                         T.C. Memo. 1997-96



                       UNITED STATES TAX COURT



                  M.I.C. LIMITED, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

              BEVERLY THEATERS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.    3910-94, 15027-94.    Filed February 24, 1997.



     Robert E. Miller and Edith S. Thomas, for petitioners.

     Alexandra E. Nicholaides, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:    Beverly Theaters, Inc. (Beverly) and M.I.C.

Ltd. (MIC), petitioned the Court to redetermine respondent's

determinations with respect to their Federal income taxes.
                                  - 2 -

Respondent's determinations for MIC are reflected in a notice of

deficiency dated December 8, 1993, and the determinations for

Beverly are reflected in a notice of deficiency dated June 2,

1994.     Respondent's determinations are as follows:

M.I.C. Ltd.:     Docket No. 3910-94

Taxable Year                          Addition to Tax     Penalty
Ended                                       Sec.            Sec.
January 31        Deficiencies           6651(a)(1)         6662

  1990              $349,589              $87,397        $69,918
  1991               125,865               31,466         25,173

Beverly Theaters, Inc.:     Docket No. 15027-94

Taxable Year                                Additions to Tax
Ended                                        Sec.          Sec.
June 30           Deficiency              6651(a)(1)     6653(a)

 1989               $335,744               $95,250      $20,100

     Following consolidation of the cases for purposes of trial,

briefing, and opinion, and following concessions by the parties,

the primary issue before the Court is whether any portion of the

$1,837,500 lump-sum award at issue herein must be recognized as

gain by MIC and/or Beverly.      The award stemmed from a

condemnation of property that was owned by MIC and leased to

Beverly.     We hold that none of the award must be recognized as

gain by MIC or Beverly.

     We also must decide the following subsidiary issues:

     1.    Whether MIC may deduct $65,000 in payments that it made

to James Hafiz ($35,000), Peter Hafiz ($20,000), and Richard
                                 - 3 -

Hafiz ($10,000) in connection with the condemnation.      We hold it

may.

       2.   Whether MIC is liable for additions to tax for the

failure to file returns, as determined by respondent under

section 6651(a)(1).     We hold it is to the extent described

herein.

       3.   Whether Beverly is liable for an addition to tax for the

failure to file a return, as determined by respondent under

section 6651(a)(1).     We hold it is not.

       4.   Whether MIC is liable for the accuracy related penalties

determined by respondent under section 6662.      We hold it is to

the extent described herein.

       5.   Whether Beverly is liable for the negligence addition to

tax determined by respondent under section 6653(a).      We hold it

is not.

       Unless otherwise stated, section references are to the

Internal Revenue Code in effect for the years in issue.      Rule

references are to the Tax Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.

The stipulations of fact and the exhibits submitted therewith are

incorporated herein by this reference.       MIC was incorporated on

March 2, 1973, and its principal place of business was in Durand,

Michigan, when it petitioned the Court.       Beverly was incorporated

on September 19, 1978, and its principal office was in St. Paul,
                               - 4 -

Minnesota, when it petitioned the Court.   Beverly was involved in

the adult entertainment industry, and its operations were based

in a multiuse, multimedia adult entertainment complex known as

the Faust Entertainment Complex (the Faust).   The Faust included:

(1) A store that sold adult books, videos, and paraphernalia,

(2)   a location that featured live peep shows/rap parlor, (3) a

stage for live entertainment, (4) individual booths for watching

adult films, and (5) a full screen motion picture theater.    The

Faust's daily operations were managed by the Hafiz family.

James Hafiz, the family's patriarch, was Beverly's president, and

his wife, Eleanor, and his sons, Peter, Richard, and Stewart,

were Beverly employees.   Peter Hafiz was a full-time employee of

Beverly, and his two brothers were part-time employees.

      On March 31, 1972, Harry V. Mohney (Mohney) purchased

property located at the corner of Dale Street and University

Avenue in St. Paul, Minnesota, for $80,000.    St. Paul is a major

manufacturing and distributing center in the upper Midwest, and

University Avenue is a busy thoroughfare that connects the

central business districts of St. Paul and Minneapolis.

      Mohney transferred the property to MIC by warranty deed on

November 14, 1977, and MIC owned the property at the times

relevant herein.   MIC had expanded the property received from

Mohney to include 626 University Avenue, and the land size of the

parcels at 620 and 626 University Avenue totaled 14,520 square

feet (hereinafter the property at 620 and 626 University Avenue
                                 - 5 -

is collectively referred to as the Property).      A one story brick

building and a three story brick building were situated at 620

University Avenue, and a 9,760 square foot theater-structure was

situated at 626 University Avenue.       There was no parking lot on

the Property.   Vehicles had to be parked on the street or across

the street in a parking lot that accommodated approximately 500

vehicles.

     The theater section of the structure at 626 University

Avenue was one-story, and it had high ceilings, angled flooring,

and a seating capacity of 394.    The structure's section fronting

University Avenue had two floors.    The first floor contained a

lobby and shopping space that was used by a barber shop.      The

second story was used as an apartment and for storage.

     The building at 620 University Avenue had 21,269 square

feet.   The building's exterior was attractive, and it had unique

features including ceramic tiles, cathedral-type window gables,

and ceramic brick facade.   The building had undergone substantial

remodeling and leasehold improvements, including individual

booths, dance area, stages, lit staircases, an arcade, and total

renovation of the store and arcade area.      A major remodeling in

the 1980's included an updating of electrical, heating/air

conditioning, and security systems, as well as remodeling the

interior which included a new theater and screens, carpeting, and

decorative lighting throughout.    The building was well adorned,

very clean, attractive, well maintained, and in good condition.
                                 - 6 -

     MIC leased the Property to Beverly under a 5-year lease that

ran from March 1986 to February 1991.    The lease provided that

Beverly would pay MIC rent at an annual rate of $3.42 per square

foot, the landlord would pay the real estate taxes, and the

tenant would pay all other property expenses.    The Property was

zoned B-3, General Business District, which permitted adult uses,

including adult bookstores, cabarets, conversation/rap parlors,

health/sports clubs, massage parlors, and motion picture

theaters.   The B-3 zoning also permitted the Property to offer

more than one adult use at that site.    The Property enjoyed value

due to its zoning, location, traffic, and its ability to offer a

number of adult uses at one site.

     In the early 1980's, the City of St. Paul (the City) had

begun to make a sweeping attempt to drive out of the City all

adult oriented businesses.   The first business owner to be

subjected to the City's scrutiny was Ferris Alexander

(Alexander), an owner and operator of a number of adult related

bookstores, bars, theaters and other entertainment facilities in

St. Paul.   One of Alexander's assets was the Flick Theater (the

Flick), a 9,760 square foot establishment that offered the same

types of adult entertainment as the Faust.    The Flick, which was

situated across the street from the Faust, was in worse physical

condition than the Faust.    The Flick was rundown and "seedy", and

it had limited usable footage.
                                - 7 -

     The City purchased an option from Alexander in December 1983

to buy the Flick for $300,000 within the next 4 years.   The

option stated that the purchase price would increase to $750,000

if the City "adopts an ordinance which regulates adult

entertainment and prohibits such activity outside an area having

a new zoning classification enacted specifically for such

purposes, and which ordinance grants or has granted a non-

conforming use or "grandfather" status to the current use of the

Optioned Property at the time of the exercise of the Option".

The City exercised its option to purchase the Flick on or before

the December 1987 expiration date, and, following extensive

litigation that prolonged the 4-year period in which the City

would have otherwise had to purchase the Flick, purchased the

Flick in or about the summer of 1989 for $300,000.   When the City

exercised its option to buy the Flick, the City had not yet

passed the type of ordinance that would have increased the

purchase price to $750,000.   In mid-1988, the City passed such an

ordinance.   At that time, the City amended its zoning code to

include distance restrictions from other adult uses, residential

property, day care, churches, libraries, parks, hotels, and fire

stations.    The amendments also prohibited additional multiplexing

of adult entertainment uses at one site.   The Property was

"grandfathered" from these amendments, and this grandfathered

status ran with the land in that it was transferable to any owner

of the Property.   Following these amendments, the Faust was the
                                - 8 -

only multiuse, multimedia adult entertainment complex operating

within the City.

     In 1985, the City had approached MIC and Beverly and

attempted to negotiate an agreement to purchase the Property.

An initial meeting was held in May 1985, and the City made an

offer based on what it stated was the fair market value of the

Property.   The City stated that the Property was worth less than

$700,000.   The City later obtained an appraisal that stated that

the Property was worth $723,000.

     Petitioners rejected the City's offer.    Petitioners then

obtained two appraisals that respectively stated that the

Property was worth $1,950,000 and $2,100,000.    On December 9,

1987, the City notified petitioners that it would acquire title

to the Property by condemnation, and, shortly thereafter, the

City petitioned the local court to condemn the Property by

eminent domain.    The City named as respondents in the petition

all persons and entities that had, or could have had, a claim to

any interest in the Property.    The respondents listed in the

petition included MIC, Beverly, and certain other persons who are

not relevant to our case.

     The court assigned the case to a panel of three

commissioners to ascertain the condemnees' award.    Before the

commissioners independently ascertained an award, the parties to

the condemnation proceeding settled their dispute.    The

settlement, which occurred in January 1989, followed
                                - 9 -

approximately 13 months of heated and contested court proceedings

and discussions related thereto.    Under the terms of the

settlement, the City agreed to deliver a $1,837,500 check to MIC

in satisfaction of all claims that could be made with respect to

the Property's condemnation.    The City prepared a written

settlement agreement that was signed by the City, on the one

hand, and MIC, Beverly, and James, Eleanor, Peter, Richard, and

Stuart Hafiz, on the other.    The agreement, dated February 14,

1989, stated that the parties thereto agreed that the settlement

resolved all claims, including the value of the real estate,

going concern value, and covenants by MIC, Beverly, and the Hafiz

family not to operate an adult business in the area.      The

agreement did not set forth a value for any specific claim.

Petitioners and the Hafiz family were advised there was little

value to the covenants.

     On February 14, 1989, the commissioners filed with the court

an award of damages in the amount of $1,837,500.    The

commissioners set their award at the amount listed in the

settlement agreement.   On February 16, 1989, MIC transferred the

Property to the City by quitclaim deed, and, on March 3, 1989,

MIC received a check payable solely to it in the amount of

$1,837,500.   There was no deed or bill of sale given for goodwill

or going concern value.   On its 1989 Form 1120, U.S. Corporation

Income Tax Return, which MIC filed with the Commissioner on

January 3, 1992, MIC reported that it had received the $1,837,500
                              - 10 -

condemnation award in 1989, and that it realized a $1,789,785

gain with respect thereto ($1,837,500 award less $47,715 adjusted

basis).   MIC reported that it was electing not to recognize this

gain in accordance with section 1033, and that it had purchased

other property similar to or related in use in an amount greater

than the gain.

     MIC retained James, Peter, and Richard Hafiz to assist MIC

during the condemnation proceedings, and James Hafiz negotiated

with MIC's management the amount of compensation that he and his

sons would receive for their assistance.    MIC sought assistance

from people with personal knowledge of the Property, and James,

Peter, and Richard Hafiz made themselves available to assist

appraisers and counsel as necessary.    James, Peter, and Richard

Hafiz also performed various jobs to enhance the value of the

Property.   Peter Hafiz, who had attended college to learn

architectural drafting and art, sketched MIC's real estate and

fixtures, and he diagramed the building's interior.    Peter Hafiz

worked more hours than Richard Hafiz.

     On April 24, 1989, MIC paid James, Richard, and Peter Hafiz

lump-sum amounts for their services.    MIC paid nothing to Eleanor

or Stuart Hafiz because they did not perform any services for MIC

in connection with the condemnation.    Respectively, James,

Richard, and Peter Hafiz received $35,000, $10,000, and $20,000.

MIC issued each of these men a 1989 Form 1099-MISC, Miscellaneous

Income, for the amount that it paid him.    MIC deducted the
                                - 11 -

$65,000 in payments on its 1989 Form 1120 as "C.L.--Management

Fees".

     Respondent determined that MIC had to recognize $1,162,215

of the $1,837,500 condemnation award in its 1989 taxable year.

Alternatively, respondent determined, Beverly had to recognize

$1,114,500 of the condemnation award in its 1988 taxable year.1

Respondent also determined that MIC could not deduct the $65,000

that it claimed as "Contract Labor Management" in its 1989

taxable year because "it has not been established that any amount

claimed constitutes an ordinary and necessary business expense,

was expended or was expended for the purpose designated."

     Modern Bookkeeping Service provided bookkeeping services for

petitioners.

         The City demolished the Property in July 1995.

                                OPINION

     We first decide whether the City paid any part of the

condemnation award for an interest other than the Property.

Where a lump-sum condemnation award consists entirely of

compensation for property taken, this Court has held in certain

circumstances that the award may not be allocated among the

various items of property involved.       Asjes v. Commissioner,

     1
       The only other adjustment that respondent made to
Beverly's 1988 taxable year concerned net operating loss (NOL)
carrybacks. Respondent carried back NOL's from Beverly's 1989,
1990, and 1991 taxable years to offset part of the increased
income that respondent determined was taxable to Beverly on
account of the condemnation award.
                              - 12 -

74 T.C. 1005, 1010-1011 (1980); Kendall v. Commissioner, 31 T.C.

549, 554 (1958); Bymaster v. Commissioner, 20 T.C. 649, 653-654

(1953); Allaben v.   Commissioner, 35 B.T.A. 327, 328 (1937); see

also Lapham v. United States, 178 F.2d 994, 996 (2d Cir. 1950).

As this Court has stated, "a lump sum purchase price is not to be

rationalized after the event of sale as representing a

combination of factors which might have been separately stated in

the contract if the parties had seen fit to do so."      Bymaster v.

Commissioner, supra at 653-654.

     The result is different, however, when the condemnation

award is actually compensation for nonproperty items, such as

interest or a waiver of legal rights.   The fact that an award

includes compensation for nonproperty rights may be evidenced by

the award's being significantly in excess of the value of the

property taken.   In such a case, the Court has allocated part of

the award to the nonproperty interests.   See Smith v.

Commissioner, 59 T.C. 107 (1972); see also Estate of Walter v.

Commissioner, T.C. Memo. 1971-244.

     The primary argument in respondent's brief is that MIC is

taxable on $1,017,500 (rather than $1,162,215 as shown in the

notice of deficiency) of the condemnation award because the award

included damages for going concern value and certain covenants.

Respondent states that this amount is taxable to MIC because MIC

was the party that actually received and used the proceeds from

the award.   Respondent does not contest that $820,000 of the
                                - 13 -

condemnation award qualifies under section 1033 for

nonrecognition of gain.   Respondent alternatively argues that

$908,750 (rather than $1,114,500 as shown in the notice of

deficiency) of the award is taxable to Beverly, $800,000 as a

payment for its going concern and $108,750 as a payment for its

covenants, and that $108,750 of the award is taxable to MIC as a

payment for its covenants.   Under her alternative argument

respondent does not contest that $820,000 of the condemnation

award qualified under section 1033 for nonrecognition of gain.

     We disagree with both of respondent's arguments.   We decline

to allocate any part of the award away from the Property because

we find that the award is not significantly in excess of the fair

market value of the Property.    Fair market value is a question of

fact.   Commissioner v. Scottish Am. Inv. Co., 323 U.S. 119, 123-

125 (1944); Helvering v. National Grocery Co., 304 U.S. 282, 294

(1938).   Fair market value represents the price that a willing

buyer would pay a willing seller, both persons having reasonable

knowledge of all relevant facts and neither person being

compelled to buy or to sell.    United States v. Cartwright, 411

U.S. 546, 551 (1973); Estate of Hall v. Commissioner, 92 T.C.

312, 335 (1989).   The willing buyer and the willing seller are

hypothetical persons, instead of specific individuals or

entities, and the characteristics of these hypothetical persons

are not necessarily the same as the personal characteristics of

the actual seller or a particular buyer.    Estate of Bright v.
                              - 14 -

United States, 658 F.2d 999, 1005-1006 (5th Cir. 1981); Estate of

Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).

     Fair market value is determined as of the valuation date,2

and no knowledge of unforeseeable future events that may affect

the value is imputed to the hypothetical persons.    See, e.g.,

Estate of Newhouse v. Commissioner, supra at 218.    Fair market

value equals the highest and best use of the property on the

valuation date.   Fair market value takes into account special

uses that are realistically available due to the property's

adaptability to a particular business.    Mitchell v. United

States, 267 U.S. 341, 344-345 (1925); Stanley Works v.

Commissioner, 87 T.C. 389, 400 (1986).    Fair market value is not

necessarily affected by whether the owner has actually put the

property to its highest and best use.    The reasonable and

objectively possible uses for the property control the valuation

thereof.   United States v. Meadow Brook Club, 259 F.2d 41, 45

(2d Cir. 1958); Stanley Works v. Commissioner, supra at 400.



     2
       The parties have not set forth their positions concerning
the date as of which the Court should value the Property. We
value the Property as of Feb. 14, 1989; i.e., when the
commissioners filed their award with the State court. As stated
by the Minnesota Supreme Court, a condemnee is entitled to
compensation equal to the "damages assessed as of the date the
commissioners file their award and with respect to the value and
condition of the property at that time." Iowa Elec. Light &
Power Co. v. Fairmount, 67 N.W.2d 41, 46 (Minn. 1954); see also
In the Matter of Branch A-38, JT Ditch No. 204 v. County of
Martin, 406 N.W.2d 524, 525 (Minn. 1987); St. Louis Park v. Almor
Co., 313 N.W.2d 606, 609-610 (Minn. 1981).
                              - 15 -

     Our determination of fair market value has been assisted by

the experts in this case.   Respondent's expert was Robert J.

Strachota (Strachota), President of the Shenehon Co.

Petitioners' expert was Robert J. Lunieski (Lunieski), President

of Lunieski & Associates.   We are not bound by an expert's

opinion, Estate of Kreis v. Commissioner, 227 F.2d 753, 755 (6th

Cir. 1955), affg. T.C. Memo. 1954-139, and we may adopt or reject

an expert's opinion in its entirety if we believe it appropriate,

Helvering v. National Grocery Co., 304 U.S. 282, 294-295 (1938).

We also may select only the portions of an expert's opinion that

we choose to adopt.   Parker v. Commissioner, 86 T.C. 547, 562

(1986).

     Strachota performed a "retrospective market value appraisal"

of the Property in July 1995, shortly after its demolition.

Strachota did not physically inspect the Property; he relied on

the descriptions of the Property that were set forth in three

appraisals, two of which valued the Property as of January 5,

1989, and the third as of February 26, 1988.   Strachota

ascertained that the highest and best use of the Property was as

a multiplex adult entertainment facility, and that the zoning

ordinances added value to the Property.   Strachota concluded that

the fair market value of the Property on March 1, 1989, was

$800,000.   Strachota reached his conclusion by estimating that

the Property's value was $600,000 under the "cost approach", and
                              - 16 -

$800,000 under both the "sales comparison" and "income

capitalization" approaches.

     Strachota estimated the value of the Property under the cost

approach by ascertaining the "current cost to reproduce or

replace the existing structure, deducting for all accrued

depreciation in the property, and adding the estimated land

value."   Strachota computed his $600,000 value under this

approach without taking into account any premium on account of

the zoning advantage enjoyed by the Property.

     Strachota estimated the value of the Property under the

sales comparison approach by "comparing the * * * [Property] to

similar properties that may have been sold recently, applying

appropriate units of comparison, and making adjustments, based on

the elements of comparison, to the sale prices of the

comparables."   Strachota computed his $800,000 value under this

approach by relying primarily on a February 1993 sale of a 13,964

square foot adult entertainment establishment in Minneapolis,

Minnesota.   Apart from this sale, Strachota concluded, no other

sales were comparable to the Property.

     Strachota estimated the value of the Property under the

income-capitalization approach by "converting anticipated

benefits into property value"; i.e., capitalizing the Property's

income expectancy to arrive at its value.   In applying the income

approach, Strachota considered commercial rents ranging from

$1.50 to $18 per square foot, and selected a $5 figure as the
                              - 17 -

Property's “market rent”.   Strachota multiplied this $5 figure by

the Property's square footage (21,269) and applied a 5-percent

vacancy and credit loss to arrive at a “potential gross rental

income” of $101,028.   Strachota subtracted $6,832 of operating

expenses from the potential gross rental income, and he divided

the result ($94,196) by a 12-percent capitalization rate to

arrive at his value of $800,000 (with rounding).   Strachota

concluded that the income approach was the most reliable

indicator of the Property's fair market value under the facts at

hand and, hence, he concluded, the Property was worth $800,000.

     Lunieski appraised the Property for the condemnation

proceeding, concluding that the fair market value of the Property

was $1,950,000 as of January 5, 1989.3   Lunieski inspected the

Property on at least five occasions, and he consulted an attorney

who was experienced with the City's adult zoning and ordinances.

Lunieski concluded that because the Property had a centralized

location and advantageous zoning, a prospective renter would pay

a premium to lease the property.   Lunieski concluded that the

City's ordinances enhanced the value of the Property, and that

the Property's highest and best use was rental to an adult

entertainment entity that was qualified to operate a complex.

     In arriving at his conclusion of fair market value, Lunieski

considered the same valuation approaches considered by Strachota.

     3
      Lunieski's appraisal was one of the three appraisals on
which Strachota relied.
                                - 18 -

Lunieski concluded that the cost approach was not helpful to him

in ascertaining the Property's fair market value because "no

substitute property could be constructed with the same zoning and

multiple use as the subject".    Lunieski concluded that the sales

comparison approach was also of no benefit because "any market

data would not reflect the unique zoning surrounding the subject

property."   Lunieski concluded that the income-capitalization

approach was the only approach that could be used to estimate the

Property's fair market value.

     In applying the income approach, Lunieski reviewed market

rentals and concluded that the appropriate range of market

rentals was $9 to $18 per square foot.   Lunieski ascertained that

the gross potential rent would be approximately $14.50 per square

foot, and, based on this figure, estimated net operating income

at $275,000 ($14.50 multiplied by the Property's 21,269 square

feet).   Lunieski used a 14-percent capitalization rate, and

concluded that the fair market value of the Property was

approximately $1,950,000 ($275,000/14 percent with rounding).

Lunieski did not factor in a vacancy and credit loss because, he

ascertained, the Property had 20 years of rental history without

a vacancy.

     We find both experts to be helpful in understanding the

industry, but we do not accept either expert's conclusion as to

the Property's fair market value.    In contrast with the belief of

both experts, we believe that the sales comparison approach can
                                - 19 -

be applied to the facts herein, and that the sales comparison

approach is the best method of valuation under our facts.      The

sales comparison approach is premised on the common sense

technique of finding the actual sales prices of properties

similar to the subject property and relating these actual prices

to the subject property to determine its value.      Given the fact

that the location, structure, and use of the Flick practically

mirrored the location, structure, and use of the Faust, we are

persuaded that the Flick is sufficiently similar to the Faust to

use the sale of the Flick for comparison purposes.      We believe

that the $750,000 price that the City would have paid for the

Flick, had the 1988 amendments to the zoning code been passed

when the City exercised its option in 1987, is the most accurate

measure of the Property's fair market value.      Lunieski's report

does not reference the sale of the Flick as a comparable

property.   Strachota's report does.     Strachota states in his

report that the sale of the Flick "would have possible relevance"

but for the fact that "it was bought by a governmental agency".

Neither Strachota nor respondent, however, explains adequately

why the fact that the Flick was bought by a governmental agency

should eliminate that sale as an accurate measure of the fair

market value of the Property.    Although it is true that a

governmental agency bought the Flick, the agency still had to pay

fair market value for it.   The City acquired the Flick from

Alexander under the threat of condemnation.      If the City had been
                              - 20 -

forced to condemn the Flick, it is indisputable that the City

would have had to pay fair market value for the property.   See

Ramsey County v. Miller, 316 N.W.2d 917 (Minn. 1982); see also

State v. Holmberg, 384 N.W.2d 214, 216 (Minn. Ct. App. 1986).      We

do not see why the City would have had to pay any more or less

for the Flick simply because Alexander sold the Flick to the City

through a negotiated sale.

     We can think of no good reason why the selling price of the

Flick is not a good measure of the fair market value of the

Property.   But for its size and appearance, we find that the

Flick was similar in most regards to the Faust.   Although it is

true that the actual purchase price of the Flick did not reflect

a premium value for advantageous zoning, it is equally true that

Alexander and the City contemplated the possibility that the

Flick's value would increase on account of the passage of zoning

that was favorable to the Flick's owners.   The option provides

that the purchase price of the Flick will increase to $750,000,

if the City enacts ordinances that would otherwise have given the

property on which the Flick was situated a form of monopoly.

     The Property, as recognized by both experts, enjoyed a form

of monopoly at the time of its condemnation on account of its

grandfathered status.   Assuming that the Flick had similar status

and that the City had been required to pay $750,000 for the

Flick, we calculate that the City would have paid $76.844 for

each square foot of the Flick.   Given this rate, as well as the
                                - 21 -

square footage of the Property (21,269), we calculate that the

fair market value of the Property was worth no less than

$1,634,395 on the relevant valuation date.    We need not quibble

with the difference between the $1.634 million figure that we

have just calculated and the $1,837,500 award paid by the City

for the Property.    Suffice it to say that the Property was in

better shape than the Flick, and it is reasonable to conclude

that the City would have paid slightly more on a square footage

basis for the Property than it did for the Flick.    We find and

hold that the award is not significantly in excess of the value

of the Property.    Accordingly, we also hold that none of the

award must be recognized by MIC as gain for the relevant year,

and that none of the award is includable in Beverly's gross

income.

     Turning to the $65,000 contract labor expense reported by

MIC, we are persuaded that MIC can deduct this amount.    We find

from the record that MIC paid $65,000 to James, Peter, and

Richard Hafiz, and that MIC paid this amount to compensate the

men for their time and efforts in connection with the City's

condemnation of the Property.    In addition to the fact that the

three men performed valuable services for MIC, for which they

were entitled to be compensated, we believe that it was

reasonable for MIC to pay these men for the time that they spent

on-call to provide advisory services as needed.    See

Yelencsics v. Commissioner, 74 T.C. 1513, 1524-1525 (1980).       We
                              - 22 -

conclude that MIC's payment of these amounts qualifies as an

ordinary and necessary business expense under section 162.       The

expense was ordinary and necessary mainly because it bore a

reasonable and proximate relation to MIC's business.       See

Trust of Bingham v. Commissioner, 325 U.S. 365, 370 (1945); see

also Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Deputy v.

Du Pont, 308 U.S. 488, 495 (1940).     We do not sustain

respondent's determination on this issue.

     Respondent also determined additions to tax under section

6651(a)(1), asserting that MIC and Beverly failed to file timely

Federal income tax returns.   The record clearly establishes that

MIC's 1989 and 1990 Forms 1120 were filed untimely, as was

Beverly's 1988 Form 1120.   Thus, in order to avoid these

additions to tax, MIC and Beverly must each prove that its

failure to file timely was:   (1) Due to reasonable cause and

(2) not due to willful neglect.   Sec. 6651(a); Rule 142(a);

United States v. Boyle, 469 U.S. 241, 245 (1985); Catalano v.

Commissioner, 81 T.C. 8 (1983), affd without published opinion

sub nom. Knoll v. Commissioner, 735 F.2d 1370 (9th Cir. 1984).

A failure to file timely is due to reasonable cause if the

taxpayer exercised ordinary business care and prudence, and,

nevertheless, was unable to file the return within the prescribed

time.   Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.      Willful

neglect means a conscious, intentional failure, or reckless

indifference.   United States v. Boyle, supra at 245.
                               - 23 -

     Following our review of the record, we are unpersuaded that

either MIC or Beverly exercised ordinary business care and

prudence in an attempt to file its tax returns timely.      We hold

that MIC and Beverly are liable for these additions, and we

sustain respondent's determination of the applicability of these

additions.   The amount of these additions is left to be computed

under Rule 155.

     Respondent also determined that MIC is liable for

accuracy-related penalties under section 6662.      Section 6662

imposes a penalty equal to 20 percent of the underpayment

attributable to negligence.    MIC bears the burden of proving

respondent wrong.    Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933); see also Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972).   MIC must prove that it was not negligent; i.e., it made

a reasonable attempt to comply with the provisions of the Code,

and that it was not careless, reckless, or in intentional

disregard of rules or regulations.      Sec. 6662(c).

     Respondent determined that MIC was liable for an

accuracy-related penalty in each year with respect to 100 percent

of the deficiency.    MIC conceded the correctness of certain of

respondent' adjustments in this case, and it has failed to prove

that the penalty does not apply to any deficiencies attributable

to the conceded items.    We hold that MIC has failed to meet its

burden or proof, and we sustain respondent's determination on the
                               - 24 -

applicability of these penalties.   The amount of these penalties

is left to be computed under Rule 155.

     Respondent also determined that Beverly is liable for an

addition to its 1988 tax for negligence.    See sec. 6653(a).

Section 6653(a) imposes an addition to tax equal to 5 percent of

the underpayment attributable to negligence.    For this purpose,

negligence is defined similarly to the definition set forth above

for section 6662.   The failure to file timely a tax return is

prima facie evidence of negligence.     Emmons v. Commissioner,

92 T.C. 342, 349 (1989), affd. 898 F.2d 50 (5th Cir. 1990).

Beverly bears the burden of proving respondent wrong.    Rule

142(a);   Welch v. Helvering, supra.

     We hold that Beverly has not met the burden of proof, and we

sustain respondent's determination on the applicability of this

addition to tax.    The amount of this addition to tax is left to

be computed under Rule 155.

     We have considered all arguments made by the parties for

contrary holdings and, to the extent not discussed above, find

them to be irrelevant or merit.

     To reflect the foregoing,

                                           Decisions will be entered

                                      under Rule 155.
