition that was completed in

1982. Also, petitioners have failed to show that they did not

include the cost of the storage addition on the depreciation

schedule attached to their 1982 return, for which respondent

already concedes an allowance for depreciation. Finally,

petitioners have not shown that they did not fully depreciate the

cost of the storage addition before 1985. Thus, petitioners may

not increase their basis in the Hoefgen Avenue property for 1985

or any later year to include any costs of building the storage

addition. 

B. Whether Petitioners Have Basis in the Hoefgen Avenue

Property for Outdoor Advertising Signs

Petitioners contend that the two outdoor advertising signs

on the Hoefgen Avenue property had a future contract value of

$130,000 and that we should increase their basis in the Hoefgen

Avenue property by that amount. We disagree. 

The basis of property is generally its cost. See sec. 1012;

Better Beverages, Inc. v. United States, 619 F.2d 424, 428 (5th

Cir. 1980); Winn-Dixie Montgomery, Inc. v. United States, 444

F.2d 677, 683-684 (5th Cir. 1971). Future contract value is not

the cost of the two outdoor signs.4 There is no evidence of the
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4(...continued)

Inc. v. United States, 444 F.2d 677, 683-684 (5th Cir. 1971). 

cost of the signs, who paid for them, or when those payments were

made. We conclude that petitioners may not increase the basis in

the Hoefgen Avenue property based on the future contract value of

the two outdoor signs.

C. Whether the Babcock Road and Warfield Drive Properties

Qualify as Replacement Property for the Hoefgen Avenue

Property Under Section 1033

1. Background and Contentions of the Parties

A taxpayer who sells under threat of condemnation real

property held for business use or investment may defer

recognition of the gain if he or she buys property of like kind

to the converted property within 3 years after the closing of the

first taxable year in which any part of the gain from the sale is

realized. See sec. 1033(a)(1), (g)(1), and (g)(4). Principles

used for deciding whether an exchange is like kind under section

1031 also apply in deciding whether replacement property is

property of a like kind under section 1033. See sec. 1.1033(g)-

1(a), Income Tax Regs. An exchange of a fee interest in real

property for an interest in a partnership does not qualify as an

exchange of like-kind property. See M.H.S. Co. v. Commissioner,

T.C. Memo. 1976-165, affd. 575 F.2d 1177 (6th Cir. 1978); sec.

1.1031(a)-1(b), Income Tax Regs. 
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5 In light of our conclusion, we need not decide

respondent’s contention that the rule stated in Commissioner v.

Danielson, 378 F.2d 771, 775 (3d Cir. 1967), vacating and

remanding 44 T.C. 549 (1965) (the Danielson rule), precludes

petitioners from claiming that their interests in the Babcock

Road and Warfield Drive properties are not partnership interests.

Petitioners contend that they may defer all of their gain

from the sale of the Hoefgen Avenue property because they bought

replacement properties that qualify under section 1033. 

Respondent contends that petitioners used proceeds from the

Hoefgen Avenue sale to buy interests in partnerships and not in

real property. Petitioners contend that petitioner and Burnett

bought the Babcock Road and Warfield Drive properties, then

decided to form a joint venture to manage them. We disagree with

petitioners.5

2. Whether Petitioner Acquired an Interest in the Babcock

Road and Warfield Drive Properties, or an Interest in

Partnerships

Petitioners contend that petitioner and Burnett acquired an

interest in and held the Babcock Road and Warfield Drive

properties in fee simple as tenants in common. Petitioner and

Burnett testified that they did not intend to form partnerships

until after they bought the real property. However, we give more

weight to the objective facts than to that testimony. The

objective facts, such as the written agreements and petitioner’s

and Burnett’s conduct, show that petitioners formed a partnership

under Texas and Federal law, that the partnerships acquired the
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6 Texas adopted the Texas Uniform Partnership Act (TUPA) in

1961, effective Jan. 1, 1962. See Humphrey v. Bullock, 666

S.W.2d 586, 588 (Tex. App. 1984).

properties, and that petitioner used the proceeds from the

Hoefgen Avenue sale to buy partnership interests. 

Under Texas law, a partnership is "an association of two or

more persons to carry on as co-owners a business for profit." 

Tex. Rev. Civ. Stat. Ann. art. 6132b, sec. 6(1) (West 1990).6 For

Federal tax purposes, generally, a partnership exists when

persons combine their money, goods, labor, or skill to carry on a

trade, profession, or business and there is a community of

interest in the profits or losses. See Commissioner v.

Culbertson, 337 U.S. 733, 742 (1949); see also sec. 7701(a)(2). 

Under Texas law, a joint venture is in the nature of a

partnership, but it is usually limited to one particular

enterprise. See State v. Houston Lighting & Power Co., 609

S.W.2d 263, 267 (Tex. Civ. App. 1980). 

a. The Babcock Road Property

Petitioners contend that they acquired the Babcock Road

property as cotenants. They contend the fact that they labeled

TGR I as a partnership does not control. See, e.g., Coastal

Plains Dev. Co. v. Micrea, Inc., 572 S.W.2d 285, 288 (Tex. 1978);

Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 586 (Tex.

App. 1999); Ben Fitzgerald Realty Co. v. Muller, 846 S.W.2d 110,

121-122 (Tex. App. 1993). They point out that coownership of
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property is not necessarily a partnership. See Demirjian v.

Commissioner, 54 T.C. 1691, 1697 (1970), affd. per curiam 457

F.2d 1 (3d Cir. 1972). We disagree that petitioner and Burnett

acquired the Babcock Road property as cotenants.

Petitioners contend that petitioner and Burnett formed TGR I

after they bought the property to help manage it. We disagree. 

Petitioner and Burnett formed TGR I on December 3, 1991,

according to the terms of the written agreement which they signed

the following day. Under Texas law, a partnership can exist

without a written agreement. See Valero Energy Corp. v. Teco

Pipeline Co., supra at 584-585; Shindler v. Marr & Associates,

695 S.W.2d 699, 703 (Tex. App. 1985); Cavazos v. Cavazos, 339

S.W.2d 224, 226 (Tex. Civ. App. 1960). 

The written agreement that they signed on December 4, 1991,

stated that their “Joint Venture I” began on December 3, 1991. 

In the written partnership agreement, petitioner and Burnett

agreed (1) to contribute equal sums to own equal interests in TGR

I; (2) to share equally in profits, and bear equal responsibility

for losses in TGR I; (3) that TGR I would own the real property;

(4) to waive their rights to require partition of partnership

property; (5) to share equally management and control over TGR I;

and (6) to restrict transferring their interests in TGR I. They

specified a principal place of business. They acquired the

Babcock Road property in the name of TGR I, then sold it for a
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profit and divided the net proceeds equally. Thus, petitioner

and Burnett formed TGR I as a partnership to hold real property

for profit.

Real property acquired in the name of the partnership is

partnership property. See Tex. Rev. Civ. Stat. Ann. art. 6132b,

sec. 2.05(a)(1) (West 1999). A copy of the deed for the Babcock

Road property is not in the record. However, it appears from the

settlement documents that TGR I bought the Babcock Road property

on December 5, 1991, in TGR I’s name. Petitioners do not dispute

this fact. A City of San Antonio statement of property taxes for

1992 states that TGR I was the owner of record of the Babcock

Road property. The documents evidencing the sale of the Babcock

Road property name TGR I as the seller. Thus, TGR I, and not

petitioner and Burnett, acquired and held title to the Babcock

Road property. See Tex. Rev. Civ. Stat. Ann. art. 6132b, sec.

2.05(a)(1) (West 1999).

We conclude that the Babcock Road property does not qualify

as replacement property for the Hoefgen Avenue property under

section 1033.

b. The Warfield Drive Property

Petitioners contend that they acquired the Warfield Drive

property as cotenants. Petitioners point out that petitioner and

Burnett testified that they did not intend to form a partnership. 

The objective facts show otherwise. 
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Petitioner and Burnett agreed to form TGR II on May 14,

1993. They signed the Warfield Drive property agreement on May

17, 1993, which memorialized their May 14, 1993, agreement. The

terms of the Warfield Drive property agreement are essentially

the same as those in the Babcock Road property agreement, except

for the purpose for acquiring the real property. Exhibits A and

B to the Warfield Drive property agreement state that petitioner

and Burnett formed TGR II to acquire the Warfield Drive property. 

The Warfield Drive property agreement stated that petitioner and

Burnett intended to collect rental income from that property for

many years and to hold it to appreciate in value. TGR II bought

and held the Warfield Drive property to carry on a business. 

Petitioner and Burnett adopted the TGR name, acquired the

property under that name, and held out TGR II as a partnership. 

Petitioners reported active partnership income and loss from TGR

II for 1993, 1994, 1996, and 1997. Petitioner and Burnett

intended to and did operate a real estate rental business

together.

Petitioners contend that TGR II did not buy the Warfield

Drive property because petitioner and Burnett signed the joint

venture agreement after they bought the property. We disagree. 

The written agreement that petitioner signed on May 17, 1993,

states that Burnett and petitioner agreed on May 14, 1993, to

establish TGR II to buy and hold rental real property for 3 to 5
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years. The record does not show whether petitioner and Burnett

signed the agreement or bought the property first. However, both

of those events occurred on May 17, 1993, after they agreed to

form the partnership. 

Petitioners contend that petitioner and Burnett took title

to the Warfield Drive property in their individual names. A copy

of the deed is not in the record, and it is not clear how title

to the Warfield Drive property is recorded. The settlement

statement shows “Gary Burnett and Tom Sandoval dba TGR and

Partnership” as borrowers. However, even if we assume that title

to the Warfield Drive property is recorded in petitioner’s and

Burnett’s names, we believe that they were TGR II’s agents when

they bought the Warfield Drive property. The property agreement

provides for buying and renting out one parcel of real property

for 3 to 5 years and that the property of TGR II may be held in

the name of petitioner or Burnett. Under Texas law, title to

partnership property may be held in the name of the partnership

or in the name of one or more of the partners. See Tex. Rev.

Civ. Stat. Ann. art. 6132b, sec. 10 (West 1990). Partnership

property, nonetheless, belongs to the partnership and not to the

individual partners. See Littleton v. Littleton, 341 S.W.2d 484,

488 (Tex. Civ. App. 1960); In re Cooper, 128 Bankr. 632, 636

(Bankr. E.D. Tex. 1991).
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Petitioners point out that petitioner filed a certificate of

assumed name for “TGR” without including Burnett’s name and

contend that this shows that Burnett and petitioner were not

partners in TGR II. We disagree. This fact is not enough to

convince us that petitioner and Burnett did not use condemnation

proceeds to pay for an interest in the partnership known as TGR

II which in turn bought and owned the Warfield Drive property. 

Also, the assumed name certificate does not affect TGR II because

petitioner and Burnett created the TGR II partnership after

petitioner filed the assumed name certificate. 

We conclude that petitioners acquired an interest in TGR II

and that the Warfield Drive property was an asset of TGR II, not

an asset owned as tenants in common by the joint venturers. 

Thus, the Warfield Drive property does not qualify as replacement

property for the Hoefgen Avenue property under section 1033.

D. Whether the Placed-In-Service Date for a Vehicle Is the Date

Acquired or the Date Used in Business

The parties disagree about when petitioner placed five

vehicles in service for depreciation purposes. Petitioners

contend that the placed-in-service date for each vehicle is the

date petitioner began using the vehicle in his business. We

disagree.

Generally, an asset is placed in service for depreciation

purposes when it is acquired and available for use in business

even if it is not actually used in the business. See Sears Oil
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Co. v. Commissioner, 359 F.2d 191, 198 (2d Cir. 1966), affg. in

part, revg. in part, and remanding T.C. Memo. 1965-39; 

P. Dougherty Co. v. Commissioner, 159 F.2d 269 (4th Cir. 1946),

affg. 5 T.C. 791 (1945). All five vehicles were available for

use in petitioner’s business when he bought them. Petitioner

placed each vehicle in service for depreciation purposes when he

bought it.

E. Whether Petitioners May Deduct More Depreciation for

Business Property Than Respondent Allowed

Petitioners contend that they may depreciate shop and office

equipment in amounts greater than they claimed on their returns

for the years in issue and greater than respondent allowed. 

Petitioners contend that respondent did not allow them to

depreciate certain shop and office equipment that had useful

lives and cost bases which had not been fully recovered as of the

beginning of 1985. We disagree. Petitioners did not identify

the equipment to which their contention applies or show that

respondent had not already allowed a depreciation deduction for

that equipment.

F. Whether Petitioners May Deduct Net Operating Loss

Carryforwards and Carrybacks and Use Investment Tax Credit

Carryforwards

Petitioners contend they may deduct net operating loss (NOL)

carryforwards and carrybacks and use investment tax credit

carryforwards. We disagree. Petitioners must prove the amount

of the NOL carryforward or carryback deductions claimed and that
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their gross income in other years did not offset those losses. 

See Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd. and

remanded on other grounds 259 F.2d 300 (5th Cir. 1958).

Dan Mitchell, petitioners’ return preparer, testified that

petitioners’ tax returns show that they are entitled to NOL

carryforwards and carrybacks and investment tax credit

carryforwards. Tax returns alone do not establish that a

taxpayer is entitled to NOL carryforwards or carrybacks or

investment tax credit carryforwards. See Wilkinson v.

Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,

62 T.C. 834, 837, 839 (1974). Petitioners offered no other

evidence about their NOL carryforwards or carrybacks or

investment tax credit carryforwards. We conclude that

petitioners may not claim NOL carryforward or carryback

deductions or investment tax credits carried forward to the years

in issue.

G. Whether Petitioners Are Liable for the Addition to Tax for

Late Filing

Petitioners contend that they are not liable for the

addition to tax under section 6651(a)(1) for their failure to

file timely their income tax returns for each year in issue

because: (1) They correctly reported that there was no tax due

for the years in issue, (2) they had reasonable cause to file

their returns late because petitioner had problems keeping office

staff who could provide the necessary information to help prepare
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the returns and it took him additional time to replace his return

preparer, and (3) they showed their good faith by filing timely

extension requests and by paying cash deposits with those

requests. We disagree.

Petitioners are liable for an addition to tax for failure to

timely file a tax return unless they show that their failure to

timely file is due to reasonable cause and not due to willful

neglect. See sec. 6651(a)(1); United States v. Boyle, 469 U.S.

241, 245 (1985).

Petitioners had extensions of time to file their returns for

the years in issue, but they filed them long after the extended

time had passed. Making cash deposits does not substitute for

timely filing a return. Petitioners did not show that they had

reasonable cause to file their returns late or that they

exercised good faith in filing their returns. Thus, petitioners

are liable for the additions to tax for failure to timely file

their tax returns for each year in issue.

H. Whether Petitioners Are Liable for the Addition to Tax or

Penalty for Substantial Understatement

Petitioners contend that they are not liable for additions

to tax for substantial understatement of tax under section

6661(a) for 1985 and 1987 and accuracy-related penalties for

substantial understatement of tax under section 6662(b)(2) and

(d) for 1989 and 1990 because they had reasonable cause for the

understatements and they acted in good faith. They rely on their
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reasons for failing to file timely, which we have found to be

unconvincing. Petitioners do not contend that they had

substantial authority for the understatements or that their tax

returns disclosed enough facts to enable respondent to identify

the potential controversy. See sec. 6662(d)(2)(B); Schirmer v.

Commissioner, 89 T.C. 277, 285-286 (1987). We conclude that

petitioners are liable for the additions to tax under section

6661(a) for 1985 and 1987 and the accuracy-related penalties

under section 6662(b)(2) and (d) for 1989 and 1990 if the

calculations under Rule 155 show that the understatements are

substantial for purposes of section 6661(a) or section

6662(d)(1).

To reflect concessions and the foregoing,

 Decision will be entered

 under Rule 155.