Melvin J. Laney and Carolyn A. Laney - Page 23

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                  Petitioners’ failure to file their 1987 income tax return                           
            until May 11, 1989, was not due to reasonable cause.                                      
                  Petitioners substantially understated their income tax                              
            liabilities for 1986, 1987, and 1988; however, they adequately                            
            disclosed in a statement attached to their tax returns the                                
            relevant facts affecting the tax treatment of their claimed net                           
            operating loss carryforward.                                                              
                  Every matter that we are to resolve in the instant case                             
            stems directly from, or is substantially affected by, R.K.                                
                                           I. Settlement                                              
            A. With Justice Department                                                                
                  Petitioners argue that they are entitled to a 1983                                  
            theft/casualty loss deduction with a 15-year net operating loss                           
            carryover because Laney had an agreement with the Department of                           
            Justice that he is entitled to deduct this net operating loss                             
            carryover in exchange for voluntarily dismissing the Court of                             
            Claims petition in which he alleged a taking of R.K. by the                               
            United States.                                                                            
                  Respondent contends that petitioners did not have an                                
            agreement with the Department of Justice.                                                 
                  We agree with respondent.                                                           
                  In their pretrial memorandum, the first witness petitioners                         
            listed was Henry, who was expected to testify about “the                                  

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