Johnson v. Commissioner ( 1993 )


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  • 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    [NOT FOR PUBLICATION]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
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    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,
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    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
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    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
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    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
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    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
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    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
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    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
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    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,
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    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).
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    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).
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    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.
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