Court Opinion

ID: 194648
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:21:56+00
Date Added: 2024-06-11T13:05:00.250606
License: Public Domain

March 30, 1993
                    [NOT FOR PUBLICATION]

                UNITED STATES COURT OF APPEALS
                    FOR THE FIRST CIRCUIT

                                        

No. 92-1938

             PETER A. JOHNSON AND CLAIRE P. LYON,

                   Petitioners, Appellants,

                              v.

              COMMISSIONER OF INTERNAL REVENUE,

                    Respondent, Appellee.

                                        

           APPEAL FROM THE UNITED STATES TAX COURT

       [Hon. Theodore Tannenwald, U.S. Tax Court Judge]
                                                      

                                        

                            Before

                    Selya, Cyr and Boudin,
                       Circuit Judges.
                                     

                                        

   Peter A. Johnson and Claire P. Lyon on brief pro se.
                                      
   James A. Bruton, Acting  Assistant Attorney General, Gary R.
                                                               
Allen, Jonathan  S. Cohen and Regina S.  Moriarty, Attorneys, Tax
                                               
Division, on brief for appellee.

                                        

                                        

P. Lyon,  appeal a decision of the Tax Court that sustained a
     Per Curiam.  The appellants, Peter A. Johnson and Claire
               

Tax Court's decision.
appellants'  joint income tax return for 1986.  We affirm the
deficiency determined by the  Internal Revenue Service on the

                              I
                               

                             -2-
shareholders of liquidating corporations.   Under 26 U.S.C.  
Hampshire.  Mr. Johnson is a certified  public accountant and

regulation.  In  1980, Mr. Johnson and Ms.  Lyon incorporated
primarily  to  law firms  practicing in  the field  of energy

Peter A.  Johnson Associates, Inc. (PAJA),  through which Mr.
for  a number  of  years made  his  living as  a  consultant,

corporation initially  issued 100 shares of  stock: 51 shares
Johnson  then  carried  on  his  consulting  business.    The
     Mr. Johnson and Ms.  Lyon are married and reside  in New

to Mr. Johnson  and 49 shares  to Ms. Lyon.   The corporation

Trust.

consulting work  tapered  off.    Late  in  1986,  with  PAJA
he  accepted  a  salaried  position  at a  hospital  and  his

relatively  dormant,  Mr. Johnson  and  Ms.  Lyon decided  to
     Mr. Johnson  worked full-time for PAJA  until 1985, when

shareholders.  
liquidate  the  company  and  distribute its  assets  to  the
later sold 8 more shares to  an entity known as PAJA  Pension

     At   the  time,  the  tax  laws   offered  a  choice  to
331, they could  recognize all of  the distributed assets  on

their  income  tax   returns  for  the  year  in   which  the

liquidation occurred,  but pay  taxes on the  distribution at

the capital gains rate, which was lower than the rate applied

to  "ordinary income" such as  wages or dividends.   Or, they

could  elect to treat the distribution under 26 U.S.C.   333.

Section  333  required  the   shareholders  to  allocate  the

distributed  assets  to  two  categories:  (1)  earnings  and

profits, and (2) all  other assets.  The shareholders  had to

declare  the  portion  of  the distribution  that  came  from

earnings  and profits as ordinary income on their returns for

the  year in which the liquidation occurred, and pay taxes on

it at the higher income  tax rate.  However, with  respect to

the portion of  the distribution  that took the  form of  the

corporation's other  assets, the shareholders  could postpone

recognizing any  gain until they themselves  sold the assets.

Roughly  speaking, then, Section 333 was a good deal only for

shareholders of  "a corporation holding  appreciated property

but having little  or no earnings  and profits . .  . ."   B.

Bittker & J. Eustice, Federal Income Taxation of Corporations
                                                             

and  Shareholders  at     11.62  (5th  ed.  1987).    If  the
                 

corporation  had  significant   earnings  and  profits,   the

shareholders   were   better   off   electing   Section  331,

recognizing a  gain immediately on  the entire  distribution,

                             -3-

but  avoiding  taxation of  the earnings  and profits  at the

higher income tax rates.

     This  case concerns  the  appellants' election  to treat

PAJA's   distributed  assets  under  Section  333  when  they

dissolved  the corporation at the  end of 1986.   Mr. Johnson

knew  that  Congress  had  repealed  Section  333,  effective

January 1, 1987.   See Pub.L. 99-514, Title VI,    631(e)(3),
                      

Oct. 22, 1986, 100 Stat. 2273.   He thus felt some urgency to

liquidate PAJA by year's end.  But, because personal business

intervened,  he did not sit  down to the  task until December

28, 1986.

     Mr. Johnson and Ms. Lyon  executed a number of documents

on December 28.  The  first was a Form 1120-A,  a "Short-Form

Corporation  Income  Tax Return"  for  PAJA.   This  document

showed  that PAJA had assets of  $132,249, of which "retained

earnings"  constituted  $96,311.    With  such a  significant

amount  of earnings --  which the shareholders  would have to

declare as ordinary income under Section 333, but could treat

as  a  capital gain  under Section  331 --  liquidation under

Section 333 was an unwise choice.  

     However,  the appellants  made  it.   For reasons  never

fully  explained,  Mr. Johnson  figured PAJA's  "earnings and

profits" at zero  when deciding whether to  elect Section 331

or Section 333.  Consequently, he and Ms. Lyon made a written

shareholder  resolution  to liquidate  the  corporation under

                             -4-

Section 333.  Each of them executed and filed with  the IRS a

Form 964,  which bears  the caption "Election  of Shareholder

under Section  333 Liquidation."   Mr. Johnson  also executed

and  filed,  on  behalf  of  the  corporation,  a  Form  966,

captioned  "Corporate  Dissolution  or   Liquidation,"  which

identified  Section 333  as  the "Section  of the  Code under

which the  corporation is  to be  dissolved or liquidated."  

Mr.  Johnson then  wrote checks  on PAJA's  corporate account

that  distributed more  than $137,000  in assets:  $64,607 to

himself,  $63,632  to Ms.  Lyon, and  $9,622 to  PAJA Pension

Trust.

     Four months later,  when Mr. Johnson and  Ms. Lyon filed

their joint  income tax  return  for 1986,  they should  have

attached copies of the already-filed  Forms 964, to alert the

IRS  to their election, see  26 C.F.R.     1.333-3 and 1.333-
                           

6(a)(5), and  treated their  share of the  distributed assets

pursuant  to Section 333 -- that is, by declaring the portion

attributable to earnings and  profits as ordinary income, but

postponing recognition of any gain on the remainder.

     The appellants  did not do what  their election required

them to  do.  They  did not attach  Form 964; in  fact, their

income tax  return contained  no mention of  the liquidation.

It  characterized all of the money they had received from the

liquidation as  proceeds  of  a  "sale" of  PAJA  stock,  and

treated  the entire  distribution as  a capital  gain.   This

                             -5-

calculation  would  have been  consistent with  a liquidation

under   Section  331,  or   with  a  simple   sale  of  stock

unaccompanied  by a liquidation, but it did not jibe with the

Section  333 election  the appellants  had made  the previous

December.

     The  IRS accepted  the  appellants' return  and took  no

further  action   until  an   audit  in  1988   revealed  the

inconsistency between the election  under Section 333 and the

tax  treatment  given  the  distribution  in the  appellants'

return.  The  IRS then  rejected the  appellants' efforts  to

revoke their  Section 333  election,  recalculated their  tax

liability  to take  the election  into account,  determined a

deficiency of $24,790, and added penalties for negligence and

for making a  substantial understatement of taxes  owed.  The

appellants  sought review in the Tax Court, which held a one-

day trial  and  sustained  the IRS'  actions.    This  appeal

followed.  

                              II
                                

     Mr.  Johnson and Ms. Lyon  say that they  are not liable

for  taxes  calculated  according  to  Section  333  for  two

reasons: first, because they never made a valid election; and

second, because  their election, even if  formally valid, was

based on a mistake and was therefore revocable.

                              A
                               

                             -6-

     The appellants point to a number of errors they say they

made  while attempting  to  elect Section  333 and  liquidate

PAJA, and assert  that strict compliance with  all of Section

333's  requirements  is  necessary  in  order  to  enjoy  the

benefits  (or in  this case,  suffer the  detriments) of  the

statute.   This  is  not  completely  true.    The  level  of

compliance  needed  to  make  a  valid  tax  election  varies

according  to the nature of  the requirement.   The IRS "'may

insist upon full compliance  with [its] regulations' when the

regulatory requirements relate to the substance or essence of

a  statute, but  [the Tax  Court  has] held  that substantial

compliance with regulatory requirements may suffice when such

requirements are procedural and  when the essential statutory

purposes have  been fulfilled."   American Air Filter  Co. v.
                                                          

Commissioner, 81 T.C.  709, 719  (1983) (citations  omitted).
            

See also Dunavant  v. Commissioner, 63 T.C. 316 (1974) (same,
                                  

construing Section 333).

     Two  of the  regulations which  the appellants  say they

violated  --  26 C.F.R.     1.333-6, which  required  them to

provide  supplemental information about  the liquidation, and

26  C.F.R.   1.333-3, which  required them to  file a copy of

Form 964 along  with the original at the time  of election --

plainly do  not go to  the "essence" of  the statute  and are

therefore "procedural"  in the sense discussed  above.  Their

breach will not defeat the election.  

                             -7-

     The  other asserted  defects  require  some  discussion.

First, the appellants  say that the distribution was  not "in

complete  cancellation or  redemption of  all the  stock," 26

U.S.C.     333(a)(1), because  their  Forms 964  inaccurately

listed the number  of shares each held.  Mr. Johnson owned 51

shares at the time of the election, but listed only 47 in his

Form 964; Ms. Lyon owned 49 shares, but listed only 46.

     The premise does not support the conclusion.  Nothing in

the  record  causes us  to believe  that,  in return  for the

company's assets, Mr. Johnson and Ms.  Lyon (and PAJA Pension

Trust) actually  gave  up anything  less  than all  of  their

shares in PAJA.  And if that is so, then the distribution was
                                                             

"in complete  cancellation or  redemption of all  the stock."

Putting  the  wrong count  on the  forms  did not  affect the

substance  of the liquidation and therefore did not go to the

essence of the statute.

     Second, the appellants claim that they failed  to make a

timely election.   Section 333(d)  says: "The filing  [of the

written  election form] must be within 30 days after the date

of  the  adoption of  the plan  of  liquidation."   The cases

indicate that this  is an "essential" requirement.   Shull v.
                                                          

Commissioner, 291 F.2d 680, 682-85 (4th Cir. 1961); Kelley v.
                                                          

Commissioner, 10  T.C.M. 143,  146 (1951).   However, whether
            

and when  a plan of liquidation was adopted "is a question of

                             -8-

fact ordinarily for the  Tax Court," Shull, 291 F.2d  at 684,
                                          

and thus subject to review only for clear error.

     We see no  error in  the Tax Court's  finding that  "the

evidence  clearly  establishes December  28,  1986 [when  the

appellants executed a written shareholder resolution], as the

date of the adoption of the plan of liquidation."  It is true

that  Mr. Johnson  testified  that he  and  Ms. Lyon  made  a

"decision" to liquidate PAJA sometime  in November 1986.   It

is also true that Section  333 does not require "that a  plan

of liquidation must be in writing or in any particular form."

Shull, 291 F.2d at 682.  
     

     But  the   statute  does   by  its  terms   require  the

shareholders  to  "adopt" some  "plan"  of  liquidation.   In

Shull,  the Fourth  Circuit  held that  the shareholders  had
     

"adopted" a  plan of liquidation  before they  made a  formal
                                        

resolution to  that effect only because  the shareholders had

previously "acted deliberately .  . . and had gone so  far in

the  actual execution of a plan of liquidation as to dissolve

the corporation and terminate  its existence for all purposes

other than  liquidation. . . ."  291 F.2d at 684-85.  Nothing

of  this sort  happened  here.   The  resolution executed  on

December 28  was the  first manifestation of  the appellants'

intention to dissolve PAJA.   In the absence of  any evidence

to  corroborate Mr.  Johnson's testimony,  the Tax  Court was

entitled to find either that the "decision" in November never

                             -9-

happened, or that it happened but was too indefinite an event

to trigger the statutory  filing requirement, and to conclude

that the  appellants did  not "adopt"  a plan  of liquidation

within the meaning of Section 333(d) until December 28 -- the

same day that they made the election and filed Form 964.

     Third,  the  appellants  contend  that  PAJA  failed  to

distribute all of its assets before the end of December 1986,

thus  violating  Section  333(a)(2),  which   says  that  the

benefits of election are  available only if "the transfer  of

all  the property  under liquidation  occurs within  some one

calendar month."  Since the bulk of the distribution occurred

in December 1986, when Mr.  Johnson wrote corporate checks to

himself,  his  wife  and   PAJA  Pension  Trust,  the  entire

transaction  had  to  be  completed  during  that  same  "one

calendar month."   But, the appellants  say, the distribution

was  not completed  until March  1987, when  Spriggs,  Bode &

Hollingsworth (one of PAJA's law firm clients) made a payment

of  $6,727 for  "services  rendered during  November 1,  1986

through March 10, 1987."

     We   agree   with  the   Tax   Court   that  only   some

"indeterminate"  portion   of  this   payment  --   the  part

attributable to services  rendered before PAJA was  dissolved

at the end of December 1986, and thus "earned" by the company

-- can  be  considered  a  "distribution" from  PAJA  to  its

shareholders.  Any money paid for services rendered after the

                             -10-

dissolution  was  money that  Mr. Johnson  earned on  his own

behalf.1  

     The late distribution of  such a relatively small amount

-- something less  than $6,727 and  thus less than 5%  of the

PAJA's  assets  -- does  not  affect  the legitimacy  of  the

election.  A "liberality of approach" exists with  respect to

tax  statutes  that  require  corporate  liquidations  to  be

accomplished within  specific  time limits.    Cherry-Burrell
                                                             

Corp. v. United  States, 367  F.2d 669, 677  (8th Cir.  1966)
                       

(Blackmun,  J.).    Thus, when  a  tax  statute  on its  face

requires  distribution  of  all  corporate  assets  within  a

certain period in  order to  qualify for a  tax benefit,  the

failure  to dispose of a  minor portion of  the assets within

the time allotted will not defeat the taxpayer's choice.  See
                                                             

Mountain  Water  Co.  v.  Commissioner, 35  T.C.  418  (1960)
                                      

(calling  this the  "de minimis  rule"); Estate  of  Lewis B.
                                                             

Meyer  v. Commissioner, 15  T.C. 850  (1950), rev'd  on other
                                                             

grounds  200 F.2d 592  (5th Cir. 1952)  (it "would be  out of
       

line with [the predecessor to Section 333] . . . to hold that

the failure, within the calendar month, physically to deliver

                    

1.    For the  same reason,  a check  received from  a second
client  in March  1987 was  not part  of the  distribution of
corporate  assets  because  it  represented  payment  of  Mr.
Johnson's monthly  retainer for January, February,  and March
1987 --  i.e.,  money earned  after  the dissolution  by  Mr.
Johnson, not by the corporation.

                             -11-

less than 6 percent  in book value of the  distributed assets

destroys the election. . . ").

     Finally, the appellants would have us rule that, because

they reincorporated PAJA in  1991, they are not bound  by the

election they made more than four years earlier.  They supply

no  useful authority  for  this proposition.   The  cases and

revenue rulings  they cite  are inapposite; all  involved the

question whether  a complete liquidation had  occurred in the

first place.  See,  e.g., Telephone Answering Service Co.  v.
                                                         

Commissioner, 63 T.C. 423  (1974).  In this case,  the record
            

shows that  the appellants  distributed PAJA's assets  in the

successful pursuit of a  complete and permanent  liquidation.

Their belated  revival of the corporate form,  done after the

IRS  had determined  a tax  deficiency (and  for no  apparent

reason  other  than  to   escape  the  consequences  of  that

determination), "did not alter the character" of the previous

distribution or affect the validity  of their election.   See
                                                             

Kennemer  v.  Commissioner, 96  F.2d  177,  178-89 (5th  Cir.
                          

1938).

                              B
                               

     Even  if  their  election was  procedurally  valid,  the

appellants say, the IRS should have allowed them to revoke it

because it was based on the mistaken belief that  PAJA had no

"earnings  and profits"  to  distribute to  its shareholders.

Although   (with  one   exception  not  relevant   here)  the

                             -12-

regulations  implementing  Section  333  say  flatly  that  a

written  election to be governed by that provision "cannot be

withdrawn  or  revoked,"  26  C.F.R.     1.333-2(b)(1),   the

appellants  believe that  a taxpayer may  nevertheless obtain

relief from an election made as the result of a mistake. 

     The courts have on  occasion allowed taxpayers to revoke

mistaken   elections.     See,   e.g.,   Meyer's  Estate   v.
                                                        

Commissioner,  200  F.2d 592  (5th  Cir.  1952); McIntosh  v.
                                                         

Wilkinson, 36  F.2d 807 (E.D.Wis.  1929);  DiAndrea,  Inc. v.
                                                          

Commissioner, 47  T.C.M. 731 (1983)  (revoking election under
            

Section 333).  However,  in each of these cases  the taxpayer

made what the court characterized as a "mistake of fact."  In

deciding whether to allow taxpayers to revoke otherwise-valid

elections, the courts have consistently distinguished between

mistakes of fact, which  may justify revocation, and mistakes

of law, which will not.  See Bankers & Farmers  Life Ins. Co.
                                                             

v. United States, 643 F.2d 234, 238 (5th Cir. 1981); Shull v.
                                                          

Commissioner, 271 F.2d 447,  449 (4th Cir. 1959); Raymond  v.
                                                         

United States, 269 F.2d 181, 183 (6th Cir. 1959); Grynberg v.
                                                          

Commissioner,   83  T.C.   255,  261-63   (1984);  Cohen   v.
                                                        

Commissioner, 63 T.C. 527 (1975).  "Oversight, poor judgment,
            

ignorance   of   the  law,   misunderstanding  of   the  law,

unawareness of  the tax  consequences of making  an election,

miscalculation,  and unexpected  subsequent  events have  all

been  held insufficient  to  mitigate the  binding effect  of

                             -13-

elections made under a variety of provisions of the [Internal

Revenue]  Code."  Estate  of Stamos v.  Commissioner, 55 T.C.
                                                    

468, 474 (1970) and cases cited therein.

     The  appellants  do  not  question the  wisdom  of  this

distinction,  but   argue  that  the  Tax  Court  erroneously

described their mistake as one of law.  We agree with the Tax

Court.  The  mistake in  this case was  Mr. Johnson's  stated

belief that PAJA had no "earnings and profits," and thus that

the  shareholders  could  defer  recognition  of  the  entire

distribution  under Section  333.   Depending on  its source,

this could have been a  mistake of fact or a mistake  of law.
                                          

"[M]istakes of fact  occur in instances where  either (1) the

facts exist, but are unknown,  or (2) the facts do  not exist

as  they are believed to."  Hambro Automotive Corp. v. United
                                                             

States, 603 F.2d 850, 855 (C.C.P.A. 1979). If Mr. Johnson had
      

decided that PAJA  had no "earnings  and profits" because  he

believed it had no money in the  bank, then his mistake would

have been a mistake of fact.  But, as the Tax Court found, it

is "difficult to believe" that the appellants were unaware of

PAJA's  cash reserves when they made the election on December

28, 1986, for on  the same day, Mr. Johnson,  as president of

PAJA,  executed a  corporate tax  return indicating  that the

company  had more  than $96,000  in "retained  earnings," and

wrote checks  to himself, Ms.  Lyon and  PAJA Pension  Trust,

                             -14-

drawn  on  the corporate  bank  account,  totaling more  than

$137,000.

     Since the appellants knew how much money the corporation

had  in  the  bank when  they  made  the  election, the  only

plausible explanation for their mistake  is that they did not

know  that  the  money  constituted  "earnings  and  profits"

subject  to taxation  as ordinary  income under  Section 333.

See  GPD, Inc. v. Commissioner, 508 F.2d 1076, 1082 (6th Cir.
                              

1974) (corporation's  "earnings and profits" may  not bear an

"exact  relation"  to  earnings  as  determined  by   "normal

corporate accounting methods"); Bennett v. United States, 427
                                                        

F.2d  1202, 1208 (Ct.Cl. 1970) ("'earnings and profits' . . .

is  a tax,  not an  economic concept").    Thus, they  made a

mistake  of law, which occurs "where the facts are known, but

their  legal consequences are not known or are believed to be

different than  they really are," Hambro  Automotive Corp. v.
                                                          

United  States, 603 F.2d  at 855 (emphasis  omitted), and may
              

not revoke their election.

                             III
                                

     The  IRS made  two  "additions" to  the appellants'  tax

liability.    First,  it  added  $1,240  under  26  U.S.C.   

6653(a)(1),  which says: "If any part of the underpayment . .

.  of  tax  required  to  be shown  on  a  return  is  due to

negligence  (or disregard  of  rules or  regulations),  there

shall be added to the tax an amount equal to 5 percent of the

                             -15-

underpayment."   "Negligence in this context is a lack of due

care  or  failure to  do  what  a  reasonable and  ordinarily

prudent  person  would  do  under  the  circumstances.    The

Commissioner's  imposition  of   a  negligence  addition   is

presumptively  correct,  leaving  the  [appellants]  with the

burden  of proving  that  their underpayment  was not  due to

negligent  or intentional  rules  violations."   McMurray  v.
                                                         

Commissioner, Nos. 92-1513 and 92-1628,  slip op. at 13  (1st
            

Cir. February 9, 1993).   We review the Tax  Court's findings

on  negligence  issues only  for  clear error.    Leuhsler v.
                                                          

Commissioner, 963 F.2d 907, 910 (6th Cir. 1992).
            

     There was  no error.   The  "underpayment" in  this case

occurred because  the appellants, having elected  in December

1986 to treat their taxes under Section 333, instead prepared

their  tax return the following  April as if  they had either

elected   Section  331  or  made   a  simple  sale  of  stock

unaccompanied by a liquidation.  Under the circumstances, and

absent a compelling explanation to the contrary, one might --

as the Tax  Court appears  to have done  in its  Supplemental

Memorandum  Opinion  --  infer  that the  "switch"  here  was

deliberate, since  making it promised to  save the appellants

some $24,000, and since the appellants obscured the de  facto
                                                             

revocation  of  their  previous  election  by describing  the

distribution as  a "sale" rather  than a liquidation,  and by

neglecting  to  attach Form  964 to  their  return.   But the

                             -16-

negligence  penalty was  appropriate even  if the  switch was

accidental;  like the  Tax Court,  we see  nothing reasonable

about a  certified public accountant's  failure to  calculate

his tax liability in accordance with his own election and the

Code's explicit instructions.2

     The IRS  also added $6,198  under 26  U.S.C.    6661(a).

Section 6661(a) imposes  a 25% addition to an underpayment if

"there is a substantial understatement of income  tax for any

taxable  year."  Section  6661(b)(1)(A) defines a substantial

understatement  as one that exceeds the greater of (1) 10% of

the tax for the  year or (2) $10,000.   Section 6661(b)(2)(B)

reduces the understatement by  any amount attributable to (i)

the  tax treatment  of  an  item  if there  was  "substantial

authority" for the  treatment, or (ii) any  item with respect

to  which the relevant facts affecting  its tax treatment are

adequately disclosed in the return or a statement attached to

it.

     The  appellants  understated their  taxes  by more  than

$24,000,  which was  almost  50% of  the  tax for  the  year.

                    

2.  Ms. Lyon's  reliance on her husband's  expertise does not
excuse  her  negligence.    Although  Section  6653(b), which
authorizes an addition to tax for fraud,  contains a "special
rule for joint  returns" that  allows the IRS  to penalize  a
spouse only to the extent that the underpayment is due to her
own  fraud, 26  U.S.C.    6653(b)(3), Section  6653(a), which
authorizes  the  penalty  for  negligence,  contains no  such
qualification.   See  Langer v.  Commissioner, 59  T.C.M. 740
                                             
(1990)  (sustaining negligence  penalty against  both spouses
where husband, an IRS agent, prepared the erroneous return).

                             -17-

However,  they  claim   to  have  satisfied  the   disclosure

requirement   with  respect  to   the  entire  understatement

because, when they  made the election in  December 1986, they

filed Forms 964 and 966 with the IRS.  But  this "disclosure"

was inadequate for  two reasons.  First,  it was not  made on

the return or  on a  statement attached  to the  return.   26

C.F.R.   1.6661-4(a)  and (b).  Second, filing  a Form 964 at

the time  of  liquidation, nearly  four months  before a  tax

return is due, is not an act that "reasonably may be expected

to apprise the  Internal Revenue Service  of the identity  of

the item,  its  amount,  and  the  nature  of  the  potential

controversy  concerning  the  item."   26  C.F.R.     1.6661-

4(b)(1)(iv) and   1.6661-4(b)(4).  That is precisely why  the

regulations require the shareholder to file Form 964 twice --

once upon making the  election and again with his  income tax

return.  26 C.F.R.    1.333-3 and 1.333-6(a)(5).

     The IRS has  the authority  to waive  all or  part of  a

Section  6661 addition to tax  "on a showing  by the taxpayer

that  there was reasonable cause for the understatement . . .

and  that the taxpayer  acted in  good faith."   26  U.S.C.  

6661(c).   The most important  factor in waiver  decisions is

"the extent  of the taxpayer's effort to  assess [his] proper

tax  liability under the  law . .  . ."  26  C.F.R.   1.6661-

6(b).  

                             -18-

     We review the  IRS' waiver  decision only  for abuse  of

discretion.   Heasley v. Commissioner, 902 F.2d 380, 385 (5th
                                     

Cir. 1990);  Mailman v.  Commissioner, 91 T.C.  1079, 1083-84
                                     

(1988).   For  the reasons already  stated, we  are confident

that  the IRS did not abuse its discretion by concluding that

reasonable  people acting in good faith would not (a) fail to

pay the tax in  accordance with their election, and  (b) fail

to  notify the IRS that  they were, in  effect, revoking that

election.  

     The appellants' Motion for Oral Argument is denied.

     The judgment of the Tax Court is affirmed.
                                              

                             -19-