                        T.C. Memo. 1998-121



                      UNITED STATES TAX COURT



                  BOBBY E. WELCH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


       BOBBY E. WELCH AND KATHLEEN NEWMAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket Nos. 23725-95, 24065-95.          Filed March 30, 1998.



     Wayne Hagendorf, for petitioners.

     Steven M. Roth, for respondent.


                        MEMORANDUM OPINION



     WRIGHT, Judge:   In these consolidated cases respondent

determined deficiencies, additions to tax, and penalties in

petitioners' Federal income taxes as follows:
                                   - 2 -

Bobby E. Welch, docket No. 23725-95

                                    Additions to Tax
Year Deficiency Sec. 6651(a) Sec. 6653(a)(1) Sec. 6653(a)(1)(A) Sec. 6661(a)

1986   $173,118   $43,517       ---               $8,703            $10,107
1987     27,070     6,860       ---                1,372              5,722
1988     25,958     6,564      $1,313               ---               4,952


       All 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.

       Pursuant to section 6653(a)(1)(B) respondent also determined

additions to tax for 1986 and 1987 in amounts equal to 50 percent

of the interest due on the respective deficiencies.

Bobby E. Welch & Kathleen Newman, docket No. 24065-95

                            Additions to Tax          Penalties
Year    Deficiency            Sec. 6651(a)           Sec. 6662(a)

1989    $49,091                 $12,327                    $9,818
1990     74,461                  18,634                    14,892

       The deficiencies result from increases in gross income based

on bank deposit analyses and the disallowances of net operating

loss carryovers.     The primary issues concern those adjustments

and whether petitioners are liable for the additions to tax and

penalties for the years at issue.          Respondent has made some

concessions that will be reflected in the Rule 155 computations.

                      Summary of Background Facts

       Certain facts have been stipulated and are so found.             The

stipulation of facts with attached exhibits is incorporated

herein by this reference.
                                 - 3 -

       Petitioners resided in Glendale, California, at the time the

petitions were filed in these cases.

       During all the years at issue Bobby E. Welch (petitioner)

was engaged in the electrical contracting business and had

several other ill-defined business activities.     On the Federal

income tax returns for these years, petitioner reported the

following on Schedules C and claimed net operating loss (NOL)

carryovers as follows:

Year          Gross Receipts        Net Profit         NOL

1986             $751,169                $7,713      $80,853
1987               79,453                 2,992       71,149
1988               64,647                  (166)      65,455
1989              104,940                 8,665       60,197
1990              179,111                 9,392       51,532


       Petitioner did not keep books and records from which the

gross receipts could be verified.    Respondent performed a bank

deposit analysis for each year.    The following total deposits

were made to various bank accounts controlled by petitioner:


                 Year       Total Bank Deposits

                 1986            $1,105,003
                 1988               150,181
                 1989               269,491
                 1990               422,926

The following table shows the deposit amounts that are still in

dispute:

                 Year       Balance of Deposits
                                in Dispute

                 1986            $352,281
                                 - 4 -

               1988                78,231
               1989               117,865
               1990               165,843


     In October 1987, petitioner claimed that since 1986 he had

made contributions totaling approximately $164,000 to the Church

of Scientology (the church).   On the 1986 Federal income tax

return, petitioner claimed no deduction for these contributions.

On a 1987 return attached to the petition,1 petitioner showed a

$5,787 charitable contribution and a carryover from the prior

year in the amount of $51,010.    On the 1989 return, petitioner

showed a contribution to the church in the amount of $57,998 and

a carryover from the prior year in the amount of $56,797.    On the

1990 return, petitioner showed charitable contributions in the

amount of $74,055 and a carryover from prior years in the amount

of $105,885.

     With respect to the unreported income, the gravamens of

petitioner's arguments are that the balances in dispute were

either loans from Stanley Zurn (Mr. Zurn) in the amounts of

$375,000 in 1986, $70,000 to $75,000 in 1988, $70,000 in 1989,



     1
        The record contains two 1987 tax returns. A copy of one
return was attached to the petition. That return, prepared by
Arthur T. Moore, a certified public accountant, is a joint
return, and shows the charitable contribution and carryover
amounts. The second return is Exhibit 4-D attached to the
stipulation of facts. That return, prepared by William D. Truax,
E.A., Inc., has a filing status of married filing separate and
claims no charitable contribution or carryover. The record is
silent concerning this anomaly.
                               - 5 -

and $180,000 in 1990 or were so-called accommodation deposits2

from Sergio Antonucci (Mr. Antonucci) in the amounts of

$30,000 on January 5, 1989, $7,5003 on March 31, 1989, and $5,000

on May 15, 1989, through an account under the name of Morgan

Stern Group during 1989.

     Mr. Zurn testified that he lent petitioner approximately

$700,000 over the years in question.   With the exception of a

copy of an alleged journal pertaining to funds received from Mr.

Zurn to construct an apartment building, see discussion infra,

there are no documents showing transfers of funds between

petitioner and Mr. Zurn.   During this time petitioner did perform

services for Mr. Zurn and/or Zurn-related activities.

     With regard to the NOL carryovers, petitioner alleges that

he suffered an NOL in 1984 in the amount of $146,058, which,

together with a carryover from prior years in the amount of

$4,907, produced an NOL carryover in the amount of $150,965.

Petitioner introduced a copy of his 1984 return that was

allegedly filed and included, inter alia, a Schedule C reporting




     2
        As we understand it, Mr. Antonucci would allegedly send
money to petitioner's account, and then later petitioner would
pay the money to Mr. Antonucci or have it paid on the latter's
behalf.
     3
        The transcript refers to this amount as $75,000. The
exhibit to which the testimony related shows $7,500 to be the
actual amount.
                               - 6 -

gross receipts in the amount of $737,86 .4   Arthur T. Moore (Mr.

Moore), a certified public accountant, prepared petitioner's 1984

return from information supplied by petitioner and sent the

return to petitioner.   Petitioner has no original books or

records supporting the figures that appear on the copy of the

1984 return.   Petitioner, however, has a work sheet allegedly

prepared in-house showing a trial balance of his business as of

December 30, 1984.   Mr. Moore did not know whether the 1984

return that he prepared was filed, and petitioner did not testify

that he filed the return.   The record does not contain any

information concerning petitioner's 1981, 1982, 1983, and 1985

tax returns.

     Petitioner did not testify as to the date that he filed the

returns for the years at issue.   A copy of the 1986 return shows

that petitioner executed that return on September 26, 1992.    That

return was prepared by "Greenberg & Jackson, CPA'S" (Greenberg

firm).   A copy of the return for 1987 attached to the petition

shows that it was prepared by Mr. Moore and shows a date of

February 20, 1994, whereas a copy of the 1987 return attached to

the stipulation of facts is undated and shows that it was

prepared by "William D. Truax, E.A., Inc." (Truax).   A copy of

the 1988 return indicates that it was prepared on August 19,

1992, by Truax.   Copies of the 1989 and 1990 returns show that

     4
        The copy of this return cuts off the last digit on the
right-hand column of the Schedule C.
                                 - 7 -

they were prepared by Mr. Moore and bear the date of February 20,

1994.   There is no explanation as to the reasons why the tax

returns were not timely filed.    No one from the Greenberg firm or

Truax testified concerning the preparation of the returns for

1986 and 1988.   Mr. Moore testified that he prepared the returns

for 1989 and 1990 from information petitioner gave him.

     During the redirect examination of petitioner, he testified

that in making deposits during 1986, he received "cash back" from

checks that were deposited, and, therefore, he made net deposits.

The total amount of the so-called cash back was $5,713.     In

reconstructing petitioner's 1986 gross income by the bank deposit

method, respondent had used the net deposits shown on the monthly

statements from the bank.   At the close of the testimony

respondent orally moved to amend the answer for the 1986 taxable

year and increase petitioner's gross income by the amount of

$5,713.   The Court took respondent's oral motion and petitioner's

objection thereto under advisement.

                            Discussion

     Petitioner does not dispute the amount of the deposits that

went into his bank accounts as determined by respondent.     Rather,

he contends that the difference between the total deposits and

the gross income reported results from the loans from Mr. Zurn

and the so-called accommodation deposits from Mr. Antonucci.

There is no question that the funds were actually received.      The

only question is whether petitioner has established that the
                               - 8 -

funds in dispute were derived from nontaxable sources.    Rule

142(a); Tokarski v. Commissioner, 87 T.C. 74 (1986); see also

Rockwell v. Commissioner, 512 F.2d 882, 885-887 (9th Cir. 1975).

We turn to an examination of the facts concerning the two alleged

sources of the deposits.

Funds From Mr. Zurn

     Petitioner's relationship with Mr. Zurn may be described as,

to say the least, confusing.   Indeed, there is even confusion as

to when petitioner and Mr. Zurn became associated.    Petitioner

testified that he met Mr. Zurn in 1984.   However, in a prior

trial involving Mr. Zurn's tax liabilities, petitioner testified

that they became associated in 1987, or possibly 1986.    This date

is important because petitioner alleges that he received funds

from Mr. Zurn in 1985 and 1986 to construct an apartment building

(referred to herein as the Montrose property).   Petitioner's

version of the events, however, is questionable in light of a

loan application dated July 14, 1986, in which petitioner stated

that he was receiving monthly rental income from the Montrose

property in the amount of $5,640.   Finally, there is the peculiar

grant deed dated August 2, 1985, purportedly conveying the

Montrose property to Mr. Zurn and a John Nuckols.    Petitioner

testified that at the time he conveyed the property to Messrs.

Zurn and Nuckols, Mr. Zurn had advanced at least $50,000 to
                                 - 9 -

construct the improvements.5    But that is contradicted by

petitioner's alleged journal on the Montrose property showing

that moneys were not spent in any amounts until after August 1,

1985.6    We are faced, therefore, with inconsistencies not only in

petitioner's testimony but also between his testimony and the

documents.

         These are not the only weaknesses in the alleged Welch/Zurn

financial relationship.     There are no indicia of a normal

debtor/creditor relationship supporting petitioner's version of

the facts.     There were no notes, no due dates or payment

schedules, and no stated rate of interest.7    Indeed, at the

trial, while both petitioner and Mr. Zurn testified that



     5
        We have tried in vain to correlate the checks from Mr.
Zurn that were deposited in the Montrose property account with
the expenditures listed on the alleged journal on the Montrose
property.
     6
        Respondent objects to Exhibit 44AR, which was offered as
a record of Mr. Zurn's advances to the Montrose property. The
only reference that may be to Mr. Zurn is an ambiguous notation
on page 2 of Exhibit 44AR that reads "$202.31 - 18 Dec. - 15 shts
3/4 CDX Grossman's - pd by Stan Zurn". We do not accept that
this was a contemporaneous record of funds allegedly borrowed by
petitioner. We do admit the exhibit as a record created by
petitioner, but we have little confidence in the document as
being a record of loans from Mr. Zurn to petitioner.
     7
        Petitioner argues that the interest rate at the beginning
was 6 percent and then was changed to 17.136 percent, as
evidenced by a notation on the alleged journal on the Montrose
property. The reference in the journal reads "Feb. 21, 85 to
B.W. 17.136%." Whatever this may refer to, we do not believe
that it relates to the interest that petitioner was expected to
pay. We note further that petitioner did not claim any deduction
for interest on his 1986 tax return.
                                - 10 -

petitioner was still indebted to Mr. Zurn, neither could give a

definite current balance of the debt.    Furthermore, during the

time that petitioner was allegedly borrowing approximately

$700,000 from Mr. Zurn to keep his businesses going, he also

allegedly gave approximately $300,000 to the church and/or

charities.    While allegedly all of the funds lent in 1986 were

used for the Montrose property, $47,000 from the account to which

the alleged loans from Mr. Zurn were deposited was sent to the

church.    This was at a time when at least Mr. Zurn was under the

impression that "Things were kind of tough [for petitioner]."

     Moreover, there is the matter of the "Community Land & Oil

Corporation Trust Lot 2160" transaction (Lot 2160 transaction) in

1989.    While the facts surrounding the Lot 2160 transaction are

unclear, during 1989 Mr. Zurn issued a check in the amount of

$258,351 to the "Fountain Exchange", which went into an account

that petitioner controlled to purchase Lot 2160, a parcel of real

estate that petitioner owned.    Later Mr. Zurn allegedly

determined that Lot 2160 was not worth the money that he had

paid.    It is unclear exactly what happened next, but it is clear

that petitioner never returned the $258,000.8   It is also strange

that, notwithstanding Mr. Zurn's view that petitioner had sold

him a worthless lot for $258,000, according to their testimonies,

     8
        The Lot 2160 transaction has been before the Court before
in Zurn v. Commissioner, T.C. Memo. 1996-386. In that case we
determined, partly on the basis of this transaction, that Mr.
Zurn had committed tax fraud.
                              - 11 -

Mr. Zurn continued to advance petitioner money without any

security or, indeed, any notes of the debt.

     Finally, we are troubled by Mr. Zurn's lack of specificity

as to the sources of the funds allegedly lent to petitioner.9    In

Zurn v. Commissioner, T.C. Memo. 1996-386, we found that during

1986 and 1987 Mr. Zurn had advanced $677,652 to an entity known

as Cities Development Group, Inc. (Cities).   If petitioner's

version that the 1986 deposits in the amount of $375,000 came

from Mr. Zurn is to be believed, then Mr. Zurn lent over $1

million during this time.   Mr. Zurn's Federal income tax returns

during this period clearly do not reveal the sources of the funds

that gave rise to this benevolent lending.    We recognize that Mr.

Zurn owned various rental properties that could generate cash

that would not reflect taxable income, but even the gross income

from rentals does not explain the source of these funds.    While

Mr. Zurn did sell some property for approximately $104,000, that

and the gross rents are far from the $1 million allegedly lent.

     Taking all the confusion, contradictions, and other

anomalies in Mr. Zurn's and petitioner's testimonies into

account, we do not find it believable that loans from Mr. Zurn

     9
         Mr. Zurn testified that

           The source would have been previous monies that I
           had, it would have been real estate money, it
           would have been any property that was sold, it
           would have been borrowed money, it would have been
           family money, what--what I had, you know, the
           different sources.
                              - 12 -

were the source of petitioner's unexplained deposits for any of

the years in question.   Even accepting the alleged unusual

business habits of both, we cannot accept that some $700,000 in

loans exchanged hands.   It is clear that funds did flow between

Mr. Zurn and petitioner, but it is also clear that petitioner

performed services for Mr. Zurn.   We do not know the reasons for

many of the transfers.   At least in the case of the funds

involved on the so-called Lot 2160 transaction, while we do not

know details of the transaction, it certainly appears that from

petitioner's position some type of taxable transaction took place

and that transaction was not reported on petitioner's tax return.

While it may be that Mr. Zurn did lend petitioner money, the

paucity of records of both Mr. Zurn and petitioner makes it

impossible to separate the possible wheat from the definite chaff

in the transfers of funds between the two.   Accordingly, we

sustain respondent's determinations based on the bank deposit

analyses for all the years at issue.10

The Accommodation Deposits

     During 1987 through 1989, Mr. Zurn and petitioner were

engaged in some type of an alleged export activity under the name


     10
        There are other peculiarities. For example, the gross
income on petitioner's 1986 Schedule C reflects $751,169 and a
net profit of $7,713. In an income statement prepared by Mr.
Moore for the first 9 months of 1986, petitioner's gross income
was shown to be $853,122 with a net profit of $108,058. While
Mr. Moore prepared the income statement, he did not prepare the
1986 tax return.
                               - 13 -

of Star Global.    Star Global had been owned by either Paul Tallis

(Mr. Tallis) or Mr. Tallis and petitioner.    Sometime between the

end of 1987 and the beginning of 1989, Mr. Tallis sold Star

Global to Mr. Zurn.    Mr. Tallis remained with Star Global until

January 1989.    After he acquired an interest in Star Global, Mr.

Zurn did not have signatory authority over Star Global's bank

account.   Petitioner and his wife had that authority and used the

account as their account.   At some point, petitioner became

acquainted with Mr. Antonucci.    Mr. Antonucci did not testify,

and there was no explanation as to the reason that he was

unavailable.    Mr. Tallis testified that "He [Mr. Antonucci]

basically was--he ostensibly was there to show us how to do

things like trusts, et cetera.    He was quite a flashy guy.    He's

have [sic] a Rolls Royce and--and he'd run his money through our

accounts because he--that's what he wanted to do".    There are no

documents that connect Mr. Antonucci with any deposits to or

subsequent withdrawals from the Star Global bank account.      Mr.

Tallis, however, could identify one wire transfer deposit made on

January 5, 1989, in the amount of $30,000 and a withdrawal in the

amount of $30,000 made on January 9, 1989, from Mr. Antonucci.11



     11
        At first Mr. Tallis identified several other deposits
and withdrawals as being part of Mr. Antonucci's transactions.
These transactions, however, took place after Mr. Tallis had left
Star Global. Petitioner testified that $14,500 was from Mr.
Antonucci. We have been unable to identify either the deposit or
a withdrawal.
                               - 14 -

       In considering both the deposits from purported loans and

the accommodation deposits, we are left with the decided

impression that petitioner is engaged in a shell game.      We have

no confidence in petitioner's testimony.      Nonetheless, we do

accept Mr. Tallis' testimony that the deposit of January 5, 1989,

in the amount of $30,000 was not income to petitioner.      None of

the other alleged accommodation deposits were verified by another

party, nor is there a clear trail of a withdrawal of the funds.

With the exception of the $30,000 January 5, 1989, deposit, we

reject petitioner's argument concerning the accommodation

deposits.

Increased Income and Deficiency--1986

       At the close of the evidence respondent orally moved to

amend the answer to conform to the evidence and to increase the

deficiency by the tax on $5,713 for 1986.      Petitioner objects to

the amendment.    We agree with respondent.    See Rule 41(b)(1) and

(2).    The evidence underlying respondent's motion was introduced

by petitioner on redirect examination for petitioner's own

reasons.    Petitioner's testimony, however, is a double-edge

sword, a cut from which petitioner now seeks to avoid.      In this

regard, petitioner does not dispute that the amount involved was

not included in respondent's bank deposit analysis, nor does he

disavow his testimony that he received cash from the items

deposited.
                              - 15 -

     Rather, petitioner argues that respondent should be

precluded by the stipulation from raising the issue.     In

paragraph 6 the parties stipulated that for 1986 the total

deposits were $1,105,003.   In paragraph 9 the parties stipulated

that the "unexplained deposits which remain at issue" for 1986

were $352,281.   The problem with petitioner's position is that we

are not concerned here with unexplained deposits.    To the

contrary, the amount in question admittedly was not deposited,

and respondent is not attempting to change the amount of deposits

which were the subject of the stipulation.12   Nor do we find

convincing petitioner's argument that he was surprised.       It was

petitioner who brought the subject up during his testimony.

     We recognize that any time there is an amendment to a

pleading that either increases or decreases a deficiency, there

is a pecuniary prejudice to the other party.   But that is not the

prejudice we are concerned with here.   Rather we are concerned

with whether petitioner was unfairly prejudiced in presenting his

case, and we do not find that type of prejudice.    Thus, we will

allow respondent to amend the answer in docket No. 23725-95 to

increase the deficiency for 1986 by the tax on $5,713.

     We next turn to the question whether petitioner had

unreported income during 1986 in the amount of $5,713.    Since


     12
        Petitioner appears to argue that the parties stipulated
the amount of the deficiency for 1986. If, indeed, that were the
case, we are unsure of the reason for a 2-day trial.
                              - 16 -

this would lead to an increased deficiency, respondent has the

burden of proof.   Rule 142(a).   As mentioned, petitioner does not

contend that this amount was deposited and not included in

respondent's bank deposit analysis.    Petitioner argues in his

brief that "the cash was reported on his income tax returns."

Petitioner's testimony was as follows:

     Q: Did you report these monies as income * * * on your
     tax returns?

     A: I always had a cash item--you know--a cash amount
     that would be put in * * * because that was pretty
     visible, and that was part of the record. On those
     particular ones, though, I had discussed that with Mr.
     Shors [the revenue agent who audited petitioners'
     returns] and he said that he wasn't asking for those,
     nor would that become part of--or be part of this
     procedure and trial.

We are somewhat unsure as to the meaning of this testimony.    The

Greenberg firm prepared the 1986 return.    There are no documents

that indicate that petitioner included the cash in the income

figures that he gave the Greenberg firm to prepare that return.

More important, even if he did include cash on his reported gross

receipts, the fact is that his total gross income from the bank

deposits was $5,713 greater than the total upon which

respondent's calculation was made.

     With regard to the part of the testimony referring to Mr.

Shors, during the audit examination Mr. Shors took the total

deposits from the monthly bank statements and not from the

deposit slips.   Even if Mr. Shors made some comment during the

audit to the effect that he was not concerned with so-called
                              - 17 -

cash-back deposits, which we doubt, respondent would not be

precluded from raising the issue, especially when he relies on

petitioner's own testimony.

     In sum, we hold that respondent may amend the answer to

raise the issue.   Furthermore, the evidence clearly established

that the gross receipts from the bank deposit analysis for 1986

were understated by $5,713.

Net Operating Loss (NOL) Carryover from 1984

     Petitioner contends that he is entitled to deductions for

the taxable years after 1985 for NOL carryovers from the 1984

taxable year.   Section 172(a) allows a deduction for an NOL

carryover to a taxable year plus an NOL carryback to that year.

For the years before the Court, an NOL would be carried back for

3 years and carried over for 15 years.13   A taxpayer can,

however, elect to relinquish the carryback period.   Such an

election must be made by the due date for filing the taxpayer's

return for the taxable year of the NOL for which the election is

to be in effect, in a manner prescribed by the Secretary.    Sec.

172(b)(3)(C).   Such an election:



          shall be made by a statement attached to the
          return (or amended return) for the taxable

     13
        Before 1986, an NOL could be carried over for 5 years.
Sec. 172(b)(1)(B). Sec. 1009(c)(3) of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3342, 3449, extended the carryover period for NOL's for losses
occurring after Dec. 31, 1975, to 15 years.
                              - 18 -

          year. The statement required * * * shall
          indicate the section under which the election
          is being made and shall set forth information
          to identify the election, the period for
          which it applies, and the taxpayer's basis or
          entitlement for making the election.


Sec. 301.9100-12T(d), Temporary Proced. & Admin. Regs., 57 Fed.

Reg. 43893 (Sept. 23, 1992) (redesignating sec. 7.0, Temporary

Income Tax Regs., 42 Fed. Reg. 1469 (Jan. 7, 1977) ("Various

elections under the Tax Reform Act of 1976")).

     Petitioner must first establish that he suffered an NOL for

the taxable year 1984.   To meet this burden petitioner relies on

a purported retained copy of his 1984 return that was prepared by

Mr. Moore.   That return shows an NOL from petitioner's sole

proprietorship "Bob Welch Electric" in the amount of $146,058 and

an NOL carryforward in the amount of $4,907.   Respondent has no

record of the return's being filed and disputes the amount of the

NOL claimed.   For the purpose of discussion only, we are willing

to assume that the return was timely filed and accurately

reflects the loss.   Petitioner, however, still faces the problem

that there is no statement attached to the return identifying

that an election has been made.   Indeed, there is no evidence

that any election to relinquish the carryback was ever made.

Thus, under the general rule, the 1984 NOL would be carried back

to the 1981, 1982, and 1983 taxable years and carried forward to

the 1985 taxable year before it would be carried forward to any

of the years before the Court.    There is nothing in this record
                               - 19 -

that provides any basis from which we could determine the amount

of the 1984 NOL that was absorbed in the years before 1986, the

earliest year before the Court.   Accordingly, petitioner has not

shown that he is entitled to deductions under section 172 for any

of the years before the Court.

Additions to Tax and Penalties

     Respondent determined additions to tax for failure to timely

file returns under section 6651(a) for all the years at issue;

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

(B) for 1986 and 1987; an addition to tax for negligence under

section 6653(a)(1) for 1988; additions to tax for substantial

understatements under section 6661(a) for 1986, 1987, and 1988;

and accuracy-related penalties for negligence under section

6662(a) for 1989 and 1990.

     Section 6651(a) imposes an addition to tax for failure to

timely file returns "unless it is shown that such failure is due

to reasonable cause and not due to willful neglect".   Sec.

6651(a)(1).   Reasonable cause "calls on the taxpayer to

demonstrate that he exercised 'ordinary business care and

prudence' but nevertheless was 'unable to file the return within

the prescribed time.'"    United States v. Boyle, 469 U.S. 241, 246

(1985) (quoting 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.

It is undisputed that the returns for the taxable years 1986
                               - 20 -

through 1990 were not timely filed.     Furthermore, there is

nothing in this record that would even remotely indicate that

these failures were due to reasonable cause and not due to

willful neglect.    Therefore, we sustain respondent's

determinations with respect to the additions to tax under section

6651(a) for all the years at issue.

     Sections 6653(a) and 6662(a) impose additions to tax and

penalties for negligence or disregard of rules or regulations.

If any part of the underpayment is due to negligence, under

section 6653(a)(1) the addition to tax is equal to 5 percent of

the amount of the underpayment.    Under section 6662(a) the

accuracy-related penalty is equal to 20 percent of the portion of

the underpayment due to negligence.     It is clear that petitioner

is liable for these additions to tax and accuracy-related

penalties.    Under section 6001 a taxpayer is required to keep

records.   As far as we can determine, petitioner kept no records

from which his (taxable) income could be determined.     While

petitioner used accounting firms to prepare his returns, as far

as Mr. Moore was concerned, petitioner supplied the information

in summary fashion.    None of the other return preparers

testified.    With respect to petitioner's gross income, the

information was greatly understated.     Furthermore, with regard to

the accuracy-related penalties, the entire underpayment for each

of the taxable years 1989 and 1990 was attributable to

negligence.    We sustain respondent's determinations with respect
                                - 21 -

to the additions to tax under section 6653(a) for 1986, 1987, and

1988 and the penalties under section 6662(a) for 1989 and 1990.

     Section 6661(a) provides that "If there is a substantial

understatement of income tax for any taxable year, there shall be

added to the tax an amount equal to 25 percent of the amount of

any underpayment attributable to such understatement."    See also

Pallottini v. Commissioner, 90 T.C. 498 (1988).    There is a

substantial understatement if the amount of the understatement

exceeds the greater of $5,000 or 10 percent of the tax required

to be shown on the return.   Sec. 6661(b)(1)(A).   The amount of

the understatement shall be reduced if there is substantial

authority for the tax treatment of any item or there is

disclosure of the relevant facts affecting the item's tax

treatment.   Sec. 6661(b)(2)(B).   The understatements of tax here

essentially result from unreported income and the disallowed NOL

carryovers, and are substantial under section 6661(b)(1).    There

was no substantial authority for either position taken, nor was

there adequate disclosure of the relevant facts.    Therefore, we

sustain respondent's determinations with respect to the additions

to tax under section 6661(a) for 1986, 1987, and 1988.

Tax on Self-Employment Income

     Section 1401(a) imposes a tax "on the self-employment income

of every individual".   As we understand it, petitioner does not

dispute that he is liable for the tax.   Rather, he contends that

his self-employment income should not be increased by the
                               - 22 -

disputed unreported income.    His arguments, therefore, are

essentially that he had no unreported income.    We have rejected

those arguments, and the increased tax on self-employment income

follows from that rejection.

     To reflect the foregoing,



                                        An order will be issued

                                 granting respondent's motion to

                                 amend the answer in docket No.

                                 23725-95 and decisions will be

                                 entered under Rule 155.
