are compelled to the conclusion that, in substance, Mr. Kluener
sold the horses using APECO as a conduit for the passage of title
and receipt of the proceeds. Consequently, we hold that
petitioners are liable for the tax payable on the gain realized
from the sales.
Having concluded that the transaction in issue is properly
viewed as a sale by Mr. Kluener using APECO as a conduit, we need
not address respondent's contention that the gain from the sale
of the horses should be allocated, pursuant to section 482, to
Mr. Kluener in order to clearly reflect the income of both
himself and APECO. We note, however, that we have previously
stated that, if the conduit analysis of Commissioner v. Court
Holding Co., 324 U.S. at 334, and its progeny applies to a
transaction, all prerequisites for application of section 482 are
likewise met. Southern Bancorporation v. Commissioner, 67 T.C.
1022, 1026 (1977).
We next consider whether petitioners are liable for the
penalty provided by section 6662(a) for substantial
understatement of income tax. Respondent determined that the
penalty applied to the underpayment of tax resulting from the
omission from Mr. and Ms. Kluener's 1989 return of the capital
gain and section 1245 recapture income realized upon the sales of
the horses that occurred during that year. Petitioners bear the
burden of establishing error in respondent's determination. Rule
142(a).
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