T.C. Memo. 1997-507

UNITED STATES TAX COURT

SAM E. SCOTT, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21525-94. Filed November 12, 1997.

Sam E. Scott, pro se.

Marshall R. Jones, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge: Respondent determined a $73,055 deficiency in

petitioner's 1991 Federal income tax, a $12,313 addition to tax for

failure to timely file a 1991 Federal income tax return pursuant to

section 6651(a)(1), and a $14,611 accuracy-related penalty for
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substantial understatement of tax pursuant to section 6662. The

deficiency primarily relates to Sam E. Scott's (petitioner)

withdrawal from his law firm partnership.

After concessions, the following issues remain for decision:

(1) Whether petitioner was entitled to a $121,500 loss deduction

due to his withdrawal from his law firm partnership; (2) whether

petitioner received an $85,455 taxable distribution from his law

firm's 401(k) plan; (3) whether petitioner is entitled to a $33,943

interest expense deduction; (4) whether petitioner is liable for an

addition to tax for failure to timely file his 1991 Federal income

tax return pursuant to section 6651(a)(1); and (5) whether

petitioner is liable for an accuracy-related penalty for the

substantial understatement of tax pursuant to section 6662.

All section references are to the Internal Revenue Code as in

effect for the year in issue, unless otherwise indicated. All Rule

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

FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

Petitioner resided in Hazlehurst, Mississippi, at the time he

filed his petition.
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Heidelberg & Woodliff Law Partnership

In 1963, petitioner joined the law firm of Heidelberg,

Woodliff & Franks (which later became Heidelberg & Woodliff), a

general partnership in Jackson, Mississippi, as an associate

attorney. Petitioner's practice primarily was confined to general

civil litigation.

In 1968, petitioner became a partner in Heidelberg, Woodliff

& Franks (hereinafter referred to as the firm, law firm, or the

partnership). Upon becoming a partner, petitioner purchased his

interest in the law firm by making monthly payments to the three

named partners. During his tenure there, petitioner was active in

the firm's management, serving as managing partner for a time.

In 1983, Messrs. Woodliff and Franks sold their interests

(totaling 46 percent) in the partnership for approximately $500,000

to seven junior partners. (Junior partners received a percentage

of the law firm profits to the extent they exceeded a certain

amount, plus a salary, but did not own an interest in the

partnership.) Four of the junior partners who bought Messrs.

Woodliff's and Franks' interests left the firm in 1985 and refused

to pay the balance due. Thereafter, the remaining partners at the

firm (including petitioner) assumed the obligation owed to Messrs.

Woodliff and Franks.
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Sometime during the late 1980's, the firm adopted a new

partnership agreement that granted partners only income interests

in the firm rather than specific interests in the firm's assets.

Partners under the old partnership agreement were bought out by the

partnership. Thus, under the new partnership agreement, partners

did not make capital contributions when they entered the

partnership, and received no liquidating distributions when they

left. The income interests were based on an annual evaluation of

each partner through a point system used by the firm's compensation

committee. In 1990, petitioner had an 8.86-percent interest in the

partnership.

On January 2, 1991, petitioner gave notice of his termination

from the firm, effective retroactively to December 31, 1990.

Petitioner then left Heidelberg & Woodliff, and together with

several other individuals who had earlier left the firm, started a

new law firm. At the time petitioner left Heidelberg & Woodliff,

he was the firm's largest producer.

Petitioner's 1990 Schedule K-1 on Form 1065 (Partner's Share

of Income, Credits, Deductions, Etc.) from Heidelberg & Woodliff

reported petitioner's capital account adjustments as follows:

(a) Capital account at $(21,369)

beginning of year

(b) Capital contributed ---

during year
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(c) Income (loss) from 223,264

* * * below

(d) Income not included 647

in column (c) plus

nontaxable income

(e) Losses not included (19,672)

in column (c), plus

unallowable deductions

(f) Withdrawals and (182,870)

distributions

(g) Capital account at end of ---

year (combine columns

(a) through (f))

The Schedule K-1 reflected that petitioner had a capital account

balance of zero at the end of 1990. Petitioner did not receive any

payments from Heidelberg & Woodliff with respect to the termination

of his interest in the law firm. Heidelberg & Woodliff continued

to exist following petitioner's departure.

Petitioner did not receive a Schedule K-1 for 1991. The only

distribution petitioner received in 1991 from Heidelberg & Woodliff

was from the firm's 401(k) plan.

Salary Reduction Plan Distribution

Petitioner participated in Heidelberg & Woodliff's 401(k)

salary reduction plan (the plan) which was administered by a firm

committee. The plan's funds were held in trust at Deposit Guaranty

National Bank (Deposit Guaranty).

In July 1989, petitioner borrowed $36,510.38 from the plan and

executed a promissory note to the plan. Later that month,

petitioner borrowed an additional $12,521.04 from the plan, for a

total of $49,031.42, and executed a new note to the plan. The note
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provided for quarterly repayments of the borrowed funds at 12-

percent interest, with the final installment due on July 5, 1994.

The note further provided:

It is agreed that in case of default in any payment of

interest, or termination of the employment of maker, or

the death of maker, the entire debt shall immediately

become due and payable at the option of the holder

hereof.

Petitioner never made any repayments of the borrowed funds to the

plan.

At the end of 1990, Jessie Homan, an account administrator for

Deposit Guaranty, contacted Jerard Pitts, the business manager at

Heidelberg & Woodliff, to discuss petitioner's delinquent payments

on his loan. Ms. Homan inquired whether the loan should be

declared in default and charged off. Mr. Pitts informed Ms. Homan

that petitioner was leaving the firm; they decided to charge off

the loan in January 1991 in accordance with the terms of the note.

On February 7, 1991, Deposit Guaranty issued a check for

$36,424.07 payable to petitioner. The check represented

petitioner's balance in the plan, $85,455.49, less the amount of

unrepaid funds borrowed from the plan, $49,031.42. The check was

mailed to Mr. Pitts and was negotiated by petitioner in 1991.

Petitioner failed to roll over any of the distributed funds into

another qualified tax-deferred account within 60 days.

A Form 1099-R (Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRA's, Insurance Contracts,
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1 The distributions were actually from the Heidelberg &

Woodliff 401(k) salary reduction plan, not from any individual

retirement accounts.

etc.) was issued to petitioner for 1991 reporting a taxable

distribution of $85,455.49. The address on the Form 1099 was the

same as that on petitioner's notice of termination submitted by

Heidelberg & Woodliff to Deposit Guaranty. At no time did Deposit

Guaranty personally notify petitioner that his loan was charged off

or that the bank deemed the loan repaid.

1991 Federal Tax Return

On his 1991 Federal tax return, petitioner reported adjusted

gross income of $69,424. On his Schedule E (Supplemental Income

and Loss) under income or loss from partnerships and S

corporations, petitioner reported a $121,500 loss from Heidelberg

& Woodliff. Petitioner calculated the loss based on his 8.86-

percent interest in the firm's accounts receivable, work in

progress, cash on hand, and furniture and equipment that he never

received upon his departure from the firm.

Petitioner also reported $40,100 in taxable individual

retirement account distributions.1 On his Schedule A, petitioner

claimed $33,943 in investment interest expense deductions.

In April 1992, petitioner filed Form 4868 (Application for

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

Return) requesting an automatic 4-month extension of the time to

file his 1991 tax return. Petitioner estimated his total 1991 tax
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liability to be $25,000, which was fully paid through withholdings.

In August 1992, petitioner filed Form 2688 (Application for

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

Return) seeking an additional 2-month extension of the time to file

his 1991 tax return because he was still awaiting records necessary

to complete his return from Heidelberg & Woodliff. Petitioner

requested a new filing deadline of October 15, 1992, which was

approved by the Internal Revenue Service (IRS). Petitioner mailed

his 1991 tax return no later than October 15, 1992, and it was

received on October 19, 1992, by the IRS Service Center in Memphis,

Tennessee.

Notice of Deficiency

In the notice of deficiency, respondent disallowed

petitioner's $121,500 loss claim from Heidelberg & Woodliff because

he could not establish his basis in the partnership. Respondent

determined that petitioner received an $85,455 taxable distribution

from Heidelberg & Woodliff's salary reduction plan and accordingly

increased petitioner's taxable income by $40,355. Moreover,

respondent disallowed all but $211 of petitioner's $33,943

investment interest expense deductions on the basis that

petitioner's offsetting investment income was only $211.

Respondent also determined that petitioner had only substantiated

$29,443 of the interest expenses. 
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Respondent also determined (1) a 25-percent addition to tax

for failure to timely file the 1991 tax return pursuant to section

6651(a)(1) on the basis that the estimated total tax liability

reported on Form 4868 was unreasonable, and thus the automatic 4-

month extension for filing the tax return was void, and (2) an

accuracy-related penalty for substantial understatement of tax

pursuant to section 6662.

OPINION

Issue 1. Loss From Law Firm Partnership

The first issue for decision is whether petitioner was

entitled to a $121,500 loss deduction due to his withdrawal from

the Heidelberg & Woodliff law firm partnership. Petitioner asserts

that the $121,500 loss represents the value of accounts receivable

and work in progress, along with other assets, he "left on the

table" when he departed the law firm. Respondent disagrees,

contending that (1) petitioner left the law firm in 1990, and thus

there was no event in 1991 (the year in issue) upon which

petitioner could recognize a loss, and (2) assuming arguendo that

petitioner left the law firm in 1991, petitioner failed to prove

his basis in the partnership. For the reasons set forth below, we

sustain respondent's determination with respect to this issue.

In order to prevail and recognize a loss, petitioner must show

that upon withdrawing from the law firm his basis in the firm

exceeded the amount he received. Sec. 731. See Harris v.
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2 At trial, petitioner calculated his basis in his

partnership interest by adding the amount of accounts receivable

and costs associated with petitioner's clients ($93,744.68) with

current work in progress ($65,485.20), for a total of

$159,229.88. Petitioner then applied a collection rate which

reduced the total figure to $121,500. 

Commissioner, T.C. Memo. 1988-195; Lynch v. Commissioner, T.C.

Memo. 1982-305; Abraham v. Commissioner, T.C. Memo. 1970-304. A

partner's adjusted basis in his partnership interest is determined

under section 705.

A partner's initial basis in a partnership is determined by

the amount of money contributed and the adjusted basis of any other

type of property contributed. Sec. 722. The partner's basis in

the partnership is then adjusted upward for the partner's

distributive share of separately stated income items, and downward

by distributions of money (including the relinquishment of

liabilities) or the adjusted basis of other property distributed,

and the partner's distributive share of losses and nondeductible

expenses. Sec. 705; La Rue v. Commissioner, 90 T.C. 465, 477

(1988).

Petitioner claims a $121,500 basis2 in the partnership due to

the "value" of his interest in accounts receivable and work in

progress for work he performed for clients of the law firm.

Petitioner explains on brief:

A partner's basis for his interest in a

partnership depends on how he acquired it. It

may consist of the amount of cash he
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contributed to the property [sic], it may

consist of property contributed to the

partnership on the amount paid to a retiring

partner for his interest.

The testimony and exhibits show that

Petitioner purchased an interest in 1968 and

paid a portion of debt due to retiring

partners after the 1985 consumption of 4/7 of

the former junior partners' debt to the named

partners who had sold their interests.

The contribution to the partnership by

the Petitioner of work in process and accounts

receivable are contributions of property.

This is recognized by IRC § 724 which deals

with unrealized receivables and inventory.

Work in process is the inventory of a law firm

and accounts receivable are unrealized

receivables. The value of those two items

alone produced and contributed by Petitioner

are significantly more than the deduction

claims.

Petitioner's reasoning is flawed. Petitioner is not entitled

to a deduction for failure to realize anticipated income. Hort v.

Commissioner, 313 U.S. 28 (1941). Petitioner has not acquired a

basis in the accounts receivable and work in progress under section

705 unless the amounts of these items had been reflected in the

income of the partnership and in petitioner's distributive share in

1990 or in prior years. Holman v. Commissioner, 66 T.C. 809, 816-

817 (1976), affd. 564 F.2d 283 (9th Cir. 1977). But as a cash

basis taxpayer, Heidelberg & Woodliff's accounts receivable and

work in progress are not reflected in the partnership's income (nor
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3 Petitioner conceded that neither he nor the firm

received or reported any income from accounts receivable and work

in progress during 1990.

in petitioner's distributive share thereof) until collected;3

consequently, these items do not affect petitioner's capital

account or his basis in the partnership. See Thatcher v.

Commissioner, 61 T.C. 28, 36 (1973), affd. in part and revd. in

part on other grounds 533 F.2d 1114 (9th Cir. 1976); Raich v.

Commissioner, 46 T.C. 604, 610 (1966); Pinson v. Commissioner, T.C.

Memo. 1990-234. 

To the extent that petitioner may have had other sources which

affected his basis in the partnership (such as capital

contributions), he has failed to prove such basis. Rule 142(a);

Welch v. Helvering, 290 U.S. 111 (1933). And in this regard, we

are mindful that when the law firm adopted a new partnership

agreement in the late 1980's, partners under the old partnership

agreement (which presumably included petitioner) were bought out by

the partnership, and partners under the new partnership agreement

did not make capital contributions. Additionally, petitioner has

failed to adjust his claimed basis in the partnership by the

distributive share items and cash distributions made by the

partnership that were reported on Schedule K-1 for 1990, or the

deemed distribution of any partnership liabilities assumed by the
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partnership upon petitioner's retirement. See secs. 705, 752(b);

Lynch v. Commissioner, supra; Abraham v. Commissioner, supra.

Thus, we hold that petitioner is not entitled to a $121,500

loss deduction due to his withdrawal from the Heidelberg and

Woodliff partnership because he failed to prove that he had any

basis in the partnership.

However, assuming arguendo that petitioner did have basis in

the Heidelberg & Woodliff partnership when he left the law firm,

petitioner has not shown that he is entitled to a loss deduction in

1991.

Section 1.736-1(a)(1)(ii), Income Tax Regs., provides:

A partner retires when he ceases to be a partner under

local law. However, for purposes of subchapter K,

chapter 1 of the Code, a retired partner or a deceased

partner's successor will be treated as a partner until

his interest in the partnership has been completely

liquidated.

A retiring partner's entire interest in a partnership is terminated

through the liquidation of the partner's interest by means of a

distribution or series of distributions to the partner by the

partnership. Secs. 736(b), 761(d); sec. 1.761-1(d), Income Tax

Regs. The liquidation is complete upon the final distribution to

the partner. Sec. 1.761-1(d), Income Tax Regs.

Here, the parties stipulated that petitioner left the firm at

the end of 1990; indeed, petitioner testified that he was not a

partner after December 31, 1990. Petitioner introduced no evidence
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4 Mississippi law provides that retiring partners may

seek an accounting of their interests in their former

partnerships. Miss. Code Ann. secs. 79-12-83, 79-12-85 (1989).

5 Heidelberg & Woodliff's Schedule K-1 issued to

petitioner indicates that petitioner's share of partnership

liabilities at the end of 1990 was $69,756. Luther Thompson, a

partner at Heidelberg & Woodliff, testified that he could not

vouch for the accuracy of that figure because it was handwritten

and not typewritten like the remainder of the schedule. To the

extent petitioner was relieved of partnership liabilities, such

would constitute a distribution of money to petitioner by the

partnership and hence a deemed liquidating distribution at the

end of 1990. Sec. 752(b); see O'Brien v. Commissioner, 77 T.C.

113 (1981); Pietz v. Commissioner, 59 T.C. 207 (1972); Stilwell

v. Commissioner, 46 T.C. 247 (1966).

that under Mississippi law he was a partner after December 31,

1990.4 Hence, for Federal tax purposes, petitioner is deemed to

have retired from the partnership on December 31, 1990.

Petitioner claims that he was entitled to a liquidating

distribution in 1990 which he never received and which could not

have been discovered from the firm's financial records until their

completion in 1991. Thus, he asserts he is entitled to recognize

a tax loss in 1991. Petitioner's argument must fail. Although

petitioner may have believed he was entitled to a liquidating

distribution in exchange for his partnership interest, the fact is

he never received one in 19915 nor was he entitled to one. Indeed,

Luther Thompson, a partner in Heidelberg & Woodliff during

petitioner's tenure with the firm, testified that the firm's

partnership agreement, as amended in the late 1980's, did not
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provide for capital contributions or liquidating distributions, but

only granted profit interests in the partnership.

Because petitioner received no liquidating distributions in

1991, petitioner's gain or loss in the partnership must be

calculated as of the time he withdrew from the partnership on

December 31, 1990. See sec. 1.736-1(a)(5), Income Tax Regs.

Consequently, petitioner cannot deduct in 1991 the amount of any

loss due to his withdrawal from the Heidelberg & Woodliff

partnership.

Issue 2. Salary Reduction Plan Distribution

The second issue for decision is whether petitioner must

include $85,455 in income as a taxable distribution from the

Heidelberg & Woodliff salary reduction plan upon his termination

from the law firm. Petitioner contends that he was not properly

notified of the cancellation of the note and that equity requires

leniency. Respondent asserts that under the terms of the plan and

the note, there were three separate grounds for requiring immediate

repayment of petitioner's note and treating it as having been

repaid and satisfied in 1991: (1) Petitioner failed to make the

required quarterly payments, and thus, was in default of payment;

(2) petitioner's employment with Heidelberg & Woodliff had

terminated; and (3) because petitioner's plan balance was to be

distributed to him in 1991, the plan's terms required that the note

be paid first. We agree with respondent's assertions.
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The amount of any distribution to a taxpayer from a qualified

pension plan described in section 401(a) generally is includable in

gross income in the year of distribution. Sec. 402(a)(1). Such

distribution includes the outstanding balance of any loan at the

time of the beneficiary's separation from service or default on the

note. Murtaugh v. Commissioner, T.C. Memo. 1997-319; see also

Minnis v. Commissioner, 71 T.C. 1049, 1056 (1979); Dean v.

Commissioner, T.C. Memo. 1993-226. However, if a portion of the

amount distributed is rolled over to another qualified pension plan

within 60 days following receipt of the distribution, that portion

is not includable in gross income in the year of distribution.

Sec. 402(a)(5).

If the taxpayer fails to roll over distributed funds within 60

days, and the distribution is made before the date the taxpayer

attains the age of 59-1/2, and none of the other exceptions in

section 72(t)(2) applies, the tax on the distribution is increased

by an amount equal to 10 percent of the portion includable in gross

income. Sec. 72(t).

Petitioner was 54 years old at the time he received his

distribution from Heidelberg & Woodliff's salary reduction plan; he

did not roll over such funds into another qualified plan. See

Rodoni v. Commissioner, 105 T.C. 29, 32-34 (1995); Clark v.

Commissioner, 101 T.C. 215, 224-225 (1993). He unquestionably

received and negotiated the $36,424.07 distribution check from
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6 Respondent determined in the notice of deficiency that

petitioner had substantiated $29,443 of the interest expenses. 

Deposit Guaranty in 1991. The check represented petitioner's

balance in the plan, $85,455.49, less the amount of unpaid funds

borrowed from the plan, $49,031.42. Thus, the check included a

deemed distribution of the loan's outstanding balance. See

Murtaugh v. Commissioner, supra.

To conclude, the entire $85,455.49 is includable in

petitioner's 1991 gross income as a taxable distribution from

Heidelberg & Woodliff's salary reduction plan, and petitioner,

having failed to show that any of the exceptions in section

72(t)(2) apply, is liable for the additional 10-percent tax for

early distributions imposed by section 72(t).

Issue 3. Interest Expense Deduction

The third issue for decision is whether petitioner is entitled

to deduct $33,943 for interest expenses. Petitioner argues that

such amount, to the extent substantiated,6 should be allowed

pursuant to section 163 as interest incurred in the conduct of a

trade or business. Respondent asserts that petitioner's interest

expense deductions are for investment interest and therefore are

limited to net investment income pursuant to section 163(d).

Section 163 generally allows the deduction of interest paid on

indebtedness during the taxable year. Section 163(d)(1) limits the

deduction for investment interest to the extent of net investment
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7 In the notice of deficiency, respondent allowed $211 of

(continued...)

income. Investment interest means interest paid on indebtedness

allocable to property held for investment. Sec. 163(d)(3)(A).

Property held for investment includes any interest held by the

taxpayer involving the conduct of a trade or business which is not

a passive activity and with respect to which the taxpayer did not

materially participate. Sec. 163(d)(5)(A)(ii). Net investment

income means investment income (gross income from property held for

investment and net gain from the disposition of property held for

investment) over investment expenses. Sec. 163(d)(4)(A) and (B).

On his 1991 Federal tax return, petitioner reported that the

interest expenses incurred were investment interest. In his

petition and on brief, petitioner described the interest as

incurred from business loans. At trial, petitioner described the

interest as incurred on loans borrowed to support his interest in

an automobile dealership.

Petitioner offered no evidence of his involvement in the

automobile dealership and thus failed to sustain his burden with

respect to the nature of the interest paid. Rule 142(a);

Cannizzaro v. Commissioner, T.C. Memo. 1982-633; see also King v.

Commissioner, 89 T.C. 445, 456-467 (1987). Consequently, we hold

that petitioner is entitled to deduct investment interest expenses

only to the extent of net investment income pursuant to section

163(d).7
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7(...continued)

investment interest expenses. This figure was based on $157 of

unreported dividend income, $36 of reported interest income, and

$18 of unreported interest income. Due to respondent's

concession regarding the $157 of dividend income, however, the

amount of net investment income must be reduced to $54.

Issue 4. Failure To File Addition to Tax

The fourth issue for decision is whether petitioner is liable

for an addition to tax for failure to timely file his 1991 Federal

tax return. Petitioner claims that he timely filed the return

following two extensions granted by the IRS. Respondent contends

that any extensions granted were invalid because petitioner failed

to make a bona fide and reasonable attempt to estimate his proper

tax liability.

Section 6651(a)(1) imposes an addition to tax of 5 percent of

the amount of tax due per month for each month that a tax return is

not timely filed, not to exceed 25 percent. An exception is made

for reasonable cause not due to willful neglect.

Petitioner's 1991 Federal tax return was due on April 15,

1992, but petitioner received an automatic 4-month extension

through his filing of Form 4868. In August 1992, petitioner sought

and received an additional 2-month extension to October 15, 1992.

Petitioner subsequently filed his return on October 15, 1992.

Petitioner reported a total 1991 estimated tax liability of

$25,000 on Form 4868, which was approximately one-third of the

final tax liability of $75,354 determined by respondent.

Respondent argues that petitioner failed to estimate properly his
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tax liability on Form 4868 when he filed for the automatic

extension, and thus such extension is invalid.

One of the requirements for the automatic extension of time to

file an individual tax return is the proper estimation of the final

tax liability for the taxable year. Sec. 1.6081-4(a)(4), Income

Tax Regs. The failure to estimate properly the final tax liability

on Form 4868 can invalidate the automatic extension and subject the

taxpayer to an addition to tax pursuant to section 6651(a)(1) for

failure to timely file the return. Crocker v. Commissioner, 92

T.C. 899 (1989); see also Berlin v. Commissioner, 59 F.2d 996 (2d

Cir. 1932), affg. a Memorandum Opinion of this Court.

To establish a proper estimate of the tax liability for

purposes of the automatic extension, the taxpayer must make "a bona

fide and reasonable estimate of his tax liability based on the

information available to him at the time he makes his request for

extension." Crocker v. Commissioner, supra at 908. The taxpayer

must determine his tax liability generally, but carefully. Id.

Further, the taxpayer must make a bona fide and reasonable attempt

to locate, gather, and consult information that will enable him to

make a proper estimate of his tax liability. Id.

Petitioner testified that he acted reasonably in estimating

his tax liability and utilized the information he had available to

him. According to petitioner's request for a second extension of

time to file his 1991 return, he was waiting for records from

Heidelberg & Woodliff that were necessary to prepare the return.
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The failure to obtain the necessary information when filing Form

4868, however, does not lead to the conclusion that petitioner

properly estimated his tax liability. See Arnaiz v. Commissioner,

T.C. Memo. 1992-729.

Petitioner knew that he terminated his interest in Heidelberg

& Woodliff as of the end of 1990; he also knew that he did not

receive a Schedule K-1 for 1991 from the firm. Moreover, he was a

partner in the firm when the partnership agreement was amended to

eliminate partner capital contributions upon admission and

liquidating distributions upon retirement. And he should have been

aware that no deduction is allowable for leaving his share of the

law firm's anticipated but not realized income (i.e., the firm's

accounts receivable and work in progress) on the table. See Hort

v. Commissioner, supra. 

As to the tax consequences of the distribution from the

Heidelberg & Woodliff salary reduction plan, petitioner claims that

he never received the Form 1099 issued to him reflecting such

distribution. Yet, petitioner never inquired as to why he did not

receive a Form 1099, nor did he inquire as to the status of the

note executed in favor of the plan for the loan proceeds he

borrowed. Even a cursory review of the note would have alerted

petitioner to the fact that his termination from the firm would

cause an acceleration of the debt; moreover, he knew that he was in

default on the note. Additionally, the notice of termination from

Heidelberg & Woodliff states that petitioner is to receive 100
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percent of his vested interest in the partnership's salary

reduction plan, which should have indicated to him that the

distribution was not limited to the proceeds from the check he

received and negotiated.

Petitioner failed to make a bona fide and reasonable estimate

of his tax liability when he filed Form 4868. See Crocker v.

Commissioner, supra at 908. He underestimated his tax liability by

two-thirds. Cf. Boatman v. Commissioner, T.C. Memo. 1995-356. His

failure to obtain the necessary information to estimate properly

his tax liability, as well as his failure to properly investigate

the law regarding his tax issues, does not excuse the error in

petitioner's estimate. Arnaiz v. Commissioner, supra. Petitioner's

mistaken belief that he was entitled to a loss deduction for the

value of accounts receivable and work in progress "left on the

table" when he departed Heidelberg & Woodliff does not constitute

reasonable cause for failure to make a proper estimate. See Mayhew

v. Commissioner, T.C. Memo. 1994-310. Thus, we sustain

respondent's voiding of the tax filing extensions obtained by

petitioner.

Because petitioner's reliance on the filing extensions

constituted his sole defense to the section 6651 (a)(1) addition to

tax, petitioner has not shown that his failure to timely file his

1991 tax return was due to reasonable cause and not willful

neglect. See Crocker v. Commissioner, supra at 913. Accordingly,

we hold that petitioner is liable for the section 6651(a)(1) 25-
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percent addition to tax for failure to timely file his 1991 tax

return.

Issue 5. Accuracy-Related Penalty

The final issue for decision is whether petitioner is liable

for the accuracy-related penalty for the substantial understatement

of tax pursuant to section 6662. Petitioner asserts that he had

reasonable cause for the understatement of tax.

Section 6662 imposes an accuracy-related penalty equal to 20

percent of any portion of an understatement attributable to a

substantial understatement. A substantial understatement means an

understatement which exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000. Sec. 6662(d)(1).

The understatement is reduced by that portion of the understatement

for which the taxpayer had substantial authority or for which the

taxpayer adequately disclosed the relevant facts in the return.

Sec. 6662(d)(2)(B). Additionally, no penalty is imposed with

respect to any portion of an understatement as to which the

taxpayer acted with reasonable cause and in good faith. Sec.

6664(c)(1).

Petitioner provided no disclosures in his return and supplied

this Court with no substantial authority for his positions. See

sec. 1.6662-4(d)(3), Income Tax Regs. Also, he failed to prove

that his effort to assess his proper tax liability was sufficient

to establish reasonable cause and good faith. See sec. 1.6664-
- 24 -

4(b), Income Tax Regs. Thus, we hold that petitioner is liable for

the accuracy-related penalty for the substantial understatement of

tax.

To reflect the foregoing and the concessions of the parties,

Decision will be entered

under Rule 155.