T.C. Memo. 2001-183



                     UNITED STATES TAX COURT



         ANTHONY B. AND JILL SERFUSTINI, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 14383-99.                      Filed July 23, 2001.


     Anthony B. Serfustini, pro se.

     Timothy S. Sinnott, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   In separate notices of

deficiency, respondent determined that petitioners were liable

for the following additions to tax for the years 1982 and 1983:1




     1
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 2 -


                                Additions to Tax
     Year        Sec. 6653(a)(1)     Sec. 6653(a)(2)     Sec. 6661

     1982             $450                *               $2,617
     1983               25                **                –--

            *    50 percent of the interest due on $10,467.
            **   50 percent of the interest due on $503.


     The issues for decision are:   (1) Whether, for 1982 and

1983, petitioners are liable for the additions to tax under

section 6653(a)(1) and (2) for negligence, and (2) whether, for

1982, petitioners are liable for the addition to tax under

section 6661 for a substantial understatement of tax.   The issues

in this case relate to the participation of Anthony B. Serfustini

(petitioner) as a limited partner in a partnership known as

Blythe Jojoba II Research, Ltd. (Blythe II or the partnership).2


     2
          Petitioners have attempted to place at issue in this
case the underlying deficiencies attributable to partnership
losses they claimed during the years at issue. As described
hereafter, the deficiencies determined by respondent in
connection with Blythe II are partnership-level adjustments, sec.
6231(a)(3), that were upheld by this Court in the case of Utah
Jojoba I Research v. Commissioner, T.C. Memo. 1998-6. This Court
has repeatedly held that it lacks jurisdiction, in a partner-
level proceeding involving nonpartnership items (which is the
case herein), to redetermine a deficiency, or any portion
thereof, attributable to the tax treatment of a partnership item.
E.g., Saso v. Commissioner, 

, 734 (1989); Maxwell v.
Commissioner, 

, 788 (1986); see also Powell v.
Commissioner, 

, 712 (1991); Woody v. Commissioner, 

, 208 (1990); Palmer v. Commissioner, T.C. Memo. 1992-
352, affd. 

 (11th Cir. 1993); English v. Commissioner,
T.C. Memo. 1990-662.
     Petitioners also contend that the issuance of the notices of
deficiency in this case was barred by the statute of limitations
                                                   (continued...)
                               - 3 -


     Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference.   At the time the petition was filed, petitioners'

legal residence was Henderson, Nevada.



     2
      (...continued)
on assessment, and that respondent failed to notify them timely
of the partnership-level proceeding. Generally, the Commissioner
is required to assess a tax within 3 years after the taxpayer's
return is filed. Sec. 6501(a). In the case of a tax
attributable to partnership items, however, sec. 6229 sets forth
special rules to extend the period of limitations prescribed by
sec. 6501. Sec. 6501(o). Sec. 6229(a) provides that the period
for assessing income tax attributable to a partnership item (or
affected item, which includes the additions to tax determined by
respondent in the instant case, sec. 301.6231(a)(5)-1T(d),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5,
1987)) for a partnership taxable year shall not expire before 3
years after the later of (1) the date the partnership return for
such year was filed or (2) the last day for filing such return
for such year (without regard to extensions). Sec. 6229(d)
provides that the mailing of a notice of final partnership
administrative adjustment suspends the running of the 3-year
limitations period for the period during which an action may be
brought under sec. 6226 (and, if an action is brought, until the
decision of the court has become final) and for 1 year thereafter.
     The record in this case reflects, and the Court so finds,
that a notice of final partnership administrative adjustment for
Blythe II, for each year at issue, was mailed to the tax matters
partner of Blythe II on Feb. 16, 1989, and that copies of the
same were mailed to petitioners' last known address on Mar. 8,
1989. The stipulation of facts includes a copy of the decision
entered regarding Blythe II, which is dated July 1, 1998. Under
sec. 6229(d)(2), the running of the 3-year period of limitations
for assessing a deficiency attributable to a 1982 or 1983
partnership item was suspended for 1 year after the date the
decision entered on July 1, 1998, became final. The decision
became final no earlier than Sept. 29, 1998 (90 days after it was
entered). Secs. 7481(a)(1), 7483. The notices of deficiency in
this proceeding were issued to petitioners on May 28, 1999;
consequently, the notices of deficiency relating to the affected
items (the additions to tax) were issued timely.
                                - 4 -


     Petitioner is an orthopedic surgeon who has practiced in the

Las Vegas, Nevada, area since 1974.     Through a physician friend

with whom petitioner had been a medical resident in Salt Lake

City, Utah, petitioner became acquainted with a financial adviser

named Gary Sheets (Mr. Sheets).    During 1982, Mr. Sheets

approached petitioner about investing in Blythe II, which was

being promoted as an agricultural research and development

partnership.    Mr. Sheets provided petitioner with a fairly

voluminous private placement memorandum3 (the offering), which

described the proposed investment in and the activities to be

conducted through Blythe II.    Petitioner admittedly did not read

the document.    Instead, petitioner passed along the offering to

his accountant, Jack Meyers (Mr. Meyers), who routinely prepared

petitioners' Federal income tax returns.    After perusing the

offering, Mr. Meyers advised petitioner that the Blythe II

investment did not appear to be any type of scam.

     Petitioner also visited the women's cosmetics aisle in a

local supermarket where he confirmed, as the Court understands

his testimony, that a few women's cosmetic products did contain

some derivative of the jojoba plant.    According to the offering,

some hair oils, shampoos, and soap already contained a derivative

of the jojoba plant, and one of the potential new uses for an oil


     3
          The private placement memorandum consisted of some 47
pages, plus 8 exhibits, and a table of contents.
                                - 5 -


derivative of the plant was an ingredient in face creams and

sunscreens.    Petitioner did not consult an attorney or any

independent expert in agriculture or jojoba plants regarding

whether jojoba oil or any other jojoba derivative had a

potentially lucrative commercial market.    Petitioners,

nevertheless, invested in Blythe II.

     On their joint 1982 Federal income tax return, petitioners

reported wages of $258,000 from petitioner's medical practice,

interest income of $1,605.91, taxable dividend income of $2,550,

and capital gains of $4,694.62.    Petitioners reported total net

losses from two separate partnerships of $52,464 for 1982, of

which $20,933 was the loss from Blythe II.4   Thus, petitioners

reported total income of $214,386.53 and a total tax liability of

$69,854.69.5

     On their joint 1983 Federal income tax return, petitioners

reported wages of $233,018.11 from petitioner's medical practice,

interest income of $3,479.22, taxable dividend income of $136.89,

and capital gains of $14,139.84.    Petitioners reported total net



     4
          The other $31,531 partnership loss was in connection
with Arrowhead Village, a real estate partnership promoted by Mr.
Sheets.
     5
          During April 1986, petitioners filed an amended return
for 1982 reporting a decrease in adjusted gross income of $2,921
due to an additional $2,921 loss in connection with the
aforementioned Arrowhead Village partnership. On the amended
return, petitioners reported a total tax liability of $68,394.19.
                               - 6 -


losses from two partnerships and two rental properties totaling

$57,513, of which $1,006 represented the loss from Blythe II.6

Thus, petitioners reported an adjusted gross income of

$193,261.06 and a total tax liability of $53,187.27.

     Blythe II was audited by the Internal Revenue Service, and a

notice of final partnership administrative adjustment was issued

to the partnership.   The partnership initiated a TEFRA proceeding

in this Court, and a decision was entered in Utah Jojoba I

Research v. Commissioner, T.C. Memo. 1998-6, which involved a

similar jojoba investment program.7    In the decided case, this

Court held that the partnerships8 did not directly or indirectly

engage in research or experimentation and that the partnerships

lacked a realistic prospect of entering into a trade or business.

In upholding respondent's disallowance of research and

experimental expenditures, the Court found that the agreements

between the partnerships and the proposed research and

development contractor, U.S. Agri Research & Development Corp.



     6
          The remainder of the loss consisted of $50,582 from
Arrowhead Village partnership, $49.57 from the rental of a
condominium, and $5,875.60 from the rental of a Mercedes
automobile.
     7
          The tax matters partner of Blythe II signed a
stipulation to be bound by the outcome of Utah Jojoba I Research
v. Commissioner, T.C. Memo. 1998-6.
     8
          Eighteen docketed cases were bound by stipulation by
the outcome of Utah Jojoba I Research v. Commissioner, supra.
                                - 7 -


(U.S. Agri), had been designed and entered into solely to provide

a mechanism to disguise the capital contributions of limited

partners as currently deductible expenditures.   The Court stated

that the activities of the partnerships were "another example of

efforts by promoters and investors in the early 1980's to reduce

the cost of commencing and engaging in the farming of jojoba by

claiming, inaccurately, that capital expenditures in jojoba

plantations might be treated as research or experimental

expenditures for purposes of claiming deductions under section

174."   Id.

     As a result of Blythe II's TEFRA proceeding, petitioners

were assessed tax deficiencies of $9,006 for 1982 and $503 for

1983, plus interest.   Subsequently, respondent issued notices of

deficiency to petitioners, for 1982 and 1983, for affected items,

determining that petitioners are liable for the additions to tax

for negligence, under section 6653(a)(1) and (2), and a

substantial understatement of tax, under section 6661, for 1982.

These additions to tax are the subject of the instant case.

     The first issue is whether petitioners are liable for the

additions to tax for negligence, under section 6653(a)(1) and

(2), for both years at issue.   Section 6653(a)(1) imposes an

addition to tax in an amount equal to 5 percent of an

underpayment of tax if any part of the underpayment is due to

negligence or intentional disregard of rules or regulations.
                               - 8 -


Section 6653(a)(2) imposes another addition to tax in an amount

equal to 50 percent of the interest due on the portion of the

underpayment attributable to negligence or intentional disregard

of rules or regulations.   Respondent’s determinations in a notice

of deficiency are presumed correct, and petitioners must

establish otherwise.   Rule 142(a); Welch v. Helvering, 

, 115 (1933); cf. sec. 7491(c).9    Respondent determined that

petitioners’ underpayments were due to negligence.    Petitioners,

therefore, have the burden of proving they were not negligent in

deducting their share of the partnership’s losses.    See Estate of

Mason v. Commissioner, 

, 663 (1975), affd. 

(6th Cir. 1977); Bixby v. Commissioner, 

, 791 (1972);

Anderson v. Commissioner, T.C. Memo. 1993-607, affd. 

(10th Cir. 1995).

     Negligence is defined as the failure to exercise the due

care that a reasonable and ordinarily prudent person would

exercise under like circumstances.     See Anderson v. Commissioner,




     9
           The Internal Revenue Service Restructuring & Reform Act
of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726, added
sec. 7491(c), which places the burden of production on the
Secretary with respect to a taxpayer’s liability for penalties
and additions to tax in court proceedings arising in connection
with examinations commencing after July 22, 1998. Petitioners do
not contend, nor is there evidence, that their examination
commenced after July 22, 1998, or that sec. 7491 is applicable in
this case.
                                 - 9 -


62 F.3d at 1271; Neely v. Commissioner, 

, 947 (1985);

Glassley v. Commissioner, T.C. Memo. 1996-206.      The focus of

inquiry is the reasonableness of the taxpayer’s actions in light

of his experience and the nature of the investment.     See Henry

Schwartz Corp. v. Commissioner, 

, 740 (1973); Greene

v. Commissioner, T.C. Memo. 1998-101, affd. without published

opinion 

 (4th Cir. 1999); Glassley v. Commissioner,

supra; Turner v. Commissioner, T.C. Memo. 1995-363.      Whether a

taxpayer is negligent in claiming a tax deduction "depends upon

both the legitimacy of the underlying investment, and due care in

the claiming of the deduction."     Sacks v. Commissioner, 

, 920 (9th Cir. 1996), affg. T.C. Memo. 1994-217; see Greene

v. Commissioner, supra.

     A taxpayer may avoid liability for negligence penalties

under some circumstances if the taxpayer reasonably relied on

competent professional advice.    See Freytag v. Commissioner, 

, 888 (1987), affd. 

 (5th Cir. 1990), affd.

on other issue 

 (1991).      Such reliance, however, is

"not an absolute defense to negligence, but rather a factor to be

considered."   Id.    For reliance on professional advice to relieve

a taxpayer from the negligence addition to tax, the taxpayer

must show that the professional adviser had the expertise and

knowledge of the pertinent facts to provide informed advice on

the subject matter.     Id.
                             - 10 -


     The facts pertinent to the instant case relating to the

structure, formation, and operation of Blythe II are as discussed

in Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6,

with the exception of a few specific dates and dollar amounts.

Blythe II was organized in December 1982 as a limited partnership

for the described purpose of conducting research and development

(R&D) involving the jojoba plant.    The offering, dated November

30, 1982, provided for a maximum capitalization of $2,968,000

consisting of 350 limited partnership units at $8,480 per unit.

Each unit required a cash downpayment of $2,500 and a non-

interest-bearing promissory note in the principal amount of

$5,980 payable in 10 annual installments with an acceleration

provision in the event of default.    The offering was limited to

investors with a net worth (exclusive of home, furnishings, and

automobiles) of $150,000, or investors whose net worth was

$50,000 (exclusive of home, furnishings, and automobiles) and who

anticipated that, for the taxable year of the investment, they

would have gross income equal to $65,000, or taxable income, a

portion of which, but for tax-advantaged investments, would be

subject to a Federal income tax rate of 50 percent.

     Petitioners' investment was for four limited partnership

units, which required an initial down payment of $10,000 and

execution of a promissory note for $23,920.   Petitioners were to

make payments of $2,600 each year from 1983 through 1985, $2,100
                               - 11 -


per year from 1986 through 1991, and a final payment of $3,520 in

1992 on the promissory note.   It is not clear from the record

whether petitioners made all the payments provided for in the

promissory note.

     The offering identified William Kellen (Mr. Kellen) as the

general partner and U.S. Agri as the contractor for the R&D

program under an R&D agreement.   Additionally, a license

agreement between Blythe II and U.S. Agri granted U.S. Agri the

exclusive right to use technology developed for Blythe II for 40

years in exchange for a royalty of 85 percent of all products

produced.   The offering included copies of both the R&D agreement

and the license agreement.10   The R&D agreement was executed

concurrently with the license agreement.

     According to its terms, the R&D agreement expired upon the

partnership's execution of the license agreement.   Since the two

were executed concurrently, amounts paid to U.S. Agri by the

partnership were not paid pursuant to a valid R&D agreement but


     10
          In the instant case, the Blythe II offering is included
in evidence as a stipulated exhibit; however, the stipulated
exhibit contains an incomplete copy of the R&D agreement that was
attached to the original offering. To the extent that relevant
facts are omitted because of the incomplete copy of the R&D
agreement (or other incomplete pieces of evidence) in the instant
case, the Court will rely on findings of fact in Utah Jojoba I
Research v. Commissioner, T.C. Memo. 1998-6, to which the
partners of Blythe II agreed to be bound. It is petitioners'
burden to establish the context in which their deductions were
taken. Rule 142(a); Welch v. Helvering, 

, 115
(1933); Bixby v. Commissioner, 

, 791 (1972).
                              - 12 -


were passive investments in a farming venture under which the

investors' return, if any, was to be in the form of royalties

pursuant to the licensing agreement.   Thus, as this Court held in

Utah Jojoba I Research v. Commissioner, supra, the partnership

was never engaged in research or experimentation, either directly

or indirectly.   Moreover, this Court found in Utah Jojoba I

Research v. Commissioner that U.S. Agri's attempts to farm jojoba

commercially did not constitute R&D, thereby concluding that the

R&D agreement was designed and entered into solely to decrease

the cost of participation in the jojoba farming venture for the

limited partners through large up-front deductions for

expenditures that were actually capital contributions.   The Court

concluded further that the partnership was not involved in a

trade or business and had no realistic prospect of entering into

a trade or business with respect to any technology that was to be

developed by U.S. Agri.

     Petitioners contend that their investment in Blythe II was

motivated solely by the potential to earn a profit.   Petitioners

contend further that their reliance on the advice of their

accountant, Mr. Meyers, should absolve them of liability for the

negligence penalty in this case.   Petitioners also argue that,

taking into account their experience and the nature of the

investment in Blythe II, they exercised the due care that a

reasonable and ordinarily prudent person would have exercised
                               - 13 -


under like circumstances.    For the reasons set forth below, the

Court disagrees with petitioners' contentions.

     First, the principal flaw in the structure of Blythe II was

evident from the face of the very documents included in the

offering.    A reading of the R&D agreement and the licensing

agreement, both of which were included as part of the offering,

plainly shows that the licensing agreement canceled or rendered

ineffective the R&D agreement because of the concurrent execution

of the two documents.    Thus, the partnership was never engaged,

either directly or indirectly, in the conduct of any research or

experimentation.    Rather, the partnership was merely a passive

investor seeking royalty returns pursuant to the licensing

agreement.    Any experienced attorney capable of reading and

understanding the subject documents should have understood the

legal ramifications of the licensing agreement's canceling out

the R&D agreement.    However, petitioners never consulted an

attorney in connection with this investment, nor did they read

the offering themselves.

     Secondly, in making their investment in Blythe II,

petitioners relied on the advice of their accountant, Mr. Meyers;

Mr. Sheets, who was a promoter for the partnership; and

petitioner's brief visit to a local supermarket to determine

whether any women's beauty products actually contained jojoba

plant derivatives.    At the time of trial Mr. Meyers was deceased;
                               - 14 -


therefore, the details in this record surrounding his advice to

petitioners about Blythe II are scant.    Petitioner provided Mr.

Meyers with a copy of the offering and asked Mr. Meyers to review

the same and advise petitioners whether or not to invest in

Blythe II.   Mr. Meyers advised petitioner that Blythe II "looked

okay" to him and that the promoters, in petitioner's words, were

"not trying to pull any funny stuff".    Petitioner admitted that

he sought Mr. Meyers' advice only with respect to the tax aspects

of the investment.   The record is devoid of any evidence to show

that Mr. Meyers gave petitioners a written opinion about the

investment, or that he conducted any independent research or

consulted any type of agricultural or jojoba plant expert about

the investment.   The record in this case indicates that Mr.

Meyers relied solely on the representations made in the offering

in rendering his advice to petitioners.

     Moreover, the record lacks evidence to show whether Mr.

Meyers had any previous experience with the deductibility of

research and development expenses at the time he advised

petitioners about Blythe II.   These types of expenses would have

allowed petitioners certain tax benefits above and beyond what

would have been provided by an ordinary business deduction.

There is no evidence in the record to suggest that Mr. Meyers

conducted any independent investigation to determine whether the

specific R&D proposed to be conducted by or on behalf of the
                               - 15 -


partnership would have qualified for deductions under section

174.

       The Court finds it notable that Mr. Meyers had no

educational background or experience in agricultural pursuits in

general, or jojoba plants in particular.      At trial, petitioner

suggested that Mr. Meyers had a "major" client who commercially

produced alfalfa plants, and that this should have, in some way,

granted Mr. Meyers specialized knowledge in the area of

agricultural investments.    When questioned by the Court about the

similarities between jojoba plants and alfalfa plants, petitioner

responded:    "The principles are the same.    It's a product that

grows in the ground and you plant it, you harvest it, you worry

about the logistics of feed, of fertilizer, of labor costs."

Petitioner made such assertions while, nevertheless, admitting

his knowledge that the important byproducts of alfalfa plants

differ from the important jojoba byproducts touted in the Blythe

II offering.    Additionally, with all due respect to petitioner,

the Court feels certain that such a generalized analysis of the

agriculture business is not a reasonable or sufficient basis for

assessing the commercial prospects of growing jojoba plants.

       There is no evidence in the record to suggest that

petitioners ever questioned Mr. Meyers about the facts and/or

legal analysis upon which he based his recommendations.      Further,

the record is devoid of any evidence that petitioners asked Mr.
                              - 16 -

Meyers to explain the Blythe II investment to them, which would

seem particularly important given the fact that petitioners opted

to not read the offering.

     The facts in this case are similar to those in Glassley v.

Commissioner, T.C. Memo. 1996-206, in which this Court found that

the taxpayers:


     acted on their fascination with the idea of
     participating in a jojoba farming venture and their
     satisfaction with tax benefits of expensing their
     investments, which were clear to them from the
     promoter’s presentation. They passed the offering
     circular by their accountants for a "glance" * * *


Similarly, petitioners acted on their enthusiasm for the

potential uses of jojoba and acted with knowledge of the tax

benefits of making the investment.     What little evidence this

record contains about the nature of the advice given by Mr.

Meyers suggests that such advice was highly generalized and based

primarily on a mere cursory review of the offering rather than on

independent knowledge, research, or analysis.     Petitioners failed

to show that Mr. Meyers had the expertise and knowledge of the

pertinent facts to provide informed advice on the investment in

Blythe II.   See Freytag v. Commissioner, 89 T.C. at 888.

Accordingly, petitioners failed to establish that their reliance

on the advice of Mr. Meyers was reasonable or in good faith.       See

Glassley v. Commissioner, supra.
                                - 17 -

     The Court next examines petitioners' reliance on the advice

of Mr. Sheets.   Mr. Sheets had no background or expertise in

agriculture or jojoba plants.    In fact, the only other investment

recommended to petitioners by Mr. Sheets had been a real estate

investment.   Also, because Mr. Sheets was a salesperson for this

investment, he had a personal profit motive and, thus, a conflict

of interest in advising petitioners to purchase the limited

partnership interests.    The advice petitioners allegedly received

from Mr. Sheets fails as a defense to negligence because of his

lack of competence to give such advice and the clear presence of

a conflict of interest.   See Rybak v. Commissioner, 

,

565 (1988).   Petitioners' reliance on the advice of Mr. Sheets

was unreasonable under the circumstances.

     Outside of Mr. Meyers and Mr. Sheets, petitioner's sole

inquiry into the viability of this partnership's operations

consisted of a visit to the cosmetics department of a local

supermarket to determine whether, in fact, any women's beauty

products actually contained extracts from the jojoba plant.

Petitioner was apparently satisfied by his discovery that some

women's beauty products did contain jojoba derivatives, and he

made no further investigation.    The Court finds it notable that

the offering listed at least 15 "potential uses of jojoba nuts",

only one of which was in certain cosmetics; yet petitioner chose

to explore only one of those potential uses by visiting the
                               - 18 -

supermarket.   Some other potential uses listed in the offering

were various lubricants for high-speed or high-temperature

machinery, pharmaceuticals, cooking oils, disinfectants,

polishing waxes, corrosion inhibitors, candles, animal feed

supplements, and fertilizer.   Being a physician, it seems logical

that petitioner would have had some access to information about

the use of jojoba in the pharmaceutical arena; however,

petitioner failed to pursue this possibility.   Petitioners'

failure to investigate any of the other enumerated potential uses

of jojoba plants was unreasonable under the circumstances.

     Petitioners had no legal or agricultural background or

training; yet they consulted no source of such information before

agreeing to invest more than $30,000 in Blythe II.11   At a

minimum, petitioners could have contacted an attorney to review

the offering, provide legal advice surrounding the partnership,

and explain the legal ramifications of the licensing agreement's

canceling out the R&D agreement.   A reasonable and ordinarily

prudent investor under the circumstances would have consulted an

attorney.   Also, petitioners could have taken the simple step of

contacting the agricultural department of a nearby college or

university, or going to another reliable source, to inquire about


     11
          As stated previously, it is unclear from the record
whether petitioners completed the payments provided for in the
promissory note; however, at the very least, they paid $10,000
and legally committed themselves to pay the remaining $23,920.
                               - 19 -

the R&D of jojoba plants and their potential commercial usage, if

any.    Again, a reasonable and ordinarily prudent investor would

have at least attempted to make this type of inquiry under the

circumstances.12

       Petitioners were not naive investors and should have

recognized the need for independent professional advice.      See

LaVerne v. Commissioner, 

, 652 (1990), affd. without

published opinion 

 (9th Cir. 1992), affd. in part

without published opinion sub nom. Cowles v. Commissioner, 

 (10th Cir. 1991); Glassley v. Commissioner, supra.         In

fact, the offering cautioned that prospective investors should

not "construe this memorandum or any prior or subsequent

communications as constituting legal or tax advice" and urged

investors to "consult their own counsel as to all matters

concerning this investment."    The offering was replete with

statements, including the cover page statement that "THIS

OFFERING INVOLVES A HIGH DEGREE OF RISK", warning of tax risks

involved with the investment and the highly speculative nature of

the commercial viability of the jojoba plant.    The offering

contained inconsistent information, such as the statement on page



       12
          In Utah Jojoba I Research v. Commissioner, T.C. Memo.
1998-6, the Court noted that there were experimental jojoba
plantations located at the University of California at Riverside,
California, of which the general partner of Blythe II, Mr.
Kellen, was aware.
                               - 20 -

9 that the general partner "has limited experience in dealing in

Jojoba beans and is mainly relying on the R&D Contractor to

develop technology and plant cultivars over the term of the R&D

Agreement", contrasted with the statement on page 34 that the

general partner "pioneered the development of the Blythe Airport

as an alfalfa ranch and jojoba farming in Desert Center" and was

"familiar with the development of jojoba, citrus, vineyards,

alfalfa and asparagus."    Such inconsistencies should have raised

a healthy suspicion in the mind of a reasonable and ordinarily

prudent investor, even one lacking any legal, tax, or

agricultural background.    However, petitioner testified that,

before committing to invest some $33,000 in Blythe II, he did not

even bother to read the offering, nor did he make an effort to

have the investment explained to him.    Moreover, petitioners

failed to monitor the progress of their investment after

purchasing the limited partnership interests.

     The Court is mindful that the Court of Appeals for the Ninth

Circuit (Ninth Circuit), the court to which an appeal in this

case would lie, has held that experience and involvement of the

general partner and the lack of warning signs could reasonably

lead investors to believe they were entitled to deductions in

light of the undeveloped state of the law regarding section 174.

See Kantor v. Commissioner, 

 (9th Cir. 1993), affg.

in part and revg. in part T.C. Memo. 1990-380.    In its holding,
                               - 21 -

the Ninth Circuit explained that the Supreme Court's decision in

Snow v. Commissioner, 

 (1974), left unclear the

extent to which research must be "in connection with" a trade or

business for purposes of qualifying for an immediate deduction

under section 174.   However, in the instant case, the partnership

was neither engaged in a trade or business nor conducting

research and development, either directly or indirectly.

Additionally, the experience in jojoba research and development

of the general partner of Blythe II, Mr. Kellen, was

questionable, at best, as evidenced by conflicting statements in

the offering.   Also, it is apparent from the evidence presented

in this case that Mr. Kellen had minimal involvement in the

partnership.    Petitioners are precluded from relying upon a "lack

of warning" as a defense to negligence, when there is no evidence

that a reasonable investigation was ever made and the offering

materials contained many warnings of the tax risks associated

with the investment.

     On this record, the Court finds that petitioners did not

exercise the due care of reasonable and ordinarily prudent

persons under the circumstances.   Consequently, the Court holds

that petitioners are liable for the negligence additions to tax

under section 6653(a)(1) and (2) for each of the years at issue.

Respondent is sustained on this issue.
                                - 22 -

     The second issue is whether petitioners are liable for the

addition to tax under section 6661(a) for a substantial

understatement of tax for 1982.    Section 6661(a), as amended by

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

sec. 8002, 100 Stat. 1951, provides for an addition to tax of 25

percent of the amount of any underpayment attributable to a

substantial understatement of income tax for the taxable year.      A

substantial understatement of income tax exists if the amount of

the understatement exceeds the greater of 10 percent of the tax

required to be shown on the return, or $5,000.      Sec.

6661(b)(1)(A).   Generally, the amount of an understatement is

reduced by the portion of the understatement that the taxpayer

shows is attributable to either (1) the tax treatment of any item

for which there was substantial authority, or (2) the tax

treatment of any item with respect to which the relevant facts

were adequately disclosed on the return.      See sec. 6661(b)(2)(B).

If an understatement is attributable to a tax shelter item,

however, different standards apply.      First, in addition to

showing the existence of substantial authority, a taxpayer must

show that he reasonably believed that the tax treatment claimed

was more likely than not proper.    Sec. 6661(b)(2)(C)(i)(II).

Second, disclosure, whether or not adequate, will not reduce the

amount of the understatement.    Sec. 6661(b)(2)(C)(i)(I).
                              - 23 -

     Substantial authority exists when "the weight of the

authorities supporting the treatment is substantial in relation

to the weight of authorities supporting contrary positions."

Sec. 1.6661-3(b)(1), Income Tax Regs.    Petitioners have failed to

present evidence to show that substantial authority existed for

the tax treatment of the Blythe II loss on their 1982 return.

     Adequate disclosure of the tax treatment of a particular

item may be made either in a statement attached to the return or

on the return itself, if it is in accordance with the

requirements of Rev. Proc. 83-21, 1983-1 C.B. 680.    Sec. 1.6661-

4(b) and (c), Income Tax Regs.   The record indicates that

petitioners did not attach a statement to their 1982 return

disclosing the specific facts surrounding their Blythe II loss

deduction.   Rev. Proc. 83-21, supra, applicable to tax returns

filed in 1983, lists information that would be deemed sufficient

disclosure if listed on the return itself, without the necessity

of attaching an additional statement to the return.    However,

none of the specific tax items referenced in Rev. Proc. 83-21,

supra, are relevant to the instant case.    If disclosure is not

made in compliance with the regulations or the revenue procedure,

disclosure on the return may still be adequate if sufficient

information is provided to enable the Commissioner to identify

the potential controversy involved.     Schirmer v. Commissioner, 

, 285-286 (1987).   The mere claiming of the loss,
                                 - 24 -

however, without further explanation, was not sufficient to alert

respondent to the controversial section 174 deduction of which

the partnership loss consisted.     Petitioners have failed to

present evidence to show that the relevant facts pertaining to

their Blythe II loss deduction were adequately disclosed on their

1982 return.13

     Finally, section 6661(c) provides the Secretary with the

discretion to waive the section 6661(a) addition to tax if the

taxpayer shows he acted with reasonable cause and in good faith.

This Court reviews for abuse of discretion the Secretary's

failure to waive the addition to tax for abuse of discretion.

Martin Ice Cream Co. v. Commissioner, 

, 235 (1998).

Petitioners argue that they acted in good faith and reasonably

relied upon the advice of Mr. Meyers in claiming the relevant

loss.     However, nothing in the record indicates that petitioners

requested a waiver for good faith and reasonable cause under

section 6661(c).      In the absence of such a request, this Court

cannot review respondent's determination for an abuse of

discretion.     Id.   In any event, petitioners have not shown that

they met the tests of reasonable cause and good faith.

     Petitioners have failed to prove that they had substantial

authority for their treatment of the partnership loss and that


     13
          As noted earlier, even if an adequate disclosure had
been made on the return, such a disclosure would not reduce the
amount of the understatement attributable to a tax shelter item.
                               - 25 -

they adequately disclosed the relevant facts of that treatment.

The understatement upon which the addition to tax was imposed was

$10,467.   The understatement is substantial because it exceeds

the greater of $5,000 or 10 percent of the amount required to be

shown on the return.14   On this record, the Court holds that

petitioners are liable for the addition to tax under section

6661(a) for a substantial understatement of tax for 1982.

Respondent is sustained on this issue.

     Finally, to the extent the Court has failed to address an

argument of petitioners herein, the Court concludes the argument

is without merit.




                                         Decision will be entered

                                    for respondent.




     14
          The amount required to be shown on the return was
$78,861, 10 percent of which equals $7,886.10.