                          108 T.C. No. 17



                     UNITED STATES TAX COURT



      ROBERT A. STANFORD AND SUSAN STANFORD, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 103-94.                     Filed April 29, 1997.



               Held: For 1990, (1) subpart F income of
          a controlled foreign corporation may not be
          reduced by deficits in earnings and profits
          of a controlled foreign sister corporation;
          and (2) on the particular facts of this case,
          subpart F income of a controlled foreign
          corporation may not be reduced by deficits in
          earnings and profits of a controlled foreign
          parent corporation.


     Salvador E. Rodriguez and Maxime Louis Bouthillette, for

petitioners.

     Lillian D. Brigman and Susan Sample, for respondent.
                               - 2 -

     SWIFT, Judge:   Respondent determined a deficiency in, an

addition to tax on, and an accuracy-related penalty on

petitioners' 1990 joint Federal income tax as follows:


                                         Accuracy-Related
                     Addition to Tax         Penalty
     Deficiency      Sec. 6651(a)(1)       Sec. 6662(a)

      $423,531          $101,585             $84,706


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for 1990, and all Rule

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

All references to petitioner are to Robert A. Stanford.

      The issues for decision are whether subpart F income of a

controlled foreign corporation may be reduced by deficits in

earnings and profits of a controlled foreign sister corporation

and whether subpart F income of a controlled foreign corporation

may be reduced by deficits in earnings and profits of a

controlled foreign parent corporation.


                         FINDINGS OF FACT

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

During the year in issue, petitioners were U.S. citizens and

resided in Houston, Texas.

     In the mid-1980's, favorable laws in the crown colony of

Montserrat, British West Indies, made it relatively easy and

profitable for individuals to establish and to operate private
                               - 3 -

banks and related companies in Montserrat.

      Under the laws of Montserrat, petitioner in 1985, 1986, and

1987, respectively, formed Guardian International Bank Ltd.

(Guardian Bank), Guardian International Investment Services Ltd.

(Guardian Services), and Stanford Financial Group Inc. (Stanford

Financial), as controlled foreign corporations for the purposes

of engaging in offshore banking and other activities.

     By 1990, petitioner owned 95 percent of the shares of stock

in Stanford Financial.   Stanford Financial, in turn, owned nearly

100 percent of the shares of stock in Guardian Bank and Guardian

Services.   Thus, by 1990, Guardian Bank and Guardian Services

were brother/sister subsidiary corporations owned by Stanford

Financial as the parent corporation.

     More specifically, on December 12, 1985, petitioner formed

Guardian Bank as a Montserrat corporation for the purpose of

engaging in certain offshore banking activities.   Upon its

formation, petitioner and petitioner’s father each owned 50

percent of the shares of stock in Guardian Bank.

     In its articles of association or charter, Guardian Bank's

stated business purpose to engage in the business of banking was

defined broadly and included administrative, management, and

marketing functions relating to the business of banking, as

follows:


     (1) To carry on the business of Banking in all its branches
     and to transact and do all matters and things incidental
                              - 4 -

     thereto, or which may at any time hereafter, at any place
     where the company shall carry on business, be usual in
     connection with the business of banking or dealing in money
     or security for money.

                          * * * * * * *

     (8) To act as agents for the sale and purchase of any
     stocks, shares or securities, or for any other monetary or
     mercantile transaction.

                          * * * * * * *

     (12) To contract for public and private loans, and to
     negotiate and issue the same.

                          * * * * * * *

     (24) To act as managing agents for other bodies or persons,
     whether corporate or not, to conduct enterprises and manage
     ventures of all types on their behalf.

     (25) To carry on any other business which may seem to * * *
     [Guardian Bank] capable of being conveniently carried on in
     connection with any business of * * * [Guardian Bank] or
     calculated directly to enhance the value of or render more
     profitable any of * * * [Guardian Bank’s] property or
     assets.

                          * * * * * * *

     (41) To do all such other things which are incidental or
     * * * [that Guardian Bank] may think conducive to the
     attainment of the above objects or any of them.


     In January of 1986, Guardian Bank obtained a banking license

required under the laws of Montserrat authorizing it to engage in

business as an offshore investment or agency bank.   Guardian Bank

itself did not accept cash deposits from customers, nor did it

maintain for its customers savings or checking accounts.   When

Guardian Bank’s customers desired to deposit funds with a bank in

Montserrat, the funds would be transferred in the customers'
                                 - 5 -

names to bank accounts with commercial banks in Montserrat with

which Guardian Bank maintained correspondent relationships.

     On October 16, 1986, petitioner formed Guardian Services as

a Montserrat corporation for the stated purpose, as indicated in

its articles of association or charter, of engaging primarily in

real estate transactions and real estate development.

     The charter of Guardian Services makes no mention of

Guardian Bank or of Stanford Financial.

     Under a written service agreement between Guardian Bank and

Guardian Services, Guardian Services provided marketing and

advertising services to Guardian Bank.    The service agreement

does not indicate that Guardian Services was to act as a nominee

of or agent for Guardian Bank.    The service agreement specified

only that Guardian Services would perform routine marketing

activities, such as the dissemination of information regarding

Guardian Bank's activities.   Nowhere in the service agreement is

Guardian Services granted the authority to act in the name of or

for the account of, or to bind by its actions, Guardian Bank.

Guardian Services held itself out to the public as a separate

affiliate of Guardian Bank, and when asked by customers of

Guardian Bank for financial statements, Guardian Services

presented its own financial statements to the customers, not the

financial statements of Guardian Bank.

     On February 3, 1987, Stanford Financial was incorporated as

a Montserrat corporation.   Upon incorporation of Stanford
                               - 6 -

Financial, substantially all of the shares of stock in Guardian

Bank and in Guardian Services were transferred to Stanford

Financial, and, as explained, Guardian Bank and Guardian Services

became related to each other as brother/sister corporations with

Stanford Financial as the parent corporation.

     In its articles of association or charter, Stanford

Financial's stated purpose was to act as a holding company and to

provide administrative and management services, as follows:


     (1) (a) To carry on the business of a Holding Company
     and to undertake and transact all kinds of agency
     business.

                           * * * * * * *

     (3) To take part in the formation, management,
     supervision or control of the business or operations of
     any company or undertaking, and for that purpose to
     appoint and remunerate any directors, accountants, or
     other experts or agents.

                          * * * * * * *

     (5) To act as managers or to direct the management of
     any * * * businesses or of any corporations or firms or
     on behalf of any person carrying on any * * *
     businesses and to act as directors of any company or as
     members of the boards of management of any corporations
     carrying on any such businesses.


Stanford Financial's articles of association or charter also

authorized Stanford Financial to engage in the business of

banking.   There is no reference in Stanford Financial's charter

to Guardian Bank or to Guardian Services.

     During 1989 and 1990, pursuant to a service agreement that
                                 - 7 -

allegedly existed between Guardian Bank and Stanford Financial,

Stanford Financial provided administrative and management

services to Guardian Bank.    Stanford Financial provided no

services to any other company.

     Guardian Bank, Guardian Services, and Stanford Financial

shared an office in Montserrat.    Also, Guardian Bank maintained

an administrative office in Mexia, Texas, and a representative

office in Houston, Texas.    Guardian Services maintained a

representative office in Miami, Florida, and Stanford Financial

maintained a representative office in Mexia, Texas.

     A separate set of books and records was maintained for each

of Guardian Bank, Guardian Services, and Stanford Financial.

     Under Montserrat law, neither Guardian Services nor Stanford

Financial obtained banking licenses, and therefore neither

presumedly was permitted to engage directly in banking activity

on behalf of Guardian Bank.

     Because some banks in Montserrat engaged in disreputable

banking practices, in the late 1980's, the Montserrat Government

began considering and adopting policies and legislation

restricting the activity of foreign owned banks in Montserrat.

Specifically, the Montserrat Government began considering

legislation that would preclude direct ownership of banks by

foreign individuals and that would restrict direct marketing by

or on behalf of foreign owned banks that were based in

Montserrat.
                               - 8 -

     Actual legislation in Montserrat, however, restricting

activity of foreign owned banks and precluding ownership in

Montserrat of banks by foreign individuals was not enacted until

1991.

     In September of 1989, Hurricane Hugo struck Montserrat

bringing with it 200-mile-an-hour winds that destroyed much of

the island, including the shared office in Montserrat of Guardian

Bank, Guardian Services, and Stanford Financial.   All of the

furniture in the office was destroyed, including a safe

containing records of Guardian Bank, Guardian Services, and

Stanford Financial.

     On October 25, 1990, petitioners filed their 1989 joint

Federal income tax return.

     On March 18, 1991, petitioner filed a 1990 corporate Federal

income tax return of Stanford Financial (Form 1120F), and on

September 19, 1991, pursuant to automatic 6-month extensions of

time for filing, petitioner filed 1990 corporate Federal income

tax returns of Guardian Bank and of Guardian Services (Forms

1120F).

     Petitioners requested and apparently received an automatic

extension of time to file until August 15, 1991, their 1990 joint

Federal income tax return.   The evidence does not indicate when

petitioners mailed to respondent their 1990 joint Federal income

tax return.   Although petitioners apparently signed their 1990

joint Federal income tax return on November 5, 1991, respondent
                                  - 9 -

did not receive this return, along with a further extension

request, until February 28, 1992.

     On their 1990 joint Federal income tax return, petitioners

reported subpart F income of, among other entities, Guardian Bank

and deficits in the earnings and profits of Guardian Services and

Stanford Financial, as follows:


                                                    Deficits In
                             Subpart F Income   Earnings & Profits

Guardian Bank                   $2,789,722            ---
Guardian Services                   ---          ($1,251,891)
Stanford Financial                  ---          ($ 154,474)

                     Total     $2,789,722        ($1,406,365)


     As indirect owners of Guardian Bank and as required under

section 951, petitioners reported on their 1990 joint Federal

income tax return the above $2,789,722 subpart F income of

Guardian Bank.   On their 1990 joint Federal income tax return,

petitioners also reduced this subpart F income of Guardian Bank

by the above $1,406,365 total deficits in the 1990 earnings and

profits of Guardian Services and of Stanford Financial.

     On their 1990 joint Federal income tax return, petitioners

also reported a $615,890 net operating loss carryforward

deduction from 1989, which net operating loss arose, in part,

from petitioners’ reduction of reported 1989 $580,483 subpart F

income of Guardian Bank by reported $385,386 total deficits in

1989 earnings and profits of Guardian Services and of Stanford

Financial.
                               - 10 -

     On audit, respondent disallowed petitioners' use for 1990 of

the $1,406,365 total deficits in earnings and profits of Guardian

Services and of Stanford Financial to reduce the $2,789,722

subpart F income of Guardian Bank.

     Respondent also reduced the $615,890 net operating loss that

petitioners carried forward from 1989 based on the disallowance

of petitioners' use of the $385,386 total 1989 deficits in

earnings and profits of Guardian Services and Stanford Financial

to reduce the 1989 $580,483 subpart F income of Guardian Bank.

     For 1990, respondent determined against petitioners a late

filing addition to tax under section 6651(a)(1) and an accuracy-

related penalty under section 6662(a).


                               OPINION

     Under subpart F of the Code, certain income (subpart F

income) of U.S. controlled foreign corporations (CFC's) is to be

included in income of U.S. shareholders of the CFC's regardless

of whether the CFC's income is distributed currently to the U.S.

shareholders.   Sec. 951(a).

     Under section 952(d), as applicable through 1986, U.S.

shareholders with subpart F income were permitted to reduce

subpart F income of profitable CFC's by deficits in earnings and

profits of unprofitable CFC's that were part of a chain of

controlled foreign corporations.   This rule was referred to as

the "chain deficit rule".   As applicable through 1986, deficits
                                - 11 -

in earnings and profits of CFC’s could be used to reduce subpart

F income of U.S. shareholders regardless of the manner by which

the profitable and the unprofitable CFC's were related to each

other within the chain (i.e., regardless of whether the

profitable and the unprofitable CFC's had a parent/subsidiary or

a brother/sister relationship).     Also, deficits in earnings and

profits of CFC’s could be used to reduce subpart F income of U.S.

    shareholders regardless of whether the various CFC’s within the

chain were engaged in similar or related business activity.1

        In 1986, section 952(d) was repealed, effective for any year

ending after 1986.     Tax Reform Act of 1986, Pub. L. 99-514, sec.

1
     Sec. 952(d), as applicable through 1986, provided, in part,
as follows:

             (d) Special Rule in Case of Indirect Ownership.--For
        purposes of subsection (c) [limitation on Subpart F income],
        if--

                  (1) a United States shareholder owns * * *
             [directly or indirectly] stock of a foreign
             corporation, and by reason of such ownership owns * * *
             [directly or indirectly] stock of any other foreign
             corporation, and

                  (2) any of such foreign corporations has a deficit
             in earnings and profits for the taxable year,

        then the earnings and profits for the taxable year of each
        such foreign corporation which is a controlled foreign
        corporation shall, with respect to such United States
        shareholder, be properly reduced to take into account any
        deficit described in paragraph (2) in such manner as the
        Secretary shall prescribe by regulations.

See also sec. 1.952-1(d)(2), Income Tax Regs., as in effect
through 1986.
                              - 12 -

1221(f), 100 Stat. 2554.   The repeal was based generally on

Congress' belief that the chain deficit rule in section 952(d)

allowed U.S. taxpayers to shelter through CFC's excessive amounts

of tax haven income from current U.S. tax.   See H. Conf. Rept.

99-841, at 621-626 (1986), 1986-3 C.B. (Vol. 4) 473, 621-626.

     In 1988, a new and revised chain deficit rule was enacted,

retroactive to any year ending after 1986.   Sec. 952(c)(1)(C);

Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L.

100-647, sec. 1012(i)(25)(A), 102 Stat. 3512.   The TAMRA version

of the chain deficit rule is the rule that governs in this case

for 1990.   The chain deficit rule, as enacted in 1988, provided

new restrictions on the use of deficits in earnings and profits

of CFC's to reduce subpart F income of profitable CFC's owned by

U.S. shareholders.

     In particular, under TAMRA, the new chain deficit rule

provides that, in order to reduce subpart F income of profitable

CFC's by deficits in earnings and profits of unprofitable CFC's,

the profitable and unprofitable CFC's must satisfy a new

"qualified chain member" rule and subpart F income of the

profitable CFC's must be attributable to the same qualified

activity to which deficits in earnings and profits of the

unprofitable CFC's are attributable.   Sec. 952(c)(1)(B) and (C).

     CFC's constitute qualified chain members under section

952(c)(1)(C) only where the CFC's are related to each other

directly or indirectly through a single, straight-line chain of
                             - 13 -

corporations, as in a parent-subsidiary relationship and not

where the CFC's are related to each other through a common

parent, as in a brother-sister relationship.   Section

952(c)(1)(C) provides, in part, as follows--


          (C) Certain deficits of member of the same chain of
     corporations may be taken into account.--

               (i) In general.--A controlled foreign corporation
          may elect to reduce the amount of its subpart F income
          for any taxable year which is attributable to any
          qualified activity by the amount of any deficit in
          earnings and profits of a qualified chain member for a
          taxable year ending with (or within) the taxable year
          of such controlled foreign corporation to the extent
          such deficit is attributable to such activity. * * *

               (ii) Qualified chain member.--For purposes of this
          subparagraph, the term "qualified chain member" means,
          with respect to any controlled foreign corporation, any
          other corporation which is created or organized under
          the laws of the same foreign country as the controlled
          foreign corporation but only if--

                    (I) all the stock of such other corporation
               * * * is owned at all times during the taxable
               year in which the deficit arose (directly or
               through 1 or more corporations other than the
               common parent) by such controlled foreign
               corporation * * * [or vice versa]. [Emphasis
               added.]


     With regard to the "same qualified activity" requirement of

the TAMRA chain deficit rule, the business activity of the

profitable and the unprofitable CFC's must arise from one of the

same specified types of activity listed in section

952(c)(1)(B)(iii), as follows:
                               - 14 -

               (iii) Qualified activity.--For purposes of this
          paragraph, the term "qualified activity" means any
          activity giving rise to--

                      (I) foreign base company shipping income,

                      (II) foreign base company oil related income,

                      (III) foreign base company sales income,

                      (IV) foreign base company services income,

                    (V) in the case of a qualified insurance
               company, insurance income or foreign personal
               holding company income, or

                    (VI) in the case of a qualified financial
               institution, foreign personal holding company
               income.


     In summary, as the TAMRA chain deficit rule applies for

1990, subpart F income of profitable CFC's may only be reduced by

deficits in earnings and profits of unprofitable CFC's if each of

the CFC's is part of a "qualified chain" and if the subpart F

income of the profitable CFC's and the deficits in the earnings

and profits of the unprofitable CFC's relate to the same

qualified activity.

     We first address the legal issue of whether Guardian Bank

and Guardian Services, as brother/sister corporations, qualify

under the TAMRA chain deficit rule as members of the same

qualified chain.   Respondent contends that Guardian Bank and

Guardian Services do not qualify as qualified chain members

because petitioner's ownership interest in Guardian Bank and

Guardian Services runs through a common parent corporation
                                - 15 -

(namely, Stanford Financial), which relationship, respondent

argues, is expressly excluded from the definition of a qualified

chain.

     Petitioners' argument that Guardian Bank and Guardian

Services qualify under the chain benefit rule of section

952(c)(1)(C) turns largely on one word in section

952(c)(1)(C)(ii).   As indicated above, the cited statutory

language makes reference to "the" common parent, and petitioners

argue that the language "the" common parent should be construed

to mean "the U.S. shareholders", not the foreign parent

corporation (namely, not Stanford Financial).

     Petitioners also rely on Treasury regulations applicable to

the prior version of section 952, and thus applicable through the

end of 1986, that have never been declared obsolete and that

permitted the use of deficits in the earnings and profits of

CFC's to reduce subpart F income of sister CFC's.

     We believe the statutory language to be clear.   In the

instant case, Guardian Bank and Guardian Services are related to

each other as brother/sister corporations only through Stanford

Financial, the common parent.    Consequently, Guardian Services

does not constitute a "qualified chain member" with respect to

Guardian Bank, and petitioners are not permitted to use deficits

in earnings and profits of Guardian Services to reduce subpart F

income of Guardian Bank.
                              - 16 -

     The portion of the regulations on which petitioners rely

(namely, sec. 1.952-1(d)(2)(ii), Income Tax Regs.) and which is

inconsistent with section 952(c)(1)(C)(ii), as amended in 1988

and as applicable to 1990, is not applicable to years such as

1990 for which the new TAMRA chain deficit rule is applicable.

This portion of the regulations construes the prior law and has

not been amended to take account of the new chain deficit rule.

The statutory language of section 952(c)(1)(C) expressly

disqualifies as “qualified chain members” CFC’s that are related

to each other through a common parent corporation (i.e., that are

related as brother/sister corporations).

     With regard to deficits in earnings and profits of Stanford

Financial, respondent acknowledges that Guardian Bank and

Stanford Financial, as subsidiary/parent corporations, qualify as

members of a "qualified chain" under section 952(c)(1)(C)(ii), as

enacted by TAMRA and as applicable to 1990.   Respondent also

acknowledges that the subpart F income of Guardian Bank

constitutes foreign personal holding company income and that

Guardian Bank constitutes a qualified financial institution

because Guardian Bank was actively engaged in the activity of

banking and financing under section 952(c)(1)(B)(iii)(VI) and

952(c)(1)(B)(vi).   Respondent argues, however, that Stanford

Financial was not also engaged in the banking, financing, or

similar business, but in the management business.
                               - 17 -

     Section 1.864-4(c)(5)(i), Income Tax Regs., dealing with

foreign sources of income, describes those activities that are

indicative of banking, financing, and similar businesses, as

follows:


     (i) Definition of banking, financing, or similar business.--

                            * * * * * * *

           (a)   Receiving deposits of funds from the public,

          (b) Making personal, mortgage, industrial, or other
loans to the public,

          (c) Purchasing, selling, discounting, or negotiating
for the public on a regular basis, notes, drafts, checks,
bills of exchange, acceptances, or other evidences of
indebtedness,

          (d) Issuing letters of credit to the public and
negotiating drafts drawn thereunder,

           (e)   Providing trust services for the public, or

          (f) Financing foreign exchange transactions for the
public.
The above description of the business of banking and finance --

originally contained in the foreign tax credit regulations of

section 904 (sec. 1.904-4(c)(1), Income Tax Regs.) -- applies

generally to CFC’s for purposes of the “same or similar activity”

requirement of the TAMRA section 952 chain deficit rule.    See S.

Rept. 100-445, at 275-276 (1988).

     Petitioners argue, among other things, that employees of

Stanford Financial were involved on behalf of Guardian Bank, in

bank management, the filing of bank regulatory compliance

reports, and other duties incidental, necessary, and similar to
                               - 18 -

the banking activity of Guardian Bank.

     The credible evidence before us, however, is sparse and

establishes only that Stanford Financial performed administrative

and management support services for Guardian Bank.   It does not

establish that Stanford Financial engaged in any banking or

financing activity described in section 1.864-4(c)(5)(i), Income

Tax Regs.   Administrative and management services of the

generalized type conducted by Stanford Financial do not qualify

as banking or financing activity for this purpose.   Stanford

Financial did not have a banking license.

     Petitioners also argue that Stanford Financial provided

services to Guardian Bank "similar" to the business of banking.

We are not persuaded on this record that the administrative and

management services performed by Stanford Financial for Guardian

Bank qualify as activities similar to those of a banking or

financing business.

     The manner by which petitioner structured the ownership

relationship between Guardian Bank, Guardian Services, and

Stanford Financial, as petitioners allege, may have related to

anticipated changes in the laws of Montserrat relating to

banking.    On the evidence before us, however, anticipated changes

in Montserrat law do not provide a sufficient basis to ignore

differences between the banking activity of Guardian Bank and the

administrative and management activities of Stanford Financial.

     We conclude that Stanford Financial was not engaged in a
                              - 19 -

banking, financing, or similar business and therefore that the

subpart F income of Guardian Bank may not be reduced by deficits

in the earnings and profits of its parent corporation, Stanford

Financial.

     In the alternative, petitioners cite Commissioner v.

Bollinger, 485 U.S. 340 (1988), and National Carbide Corp. v.

Commissioner, 336 U.S. 422 (1949), and petitioners argue that

Guardian Services and Stanford Financial should be treated as

mere agents of Guardian Bank and that Guardian Services' and

Stanford Financial's 1989 and 1990 deficits in earnings and

profits should simply be treated as expenses or losses of

Guardian Bank.

      Under Montserrat law, neither Guardian Services nor

Stanford Financial obtained banking licenses and therefore

neither presumedly was permitted to engage directly in banking

activity on behalf of Guardian Bank.

     As we have found, in its advertisements, Guardian Services

represented that it was an "affiliate" of Guardian Bank, not a

nominee or agent thereof.   The employees of Guardian Services

provided customers of Guardian Bank with Guardian Services’ own

financial statements and not those of Guardian Bank.   The service

agreement between Guardian Bank and Guardian Services did not

indicate that Guardian Services was a nominee or agent of

Guardian Bank.   The service agreement specified only that

Guardian Services would perform marketing activities for Guardian
                                - 20 -

Bank.     Nowhere in the service agreement is Guardian Services

granted the authority to act in the name of or for the account

of, or to bind by its actions, Guardian Bank.

     Petitioners' 1990 joint Federal income tax return indicates

no agency relationship between Guardian Bank and Guardian

Services.

     With regard to Stanford Financial, the evidence does not

indicate that Stanford Financial ever acted specifically in the

name of or for the account of Guardian Bank, nor that it ever

bound Guardian Bank by its actions.

     Stanford Financial performed services for Guardian Bank of

an administrative and management nature.

     The alleged service agreement between Guardian Bank and

Stanford Financial is insufficient to establish the existence of

an agency relationship between Guardian Bank and Stanford

Financial.

     Based on our analysis of the evidence before us, we conclude

that neither Guardian Services nor Stanford Financial is properly

to be regarded as an agent of Guardian Bank; rather they are to

be regarded as separate entities.     Accordingly, their separate

deficits in earnings and profits are not to be treated as

expenses or losses of Guardian Bank.


Addition to Tax and Accuracy-Related Penalty

        Section 6651(a)(1) imposes an addition to tax for taxpayers'
                                 - 21 -

failure to timely file income tax returns by the due date of the

returns unless that failure is due to reasonable cause.    To

establish reasonable cause, taxpayers must show that they

exercised ordinary business care and prudence but were still

unable to file their returns by the due date.    Sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.     Whether the untimely filing of

tax returns is due to reasonable cause raises a question of fact.

Denenburg v. United States, 920 F.2d 301, 303 (5th Cir. 1991).

     Section 6662(d) imposes a penalty for substantial

understatements of tax but provides that the amount of any

understatements shall be reduced by that portion that is

attributable to either (1) the tax treatment of any item for

which there was substantial authority or (2) any item if the

relevant facts affecting the item's tax treatment are adequately

disclosed in the returns or in statements attached to the

returns.   Sec. 6662(d)(2)(B).

     Petitioners argue that the delay in filing their 1990 joint

Federal income tax return was due to reasonable cause based on

the destruction by Hurricane Hugo of records of Guardian Bank,

Guardian Services, and Stanford Financial that were necessary to

properly prepare and file their 1990 joint Federal income tax

return and that extra time was needed to reconstruct these

records.

     Petitioners, however, offer no argument regarding the

4-month delay between November 5, 1991, the day they signed their
                              - 22 -

1990 joint Federal income tax return and February 28, 1992, the

day respondent received the return.

     We note that even though Hurricane Hugo occurred in

September of 1989, on October 25, 1990, petitioners were able to

file their 1989 joint Federal income tax return and, in the fall

of 1991, petitioner was able to file the 1990 Federal corporate

income tax returns of Guardian Bank, Guardian Services, and

Stanford Financial.   Consequently, it appears that the records

arguably destroyed by Hurricane Hugo had been reconstructed by

the fall of 1991.   Petitioners, however, failed to file their

1990 joint Federal income tax return until February 28, 1992,

more than 5 months after records that petitioners needed to

complete their 1990 joint Federal income tax return apparently

had become available.   Petitioners’ argument based on the

destruction of records, therefore, does not provide reasonable

cause for the untimely filing of their 1990 joint Federal income

tax return.

     With respect to the accuracy-related penalty, respondent

argues that no substantial authority existed for petitioners to

use deficits in earnings and profits of Guardian Services and

Stanford Financial to reduce the subpart F income of Guardian

Bank.

     If the Court concludes that petitioners' interpretation of

the chain deficit rule and petitioners' application of that rule
                             - 23 -

to their CFC's are rejected, petitioners argue that because the

relevant provisions of section 952 are so technical and unclear,

it was not unreasonable for them to have adopted the

interpretation they utilized in preparing and filing their 1990

joint Federal income tax return.   Petitioners also argue that

they satisfied the disclosure rules and provided sufficient

information on their 1990 joint Federal income tax return

regarding their CFC's to put respondent on notice of the basis

for their claimed tax treatment of their subpart F income.

     We agree with respondent that no substantial authority

existed to support petitioners' reading of section 952.

     With respect to disclosure, we agree with respondent that

petitioners failed adequately to disclose facts necessary for

respondent to determine the proper tax treatment of the subpart F

income reported on petitioners' 1990 joint Federal income tax

return.

     We sustain respondent's impositions of the addition to tax

for petitioners' untimely filing of their 1990 joint Federal

income tax return and the accuracy-related penalty.

     To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
